FORM 20-F
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ________
Commission File No. 0-13012
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I.I.S. Intelligent Information Systems Limited
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(Exact name of Registrant as specified in its charter and translation of
Registrant's name into English)
ISRAEL
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(Jurisdiction of incorporation or organization)
33 Jabotinsky Street, Ramat Gan, Israel
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(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Ordinary Shares, NIS 0.003 par value per share
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(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by
the annual report: As of December 31, 2000, the Registrant had 8,987,324
Ordinary Shares, NIS 0.003 par value per share, outstanding ("Ordinary
Shares").
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 ____________
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Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 _______ Item 18 X
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This Annual Report on Form 20-F contains historical information and forward-
looking statements. Statements looking forward in time are included in this
Form 20-F pursuant to the "safe harbor" provision of the Private Securities
Litigation Reform Act of 1995. They involve known and unknown risks and
uncertainties that may cause the Company's actual results in future periods to
be materially different from any future performance suggested herein. Further,
the Company operates in an industry sector where securities values may be
volatile and may be influenced by economic and other factors beyond the
Company's control. In the context of the forward-looking information provided
in this Form 20-F and in other reports, please refer to the discussions of risk
factors detailed in, as well as the other information contained in, the
Company's filings with the Securities and Exchange Commission during the past 12
months.
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PART I
Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
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Not applicable.
Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE
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Not applicable.
Item 3. KEY INFORMATION
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A. Selected Financial Data.
The following selected consolidated financial data of the Company as of December
31, 2000 and 1999 and for the three years ended December 31, 2000, are derived
from the Company's audited consolidated financial statements which are included
in this Annual Report and have been prepared in accordance with U.S. GAAP. The
selected consolidated financial data as of December 31, 1998, 1997 and 1996 and
for the years ended December 31, 1997 and 1996 have been derived from audited
consolidated financial statements not included in this Annual Report and have
also been prepared in accordance with U.S. GAAP. The Selected Financial Data
set forth below should be read in conjunction with and are qualified by
reference to Item 5 (Operating and Financial Review and Prospects), and the
Consolidated Financial Statements included elsewhere in this Annual Report.
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Statement of Operations Data (in thousands, except per share data):
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Year Ended December 31,
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1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Sales revenues $ 54,431 $37,981 $ 31,481 $ 5,408 $ 96
Maintenance and other services revenues 8,529 6,417 4,467 547 --
Total revenues 62,960 44,398 35,948 5,955 96
Cost of sales 41,542 26,930 23,327 4,484 27
Inventories write off 4,900 -- 5,442 -- --
Cost of maintenance and other services 8,935 5,316 2,836 429 --
Total cost of revenues 55,377 32,246 31,605 4,913 27
Gross profit 7,583 12,152 4,343 1,042 69
Research and 3,768 2,719 2,410 686 925
development costs, net
Selling and marketing expenses 16,199 9,245 7,589 1,417 639
General and administrative expenses 9,071 6,465 5,870 1,777 899
Write-off of trade receivables 1,200 -- 470 -- --
Restructuring & reorganization expenses 3,500 -- 1,071 467 --
Operating loss (26,155) (6,277) (13,067) (3,305) (2,394)
Financial income (expenses), net 497 (203) (1,022) 173 277
Other income (expenses), net 437 (36) (267) (1,770) (12)
Loss before income taxes and (25,221) (6,516) (14,356) (4,902) (2,129)
minority interest
Income taxes -- 75 -- -- --
Minority interest in losses of -- -- -- 55 740
subsidiary
Net loss $(25,221) $(6,591) $(14,356) $(4,847) $(1,389)
Basic and diluted net earnings (loss) $(5.43) $(1.41) $(2.55) $(0.55) $(.016)
per share
Weighted average number of shares used 4,649 4,649 5,621 8,860 8,901
in computing basic and diluted net
earnings (loss) per share (in
thousands)
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At December 31,
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Balance Sheet Data (in thousands): 1996 1997 1998 1999 2000
- ---------------------------------- ---- ---- ---- ---- ----
Working capital $18,508 $14,175 $ 3,761 $5,590 $2,254
Cash and cash equivalents 11,098 5,958 5,661 7,350 3,077
Total assets 44,131 35,326 17,992 8,496 6,349
Short-term bank credits 829 2,370 3,588 142 10
Long-term debt ---- 2,706 568 122 2,839
Shareholders' equity $22,946 $16,289 $ 4,005 $2,757 $1,882
B. Capitalization and Indebtedness.
Not applicable.
C. Reasons for the Offer and Use of Proceeds.
Not applicable.
D. Risk Factors.
An investment in the Company involves a high degree of risk. The following
risk factors should be considered carefully in evaluating an investment in the
Company. Since StoreAge Networking Technologies Ltd. ("StoreAge") is the
Company's most valuable asset, a number of the following risks relate to the
Company's investment in, and affiliation with, StoreAge.
We Depend on StoreAge's Future Success For Continued Growth. We are highly
dependent on the success of our StoreAge affiliate for future profits. We cannot
assure you that StoreAge will prove commercially successful, or that our
investment in StoreAge will be profitable. To date, StoreAge's revenues have
been very limited.
We have a History of Substantial Recurring Losses. We lost approximately
$1.4 million during the year ended December 31, 2000, $4.8 million during the
year ended December 31, 1999, $14.4 million during the year ended December 31,
1998, $6.6 million during the year ended December 31, 1997, and $25.2 million
during the year ended December 31, 1996. Our ability to achieve profitable
operations depends on, among other things, the successful marketing of storage
technology products which we have only recently introduced into the market.
However, we cannot assure you that we will become and stay profitable.
Since We Have a Minority Ownership Interest in StoreAge, Our Interest in
StoreAge's Profits and Our Ability to Direct Its Business Affairs Are Limited.
Our interest in StoreAge was reduced
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following StoreAge's recently completed private placement (described below) to a
39% ownership interest (and may be further reduced). Cisco Systems, Inc., CDC
Holdings Ltd., Morgan Keegan Entities, Genesis Partners, Koonras Technologies
Ltd., The Challenge Fund and Ophir Tech Ltd. (together, the "Private
Investors"), hold the remaining 61% ownership interest. Because we hold a
diminished percentage interest in StoreAge, our shareholders will also have a
smaller indirect interest in StoreAge. In addition, future financing needs of
StoreAge are likely to require additional private or public equity financing,
thus further diluting our shareholding percentage. The significant ownership
interest in StoreAge held by the Private Investors (which may be further
increased) and the rights granted to the Private Investors, including
preferences in liquidation and receipt of dividends, registration rights and
various negative covenants, will also reduce the flexibility that we will have
in the operation and any future disposition of StoreAge.
Our Future Capital Needs Could Adversely Affect Us if We are Unable to
Raise Additional Capital. Given the business levels we presently expect, we
believe that our existing cash on hand will be sufficient to meet our working
capital requirements, including normal capital expenditures, for at least the
next 12 months, and that StoreAge's existing cash on hand, including the net
proceeds of its recent private placement, will be sufficient to meet its working
capital requirements, including normal capital expenditures, for at least the
next 12 months. However, continued losses could reduce StoreAge's and/or our
working capital and cash equivalents, which could adversely affect StoreAge's or
our future operations unless we secure additional financing. If financing is not
available when required or is not available on acceptable terms, we may be
unable to develop or enhance our services, take advantage of business
opportunities or respond to competitive pressures.
We Have Incurred Substantial Indebtedness. We have incurred substantial
indebtedness, in the form of the $3,000,000 principal amount of debentures
described below. On December 20, 2000, we entered into a securities purchase
agreement under which we issued 30 units, each consisting of $100,000 principal
amount of our convertible secured debentures (the "Debentures") and three-year
non redeemable warrants (the "Warrants"). If a substantial portion of the
Debentures are not converted into Ordinary Shares, we will have to repay the
principal amount of the unconverted Debentures, plus interest. The degree to
which we are leveraged could have important consequences to our shareholders,
including the following: (i) our ability to obtain additional financing in the
future for acquisitions, general corporate purposes or other purposes, may be
impaired; (ii) a substantial portion of our available cash must be dedicated to
the payment of the principal of and interest on our existing debt; (iii) the
Debentures contain certain restrictive operating covenants; (iv) we might be
placed at a competitive disadvantage in comparison to certain less-leveraged
competitors; (v) the Debentures are subject to floating rates of interest,
causing us to be vulnerable to increases in interest rates; and (vi) our
substantial degree of leverage could make us more vulnerable in the event of a
continued downturn in general economic conditions. The holders of the Debentures
have a floating charge on all of our assets, including our shares in StoreAge,
our primary asset, and thus have rights in those assets in the event of a
default under the terms of the Debentures, senior to the rights of our
shareholders.
Competition From Other Companies That Have Greater Resources Than We Do
Could Adversely Affect Us. The markets in which StoreAge's technology products
will be sold, especially the United States, are highly competitive. Most of our
competitors have substantially greater financial, technical and marketing
resources than we do.
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Our Business Prospects May Suffer If StoreAge Is Unable To Keep Up With The
Rapid Technological Developments In The Storage Industry. The market for
StoreAge's products is characterized by rapidly changing technology and evolving
industry standards. The introduction of new technologies and the emergence of
new industry standards can render existing products obsolete and unmarketable.
StoreAge's ability to anticipate such changes and to develop and introduce
successfully new and enhanced products on a timely basis will be a very
significant factor in its ability to grow and to remain competitive. StoreAge
will need to make substantial expenditures (including commitments to pay
royalties) for research, development and introduction of new products. If
StoreAge is unable, for technological or other reasons, to develop products in
response to changes in the industry, its business and our prospects will be
materially and adversely affected. We cannot assure you that StoreAge will not
encounter technical or other difficulties that could delay the introduction of
new products in the future. If StoreAge is unable to introduce new products in
response to changes in the industry, StoreAge's business and the market price of
our Ordinary Shares will be materially and adversely affected.
If There Are Changes in StoreAge's Future Customers' Requirements, Its
Business May Suffer. The markets for computer and storage technology equipment
are changing rapidly and often unpredictably. Changes in customer requirements
and preferences, introduction or modification of new industry standards, or
variations in the relative cost-effectiveness of different storage technology
solutions could adversely affect its growth and future financial performance. If
future customer requirements differ from those projected by StoreAge, its future
product sales would be adversely affected.
Our Business Depends on a Limited Number of Key Personnel, the Loss of Whom
Could Adversely Affect Us. Our continued success depends to a significant
extent upon the performance of our senior executives. We do not maintain key-man
life insurance policies covering any of our executives. The loss of one or more
senior executives' services would likely have a material adverse effect on us.
Our Quarterly Results May Fluctuate. Our future quarterly results may vary
significantly due to a combination of several factors, including fluctuations in
research and development expenses and the absence of sales.
Anti-takeover Provisions Could Negatively Impact Our Shareholders.
Provisions of Israeli law may delay, prevent or make difficult an acquisition of
our Company, which could prevent a change of control and therefore depress the
price of our stock. Israeli corporate law regulates mergers and acquisitions of
shares through tender offers in certain circumstances, requires special
approvals for transactions involving significant shareholders and regulates
other matters that may be relevant to these types of transactions.
Because Our Board of Directors Is Classified, it Could Hinder a Merger,
Proxy Contest or Tender Offer, Whether or Not They Would Be Beneficial to Our
Shareholders. The classification of our board of directors could delay or
impede the removal of incumbent directors and could therefore complicate a
merger, tender offer or proxy contest involving us, even if such events would be
beneficial to the interests of our shareholders, or could discourage a third
party from attempting to acquire control of the Company.
A Substantial Number of Our Shares Can Be Sold in the Future under Rule
144, Which Could Lower the Price of Our Shares. Existing shareholders may sell
Ordinary Shares pursuant to Rule 144
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("Rule 144") promulgated under the Securities Act, or otherwise. In addition,
warrants ("Settlement Warrants") granted to certain parties as part of a
settlement of a class action filed against the Company may be exercised for
Ordinary Shares and such Ordinary Shares may then be sold. Additionally, we
issued Debentures and Warrants pursuant to a securities purchase agreement which
may be converted and exercised, respectively, for Ordinary Shares which may then
be sold. Such sales could adversely affect the price of the Ordinary Shares. We
cannot predict the effect that future sales of the Ordinary Shares, or the
availability of the Ordinary Shares for future sales, will have on the market
price of the Ordinary Shares. Prevailing market prices for the Ordinary Shares
could drop if substantial amounts of the Ordinary Shares are sold, or if others
perceive that such sales could occur. In addition, proposed changes in Israeli
taxation of capital gain may result in the sale of a substantial number of the
Ordinary Shares in a short period of time in the future.
We May Not Pay Dividends. We have not declared or paid dividends on our
Ordinary Shares since 1989, and do not intend to declare or pay any dividends to
our shareholders in the foreseeable future.
Our Share Price May Be Volatile. The market price of our Ordinary Shares
may fluctuate following the announcement of financial results or new product
introductions by us or our competitors or other matters such as military,
political or economic developments in the Middle East and the market for
technology stocks generally.
The Market Price of our Ordinary Shares May Fall Due to Dilution Resulting
From the Issuance of the Shares. If the Debentures are converted or the Warrants
or Settlement Warrants are exercised, the existing holders of the Ordinary
Shares will suffer substantial dilution.
Our Financial Results May Be Adversely Affected By Inflation and Currency
Fluctuations. Since we report our financial results in dollars, fluctuations in
rates of exchange between the dollar and non-dollar currencies may have a
material adverse affect on our results of operations. The majority of our
expenses are paid in NIS (primarily salaries) and are influenced by the timing
of, and the extent to which, any increase in the rate of inflation in Israel
over the rate of inflation in the United States is not offset by the devaluation
of the NIS in relation to the dollar. We believe that the rate of inflation in
Israel has not had a material adverse effect on our business to date. However,
our dollar costs in Israel will increase if inflation in Israel exceeds the
devaluation of the NIS against the dollar or if the timing of such devaluation
lags behind inflation in Israel. Over time, the NIS has been devalued against
the dollar, generally reflecting inflation rate differentials. Likewise, our
operations could be adversely affected if we are unable to guard against
currency fluctuations in the future. We do not currently engage in any currency
hedging transactions intended to reduce the effect of fluctuations in foreign
currency exchange rates on our results of operations. We cannot guarantee that
we will not enter into such transactions in the future or that such measures
will adequately protect us from serious harm due to the impact of inflation in
Israel.
Since StoreAge Currently Has a Limited Number of Customers, Loss of Any One
Customer in the Future as StoreAge Builds Its Customer Base Could Hurt Its
Business. A material percentage of StoreAge's revenues are derived from a
limited number customers. We do not anticipate that StoreAge generally will
enter into long-term contracts with its customers, and customers generally will
have certain rights to extend or delay the shipment of their orders or cancel
orders without penalty. Loss of one or more principal customers or a material
decrease in orders could materially and adversely affect
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its business, financial position and results of operations.
StoreAge's Proprietary Technology Enjoys Only Limited Protection; Third-
Party Claims of Infringement Could Harm StoreAge's Business. StoreAge has
limited patent protection for its products and has attempted to protect its
proprietary software and other intellectual property rights through trade
secrets, nondisclosure agreements and other measures. StoreAge has applied for
several patents for its technology. We cannot assure you, however, that StoreAge
will receive these patents and/or be able to protect its proprietary software
and other intellectual property rights adequately or that competitors, all of
whom have legitimate access to any non-proprietary technical standards utilized
by StoreAge will not be able to develop similar technology independently. For
example, a number of StoreAge's competitors are producing or plan to produce
products that incorporate Virtualization technology.
Third parties may from time to time notify StoreAge that it may be
infringing patents owned by or proprietary rights of third parties, although no
such claims are currently pending against StoreAge. If necessary, StoreAge may
have to seek a license under any such patent, or redesign or modify its products
and processes in order to avoid infringement of such patents. There can be no
assurance that such a license would be available on acceptable terms, if at all,
or that StoreAge could so avoid infringement of such patents, in which case
StoreAge's business, financial position and results of operations could be
materially and adversely affected.
There has been substantial litigation in the technology industry regarding
intellectual property rights, and litigation may be necessary to protect
StoreAge's proprietary technology. It is also possible that StoreAge will
increasingly have to litigate infringement claims with companies in the storage
system market, as the number of competitive products and companies grow. Any
such claims or litigation may be time-consuming and costly, cause product
shipment delays, require StoreAge to redesign or modify its products or require
StoreAge to enter into royalty or licensing agreements, any of which could have
a material adverse effect on StoreAge's business, operating results or financial
condition. Despite StoreAge's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of StoreAge's products or to
obtain and use information that StoreAge regards as proprietary. In addition,
the laws of some foreign countries do not protect proprietary rights to as great
an extent as do the laws of the United States. There can be no assurance that
StoreAge's means of protecting its proprietary rights will be adequate or that
StoreAge's competitors will not independently develop similar technology or
duplicate StoreAge's products or design.
StoreAge Depends on a Limited Number of Key Suppliers of Key Components to
Manufacture Its Products. StoreAge's reliance on a limited number of suppliers
for key components of its products, the absence of long term purchase agreements
with those suppliers, the fact that StoreAge is likely to maintain only minimum
inventory levels and the fact that there may be a significant market demand for
those components involve several risks in addition to inadequate supply. These
risks include potential price increases, selective supply allocations, late
deliveries and poor component quality. We cannot assure you that StoreAge will
not experience shortages of key components in the future or that StoreAge will
not be subject to selective supply allocations and increased prices of
components. Any shortage of key components and any delay or other difficulty in
obtaining such components from other suppliers and integrating them into
StoreAge's products could materially and adversely affect StoreAge's business,
financial position and results of operations.
StoreAge Depends on Subcontractors to Manufacture its Products. StoreAge
depends on
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subcontractors to manufacture its products. StoreAge's future results of
operations will be dependent in large part upon its ability to have products
manufactured and delivered promptly upon the receipt of orders and to provide
prompt and efficient service to its customers. As a result, any disruption of
its day-to-day operations, or the day-to-day operations of its subcontractors,
could have a material adverse effect upon StoreAge. StoreAge's operations,
including, research, marketing, customer service and distribution functions, are
based in and managed from a single facility in Israel. It relies on the
manufacturing facilities of subcontractors that may be based in and managed from
a small number of facilities in Israel. A fire, flood, earthquake or other
disaster or condition affecting these facilities could disable these functions.
