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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-29634
FUNDTECH LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ISRAEL NOT APPLICABLE
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
BEIT HABONIM, 2 HABONIM STREET, RAMAT GAN, ISRAEL 52462
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
011-972-3-575-2750
(REGISTRANTS' TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Ordinary Shares,
NIS 0.01 par value
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting common equity held by
non-affiliates was $189,627,027 as at March 25, 1999. The number of Ordinary
Shares outstanding at March 25, 1999 was 10,897,968.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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TABLE OF CONTENTS
PAGE
NO.
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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11
PART II
Item 5. Market for Registrants' Common Equity and Related
Stockholder Matters......................................... 11
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 21
Item 8. Financial Statements and Supplementary Data................. 21
Consolidated Financial Statements........................... 21
Notes to Consolidated Financial Statements.................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 42
PART III
Item 10. Directors and Executive Officers of the Registrants......... 42
Item 11. Executive Compensation...................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 51
Item 13. Certain Relationships and Related Transactions.............. 53
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 53
Signatures............................................................ 55
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PART I
ITEM 1. BUSINESS
Fundtech is a leading provider of software which enables businesses and
their banks to process payments, transfer funds and manage cash positions
electronically. Our client/server software products automate the process of
transferring funds among corporations, banks and clearance systems and enable
businesses to manage global cash positions efficiently and in real-time.
Fundtech's suite of products and related services are designed to integrate all
elements of the electronic payments cycle, including electronic funds transfer,
cash management and treasury management.
INDUSTRY BACKGROUND
The increasing integration of global economies has led to a dramatic
increase in the number of financial transactions consummated each day through
electronic payments and funds transfers. National and multinational financial
institutions and businesses must facilitate this ever-increasing volume of
electronic payments and funds transfers. The transfer and settlement of funds
has traditionally been error-prone, inefficient and costly due to a significant
manual back-office component on both sides of the transfer. In addition, the
integration of global economies has increased both the complexity and the
importance of managing the flow of a corporation's funds on a daily basis.
Businesses are demanding from their financial institutions cash management
solutions that permit real-time management of funds across multiple accounts,
currencies and international borders. To service the emerging needs of their
business clients, financial institutions are seeking a more cost-efficient
method of offering funds transfer and cash management services and are
increasingly migrating to electronic intranet and client/server based platforms.
Electronic payments enable businesses to transfer funds in a rapid and
secure manner, and permit the financial institutions which implement such
transfers to do so accurately, rapidly and cost-effectively. Electronic payments
and funds transfers are made through: (1) a financial institution at which the
transferring party has an account; (2) a financial institution at which the
receiving party has an account; and (3) a clearing bank at which the financial
institutions of both parties have their own accounts. Linking all these parties
is a network comprised of financial institutions which serve as intermediaries,
receiving payment instructions and transmitting them to the next appropriate
institution along the payment route. In the United States, the primary funds
transfer network is the FedWire, which connects more than 10,000 financial
institutions. Internationally, the primary funds transfer network is SWIFT,
which connects approximately 6,000 financial institutions and related
enterprises in more than 178 countries. In contrast to the FedWire, SWIFT is a
message-carrying network that carries only payment instructions. Such
instructions are processed throughout the day, but require interbank settlement
of funds that typically takes place at the end of the day (a "net settlement
basis").
Electronic banking provides a link between banks and their business
clients, enabling such clients to manage their cash, debt and other accounts in
a real-time comprehensive and secure manner, and permit the financial
institutions with which such businesses have accounts to implement, record and
report the financial transactions conducted by such businesses rapidly and
cost-effectively. Some of the features that comprise an electronic banking
solution include: (1) facilitating the transfer of cash within an organization;
(2) enabling control of cash movement through interfacing with financial
institutions; and (3) providing the capability to report on the status of all
types of accounts, including lines of credit, and on the availability of funds.
PRODUCTS AND SERVICES
Fundtech's products and related services are designed to integrate all
elements of the electronic payments cycle, including: (1) electronic funds
transfer; (2) cash management; and (3) treasury management. Fundtech believes
that its products are among the most technologically advanced and cost-effective
solutions in the electronic payments and banking industry. Fundtech's products
facilitate all aspects of the
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electronic payments and banking cycle including payment initiation, electronic
balance reporting, account reconciliation, real-time account balance
verification, and other sophisticated auditing and reporting functionality.
Fundtech's products offer exceptional graphical user interfaces, enabling its
customers to easily receive accurate and focused information concerning the
status of electronic payment transactions and other cash management data.
PRODUCT NAME DESCRIPTION RELEASE DATE
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ELECTRONIC FUNDS TRANSFERS SOLUTIONS
FEDplu$........................ Supports payment processing, risk May 1995
management and regulatory compliance for
U.S. FedWire payments
PAY$tar........................ Supports payment processing, risk January 1997
management and regulatory compliance for
international multi-currency payments
PAYplus RTGS................... Supports payment processing, risk December 1997
management and regulatory compliance for
payments systems of countries other than
the U.S.
CASH MANAGEMENT SOLUTIONS
Access Banking................. Access Banking allows financial March 1995
institutions to deliver a complete set of
cash management services to their clients
through a full range of delivery channels,
including the Internet.
InfoVue........................ Windows-based cash management software October 1995
suite for interfacing with Access Banking
webAccess...................... HTML browser-based cash management September 1998
interface to Access Banking server at the
bank
Access.pro..................... Internet-based cash management across Under development
global accounts in multiple currencies.
TREASURY MANAGEMENT SOLUTIONS
RECON$tar...................... Automated reconciliation of payments and February 1996
other electronic transactions
Global CASHstar................ Multicurrency treasury management system Under development
for large financial institutions and large
business enterprises
SERVICES
WireUP......................... Contingency recovery for Fundtech's December 1997
clients
Treasury Service............... Global Internet/intranet for Cash Under development
Management
ELECTRONIC FUNDS TRANSFER SOLUTIONS
FEDplu$
Fundtech's FEDplu$ product is a client/server funds transfer solution used
to connect a financial institution's wire room to the Federal Reserve's FedWire
system. FEDplu$ enhances and improves productivity and customer service for
financial service institutions in what has long been an area of manually
intensive back-office operations. FEDplu$, which can interface with many
different bank accounting packages while automating the wire transfer process,
made an immediate impact on the targeted market of midsized financial
institutions.
FEDplu$ interconnects with branches and customers using LAN/WAN
architecture and relational databases. FEDplu$ provides financial institutions
with complete funds transfer capacity at substantially lower cost than other
technologies. At the same time, FEDplu$ both reduces payments risk (through
real-time
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updates of account balances by means of an on-line interface with the host
computer) and improves customer service (through its comprehensive database
containing all the information about a transfer -- from its creation to
accounting and memo posting).
PAY$tar
Fundtech's PAY$tar product is a fully integrated domestic and international
multi-currency payments solution that enables the handling of transactions and
the processing of various network message systems such as SWIFT, local clearing
and settlement networks, internal bank accounting systems, and remote
customer/branch workstations.
PAY$tar supports high-value payments with initiation from customers and
branches via LAN/WAN, telephone or fax. Based on Windows NT client/server
technology, PAY$tar provides comprehensive funds transfer automation, regulatory
compliance and management of non-payment, fraud, credit and foreign exchange
risks. In addition, PAY$tar reduces payment risk for the financial institution
initiating the transfer through on-line verification of customer balances.
PAY$tar enhances customer service by providing immediate confirmation and
advising of payments; a comprehensive electronic audit trail on each payment
from its creation through account posting; and on-line access to a database for
historical research and investigations. PAY$tar supports multi-banking,
anticipated-funds monitoring, Nostro account management, and regulatory
reporting.
PAYplus RTGS
Fundtech's PAYplus RTGS solution is a client/server funds transfer software
product that is used to connect the wire room of financial institutions outside
the United States with the applicable real-time gross settlement system. PAYplus
RTGS enhances the functionality of SWIFT's Computer-Based Terminal ("CBT") by
providing full payment processing based on SWIFT's CBT message formats. PAYplus
RTGS enables: (1) management of a financial institution's cash reserves at a
central bank; (2) forecasting of end-of-day funds availability; (3)
reconciliation of transactions performed by customers of the financial
institution directly with the central bank; and (4) management of non-payment,
fraud, foreign exchange and credit risks.
Other Products
Fundtech also has add-on products that supplement its electronic funds
transfer solutions by automatic processing of faxed wire transfer requests,
storage and the retrieval of transactions by wire and phone.
CASH MANAGEMENT SOLUTIONS
Access Banking
Fundtech's Access Banking solution is a UNIX-based client/server product
that enables banks and other financial institutions to provide cash management
services to their corporate clients. Through Access Banking, clients can obtain
balance history and intra-day reporting, manage check payments, originate ACH
transactions and initiate wire transfer payments. Access Banking consists of a
server located in the back office of a bank and a remote access module located
at the premises of the bank's corporate client. Clients can interact with the
bank's Access Banking server remotely via touch-tone telephone with voice
response, teletype terminal emulation, or facsimile transmission. Internet-based
access methods are under development.
InfoVue
Fundtech's InfoVue product is a Windows-based cash management software
suite for interfacing with Access Banking. The InfoVue suite includes balance
reporting of current and previous-day balances, ACH
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origination, wire initiation, book transfers and check management. New modules
developed within the past twelve months include:
- InfoVue Loans -- reports previous-day loan balances, payments due and
interest rate information; facilitates the initiation of loan payments
and advances; allows management of the entire line of credit or specific
notes;
- InfoVue Positive Pay -- provides daily reporting of exception items
requiring verification before final payment, especially unmatched
exceptions from ARP/SMS or other account reconciliation systems,
including imaging of exception items such as photographic images of
excepted checks.
webACCESS
webACCESS employs an HTML browser-based cash management interface to the
Access Banking server at the bank. Financial institutions can use webACCESS to
provide low-cost, branded banking services via Internet, intranet or extranet.
Access.pro
Fundtech's Access.pro product, an Internet-based product currently under
development, will enable corporations to perform sophisticated cash management
functions across accounts at multiple branches, in multiple currencies, and in
multiple countries and regulatory environments. Like Global CASHstar, Access.pro
is Internet-based. Access.pro will reduce the cost of delivering remote banking
services through universal access and simplified maintenance and distribution of
remote software.
TREASURY MANAGEMENT SOLUTIONS
RECON$tar
Fundtech's RECON$tar solution is a client/server system based on Windows NT
and SQL Server software that enables financial institutions to reconcile
automatically various types of transactions, such as incoming/outgoing wire
transfer transactions. Flexibility was incorporated into the product to cover a
wide range of reconciliation requirements and to permit tailoring of the product
to meet specific processing, accounting and reporting needs.
Global CASHstar
Fundtech is currently developing Global CASHstar, a treasury management
system for large financial institutions and industrial companies. Global
CASHstar will facilitate the transfer of cash to and from an institution's
branches worldwide; control cash movement by providing audatibility, accounting,
and reconciliation for the related activities; report on funds availability,
cash balance management and risk management; and make immediate notification of
pertinent financial information. In September 1997, Fundtech entered into an
agreement with Merrill Lynch & Co., Inc. for the creation of a software solution
for worldwide treasury operations. Pursuant to the agreement, Fundtech retains
proprietary rights to this system and expects that it will apply these rights to
the needs of other large financial institutions and industrial companies.
SERVICES
WireUp -- Contingency Processing Centers
Fundtech's WireUp -- Contingency Processing Centers were developed to
respond to the need expressed by many of Fundtech's customers for a contingency
back-up system for wire transfer operations (in accordance with government
regulations), and to realize Fundtech's objective of entering a niche market
within the client base of Fundtech and its partners. Fundtech established its
first WireUp -- Contingency Processing Center service center in San Leandro,
California, and anticipates establishing two additional service centers to
provide services effectively to Fundtech's geographically dispersed customer
base.
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Treasury Services
Fundtech's Treasury Services will provide global treasury management
capabilities on a service bureau basis. Through the Internet, Fundtech will
provide its clients with a virtual private network which replaces the need for
an intranet and allows for distributed treasury workflow throughout an
organization. The Treasury Service Internet connection will then allow the
virtual private network to interface with numerous banks, enabling advanced cash
management functionality.
CUSTOMERS AND MARKETS
Fundtech's scaleable products are sold to a wide array of financial
institutions and large business enterprises.
The markets for Fundtech's products consist of the following end-users:
U.S. Banks -- This group of customers may be divided into three tiers.
The top tier consists of over 100 banks each with more than $5 billion in
assets. These banks process a high volume of wire transfers both in the
U.S. and internationally and generally utilize highly customized systems.
The second tier consists of approximately 3,000 banks with over $100
million in assets. The institutions in this market require standardized
payments processing products so that they may provide competitive payments
processing services to their customers. The third tier consists of
approximately 7,000 small banks with less than $100 million in assets,
which seek regulatory compliance solutions.
Agency Banks and Branches of Foreign Banks Located in the United
States -- These banks, located mainly in financial centers such as New York
City, San Francisco, Los Angeles and Dallas, process both international and
domestic U.S. payments at various volume levels both for their own
activities and for their parent organizations. Depending on the specific
needs of the bank, Fundtech markets the appropriate combination of FEDplu$,
PAY$tar and complementary products.
Banks Located Outside of the U.S. -- The payments systems of both
developed and developing countries are undergoing a major conversion to
RTGS, spawning a great demand for wholesale payments applications that
support real-time posting and immigration of financial data. Fundtech
intends to pursue the worldwide market for electronic payments systems with
a version of PAYplus RTGS modified for each country's RTGS model.
Corporate Clients of Banks -- The largest segment of end-users of
Fundtech's products consists of the corporate clientele of banks and other
financial institutions. These corporations access Fundtech's solutions
remotely via Wire$tar, InfoVue and other remote access modules for Access
Banking.
Large Business Enterprises -- These enterprises consist of: (1)
financial institutions which provide regular treasury management services
to large corporations; (2) large non-bank financial institutions, primarily
brokerage houses, bond dealers, and insurance firms, which need to conduct
their own internal treasury management and risk management activities; and
(3) Fortune 500 companies with significant multinational operations which
require a real-time view of their cash position.
SALES AND MARKETING
Fundtech sells its products through its direct sales force and through
distributors including EDS Japan, Fiserv, M&I, Sterling Commerce and Compaq.
Because the sale of electronic payments and banking products is highly
technical, the sales cycle can be as long as six months, varying by product and
customer.
Fundtech's distributors serve as an integral part of Fundtech's marketing
and service network worldwide. They have contributed significantly to Fundtech's
growth through cross-selling Fundtech products to their current client/product
bases and extensive marketing and promotion of Fundtech's name and products.
Compaq is a manufacturer of computer hardware used for on-line transaction
processing worldwide, and has assembled a consortium of companies (the "NPF
Consortium") whose combined offering, The Non-Stop Payments Factory ("NPF"),
which is based on the Windows NT platform, is designed to comprehensively
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address the wholesale banking needs of major international financial
institutions. Fundtech has been selected as the NPF Consortium's funds transfer
software provider. Fundtech has entered into a marketing agreement with Compaq
which grants Compaq exclusive distribution rights to PAYplus RTGS in Australia
and New Zealand and non-exclusive distribution rights globally.
EDS Japan, a subsidiary of Electronic Data Systems Corporation, is a
professional consulting services firm engaging in systems development and data
center and network management and offering special expertise in cash management,
risk management and customer relationship banking. EDS Japan's clients include
Citibank N.A., Fujitsu Ltd., General Motors, Yamaha Motor Co., Ltd. and
Mitsubishi Motor Co., Ltd. Fundtech has entered into contracts with EDS Japan
for the distribution in Asia of its cash management products.
Fiserv is an independent producer of financial data processing systems and
related information management services and products which it markets to
financial institutions worldwide. Fundtech has entered into contracts with two
divisions of Fiserv, Fiserv Pittsburgh and Fiserv CBS. Fiserv Pittsburgh is
selling Fundtech's products to its client base through sales representatives.
Fiserv's outsourcing division, Fiserv CBS, sells PAY$tar to its substantial
customer base through sales representatives.
M&I provides financial data processing, outsourcing, systems integration,
and a range of software products to more than 600 financial institutions in
North America, Europe, and the Pacific Rim. M&I provides exclusive referrals to
Fundtech for funds transfer systems within its customer base. Fundtech provides
all sales and technical support for a percentage of the license fee.
Sterling Commerce is a banking/financial software company with a strong
presence in the EDI (Electronic Data Interchange) and cash management software
marketplace. Sterling Commerce is private-labeling FEDplu$ under the name
"Vector: Fedwire."
Fundtech focuses a significant amount of its sales and marketing resources
on its distributors, communicates with them regularly and provides them with
ongoing support. In addition, Fundtech, in conjunction with its distributors,
participates in exhibitions of its products worldwide, places advertisements in
local publications, encourages exposure in the form of articles and editorials
in communications journals and other periodicals and prepares direct mailings of
flyers and advertisements focusing on Fundtech's products. Fundtech also markets
its products directly through our World Wide Web home page.
STRATEGIC ALLIANCES
The material strategic alliances formed by Fundtech to date include:
Compaq
Compaq has funded the initial development and integration of the NPF
Consortium's software products. Compaq's sales and marketing program for NPF
uses worldwide sales and systems integration resources to promote the integrated
offering. In addition, Fundtech and Compaq participate together in trade shows,
banking industry advertising and other joint marketing activities.
Microsoft
Fundtech is a Microsoft Independent Software Vendor and is also a Microsoft
Solution Provider. In the context of this strategic relationship, Fundtech
develops its software solutions to operate on Microsoft operating systems, such
as Windows, Windows NT and BackOffice. Microsoft provides Fundtech with
marketing support such as including Fundtech in Microsoft's regional banking
seminars, advertising some of Fundtech's products in Microsoft Solution Provider
directories (including the World Wide Web page), and jointly participating with
Fundtech in trade shows, banking industry advertising and other public relations
opportunities. In addition, Microsoft provides Fundtech with technical and
software development support.
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SWIFT
Another strategic partner of Fundtech is SWIFT, a global information
network that links approximately 6,000 banks, securities firms and stock
exchanges in more than 160 countries. Member financial institutions exchange
payment instructions and funds and securities transfer details using standard
message formats. SWIFT signed a strategic partnership agreement with Fundtech
during 1996 for the integration of SWIFT's CBT product (based on Windows NT).