Any such damage to, or other condition interfering with the operation of, these
facilities would have a material adverse effect on the business of StoreAge and
its financial position and results of operations.
StoreAge is Subject to Warranty Claims for Defective Products. Products
offered by StoreAge may contain defects in hardware, software or workmanship
that remain undetected until after commercial shipment. Any loss or delay in
customer or market acceptance attributable to such defects or any material
replacement or repair expenses due to any such defects could have a material
adverse effect on StoreAge's business, financial position and results of
operations.
StoreAge's Planned International Expansion Will Expose It to New Risks.
StoreAge intends to expand its operations internationally. These efforts will
require significant management attention and financial resources. There can be
no assurance that these efforts will be successful. Although sales are effected
in U.S. dollars, international sales are subject to a number of risks, including
longer payment cycles, unexpected changes in regulatory requirements, import and
export restrictions and tariffs, the burden of complying with a variety of
foreign laws, potentially adverse tax consequences, currency fluctuations, the
imposition of currency exchange or price controls, and political and economic
instability abroad. If StoreAge increases its international sales, seasonal
fluctuations may also affect to a greater extent StoreAge's total revenues due
to lower sales that typically occur during the summer months in Europe and other
parts of the world.
Conducting Business In Israel Entails Special Risks. We are incorporated
under the laws of, and our executive offices and research and development
facilities, and those of StoreAge, are located in, the State of Israel.
Although most of StoreAge's sales are made to customers outside Israel, it is
nonetheless directly affected by the political, economic and military conditions
affecting Israel. Any of StoreAge's manufacturing operations would be heavily
dependent upon components imported from outside of Israel. Any major hostilities
involving Israel or the interruption or curtailment of trade between Israel and
its present trading partners could have a material adverse effect on our
business, financial condition and results of operations and that of StoreAge.
Since the establishment of the State of Israel in 1948, a state of hostility has
existed, varying in degree and intensity, between Israel and the Arab countries.
While Israel has entered into peace agreements with both Egypt and Jordan and
several other countries have announced their intentions to establish trade and
other relations with Israel, Israel has not entered into any peace arrangement
with Syria or Lebanon. Moreover, while Israel is in the process of conducting
peace negotiations with the Palestinian Authority, since September 2000 there
has been a significant deterioration in the relationship between Israel and the
Palestinian Authority and as a result of violence between Israelis and
Palestinians, the peace process between the parties has stagnated. Efforts to
resolve the problem have failed to result in an agreeable solution. Continued
hostilities between the Palestinian community and Israel and any failure to
settle the conflict may have a material adverse effect on our business and that
of StoreAge. Further deterioration of hostilities into a full scale
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conflict might require more widespread military reserve service by our and
StoreAges's employees that may have a material adverse effect on our business
and that of StoreAge. In addition, termination or reduction of certain
governmental grants, programs and tax benefits could have a material adverse
effect on us and StoreAge.
On May 4, 2000, a committee chaired by the Director General of the Israeli
Ministry of Finance issued a report recommending a sweeping reform in the
Israeli system of taxation. The proposed reform would significantly alter the
taxation of individuals and would also affect corporate taxation. In particular,
the proposed reform would reduce but not eliminate the tax benefits available to
approved enterprises. The Israeli cabinet of the previous government approved
the recommendation in principle. The new Israeli government has declared that
it intends to recommend tax reforms but has not approved the May 4, 2000 report
or any alternative reform. Implementation of any reform requires legislation by
Israel's Knesset. We are not certain whether the proposed reform will be
adopted, when it will be adopted or what form reforms will ultimately take or
what effect it will have on us.
Item 4. INFORMATION ON THE COMPANY
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A. History and Development of the Company.
Until early 1999, I.I.S. Intelligent Information Systems Limited ("IIS" or
the "Company") was engaged in the development, manufacture, marketing and
service of data communication and intelligent peripheral products targeted at
the International Business Machines ("IBM") midrange, IBM mainframe and open
systems computing environments. In late 1998, the Company implemented a
restructuring plan (the "Restructuring") which resulted in the disposition of
most of the assets of the Company, substantial changes in the Company's
structure and a focus exclusively on storage area networking ("SAN"). For
information regarding the Company's products prior to completion (in early 1999)
of the Restructuring, please refer to the Company's Annual Report on Form 20-F
for the fiscal year ended December 31, 1997.
In January 1999, StoreAge Networking Technologies Ltd., an Israeli company,
("StoreAge") was organized as a wholly-owned subsidiary of IIS and commenced
development and marketing of products based on its SAN Virtualization
technology.
In January 1999, the Company divested itself of its 62.3% equity interest
in NetWiz Ltd., an Israeli development-stage company ("NetWiz"). In the
transaction, it transferred its entire interest in NetWiz to a non-affiliated
third party and such non-affiliated third party assumed all liabilities
associated with such interest. The divestiture required the Company to expend
$945,000. Net gain realized as a result of the sale of NetWiz amounted to
$616,000.
In February 1999, the Company disposed of its networking products and
network integration services division, which was comprised of Adanet
Communications, Ltd. ("Adanet"), an Israeli company which the Company acquired
in June 1994, and I.I.S. Computer Maintenance and Services (1983) Limited
("I.I.S. Maintenance"), an Israeli company. The Company realized net proceeds of
$1.506 million and net gain of $175,000 as a result of the sale of Adanet and
I.I.S. Maintenance.
In March 1999, the Company sold most of the assets and the buyer assumed
most of the liabilities of its Decision Data Division ("Decision Data"), which
comprised all of the Company's United States, United Kingdom and German
operations. The Company realized net proceeds of $2.487 million and net gain of
$205,000 as a result of the sale of Decision Data.
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During November 2000, the Company acquired the assets of Eastek Embedded
Systems (Meitav) Ltd. ("Eastek"), a private Israeli software company, to enhance
its R&D capabilities in order to develop synergetic software solutions for the
SAN market.
In December 2000, the Company completed a private placement of $3 million
in the issuance of convertible subordinated notes and warrants to qualified
investors. The net proceeds from the offering were used to fund the Company's
investment in StoreAge's second round of financing.
On January 25, 2001, StoreAge completed its second round of financing,
raising a total of $25 million from strategic and institutional investors in a
private placement. The Company was an investor in the financing, investing a
total of $4.2 million. Following the consummation of the financing, the Company
held 39% of the outstanding shares of StoreAge.
IIS was incorporated in Israel in 1980. The executive offices of the
Company are located at 33 Jabotinsky Street, Ramat Gan, Israel, its telephone
number is (+972) 3-751-0007 and its facsimile number is (+972) 3-575-0595. The
Company's agent in the United States is Brown Raysman Millstein Felder & Steiner
LLP located at 900 Third Avenue New York, NY 10022.
B. Business Overview.
With the ever growing need for storage in computing systems, resulting
among other things from the wide applications of Internet and Intranet
technologies, coupled with the deployment of data warehouses and other decision
support systems, the storage industry is changing its structure. Storage is
developing into a separate industry, with information technology departments
seeking to purchase storage systems independently from purchasing and upgrading
computing environments. An additional aspect of the phenomenal growth of the
installed storage is the increasing dependency of users on their storage systems
and, hence, the requirement for high availability as well as protection from
malfunctions and disasters.
With data growing at an exponential rate, it was inevitable that a logical
method of data storage, retrieval and management be developed, thus the
formation of storage area networks ("SANs"). A SAN configuration is typically
based on a "fabric" of fibre channel cables, switches and hubs that provide the
connectivity necessary to establish data patterns between a heterogeneous set of
servers and storage devices on a many-to-many basis. This storage network helps
companies gain a competitive edge by assisting them in the management of storage
and the retrieval of the explosive growth of stored digital data. SAN provides
users with the ability to quickly share information assets, regardless of their
location, in any desired format. SAN technology enables the user to connect
multiple hosts to multiple storage systems using a hub or a switch, making all
storage systems accessible to all or specified servers.
The complexity, rapid growth and increased importance of data to mission-
critical applications has led to the development of storage management
software. This software allows IT managers to effectively manage and maintain
the integrity of the data stored. The growing size and complexity of
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storage installations, combined with the rapid growth in the demand for storage,
has made the administration of storage resources more challenging as
administrators seek to solve the problem of assuring the availability of data
across multiple platforms and geographies. Consequently, the storage management
process now has much broader implications for many organizations. Enterprises
now want integrated storage management solutions that provide centralized
management of storage resources and support high data availability, scalability,
and performance in heterogeneous environments.
In order to enable total focus on the new fast growing, large SAN and fibre
channel market, in January 1999, IIS formed StoreAge, a separate entity whose
sole purpose is to concentrate on storage networking development activities.
StoreAge's goal is to be a leader in the storage networking industry. Its
personnel has extensive experience in the design and implementation of leading
edge technologies. Its mission includes the development and deployment of
products and services in areas such as (i) a Redundant Array of Independent
Disks ("RAID") storage system for Open Systems (including NT, Linux and UNIX),
(ii) storage networking middleware (distributed RAID, volume management), (iii)
storage management software, and (iv) storage related applications, such as
snapshot, remote mirroring and others. The innovative approach to enterprise
storage systems proposed by StoreAge has attracted interest from original
equipment manufacturers ("OEMs"), including those whose range of options do not
include similar solutions. Therefore, StoreAge is employing an OEM market
strategy, as opposed to a direct market strategy targeted at end-users.
StoreAge seeks to make strategic alliances with major corporations that
have developed customer bases, such as computing platforms manufacturers,
networking platforms manufacturers and possibly storage systems manufacturers.
Such strategic alliances and business cooperation may benefit StoreAge by
providing it with promising distribution avenues, while introducing these
partners to StoreAge's advanced technology and products.
Products and Systems
In June 2001, the Company launched the iSCSI SWAT line, an advanced suite
of applications for enhanced development, testing and verification of storage
solutions and peripherals based on the Internet Small Computer Systems Interface
("iSCSI") specification for the SAN. iSCSI is a new protocol that is expected
to eventually replace the "Fibre Channel" protocol currently being used for SAN.
The advantage of the iSCSI is that it works with standard Ethernet (Fast and
Gigabit Ethernet), the existing enterprise infrastructure built over many years
for a Local Area Network ("LAN"). iSCSI enables the creation of cost-effective
and high-performance storage solutions for the SAN by extending the capabilities
of regular Ethernet to include the transfer of storage data without sacrificing
ease of access. The iSCSI SWAT emulates an iSCSI environment and provides a rich
multiple document, graphical user interface ("GUI") that incorporates all
professional features and functionality within a single test environment
interface.
StoreAge's family of products include the Storage Virtualization Manager
("SVM(TM)"). StoreAge has developed the SVM(TM) as a SAN storage management
solution. The SVM(TM) is a storage area network appliance that works with
StoreAge's proprietary software through the creation and allocation of virtual
volumes ("virtualization") to provide overall virtual volume management in a
heterogeneous SAN environment. The SVM(TM) features physical device monitoring,
volume definitions
-13-
and virtual storage allocations for all servers and storage connected to the
Fibre Channel loop or fabric. It provides a common GUI through which storage is
virtualized and selectively presented to users in a flexible way. Unlike other
competing management solutions, the SVM(TM) does not impose any performance
degradation on the I/O traffic on a SAN.
The SVM(TM) serves as a platform for storage applications, such as remote
mirroring and snapshot, and is a key enabler for functions such as serverless,
LAN-free backup, shared file systems and multi-node clusters among other
services that require a uniform overall view of and multiple access to all
storage resources of the enterprise ("Storage Applications").
The SVM(TM) enables the flexibility of a centrally managed highly scalable
SAN without incurring degradation of performance or high cost of hardware. The
SVM(TM) appliance can be a small and inexpensive unit since it does not have to
conduct the actual data transfer. In the SVM(TM) based solution all storage is
handled uniformly, independent of the type of storage subsystem or operating
systems. Virtual volumes can be created, expanded, deleted, moved from server
to server and assigned to multiple servers.
An important aspect of the SVM(TM) is that Storage Applications, in
addition to human administrators (via the management GUI), can request volume
allocations from the SVM(TM) appliance, giving a SAN new capabilities for
improved data management. Applications such as Snapshot and others can create,
expand and delete their own volumes, communicating directly with the SVM(TM).
The SVM(TM) delivers the following key functions critical for SAN
management:
. SAN manageability: A central point for managing entire SAN resources via a
Web-enabled intuitive GUI effected through any standard browser and the
ability to administer multiple RAID subsystems as if it was one large
system (RAID pooling).
. SAN Scalability: Unlimited SAN growth from a number of servers, storage
capacity, I/O performance or bandwidth viewpoint.
. SAN Security: Selective presentation of volumes to users with a fabric
zoning control, which protects data from access via unauthorized path.
. High Availability: Complete redundancy is supported. Modifications to the
system are done on the fly without system re-boot. SAN bottlenecks are
avoided due to multiple paths with load balancing and automatic failover.
. Interoperability and Sharing: Volume masking enables sharing of storage
among servers with different OS and FS. Volumes can be seen by more than
one host, creating an ideal platform for shared file systems and clusters.
Volumes can be moved from host to host (without copying).
. Performance Enhancement: Striping across RAID subsystems for increased
performance. Performance statistics help to facilitate removal of SAN
bottlenecks.
SVM(TM) provides a central management point for storage virtualization while the
data is directly transferred between the host computer and storage devices.
This architecture meets all key requirements from a good virtualization scheme
and in particular the total independence of the virtual storage from both the
servers and the storage subsystems, thus creating true heterogeneous SANs.
-14-
SVM(TM) provides significant scalability, performance, reliability and price
advantages over alternative architectures.
Sales and Marketing
StoreAge's objective is to become the leading provider of SAN Storage
Management software solutions offering high availability and increased
protection of data over distributed networks. In order to achieve this
objective, StoreAge is pursuing the following strategies:
. Accelerate sales through strategic partnerships with OEM suppliers
. Develop a reseller distribution channel
. Accelerate the build-up of its U.S. operation
StoreAge targets its products to industry leaders in the following areas:
. Server Suppliers. These companies design, make and sell the computers that
are shared on a network. Traditionally they are also the largest suppliers
of storage used by these servers. Some of the largest companies in this
area include Compaq Computer Corp., Dell Computer Corp., Hewlett-Packard
Company, IBM Corp. and Sun Microsystems, Inc.
. Storage System Suppliers. Storage systems suppliers make products such as
disk and tape drives and cartridge libraries. Some of the biggest
enterprises in this space include Data General, a Division of EMC Corp. and
Storage Technology Corp.
. Systems Integrators. Systems integrators custom-design data storage systems
for organizations. These companies include Electronic Data Systems
Corporation (EDS) and Datalink Corp.
. Suppliers of Computer-Based Products with High Storage Content.
. Storage Service Providers. These companies provide outsourced data storage
services to organizations. The main companies include StorageNetworks, Inc.
and Storability, Inc.
StoreAge has traditionally marketed its products through one-on-one
presentations to potential OEM partners, as well as through appearances at
industry conferences/trade shows. In addition, StoreAge also promotes its
products through frequent press releases covering its developments and
technological breakthroughs and through StoreAge's Web site located at
www.store-age.com.
- -----------------
StoreAge's major markets are in the US. In particular, most of the
potential OEM partners are U.S. based companies with only a small number in
Europe and the Far East. StoreAge opened its first U.S. office in Scottsdale,
Arizona, in May 2000. StoreAge has started hiring key personnel in the U.S.
office and plans on expanding its U.S. presence in the near future. Until
recently, the members of senior management shared sales and marketing
responsibilities.
Product Research and Development
The Company is currently engaged in the Internet Small Computer Systems
Interface ("iSCSI") space and is looking into new applications for its iSCSI and
storage expertise. The Company has a continuing program of product research and
development that is exclusively directed at developing new data storage products
for open systems environments. The Company's research and development staff
-15-
works closely with its marketing and field personnel in an effort to determine
emerging user needs and continually reviews and evaluates technological changes
affecting the Company's markets.
In past years, a significant portion of the Company's and StoreAge's
research and development expenses have been financed by grants from the office
of the Chief Scientist of the Israeli Ministry of Industry and Trade (the "Chief
Scientist"), which typically provides grants up to 50% of the expenditures
connected with a project which it approves, in return for royalties at the rate
of 3% to 5% of sales of products developed with funds provided, up to a dollar-
linked amount equal to the grant received bearing interest of LIBOR in respect
of the particular project. The terms of these grants prohibit the manufacture
of products developed outside of Israel and the transfer of the technology
developed through projects funded by these grants to any person or entity
without the prior consent of the Research Committee of the Chief Scientist.
There can be no assurance that such consent, if requested, will be granted.
Such restrictions do not apply to exports of the Company's or StoreAge's
products developed with the assistance of the Chief Scientist. As of December
31, 2000, both the Company and StoreAge ceased to apply for grants from the
Chief Scientist due to the restrictions described above and certain other
restrictions on the sale of technology under the terms of the grants. The
elimination of such grants requires additional expenditures by the Company and
StoreAge and, accordingly, will result in increased net research and development
expenses in the future.
The following table shows the net consolidated research and development
expenditures of the Company and participation in such expenditures by the Chief
Scientist since 1998:
Year Ended December 31,
-----------------------
1998 1999 2000
(in thousands)
Company-funded research and $2,410 $ 686 $ 925
Development expenditures
Chief Scientist participation $ 261 $ 223 $ 403
------ ----- ------
Total outlay for research and
Development $2,671 $ 909 $1,328
====== ===== ======
In 1998, 1999 and 2000, the Company incurred royalty expenses of
approximately $20,000, $63,000 and $15,000 respectively, for payment to the
Chief Scientist. These amounts were included in cost of sales expenses for such
periods. The Company's net research and development expenses constituted 6.7%
and 11.5% of total revenues for the years ended December 31, 1998 and 1999,
respectively. The Company's net research and development expenses exceeded
total revenues by $829,000 for the year ended December 31, 2000.
As of December 31, 2000, the Company and StoreAge had a research and
development staff of 5 and 25 employees, respectively. All such employees are
engineers and technicians engaged in applied research, development of new
products and enhancement of existing products.
Despite the Company's commitment to product research and development, there
can be no assurance that any of the Company's development efforts will result in
commercially successful
-16-
products, that such products will be released in a timely manner or that the
Company will be able to respond effectively to technological changes or new
product announcements by others.
Customer Service and Support
In conjunction with implementing an OEM strategy, StoreAge has chosen not
to invest a significant part of its resources in building direct customer
service and support, but instead has chosen to invest in making strategic
alliances with major corporations that have developed customer service and
support. StoreAge expects to indirectly provide the same level of support as
many of its competitors through these alliances. Therefore, service revenues
are not expected to comprise a significant portion of StoreAge's revenues.
StoreAge's office in Arizona is providing the first line of support to its OEM
customers and system integrators.
Manufacturing
StoreAge expects that some of its customers will prefer to license its
designs and have the modules produced by their own sources, and, in such cases,
it is not expected that StoreAge will be directly involved in the production or
assembly of hardware modules, unless its OEM customers require it.
To the extent necessary, StoreAge expects to implement its production
through authorized sub-contractors. By relying on other companies to supply
certain key components of its products that are available only from limited
sources in the quantities and quality demanded by StoreAge, the company runs the
risk that there may be a shortage in certain products it obtains from these
outside vendors. For example, some of StoreAge's hardware modules are built
based on components which may not be available in great quantities in the
market, and may have only a single source, such as Intel and Q-Logic. While
these sources are major, and generally reliable companies, the fact that there
is a single source for some of the components may result in potential supply
problems.
Competition
StoreAge believes it is the first company that has completed the
development of an Asymmetric (off-the-data-path) SAN volume (virtualization)
management appliance. On June 9, 2000, Compaq announced its VersaStor
architecture which is based on similar concepts, however this was a technology
announcement only and no products have been formally launched.
StoreAge's primary competition currently is from companies that offer
Symmetric storage virtualization (in-the-data-path). Included in this category
are DataCore Software Corporation, FalconStor, StorageApps Inc. and Vicom
Systems, Inc. Veritas Software has also announced its intention to release such
a software product. StoreAge believes that its off-the-data-path Virtualization
technology is far superior to the alternative architecture. StoreAge believes
that its system architecture provides it with competitive advantages over its
competitors because of main user benefits such as incremental growth capability,
scalability, availability and performance and main OEM benefits including cost
effective solutions and time to market advantage. However, even with these
competitive advantages, there can be no assurance that StoreAge will be able to
compete successfully or that competition will not have a material adverse effect
on its results of operations.
-17-
In addition, there are a number of companies whose product offerings fall
within the bounds of the storage management software market. These companies
include major players in the data storage industry, such as Commvault Systems,
Inc., Computer Associates International, Inc., Data General, a Division of EMC
Corp., Hewlett-Packard Company, IBM Corp., Legato Systems, Inc., Network
Specialists, Inc. and Veritas Software. Nevertheless, these companies' storage
management applications relate primarily to data backup and replication,
disaster recovery and load balancing rather than SAN virtualization and
management and, therefore, do not compete directly with StoreAge's solutions,
for the most part.
Some of StoreAge's potential customers may become its competitors in the
storage management software market. These companies may dedicate or acquire
greater resources in the future geared toward providing storage management
solutions that compete directly with StoreAge's products. Such actions could
preclude any future relationship between StoreAge and these customers.
StoreAge also expects that competition will increase as a result of growth
in the SAN industry and the resulting increase in demand for SAN management
solutions. Current and potential competitors may also establish cooperative
relationships among themselves or with third parties, including StoreAge's
potential OEM partners, in order to increase the ability of their products to
address the needs of prospective customers and end-users. Accordingly, new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share.
See Note 12 to the Company's Consolidated Financial Statements for
information regarding the geographic distribution of the Company's revenues
since 1998. Substantially all revenues were generated by assets and operations
which have subsequently been disposed of in the Restructuring.
Proprietary Technology and Intellectual Property
To date, the Company has not entered into any agreements with third-parties
whereby it has sold substantially all of its existing rights to technology.
However, the Company does contemplate licensing as a means of exploiting its
technology as part of its business.
The Company and StoreAge rely on a combination of trade secret, patent and
trademark law, together with non-disclosure agreements and technical measures,
to establish and protect proprietary rights in their products. StoreAge has
filed several patents for its technology and plans to apply for patent
protection on more of its inventions in the future. Currently, StoreAge has very
limited patent protection and has registered only certain of its trademarks. It
may be possible for unauthorized third parties (including competitors) to copy
aspects of StoreAge's products, whether or not in violation of StoreAge's
rights. However, the Company believes that, because of the rapid pace of
technological change in the networking and data communications and computer
industries, legal protection for its products is less significant to its
prospects than the knowledge, ability and expertise of its management and
technical personnel to rapidly develop and produce new products and product
enhancements.
The Company and StoreAge do not believe that their products, trademarks or
other proprietary rights infringe upon the proprietary rights of any third
parties. However, there can be no assurance that one or more third parties will
not make a contrary assertion. The cost of responding to any such assertion may
be material, whether or not the assertion is validated.
-18-
C. Organizational Structure.
In January 1999, StoreAge, an Israeli company, was organized as our wholly-
owned subsidiary and commenced development and marketing of products based on
Storage Area Network ("SAN") Virtualization technology. We currently hold 39%
of the outstanding shares of StoreAge.
D. Property, Plants and Equipment.
Our executive offices are currently located at 33 Jabotinsky Street, Ramat
Gan, Israel, where we lease premises of 200 square meters and conduct all of our
business activities. The annual rent for this space is approximately $43,000,
with total annual occupancy costs, including local taxes, utilities, maintenance
and other costs of approximately $24,000.
StoreAge conducts all of its activities, including their corporate
administration, research and development and testing laboratory activity from a
3,150 square foot rented facility located in the Gutwirth Science-Based
Industries Center, Technion City, Haifa, Israel. The annual rent for this space
is approximately $42,000, with total annual occupancy costs, including local
taxes, utilities, maintenance and other costs of approximately $12,000.
StoreAge also leases space of 4420 square feet for its sales and marketing
office located in Scottsdale, Arizona. The annual rent for this space is
approximately $55,044. StoreAge plans to enter into a new lease for space of
7,650 square feet located in the Nesher area in Haifa, Israel, in which StoreAge
will conduct their corporate administration, research and development and
testing laboratory activity.
Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
- ------- --------------------------------------------
Forward Looking Statements
Some of the information in this section contains forward looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward looking words such as "expect", "anticipate", "believe",
"seek", "estimate" and similar words. Statements that we make in this section
that are not statements of historical fact also may be forward looking
statements. Forward looking statements are not guarantees of our future
performance, and involve risks, uncertainties and assumptions that may cause our
actual results to differ materially from the expectations we describe in our
forward looking statements. There may be events in the future that we are not
accurately able to predict, or over which we have no control. You should not
place undue reliance on forward looking statements. We do not promise to notify
you if we learn that our assumptions or projections are wrong for any reason. We
disclaim any obligation to update our forward looking statements. See "Risk
Factors" for more information.
A. Operating Results.
General
IIS is an Israeli company which, following the Restructuring, operates in
one business segment - the research, development and, ultimately, production,
marketing, sale and/or licensing of products based on SAN space.
-19-
The functional currency of the Company and its subsidiaries is the U.S
dollar, as the U.S. dollar is the primary currency of the economic environment
in which the Company and its subsidiaries have operated and expect to continue
to operate in the foreseeable future. The majority of the Company's operations
is currently conducted in Israel and most of the Israeli expenses are currently
paid in new Israeli shekels ("NIS"); however, most of the expenses are
denominated and determined in U.S. dollars. Financing and investing activities
including loans, equity transactions and cash investments, are made in U.S.
dollars. Most of the Company's revenues (58.3% in 2000 and 72.9% in 1999) are
from sales and services outside of Israel in United States dollars and other
non-Israeli currencies. Where practicable, arrangements are made to ensure that
the dollar value of most export sales made in non-dollar currencies is
maintained. A majority of the Company's purchases of materials and components
are also made in non-Israeli currencies (mainly the dollar). In addition, most
marketing costs are incurred outside of Israel. Thus, the functional currency
of the Company is the dollar.
Transactions and balances originally denominated in dollars are presented
at their original amounts. Transactions and balances in other currencies are
re-measured into dollars in accordance with the principles set forth in
Statement No. 52 of the Financial Accounting Standards Board of the United
States ("FASB") "Foreign Currency Translation".
The implementation of the Restructuring has resulted in the disposition of
most assets of the Company, substantial changes in the Company's structure and a
focus on the SAN space, which the Company believes can be structured to become
profitable in the next several years. This new business, run by the Company and
StoreAge, an affiliate of the Company, focuses on the storage market. The
Company believes that new market trends have resulted in the creation of a
significant market niche which can be exploited by the Company using its storage
technology and which could generate significant sales within two to three years.
Results of Operations
The following tables set forth for the periods indicated selected income
statement items as a percentage of the total revenues of the Company.
Year Ended December 31
--------------------------------------------------
1998 1999 2000
--------------------------------------------------
Sales revenues 87.6% 90.8% 100.0%
Maintenance and other services revenues 12.4 9.2 0
------------ ------------ ------------
Total revenues 100.0% 100.0% 100.0%
------------ ------------ ------------
Cost of sales 64.9 75.3 28.1
Inventories Write Off 15.1 -- --
Cost of maintenance and other services 7.9 7.2 0
------------ ------------ ------------
Total cost of revenues 87.9 82.5 28.1
------------ ------------ ------------
Gross profit 12.1 17.5 71.9
Research and development costs, net 6.7 11.5 *
-20-
Selling, marketing, general and administrative 37.4 53.6 *
expenses
------------ ------------ ------------
Non recurring charges 4.3 7.9 *
(trade receivables write off and restructuring and
reorganization)
Operating loss (36.3) (55.5) *
------------ ------------ ------------
Financial and other (3.6) (26.8) *
income (expenses), net
Loss before minority interest in losses of subsidiary (39.9) (82.3) *
Minority interest in losses of subsidiary -- 0.9 *
------------ ------------ ------------
Net loss (39.9%) (81.4%) *
____________________
* Greater than revenues
Years Ended December 31, 2000, 1999 and 1998
In 2000, total revenues decreased 98.4% compared with 1999, and in 1999,
total revenues decreased 83.4% compared with 1998, reflecting the effects of the
Restructuring
Revenues from sales and services to unaffiliated customers outside of
Israel represented approximately 58.3% of revenues in 2000 and 72.9% of revenues
in 1999, compared with 65.6% of revenues in 1998. See Note 12 to the Company's
Consolidated Financial Statements for additional information regarding the
geographic distribution of the Company's revenues since 1998. Substantially all
1998 and 1999 revenues were generated by assets and operations which were
subsequently disposed of in the Restructuring.
Gross profit as a percentage of total revenues was approximately 71.9% in
2000 compared with 17.5% in 1999 and 12.1% in 1998. The increase in 2000 was
primarily due to sales of more profitable StoreAge products and other software
products. The increase in 1999 was due to the Restructuring.
Marketing efforts to penetrate the emerging storage area networking market
may produce a new source of revenue, offsetting, at least in part, the loss of
revenue, but there is no assurance that such revenue growth will occur.
Total outlays for research and development decreased to approximately $1.33
million in 2000 and $909,000 in 1999 compared with approximately $2.67 million
in 1998. The net cost to the Company of such outlays was $925,000 ($829,000
greater than revenues) in 2000 compared with approximately $686,000 (11.5% of
revenues) in 1999, and approximately $2.41 million (6.7% of revenues) in 1998.
IIS anticipates a continued investment by it and StoreAge in research
and development in storage subsystems to address future market demands for
storage technology products.
Selling and marketing expenses decreased to approximately $639,000 in 2000
($543,000 greater than revenues) from $1.4 million in 1999 (23.8% of revenues)
and approximately $7.6 million in 1998 (21.1% of revenues). General and
administrative expenses decreased to approximately $899,000 in
-21-
2000 ($803,000 greater than revenues) from $1.8 million in 1999 (29.8% of
revenues) and approximately $5.9 million in 1998 (16.3% of revenues). The
decrease in expenses reflects the effects of the Company's current structure and
the completion of the Restructuring.
In 2000, the Company recorded an operating loss of approximately $2.39
million compared with an operating loss of approximately $3.31 million in 1999
and an operating loss of approximately $13.07 million in 1998. The lower 2000
operating loss reflects the Company's current structure. The 1999 operating
loss reflected the effects of the Restructuring, in which the Company completed
its disposition of its revenue-generating operations.
There were no taxes on income in 2000, 1999 or 1998. See "Effective
Corporate Tax Rate".
As a result of the foregoing factors, the Company recorded a net loss of
approximately $1.39 million in 2000, a net loss of approximately $4.85 million
in 1999, and a net loss of approximately $14.36 million in 1998.
There can be no assurance that the Company will return to profitability in
2001 or thereafter.
Impact of Inflation and Exchange Rates
The dollar cost of the Company's operations in Israel is related to the
extent to which the rate of inflation in Israel is offset by the devaluation of
Israeli currency in relation to the dollar without significant timing delays.
The Company's dollar costs in Israel will increase if devaluation fails to keep
pace with the rate of inflation. Conversely, those costs will decrease if the
rate at which Israeli currency devalues against the dollar exceeds the rate of
inflation in Israel on a relatively even basis.
Periodically, dependent upon inflation and other considerations, both
fiscal and monetary, the Bank of Israel resets the target (middle of the range)
exchange rate of the NIS in relation to a weighted basket of foreign currencies
of Israel's major trading partners and allows the actual exchange rate to float
within a range determined by the Bank of Israel. During 1998, 1999 and 2000,
the NIS was devalued (appreciated) approximately 20.4%, (3.2%) and (5.5%)
respectively, against the currency basket, and approximately 17.6%, (0.2%) and
(2.7%) respectively, against the dollar. Our operations could be adversely
affected if we are unable to guard against currency fluctuations in the future.
We do not currently engage in any currency hedging transactions intended to
reduce the effect of fluctuations in foreign currency exchange rates on our
results of operations. We cannot guarantee that we will not enter into such
transactions in the future or that such measures will adequately protect us from
serious harm due to the impact of inflation in Israel.
The relationship between the Company's assets and liabilities in Israeli
currency and whether they are linked to a foreign currency or price index also
affects the Company's financial results. In the past IIS has managed its
exposure in Israeli currency so that unlinked liabilities generally exceeded
unlinked monetary assets in Israeli currency. The Company cannot predict
whether it will be able to continue to manage its assets and liabilities in this
manner in the future.
-22-
Effective Corporate Tax Rate
The income tax obligations of IIS in Israel are based upon earnings
determined for Israeli statutory purposes and not as determined from the amounts
reported in dollars. Therefore, the provision for income taxes included in the
financial statements does not directly relate to income shown on those
statements.
If certain conditions are met, IIS will be deemed an "Industrial Company."
In the past, certain of its Israeli operations have been granted "Approved
Enterprise" status under the Law for the Encouragement of Capital Investments,
1959, as amended (an "Approved Enterprise"). Consequently, part of its Israeli
activities were subject to taxation at reduced rates and were permitted special
deductions in computing taxable income. Income arising from an Approved
Enterprise may be subject to a reduced company tax at the rate of 25% (rather
than the regular company tax rate of 36% in 2000), or may be exempt from company
tax for a period of time, depending on the election made by the enterprise.
Since the Company's Israeli operations are operating under more than one
Approved Enterprise designation and since part of its taxable income is not
entitled to tax benefits and is taxed at regular rates, its past effective tax
rate was the result of a weighted combination of the various applicable rates or
tax exemptions.
We cannot assure you that we will maintain our status as an Industrial
Company for year 2001 or beyond. If we do not maintain our status as an
Industrial Company, the applicable Israeli income tax with respect to capital
gain realized by an individual shareholder with respect to the Ordinary Shares
will be as follows: 35% for individuals who are Israeli residents, 36% for
Israeli companies and 50% for non-residents of Israel. See also Item 10.E.
"Taxation."
Net loss carry forwards of the Company totaled approximately $73 million as
of December 31, 2000 and are unlimited in time. See Note 11 to the Company's
Consolidated Financial Statements.
Quarterly Results
The Company's operating results in the near future may vary significantly
from quarter to quarter, in part because of the substantial changes in the
Company's structure and a focus on SAN channel technology. The Company's
operating results for any particular quarter are not necessarily indicative of
any future results. The nature of the Company's industry and business has
changed, and the accelerated and unpredictable pace of new product introduction
and market trends, which is expected to continue, limits management's ability to
accurately forecast short-term results of operations. Furthermore, there can be
no assurance that the Company will return to profitability in 2001 or
thereafter.
Governmental Economic, Fiscal, Monetary or Political Factors
Our principal offices and our principal facilities, and those of StoreAge,
are located in Israel, and each of us is directly affected by the political,
economic and military conditions to which that country is subject. Any of
StoreAge's manufacturing operations would be heavily dependent upon components
imported from outside of Israel. A substantial majority of StoreAge's future
sales, if any, will be made outside of Israel. Accordingly, our operations and
those of StoreAge could be materially adversely affected if major hostilities
involving Israel should occur or if trade between Israel and its
-23-
present trading partners were interrupted or curtailed. In addition, termination
or reduction of certain governmental grants, programs and tax benefits could
have a material adverse effect on us and StoreAge.
On May 4, 2000, a committee chaired by the Director General of the Israeli
Ministry of Finance issued a report recommending a sweeping reform in the
Israeli system of taxation. The proposed reform would significantly alter the
taxation of individuals and would also affect corporate taxation. In particular,
the proposed reform would reduce but not eliminate the tax benefits available to
Approved Enterprises. The Israeli cabinet of the previous government approved
the recommendation in principle. The new Israeli government has declared that
it intends to recommend tax reforms but has not approved the May 4, 2000 report
or any alternative reform. Implementation of any reform requires legislation by
Israel's Knesset. We are not certain whether the proposed reform will be
adopted, when it will be adopted or what form reforms will ultimately take or
what effect it will have on us.