SWIFT's CBT product is in the process of replacing SWIFT's ST200 message
terminal, which is currently in use by more than 600 North American members. As
of December 31, 1998, Fundtech was one of approximately 15 SWIFT strategic
partners in the world and the only such partner that is a provider of integrated
electronic payments software. In May 1998, SWIFT awarded Fundtech with the SWIFT
Gold Medal Award for excellence in electronic payments solutions.
SOFTWARE DEVELOPMENT
Fundtech believes that its software development team provides a significant
competitive advantage. The team is comprised of developers with experience in
visual programming design and object-oriented software development of
mission-critical applications. Fundtech believes this assembly of diverse
technical expertise contributes to the highly integrated functionality of its
products. Fundtech's ability to attract and retain highly qualified employees
will be the principal determinant of its success in maintaining technological
leadership. The total software development staff consisted of 126 full-time
employees, as of March 18, 1999. All of Fundtech's products have been developed
internally by its product development staff. Fundtech believes significant
investments in product development are required to remain competitive.
To ensure that its products are developed successfully, within their
budgets and according to schedule, Fundtech sends its products through four
distinct design and testing stages: (1) specifications are developed through
consultation with prospective users to ensure that the product matches the
user's requirements; (2) an internal quality assurance team verifies the
integrity of the product at each stage of development prior to beta testing; (3)
beta testing data is used to evaluate the functionality of the products and
their ability to perform under realistic conditions; and (4) a controlled group
of users is polled regularly to identify any modifications that may be
necessary. In addition, Fundtech works closely with current and potential
end-users, Fundtech's strategic partners and leaders in certain industry
segments to identify market needs and define appropriate product specifications.
Fundtech's employees also participate in numerous user focus groups to review
product design. Fundtech has software development sites in Israel, New Jersey,
Massachusetts and Georgia. Fundtech believes that separating development by
geographic region both allows for development to be close to the targeted market
and increases Fundtech's opportunity to attract development talent.
CUSTOMER SUPPORT AND MAINTENANCE
Fundtech believes that effective customer support and maintenance in the
software industry requires rapid, efficient and comprehensive installation of
the product. Upon installation, Fundtech strives to provide superior customer
support by solving problems quickly and providing customers with consistent,
accurate and understandable technical information. Fundtech employs test scripts
and bank production data to test its solutions and its products are shipped with
back-up procedures installed. Fundtech recognizes that, in the event problems do
arise, timely solutions are essential for mission-critical solutions like
FEDplu$, PAY$tar, PAYplus RTGS and Access Banking. Fundtech's policy is to
emphasize responsiveness to customer inquiries and to provide telephonic support
twenty-four hours a day. Customer inquiries range from production problems to
user questions and hardware issues. In addition, Fundtech utilizes Remote Access
Services (RAS-Windows NT service) to enhance remote customer support. Certain of
Fundtech's distributors also provide sales, service and technical support
functions for Fundtech's products to end-users in the distributors' respective
territories.
COMPETITION
Fundtech believes that the principal competitive factors in the industry in
which it operates are product performance, technical features, compatibility
with existing operating systems, reliability, security, relational
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database powers, price, customer service and support, ease of use and Year 2000
compliance. Fundtech believes that its products and related services are
competitive with respect to these factors. However, there can be no assurance
that Fundtech will be able to differentiate its products from the products of
its competitors or to develop or introduce successfully new products that are
less costly than or superior to those of its competitors. In addition, existing
and new competitors of Fundtech may have established relationships with
Fundtech's existing and potential customers, which could have a material adverse
effect on Fundtech's ability to compete.
The industry in which Fundtech operates is highly competitive and evolving.
Competing providers of Electronic payments and Banking solutions include, but
are not limited to, BankServe, Credo Group Limited, FICS Group N.V., ICM
Electronic Banking Services, Inc., Logica PLC, Magnet Communications, Inc.,
Politzer & Haney, Transaction Software Technologies, Inc. and Transaction
Systems Architects, Inc. Furthermore, certain large banks have developed
solutions internally which they have then marketed to other banks or implemented
in banks that they have acquired. In addition to its current competitors,
Fundtech expects substantial competition from both established and emerging
companies. Many of Fundtech's existing and potential competitors have or are
likely to have more extensive engineering, development, marketing, distribution
(particularly with respect to direct sales forces), financial, technological and
personnel resources than Fundtech.
Increased competition could materially adversely affect Fundtech's revenues
and profitability through loss of market share, pricing pressures and other
factors, any of which could have a material adverse effect on Fundtech's
business, financial condition and results of operations.
PROPRIETARY RIGHTS
Fundtech relies upon a combination of contractual rights, trade secrets,
copyrights, technical measures, non-disclosure agreements and trademarks to
establish and protect its proprietary rights in its products and technologies.
In addition, although Fundtech sometimes enters into non-disclosure and
confidentiality agreements with its employees and distributors with access to
sensitive information, there can be no assurance that these agreements will not
be breached, that Fundtech would have adequate remedies for any breach, that
others will not acquire substantially equivalent proprietary technologies, that
others will not otherwise gain access to Fundtech's proprietary technologies, or
that any particular technology will be regarded as a trade secret under
applicable law. As a result of the reliance that Fundtech places on its trade
secrets, loss of Fundtech's trade secret protection could have a material
adverse effect on Fundtech's business, financial condition and results of
operations. Fundtech has no registered patents or pending patent applications.
There can be no assurance that the steps taken by Fundtech to protect its
proprietary rights will be adequate to prevent misappropriation of Fundtech's
technology or independent development or sale by others of software products
with features based upon, or otherwise similar to, those of Fundtech's products.
Although Fundtech believes that its technology has been independently
developed and that none of its technology or intellectual property infringes on
the rights of others, there can be no assurance that Fundtech does not and will
not so infringe or that third parties will not assert infringement claims
against Fundtech in the future. If such infringement were found to exist,
Fundtech would, under certain circumstances, be required to modify its products
or technologies or obtain a license to permit their continued use. There can be
no assurance that Fundtech would be able to do either in a timely manner or upon
acceptable terms and conditions, and any failure to do so could have a material
adverse effect on Fundtech's business, financial condition and results of
operations. In addition, if future litigation were to become necessary to
protect trade secrets, know-how or other proprietary rights owned by Fundtech,
to defend Fundtech against claimed infringement of the rights of others or to
determine the scope and validity of the proprietary rights of others, such
litigation, whether successful or unsuccessful, could result in substantial cost
to, and diversion of efforts by, Fundtech. Adverse determinations in any such
litigation or proceedings also could subject Fundtech to significant liabilities
to third parties and could prevent Fundtech from producing, selling or using
certain of its products or technologies, any of which could have a material
adverse effect on Fundtech's business, financial condition and results of
operations. There can be no assurance that Fundtech will have the resources to
defend or prosecute a proprietary rights infringement or other action. In
addition, the laws of certain countries may
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not protect Fundtech's contractual rights, trade secrets, copyrights, technical
measures, non-disclosure agreements, trademarks, products, processes or
technologies to the same extent as in the U.S.
GOVERNMENT REGULATION
Fundtech's current and prospective customers, which include financial
institutions such as state and federally chartered banks and savings and loan
associations as well as customers in other industries that Fundtech may target
in the future, operate in markets that are subject to extensive and complex
regulation. While Fundtech is not itself directly subject to such regulation,
Fundtech's products and services must be designed to work within the extensive
and evolving regulatory constraints under which its customers operate. The
failure of Fundtech's products and services to support customers' compliance
with current regulations and to address changes in customers' respective
regulatory environments, or to adapt to such changes in an efficient and
cost-effective manner, could have a material adverse effect on Fundtech's
business, results of operations and financial condition.
EMPLOYEES
As of March 18, 1999, Fundtech had 45 employees in Israel, four employees
in the United Kingdom, and 177 employees in the United States. Of the 177
employees in the United States, 76 were employed in software development, 63 in
operations, 14 in sales and marketing, and 24 in administration. Of the 45
employees in Israel, 30 were employed in software development, five in
operations, four in sales and marketing and six in administration. Fundtech
considers its relations with its employees to be good and has never experienced
a labor dispute, strike or work stoppage. Fundtech's employees are not
represented by a labor union.
None of Fundtech's employees is a party to a collective bargaining
agreement with Fundtech. However, Fundtech is subject to certain provisions of
collective bargaining agreements among the Government of Israel, the Histadrut
(General Federation of Labor in Israel) and the Coordinating Bureau of Economic
Organizations (including the Industrialists' Association) that are applicable to
Fundtech's Israeli employees by virtue of expansion orders of the Israeli
Ministry of Labor and Welfare. In addition, Israeli labor laws are applicable to
all of Fundtech's employees in Israel. Those provisions and laws principally
concern the length of the work day, minimum daily wages for workers, procedures
for dismissing employees, determination of severance pay and other conditions of
employment.
A general practice followed by Fundtech, although not legally required, is
the contribution of funds on behalf of most of its full-time employees in Israel
to an individual insurance policy known as "Managers' Insurance." This policy
provides a combination of savings plan, insurance and severance pay benefits to
the insured employee; it provides for payments to the employee upon retirement
or death and secures the severance pay, if any, to which the employee is legally
entitled upon termination of employment. The remaining part of this obligation
is presented on the balance sheet of Fundtech as provision for severance pay.
See Note 8 to the Consolidated Financial Statements.
All Israeli employers, including Fundtech, are required to provide certain
increases in wages as partial compensation for increases in the CPI. The
specific formula for such increases varies according to agreements reached among
the Government of Israel, the Manufacturers' Association and the Histadrut.
Israeli employees and employers also are required to pay pre-determined sums
(which include a contribution to national health insurance) to the Israel
National Insurance Institute, which provides a range of social security
benefits.
CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION
Statements included in this Report may contain forward-looking statements.
Such forward-looking statements are made pursuant to the safe-harbor provisions
of the Private Securities Litigation Reform Act of 1995. Such statements may
relate, but are not limited, to projections of revenues, income or loss, capital
expenditures, plans for growth and future operations, including Year 2000
compatibility, competition and regulation as well as assumptions relating to the
foregoing. Forward-looking statements are inherently subject to risks and
uncertainties, many of which cannot be predicted or quantified. When used in
this Report, the words, "estimates", "expects", "anticipates", "believes",
"plans", "intends" and variations of such words and
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similarly expressions are intended to identify forward-looking statements that
involve risks and uncertainties. Future events and actual results could differ
materially from those set forth in, contemplated by or underlying the
forward-looking statements. The factors that could cause actual results to
differ materially from those suggested by any such statements include, but are
not limited to, those discussed or identified from time to time in Fundtech's
public filings, including general economic and market conditions, changes in
regulations and taxes, changes in competition and pricing environments, the
difficulty in identifying hardware and software that may not be Year 2000
compliant and the lack of success of third parties to adequately address the
year 2000 issue. Undue reliance should not be placed on these forward-looking
statements, which are applicable only as of the date hereof. Fundtech undertakes
no obligation to revise or update these forward-looking statements to reflect
events or circumstances that arise after the date of this Report or to reflect
the occurrence of unanticipated events.
ITEM 2. PROPERTIES
Fundtech does not own any real property. As of March 18, 1999, Fundtech
leased an aggregate of approximately 260 square meters of office space in Ramat
Gan, Israel and an aggregate of approximately 6,000, 10,000, 2,000 and 22,000
square feet of office space in Lexington, Massachusetts, Jersey City, New
Jersey, San Leandro, California and Norcross, Georgia, respectively. In 1998,
aggregate annual lease payments for Fundtech's facilities were approximately
$605,000.
ITEM 3. LEGAL PROCEEDINGS
Fundtech is not a party to any material litigation, either in Israel or
abroad, and is not aware of any pending or threatened litigation that would have
a material adverse effect on Fundtech or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of Fundtech's security holders of
during the fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF ORDINARY SHARES
The ordinary shares have been quoted on the Nasdaq National Market under
the symbol "FNDTF" since Fundtech's initial public offering. The following table
sets forth, for the periods indicated, the high and low closing sales prices for
the ordinary shares:
HIGH LOW
---- ---
1998
First Quarter (commencing March 13, 1998)................. 18 5/8 16 3/4
Second Quarter............................................ 24 5/8 15 3/4
Third Quarter............................................. 19 1/8 10 9/6
Fourth Quarter............................................ 20 11/16 8 3/4
1999
First Quarter (through March 29, 1999).................... 31 19
On March 29, 1999, the last closing sale price of the ordinary shares, as
reported by the Nasdaq National Market, was $30.19 per share. As of March 23,
1999, Fundtech had 42 shareholders of record. Fundtech believes that the number
of beneficial owners of the ordinary shares is in excess of 400.
DIVIDEND POLICY
Fundtech intends to retain all future earnings for use in the development
of its business and does not anticipate paying cash dividends in the foreseeable
future. If cash dividends are declared by Fundtech, the
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cash dividends could be taxable to the recipients of the dividends. Because
Fundtech has received benefits under the Law for the Encouragement of Capital
Investments, 1959, as amended (the "Investment Law"), payment of cash dividends
during the exemption period will subject that portion of Fundtech's income
derived from the Approved Enterprise to Israeli taxes to which the income would
not otherwise be subject. Fundtech has decided to reinvest the amount of the
tax-exempt income derived from its "Approved Enterprises" permanently and not to
distribute such income as dividends.
Cash dividends may be paid by an Israeli company only out of profits as
determined under Israeli law. The declaration of any final annual cash dividends
requires shareholder approval. Shareholders may reduce, but not increase,
dividends from the amount proposed by the Board of Directors. It is anticipated
that any dividends paid to non-residents of Israel would be paid in NIS.
RECENT SALES OF UNREGISTERED SECURITIES
Between December 1, 1997 and May 15, 1998 Fundtech granted certain
employees options to purchase an aggregate of 300,250 ordinary shares at
exercise prices ranging from $7.33 to $21.00. In October 1998, these options
were repriced at $11.625, the then current market price of the ordinary shares.
On May 18, 1998, Fundtech agreed to grant options to purchase an aggregate
of 42,000 ordinary shares to members of the Board of Directors. Such grant was
made following the election of a Board of Directors at Fundtech's annual general
meeting of the shareholders, in August 1998. The options vest over a period of
one year.
Between October 20, 1998 and March 10, 1999, Fundtech granted to executive
officers and employees options to purchase an aggregate of 142,250 ordinary
shares at exercise prices ranging from $10.375 to $21.9375.
Each of the securities listed above was (i) sold pursuant to exemptions
from registration under Section 4(2) of the Securities Act and/or (ii) sold to
persons who were neither nationals nor residents of the United States and no
facilities or instrumentalities of United States interstate commerce were used
in connection with any offer or sale thereof. No underwriter or underwriting
discount or commission was involved in any of such sales."
USE OF PROCEEDS FROM REGISTERED SECURITIES
The effective date of the registration statement (No. 333-8304) for
Fundtech's initial public offering of its Ordinary Shares, NIS .01 par value,
was March 13, 1998. The offering commenced on March 16, 1998, and terminated
after the sale of all the securities registered. The managing underwriter of the
offering was BancAmerica Robertson Stephens. Fundtech registered 3,450,000
ordinary shares in the offering, including shares issued pursuant to the
exercise of the underwriters' over-allotment option. Of such shares, Fundtech
sold 2,587,500 ordinary shares at an aggregate offering price of $33.6 million
($13.00 per share) and certain selling shareholders sold an aggregate of 862,500
ordinary shares at an aggregate offering price of $11.2 million ($13.00 per
share). Under the terms of the offering, Fundtech incurred underwriting
discounts of $2.4 million. Fundtech also incurred estimated expenses of $2.5
million in connection with the offering. None of the amounts were paid directly
or indirectly to any director, officer, general partner of Fundtech or their
associates, persons owing ten percent or more of any class of equity securities
of Fundtech, or an affiliate of Fundtech.
The net proceeds that Fundtech received as a result of the offering were
$29.0 million. As of March 31, 1999, the net proceeds have been used as follows:
$7.6 million has been used to purchase a series of 30 day certificates of
deposit at interest rates ranging from 4.8% to 5.5% pending application of the
funds, $18.8 million has been used for the acquisition of certain assets from
CheckFree Holdings Corporation, and $2.4 million has been used for general
corporate purposes. In addition, approximately $248,000 of the net proceeds was
used to repay a loan to Fundtech from one of Fundtech's shareholders, Aura
Investments Research & Development Ltd., in 1993. Except for the repayment of
the aforementioned loan, none of the net proceeds of the offering were paid
directly or indirectly to any director, officer, general partner of Fundtech
or their associates, persons owning ten percent or more of any class of equity
securities of Fundtech, or an affiliate of Fundtech.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of Fundtech presented below as of
December 31, 1997 and 1998 and for each of the years ended December 31, 1996,
1997 and 1998 are derived from Fundtech's Consolidated Financial Statements set
forth elsewhere herein which have been prepared in accordance with U.S.
generally accepted accounting principles. The selected consolidated financial
data of Fundtech as of December 31, 1995 and for each of the years ended
December 31, 1993 and 1994 have been derived from audited consolidated financial
statements of Fundtech not included herein. All of the financial data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements and Notes thereto appearing elsewhere herein.