B. Liquidity and Capital Resources.
In late 1999, StoreAge completed a private placement of 707,558 convertible
preferred shares to outside investors for a total net consideration of
approximately $3.12 million. Accordingly, the Company's equity interest in
StoreAge was reduced to 58.56%. The excess received by StoreAge from the
issuance of convertible preferred shares to outside investors, over the amount
invested by the Company, amounting to approximately $2.24 million, was recorded
as a quasi-equity item, preferred shares of subsidiary.
During November 2000, the Company acquired the assets of Eastek Embedded
Systems (Meitav) Ltd. ("Eastek"), a private Israeli software company, to enhance
its R&D capabilities in order to develop synergetic software solutions for the
SAN market. The acquisition was completed through the issuance of shares to
Eastek and its founder, Danny Shavit. If certain conditions are met a total of
180,000 shares will be delivered to Eastek and Mr. Shavit.
In December 2000, the Company completed a private placement of $3 million
through the issuance of convertible subordinated notes and warrants to qualified
investors. The net proceeds from the offering were used to fund part of the
Company's investment in StoreAge's second round of financing.
On January 25, 2001, StoreAge completed its second round of financing,
raising a total of $25 million from strategic and institutional investors in a
private placement. The Company was an investor in the financing, investing a
total of $4.2 million. Following the consummation of the financing, the Company
held 39% of the outstanding shares of StoreAge.
The Company had cash and cash equivalents of approximately $5.66 million at
December 31, 1998, $7.35 million at December 31, 1999 and $3.08 million at
December 31, 2000. The ratio of current assets to current liabilities was
1.30:1.00 at December 31, 1998, 3.59:1.00 at December 31, 1999 and 2.42:1.00 at
December 31, 2000. The increase in the current ratio in 1999 reflected the
disposition of various assets for cash in the Restructuring. The decrease in
the current ratio in 2000 was primarily due to operating losses and de-
consolidation of StoreAge. For a discussion of the primary currency in which
the operations of the Company are conducted see Item 5.A., "Operating Results,"
above.
-24-
In 2000, the Company recorded a net negative cash flow from operations of
approximately $(2.04) million and in 1999, the Company recorded a net negative
cash flow from operations of approximately $(2.19) million, compared with a net
negative cash flow from operations of approximately $(2.88) million in 1998.
Net cash flow from operations in 1998, 1999 and 2000 was adversely affected by
the operating losses during those years.
The Company anticipates that its existing cash on hand, will be sufficient,
at the business levels presently projected, to meet its working capital
requirements, including normal capital expenditures, for at least the next 12
months. However, continued losses from operations or inability to secure
additional financing for StoreAge, if required, may reduce the Company's working
capital and cash equivalents to a level which could adversely affect the
Company's future operations.
StoreAge has certain limitations in respect of its Approved Enterprise
status. StoreAge has been granted Approved Enterprise status and has elected
the "alternative track of benefits." Income derived from an Approved Enterprise
is tax exempt for the first two years of a 7-year period of benefits. Income
derived during the remaining five years of benefits is taxed at a reduced tax
rate. The period of benefits commences with the first year in which StoreAge has
taxable income. The period of benefits relating to StoreAge's Approved
Enterprise status will expire no later than the year 2013.
In the event of distribution of cash dividends from income which is tax
exempt due to the above, StoreAge would have to pay tax at the rate of 25% on an
amount equal to the amount of dividends distributed.
The Company does not control StoreAge and consequently has no ability to
receive loans or advances from StoreAge. In the event that StoreAge declares
dividends, the holders of the preferred shares will receive the greater of (i)
their investment plus 8% per annum, compounded annually or (ii) their pro rata
portions of the dividends available for distribution to all the shareholders.
C. Research and Development, Patents and Licenses, etc.
See the information in "Item 4. Information on the Company - B. Business
Overview - Product Research and Development".
D. Trend Information.
StoreAge is a start-up company that has only recently begun to sell its
products and the Company is in the earliest stages of establishing its own
research & development unit, specializing in storage technology. As a result of
this limited history, there are no trends yet known to the Company that are
likely to have a material effect on the Company's revenues, income from
continuing operations, profitability, liquidity or capital resources. For
additional information please see the "Risk Factors" listed in Item 3 above.
-25-
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
- ------- ------------------------------------------
A. Directors and Senior Management.
The Company's executive officers and directors as of June 1, 2001 were as
follows:
Name Age Position with the Company
- ---- --- -------------------------
Robi Hartman 40 Chairman of the Board, Director, Chief
Executive Officer and Acting Chief Financial
Officer
Moshe Kahn* 43 External Director
David Rubner 61 Director
Aharon Jacobowitz* 52 Director
Yael Ilan 52 Director
Gideon Marks 46 Director
Jonathan Nativ* 54 External Director
Danny Shavit 46 Chief Technology Officer
* Member of the Audit Committee and Compensation Committee
Robi Hartman has been a director of the Company since September 1998, Vice
Chairman of the Board from October 1998 to March 2000, Acting Chief Financial
Officer since December 1998, and Chairman of the Board and Chief Executive
Officer of the Company since March 2000. Before joining the Company, from 1987
to 1996, Mr. Hartman was the manager of Teledata Communications Ltd., a leading
supplier of advanced access solutions, beginning as a manager and progressing to
the Chief Financial Officer and finally as Chief Executive Officer and
President. From 1996 to 1997, Mr. Hartman was the President of VCON
Telecommunications, a pioneer in PC based teleconferencing. Since 1997 he owns
and manages West End Technology Investments Ltd. Currently, he is also a
director of NSI Communications in Canada. Mr. Hartman received his B.A. in
Economics and Political Science from Bar Ilan University and his Masters degree
in Business Administration (MBA) from Bentley College.
Moshe Kahn has been a director of the Company since November 2000. Mr.
Kahn was elected as an external director in accordance with the Israeli
Companies Law. He is an attorney admitted to practice in Israel and the State
of New York. He is a partner of the law firm of M. Porath and Co. in Tel Aviv,
where he is engaged in corporate law and commercial mediation and acts as
council for local and international firms. Mr. Kahn serves as a Major in the
Legal Department of the Armed Forces of the State of Israel reserves. Mr. Kahn
has an L.L.B. in Law from Bar Ilan University. Mr. Kahn is a member of our audit
committee.
David Rubner has been a director of the Company since March 2000. Mr.
Rubner is Chairman and Chief Executive Officer of Rubner Technology Ventures
Ltd. Mr. Rubner was employed from 1970 until recently by ECI Telecom Ltd.
("ECI"). From 1991 to October 1999 and February 2000,
-26-
respectively, he was ECI's President and Chief Executive Officer. In November
1999 he was appointed Vice-Chairman of the Board of Directors of ECI. Mr. Rubner
is also Chairman of the Board of Directors of ECTel Ltd., a publicly traded
subsidiary of ECI, and serves on the boards of Check Point Software Technologies
Ltd., Efcon Ltd., Jigami Corp. and Koor Ltd. Mr. Rubner holds a bachelor of
science degree with honors in electronic engineering from Queen Mary College,
University of London, and a master of science degree in electrical engineering
from Carnegie Mellon University, Pittsburgh. Mr. Rubner is a member of the
Presidium of the Israel Manufacturers' Association, and was recipient of the
Industry Prize of Israel for 1995.
Aharon Jacobowitz has been a director of the Company since May 1995. Since
1989, Mr. Jacobowitz has been a management consultant to large organizations on
data processing issues. His clients include the Accountant General, Ministry of
Finance, State of Israel, General Manager of the Social Security Institute in
Israel and Teva Pharmaceutical Industries Ltd., the largest pharmaceutical
manufacturer of Israel. Prior to 1989, Mr. Jacobowitz was employed for 14 years
in various capacities in the marketing division of IBM Israel Ltd. His main
specialties were networking and midrange systems. Mr. Jacobowitz is a member of
our audit committee.
Dr. Yael Ilan has been a director of the Company since November 1997. She
is the Chief Executive Officer of Optichrom Ltd., an optical components private
company, the President of Yedatel Ltd., an economic consulting company, and a
director of several public and private corporations, most of them in the
technology sector. Until 1998, she was a director of Bezeq - Israel's
Telecommunication Company in which she was also a member of the audit committee
and the committee for strategic planning and investments. Correspondingly, she
is the head of the Broadband Communication Programs administration, a
subdivision of MAGNET - the Israeli Government hi-tech cooperation initiative.
Dr. Ilan holds a Ph.D. in industrial engineering, Ph.D. in physical chemistry
and a Masters degree in business administration.
Gideon Marks has been a director of the Company since July 2000. He is the
managing director, Israel of Garage.com. From 1988 until 1998 Mr. Marks served
as Chief Financial Officer of the RAD Group, one of the largest data
communication groups in Israel. Prior to joining Garage.com, Mr. Marks was the
representative of NationsBanc Montgomery Securities in Israel. Mr. Marks has a
B.A. and an M.B.A from Tel Aviv University.
Jonathan Nativ has been a director of the Company since November 2000. Mr.
Nativ was elected as an external director in accordance with the Israeli
Companies Law. He has served since 1997 as the Chief Executive Officer of
Compwise Ltd., a company that develops, markets and sells special-purpose
software for tariff modeling and analysis and auditing solutions to
telecommunications companies, particularly those involved in wireless
telecommunications. From 1978 until 1983, he served as project manager at
Tadiran Ltd. (Telecommunications Division), one of Israel's leading electronics
firms. From 1983 to 1995, Mr. Nativ served as the Director of Research and
Development, Executive Vice President of Marketing, and Executive Vice President
of Strategy and Business Development at Teledata Communications Ltd., a leading
supplier of advanced access network solutions to telecommunication network
operators worldwide. From 1995 to 1997 he served as a consultant to Teledata
Communications Ltd. He serves as director of TDSoft Ltd. and other Israeli
technology-based companies. Mr. Nativ earned a bachelor's degree. in Electronic
Engineering from the Technion, Israel Institute of Technology and an Executive
MBA from Tel-Aviv University. Mr. Nativ is a member of our audit committee.
-27-
Danny Shavit has been the Chief Technology Officer of the Company since
November 2000. He was the Co-Founder and Managing Director of Eastek, a company
that developed CDROM and hard-disk drive test software from October 1995 until
November 2000. From January 1992 until August 1995 he was the R&D Manager of
Meitav Ltd., a company that developed real-time temperature control systems.
From October 1987 until December 1991 he was the Co-Founder and R&D Manager of
Maintek LTD., a start-up in the field of hard-disk controllers doing a joint
venture with Standard Microsystems Corporation in the United States. Mr. Shavit
is an expert in real-time microprocessor based, mass-storage controllers and
test systems. He earned a Bachelor of Science degree in Computer Engineering and
a Masters of Science degree in Digital Signal Processing from the Technion in
Israel.
There is no family relationship between any of the persons named above.
Furthermore, there are no arrangements or understandings with any of the major
shareholders, customers, suppliers or others, pursuant to which any person
referred to above was selected as a director or member of senior management.
B. Compensation.
During the fiscal year ended December 31, 2000, the aggregate remuneration
paid to all officers and directors of the Company as a group (then eight
persons) was approximately $230,000. In connection with the Eastek acquisition,
100,000 Ordinary Shares of the Company were issued to Danny Shavit. Subject to
certain conditions, the Ordinary Shares issued to Mr. Shavit will be delivered
to him in installments of 30,000, 35,000 and 35,000 Ordinary Shares on the
first, second and third anniversaries of the Eastek acquisition, respectively.
See Note 2 to the Consolidated Financial Statements of the Company for
information regarding certain severance pay and pension plans generally
available to employees of the Company, and in which certain officers and
directors participate.
An aggregate of 656,550 options were granted to the Company's directors
during the fiscal year ended December 31, 2000. All of such options are
exercisable for Ordinary Shares of the Company and have an exercise price of
$3.625. With the exception of the options held by Robi Hartman, the options
become exercisable in four equal annual installments from November 30, 2000 and
expire on November 30, 2006. Mr. Hartman holds a total of 356,550 options, of
which 56,550 are currently fully exercisable and expire on November 30, 2006.
The other 300,000 options held by Mr. Hartman become exercisable in four equal
annual installments from March 22, 2000 and expire on November 30, 2006. For
information on the Company's stock option plan, see "Stock Option Plans" below
and Note 10 to the Company's Consolidated Financial Statements.
C. Board Practices.
In August 1993 the Company's articles of association were amended to
provide, among other matters, for a classified board of directors. These
provisions were retained with minor amendments, in the new articles of
associations of the Company approved on November 19, 2000 (the "Articles of
Association"). Mr. Marks and Dr. Ilan have served as directors of the Company
since July 2000 and November 1997, respectively, and currently serve until the
2001 annual meeting and until their successors have been elected and qualified.
Mr. Hartman has been a director of the Company since September 1998 and
currently serves until the 2002 annual meeting and until his successor has been
-28-
elected and qualified. However, since Mr. Hartman is Chief Executive Officer of
the Company, in accordance with the provisions of the Articles of Association,
he shall serve as a director as long as he remains Chief Executive Officer.
Messrs. Jacobowitz and Rubner have been directors of the Company since May 1995
and March 2000, respectively, and currently serve until the 2003 annual meeting
and until their successors have been elected and qualified. Messrs. Nativ and
Kahn have each served as directors of the Company since November 2000 when they
were elected as external directors (as defined below) pursuant to the Israeli
Companies Law. Under Israeli Companies Law, the initial term of an external
director is three years and may be extended for an additional three years.
Officers serve at the discretion of the board of directors, subject to the
terms of any agreement between them and the Company. Mr. Shavit has served as
the Company's Chief Technology Officer since November 2000 and will continue to
serve in this position subject to the terms of his employment agreement.
There are no service contracts between the Company and any of its directors
providing for benefits upon termination of employment.
External and Independent Directors
Under the new Israeli Companies Law, Israeli companies whose shares have
been offered to the public in or outside of Israel are required to appoint two
people to serve as external directors on the board of directors of a company.
The Companies Law provides that a person may not be appointed as an external
director if the person or the person's relative, partner, employer or any entity
controlled by that person has at the date of appointment, or has had at any time
during the two years preceding that date, any affiliation with the company, any
entity controlling the company or any entity controlled by the company or by
this controlling entity. The term "affiliation" includes:
. an employment relationship;
. business or professional relationship maintained on a regular
basis;
. control; or
. service as an officer.
No person can serve as an external director if the person's position or
other business creates, or may create, conflict of interests with the person's
responsibilities as an external director or if such position or other business
may impair such director's ability to serve as an external director. No person
who is a director in one company can serve as an external director in another
company, if at that time a director of the other company serves as an external
director in the first company. The Companies Law further provides that when, at
the time of appointment of an external director, all members of the board of
directors of the company are of one gender, then the external director appointed
shall be of the other gender.
External directors are appointed by a majority vote at a shareholders'
meeting, provided that either: (1) the majority of shares voted at the meeting,
including at least one third of the shares of non-controlling shareholders voted
at the meeting, vote in favor of appointment of the director or (2) the
-29-
total number of shares of non-controlling shareholders voted against the
election of the director does not exceed one percent of the aggregate voting
rights in the company. The initial term of an external director will be three
years and may be extended for an additional three-year period. Each committee of
a company's board of directors will be required to include at least one external
director and all external directors must be members of the company's audit
committee.
In addition, we are obligated under the requirements for quotation on the
Nasdaq SmallCap Market to have at least two independent directors on our board
of directors, who also may serve as external directors under the Companies Law,
and to establish an audit committee, at least a majority of whose members are
independent of management. The audit committee should adopt a formal written
audit committee charter to be reviewed annually.
An external director is entitled to consideration and to the refund of
expenses, only as provided in regulations adopted under the Companies Law and is
otherwise prohibited from receiving any other consideration, directly or
indirectly, in connection with service provided as an external director.
Nevertheless, the grant of an exemption from liability for breach of fiduciary
duty or duty of care, an undertaking to indemnify, indemnification or insurance
under the provisions of the Companies Law shall not be deemed as consideration.
Under the Companies Law, an external director cannot be dismissed from the
office unless:
. the board of directors determines that the external director no
longer meets the requirements for holding such office, as set forth in the
Companies Law or that the director is in breach of his or her fiduciary duties
to the company and the shareholders of the company vote (by the same majority
required for the appointment) to remove the external director after the external
director has been given the opportunity to present his or her position;
. an Israeli court determines, upon a request of a director or a
shareholder, that the director no longer meets the requirements for holding such
office as set forth in the Companies Law or that the director is in breach of
his or her fiduciary duties to the company; or
. the court determines, upon a request of the company or a director,
shareholder or creditor of the company, that the external director is unable to
fulfill his or her duty or has been convicted of certain crimes as specified in
the Companies Law.
Audit Committee and Internal Auditor
The Israeli Companies Law requires public companies to appoint an audit
committee. The responsibilities of the audit committee include identifying
irregularities in the management of the company's business and approving related
party transactions as required by law. An audit committee must consist of at
least three directors, including all of the external directors. The chairman of
the board of directors, any director employed by or otherwise providing services
to the company, and a controlling shareholder or any relative of a controlling
shareholder, may not be a member of the audit committee. An audit committee may
not approve an action or a transaction with a controlling shareholder, or with
an office holder, unless at the time of approval two external directors are
serving as members of the audit committee and at least one of the external
directors was present at the meeting in which an approval was granted. Our
audit committee consists of Messrs. Kahn, Nativ and Jacobowitz.
-30-
Under the Israeli Companies Law, the board of directors must appoint an
internal auditor, nominated by the audit committee. The role of the internal
auditor is to examine, among other matters, whether the company's actions comply
with the law and orderly business procedure. Under the Israeli Companies Law,
the internal auditor may be an employee of the company but not an office holder,
or an affiliate, or a relative of an office holder or affiliate, and he or she
may not be the company's independent accountant or its representative. We
intend to appoint an internal auditor in the near future.
Compensation Committee
The Israeli Companies Law does not require public companies to appoint a
compensation committee. The Company, however, has selected a compensation
committee which makes recommendations to the board with respect to all director
and officer compensation issues including the grant of stock options. Our
compensation committee consists of Messrs. Kahn, Nativ and Jacobowitz.
D. Employees.
As of December 31, 2000 the Company and StoreAge employed 9 and 30 persons,
respectively: 30 in engineering, 2 in sales, 3 in operations and logistics, and
4 in general management and marketing. The Company and StoreAge are planning to
increase the current staff by 18 persons in the next six months, in the areas of
engineering and sales, with a focus on research and development and testing, as
well as in marketing.
The Company has never experienced a work stoppage, and the Company
considers its relations with its employees to be good. The Company pays
competitive salaries and provides competitive benefits to its employees.
Certain provisions of the collective bargaining agreements between the
Histadrut (the General Federation of Labor in Israel) and the Coordinating
Bureau of Economic Organizations (including the Industrialists' Association)
(the "CBEO") are applicable to the Company's Israeli employees by order of the
Israeli Ministry of Labor. These provisions principally concern the length of
the workday, minimum daily wages for professional workers, contributions to a
pension fund, insurance for work-related accidents, procedures for dismissing
employees, determination of severance pay and other conditions of employment.
The Company generally provides its Israeli employees with benefits and
conditions beyond the required minimums.
An important contractual provision applicable to all employers in Israel is
the linkage of wages to increases in the CPI, although the extent of the linkage
has been limited in recent years. The specific formula of such linkage varies
according to agreements reached between the Government of Israel, the Histadrut
and the CBEO.
In addition, Israeli law generally requires severance pay (generally one
month's salary for each year of employment) upon the retirement or death of an
employee or termination of employment without due cause. Furthermore, Israeli
employees and employers are required to pay predetermined sums to the National
Insurance Institute which is similar to the United States Social Security
-31-
Administration. Such payments amount to approximately 9% of wages (up to a
maximum amount), with the employee contributing approximately 4.5% and the
employer contributing the remainder.
E. Share Ownership.
The following chart sets forth director and senior management share
ownership in the Company as of May 31, 2001. Each shareholder listed below
enjoys the same voting rights with respect to each share.
Number of
Shares Percentage of Shares
Title of Beneficially Beneficially Owned
Name Class Owned(1) (%)(2) Options(3)
- ---- ----- -------- ------------------ -----------------
Gideon Marks Ordinary
Shares - * 50,000
David Rubner Ordinary
Shares - * 50,000
Robi Hartman Ordinary
Shares 496,814 5.47% 356,550
Yael Ilan Ordinary
Shares - * 50,000
Aharon Jacobowitz Ordinary
Shares - * 50,000
Jonathan Nativ Ordinary -
Shares * 50,000
Moshe Kahn Ordinary -
Shares * 50,000
Danny Shavit Ordinary
Shares 180,000(4) 1.98% -
___________________
* Owns less than one percent of the Ordinary Shares outstanding.
(1) Beneficial ownership by a person assumes the exercise of all options and
warrants held by such person that are currently exercisable or are
exercisable within 60 days of such date.
(2) Percentage ownership is based on 9,087,324 shares outstanding as of May 31,
2001.
(3) All of the options are exercisable for Ordinary Shares of the Company and
have an exercise price of $3.625. With the exception of the options held
by Robi Hartman, the options become exercisable in four equal annual
installments from November 30, 2000 and expire on November 30, 2006. Mr.
Hartman holds a total of 356,550 options, of which 56,550 options are
currently
-32-
fully exercisable and expire on November 30, 2006. The other 300,000
options held by Mr. Hartman become exercisable in four equal annual
installments from March 22, 2000 and expire on November 30, 2006.
(4) In connection with the Eastek acquisition, 100,000 and 80,000 shares were
issued to Mr. Shavit and Eastek, respectively. Subject to certain
conditions, the Ordinary Shares issued to Mr. Shavit will be delivered to
him in installments of 30,000, 35,000 and 35,000 Ordinary Shares on the
first, second and third anniversaries of the Eastek acquisition,
respectively. Additionally, Mr. Shavit is the beneficial owner of the
shares issued to Eastek. The Company issued 60,000 of such shares to
Eastek as partial consideration for the acquisition and the Company may
deliver an additional 20,000 Ordinary Shares to Eastek on the first
anniversary of the acquisition if certain conditions are met.
Stock Option Plans
In August 1993, a new employee share incentive plan (the "Plan") was
approved by the board of directors and later adopted by the Company's
shareholders. The Plan permits the grant of options to purchase Ordinary Shares
to officers, directors and key employees of, and consultants to, the Company or
any subsidiary of the Company. The Plan presently permits the grant of options
to purchase up to an aggregate of 1,239,883 Ordinary Shares.
The Plan is administered by the board of directors or by a committee
appointed by the board of directors, which designates the optionees, exercise
prices and amounts and dates of grant. The exercise price of options granted
under the Plan is the fair market value (in NIS linked to the dollar in the case
of Israeli employees and in dollars in the case of non-Israeli employees) of the
underlying shares on the date of grant, or a lesser percentage of fair market
value as is determined by the committee or the board of directors, but in no
event less than 85% of the market price of the shares on the date of grant.
Options are non-assignable except by the laws of descent and generally vest and
are exercisable in three equal annual installments. The options expire 6-10
years subsequent to the date of grant.
As of December 31, 2000, options to purchase up to 1,148,150 Ordinary
Shares were outstanding, exercisable at prices ranging from $3.63 to $67.2 per
share, with expiration dates ranging from February 2002 to November 2006, of
which options to purchase up to 656,550 Ordinary Shares were held by all
officers and directors of the Company and StoreAge as a group. For additional
information regarding the Company's stock option plan, see Note 10 to the
Company's Consolidated Financial Statements.
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
- ------- -------------------------------------------------
A. Major Shareholders.
As of December 31, 1999, Resonance Ltd. beneficially owned 28.3% of the
Company's outstanding Ordinary Shares. Subsequently, Resonance Ltd. advised the
Company that it was no longer a 10% shareholder of the Company. The Company
believes that Resonance Ltd. sold the balance of its shares in the public market
and as a result is no longer a beneficial owner of 5% or more of the Company's
outstanding Ordinary Shares. During the period of March 5, 2001 to April 27,
2001, Mr. Hartman purchased an aggregate of 106,500 of the Company's Ordinary
Shares. As reported on its Schedule 13G recently filed with the Securities &
Exchange Commission, Europlan Trust Company Ltd. is the
-33-
beneficial owner of an aggregate of 887,145 Ordinary Shares of the Company or
9.76% of the Company's outstanding Ordinary Shares.
The following table sets forth, as of May 31, 2001, the number of Ordinary
Shares of the Company owned by all persons known to the Company to beneficially
own 5% or more of the Company's Ordinary Shares. The Company's major
shareholders do not have different voting rights.
Number of Percentage of
Ordinary Shares Beneficially Ordinary Shares
Name and Address Owned(1) Beneficially Owned(2)
- ---------------- -------- ---------------------
Europlan Trust Company Ltd.(3)...... 887,145 9.76%
Robi Hartman(4)..................... 496,814 5.47%
All directors and officers
as a group.......................... 646,814 7.12%
____________________
(1) Beneficial ownership assumes the exercise of all options and warrants held
by such person or persons that are currently exercisable or are exercisable
within 60 days of such date.
(2) Percentage ownership is based on 9,087,324 shares outstanding as of May 31,
2001.
(3) As reported on Schedule 13G filed with the Securities & Exchange
Commission, dated June 6, 2001.
(4) Mr. Hartman is Chief Executive Officer and Chairman of the Company.
Beneficial ownership is as reported on Amendment No. 1 to Schedule 13G
dated May 1, 2001.
As of April 30, 2001, approximately 89.2% of the outstanding Ordinary
Shares of the Company were held of record by approximately 65 holders registered
on the books of the Company's United States transfer agent with addresses in the
United States. The Company believes that there are more than 500 beneficial
owners of its Ordinary Shares in the United States and that a substantial
majority of its Ordinary Shares are beneficially owned by non-United States
persons.
To the extent known to the Company, the Company is not directly or
indirectly owned or controlled by another corporation, by any foreign
government or by any other natural or legal person.
There are currently no arrangements known to the Company that may result in
a change in control of the Company.
B. Related Party Transactions.
In connection with the StoreAge's private placement, in January 2001,
StoreAge entered into a shareholders' rights agreement (the "Rights Agreement")
with a wholly-owned subsidiary of the Company and with certain other investors.
Under the Rights Agreement, in addition to other provisions, each party has the
right of first refusal to purchase any shares of StoreAge offered for sale by
the Company and the other investors.
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In February 2001, a portion of the Company's office space located in Ramat
Gan, Israel was leased from a company that is owned by Robi Hartman, the
Company's Chief Executive Officer and Chairman. The space was leased at 70% of
the then generally prevailing market rate for lease space in the area, as
approved by the Company's audit committee based upon an independent appraisal
report.
Several of the Company's employees perform research and development work
for StoreAge and StoreAge is charged on a percentage of cost basis for such
work. Additionally, the Company's research and development team is currently
engaged in developing Internet Small Computer Systems Interface ("iSCSI")
applications for StoreAge for a fixed price per product developed.
C. Interests of Experts and Counsel.
Not applicable.
Item 8. FINANCIAL INFORMATION
- ------- ---------------------
A. Consolidated Statements and Other Financial Information.
See pages F-1 - F-28 following Item 19.
Legal Proceedings
On December 14, 1999, we, as defendants, and a class constituted of certain
of our current and former shareholders, as plaintiffs, were the subject of a
Stipulation of Settlement filed in the United States District Court for the
Eastern District of New York (the "Stipulation"). The Stipulation served to
settle a class action lawsuit brought against us on behalf of the class of
plaintiffs (the "Class") through a complaint filed on September 15, 1993. The
plaintiffs in the lawsuit claimed violations of the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended, by us, by some of
our officers, and by two underwriters of our securities in connection with the
public offering of some of our Ordinary Shares in an August 1993 public
offering.
In accordance with the Stipulation, we issued warrants to the members of
the Class willing to participate in the settlement. The warrants entitle their
holders to purchase that number of Ordinary Shares equal to 10% of the number of
Ordinary Shares outstanding as of the date that the Stipulation was submitted to
court, or 886,039 Ordinary Shares, at an exercise price of $0.30 per share.
A suit was filed in Israel in 1995 against the Company and certain of its
officers and directors alleging inadequate disclosure in prior years of the
Company's financial position, results of operations and prospects, and damages
in the amount of $250,000. The Company has answered the complaint, denying all
allegations of wrongdoing. The Company believes that the allegations are without
merit and, if a settlement is not consummated, intends to continue to defend the
action vigorously. While the Company does not believe that the outcome of the
action, if not settled, will have a material adverse effect on either its
business operations or its financial position, there can be no assurance as to
the outcome of the suit.
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The Company is not a party to any other litigation that would, individually
or in the aggregate, have a material adverse effect on the Company or its
business, and is not aware that any such litigation is threatened.
Dividends
The Company has not declared or paid dividends on their Ordinary Shares
since 1989, and does not intend to declare or pay any dividends to their
shareholders in the foreseeable future.
B. Significant Changes.
There have been no significant changes since December 31, 2000, the date of
the annual financial statements in this annual report.
Item 9. THE OFFER AND THE LISTING
- ------- --------------------------
The Ordinary Shares of the Company have been traded in the over-the-counter
market in the United States since the Company's initial public offering on
November 8, 1984. The Ordinary Shares originally traded under the symbol IISLF
and now trade under the symbol IISL. From January 22, 1985 to March 17, 1999,
the Ordinary Shares traded on the Nasdaq National Market ("Nasdaq"). Since
March 18, 1999 the Ordinary Shares have traded on the Nasdaq SmallCap Market
(the "SmallCap Market").
The following table sets forth, for the periods indicated, the annual high
and low sale prices of the Ordinary Shares as reported by Nasdaq for the five
most recent full financial years, the quarterly high and low sale prices for the
two most recent full financial years and first quarter 2001 and the monthly high
and low sale prices for the most recent six months.
High Low
---- ---
Year ended December 31, 1996 $12.39 $4.14
Year ended December 31, 1997 $ 7.88 $3.00
Year ended December 31, 1998 $ 3.94 $0.28
Year ended December 31, 1999 $ 7.94 $0.34
Year ended December 31, 2000 $10.03 $1.38
1999
- ----
First Quarter $ 0.81 $0.34
Second Quarter 1.31 0.50
Third Quarter 1.13 0.84
Fourth Quarter 7.94 0.81
2000
- ----
First Quarter $10.03 $3.88
Second Quarter 7.69 3.00
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High Low
---- ---
Third Quarter $7.00 $3.50
Fourth Quarter 4.94 1.38
First Quarter 2001 4.44 1.44
Most Recent Six Months
- ----------------------
December 2000 $3.63 $1.38
January 2001 3.81 1.44
February 2001 4.44 1.94
March 2001 2.58 1.76
April 2001 2.10 1.52
May 2001 2.52 2.17
The foregoing prices reflect inter-dealer quotations without retail mark-
ups, mark-downs or commissions and may not represent actual transactions.
Item 10. ADDITIONAL INFORMATION
- -------- ----------------------
A. Share Capital.
Not applicable.
B. Memorandum and Articles of Association.
Objects and Purposes in the Company's Articles of Association
The Company's objects and purposes are specified in its Memorandum of
Association filed as Exhibit 3.2 to Registration Statement No. 33-62862 dated
August 10, 1993 (the "Memorandum").
Provisions Regarding Directors
Pursuant to article 54(b) of our Articles of Association, a transaction
entered into by the Company in which a director of the Company has a personal
interest, directly or indirectly, will be valid in respect of the Company and
the given director only if approved by the Company's board of directors and, if
such transactions are "irregular transactions" as defined in the Israeli
Companies Law, only if approved in accordance with the requirements of the
Israeli Companies Law.
An "irregular transaction" pursuant to the Israeli Companies Law is defined
as a transaction which is not in the ordinary course of business, a transaction
which is not under ordinary market conditions or any transaction which might
substantially affect the profitability of the Company, its assets and
liabilities.
The Israeli Companies Law provides that a director who has personal
interest in a given transaction of the Company, brought to the approval of the
board of directors, shall not be present and vote at that meeting. Article 55 of
the Company's Articles of Association, provides that a director who has a
personal interest in a matter which is brought for discussion before the board
of directors may participate in said discussion, provided that he shall neither
vote in nor attend discussions concerning
-37-
the approval of the activities or the arrangements. If said director did vote or
attend as aforesaid, the approval given to the aforesaid activity or
arrangements shall be invalid.
Pursuant to article 72 of the Company's Articles of Association, at any
meeting of the board of directors at which a quorum is present, the board will
have the authority to exercise all or part of the authorities, power of attorney
and discretion invested at such time in the directors or regularly exercised by
them. With respect to legal quorum at our board meetings, the Israeli Companies
Law provides that, unless determined otherwise by the Company, a legal quorum at
the board meetings shall consist of the majority of the board members. We have
not decided otherwise and therefore, the legal quorum at our board meeting will
consist of the majority of the board members.
Any transaction concerning compensation to a director requires the approval
by the board of directors, the audit committee and the shareholders of the
Company.
The board of directors may from time to time, in its discretion, cause the
Company to borrow or secure the payment of any sum or sums of money for the
purpose of the Company. Additionally, the Company may secure or provide for the
repayment of such sum or sums in such manner, at such times and upon such terms
and conditions in all respects as it sees fit and in particular, by the issuance
of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages,
charges or other securities on the undertaking, or the whole or any part of the
property of the Company, both present and future, including units uncalled or
called but unpaid capital for the time being.
There is no mandatory retirement age for the directors under our Articles
of Association or the Companies Law.
There is no requirement concerning the number of shares one individual must
hold in order to qualify him or her as a director under our Articles of
Association or the Israeli Companies law.
Dividends
Subject to any preferential, deferred, qualified or other rights,
privileges or conditions attached to any special class of shares with regard to
dividends, the profits of the Company available for dividend and resolved to be
distributed shall be applied in payment of dividends upon the shares of the
Company in proportion to the amount paid up or credited as paid up per the
nominal value thereon respectively. Unless not otherwise specified in the
conditions of issuance of the shares, all dividends with respect to shares which
were not fully paid up within a certain period, for which dividends were paid,
shall be paid proportionally to the amounts paid or credited as paid on the
nominal value of the shares during any portion of the above-mentioned period.
The board of directors may declare a dividend to be paid to the shareholders
according to their rights and interests in the profits, and may fix the record
date for eligibility and the time for payment.
The directors may from time to time pay to the shareholders on account of the
next forthcoming dividend such interim dividends as, in their judgment, the
position of the Company justifies.
A transfer of shares shall not pass the right to any dividend declared thereon
after such transfer and before the registration of the transfer.
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There is no time limit after which dividend entitlement lapses according to
our Articles of Association or the Companies Law.
The board of directors may determine that, a dividend may be paid, wholly or
partly, by the distribution of specific assets of the Company or by distribution
of paid-up shares, debentures or debenture stock or any other securities of the
Company or of any other companies or in any one or more of such ways in the
manner and to the extent permitted by the Companies Law.
Terms of Directors
Pursuant to article 50 of our Articles of Association, except for external
directors (as defined in the Companies Law) and the Chief Executive Officer of
the Company which will automatically be a director of the Company and his term
of office as a director shall be vacated, ipso facto, when he ceases to serve as
Chief Executive Officer of the Company, all directors shall be classified, with
respect to the time for which they severally hold office, into three classes, as
nearly equal in number as possible, one class to hold office initially for a
term expiring at the 2001 annual meeting of the Company, another class to hold
office initially for a term expiring at the 2002 annual meeting of the Company,
and another class to hold office initially for a term expiring at the 2003
annual meeting of the Company, with the members of each class to hold office
until their successors have been duly elected and qualified. At each annual
meeting following the 2001 annual meeting, the class of directors whose term
expires at that meeting shall be elected to hold office for a term expiring at
the annual meeting of the Company held in the third year following the year of
their election and until their successors have been duly elected and qualified.