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------ --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license fees............................ $ -- $ 284 $ 2,403 $4,997 $ 14,007
Maintenance and services fees.................... -- 68 498 2,313 7,116
Hardware sales................................... -- 117 667 709 2,009
------- ------- ------- ------ --------
Total revenues............................ -- 469 3,568 8,019 23,132
------- ------- ------- ------ --------
Cost of revenues:
Software license costs........................... -- 58 163 334 238
Maintenance and services costs................... -- 36 316 1,086 4,549
Hardware costs................................... -- 99 596 646 1,631
------- ------- ------- ------ --------
Total cost of revenues.................... -- 193 1,075 2,066 6,418
------- ------- ------- ------ --------
Gross profit....................................... -- 276 2,493 5,953 16,714
------- ------- ------- ------ --------
Operating expenses:
Software development, net........................ 1,033 1,158 1,595 2,468 6,636
Selling and marketing, net....................... 67 1,319 1,424 1,750 2,970
General and administrative....................... 133 763 963 1,289 2,471
In-process research and development write-off.... -- -- -- -- 16,600
------- ------- ------- ------ --------
Total operating expenses.................. 1,233 3,240 3,982 5,507 28,677
------- ------- ------- ------ --------
Operating income (loss)............................ (1,233) (2,964) (1,489) 446 (11,963)
Financial income (loss), net....................... 103 79 28 190 571
------- ------- ------- ------ --------
Net income (loss).................................. $(1,130) $(2,885) $(1,461) $ 636 $(11,392)
Basic earnings (loss) per share.................... $ (0.29) $ (0.91) $ (0.50) $ 0.22 $ (1.12)
======= ======= ======= ====== ========
Diluted earnings (loss) per share.................. $ (0.29) $ (0.91) $ (0.50) $ 0.08 $ (1.12)
======= ======= ======= ====== ========
Shares used in computing:
Basic earnings (loss) per share.................. 3,945 3,180 2,925 2,837 10,151
======= ======= ======= ====== ========
Diluted earnings (loss) per share................ 3,945 3,180 2,925 7,935 10,151
======= ======= ======= ====== ========
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term bank
deposits......................................... $ -- $ 660 $ 1,314 $4,267 $ 13,019
Working capital.................................... 554 390 779 6,645 18,140
Total assets....................................... 1,125 1,732 3,847 9,658 32,717
Short-term bank credits, including current
maturities of long-term debt..................... -- 9 962 255 --
Long-term debt..................................... 230 247 271 261 --
Shareholders' equity............................... 552 684 1,475 7,404 25,048
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Fundtech was incorporated in 1993. Fundtech is a leading provider of
software which enables businesses and their banks to process payments, transfer
funds and manage cash positions electronically. Fundtech's client/server
software products automate the process of transferring funds among corporations,
banks and clearance systems and enable businesses to manage global cash
positions efficiently in real-time. Fundtech introduced its FEDplu$ product in
May 1995, its PAY$tar product in January 1997 and its PAYplus RTGS product in
December 1997. To date, Fundtech has derived substantially all of its revenues
from licenses of its Access Banking, FEDplu$, PAY$tar, PAYplus RTGS and Global
CASHstar products, and related services and third-party hardware sales.
Fundtech's revenues are derived from software license fees, maintenance and
services fees and hardware sales. Revenues from software license fees are
recognized upon delivery of the software product to a customer, when collection
is probable, all license payments are due within one year, the license fee is
otherwise fixed or determinable and vendor-specific evidence exists to allocate
the total fee to the elements of the arrangement and when persuasive evidence of
an arrangement exists. Revenues from certain of Fundtech's contracts are
recognized on a percentage-of-completion basis. Revenues from maintenance and
services fees are recognized over the life of the maintenance agreement or at
the time when services are rendered. Revenues from hardware sales are recognized
upon shipment.
Fundtech has received approximately $1.1 million in product development
grants from the Government of Israel through the OCS. These grants are credited
against software development expenses in the periods in which they are earned
and received. Fundtech is obligated to repay these product development grants
through the payment of royalties ranging from 3% to 5% (depending on the length
of time to repayment) of revenues generated from the products until such time as
the grants are repaid in full (and in some instances until 150% of the grant has
been repaid). Fundtech is not obligated to repay the grants if Fundtech does not
generate sufficient revenues to do so. The royalty payments are included in cost
of sales in the periods in which they are accrued. In addition, Fundtech has
received approximately $0.4 million in marketing grants from the Government of
Israel's Fund for the Encouragement of Marketing Activities. Fundtech is
obligated to repay approximately $0.2 million of the marketing grants through
payment of royalties equal to 3% of Fundtech's total increase in export sales in
comparison to 1995, from the end of the second year of implementation of the
marketing plan until such date as the grants have been fully repaid.
Fundtech records software development costs in accordance with Financial
Accounting Standards Board ("FASB") Statement No. 86. Due to the immaterial
amount of time between technological feasibility and the time that the software
is generally available for sale, Fundtech has expensed software development
costs as incurred.
As a result of the need to develop new and enhanced products, Fundtech
expects to continue making significant investments in software development
before and after product introductions. Fundtech expects that the level of such
continued investments will be at least comparable to the level of such
investments in the past.
The currency of the primary economic environment in which the operations of
Fundtech are conducted is the dollar. Thus, Fundtech uses the dollar as its
functional and reporting currency. Transactions and balances in other currencies
are remeasured into dollars in accordance with the principles set forth in FASB
Statement No. 52. Exchange gains and losses arising from remeasurement are
recorded in income or expense as applicable. See "-- Impact of Inflation and
Currency Fluctuations; Market Risks."
Israeli companies, such as Fundtech, are generally subject to income tax at
the corporate rate of 36%. However, Fundtech is eligible for certain tax
benefits which should result in its income being taxed at a significantly lower
rate for some time after it begins to report taxable income and exhausts its net
operating loss carry-forwards. See "-- Effective Corporate Tax Rate."
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The following table presents Fundtech's consolidated revenues according to
the geographical regions to which such revenues are attributable:
1996 1997 1998
--------------------- --------------------- ---------------------
TOTAL TOTAL TOTAL
REVENUES PERCENTAGE REVENUES PERCENTAGE REVENUES PERCENTAGE
-------- ---------- -------- ---------- -------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Israel.................... $ 50 1.4% $ 204 2.5% $ 693 3.0%
U.S.A..................... 3,518 98.6 7,471 93.2 19,190 83.0
Australia................. -- -- 332 4.2 262 1.1
Europe.................... -- -- 12 0.1 1,801 7.8
Other..................... -- -- -- -- 1,186 5.1
------ ---- ------ ---- ------- ----
$3,568 100% $8,019 100% $23,132 100%
====== ==== ====== ==== ======= ====
ACQUISITION OF THE CHECKFREE BUSINESSES
In April 1998, Fundtech acquired from CheckFree two businesses engaged
primarily in the design and development of cash management software products and
the development and sale of wire transfer products. Fundtech paid $18,824,000 in
cash (including acquisition expenses) for the acquired CheckFree businesses. The
software products acquired, including Access Banking and InfoVue, and the
corresponding technology under development, such as webACCESS, provide
sophisticated cash management functionality and serve as a foundation for
Fundtech to provide a next generation of cash management products. As a result
of the CheckFree acquisition, Fundtech's new product suite will address all
aspects of the payments cycle -- beginning with cash management and payment
initiation at the user end and moving to funds transfer and reconciliation on
the banking and settlement end. Further, the CheckFree acquisition enables
Fundtech to continue developing more advanced, comprehensive electronic payments
and banking solutions, while eliminating duplicative product development costs.
Customers using the acquired technology include Bank of Tokyo, Mitsubishi
Information Services, Banco Popular de Puerto Rico, Dai-Ichi Kangyo Bank of
California, Key Services Corporation, National Australia Group, Republic
National Bank and SouthTrust Bank. These clients provide Fundtech with a
significant opportunity to sell complementary or upgraded products to such
customers, and to derive cost savings by rationalizing its FEDplu$ distribution
channel. Fundtech will no longer be required to share its maintenance revenue
stream with CheckFree and can eliminate costs that were associated with
CheckFree's operations. Fundtech also enhanced its existing employee base
through the CheckFree acquisition by adding approximately 60 employees,
primarily involved in service, software development and sales. The offices of
the acquired CheckFree businesses are located in Norcross, Georgia.
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RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
revenues represented by each of the items in Fundtech's statement of operations:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
----- ----- -----
Revenues:
Software license fees..................................... 67.3% 62.3% 60.6%
Maintenance and service fees.............................. 14.0 28.8 30.8
Hardware sales............................................ 18.7 8.9 8.6
----- ----- -----
Total revenues..................................... 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Software license costs.................................... 4.6 4.2 1.0
Maintenance and service costs............................. 8.9 13.5 19.7
Hardware costs............................................ 16.7 8.1 7.1
----- ----- -----
Total cost of revenues............................. 30.2 25.8 27.8
----- ----- -----
Gross profit................................................ 69.8 74.2 72.2
----- ----- -----
Operating expenses:
Software development, net................................. 44.7 30.8 28.7
Selling and marketing, net................................ 39.9 21.8 12.8
General and administrative................................ 27.0 16.1 10.7
In-process research and development write-off............. -- -- 71.8
----- ----- -----
Total operating expenses........................... 111.6 68.7 124.0
----- ----- -----
Operating income (loss)..................................... (41.8) 5.5 (51.8)
Financial income, net....................................... 0.8 2.4 2.5
----- ----- -----
Net income (loss)........................................... (41.0)% 7.9% (49.3)%
===== ===== =====
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Software License Fees. Software license fees consist of revenues derived
from software license agreements entered into between Fundtech and its
customers. Software license fees increased by $9,010,000 to $14,007,000 in the
year ended December 31, 1998 from $4,997,000 for the year ended December 31,
1997, an increase of 180%. This increase was attributable to the sale of new
product offerings such as Global CASHstar and PAYplus RTGS, Fundtech's
international payment system and due to the revenue generated from the new
products of the acquired CheckFree businesses such as ACCESS.pro, webACCESS,
InfoVue and MicroACH. Additionally, this increase was due to an increase of
sales throughout Fundtech's distribution channels, such as Sterling Commerce,
and Fiserv.
Maintenance and Services Fees. Maintenance and services fees include
revenues derived from maintenance contracts, installation and training revenue,
consulting fees, certification fees and related items. Fundtech generally
receives a contract for maintenance and services at the time of the sale of the
system. Maintenance and services fees increased by $ 4,803,000 to $7,116,000 in
the year ended December 31, 1998 from $2,313,000 in the year ended December 31,
1997, an increase of 208%. The increase is commensurate with the increase in
systems sold during this period and due to the revenue generated from
maintenance and services fees related to products of the acquired CheckFree
businesses.
Hardware Sales. Hardware sales consist of revenues received from resales
of third-party hardware in connection with the license and installation of
Fundtech's software. Hardware sales increased by $1,300,000 to $2,009,000 in the
year ended December 31, 1998 from $709,000 in the year ended December 31, 1997,
an increase of 183%. Hardware sales increased due to the increase in number of
systems sold with hardware due to revenues generated by the acquired CheckFree
businesses. Fundtech currently requests that its customers purchase hardware on
their own and send it to Fundtech for testing with the software.
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Software License Costs. Software license costs consist primarily of the
royalty payments related to grants from the Government of Israel, product media,
duplication, manuals and shipping. Software license costs decreased by $96,000
to $238,000 in the year ended December 31, 1998 from $334,000 in the year ended
December 31, 1997, a decrease of 29%. The gross margin on software license fees
increased from 93% in the year ended December 31, 1997 to 98% in the year ended
December 31, 1998. The increase in gross margin is attributable to the decrease
in royalty payments as a percentage of total sales as certain of Fundtech's
product offerings are not royalty bearing.
Maintenance and Services Costs. Maintenance and services costs consist
primarily of personnel costs, telephone support costs and other costs related to
the provision of maintenance and consulting services. Maintenance and services
costs increased by $3,463,000 to $4,549,000 in the year ended December 31, 1998
from $1,086,000 in the year ended December 31, 1997, an increase of 319%. The
gross margin on maintenance and services fees decreased from 53% for the year
ended December 31, 1997 to 36% for the year ended December 31, 1998. The
decrease in gross margin was primarily due to an increase in personnel
associated with the acquired CheckFree businesses.
Hardware Costs. Hardware costs consist primarily of Fundtech's cost of
computer hardware resold to its customers. Cost of hardware sales increased by
$985,000 to $1,631,000 in the year ended December 31, 1998 from $646,000 in the
year ended December 31, 1997, an increase of 152%. This increase is commeasurate
with the increase in hardware sales by Fundtech in 1998.
Software Development Expenses, Net. Software development expenses consist
principally of expenses related to the development and testing of new products
and product enhancements. Software development expenses increased by $4,168,000
to $6,636,000 in the year ended December 31, 1998 from $2,468,000 in the year
ended December 31, 1997, an increase of 169%. The increase in software
development costs related to the development of new product offerings by
Fundtech such as the PAYplus RTGS system and Global CASHstar as well as
enhancements to certain of Fundtech's existing products. In the years ended
December 31, 1997 and 1998, Fundtech did not receive grants from the Government
of Israel.
Selling and Marketing Expenses, Net. Gross selling and marketing expenses
increased by $1,167,000 to $3,015,000 in the year ended December 31, 1998 from
$1,848,000 in the year ended December 31, 1997, an increase of 63%. However,
gross selling and marketing expenses as a percentage of revenues decreased to
13% in December 31, 1998 from 23% in the year ended December 31, 1997 due to the
increase in sales attributable to each salesperson. In the year ended December
31, 1997 and 1998, Fundtech accrued $98,000 and $45,000, respectively, for
marketing grants from the Government of Israel. These grants were recorded as a
reduction to selling and marketing expenses resulting in net selling and
marketing expenses of $1,750,000 and $2,970,000 in 1997 and 1998, respectively.
General and Administrative Expenses. General and administrative expenses
increased by $1,182,000 to $2,471,000 in the year ended December 31, 1998 from
$1,289,000 in the year ended December 31, 1997, an increase of 92%. As a
percentage of total revenues, general and administrative expenses declined to
11% compared with 16% in the same period for 1997. This decrease is primarily
attributed to efficiencies attained through the elimination of duplicate
functions of the acquired CheckFree businesses.
In-Process Research and Development Write-Off. In April 1998, Fundtech
acquired from CheckFree assets and liabilities of certain businesses engaged
primarily in the design and development of cash management software products and
the development and sale of wire transfer products. Fundtech paid $18,824,000
for the acquired CheckFree businesses.
The CheckFree acquisition has been accounted for using the purchase method
of accounting and, accordingly, the purchase price has been allocated to the
assets acquired and the liabilities assumed based on their estimated fair value
at the date of acquisition. The excess of the purchase price over the estimated
fair value of the net assets acquired has been recorded, as goodwill, which is
amortized on a straight-line basis over 10 years. Fundtech recorded, according
to FASB interpretation No. 4 (FIN 4), an expense in the amount of $16,600,000
which represents the estimated value of software acquired from CheckFree for
which
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technological feasibility has not yet been established and for which no
alternative future use exists (in-process research and development).
Financial Income, Net. Net financial income increased by $381,000 to
$571,000 in the year ended December 31, 1998 from $190,000 in the year ended
December 31, 1997. The increase in the financial income is due mainly to
interest earned on cash received from our initial public offering in March 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Software License Fees. Software license fees increased by $2,594,000 to
$4,997,000 in the year ended December 31, 1997 from $2,403,000 for the year
ended December 31, 1996, an increase of 108%. This increase is primarily due to
the increased demand for Fundtech's FEDplu$ product. The majority of the
increase in 1997 was the result of sales by Fundtech's distributors, including
CheckFree and Sterling Commerce.
Maintenance and Services Fees. Maintenance and services fees increased by
$1,815,000 to $2,313,000 in the year ended December 31, 1997 from $498,000 in
the year ended December 31, 1996, an increase of 364%. The increase is
commensurate with the increase in systems sold during 1997. In addition, this
increase was attributable to the increase in the number of large systems sold
during 1997 to customers that required protocol certification by the Federal
Reserve, which in turn increased the need for on-site consulting services.
Hardware Sales. Hardware sales increased by $42,000 to $709,000 in the
year ended December 31, 1997 from $667,000 in the year ended December 31, 1996,
an increase of 6%. Although hardware sales increased in total dollars, they
decreased as a percentage of revenue to 9% for the year ended December 31, 1997
from 19% for the year ended December 31, 1996. Fundtech currently requests that
its direct-sales customers and distributors purchase and resell hardware on
their own and send it to Fundtech for testing with the software.
Software License Costs. Software license costs increased by $171,000 to
$334,000 in the year ended December 31, 1997 from $163,000 in the year ended
December 31, 1996, an increase of 105%. The gross margin on software license
fees was 93% for each of the years ended December 31, 1997 and 1996. The
increase in the dollar amount of the cost of license fees resulted from the
increase in the number of software licenses sold.
Maintenance and Services Costs. Maintenance and services costs increased
by $770,000 to $1,086,000 in the year ended December 31, 1997 from $316,000 in
the year ended December 31, 1996, an increase of 244%. The gross margin on
maintenance and services fees increased from 37% for the year ended December 31,
1996 to 53% for the year ended December 31, 1997. The increase in gross margin
was primarily due to an increased percentage of maintenance and services fee
revenue being derived from maintenance contracts associated with the sales of
software licenses in the period, which revenue typically has a higher gross
margin than service-based revenue, as well as from an increase in the rates
charged for consulting services.
Hardware Costs. Cost of hardware sales increased by $50,000 to $646,000 in
the year ended December 31, 1997 from $596,000 in the year ended December 31,
1996, an increase of 8%. Gross margin on hardware sales decreased to 9% in the
year ended December 31, 1997 from 11% in the year ended December 31, 1996. This
decrease in gross margin is due to the reduced prices of such hardware.
Software Development Expenses, Net. Software development expenses
increased by $674,000 to $2,468,000 in the year ended December 31, 1997 from
$1,794,000 in the year ended December 31, 1996, an increase of 38%. In the year
ended December 31, 1996, Fundtech received $199,000 in development grants from
the Government of Israel, while in the year ended December 31, 1997, Fundtech
received no such grants. The grants were recorded as a reduction to software
development expenses resulting in a net software development expense in 1996 of
$1,595,000. Consequently, software development expenses, net increased by
$873,000 to $2,468,000 in the year ended December 31, 1997 from $1,595,000 in
the year ended December 31, 1996, an increase of 55%. The increase in software
development costs was related to the increase in the development of Fundtech's
product offerings. During 1997, Fundtech released its PAY$tar and PAYplus RTGS
product offerings for U.S. and non-U.S. financial institutions, respectively.
18
20
Selling and Marketing Expenses, Net. Gross selling and marketing expenses
increased by $184,000 to $1,848,000 in the year ended December 31, 1997 from
$1,664,000 in the year ended December 31, 1996, an increase of 11%. However,
gross selling and marketing expenses as a percentage of revenues decreased to
23% in 1997 from 47% in 1996 due to Fundtech's shift towards selling through
distributors in 1997. In the year ended December 31, 1996, Fundtech accrued
$240,000 in marketing grants from the Government of Israel and in the year ended
December 31, 1997 Fundtech accrued $98,000 in such grants. These grants were
recorded as a reduction to selling and marketing expenses resulting in net
selling and marketing expenses of $1,750,000 and $1,424,000 in 1997 and 1996,
respectively. As a result, net selling and marketing expenses increased by 23%.