Except for article 50 of the Company's Articles of Association (described above)
which may be amended only by the affirmative vote of 75% of our shareholders
present (in person or by proxy) and voting on such resolution at a general
meeting, all other articles of our Articles of Association may be amended by a
majority vote of shareholders present and voting at a meeting of shareholders of
the Company.
Votes of Shareholders
Our shareholders have one vote for each share held on all matters submitted
to a vote of shareholders. Except as otherwise provided in our Articles of
Association, any resolution at a general meeting shall be deemed adopted if
approved by the holders of a majority of the voting rights in the Company
represented at the meeting in person or by proxy and voting thereon. In the case
of an equality of votes, either on a show of hands or a poll, the chairman of
the meeting shall not be entitled to a further or casting vote.
At all general meetings, a resolution put to a vote at the meeting shall be
decided on a show of hands unless, before or upon the declaration of the result
of the show of hands, a poll in writing be demanded by the chairman (being a
person entitled to vote), or by at least two shareholders present, in person or
by proxy, holding at least 5% of the issued share capital of the Company and,
unless a poll be so demanded, a declaration by the chairman of the meeting that
a resolution has been carried, or has been carried unanimously or by a
particular vote, or lost, or not carried by a particular vote, shall be
conclusive, and an entry to that effect in the minute book of the Company shall
be conclusive evidence thereof, without proof of the number or proportion of the
votes recorded in favor of or against such
-39-
resolution.
If a poll be demanded in manner aforesaid, it shall be taken forthwith, and
the result of the poll shall be deemed to be the resolution of the meeting at
which the poll was demanded. The demand of a poll shall not prevent the
continuance of a meeting for the transaction of any business other than the
question on which a poll has been demanded.
Any shareholder which is not a natural person may, by resolution of its
directors or other governing body, authorize such person as it thinks fit to act
as its representative at a general meeting, and the person so authorized to the
satisfaction of the Company shall be entitled to exercise the same powers on
behalf of such company, which he represents as the company could exercise if it
were an individual shareholder.
Subject to any rights or restrictions for the time being attached to any
class or classes of shares, every shareholder shall have one vote for each share
of which he is the holder, whether on a show of hands or on a poll. Our Articles
of Association do not permit cumulative voting and it is not mandated by Israeli
law. Votes may be given either personally or by proxy. A proxy need not be a
shareholder of the Company. If any shareholder be a lunatic, idiot, or non
compos mentis, he may vote by his committee, receiver, curator bonis or other
legal curator, and such last-mentioned persons may give their votes either
personally or by proxy. If two or more persons are jointly entitled to a share
then, in voting upon any question, the vote of the senior person who tenders a
vote, whether in person or by proxy, shall be accepted to the exclusion of the
votes of the other registered holders of the share and, for this purpose
seniority shall be determined by the order in which the names stand in the
shareholder register.
The instrument appointing a proxy shall be in writing in the usual common
form, or such form as may be approved by the board of directors, and shall be
signed by the appointor or by his attorney duly authorized in writing or, if the
appointor is a corporation, the corporation shall vote by its representative,
appointed by an instrument duly signed by the corporation. The instrument
appointing a proxy shall be deemed to include authorization to demand a poll or
to vote on a poll on behalf of the appointor.
A vote given in accordance with the terms of an instrument of proxy shall be
valid notwithstanding the previous death or insanity of the principal, or
revocation of the proxy, or transfer of the share in respect of which the vote
is given, unless an intimation in writing of the death, revocation or transfer
shall have been received at the office before the commencement of the meeting or
adjourned meetings at which the proxy is used.
The instrument appointing a proxy shall be deposited at the registered
office of the Company or at such other place or places, whether in Israel or
elsewhere, as the board of directors may from time to time, either generally or
in a particular case or class of cases prescribe, at least forty-eight (48)
hours before the time appointed for holding the meeting or adjourned meeting at
which the person named in such instrument proposes to vote. Otherwise, the
person so named shall not be entitled to vote in
-40-
respect thereof, but no instrument appointing a proxy shall be valid after the
expiration of twelve months from the date of its execution.
Subject to the provisions of the Companies Law, a resolution in writing
(approved by letter, telex, facsimile or otherwise) by all the shareholders, in
person or by proxy, for the time being entitled to vote at a general meeting of
the Company, shall be as valid and as effectual as a resolution adopted by a
general meeting duly convened, held and constituted for the purpose of passing
such resolution.
A shareholder will be entitled to vote at the meetings of the Company by
several proxies appointed by him, provided that each proxy shall be appointed
with respect to different shares held by the appointing shareholder. Every
proxy so appointed on behalf of the same shareholder shall be entitled to vote
as he sees fit.
Further Rights and Preferences of the Ordinary Shares
In the event of sale or the undertaking of the Company, the board or the
liquidator on a winding up, as the case may be, subject to the authorization by
a majority vote at a meeting of shareholders, may distribute to our shareholders
all assets remaining after payment of the Company's liabilities.
Our Articles of Association allow, subject to the Israeli Companies Law,
the issue of redeemable shares and to redeem the same according to terms and
conditions determined by the Company. Our Articles of Association do not include
provisions related to sinking funds.
According to our Articles of Association no person shall be entitled to
vote at any general meeting (or be counted as a part of the quorum thereof)
unless all calls then payable by him in respect of his shares in the Company
shall have been paid. The Israeli Companies Law provides that a company is
entitled to determine within its articles a provision allowing the board to
place call on shares, in event the consideration for such shares, in full or in
part, have not been paid on time and in accordance with the agreeable terms set
out in the given agreement or the articles of association of the company.
According to our Articles of Association, there are no discriminating
provisions against any existing or prospective holders of shares of the Company
as a result of a shareholder holding a substantial number of shares.
Modification of Class Rights
If, at any time, the share capital is divided into different classes of
shares, the rights attached to any class (unless otherwise provided by the terms
of issuance of the shares of that class) may be varied with the consent in
writing of the holders of all the issued shares of that class, or with the
sanction of a majority vote at a meeting of the shareholders passed at a
separate meeting of the holders of the shares of the class. The provisions of
our Articles of Association relating to general meetings shall apply, mutatis
mutandis, to every such separate general meeting. Any holder of shares of the
class present in person or by proxy may demand a secret poll.
-41-
Unless otherwise provided by the conditions of issuance, the enlargement of
an existing class of shares, or the issuance of additional shares thereof, shall
not be deemed to modify or abrogate the rights attached to the previously issued
shares of such class or of any other class. These conditions provide for the
minimum shareholder approvals permitted by the Israeli Companies Law.
General Meetings
General meetings shall be held at least once in every calendar year at such
time, not being more than fifteen months after the holding of the last preceding
general meeting, and at such time and place as may be determined by the board of
directors.
The board of directors may, whenever it deems necessary, and shall upon
such requisition in writing as is provided by Section 63(b) of the Companies
Law, convene a general meeting. Any such request must state the purposes for
which the meeting is to be called, be signed by the requesting shareholders, and
must be deposited at the registered office of the Company. Such request may
consist of several documents in like form, each signed by one or more requesting
shareholder.
Unless a longer period for notice is prescribed by the Companies Law, at
least ten (10) days and not more than sixty (60) days notice of any general
meeting shall be given, specifying the place, the day and the hour of meeting
and, in the case of special business, the nature of such business, shall be
given in the manner hereinafter mentioned, to such shareholders as are under the
provisions of the Company's Articles of Association, entitled to receive notices
from the Company. Notices shall be given by mail or by personal delivery to
every registered shareholder of the Company, to his address as described in the
shareholders register of the Company or such other address as designated by him
in writing for this purpose. Provided that the accidental omission to give such
notice to, or the non-receipt of such notice by, any such shareholder shall not
invalidate any resolution passed or proceeding held at any such meeting and,
with the consent of all the shareholders for the time being entitled to receive
notice of meetings, a meeting may be convened upon a shorter notice or without
notice, and generally in such manner as such shareholders may approve. Such
consent may be given at the meeting or retrospectively after the meeting. If the
shareholder did not provide the Company any address for the delivery of notices,
the shareholder shall be deemed to have waived his right to receive notices.
Only shareholders of record as reflected on the Company's share register
at the close of business on the date fixed by the board of directors as the
record date determining the then shareholders who will be entitled to vote,
shall be entitled to notice of, and to vote, in person or by proxy, at a general
meeting and any postponement or adjournment thereof.
Quorum at General Meetings
No business shall be transacted at any general meeting unless a quorum
is present when the meeting proceeds to business. The quorum at any Meeting
shall be two shareholders present in person or by proxy, holding or representing
at least twenty five percent (25%) of the total voting rights in the Company. A
company being a shareholder shall be deemed to be personally present for the
purpose of the Company's Articles of Association if represented by its
representative duly authorized in accordance
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with article 42 of the Company's Articles of Association.
If, within half an hour from the time appointed for the holding of a
general meeting, a quorum is not present, the meeting shall stand adjourned to
the same day in the next week at the same time and place, or any time and hour
as the board of directors shall designate and state in a notice to the
shareholders entitled to vote at the original meeting, and if, at such adjourned
meeting, a quorum is not present within half an hour from the time appointed for
holding the meeting any two shareholders present in person or by proxy shall
constitute a quorum. Notwithstanding the aforesaid, if a general meeting was
convened at the demand of shareholders as permitted by Section 63(b) of the
Companies Law, then a quorum at such adjourned meeting shall be present only if
one or more shareholders are present who held in the aggregate at least 5% of
the issued share capital of the Company and at least 1% of the voting rights in
the Company or one or more shareholders who hold in the aggregate at least 5% of
the voting rights in the Company.
Restrictions on Shareholders Rights to Own Securities
The Memorandum and Articles of Association of the Company do not restrict
in any way the ownership of Ordinary Shares by residents or nonresidents, except
with respect to subjects of countries which are in a state of war with Israel,
and neither the Memorandum and Articles of Association nor Israeli law restricts
the voting rights of residents or nonresidents.
Potential Issues that Could Delay a Merger
The classification of our board of directors could delay or impede the
removal of incumbent directors and could therefore complicate a merger, tender
offer or proxy contest involving us, even if such events would be beneficial to
the interests of our shareholders, or could discourage a third party from
attempting to acquire control of the Company.
A merger of the Company requires the approval of the board of directors and
the general meeting of shareholders, in accordance with the provisions of the
Israeli Companies Law.
Requirement of Disclosure of Shareholder Ownership
There are no provisions of our Memorandum or Articles of Association
governing the ownership threshold above which shareholder ownership must be
disclosed.
Approval of Special Transactions under Israeli Law
Under the Companies Law, the approval of the board of directors is required
only for arrangements with respect to compensation of a company's chief
executive officer. Arrangements regarding the compensation of directors requires
approval by the board of directors, audit committee and the shareholders.
The Companies Law requires that an officer or a controlling shareholder in
a public company, including an Israeli company that is publicly traded outside
of Israel, promptly disclose to the audit committee, board of directors and, in
certain circumstances, the shareholders, any personal interest that
-43-
he may have and all related material information known to him, in connection
with any existing or proposed transaction by the company (an officer and a
controlling shareholder are under no such duty of disclosure when the personal
interest stems only from the personal interest of a relative in a transaction
that is not exceptional). In addition, if the transaction is an exceptional
transaction, as defined in the Companies Law, the officer must also disclose any
personal interest held by the officer's spouse, siblings, parents, grandparents,
descendants, spouse's descendants and the spouse of any of the foregoing, or by
a corporation in which the officer is a 5% or greater shareholder, director or
general manager or in which he or she has the right to appoint at least one
director or the general manager. The disclosure must be made without delay and
not later than the board of directors meeting as which the transaction is first
discussed. For these purposes, the definition of a controlling shareholder under
the Companies Law includes a shareholder that holds 25% or more of the voting
rights in a company, unless another shareholder holds more than 50% of the
voting rights (if two or more shareholders are interested parties in the same
transaction their shareholdings shall be deemed cumulative).
Once the officer or controlling shareholder complies with these disclosure
requirements, the company may approve the transaction in accordance with the
provisions of the Companies Law and its articles of association. Generally, the
approval of the majority of the disinterested members of the audit committee and
the board of directors is required. If audit committee approval is required for
a transaction with an interested party, an officer or a controlling shareholder,
such approval may not be given unless, at the time the approval was granted two
members of the audit committee were external directors and at least one of them
was present at the meeting at which the audit committee decided to grant the
approval. Shareholder approval may also be required if the transaction is an
exceptional transaction. An exceptional transaction is a transaction other than
in the ordinary course of business, otherwise than on market terms or that is
likely to have a material impact on the company's profitability, assets or
liabilities. In such event, the principal terms of such transaction must be
disclosed in a notice to the shareholders which will include all substantive
documents relating to the transaction. If the transaction is with an officer or
with a third party in which the officer or the controlling shareholder has a
personal interest, the approval must confirm that the transaction is not adverse
to the company's interest. Shareholders must also approve all compensation paid
to directors in whatever capacity, company's undertaking to indemnify a director
or indemnification under a permit to indemnify and any transaction in which a
majority of the board members have a personal interest. An officer with a
personal interest in any matter may not be present at any audit committee or
board of directors meeting where such matter is being approved, and may not vote
thereon, unless the majority of the members of the audit committee or of the
board of directors have a personal interest in such approval. Shareholders'
approval for an exceptional transaction must include at least one third of the
shareholders who have no personal interest in the transaction and are present at
the meeting. However, the transaction can be approved by shareholders without
this one-third approval if the total shareholdings of those who vote against the
transaction do not represent more than one percent of the voting rights in the
company, unless the Minister of Justice shall determine a different percentage.
Anti-Takeover Provisions; Mergers and Acquisitions under Israeli Law
Pursuant to the Companies Law, if following any acquisition of shares of a
public company or of a class of shares of a public company the acquiror will
hold 90% or more of the company's shares or 90% of any class of the company's
shares, respectively, then the acquiror must make a tender offer for all of the
remaining shares or the particular class of shares of the company. In the event
that 5% or more of the shareholders have not responded favorably to a tender
offer, the offeror may not purchase
-44-
more than 90% of that class of shares. This rule does not apply if the
acquisition is made by way of a merger. Furthermore, the Companies Law provides
that as long as a shareholder in a public company holds more than 90% of the
company's shares or of a class of shares, such shareholder shall be precluded
from purchasing any additional shares of that type.
The Companies Law further provides that if following the tender offer such
acquiring shareholder holds more than 95% of the outstanding shares of any
class, the holders of all the remaining shares will be obligated to transfer
such shares to the acquiror at the tender offer price. This entails the
possibility of additional delay and the imposition of further approval
requirements at the court's discretion. The Companies Law requires that each
company that is party to a merger approve the transaction by a vote of the board
of directors and by a vote of the majority of its outstanding shares, generally
excluding shares voted by the other party to the merger or any person holding at
least 25% of the other party to the merger, at a shareholders' meeting called on
at least 21 days prior notice. In addition, the Companies Law does not generally
require court approval of a merger. Pursuant to the Companies Law, the articles
of association of companies such as ours, which have been incorporated prior to
February 1, 2000, are deemed to include a provision whereby the approval of a
merger requires approval of the transaction by the majority of the shareholders
present and voting on the proposed transaction who hold at least 75% of the
shares present and voting at such meeting. Upon the request of a creditor to
either party to the proposed merger, the court may delay or prevent the merger
if it concludes that there exists a reasonable concern that as a result of the
merger, the surviving company will be unable to satisfy the obligations of any
of the parties to the merger. In addition, a merger may not be completed unless
at least 70 days have passed from the time that a proposal for approval of the
merger has been filed with the Israeli Registrar of Companies and certain
notification and information have been provided to debtors.
Notwithstanding the approval requirements set forth in the Companies Law,
companies, such as ours, which have been incorporated prior to the Companies Law
coming into effect, must specifically amend their articles of association to
provide for the shareholder voting requirements contained in the Companies Law.
The Companies Law also provides that an open market acquisition of shares
in a public company must be made by means of a tender offer if as a result of
the acquisition the purchaser would become a holder of 25% of the voting rights
in the company. This rule does not apply if there already is another holder of
25% of the voting rights in the company. Similarly, the Companies Law provides
that an open market acquisition of shares in a public company must be made by
means of a tender offer if as a result of the acquisition the purchaser would
become the holder of 45% of the voting rights in the company. This rule does not
apply if another party already holds more than 50% of the voting rights in the
company. Regulations promulgated under the Companies Law provide that these
tender offer requirements do not apply to companies whose shares are listed for
trading on a stock exchange outside of Israel only if, according to the laws in
the country in which its shares are traded there is either a limitation on the
acquisition of a specified percentage of control in the Company or the
acquisition of a specified percentage of control requires the purchaser to also
make a tender offer to the public.
The Companies Law extends the disclosure requirements applicable to an
officer of the Company to a shareholder that holds 25% or more of the voting
rights in a public company, including an Israeli company that is publicly traded
outside of Israel such as on NASDAQ. Certain transactions
-45-
between a public company and a 25% shareholder, or transactions in which a 25%
shareholder of the company has a personal interest but which are between a
public company and another entity, require the approval of the board of
directors and of the shareholders. Moreover, an extraordinary transaction with a
25% shareholder or the terms of compensation of a 25% shareholder must be
approved by the audit committee, the board of directors and shareholders. The
shareholder approval for an extraordinary transaction must include at least one
third of the shareholders who have no personal interest in the transaction and
are present at the meeting; the transaction can be approved by shareholders
without this one third approval, if the total share holdings of those who vote
against the transaction do not represent more than 1% of the voting rights in
the company.
The Israeli Companies Ordinance requires that certain transactions, actions
and arrangements be approved as provided for in the Company's Articles of
Association, by the Company's board of directors, by the audit committee and/or
by the Company's shareholders. 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.
Changes in Capital
The Company's Memorandum and Articles of Association do not impose any
conditions governing changes in capital that are more stringent than required by
the Israeli Companies Law.