General and Administrative Expenses. General and administrative expenses
increased by $326,000 to $1,289,000 in the year ended December 31, 1997 from
$963,000 in the year ended December 31, 1996, an increase of 34%. This increase
was attributable to the growth of Fundtech, including an increase in
administrative staff support expenses from $630,000 in the year ended December
31, 1996 to $809,000 in the year ended December 31, 1997, an increase in
occupancy costs from $87,000 in the year ended December 31, 1996 to $153,000 in
the year ended December 31, 1997, and an increase in communications costs from
$10,000 in the year ended December 31, 1996 to $46,000 in the year ended
December 31, 1997. There was also an increase in other related items from
$236,000 in the year ended December 31, 1996 to $281,000 in the year ended
December 31, 1997.
Financial Income, Net. Net financial income increased by $162,000 to
$190,000 in the year ended December 31, 1997 from $28,000 in the year ended
December 31, 1996, an increase of 579%. The increase in the financial income is
due mainly to an increase in the interest earned on cash and short-term bank
deposits raised in a private placement of equity consummated by Fundtech in
March 1997.
LIQUIDITY AND CAPITAL RESOURCES
Fundtech has financed its operations primarily through the sale of equity
securities to its shareholders in the amount of approximately $42,000,000,
including net proceeds from the IPO in the amount of approximately $29,000,000,
grants from the Government of Israel and borrowings from banks.
As of December 31, 1998, Fundtech's working capital was $18,140,000. Cash
and cash equivalents and short-term bank deposits were $13,019,000 and
$4,267,000 at December 31, 1998 and 1997, respectively. Fundtech utilized net
cash from operations amounting to $2,180,000 for the year ended December 31,
1998 and utilized $1,056,000 for the year ended December 31, 1997.
In April 1998, Fundtech acquired the CheckFree businesses for approximately
$18,824,000 in cash, including expenses.
Fundtech believes that cash on hand and cash flow from operations, together
with the proceeds from this offering, will provide adequate financial resources
to finance Fundtech's current operations and the planned expansion of its
operations for the foreseeable future. However, in the event that Fundtech were
to make one or more acquisitions for consideration consisting, in whole or in
part of cash, Fundtech might be required to seek external debt or equity
financing for such acquisition or acquisitions or to fund subsequent operations.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS; MARKET RISK
The dollar cost of Fundtech's operations in Israel is influenced by the
extent to which any increase in the rate of inflation in Israel is (or is not)
offset (or is offset on a lagging basis) by the devaluation of the NIS in
relation to the dollar. Inflation in Israel will have a negative effect on the
profitability to Fundtech of contracts under which Fundtech is to receive
payment in dollars or dollar-linked NIS while incurring expenses in NIS linked
to the Israeli CPI, unless such inflation is offset by a devaluation of the NIS.
In 1995 and 1996, the rate of inflation in Israel was 8.1% and 10.6%,
respectively, and the devaluation of the NIS against the dollar was 3.9% and
3.7%, respectively. This imbalance was reversed during 1997 and 1998 when the
rate of inflation was 7.0% and 8.6%, respectively, and the rate of devaluation
was 8.8% and 17.6%, respectively, resulting in increasing the dollar cost of
operating in Israel. However, there can be no
19
21
assurance that the reversal will continue, that the recent devaluations will not
be followed by an increased rate of inflation or that Fundtech will not be
materially adversely affected in the future if inflation in Israel exceeds the
devaluation of the NIS against the dollar or if the timing of any such
devaluation lags behind increases in inflation in Israel.
A devaluation of the NIS in relation to the dollar would have the effect of
decreasing the dollar value of any asset of Fundtech which consists of NIS or
receivables payable in NIS (unless such receivables are linked to the dollar).
Such a devaluation would also have the effect of reducing the dollar amount of
any expenses or liabilities of Fundtech which are payable in NIS (unless such
expenses or payables are linked to the dollar). Conversely, any increase in the
value of the NIS in relation to the dollar would have the effect of increasing
the dollar value of any unlinked NIS assets of Fundtech and the dollar amounts
of any unlinked NIS liabilities and expenses of Fundtech.
Because exchange rates between the NIS and the dollar fluctuate
continuously (albeit with a historically declining trend in the value of the
NIS), exchange rate fluctuations and especially larger periodic devaluations
will have an impact on Fundtech's profitability and period-to-period comparisons
of Fundtech's results. Such impact is recorded in Fundtech's financial
statements as financial income or expense. To date, Fundtech has not engaged in
currency-hedging transactions intended to reduce the effect of fluctuations in
foreign currency exchange rates on Fundtech's results of operations.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using
two digits (rather than four) to identify a given year. Computer programs that
have time-sensitive software may interpret the date code "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in other normal business activities. We maintain a significant number of
computer software programs and operating systems across our entire organization,
including various administrative and billing functions, all of which are
potentially subject to Year 2000 problems.
Fundtech's Year 2000 compliance program is divided into two sections:
software programs licensed to Fundtech's customers and internal information
technology systems. Phases common to both sections include preparing inventory
of all software and hardware items affected by the Year 2000 issue, assessing
the Year 2000 compliance of identified items, repairing or replacing items that
are determined not to be Year 2000 compliant, testing items, and creating
contingency plans.
The software product section of Fundtech's compliance program includes all
Fundtech software products licensed by Fundtech's customers. As of March 24,
1999 substantially all of Fundtech's software products had been assessed for
Year 2000 compliance. The software repair and testing phases began in June 1997.
The assessment phase will be repeated periodically through January 2000 to
verify that any changes made to Fundtech's existing software do not bring any of
Fundtech's software components out of Year 2000 compliance. The repair and
testing steps will be repeated as necessary depending on the outcome of the
periodic assessments. Both phases are dependent on the availability of Year 2000
compliant versions of software from some external vendors. If Fundtech's testing
uncovers any material Year 2000 compliance issues in any widely-used versions of
our software, it may be necessary for Fundtech to upgrade all affected customers
to a newer version of Fundtech's software which is Year 2000 compliant.
The infrastructure section of our compliance program consists of hardware
and software used by Fundtech's staff in the course of operating its business.
We estimate that as of March 25, 1999 this phase was 95% complete. The
repair/replacement phase and testing phase are both expected to be completed by
June 1999, although both phases are dependent on the availability of Year 2000
compliant versions of certain software and hardware.
In its review process, Fundtech confirmed that a substantial majority of
all of its customers, the disruption of whose operations could have a material
adverse impact on Fundtech's operations, are subject to regulations
20
22
promulgated by the Federal Reserve mandating Year 2000 compliance. Fundtech
expects that substantially all such customers will comply with such regulations
prior to January 1, 2000.
Fundtech expects that its employees will perform all significant work for
the Year 2000 project described above. Fundtech does not anticipate hiring any
additional employees, nor does Fundtech anticipate incurring any significant
consulting expenses for the Year 2000 project. The cost of software tools and
consulting expenses used for detection of Year 2000 compliance problems and
repair of affected software is not currently expected to exceed $500,000.
Contingency planning has not yet begun for either section, but Fundtech
expects preliminary contingency plans to be completed by June 1999.
Compliance with Year 2000 requirements may disrupt Fundtech's ability to
continue developing and marketing its electronic payments and funds transfers
and cash and treasury management solutions. Fundtech may also incur certain
unexpected expenditures in connection with Year 2000 compliance. While
uncertainty exists concerning such expenditures, Fundtech does not believe that
Year 2000 compliance will result in a material adverse effect on its business,
financial condition or results of operations. Even if Fundtech's products and
services are Year 2000 compliant, the electronic funds transfer products and
services used by funds-transferring parties not using Fundtech's products may
not be Year 2000 compliant, thereby disrupting the ability of Fundtech's
customers to use Fundtech's products for funds transfer transactions with these
parties. Furthermore, if funds transfers were unable to be processed by
Fundtech's customers because of Year 2000 compliance problems, there can be no
assurance that third parties will not commence litigation against Fundtech for
such funds transfer failure.
EFFECTIVE CORPORATE TAX RATE
Fundtech's development facility in Israel has been granted "Approved
Enterprise" status under Israel's Law for the Encouragement of Capital
Investments. Fundtech has derived, and expects to continue to derive, a portion
of its income from Approved Enterprise investments. Under the Approved
Enterprise program, Fundtech is entitled to reductions in the tax rate normally
applicable to Israeli companies with respect to income generated from its
Approved Enterprise investments. Fundtech is entitled to a tax exemption for a
period of two years commencing in the first year in which such income is earned,
subject to certain time restrictions. The first year of tax exemption for
Fundtech Ltd. was 1998. At December 31, 1998, Fundtech had net operating loss
carryforwards in the U.S. of approximately $4.7 million. See Note 12 to the
Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Fundtech does not utilize financial instruments for trading purposes and
holds no derivative financial instruments which could expose Fundtech to
significant market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS FOR FUNDTECH
Report of Independent Auditors.............................. 22
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... 23
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1998............... 24
Statements of Changes in Shareholders' Equity for the
three year period ended December 31, 1998................ 25
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1998............... 26
Notes to Consolidated Financial Statements.................. 27
21
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[ERNST & YOUNG KOST FORER & GABBAY LOGO]
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
FUNDTECH LTD.:
We have audited the accompanying consolidated balance sheets of Fundtech
Ltd. as of December 31, 1997 and 1998, and the related consolidated statements
of operations, changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance as to whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by the management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above,
present fairly, in all material respects, the consolidated financial position of
Fundtech Ltd. as of December 31, 1997 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles in the United States.
KOST, FORER and GABBAY
Certified Public Accountants (Israel)
A Member of Ernst & Young
International
Tel Aviv, Israel
March 26, 1999
22
24
FUNDTECH LTD.
CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
-------------------
1997 1998
------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,573 $ 13,019
Short-term bank deposits.................................. 2,694 --
Trade receivables (net of allowance -- $100 in 1997 and
$301 in 1998).......................................... 2,152 7,244
Unbilled receivables...................................... 1,583 4,796
Other receivables and prepaid expenses (Note 3)........... 589 579
------- --------
Total current assets................................... 8,591 25,638
------- --------
SEVERANCE PAY FUND (Note 8)................................. 37 113
------- --------
LONG-TERM TRADE RECEIVABLES (Note 4)........................ 189 244
------- --------
FIXED ASSETS, NET (Note 5).................................. 841 3,759
------- --------
OTHER ASSETS (net of amortization of $153 in 1998).......... -- 2,963
------- --------
$ 9,658 $ 32,717
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit, including current maturities of
long-term debt......................................... $ 255 $ --
Trade payables............................................ 746 1,386
Deferred revenues......................................... 276 3,933
Other payables and accrued expenses (Note 7).............. 669 2,179
------- --------
Total Current Liabilities.............................. 1,946 7,498
------- --------
LONG-TERM LIABILITIES:
Loan payable.............................................. 15 --
Loan payable to related party (Note 6).................... 246 --
Other liabilities......................................... -- 36
Accrued severance pay (Note 8)............................ 47 135
------- --------
Total long-term liabilities............................ 308 171
------- --------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 9)
SHAREHOLDERS' EQUITY: (Note 10)
Preferred Shares:
Authorized: 5,821,011 of NIS 0.01 par value as of
December 31, 1997;
Issued and outstanding: 5,202,521 as of December 31,
1997 and none as of December 31, 1998................. 10 --
Ordinary Shares:
Authorized: 19,949,998 of NIS 0.01 par value;
Issued and outstanding: 2,774,997 as of December 31,
1997 and 10,791,952 as of December 31, 1998........... 7 34
Deferred Shares:
Authorized, issued and outstanding:
50,002 of NIS 0.01 par value shares as of December
31, 1997 and 1998................................... -- --
Additional paid-in capital................................ 12,623 41,664
Deferred compensation..................................... (197) (219)
Accumulated deficit....................................... (5,039) (16,431)
------- --------
Total shareholders' equity........................... 7,404 25,048
------- --------
$ 9,658 $ 32,717
======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
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25
FUNDTECH LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------ --------
Revenues:
Software licenses fees.................................... $ 2,403 $4,997 $ 14,007
Maintenance and services fees............................. 498 2,313 7,116
Hardware sales............................................ 667 709 2,009
------- ------ --------
Total revenues.................................... 3,568 8,019 23,132
------- ------ --------
Cost of revenues:
Software licenses costs................................... 163 334 238
Maintenance and services costs............................ 316 1,086 4,549
Hardware costs............................................ 596 646 1,631
------- ------ --------
Total cost of revenues............................ 1,075 2,066 6,418
------- ------ --------
Gross profit................................................ 2,493 5,953 16,714
------- ------ --------
Operating expenses:
Software development, net................................. 1,595 2,468 6,636
Selling and marketing, net (Note 9)....................... 1,424 1,750 2,970
General and administrative................................ 963 1,289 2,471
In-process research and development write-off (Note 1b)... -- -- 16,600
------- ------ --------
Total operating expenses.......................... 3,982 5,507 28,677
------- ------ --------
Operating income (loss)..................................... (1,489) 446 (11,963)
Financial income, net (Note 13c)............................ 28 190 571
------- ------ --------
Net income (loss)........................................... $(1,461) $ 636 $(11,392)
======= ====== ========
Basic earnings (loss) per share............................. $ (0.50) $ 0.22 $ (1.12)
======= ====== ========
Diluted earnings (loss) per share........................... $ (0.50) $ 0.08 $ (1.12)
======= ====== ========
The accompanying notes are an integral part of the consolidated financial
statements.
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26
FUNDTECH LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PREFERRED SHARES ORDINARY SHARES DEFERRED SHARES ADDITIONAL
------------------- ------------------- --------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
---------- ------ ---------- ------ ------ ------ ---------- ------------
Balance as of January 1,
1996....................... 2,655,612 $ 6 2,924,997 $ 7 50,002 $-- $ 4,885 $ --
Issuance of Preferred "C"
Shares, net of issuance
costs...................... 1,007,157 2 -- -- -- -- 2,250 --
Net loss..................... -- -- -- -- -- -- -- --
---------- ---- ---------- --- ------ --- ------- -----
Balance as of December 31,
1996....................... 3,662,769 8 2,924,997 7 50,002 -- 7,135 --
Issuance of Preferred "D"
Shares net of issuance
costs...................... 1,389,752 2 -- -- -- -- 5,287 --
Conversion of Ordinary Shares
to Preferred "D" Shares.... 150,000 -- (150,000) -- -- -- -- --
Deferred compensation related
to grant options........... -- -- -- -- -- -- 201 (201)
Amortization of deferred
compensation............... -- -- -- -- -- -- -- 4
Net income................... -- -- -- -- -- -- -- --
---------- ---- ---------- --- ------ --- ------- -----
Balance as of December 31,
1997....................... 5,202,521 10 2,774,997 7 50,002 -- 12,623 (197)
Stock dividend............... -- -- -- 8 -- -- (8) --
Exercise of stock options,
net........................ -- -- 42,325 -- -- -- 159 --
Exercise of warrants, net.... -- -- 184,609 1 -- -- 130 --
Conversion of Preferred
Shares into Ordinary
Shares..................... (5,202,521) (10) 5,202,521 10 -- -- -- --
Issuance of Ordinary Shares,
net........................ -- -- 2,587,500 8 -- -- 28,667 --
Deferred compensation related
to grant options........... -- -- -- -- -- -- 93 (93)
Amortization of deferred
compensation............... -- -- -- -- -- -- -- 71
Net loss..................... -- -- -- -- -- -- -- --
---------- ---- ---------- --- ------ --- ------- -----
Balance as of December 31,
1998....................... -- $ -- 10,791,952 $34 50,002 $-- $41,664 $(219)
========== ==== ========== === ====== === ======= =====
TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT EQUITY
----------- -------------
Balance as of January 1,
1996....................... $ (4,214) $ 684
Issuance of Preferred "C"
Shares, net of issuance
costs...................... -- 2,252
Net loss..................... (1,461) (1,461)
-------- --------
Balance as of December 31,
1996....................... (5,675) 1,475
Issuance of Preferred "D"
Shares net of issuance
costs...................... -- 5,289
Conversion of Ordinary Shares
to Preferred "D" Shares.... -- --
Deferred compensation related
to grant options........... --
Amortization of deferred
compensation............... -- 4
Net income................... 636 636
-------- --------
Balance as of December 31,
1997....................... (5,039) 7,404
Stock dividend............... -- --
Exercise of stock options,
net........................ -- 159
Exercise of warrants, net.... -- 131
Conversion of Preferred
Shares into Ordinary
Shares..................... -- --
Issuance of Ordinary Shares,
net........................ -- 28,675
Deferred compensation related
to grant options........... -- --
Amortization of deferred
compensation............... -- 71
Net loss..................... (11,392) (11,392)
-------- --------
Balance as of December 31,
1998....................... $(16,431) $ 25,048
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
25
27
FUNDTECH LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $(1,461) $ 636 $(11,392)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 102 155 529
In-process research and development write-off............. -- -- 16,600
Amortization of deferred compensation..................... -- 4 71
Capital loss (gain) on sale of fixed assets............... 5 (1) 4
Increase in trade receivables and unbilled receivables.... (1,658) (1,989) (5,008)
Decrease (increase) in other receivables and prepaid
expenses............................................... 98 (498) 120
Increase in trade payables................................ 165 324 615
Increase in other payables and accrued expenses........... 190 316 645
Other..................................................... 15 (3) (4)
------- ------- --------
Net cash provided by (used in) operating activities......... (2,544) (1,056) 2,180
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of CheckFree(a)................................. -- -- (18,824)
Investment in short-term bank deposits...................... (1,209) (6,460) --
Proceeds from short-term bank deposits...................... -- 4,975 2,694
Purchase of fixed assets.................................... (184) (574) (3,069)
Proceeds from sale of fixed assets.......................... 168 13 12
------- ------- --------
Net cash used in investing activities....................... (1,225) (2,046) (19,187)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of share capital and exercise of
stock options and warrants, net of expenses............... 2,252 5,289 28,965
Proceeds from long-term bank loans.......................... 25 -- --
Short-term bank credit, net................................. 950 (705) (250)
Principal payment of long-term loan to a related party...... -- -- (242)
Principal payment of long-term loans........................ (13) (14) (20)
------- ------- --------
Net cash provided by financing activities................... 3,214 4,570 28,453
------- ------- --------
Increase (decrease) in cash and cash equivalents............ (555) 1,468 11,446
Cash and cash equivalents at the beginning of the year...... 660 105 1,573
------- ------- --------
Cash and cash equivalents at the end of the year............ $ 105 $ 1,573 $ 13,019
======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS ACTIVITIES:
Cash paid during the period for:
Interest.................................................. $ 14 $ 24 $ 16
======= ======= ========
- ---------------
(a) Payment for acquisition of CheckFree: (see Note 1b)
Estimated fair value of assets acquired and liabilities
assumed
Working capital deficiency............................. $ (1,133)
Fixed assets........................................... 241
Goodwill............................................... 3,116
In-process research and development.................... 16,600
--------
$ 18,824
========
The accompanying notes are an integral part of the consolidated statements.