C. Material Contracts.
On November 30, 2000, we entered into a purchase and assignment agreement
(the "Purchase and Assignment Agreement") with Eastek Embedded Systems (Metiav)
Ltd. ("Eastek"), an Israeli based software company, and Eastek's founder, Mr.
Danny Shavit ("Mr. Shavit"), to acquire all the assets of Eastek. Under the
terms of the Purchase and Assignment Agreement, we issued 60,000 of the
Company's Ordinary Shares to Eastek as partial consideration for the acquisition
and may deliver an additional 20,000 Ordinary Shares to Eastek on the first
anniversary of the acquisition if certain conditions are met.
In connection with our acquisition of Eastek, we hired Mr. Shavit to serve
as Chief Technology Officer of the Company. On November 30, 2000, we entered
into an employment agreement with Mr. Shavit under the terms of which we issued
100,000 of the Company's Ordinary Shares to Mr. Shavit. Subject to certain
conditions, the Ordinary Shares will be delivered to Mr. Shavit in installments
of 30,000, 35,000 and 35,000 Ordinary Shares on the first, second and third
anniversaries of the acquisition respectively.
On December 20, 2000, we entered into a securities purchase agreement (the
"Purchase Agreement") with CDC Holdings Ltd., Armour Investments Ltd.,
Industrial Systems & Equipment Co., Meir Noga and Nachum Ezra (the
"Purchasers"). In accordance with the Purchase Agreement, we issued units, each
consisting of $100,000 principal amount of our convertible secured debentures
(the "Debentures") and three-year non-redeemable warrants (the "Warrants") to
acquire 10,000 Ordinary Shares, par value NIS .003 per share (the "Ordinary
Shares") to the Purchasers. We issued a total of 30 Units, representing
Debentures in an aggregate principal amount of $3,000,000 and Warrants to
acquire an aggregate of 300,000 Ordinary Shares. We will not receive any
proceeds from the sale of the Ordinary Shares issuable upon the conversion of
the Debentures by the converting
-46-
shareholders. We will receive from the exercising shareholders the exercise
price of the Warrants upon exercise of which the Ordinary Shares are issuable,
but will not receive any proceeds from the sale of the Ordinary Shares by the
exercising shareholders.
In connection with the StoreAge's private placement, in January 2001,
StoreAge entered into a shareholders' rights agreement (the "Rights Agreement")
with a wholly-owned subsidiary of the Company, Nelson Nahum, Ophirtech Ltd.,
Koonras Technologies Ltd., Genesis Partners II L.D.C., Genesis Partners II
(Israel) L.P., Cisco Systems, Inc., Morgan Keegan & Company, Inc., Morgan Keegan
Opportunity Fund, L.P., Morgan Keegan Employee Investment Fund, L.P. and certain
other investors (each an "Investor" collectively, the "Investors"). Under the
Rights Agreement, in addition to other provisions, each Investor has the right
of first refusal to purchase any shares of StoreAge offered for sale by the
Company and the other Investors.
In January 2001, the Company entered into a lease with West End Technology
Investments Ltd. for office space located at 33 Jabotinsky Street, Ramat Gan,
Israel. The lease is for an undefined term that began on February 1, 2001. Both
parties have the right to terminate the lease at any time, by written notice of
75 days in advance. The annual rent for this space is approximately $34,680,
with total annual occupancy costs, including local taxes, utilities, maintenance
and other costs of approximately $21,360. The rent is for fully furnished office
space. The remaining empty office space is rented from a third party at a higher
price.
D. Exchange Controls
Nonresidents of Israel who purchase Ordinary Shares of the Company outside
of Israel will be able to receive dividends (if any be declared), and any
amounts payable upon the dissolution, liquidation or winding up of the affairs
of the Company, which will be fully repatriable in certain non-Israeli
currencies (including United States dollars), at the rate of exchange prevailing
at the time of conversion, pursuant to a general permit issued by the Controller
of Foreign Currency at the Bank of Israel (the "Controller") under the Currency
Control Law, 1978, provided that Israeli income tax has been paid on such
amounts by the Company.
Investments, including acquisitions, and certain other transactions outside
Israel by the Company require specific approval from the Controller. The
Company has received such approvals in the past, but no assurance can be given
that they will be received in the future.
The Memorandum and Articles of Association of the Company do not restrict
in any way the ownership of Ordinary Shares by nonresidents, except with respect
to subjects of countries which are in a state of war with Israel, and neither
the Memorandum and Articles of Association nor Israeli law restricts the voting
rights of nonresidents. The Israeli Currency Control Law, 1978 imposes certain
limitations concerning foreign currency transactions and transactions between
Israeli and non-Israeli residents, which limitations may be regulated or waived
by the Controller of Foreign Exchange at the Bank of Israel, through "general"
and "special" permits. In May 1998, a new "general permit" was issued pursuant
to which substantially all transactions in foreign currency are permitted. Any
dividends or other distributions paid in respect of Ordinary Shares and any
amounts payable upon the dissolution, liquidation or winding up of the affairs
of a company, as well as the proceeds of any sale in Israel of the company's
securities to an Israeli resident are freely repatriable into non-Israeli
currencies at the
-47-
rate of exchange prevailing at the time of conversion, provided that any Israeli
income tax owing has been paid on (or withheld from) such payments. Because
exchange rates between the NIS and the U.S. dollar fluctuate continuously, U.S.
shareholders will be subject to any such currency fluctuation during the period
from when such dividend is declared through the date payment is made in U.S.
dollars.
E. Taxation.
Capital Gains and Income Taxes Applicable to Non-Israeli Shareholders
Under existing regulations, any gain realized by a shareholder with respect
to the Company's Ordinary Shares will be exempt from Israeli capital gains tax
as long as the Ordinary Shares are listed on an approved foreign securities
market (which term includes the NASDAQ SmallCap Market in the United States) and
provided that the Company qualifies as an "Industrial Company" within the
definition of the Law for the Encouragement of Industry (Taxes), 1969. There
can be no assurance, however, that the provisions of the law, with respect to
this exemption, will not change.
If we qualify and maintain our status as an Industrial Company (of which
there can be no assurance), the applicable income tax will be as follows: 35%
for individuals who are Israeli residents, 36% for Israeli companies and 50% for
non-residents of Israel (subject to an applicable trouble-taxation treaty).
Individuals who are non-residents of Israel are subject to income tax on income
derived from sources in Israel, or received in Israel. Such sources of income
include passive income such as dividends, royalties and interest, as well as
non-passive income form services rendered in Israel.
On the distribution of dividends other than bonus shares (stock dividends),
income tax is withheld at source at the rate of 25% (or the lower rate payable
with respect to "Approved Enterprises"), unless a double taxation treaty which
provides for a lower tax rate in Israel or dividends is in effect between Israel
and the shareholder's country.
The Convention between the State of Israel and the Government of the United
States relating to relief from double taxation (the "Treaty") provides for a
maximum tax of 25% on dividends paid to a resident of the United States.
Generally, under the Treaty, the maximum withholding tax on dividends paid to a
holder of Ordinary Shares of the Company who is a resident of the United States
(as defined in the Treaty) will be 25%. Dividends of an Israeli company derived
from the income of an Approved Enterprise will be subject to a 15% dividend
withholding tax.
The Treaty exempts from Israeli taxation any capital gain realized on the
sale, exchange or other disposition of Ordinary Shares by a United States
shareholder who owned, either directly or indirectly, less than 10% of the
voting stock of the Company at all times during the 12-month period preceding
such sale, exchange or other disposition.
A nonresident of Israel who has had income derived or accrued in Israel
from which tax was withheld at source and which constitutes income from certain
sources, including dividends, is currently exempt from the duty to file an
Israeli tax return with respect to such income, provided such income was not
derived from a business carried on in Israel by such nonresident.
-48-
Proposed Tax Reform
On May 4, 2000, a committee chaired by the Director General of the Israeli
Ministry of Finance, issued a report recommending a significant reform in the
Israeli system of taxation. The proposed reform would significantly alter the
taxation of individuals, and would also affect corporate taxation. In
particular, the proposed reform would reduce, but not eliminate, the tax
benefits available to approved enterprises. The Israeli cabinet of the previous
government approved the recommendation in principle. The new Israeli Government
has declared that it intends to recommend tax reforms but has not approved the
May 4, 2000 report or any alternative reform. Implementation of the reform
requires legislation by Israel's Knesset. We cannot be certain whether the
proposed reform will be adopted, when it will be adopted or what form any reform
will ultimately take.
United States Federal Income Tax Consequences
The following is a summary of certain material U.S. Federal income tax
consequences that apply to U.S. Holders (as defined below) who hold Ordinary
Shares as capital assets. This summary is based on the United States Internal
Revenue Code of 1986, as amended (the "Code"), Treasury regulations promulgated
thereunder, judicial and administrative interpretations thereof, and the U.S.-
Israel Tax Treaty, all as in effect on the date hereof and all of which are
subject to change either prospectively or retroactively. This summary does not
address all tax considerations that may be relevant with respect to an
investment in Ordinary Shares. This summary does not account for the specific
circumstances of any particular investor, such as:
. broker-dealers,
. financial institutions,
. certain insurance companies,
. investors liable for alternative minimum tax,
. tax-exempt organizations,
. non-resident aliens of the U.S. or taxpayers whose functional currency is
not the U.S. dollar,
. persons who hold the Ordinary Shares through partnerships or other pass-
through entities,
. investors that actually or constructively own 10 percent or more of our
voting shares, and
. investors holding Ordinary Shares as part of a straddle or a hedging or
conversion transaction.
-49-
This summary does not address the effect of any U.S. Federal taxation other
than U.S. Federal income taxation. In addition, this summary does not include
any discussion of state, local or foreign taxation.
Shareholders are urged to consult their tax advisors regarding the foreign
and United States Federal, state and local tax considerations of an investment
in Ordinary Shares.
For purposes of this summary, a "U.S. Holder" is a shareholder which is:
. an individual who is a citizen or, for U.S. Federal income tax purposes, a
resident of the United States;
. a partnership, corporation or other entity created or organized in or under
the laws of the United States or any political subdivision thereof;
. an estate whose income is subject to U.S. Federal income tax regardless of
its source; or
. a trust if:
(a) a court within the United States is able to exercise primary
supervision over administration of the trust, and
(b) one or more United States persons have the authority to control all
substantial decisions of the trust.
Taxation of Dividends
The gross amount of any distributions received with respect to Ordinary
Shares, including the amount of any Israeli taxes withheld therefrom, will
constitute dividends under U.S. Federal income tax purposes, to the extent of
our current and accumulated earnings and profits as determined for U.S. Federal
income tax principles. Shareholders will be required to include this amount of
dividends in gross income as ordinary income. Distributions in excess of our
earnings and profits will be treated as a non-taxable return of capital to the
extent of a shareholder's tax basis in the Ordinary Shares and any amount in
excess of such shareholder's tax basis, will be treated as gain from the sale of
Ordinary Shares. See "Disposition of Ordinary Shares" below for the discussion
on the taxation of capital gains. Dividends will not qualify for the dividends-
received deduction generally available to corporations under Section 243 of the
Code.
Dividends that we pay in NIS, including the amount of any Israeli taxes
withheld therefrom, will be included in a shareholder's income in a U.S. dollar
amount calculated by reference to the exchange rate in effect on the day such
dividends are received. A U.S. Holder who receives payment in NIS and converts
NIS into U.S. dollars at an exchange rate other than the rate in effect on such
day may have a foreign currency exchange gain or loss that would be treated as
ordinary income or loss. U.S. Holders should consult their own tax advisors
concerning the U.S. tax consequences of acquiring, holding and disposing of NIS.
-50-
Any Israeli withholding tax imposed on such dividends will be a foreign
income tax eligible for credit against a U.S. Holder's U.S. federal income tax
liability, subject to certain limitations set out in the Code (or,
alternatively, for deduction against income in determining such tax liability).
The limitations set out in the Code include computational rules under which
foreign tax credits allowable with respect to specific classes of income cannot
exceed the U.S. federal income taxes otherwise payable with respect to each such
class of income. Dividends generally will be treated as foreign-source passive
income or financial services income for United States foreign tax credit
purposes. Foreign income taxes exceeding the credit limitation for the year of
payment or accrual may be carried back for two taxable years and forward for
five taxable years in order to reduce U.S. federal income taxes, subject to the
credit limitation applicable in each of such years. Other restrictions on the
foreign tax credit include a prohibition on the use of the credit to reduce
liability for the U.S. individual and corporation alternative minimum taxes by
more than 90%. A U.S. Holder will be denied a foreign tax credit with respect
to Israeli income tax withheld from dividends received on the Ordinary Shares to
the extent such U.S. Holder has not held the Ordinary Shares for at least 16
days of the 30-day period beginning on the date which is 15 days before the ex-
dividend date or to the extent such U.S. Holder is under an obligation to make
related payments with respect to substantially similar or related property. Any
days during which a U.S. Holder has substantially diminished its risk of loss on
the Ordinary Shares are not counted toward meeting the 16-day holding period
required by the statute. The rules relating to the determination of the foreign
tax credit are complex, and shareholders should consult with their personal tax
advisors to determine whether and to what extent they would be entitled to this
credit.
Dispositions of Ordinary Shares
If a shareholder sells or otherwise disposes of Ordinary Shares, such
shareholder will recognize a gain or loss for U.S. Federal income tax purposes
in an amount equal to the difference between the amount realized on the sale or
other disposition and the adjusted tax basis of such Ordinary Shares. Subject to
the discussion below under the heading "Passive Foreign Investment Companies,"
such gain or loss generally will be capital gain or loss and will be long-term
capital gain or loss if a shareholder has held the Ordinary Shares for more than
one year at the time of the sale or other disposition. In general, any gain that
a shareholder recognizes on the sale or other disposition of Ordinary Shares
will be U.S.-source for purposes of the foreign tax credit limitation; losses,
will generally be allocated against U.S. source income. Deduction of capital
losses is subject to certain limitations under the Code.
In the case of a cash basis U.S. Holder who receives NIS in connection with
the sale or disposition of Ordinary Shares, the amount realized will be based on
the U.S. dollar value of the NIS received with respect to the Ordinary Shares as
determined on the settlement date of such exchange. A U.S. Holder who receives
payment in NIS and converts NIS into United States dollars at a conversion rate
other than the rate in effect on the settlement date may have a foreign currency
exchange gain or loss that would be treated as ordinary income or loss.
An accrual basis U.S. Holder may elect the same treatment required of cash
basis taxpayers with respect to a sale or disposition of Ordinary Shares,
provided that the election is applied consistently from year to year. Such
election may not be changed without the consent of the Internal Revenue Service
(the "IRS"). In the event that an accrual basis U.S. Holder does not elect to
be treated as a cash basis taxpayer (pursuant to the Treasury regulations
applicable to foreign currency transactions), such U.S. Holder may have a
foreign currency gain or loss for U.S. federal income tax purposes because of
differences between the U.S. dollar value of the currency received prevailing on
-51-
the trade date and the settlement date. Any such currency gain or loss would be
treated as ordinary income or loss and would be in addition to gain or loss, if
any, recognized by such U.S. Holder on the sale or disposition of such Ordinary
Shares.
Passive Foreign Investment Companies
For U.S. Federal income tax purposes, we will be considered a passive
foreign investment company ("PFIC") for any taxable year in which either (1) 75%
or more of our gross income is passive income, or (ii) at least 50% of the
average value of all of our assets for the taxable year produce or are held for
the production of passive income. For this purpose, passive income includes
dividends, interest, royalties, rents, annuities and the excess of gains over
losses from the disposition of assets which produce passive income. If we were
determined to be a PFIC for U.S. Federal income tax purposes, highly complex
rules would apply to U.S. Holders owning Ordinary Shares. Accordingly,
shareholders are urged to consult their tax advisors regarding the application
of such rules.
Based on our current and projected income, assets and activities, we
believe that we are not currently a PFIC nor do we expect to become a PFIC in
the foreseeable future. However, because the determination of whether we are a
PFIC is based upon the composition of our income and assets from time to time,
there can be no assurances that we will not become a PFIC for any future taxable
year.
If we are treated as a PFIC for any taxable year, then, unless a
shareholder elects either to treat such shareholder's investment in Ordinary
Shares as an investment in a "qualified electing fund" (a "QEF election") or to
"mark-to-market" such shareholder's Ordinary Shares, as described below:
. the shareholder would be required to allocate income recognized upon
receiving certain dividends or gain recognized upon the disposition of
Ordinary Shares ratably over the holding period for such Ordinary
Shares;
. the amount allocated to each year during which we are considered a
PFIC other than the year of the dividend payment or disposition would
be subject to tax at the highest individual or corporate tax rate, as
the case may be, and an interest charge would be imposed with respect
to the resulting tax liability allocated to each such year;
. gain recognized upon the disposition of Ordinary Shares would be
taxable as ordinary income; and
. the shareholder would be required to make an annual return on IRS Form
8621 regarding distributions received with respect to Ordinary Shares
and any gain realized on such shareholder's Ordinary Shares.
If a shareholder makes either a timely QEF election or a timely mark-to-
market election in respect of such shareholder's Ordinary Shares, the
shareholder would not be subject to the rules described above. If a shareholder
makes a timely QEF election, the shareholder would be required to include in
such shareholder's income for each taxable year such shareholder's pro rata
share of our ordinary earnings as ordinary income and such shareholder's pro
rata share of our net capital gain as long-term capital gain, whether or not
such amounts are actually distributed to the shareholder. A shareholder would
not be eligible to make a QEF election unless we comply with certain applicable
information reporting requirements.
-52-
Alternatively, if a shareholder elects to "mark-to-market" such
shareholder's Ordinary Shares, the shareholder will generally include in income
any excess of the fair market value of the Ordinary Shares at the close of each
tax year over such shareholder's adjusted basis in the Ordinary Shares. If the
fair market value of the Ordinary Shares had depreciated below the shareholder's
adjusted basis at the close of the tax year, the shareholder may generally
deduct the excess of the adjusted basis of the Ordinary Shares over its fair
market value at that time. However, such deductions generally would be limited
to the net mark-to-market gains, if any, that the shareholder included in income
with respect to such Ordinary Shares in prior years. Income recognized and
deductions allowed under the mark-to-market provisions, as well as any gain or
loss on the disposition of Ordinary Shares with respect to which the mark-to-
market election is made, is treated as ordinary income or loss.