26
28
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1 -- GENERAL
a. Overview
Fundtech Ltd. was incorporated in Israel in April 1993, and commenced
operations approximately at that time. Fundtech Ltd., together with its wholly
owned U.S. subsidiary, Fundtech Corporation, ("the Company") designs, develops,
markets and supports a suite of client/server software products which enables
businesses and their banks to process payments, transfer funds and manage cash
positions electronically.
On December 29, 1998, the Company established a wholly owned subsidiary in
England. This subsidiary commenced its operations on January 6, 1999.
As to geographical destinations and customers, see Notes 13a and 13b.
b. Acquisitions
In April 1998, the Company acquired from CheckFree Holdings Corporation
("CheckFree") assets and liabilities of certain businesses ("the Acquired
Businesses") engaged primarily in the design and development of cash management
software products and the development and sale of wire transfer products ("the
Acquisition").
The Company paid $18,824 for the Acquired Businesses.
The Acquisition has been accounted for using the purchase method of
accounting, and accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based on the estimated fair value at the
date of acquisition. The excess of the purchase price over the estimated fair
value of the net assets acquired has been recorded as goodwill, which is
amortized on a straight-line basis over 10 years. The Company recorded an
expense in the amount of $16,600 which represents the estimated value of the
software acquired from CheckFree for which technological feasibility has not yet
been established and for which no alternative future use exists ("in-process
research and development").
CheckFree's financial statements are included with those of the Company
commencing with the second quarter of 1998.
The estimated fair value of the assets and liabilities acquired are
summarized as follows:
Working capital deficiency.................................. $(1,133)
Fixed assets................................................ 241
In-process research and development......................... 16,600
Goodwill.................................................... 3,116
-------
$18,824
=======
The following represents the unaudited pro forma results of operations
assuming the acquisition occurred on January 1, 1997, excluding the write-off of
the acquired in-process research and development.
27
29
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1 -- GENERAL (CONTINUED)
c. Statement of operations data
DECEMBER 31,
------------------
1997 1998
------- -------
Revenues.................................................... $16,718 $26,071
======= =======
Net income.................................................. $ 31 $ 5,493
======= =======
Basic earnings per share.................................... $ 0.01 $ 0.54
======= =======
Diluted earnings per share.................................. $ 0.01 $ 0.51
======= =======
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States.
a. Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
b. Financial statements in United States dollars
A majority of the revenues of Fundtech Ltd. and its subsidiary are
generated in United States dollars. In addition, a substantial portion of the
costs of Fundtech Ltd. and its subsidiary are incurred in dollars. Since the
dollar is the primary currency in the economic environment in which the Company
operates, the dollar is its functional currency and, accordingly, monetary
accounts maintained in currencies other than the dollar are remeasured using the
foreign exchange rate at the balance sheet date. Operational accounts and
non-monetary balance sheet accounts are measured and recorded at the rate in
effect at the date of the transaction. The effects of foreign currency
remeasurement are reported in current operations.
c. Principles of consolidation
The consolidated financial statements include the accounts of Fundtech Ltd.
and its wholly owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
d. Cash equivalents
Cash equivalents are short-term, highly liquid investments that are readily
convertible to cash, and purchased with maturities of three months or less.
e. Short-term bank deposits
Bank deposits with maturities of more than three months but less than one
year, are included in short-term deposits. The short-term deposits are presented
at cost, including accrued interest.
f. Allowance for doubtful accounts
The allowance for doubtful accounts is determined with respect to specific
debts that are doubtful of collection.
28
30
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
g. Fixed assets
Fixed assets are stated at cost. Depreciation is calculated by the
straight-line method over the estimated useful lives of the assets, at the
following annual depreciation rates:
%
-------
Office furniture and equipment.............................. 6 - 15
Computers and software...................................... 20 - 33
Motor vehicles.............................................. 15
Leasehold improvements are depreciated over the related lease periods.
h. Other assets
Other assets are stated at amortized cost. Amortization is calculated using
the straight-line method over the estimated useful lives, at the following
annual rates:
%
---
Goodwill.................................................... 10
i. Deferred taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) 109, Accounting for Income Taxes. This
Statement prescribes the use of the liability method whereby deferred tax asset
and liability account balances are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. The Company provides a valuation allowance, if
necessary, to reduce deferred tax assets to their estimated realizable value.
j. Revenue recognition
The Company generates revenues from licensing the rights to use its
software products directly to end-users and indirectly through sub-license fees
from resellers. The Company also generates revenues from sales of professional
services, including consulting, implementation, training and maintenance.
Revenues from software license agreements are recognized, in accordance
with Statement Of Position (SOP) 97-2 "Software Revenue Recognition", upon
delivery of the software when collection is probable; all license payments are
due within one year, the license fee is otherwise fixed or determinable,
vendor-specific evidence exists to allocate the total fee to the elements of the
arrangement and persuasive evidence of an arrangement exists.
Revenues from software licenses that require significant customization,
integration and installation are recognized using contract accounting on a
percentage of completion methods based on the relationship of actual costs
incurred to total estimated costs.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are first determined, in the amount of the estimated
loss on the entire contract.
Revenues from maintenance and services are recognized over the life of the
maintenance agreement or at the time that services are rendered.
Revenues from hardware sales are recognized upon shipment.
29
31
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred revenues include unearned amounts received under maintenance and
support contracts and amounts billed to customers but not recognized as
revenues.
k. Advertising expenses
Advertising expenses are charged to the statement of operations as
incurred. Advertising expenses for the years ended 1996, 1997 and 1998 were $30,
$59 and $144, respectively.
l. Software development
Software development costs incurred in the process of developing product
improvements or new products, are charged to expenses as incurred, net of
participation of the Office of the Chief Scientist.
SFAS No. 86 "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," requires capitalization of certain software
development costs subsequent to the establishment of technological feasibility.
Based on the Company's product development process, technological
feasibility is established upon completion of a working model. Costs incurred by
the Company between completion of the working model and the point at which the
product is ready for general release have been insignificant. Therefore, all
research and development costs have been expensed.
m. Concentration of credit risks
SFAS No. 105, "Disclosure of Information About Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk", requires disclosure of any significant off-balance sheet and credit risk
concentrations. The Company has no significant off-balance sheet concentration
of credit risk, such as foreign exchange contracts, option contracts or other
foreign hedging arrangements.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents,
short-term bank deposits and accounts receivable. The Company's cash and cash
equivalents and short-term bank deposits are invested in deposits with major
banks in Israel and in the United States. Management believes that the financial
institutions holding the Company's investments are financially sound, and
accordingly, minimal credit risk exists with respect to these investments. The
Company's accounts receivable are derived from sales to customers located mainly
in the United States. The Company generally does not require collateral;
however, in certain circumstances, the Company may require letters of credit,
other collateral or additional guarantees. The Company performs ongoing credit
evaluations of its customers and to date has not experienced any material
losses.
n. Basic and diluted earnings (loss) per share
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128 "Earnings per Share" ("Statement 128"), which replaced the
provision of Accounting Principles Board Opinion No. 15, "Earnings per Share."
Statement 128, which establishes the standards for computing and reporting
earnings per share, requires the presentation of basic and diluted earnings per
share. Basic earnings per share excludes dilution and is computed by dividing
income available to holders of Ordinary Shares by the weighted average number of
ordinary shares outstanding for the period. Diluted earnings per share reflect
the dilution that could occur if securities or other contracts to issue ordinary
shares were exercised or converted into ordinary shares (see Note 11).
30
32
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
o. Accounting for stock-based compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) in accounting for its
employee stock options plans. Under APB 25, when the exercise price of the
Company's employee stock options equals or is above the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The pro forma information with respect to the fair value of options granted is
provided in accordance with the provisions of Statement No. 123 (see Note 10c).
In accounting for options granted to persons other than employees and
directors, the provisions of SFAS 123 were applied.
p. Fair value of financial instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents and short-term bank deposits -- The carrying
amounts of these items approximate their fair value due to the short-term
maturity of such instruments.
Short-term bank credit and long-term loans -- The carrying amounts of the
Company's borrowing arrangements approximate their fair value. Fair values were
estimated using discounted cash flow analyses, based on the Company's
incremental borrowing rates for similar types of borrowing arrangements.
q. Comprehensive income
As of January 1, 1998, the Company adopted Statement, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components. The adoption of this
Statement had no impact on the Company's net income or shareholders' equity for
the years ended December 31, 1996, 1997 and 1998.
r. Future adoption of new accounting standard
In June 1998, the Financial Accounting Standards Board issued SFAS No.133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
This Statement establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement also requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999 and cannot be applied retroactively. The Company does not expect
that this new Statement will have any material impact on the Company's
consolidated balance sheets or results of operations.
31
33
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 3 -- OTHER RECEIVABLES AND PREPAID EXPENSES
DECEMBER 31,
------------
1997 1998
---- ----
Prepaid expenses............................................ $233 $249
Accrued income.............................................. 189 224
Employees................................................... 19 34
Government authorities...................................... 35 42
Other....................................................... 113 30
---- ----
$589 $579
==== ====
NOTE 4 -- LONG-TERM TRADE RECEIVABLES
DECEMBER 31,
------------
1997 1998
---- ----
Maturity dates -- long-term trade receivables:
First year (current maturities)........................... $444 $189
Second year............................................... 132 131
Third year................................................ 36 75
Fourth year............................................... 17 26
Fifth year................................................ 4 12
---- ----
633 433
Less -- current maturities.................................. 444 189
---- ----
$189 $244
==== ====
NOTE 5 -- FIXED ASSETS
DECEMBER 31,
----------------
1997 1998
------ ------
Cost:
Office furniture and equipment............................ $ 211 $ 798
Computers and software.................................... 910 3,494
Motor vehicles............................................ 46 156
Leasehold improvements.................................... 10 16
------ ------
1,177 4,464
------ ------
Accumulated depreciation:
Office furniture and equipment............................ 28 106
Computers and software.................................... 289 567
Motor vehicles............................................ 14 20
Leasehold improvements.................................... 5 12
------ ------
336 705
------ ------
Depreciated cost............................................ $ 841 $3,759
====== ======
Depreciation expenses for the years ended December 31, 1996, 1997 and 1998
are $ 73, $ 155 and $ 337, respectively.
32
34
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 6 -- LOAN PAYABLE TO RELATED PARTY
The loan is linked to the Israeli CPI and does not bear interest. Under the
terms of the agreement, the loan was repaid upon the initial public offering of
the Company's shares.
NOTE 7 -- OTHER PAYABLES AND ACCRUED EXPENSES
DECEMBER 31,
--------------
1997 1998
---- ------
Employees and payroll accruals.............................. $224 $ 514
Accrued expenses............................................ 269 1,365
Office of the Chief Scientist and the Fund for the
Encouragement of Marketing Activities (see Note 9)........ 139 214
Others...................................................... 37 86
---- ------
$669 $2,179
==== ======
NOTE 8 -- ACCRUED SEVERANCE PAY, NET
The Company's liability for severance pay, pursuant to Israel law, is fully
provided by an accrual. Part of the liability is funded through insurance
policies. The cash value of these policies is recorded as an asset in the
Company's balance sheets.
Severance expenses for the years ended December 31, 1996, 1997 and 1998
amounted to approximately $60, $37 and $104, respectively.
NOTE 9 -- COMMITMENTS AND CONTINGENT LIABILITIES
a. The Company participates in programs sponsored by the Israeli
Government for the support of research and development activities. Through
December 31, 1996, 1997 and 1998, the Company had obtained grants from the
Office of the Chief Scientist in the Israeli Ministry of Industry and Trade
("the OCS") aggregating to $1,115 for certain of the Company's software
development projects. The Company is obligated to pay royalties to the OCS,
amounting to 3%-5% of the sales of the products and other related revenues
generated from such projects, up to an amount equal to 100%-150% of the grants
received.
Through December 31, 1998, the Company has paid or accrued royalties to OCS
in the amount of $500. As of December 31, 1998, the aggregate contingent
liability to OCS was $753. The amounts of grants earned from the OCS for the
years ended 1996, 1997 and 1998 were $199, $0 and $0, respectively.
b. The Israeli Government, through the Fund for the Encouragement of
Marketing Activities, awarded the Company grants for participation in expenses
for overseas marketing.
The Company received an accumulated amount of grants of $404 for the years
up to and including 1998.
The Company is committed to pay royalties at the rate of 3% of the increase
in export sales, up to the amount of $228 as of December 31, 1998.
33
35
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 9 -- COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
The following table sets forth the amounts of net selling and marketing
expenses, the amounts of grants earned and the related gross selling and
marketing expenses.
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
Gross selling and marketing expenditures................. $1,664 $1,848 $3,015
Total participations of the Fund for Encouragement of
Marketing Activities................................... (240) (98) (45)
------ ------ ------
Selling and marketing expenses, net...................... $1,424 $1,750 $2,970
====== ====== ======
c. The Company rents its facilities under various operating lease
agreements, which expire on various dates, the latest of which is in 2004. The
minimum rental payments under non-cancelable operating leases are as follows:
YEAR ENDED DECEMBER 31,
- -----------------------
1999................................................ $ 618
2000................................................ 617
2001................................................ 427
2002................................................ 395
2003................................................ 280
2004................................................ 227
------
$2,564
======
Total rent expenses for the years ended December 31, 1996, 1997 and 1998,
were approximately $242, $193 and $605, respectively.
NOTE 10 -- SHARE CAPITAL
a. General
1. The Ordinary Shares of the Company are traded on Nasdaq National
Market.
2. In March 1998, the Company completed an initial public offering
(the "IPO") of 2,587,500 Ordinary Shares, which raised net proceeds in the
amount of approximately $29,000.
3. In December 1997, the Company's shareholders approved a stock
dividend of one Ordinary Share for every two Ordinary Shares outstanding to
be effected immediately prior to the completion of the IPO. All Ordinary
shares, Preferred Shares and per share data included in these financial
statements have been retroactively adjusted to reflect this issuance of
stock dividend. In connection with the IPO, all of the Company's Preferred
Shares outstanding as of December 31, 1997 were converted into 5,202,521
Ordinary Shares.
Prior to the IPO, the Company increased its authorized share capital
to 20,000,000 shares NIS 0.01 par value each. The increase in authorized
share capital is presented as of December 31, 1997.
34
36
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 10 -- SHARE CAPITAL (CONTINUED)
b. Composition of share capital
AUTHORIZED ISSUED AND OUTSTANDING
------------------------ -----------------------
DECEMBER 31, DECEMBER 31,
------------------------ -----------------------
1997 1998 1997 1998
---------- ---------- --------- ----------
(NUMBER OF SHARES)
Shares of NIS 0.01 par value:
Ordinary Shares(1)................. 14,128,987 19,949,998 2,774,997 10,791,952
Deferred Shares(2)................. 50,002 50,002 50,002 50,002
Preferred "A" Shares............... 945,000 -- 945,000 --
Preferred "B" Shares............... 2,050,995 -- 1,710,612 --
Preferred "C" Shares............... 1,175,016 -- 1,007,157 --
Preferred "D" Shares............... 1,650,000 -- 1,539,752 --
---------- ---------- --------- ----------
20,000,000 20,000,000 8,027,520 10,841,954
========== ========== ========= ==========
1. The Ordinary Shares confer upon the holders the right to receive
notice to participate and vote in general meetings of the Company, and the
right to receive dividends, if declared.
2. Deferred Shares are non-transferable and entitle their holders to
no voting, dividend or other rights except the right to receive the par
value of the shares upon dissolution of the company.
c. Warrants and options
1. The Company's outstanding warrants as of December 31, 1998, are as
follows:
PRICE PER
ISSUANCE DATE AMOUNT SHARE EXPIRATION DATE
- ------------- ------ --------- ---------------
March 21, 1996(a)....................... 3,572 $ 2.57 March 21, 1999
August 26, 1997(b)...................... 72,191 $13.00 March 13, 2000
------ ------
75,763 $12.51
====== ======
a) In 1996, the Company issued 167,859 warrants to a group of
investors. Each warrant can be exercised to purchase an Ordinary share
within three years from a date of its issuance at an exercise price of
$2.57 per warrant. During 1998, 164,287 warrants were exercised.
b) On August 26, 1997, the Company granted 72,191 warrants to a
consultant which were exercisable upon the success of the IPO. The
consultant is entitled to purchase, for a period of two years after the
IPO, Ordinary Shares of the Company, at an exercise price of $13.00 per
share. Subsequent to the balance sheet date, on February 19, 1999, the
consultant exercised 32,191 warrants.
In addition, the Company paid this consultant a fee equal to
approximately 1% of the gross proceeds of the IPO.
All the warrants are exercisable as of December 31, 1998.
A shareholder had warrants to purchase 45,000 shares of the
Company's NIS 0.01 par value ordinary shares at a total price of $30,
which warrants were exercised in May 1998 at a total price of $30.
35
37
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 10 -- SHARE CAPITAL (CONTINUED)
2. Stock options:
a. Under the Company's 1996 Stock Option Plans, the 1997 Stock
Option Plan and the 1998 Stock Option Plan (the "Plans"), options may be
granted to employees and directors of the Company or its subsidiary.
b. Pursuant to the plans, as of December 31, 1998, an aggregate of
91,716 options of the Company are still available for future grant.
c. Each option granted under the Plans to employees expires no
later than 4 to 5 years from the date of the grant. The options vest
primarily over four years. Any options which are canceled or not
exercised before expiration become available for future grants.
Options granted to directors are exercisable within a year from
their date of grant.
d. Each option granted to employees and directors is exercisable to
purchase one Ordinary Share at an exercise price of $2.33 to $17.00.
A summary of the Company's share option activity under the Plans is
as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1997 1998
------------------ ------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- -------- -------- --------- --------
Outstanding -- beginning of
the year.................... -- $ -- 415,128 $2.33 543,753 $ 3.22
Granted....................... 423,003 $2.33 334,500 3.80 624,438 $12.29
Exercised..................... -- -- -- -- (42,325) $ 3.77
Forfeited..................... (7,875) $2.33 (205,875) 2.34 (59,907) $12.55
------- ----- -------- ----- --------- ------
Outstanding -- end of the
year........................ 415,128 $2.33 543,753 $3.22 1,065,959 $ 8.16
======= ===== ======== ===== ========= ======
Options exercisable........... 70,407 $2.33 133,689 $2.54 268,355 $ 4.48
======= ===== ======== ===== ========= ======
The options outstanding as of December 31, 1998 have been separated
into ranges of exercise price, as follows:
OPTIONS WEIGHTED OPTIONS
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AS OF REMAINING AVERAGE AS OF AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICE 1998 LIFE PRICE 1998 PRICE
- ------------ ------------ ----------- -------- ------------ --------
$ 2.33 192,173 2.7 $ 2.33 137,607 $ 2.33
3.33 258,099 3.5 3.33 76,866 3.33
7.33-11.50 52,250 3.9 7.49 12,375 7.33
11.63-17.00 563,437 4.5 12.43 41,507 12.92
- ------------ --------- --- ------ ------- ------
$ 2.33-17.00 1,065,959 3.9 $ 8.16 268,355 $ 4.48
============ ========= === ====== ======= ======
36
38
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 10 -- SHARE CAPITAL (CONTINUED)
On October 20, 1998, the Board of Directors decided to reduce to
the current market price the exercise price of all employee stock
options, excluding options granted to members of the Board of Directors,
that were not exercised, canceled or forfeited, that had an original
exercise price above $11.63.
The number of options repriced was 304,500. The original exercise
price of these options ranged between $13.00-$21.50.
Compensation expense for the excess of market value over the
exercise price of options at the date of grant totaled $294 and is being
amortized to income over the vesting period for four years.
Under SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"), pro-forma information regarding net income (loss) and
earnings (loss) per share is required for grants issued after December
1994, and has been determined as if the Company had accounted for its
employee share options under the fair value method of SFAS No. 123. The
fair value for these options was estimated at the grant date using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996, 1997 and 1998: risk-free interest rates of 7.0%,
5.5% and 5.5%, respectively, dividend yields of 0.0%, volatility factors
of the expected market price of the Company's Ordinary Shares of 0.20,
0.20 and 0.75, respectively, and a weighted-average expected life of
four years per option.
The weighted average fair values of options granted for the years
ended December 31, 1996, 1997 and 1998, were $2.33, $3.61 and $6.33,
respectively.
The weighted average fair values of options granted at an exercise
price less than the market price for the years ended December 31, 1997
and 1998 were $6.28 and $8.20 respectively.
Because changes in the subjective input assumptions can materially
affect the fair value estimate, it is management's opinion that the
existing option pricing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Pro-forma information under SFAS No. 123 is as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------- ----- --------
Net income (loss) as reported.................. $(1,461) $ 636 $(11,392)
======= ===== ========
Pro-forma income (loss)........................ $(1,484) $ 586 $(11,803)
======= ===== ========
Pro-forma basic earnings (loss) per share...... $ (0.50) $0.21 $ (1.16)
======= ===== ========
Pro-forma diluted earnings (loss) per share.... $ (0.50) $0.07 $ (1.16)
======= ===== ========
d. Dividends
In the event that cash dividends are declared in the future, such dividends
will be paid in NIS. The Company does not intend to pay cash dividends in the
foreseeable future.
The Company has decided to permanently reinvest its tax exempt income (see
note 12a).
37
39
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 11 -- EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of historical basic and
diluted earnings (loss) per share:
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
--------- --------- ----------
Numerator:
Net income (loss)...................................... $ (1,461) $ 636 $ (11,392)
========= ========= ==========
Numerator for basic earnings (loss) per share -- income
(loss) available to ordinary shareholders........... $ (1,461) $ 636 $ (11,392)
========= ========= ==========
Numerator for diluted earnings (loss) per
share -- income (loss) available to ordinary
shareholders after assumed conversions.............. $ (1,461) $ 636 $ (11,392)
========= ========= ==========
Denominator:
Weighted average Ordinary shares outstanding............. 2,924,997 2,837,497 10,151,033
--------- --------- ----------
Denominator:
Denominator for basic earnings (loss) per share --
weighted-average shares............................. 2,924,997 2,837,497 10,151,033
--------- --------- ----------
Effect of dilutive securities(1)
Employee stock options.............................. -- 168,660 --
Warrants............................................ -- 135,827 --
Convertible preferred shares........................ -- 4,792,583 --
--------- --------- ----------
Dilutive potential Ordinary shares..................... -- 5,097,070 --
--------- --------- ----------
Denominator for diluted earnings (loss) per
share -- adjusted weighted-average shares and
assumed conversions............................... 2,924,997 7,934,567 10,151,033
========= ========= ==========
- ---------------
(1) The effect of the inclusion of these securities in 1996 and 1998 would be
antidilutive.
NOTE 12 -- TAXES ON INCOME
a. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959
The Company has been granted in November 1995 the status of an "Approved
Enterprise", under the Law for the Encouragement of Industry (Taxation), 1969
(the "Investment Law") and the Company has elected the alternative benefits
program, waiver of grants in return for tax exemptions. Pursuant thereto, the
income of the Company derived from the "Approved Enterprise" program is
tax-exempt for two years and will enjoy a reduced tax rate of 25% for an
eight-year period (subject to adjustment of 20% based upon the foreign
investors' ownership of the Company).
The Company completed its investment according to its first program on
November 27, 1997.
Income derived from this program is tax exempt for two years commencing in
1998 and will enjoy a reduced tax of 25% for an additional eight years.
In 1998, the Company received an approval for an expansion program of its
Approved Enterprise. Accordingly, the Company's income from the expansion
program will be tax-exempt for a period of two years and will be subject to a
reduced tax rate as mentioned above for an additional period of eight years. The
38
40
FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 12 -- TAXES ON INCOME (CONTINUED)
aforementioned benefits are in respect of the taxable income that the Company
derives from the expansion program.
The period of tax benefits detailed above is subject to limits of 12 years
from the year of commencement of production, or 14 years from the date of
granting the approval, whichever is earlier.
The tax-exempt profits that will be earned by the Company's "Approved
Enterprise" can be distributed to shareholders, without tax liability to the
Company only upon the complete liquidation of the Company. As of December 31,
1998 retained earnings included approximately $2,630 in tax exempt income earned
by the Company's "Approved Enterprise". The company has decided to permanently
reinvest its tax exempt income. Accordingly, no deferred income taxes have been
provided on income attributable to the company's "Approved Enterprise". If these
retained tax-exempt profits are distributed in a manner other than in the
complete liquidation of the Company, they would be taxed at the corporate tax
rate applicable to such profits as if the Company had not chosen the alternative
tax benefits (currently 25% for an "Approved Enterprise") and an income tax
liability would be incurred of approximately $657 as of December 31, 1998.
The Investment Law also grants entitlement to claim accelerated
depreciation on equipment used by the "Approved Enterprise" during five tax
years.
Should the Company derive income from sources other than the "Approved
Enterprise" during the periods of benefits, such income shall be taxable at
regular corporate tax rates (1996 and thereafter: 36%).
b. Tax benefits under the Israeli Law for the Encouragement of Industry
(Taxation), 1969
The Company is an "industrial company" under the Law for the Encouragement
of Industry (Taxation), 1969 and, therefore, is entitled to certain tax
benefits, including accelerated rates of depreciation and deduction of public
offering expenses.
c. Measurement of results for tax purposes under the Income Tax Law
(Inflationary Adjustments), 1985
Results for tax purposes are measured in real terms of earnings in NIS
after certain adjustments for increases in the CPI. As explained in Note 2b, the
financial statements are presented in U.S. dollars. The difference between the
annual change in the CPI and in the NIS/dollar exchange rate causes a difference
between taxable income and the income before taxes shown in the financial
statements. In accordance with paragraph 9(f) of SFAS No. 109, the Company has
not provided deferred income taxes on this difference between the reporting
currency and the tax bases of assets and liabilities.
d. Tax assessments
The Company has not received final tax assessments since its incorporation.
e. Net operating losses carryforwards
As of December 31, 1998, Fundtech Corporation had a U.S. federal net
operating loss carryforward of approximately $4,741.
f. Deferred income taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
39
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FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 12 -- TAXES ON INCOME (CONTINUED)
DECEMBER 31,
------------------
1997 1998
------- -------
U.S. net operating loss carryforwards....................... $ 1,910 $ 1,659
Other reserve and allowances (including in process, research
and development write-off $5,552 in 1998)................. 43 5,657
------- -------
Total deferred assets....................................... 1,953 7,316
Valuation allowance......................................... (1,953) (7,316)
------- -------
Balance at the end of the year.............................. $ -- $ --
======= =======
The subsidiary has provided valuation allowances in respect of deferred tax
assets resulting from tax loss carryforwards and other temporary differences,
since it has a history of losses over the past years. Management currently
believes that it is more likely than not that the deferred tax regarding the
loss carryforwards and other temporary differences will not be realized.
g. Reconciliation of the theoretical tax expenses
A reconciliation between the theoretical income tax, assuming all income is
taxed at the statutory rate applicable to income of the Company and the actual
income tax as reported in the statements of operations, is as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------- ----- --------
Pre tax income (loss).................................. $(1,461) $ 636 $(11,392)
------- ----- --------
Statutory tax rate in Israel........................... 36% 36% 36%
======= ===== ========
Theoretical tax (benefit) expense...................... $ (526) $ 229 $ (4,101)
Tax benefits arising from "approved enterprises"....... -- -- (947)
Write off of in process research and development....... -- -- 5,552
Tax adjustment in respect of inflation in Israel and
others............................................... (75) (18) (131)
Carryforward losses and other deferred taxes for which
valuation allowance was recorded..................... 853 363 --
Items for which deferred taxes were not recognized..... (258) 14 (301)
Difference between tax rate in Israel and in U.S. ..... 2 4 209
Utilization of tax losses carryforward................. -- (615) (296)
Non deductible expenses................................ 4 23 15
------- ----- --------
Income taxes........................................... $ -- $ -- $ --
======= ===== ========
h. Income (loss) before taxes on income
Income (loss) before taxes on income consists of the following:
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------ --------
Domestic (within Israel).............................. $ (57) $1,599 $ 4,183
Foreign (outside Israel).............................. (1,404) (963) (15,575)
------- ------ --------
$(1,461) $ 636 $(11,392)
======= ====== ========
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FUNDTECH LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 13 -- SELECTED STATEMENTS OF OPERATIONS DATA
a. Summary information about geographical destinations
The Company operates in one industry -- the design, development, marketing
and support of a suite of client server software products which enables
businesses and their banks to process payments, transfer funds and manage cash
positions electronically, and is divided into four main geographical
destinations.
The Company attributes revenues for external customers on the basis of
where the products are being sold as follows:
1996 1997 1998
-------- ---------------------- ----------------------
TOTAL TOTAL LONG-LIVED TOTAL LONG-LIVED
REVENUES REVENUES ASSETS REVENUES ASSETS
-------- -------- ---------- -------- ----------
Israel........................... $ 50 $ 204 $189 $ 693 $ 413
U.S.A............................ 3,518 7,471 689 19,190 6,422
Australia........................ -- 332 -- 262 --
Europe........................... -- 12 -- 1,801 --
Other............................ -- -- -- 1,186 --
------ ------ ---- ------- ------
$3,568 $8,019 $878 $23,132 $6,835
====== ====== ==== ======= ======
b. Major customers data; percentage of total revenues
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
----- ----- -----
Customer A.................................................. -- 31% 1%
=== === ==
Customer B.................................................. 3% 12% 4%
=== === ==
c. Financial income, net
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
----- ----- -----
Financial expenses:
Interest and other........................................ $ 44 $ 28 $ 24
---- ---- ----
44 28 24
---- ---- ----
Financial income:
Foreign currency translation differences, net............. (11) 57 9
Interest and other........................................ 83 161 586
---- ---- ----
72 218 595
---- ---- ----
Financial income, net....................................... $ 28 $190 $571
==== ==== ====
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PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table lists the names and ages of the current directors,
executive officers and key employees of Fundtech:
NAME AGE POSITION
- ---- --- --------
Reuven Ben-Menachem....................... 38 Chief Executive Officer, President and Chairman
Ariu Levi................................. 51 President of Fundtech Corp.
Joseph P. Mazzetti........................ 58 Executive Vice President, Sales and Marketing
Michael Carus............................. 33 Executive Vice President and Chief Financial
Officer
Gil Gadot................................. 37 Executive Vice President, Head of Israeli
Operations
Isaac Yaniv............................... 37 Senior Vice President, Head of RTGS Technology
Paul J. Citarella......................... 41 Senior Vice President, Electronic Banking
Michael S. Hyman.......................... 41 Vice President, General Counsel and Secretary
George M. Lieberman....................... 56 Director
Boaz Misholi.............................. 47 Director
Jay B. Morrison........................... 52 Director
Rina Shainski............................. 39 Director
Eddy Shalev............................... 51 Director
Rimon Ben-Shaoul.......................... 54 Director
Reuven Ben-Menachem, a co-founder of Fundtech, has served as Fundtech's
Chief Executive Officer and President, as a director of Fundtech since its
inception in April 1993 and as Chairman of the Board of Directors since August
1998. Before founding Fundtech, Mr. Ben-Menachem was employed at Logica Data
Architects, a funds transfer software provider, most recently as a Technical
Director and a Product Manager. From January 1984 until June 1986, Mr.
Ben-Menachem served as Director of Banking Systems at Manof Communications
Systems, a middleware software provider. Prior thereto, Mr. Ben-Menachem served
as a senior programmer/analyst in the Israeli Air Force.
Ariu Levi, a co-founder of Fundtech, has been President of Fundtech Corp.
since it commenced operations in 1993. Before founding Fundtech, from 1991 to
1993, Mr. Levi was the Vice President of West Coast Sales at Winter Partners, an
international banking software company. From 1981 to 1991, Mr. Levi was employed
in the payments systems consultancy and sales and marketing divisions at TMI,
Inc. and Logica USA. From 1973 to 1981, Mr. Levi was Vice President at the
Cashiers Division of Bank America, and was responsible for the management of
Bank America's consolidated cash flow and payment systems policy. Mr. Levi has
24 years of experience in the wholesale payments industry.
Joseph P. Mazzetti has served as Executive Vice President, Sales and
Marketing of Fundtech since December 1997 and served as Senior Vice President,
Sales and Marketing of Fundtech since joining Fundtech in 1994. From 1992 to
1994, Mr. Mazzetti was employed as an Executive Vice President at PRT Corp., a
Year 2000 solution company. From 1984 to 1992, Mr. Mazzetti was employed at
Logica Data Architects, most recently as Executive Vice President of the
Financial Products Group, where he had responsibility for funds transfer,
message switching, and asset/liability product lines. Mr. Mazzetti has more than
30 years of experience in information technology in the public and private
sectors with concentration in the banking and financial institutions market.
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Michael Carus has served as Executive Vice President and Chief Financial
Officer of Fundtech since May 1998, and as Senior Vice President and Chief
Financial Officer from September 1997 to May 1998. From May 1995 to August 1997,
Mr. Carus was employed by Geotek Communications Inc., a wireless communications
solution provider, most recently as Vice President and Acting Chief Financial
Officer, Corporate Controller and Chief Accounting Officer. From 1988 to 1995,
Mr. Carus was employed by Coopers & Lybrand as a Certified Public Accountant,
most recently in the position of Manager - Business Assurance.
Gil Gadot has served as Executive Vice President and Head of Israeli
Operations of Fundtech since September 1998. From 1995 until September 1998, Mr.
Gadot was Senior Vice President of Operations -- Technology, and served as Vice
President of Research and Development of Fundtech since it commenced operations
in 1993 until 1995. From 1987 to 1993, Mr. Gadot was a senior project manager of
DSSI, a leading systems and software supplier with operations in Israel and the
United States. Mr. Gadot has more than 15 years of software development
experience, particularly in advanced graphical user interface, operating and
real-time systems.
Isaac Yaniv has served as a Senior Vice President and Head of RTGS
Technology since September 1998. From 1995 until September 1998, Mr. Yaniv was
Senior Vice President and Head of Israeli Operations. From 1993 to 1995, Mr.
Yaniv was Managing Director of 2001 Systems and Services Ltd., a software
development and systems integration firm. Mr. Yaniv has more than ten years of
design and development experience in technical and management positions in the
financial industry.
Paul J. Citarella has served as Senior Vice President and General Manager
of the Electronic Banking Division of Fundtech since April 1998. Mr. Citarella
held the same position at CheckFree Corporation where he was employed from 1996
to April 1998. From 1985 to 1995, Mr. Citarella was employed by Unisys
Corporation, an information technology solutions provider, where he held
management and sales positions with that company's Financial Services Division.
Michael S. Hyman has served as Vice President, General Counsel and
Secretary of Fundtech since September 1998. From January until September 1998,
Mr. Hyman worked as a special counsel to the law firm of Wilson Sonsini Goodrich
and Rosati. In 1996 and 1997, Mr. Hyman worked in Israel as an associate at the
law firm of Leshem, Brandwein & Co. In 1994 and 1995, Mr. Hyman worked as a
foreign expert at the law firm of Dankner -- Lusky & Co. Mr. Hyman was admitted
as a member of the bar of the State of Illinois in 1982 and the State of Israel
in 1986.
George M. Lieberman has served as a Director of Fundtech since December
1998. Mr. Lieberman has been with WIT Capital, a pioneer online investment
banking firm, as Senior Vice President and CIO since February 1998. Prior to
February 1998, Mr. Lieberman held a number of positions at Merrill Lynch
including First Vice President of Technology Strategy and Planning and was a
member of the Merrill Lynch Technology Advisory Board. Mr. Lieberman has more
than 30 years of information technology management and development experience
across a broad spectrum of industries. He holds two computer related patents.
Mr. Lieberman was also responsible for the development of major systems projects
at many financial industry companies including Citibank and ADP. Mr. Lieberman
holds advanced degrees in Industrial Engineering and Operations Research.
Boaz Misholi has served as a director of Fundtech since its inception in
1993, and was co-Chairman of the Board of Directors until August 1998. Since
1992, Mr. Misholi has served as the Chairman of the Board and CEO of Aura
Investments Ltd. ("Aura"), a company listed on the Tel Aviv Stock Exchange
("TASE"), whose primary business is the development of high-tech companies. In
addition, Mr. Misholi has served as Chairman of the Board of MAGMA Industries
(an Israeli company listed on TASE) since 1993, and as Chairman of the Board of
Directors of VersaMed Ltd. since 1996. From 1982 to 1988, Mr. Misholi was the
founder, CEO and Chairman of Comverse Technology and its subsidiaries in Israel,
EFRAT and TeleMesser. Mr. Misholi has more than 20 years of involvement in
founding, managing and investing in high-tech companies in the United States and
Israel. Mr. Misholi received his B.Sc. in Computer Engineering from the
Technion, Israel Institute of Technology (the "Technion").
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45
Jay B. Morrison has served as a director of Fundtech since 1995 and was
co-Chairman of the Board of Directors until August 1998. Dr. Morrison has been a
General Partner of Newbury Ventures, Inc., a venture capital investment firm,
since 1992. Prior thereto, Dr. Morrison held a number of positions with Govett &
Co. Ltd., a European international fund management company, including Chief
Financial Officer and President of its venture capital subsidiary from 1990 to
1991. Dr. Morrison holds B.Ie. and M.S. degrees from Ohio State University and a
Ph.D. from the University of California, Berkeley, and has more than 14 years of
experience in investing in and working with emerging growth companies.
Rina Shainski was recently appointed to serve as a director of Fundtech
after serving as an alternate director of Fundtech since August 1998. Ms.
Shainski has served as Vice President Business Development of Clal Industries
and Investments Ltd., one of Israel's largest investment and holding companies,
which is invested primarily in the industrial and technology sectors, since
September 1997. From 1989 until 1996 Ms. Shainski was employed by Tecnomatix
Technologies Ltd., most recently as Director Research & Development and Vice
President Business Development. Ms. Shainski has more than 17 years of
experience in management of high-tech software companies. Ms. Shaninski holds an
M.Sc. degree in Computer Science from Weizmann Institute and a B.Sc. degree in
Physics from Tel Aviv University.
Eddy Shalev has served as a Director of Fundtech since 1996, and has been
affiliated with Fundtech since 1993. Since 1985, Mr. Shalev has served as Chief
Executive Officer of E. Shalev Ltd., an affiliate of CIBC Oppenheimer Corp., in
charge of the Tel Aviv office. Since 1992, Mr. Shalev has participated in many
private equity investments in emerging growth and technology companies. Mr.
Shalev also co-founded Mofet Israel Technology Fund, a venture capital fund, in
1992 and is a general partner of Genesis Partners LLP. Previously, Mr. Shalev
worked in the Computer Center of the Israeli Ministry of Defense. Mr. Shalev
earned an M.Sc. degree in Information Systems Management and a B.A. degree in
Statistics from Tel Aviv University.
Rimon Ben-Shaoul has served as a director of Fundtech since August 1998. He
has also served as President of Clal Industries and Investments Ltd., one of
Israel's largest holding companies, which is invested primarily in the
industrial and technology sectors, since May 1997. From 1985 until 1997, Mr.
Ben-Shaoul served as President and as a member of the board of directors of Clal
Insurance Company Ltd. Mr. Ben-Shaoul also serves as the chairman or a member of
the boards of directors of several other companies in which Clal Industries and
Investments Ltd. has interests. Mr. Ben-Shaoul earned a B.A. in Economics as
well as an M.B.A. from Tel Aviv University.
The Amended and Restated Articles of Association of Fundtech (the "Articles
of Association"), provide that, unless otherwise resolved by an ordinary
resolution of the General Meeting of Fundtech, the number of directors of
Fundtech shall be between five and seven directors. The minimum number of
directors is four. Officers of Fundtech serve at the discretion of the Board of
Directors. Directors may be removed at any time by an ordinary resolution of the
shareholders, provided the shareholders are given 21 days' notice.
Prior to every annual ordinary meeting of Fundtech, the Board of Directors
of Fundtech is to select between five and seven persons to be proposed to the
shareholders of Fundtech for election as directors of Fundtech until the next
annual ordinary meeting. Except for such nominees, no candidate for the office
of a director may be proposed at an annual ordinary meeting of Fundtech unless
not less than 72 hours and not more than 42 days prior to the date appointed for
the annual ordinary meeting, a notice in writing, signed by members holding at
least 10% of Fundtech's issued and outstanding shares who are entitled to attend
a meeting in respect of which notice has been sent and who are entitled to vote
thereat, is delivered to Fundtech stating that such members intend to propose
candidates for the office of directors instead of the nominees proposed by the
Board of Directors. The directors are elected by an ordinary resolution at every
annual ordinary meeting, for a term of office which shall end upon the convening
of the first annual ordinary meeting held after the date of their election.
The Articles of Association provide that a director may appoint, by written
notice to Fundtech, any individual to serve as an alternate director. Any
alternate director shall have all of the rights and obligations of the
appointing director except the power to appoint an alternate for himself. Unless
the period or scope of any such appointment is limited by the appointing
director, such appointment is effective for all purposes and for a
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46
period of time concurrent with the term of the appointing director. Currently,
no alternate directors have been appointed.
INDEPENDENT DIRECTORS
Under the requirements for quotation on Nasdaq, Fundtech is required to
have at least two independent directors on its Board of Directors and to
establish an audit committee, a majority at least of whose members are
independent of management. Fundtech is in compliance with this requirement.
DUTIES UNDER THE COMPANIES ORDINANCE
Fundtech is subject to the provisions of the Israeli Companies Ordinance
(New Version), 1983, as amended (the "Companies Ordinance"). The Companies
Ordinance codifies the duty of care and fiduciary duties that an "Office Holder"
has to a company. An Office Holder is defined in the Companies Ordinance as a
director, managing director, chief business manager, president, executive vice
president, vice president, other manager directly subordinate to the managing
director or any other person who fills one of the above positions in the
company, even if he or she carries a different title. Each person listed in the
table under "Management" set forth above (other than Mr. Ariu Levi, who is an
officer of Fundtech Corp.) is an Office Holder of Fundtech Ltd.
Under the Companies Ordinance, an Office Holder's duty of care and
fiduciary duty include, among other things, avoiding any conflict of interest
between the Officer Holder's position in the company and his personal or other
affairs, avoiding any competition with the company, avoiding exploiting any
business opportunity of the company in order to receive personal advantage for
himself or herself or others and revealing to the company any information or
documents relating to the company's affairs which the Office Holder has received
due to his or her position as an Office Holder. Under the Companies Ordinance,
all arrangements as to compensation by Fundtech of Office Holders who are not
directors require approval of the Board of Directors and when the majority of
the members of the Board have a personal interest, approval by the shareholders
is required. Shareholder approval is also required for all arrangements relating
to the compensation of directors in any capacity.
APPROVAL OF CERTAIN TRANSACTIONS UNDER THE COMPANIES ORDINANCE; AUDIT COMMITTEE
The Companies Ordinance requires that certain transactions, actions and
arrangements be approved as provided for in a company's Articles of Association.
In certain circumstances, shareholder, audit committee or board of directors
approval is also required. The vote required by the Audit Committee and the
Board for approval of such matters, in each case, is a majority of the
disinterested directors participating in a duly convened meeting.
The Companies Ordinance's disclosure provisions require that an Office
Holder of a company promptly disclose any direct or indirect "personal interest"
(including a personal interest of certain relatives or of a corporation in which
the Office Holder or such relative is an interested party) that he or she may
have and all related material information known to him or her, in connection
with any existing or proposed transaction (whether extraordinary or regular) by
the company in which he or she has a personal interest. An extraordinary
transaction is a transaction other than in the ordinary course of business,
otherwise than on market terms or likely to have a material impact on the
company's profitability, assets or liabilities. If the Office Holder's personal
interest derives only from the personal interest of his relative in a regular
transaction, then the Office Holder would be exempt from the above mentioned
disclosure obligations.
Once the Office Holder complies with the above disclosure requirement, the
company may approve the transaction in accordance with the provisions of its
Articles of Association. If the transaction is with the Office Holder or a third
party in which the Office Holder has a personal interest, the approval must
confirm that the transaction is not adverse to the company's interest and, in
the case of a transaction with an Office Holder, the approval must also confirm
that the Office Holder acted in good faith. Furthermore, if the transaction is
an extraordinary transaction, then, in addition to any approval stipulated by
the Articles of Association, it also must be approved by the company's Audit
Committee and then by the Board of Directors (in each case,
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without the participation of the interested Office Holder), and, under certain
circumstances, by a majority of the shareholders of the company at a general
meeting.
The Articles of Association of Fundtech provide that the Board may delegate
all of its powers to such committees of the Board as it deems appropriate,
subject to the provisions of the Companies Ordinance.
For information concerning the direct and indirect personal interests of
certain Office Holders and principal shareholders of Fundtech in certain
transactions with Fundtech, see "Certain Relationships and Related Party
Transactions."
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Companies Ordinance provides that an Israeli company cannot exempt an
officer from liability with respect to a breach of his duty of care or his
fiduciary responsibilities. However, the Articles of Association of Fundtech
provide that, subject to the provisions of the Companies Ordinance, Fundtech may
enter into a contract for the insurance of the liability, in whole or in part,
of any of its Office Holders with respect to: (i) a breach of his duty of care
to Fundtech or to another person; (ii) a breach of his fiduciary duty to
Fundtech, provided that the Office Holder acted in good faith and had reasonable
cause to assume that his act would not prejudice the interests of Fundtech; or
(iii) a financial liability imposed upon him in favor of another person in
respect of an act performed by him in his capacity as an Office Holder of
Fundtech. In addition, Fundtech may indemnify an Office Holder against: (i) a
financial liability imposed on him in favor of another person by any judgment,
including a compromise judgment or an arbitrator's award approved by a court in
respect of an act performed in his capacity as an Office Holder of Fundtech, and
(ii) reasonable litigation expenses, including attorneys' fees, incurred by such
Office Holder or charged to him by a court in proceedings instituted against him
by Fundtech or on its behalf or by another person, or in a criminal charge from
which he was acquitted, all in respect of an act performed in his capacity as an
Office Holder of Fundtech. The Articles of Association of Fundtech state that an
Office Holder of Fundtech, for purposes of this Article, includes a director, a
general manager, the chief executive officer, an executive vice president, a
vice president, other managers directly subordinate to the general manager and
any person who fills one of the above positions in Fundtech, even if he carries
a different title. Fundtech has obtained directors and officers liability
insurance for the benefit of Fundtech's Office Holders.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has formed an Audit and Control Committee (the
"Audit Committee") and a Compensation Committee. The Audit Committee, which
consists of Dr. Jay Morrison and Ms. Rina Shainski, exercises the powers of the
Board of Directors with respect to the accounting, reporting and financial
control practices of Fundtech. The Compensation Committee, which consists of
Messrs. Boaz Misholi and Eddy Shalev, Dr. Jay Morrison and Ms. Rina Shainski,
administers Fundtech's stock option plans and Fundtech's overall compensation
practices.
DIRECTOR COMPENSATION
Pursuant to its directors' stock option plan, Fundtech granted or will
grant options to purchase up to 6,000 ordinary shares to each member of the
board of directors.
We do not otherwise currently compensate directors for attending meetings
of the board of directors or committee meetings of the board of directors, but
we do reimburse directors for their reasonable travel expenses incurred in
connection with attending these meetings.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
During 1999, the directors, officers and 10% stockholders of Fundtech
became aware that Fundtech is no longer a "foreign private issuer" (as defined
in the Exchange Act) and that reports of ownership and changes in ownership of
Fundtech's equity securities that are required to be disclosed under Section
16(a) of the Exchange Act had not been previously reported. Fundtech has
implemented a program that is intended to
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ensure that the required filings will be promptly made and that directors,
officers and 10% stockholders comply with their Section 16(a) filing
requirements on a timely basis in the future.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation paid or distributed during
the years ended December 31, 1998, 1997 and 1996 by Fundtech for services
rendered by (i) Fundtech's chief executive officer and (ii) Fundtech's four most
highly compensated executive officers (the "Named Executive Officers") other
than the chief executive officer.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME & PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1)
- ------------------------- ---- -------- -------- ------------ ---------------
Reuven Ben-Menachem.................. 1998 $165,417 $140,000 21,000(2) 2,954
Chief Executive Officer, President 1997 141,246 5,000 -- 2,866
and Chairman 1996 125,000 25,000 -- 43,245
Ariu Levi............................ 1998 90,000 22,545 -- 2,954
President of Fundtech Corp. 1997 90,000 6,380 -- 2,866
1996 90,000 -- -- 3,300
Joseph P. Mazzetti................... 1998 146,875 25,000 15,000 2,954
Executive Vice President -- Sales 1997 110,000 10,000 10,500 2,866
and Marketing 1996 110,000 -- 27,000 3,300
Michael Carus........................ 1998 145,833 40,000 15,000 2,954
Executive Vice President and Chief 1997 40,833 -- 60,000 716
Financial Officer 1996 -- -- -- --
Gil Gadot............................ 1998 115,000 20,000 10,000 2,954
Executive Vice
President -- Operations 1997 90,000 20,000 -- 2,866
and Technology 1996 90,000 -- 30,002 30,798
- ---------------
(1) Represents relocation, housing and health insurance premiums.
(2) Includes 6,000 options granted pursuant to the Director's Option Plan and
15,000 options granted pursuant to Fundtech's employee option plans.
No other annual compensation, stock appreciation rights, long-term
restricted stock awards, or long-term incentive plan payouts were awarded to,
earned by, or paid to the named executive officers during any of Fundtech's last
three fiscal years.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding options granted to the
Named Executive Officers during the fiscal year ended December 31, 1998. We have
never granted any stock appreciation rights.
INDIVIDUAL GRANTS
----------------------------------------------------
NUMBER POTENTIAL REALIZABLE VALUE
OF PERCENTAGE OF AT ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(4)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------------------
NAME GRANTED FISCAL YEAR(2) SHARE(3) DATE 5% 10%
- ---- ---------- -------------- --------- ---------- ------------ -------------
Reuven Ben-Menachem............ 15,000(1) 2.4% $11.625 10/19/03 $48,176 $106,458
6,000(5) 1.0% 16.750 8/12/03 27,766 61,356
Ariu Levi...................... -- -- -- -- -- --
Joseph Mazzetti................ 15,000(1) 2.4% 11.625 10/19/03 48,176 106,458
Michael Carus.................. 15,000(1) 2.4% 11.625 10/19/03 48,176 106,458
Gil Gadot...................... 10,000(1) 1.6% 11.625 10/19/03 32,117 70,972
- ---------------
(1) Each option represents the right to purchase one ordinary share. These
options were granted pursuant to Fundtech's employee option plans on October
20, 1998. All of the options vest at a rate of 12.5% every six months.
(2) In the year ended December 31, 1998, we granted options to employees and
directors to purchase an aggregate of 624,438 ordinary shares, including
options to purchase an aggregate of 42,000 ordinary shares granted to
Fundtech's directors.
(3) The exercise price on the date of grant was equal to 100% of the fair market
value of the ordinary shares on the date of grant.
(4) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The 5% and
10% assumed annual rates of compounded stock price appreciation are mandated
by the rules of the Securities and Exchange Commission and do not represent
an estimate or projection of our future ordinary share prices. These amounts
represent certain assumed rates of appreciation in the value of our ordinary
shares from the fair market value on the date of grant. Actual gains, if
any, on stock option exercises are dependent on the future performance of
the ordinary shares and overall stock market conditions. The amounts
reflected in the table may not necessarily be achieved.
(5) Each option represents the right to purchase one ordinary share. These
options were granted to Reuven Ben-Menachem as a director on August 13, 1998
pursuant to the Directors' Option Plan. The options vest at a rate of 25%
every three months.
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OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table summarizes for each of the Named Executive Officers
option exercises during fiscal 1998, including the aggregate value of gains on
the date of exercise, the total number of unexercised options for ordinary
shares, if any, held at December 31, 1998 and the aggregate dollar value of
unexercised in-the-money options for ordinary shares, if any, held at December
31, 1998. Value of unexercised in-the-money options at fiscal year-end is the
difference between the exercise or base price of such options and the fair
market value of the underlying ordinary shares on December 31, 1998, which was
$20.625 per share. These values have not been, and may never be, realized, as
these options have not been, and may never be, exercised. Actual gains, if any,
upon exercise will depend on the value of ordinary shares on the date of any
exercise of options.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END
SHARES ACQUIRED VALUE --------------------------- ----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- -------- ----------- ------------- ----------- -------------
Reuven Ben-Menachem..... -- -- 1,500 19,500 $ 5,813 $152,438
Ariu Levi............... -- -- -- -- -- --
Joseph Mazzetti......... -- -- 24,187 28,313 438,564 371,998
Michael H. Carus........ 10,000 $79,200 5,000 60,000 86,475 913,275
Gil Gadot............... -- -- 22,501 17,501 411,656 227,231
EMPLOYMENT AGREEMENTS
On November 25, 1997, Fundtech entered into an employment agreement with
Reuven Ben-Menachem engaging him as the Chairman of the Board and Chief
Executive Officer of Fundtech and of Fundtech Corporation. The initial term of
Mr. Ben-Menachem's employment commenced on January 1, 1998 and continues until
December 31, 1999, unless renewed. Mr. Ben-Menachem's agreement sets forth his
annual base salary ($160,000) and eligibility for bonuses based on Fundtech's
achievement of certain performance goals. Fundtech may terminate Mr.
Ben-Menachem without cause, in which case Mr. Ben-Menachem would receive
severance payment in the amount equal to his then current base salary for a
period of six (6) months, plus the pro-rata portion of his bonus for such year.
Mr. Ben-Menachem's base salary is reviewed annually and any increases to his
base salary require the approval of the compensation committee. Mr.
Ben-Menachem's employment agreement incorporates a non-competition and
confidentiality agreement entered into on February 2, 1995.
Fundtech does not currently have any written employment contracts in effect
with any of the Named Executive Officers other than Reuven Ben-Menachem, its
chief executive officer.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee for the fiscal year ended
December 31, 1998 were Messrs. Boaz Misholi and Eddy Shalev and Dr. Jay
Morrison. No member of the Compensation Committee is an officer or employee of
Fundtech. The responsibilities of the Compensation Committee include
administering Fundtech's stock plans and approving the base compensation of Mr.
Reuven Ben-Menachem.
STOCK OPTION PLANS
Pursuant to a resolution of Fundtech's Board of Directors, a total of
1,300,000 ordinary shares have been reserved for the granting of options to
employees of Fundtech Ltd. and Fundtech Corp. As of March 24, 1999, 1,005,705
options were outstanding, 112,578 options have been exercised and 181,717
options are available to be issued. These options have been reserved and granted
pursuant to the following plans:
1996 Stock Option Plans
In April 1996, the Board of Directors adopted a resolution to reserve
423,003 ordinary shares for the exercise of options which Fundtech intends to
grant to employees of Fundtech Ltd. and employees of Fundtech Corp. pursuant to
two separate plans.
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The first plan for the employees of Fundtech Ltd., the 1996 Employee Stock
Option Plan for Employees of Fundtech Ltd. (the "102 Plan"), adopted in May
1996, provides for the granting of up to 150,753 ordinary shares under Section
102 of the Israel Income Tax Ordinance ("Section 102"). Pursuant to Section 102
and the rules promulgated thereunder (including the requirement that the options
and/or the resulting shares be deposited with a trustee for at least two years),
the tax on the benefit arising to the employee from the grant and exercise of
options as well as from the allotment of ordinary shares under these options is
deferred until the transfer of the options and/or ordinary shares to the
employee's name or upon sale of those options and/or ordinary shares. Fundtech
will be allowed to claim as an expense for tax purposes the amounts credited to
the employees as a benefit upon sale of the shares allotted under the plan at a
price exceeding the exercise price, when the related capital gains tax is
payable by the employee. The options granted under the 102 Plan vest over a
period of four years and expire five years from the date of grant. Options with
respect to 34,500 ordinary shares originally authorized under the 102 Plan
became subject to a resolution adopted by the Board of Directors on December 31,
1997 (the "December 1997 Resolution"), discussed more fully below.
The second plan for the employees of Fundtech Corp. and employees of
Fundtech Ltd., the 1996 Stock Option Plan for Employees at Fundtech Ltd. and
Employees of Fundtech Corp. (the "1996 U.S. Plan"), adopted in October 1996,
provides for the granting of up to 272,250 ordinary shares. The options granted
under the U.S. Plan vest over a period of four years and expire five years from
the date of grant. Options with respect to 36,750 ordinary shares originally
authorized under the U.S. Plan became subject to the December 1997 Resolution,
discussed more fully below.
1997 Stock Option Plans
On September 2, 1997, the Board of Directors adopted a resolution to
reserve 225,000 ordinary shares for the exercise of options which Fundtech
intends to grant to its employees pursuant to the Fundtech 1997 Stock Option
Plan (the "1997 U.S. Plan"). In April and July 1998, the Board of Directors
adopted resolutions to reserve an aggregate of an additional 240,000 ordinary
shares for the exercise of options to be granted under the 1997 U.S. Plan. The
options under the 1997 U.S. Plan vest over a period of four years and expire
five years from the date of grant.
On December 31, 1997, the Board of Directors adopted the December 1997
Resolution. The December 1997 Resolution governs the method by which a total of
71,150 options reserved by prior plans are to be granted (the "1997 Israel
Plan"). The 71,150 options governed by the December 1997 Resolution consist of:
(i) 34,500 options which previously had been reserved under the 102 Plan, but
which had not vested in employees as well as (ii) 36,750 options which
previously had been reserved under the U.S. Plan. In July 1998, the Board of
Directors adopted a resolution to reserve an additional 40,000 ordinary shares
for the exercise of options to be granted under the 1997 Israel Plan.
The Board of Directors has reserved an additional 329,997 ordinary shares
for the exercise of options to be allocated among the 1997 U.S. Plan and the
1997 Israel Plan.
On October 20, 1998, the Board of Directors repriced all stock options
(other than those held by Directors or the Named Executive Officers) with an
exercise price of more than $11.625 to an exercise price of $11.625 (the then
current market price of the ordinary shares).
Directors' Stock Option Plan
On May 18, 1998, Fundtech agreed to grant options to purchase an aggregate
of 42,000 ordinary shares to members of the Board of Directors. The options were
granted following the election of a Board of Directors at Fundtech's annual
general meeting of the shareholders in August 1998. These options vest over a
period of one year.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the ordinary shares as of March 24, 1999, and as adjusted to
reflect the sale of the ordinary shares in this offering, by (i) all directors,
(ii) all executive officers, (iii) all directors and executive officers as a
group, and (iv) each person who is known by Fundtech to own beneficially more
than 5% of its outstanding ordinary shares. Unless otherwise indicated, the
address of each beneficial owner listed below is c/o Fundtech Ltd., Beit
Habonim, 2 Habonim Street, Ramat Gan, Israel.
PERCENTAGE
BENEFICIALLY OWNED
NUMBER OF SHARES ---------------------------
BENEFICIALLY OWNED BEFORE AFTER
NAME OF BENEFICIAL OWNER PRIOR TO OFFERING(1) OFFERING(2) OFFERING(2)
- ------------------------ -------------------- ----------- -----------
DIRECTORS
Aura Investments Ltd.(3)........................... 1,144,590 10.5% 8.5%
Boaz Misholi(4).................................... 1,149,090 10.5% 8.6%
Clal Industries and Investments(5)................. 2,168,297 19.9% 16.2%
Rina Shainski(6)................................... 2,168,297 19.9% 16.2%
Rimon Ben-Shaoul(7)................................ 2,172,297 19.9% 16.2%
Reuven Ben-Menachem(8)............................. 365,243 3.3% 2.7%
Jerusalem Pacific Ventures(9)...................... 111,325 1.0% *%
Jay B. Morrison(10)................................ 115,825 1.0% *%
Eddy Shalev(11).................................... 62,764 * *
George M. Lieberman................................ -- -- --
EXECUTIVE OFFICERS
Ariu Levi(12)...................................... 414,150 3.8% 3.1%
Gil Gadot(13)...................................... 127,955 1.2% *
Joseph Mazzetti(14)................................ 17,750 * *
Michael Carus(15).................................. 9,375 * *
DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (10
PERSONS)......................................... 4,434,994 40.4% 32.9%
- ---------------
* Less than one percent.
(1) Except as otherwise noted and pursuant to applicable community property
laws, each person or entity named in the table has sole voting and
investment power with respect to all ordinary shares listed as owned by
such person or entity. Shares beneficially owned included shares that may
be acquired pursuant to the exercise of fully vested options that are
exercisable through May 23, 1999.
(2) Based on 10,897,968 ordinary shares outstanding prior to this offering. The
percentage of shares beneficially owned after the offering gives effect to
the sale of 2,500,000 ordinary shares offered hereby by Fundtech, assuming
no exercise of the underwriters' over-allotment option. Ordinary shares
deemed beneficially owned by virtue of the rights of any person or group to
acquire such shares within 60 days of the date of this prospectus are
treated as outstanding only for purposes of determining the percentage
owned by such person or group.
(3) Consists of 1,144,590 ordinary shares held by Aura Investments Ltd.
("Aura"), of which Mr. Misholi is Chairman of the Board and Chief Executive
Officer. Mr. Misholi disclaims beneficial ownership of such shares, except
to the extent of his proportionate pecuniary interest therein.
(4) Includes 1,144,590 ordinary shares held by Aura, of which Mr. Misholi is
Chairman of the Board and Chief Executive Officer. Mr. Misholi disclaims
beneficial ownership of such shares, except to the extent of his
proportionate pecuniary interest therein. Also includes options to purchase
4,500 ordinary shares granted pursuant to the Directors' Option Plan.
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(5) Consists of 2,168,297 ordinary shares held by Clal Industries and
Investments Ltd. ("Clal"), of which Mr. Ben-Shaoul is President. The
address of Clal is Clal Atidim Tower, Building No. 4, Tel Aviv 61581,
Israel. Mr. Ben-Shaoul disclaims beneficial ownership of the shares held by
Clal.
(6) Consists of 2,168,297 ordinary shares owned by Clal. Ms. Shainski disclaims
beneficial ownership of the shares held by Clal.
(7) Includes 2,168,297 ordinary shares owned by Clal, of which Mr. Ben-Shaoul
is President. Mr. Ben-Shaoul disclaims beneficial ownership of the shares
held by Clal. Also includes options to purchase 4,500 ordinary shares
granted pursuant to the Directors' Option Plan.
(8) Includes options to purchase 4,500 ordinary shares granted pursuant to the
Directors' Option Plan. Also includes 1,593 ordinary shares issuable upon
the exercise of options held by Mr. Ben-Menachem's spouse, who is an
employee of Fundtech.
(9) Consists of 111,325 ordinary shares held by Jerusalem Pacific Ventures,
which is affiliated with Newbury Ventures, Inc., of which Dr. Morrison is a
General Partner. Mr. Morrison disclaims beneficial ownership of such shares
except to the extent of his proportionate pecuniary interest therein.
(10) Includes 111,325 ordinary shares held by Jerusalem Pacific Ventures, which
is affiliated with Newbury Ventures, Inc., of which Dr. Morrison is a
General Partner. Mr. Morrison disclaims beneficial ownership of such shares
except to the extent of his proportionate pecuniary interest therein. Also
includes options to purchase 4,500 ordinary shares granted pursuant to the
Directors' Option Plan.
(11) Consists of 11,621 ordinary shares held by Mr. Shalev and options to
purchase 4,500 ordinary shares granted pursuant to the Directors' Option
Plan and 14,963 and 31,680 ordinary shares owned by Genesis Partners I
(Cayman) L.P. and Genesis Partners I L.P., respectively, of which Mr.
Shalev is a general partner. Mr. Shalev disclaims beneficial ownership of
the shares held by Genesis Partners I (Cayman) L.P. and Genesis Partners I
L.P., except to his proportionate pecuniary interest therein.
(12) The address of Ariu Levi is c/o Fundtech Corporation, 428 McCormick Street,
San Leandro, California 94577.
(13) Includes 22,001 and 2,625 ordinary shares issuable upon the exercise of
options held by Mr. Gadot and his wife, respectively.
(14) Consists of options to purchase 17,750 ordinary shares.
(15) Consists of options to purchase 9,375 ordinary shares.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
OPTION GRANTS
Between May 15, 1996 and October 7, 1996, Fundtech granted to certain
executive officers options to purchase an aggregate of 117,004 ordinary shares
at an exercise price of $2.33 per share. Such options vest over four years and
expire five years following the date of grant.
Between May 22, 1997 and September 17, 1997, Fundtech granted to certain
executive officers options to purchase an aggregate of 93,000 ordinary shares at
an exercise price of $3.33 per share. Such options vest over four years and
expire five years from the date of grant.
Between September 18, 1997 and May 1, 1998, Fundtech granted to certain
executive officers options to purchase an aggregate of 50,000 ordinary shares at
an exercise price of $21.00 per share. In October 1998, these options were
repriced at the then current market price for the ordinary shares of $11.625.
Such options vest over four years and expire five years from the date of grant.
On May 18, 1998, Fundtech agreed to grant options to purchase an aggregate
of 42,000 ordinary shares to members of the Board of Directors. These grants
were made following the election of a Board of Directors at Fundtech's annual
general meeting of the shareholders in August 1998. The options vest over a
period of one year.
On October 20, 1998, Fundtech granted certain executive officers options to
purchase an aggregate of 98,750 ordinary shares at an exercise price of $11.625
per share. Such options vest over four years and expire five years from the date
of grant.
REGISTRATION RIGHTS
Fundtech has entered into agreements with some of its existing shareholders
entitling them to certain registration rights (relating to 2,000,787 ordinary
shares). Pursuant to such agreements, Fundtech's existing shareholders will each
have the right, exercisable at any time within four years from the date of IPO,
to demand one registration of their shares under the Securities Act. In
addition, each of the parties to such agreements (other than Fundtech) will have
the right to have its shares included in certain registration statements of
Fundtech.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements
Consolidated Financial Statements of Fundtech Ltd. for the three years ended
December 31, 1998.
PAGE
----
Report of Independent Auditors.............................. 22
Consolidated Balance Sheets................................. 23
Consolidated Statements of Operations....................... 24
Statements of Changes in Shareholders' Equity............... 25
Consolidated Statements of Cash Flows....................... 26
Notes to Consolidated Financial Statements.................. 27
All financial statements required to be filed as part of this Annual Report
on Form 10-K are filed under "Item 8. Financial Statements and Supplementary
Data."
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FINANCIAL STATEMENT SCHEDULES
The schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
(b) REPORTS ON FORM 8-K
Fundtech did not file any reports on Form 8-K during the quarter ended
December 31, 1998.
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
3.1 Amended Memorandum of Association of Registrant*
3.2 Amended and Restated Articles of Association of Registrant*
4.1 Form of Ordinary Share Certificate*
4.2 Form of Registration Rights*
10.1 Software License, Maintenance Services and Training
Agreement, dated February 28, 1997, by and between CheckFree
and Fundtech*+
10.2 Software Development, Licensing and Maintenance Agreement,
dated September 26, 1997, by and between Merrill Lynch and
Fundtech*+
10.3 Development and Distribution License Agreement, dated August
15, 1997, by and between Compaq and Fundtech*+
10.4 Fundtech Ltd. 1996 Employee Stock Option Plan for the
Employees of Fundtech Ltd.*
10.5 Fundtech Ltd. 1996 Employee Stock Option Plan for the
Employees of Fundtech Ltd. and the Employees of Fundtech
Corp.*
10.6 Fundtech Ltd. 1997 Stock Option Plan for Fundtech
Corporation*
10.7 Fundtech Ltd. December 1997 Israeli Share Option Plan
(English summary)*
10.8 Loan Agreement, dated March 1993, between Fundtech and Aura
Investments Research & Development Ltd., as amended (English
summary)*
10.9 Grant Approvals issued by the Chief Scientist to Fundtech
(English summary of representative approval)*
10.10 Grant Approvals issued by the Marketing Fund to Fundtech
(English summary)*
10.11 Asset Purchase Agreement between CheckFree Corporation and
Fundtech Ltd., dated as of April 20, 1998**
10.12 Employment Agreement between Reuven Ben-Menachem and
Fundtech Corporation, dated November 25, 1997
10.13 Lease Agreement relating to Fundtech's Facility in Ramat
Gan, Israel (English summary)
10.14 Lease Agreement relating to Fundtech's Facility in Atlanta,
Georgia
21 Subsidiaries of Registrant
23.1 Consent of Kost, Forer & Gabbay
27.1 Financial Date Schedule for the year ended December 31, 1998
- ---------------
* Previously filed as an exhibit to the Registrant's Registration Statement on
Form F-1, as amended, dated March 13, 1998, and incorporated herein by
reference.
** Previously filed as an exhibit to the Registrant's Report on Form 6-K, dated
April 30, 1998, and incorporated herein by reference.
+ Certain portions of this agreement have been omitted pursuant to a request
for confidential treatment.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
30, 1999.
FUNDTECH LTD.
By: /s/ REUVEN BEN-MENACHEM
------------------------------------
Name: Reuven Ben-Menachem
Title: Chairman of the Board of
Directors, Chief
Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1933, this
Report has been signed by the following persons in the capacities and on the
dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ REUVEN BEN-MENACHEM Chairman of the Board of Directors, Chief March 30, 1999
- ------------------------------------------ Executive Officer and President
Reuven Ben-Menachem
Director March 30, 1999
- ------------------------------------------
Boaz Misholi
/s/ JAY B. MORRISON Director March 30, 1999
- ------------------------------------------
Jay B. Morrison
/s/ EDDY SHALEV Director March 30, 1999
- ------------------------------------------
Eddy Shalev
/s/ GEORGE M. LIEBERMAN Director March 30, 1999
- ------------------------------------------
George M. Lieberman
/s/ RINA SHAINSKI Director March 30, 1999
- ------------------------------------------
Rina Shainski
/s/ RIMON BEN-SHAOUL Director March 30, 1999
- ------------------------------------------
Rimon Ben-Shaoul
/s/ MICHAEL CARUS Executive Vice President and Chief March 30, 1999
- ------------------------------------------ Financial Officer (principal financial
Michael Carus and accounting officer)
Authorized Representative in the United States:
FUNDTECH CORP.
/s/ REUVEN BEN-MENACHEM
- ------------------------------------------
Reuven Ben-Menachem, March 30, 1999
Chief Executive Officer
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EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
----------- -------
3.1 Amended Memorandum of Association of Registrant*
3.2 Amended and Restated Articles of Association of Registrant*
4.1 Form of Ordinary Share Certificate*
4.2 Form of Registration Rights*
10.1 Software License, Maintenance Services and Training
Agreement, dated February 28, 1997, by and between CheckFree
and Fundtech*++
10.2 Software Development, Licensing and Maintenance Agreement,
dated September 26, 1997, by and between Merrill Lynch and
Fundtech*++
10.3 Development and Distribution License Agreement, dated August
15, 1997, by and between Compaq and Fundtech*++
10.4 Fundtech Ltd. 1996 Employee Stock Option Plan for the
Employees of Fundtech Ltd.*
10.5 Fundtech Ltd. 1996 Employee Stock Option Plan for the
Employees of Fundtech Ltd. and the Employees of Fundtech
Corp.*
10.6 Fundtech Ltd. 1997 Stock Option Plan for Fundtech
Corporation*
10.7 Fundtech Ltd. December 1997 Israeli Share Option Plan
(English summary)*
10.8 Loan Agreement, dated March 1993, between Fundtech and Aura
Investments Research & Development Ltd., as amended (English
summary)*
10.9 Grant Approvals issued by the Chief Scientist to Fundtech
(English summary of representative approval)*
10.10 Grant Approvals issued by the Marketing Fund to Fundtech
(English summary)*
10.11 Asset Purchase Agreement between CheckFree Corporation and
Fundtech Ltd., dated as of April 20, 1998**
10.12 Employment Agreement between Reuven Ben-Menachem and
Fundtech Corporation, dated November 25, 1997
10.13 Lease Agreement relating to Fundtech's Facility in Ramat
Gan, Israel (English summary)
10.14 Lease Agreement relating to Fundtech's Facility in Atlanta,
Georgia
21 Subsidiaries of Registrant
23.1 Consent of Kost, Forer & Gabbay
27.1 Financial Data Schedule for the year ended December 31, 1998
- ---------------
* Previously filed as an exhibit to the Registrant's Registration Statement on
Form F-1, as amended, dated March 13, 1998, and incorporated herein by
reference.
** Previously filed as an exhibit to the Registrant's Report on Form 6-K, dated
April 30, 1998, and incorporated herein by reference.
++ Certain portions of this agreement have been omitted pursuant to a request
for confidential treatment.
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