Backup Withholding and Information Reporting
Payments in respect of Ordinary Shares may be subject to information
reporting to the U.S. Internal Revenue Service and to a 31 percent U.S. backup
withholding tax. Backup withholding will not apply, however, if a shareholder
(i) is a corporation or comes within certain exempt categories, and demonstrates
the fact when so required, or (ii) furnishes a correct taxpayer identification
number and makes any other required certification. Any amount withheld under
these rules may be credited against shareholder federal income tax liability.
Backup withholding is not an additional tax. Amounts withheld under the
backup withholding rules may be credited against a U.S. Holder's U.S. tax
liability, and a U.S. Holder may obtain a refund of any excess amounts withheld
under the backup withholding rules by filing the appropriate claim for refund
with the IRS.
Any U.S. Holder who holds 10% or more in vote or value of our Ordinary
Shares will be subject to certain additional United States information reporting
requirements.
U.S. Gift and Estate Tax
An individual U.S. Holder of Ordinary Shares will be subject to U.S. gift and
estate taxes with respect to Ordinary Shares in the same manner and to the same
extent as with respect to other types of personal property.
F. Dividends and Paying Agents.
Not applicable.
G. Statements by Experts.
Not applicable.
H. Documents on Display.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, accordingly, it
files reports and other information with the Securities and Exchange Commission
(the "SEC"). Individuals can inspect and copy those reports and other
information at the public reference facilities maintained by the SEC at
Judiciary Plaza, 450 Fifth
-53-
Street, N.W., Washington, D.C. 20549 and at the following Regional Offices of
the SEC: Northwestern Atrium Center, 500 West Madison Street, Suite 1400, 14th
Floor, Chicago, Illinois 60661; and Seven World Trade Center, 13th Floor, New
York, New York 10048. You can obtain copies of such material at prescribed rates
from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Individuals can also obtain reports and other
information from the Internet site maintained by the SEC at http://www.sec.gov.
In addition, documents referred to in this 20-F filing are available, at no
cost, upon request from Robi Hartman, Chief Executive Officer, I.I.S.
Intelligent Information Systems Limited, 33 Jabotinsky Street, Ramat Gan, Israel
(Tel. 972-3-751-0007).
I. Subsidiary Information.
Not applicable.
Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------- ------------------------------------------------------------
In the normal course of business, the financial position of the Company is
routinely subjected to a variety of risks, including market risk associated with
interest rate movements and currency rate movements on non-U.S. dollar
denominated assets and liabilities. The Company regularly assesses these risks
and has established policies and business practices to protect against the
adverse effects of these and other potential exposures. As a result, the
Company does not anticipate material losses in these areas.
For purposes of specific risk analysis, the Company uses sensitivity
analysis to determine the impacts that market risk exposures may have on the
fair values of the Company's financial instruments. The financial instruments
included in the sensitivity analysis consist of all of the Company's cash and
cash equivalents.
To perform sensitivity analysis, the Company assesses the risk of loss in
fair values from the impact of hypothetical changes in interest rates and
foreign currency exchange rates on market sensitive instruments. The market
values for interest risk are computed based on the present value of future cash
flows as impacted by the changes in rates attributable to the market risk being
measured. The discount rates used for the present value computations were
selected based on market interest rates in effect at December 31, 2000. The
market values for foreign exchange risk are computed based on spot rates in
effect at December 31, 2000. The market values that result from these
computations are compared to the market values of these financial instruments at
June 30, 2000. The differences in this comparison are the hypothetical gains or
losses associated with each type of risk.
The results of the sensitivity analysis are as follows:
Interest Rate Risk: A 10% decrease or a 10% increase in the levels of
interest rates with all other variables held constant would not materially
affect the earnings, cash flow and fair value of the Company's financial
instruments at December 31, 2000.
-54-
Foreign Currency Exchange Rate Risk: A 10% movement in levels of foreign
currency exchange rates against the U.S. dollar with all other variables held
constant would not materially affect the earnings, cash flow and fair value of
the Company's financial instruments at December 31, 2000.
Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
- -------- ------------------------------------------------------
Not applicable.
-55-
PART II
Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
- -------- ----------------------------------------------
Not applicable.
Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
- -------- -------------------------------------------------------------------
PROCEEDS
--------
Not applicable.
Item 15. [Reserved]
- --------
Item 16. [Reserved]
- --------
PART III
Item 17. FINANCIAL STATEMENTS
- -------- --------------------
Not applicable.
Item 18. FINANCIAL STATEMENTS
- -------- --------------------
Attached. See Item 19(a).
Item 19. FINANCIAL STATEMENTS AND EXHIBITS
- -------- ---------------------------------
(a) Index to Financial Statements: Page
----
Report of Independent Auditors on Consolidated
Financial Statements of the Company and its subsidiaries...... F-2
Consolidated Balance Sheets at December 31, 2000 and 1999........ F-3 - F-4
Consolidated Statements of Operations for the Three Years ended
December 31, 2000............................................. F-5
Consolidated Statements of Changes in Shareholders' Equity
for the Three Years ended December 31, 2000................... F-6
Consolidated Statements of Cash Flows for the Three Years ended
December 31, 2000............................................. F-7 - F-8
Notes to the Consolidated Financial Statements................... F-9 - F-28
All 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.
-56-
(b) Exhibits
1.1 Memorandum of Association of the Company*
1.2 Articles of Association of the Company, Amended and Restated as of November
19, 2000.
2.1 Form of Debenture issued pursuant to the securities purchase agreement
dated January 31, 2001.
2.2 Form of Warrant issued pursuant to the securities purchase agreement dated
January 31, 2001.
4.1 Purchase and Assignment agreement between the Company and Eastek Embedded
Systems (Meitav) Ltd., dated November 30, 2000.
4.2 Employment Agreement of Danny Shavit, dated November 30, 2000.
4.3 Summary English Translation from the original Hebrew of a Lease Agreement
entered into between the Company and West End Technology Investments Ltd.,
for office space located at 33 Jabotinsky Street, Ramat Gan, Israel, dated
January 30, 2001.
4.4 Securities Purchase Agreement dated January 31, 2001, between the Company
and CDC Holdings Ltd., Armour Investments Ltd., Industrial Systems &
Equipment Co., Meir Noga and Nachum Ezra.
4.5 Shareholders' Rights Agreement dated as of January 18, 2001 between
StoreAge and certain investors.
8.1 List of significant subsidiaries of the Company.
10.1 Consent of Kost Forer and Gabbay, a Member of Ernst & Young
International.
* Incorporated by reference to Exhibit 3.2 to the Company's Registration
Statement No. 33-62862 dated August 10, 1993.
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SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this Annual Report on its behalf.
I.I.S. INTELLIGENT INFORMATION
SYSTEMS LIMITED
(Registrant)
By: /s/ Robi Hartman
------------------------------------------
Robi Hartman, Chief Executive Officer
Date: June 28, 2001
-58-
Index to Exhibits:
Exhibit No.
- -----------
1.1 Memorandum of Association of the Company.*
1.2 Articles of Association of the Company, Amended and Restated as of November
19, 2000.
2.1 Form of Debenture issued pursuant to the securities purchase agreement
dated January 31, 2001.
2.2 Form of Warrant issued pursuant to the securities purchase agreement dated
January 31, 2001.
4.1 Purchase and Assignment agreement between the Company and Eastek Embedded
Systems (Meitav) Ltd., dated November 30, 2000.
4.2 Employment Agreement of Danny Shavit dated November 30, 2000.
4.3 Summary English Translation from the original Hebrew of a Lease
Agreement entered into between the Company and West End Technology
Investments Ltd., for office space located at 33 Jabotinsky Street, Ramat
Gan, Israel, dated January 30, 2001.
4.4 Securities Purchase Agreement dated January 31, 2001 between the Company
and CDC Holdings Ltd., Armour Investments Ltd., Industrial Systems &
Equipment Co., Meir Noga and Nachum Ezra.
4.5 Shareholders' Rights Agreement dated as of January 18, 2001 between
StoreAge and certain investors.
8.1 List of significant subsidiaries of the Company.
10.1 Consent of Kost Forer and Gabbay, a Member of Ernst & Young
International.
* Incorporated by reference to Exhibit 3.2 to the Company's Registration
Statement No. 33-62862 dated August 10, 1993.
-59-
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2000
IN U.S. DOLLARS
INDEX
Page
--------------
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Operations F-5
Statements of Changes in Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-28
- - - - - - - - - - - -
[ERNST & YOUNG LOGO] KOST FORER & GABBAY Phone: 972-3-6232525
3 Aminadav St. Fax: 972-3-5622555
Tel-Aviv 67067, Israel
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
We have audited the accompanying consolidated balance sheets of I.I.S.
Intelligent Information Systems Limited ("the Company") and its subsidiaries as
of December 31, 2000 and 1999, 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, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of Decision Data (U.K.) Ltd., which statements reflect
total revenues constituting 12% of the related consolidated totals revenues for
the year ended December 31, 1998. Those statements were audited by other
auditors whose reports has been furnished to us and our opinion, insofar as it
relates to the data included for Decision Data (U.K.) Ltd., is based solely on
the reports of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the consolidated financial statements referred to above, present fairly, in all
material respects, the consolidated financial position of I.I.S. Intelligent
Information Systems Limited and its subsidiaries as of December 31, 2000 and
1999, and the consolidated results of their operations and cash flows for each
of the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.
Tel-Aviv, Israel KOST FORER & GABBAY
March 11, 2001 A Member of Ernst & Young International
F-2
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. Dollars in thousands
- -------------------------------------------------------------------------------
DECEMBER 31,
---------------------------------------
2000 1999
----------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $3,077 $7,350
Restricted deposit 600 -
Trade receivables 43 -
Affiliate 79 -
Other accounts receivable and prepaid expenses (Note 3) 45 395
------ ------
Total current assets 3,844 7,745
------ ------
SEVERANCE PAY FUND 32 320
------ ------
INVESTMENT IN AN AFFILIATE (Note 4) 2,127 -
------ ------
PROPERTY AND EQUIPMENT, NET (Note 5) 63 431
------ ------
WORK FORCE, NET (Note 6) 283 -
------ ------
$6,349 $8,496
====== ======
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. Dollars in thousands (except share data)
- -------------------------------------------------------------------------------
DECEMBER 31,
---------------------------------------
2000 1999
----------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit (Note 8a) $ - $ 68
Current maturities of long-term bank loans (Note 8b) 10 74
Trade payables 177 245
Other accounts payable and accrued expenses (Note 7) 1,403 1,768
-------- --------
Total current liabilities 1,590 2,155
-------- --------
LONG-TERM LIABILITIES:
Long-term bank loans, net of current maturities (Note 8b) 11 122
Convertible debentures (Note 8c) 2,828 -
Accrued severance pay 38 384
-------- --------
Total long-term liabilities 2,877 506
-------- --------
MINORITY INTEREST IN A SUBSIDIARY - 842
-------- --------
PREFERRED SHARES OF SUBSIDIARY - 2,236
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Share capital (Note 10)- Ordinary shares of NIS 0.003 par value
Authorized: 16,666,667 shares as of December 31, 2000 and 1999;
Issued and outstanding: 8,987,324 and 8,860,394 shares as of
December 31, 2000 and 1999, respectively; 54 54
Additional paid-in capital 37,435 36,683
Receivables on account of shares (16) -
Deferred stock compensation (222) -
Accumulated deficit (35,369) (33,980)
-------- --------
1,882 2,757
-------- --------
$ 6,349 $ 8, 496
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. Dollars in thousands (except per share data)
- -------------------------------------------------------------------------------
Year ended December 31,
-------------------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
Revenues: (Note 12)
Sales $ 96 $ 5,408 $ 31,481
Maintenance and other services - 547 4,467
------- ------- --------
96 5,955 35,948
------- ------- --------
Cost of revenues:
Sales 27 4,484 23,327
Inventories written off (Note 1) - - 5,442
Maintenance and other services - 429 2,836
------- ------- --------
27 4,913 31,605
------- ------- --------
Gross profit 69 1,042 4,343
------- ------- --------
Operating expenses:
Research and development, net (Note 13a) 925 686 2,410
Selling and marketing 639 1,417 7,589
General and administrative 899 1,777 5,870
Trade receivables written off (Note 1) - - 470
Restructuring and reorganization (Note 1) - 467 1,071
------- ------- --------
Total operating expenses 2,463 4,347 17,410
------- ------- --------
Operating loss (2,394) (3,305) (13,067)
Financial income (expenses), net (Note 13b) 277 173 (1,022)
Other expenses, net (Note 13c) (12) (1,770) (267)
------- ------- --------
Loss before minority interest in losses of subsidiary (2,129) (4,902) (14,356)
Minority interest in losses of subsidiary 740 55 -
------- ------- --------
Net loss $(1,389) $(4,847) $(14,356)
======= ======= ========
Basic and diluted net loss per share $(0.16) $(0.55) $(2.55)
======= ======= ========
Number of shares used in computing basic
and diluted net loss per share (in thousands) 8,901 8,860 5,621
======= ======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
U.S. Dollars in thousands
- -------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL RECEIVABLES DEFERRED OTHER
SHARE PAID-IN ON ACCOUNT OF STOCK COMPREHENSIVE
CAPITAL CAPITAL SHARES COMPENSATION LOSS
--------------------------------------------------------------------------------------
Balance as of January 1, 1998 $51 $31,457 $ - $ - $(442)
Comprehensive loss:
Foreign currency translation
adjustments - - - - (348)
Net loss - - - - -
Total comprehensive loss
Conversion of convertible
debentures and amortization of
beneficial conversion feature 3 2,417 - - -
---- ------- ---- ----- ----
Balance as of December 31, 1998 54 33,874 - - (790)
Comprehensive loss:
Foreign currency translation
adjustments - - - - 73
Net loss - - - - -
Total comprehensive loss
Amortization of compensation in
respect to warrants issued upon
settlement of lawsuit - 2,809 - - -
Foreign currency translation
adjustment due to realization of
investment in subsidiaries - - - - 717
---- ------- ---- ----- ----
Balance as of December 31, 1999 54 36,683 - - -
Comprehensive loss:
Net loss - - - - -
Total comprehensive loss
Issuance of shares upon
acquisition of Eastek - *) 160 - - -
Issuance of warrants related
to convertible debentures - 147 - - -
Exercise of options - *) 208 (16) - -
Deferred stock compensation
related to shares in escrow
issued on the acquisition
of Eastek - 237 - (237) -
Amortization of deferred stock
compensation - - - 15 -
---- ------- ---- ----- ----
Balance as of December 31, 2000 $54 $37,435 $(16) $(222) $ -
==== ======= ==== ===== ====
TOTAL TOTAL
ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
DEFICIT LOSS EQUITY
---------------------------------------------------------------
Balance as of January 1, 1998 $(14,777) $ 16,289
Comprehensive loss:
Foreign currency translation
adjustments - $ (348) (348)
Net loss (14,356) (14,356) (14,356)
--------
Total comprehensive loss $(14,704)
========
Conversion of convertible
debentures and amortization of
beneficial conversion feature - 2,420
-------- --------
Balance as of December 31, 1998 (29,133) 4,005
Comprehensive loss:
Foreign currency translation
adjustments - $ 73 73
Net loss (4,847) (4,847) (4,847)
--------
Total comprehensive loss $ (4,774)
========
Amortization of compensation in
respect to warrants issued upon
settlement of lawsuit - 2,809
Foreign currency translation
adjustment due to realization of
investment in subsidiaries - 717
-------- --------
Balance as of December 31, 1999 (33,980) 2,757
Comprehensive loss:
Net loss (1,389) $ (1,389) (1,389)
--------
Total comprehensive loss $ (1,389)
========
Issuance of shares upon
acquisition of Eastek - 160
Issuance of warrants related
to convertible debentures - 147
Exercise of options - 192
Deferred stock compensation
related to shares in escrow
issued on the acquisition
of Eastek - -
Amortization of deferred stock
compensation - 15
-------- --------
Balance as of December 31, 2000 $(35,369) $ 1,882
======== ========
*) Represents an amount lower than $1.
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED STATMENTS OF CASH FLOWS
U.S. Dollars in thousands
- -------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------------------------------------
2000 1999 1998
------------------ ------------------ ------------------
Cash flows from operating activities:
- ------------------------------------------------------
Net loss $(1,389) $(4,847) $(14,356)
Adjustments to reconcile net loss to net cash
used in operating activities:
Inventories write off - - 5,442
Loss from sale of shares in an investee - - 49
Gain on sale of investment in subsidiaries - (996) -
Depreciation, amortization and write off of
property, equipment and other assets 151 613 2,626
Amortization of deferred stock compensation 15 - -
Loss (gain) on sale of property and equipment 37 (43) (363)
Minority interest in losses of subsidiary (740) (55) -
Amortization of beneficial conversion feature - - 667
Amortization of compensation in respect to warrants
issued upon settlement of lawsuit - 2,809 -
Decrease (increase) in trade receivables (96) 1,396 3,905
Decrease (increase) in other accounts receivable and
prepaid expenses 11 (220) 578
Decrease (increase) in inventories (102) 785 2,424
Increase (decrease) in trade payables 199 (411) (2,573)
Decrease in other accounts payable and accrued
expenses (63) (659) (1,114)
Decrease in provision for warranties - (47) (164)
Decrease in accrued severance pay, net (58) (517) (5)
------ ------ ------
Net cash used in operating activities (2,035) (2,192) (2,884)
------ ------ ------
Cash flows from investing activities:
- ------------------------------------------------------
Proceeds from sale of property and equipment 3 93 2,291
Purchase of property and equipment (446) (131) (796)
Investment in restricted deposit (600) - -
Proceeds from sale of investment in subsidiaries, net
of cash in the subsidiaries at the time they ceased
being consolidated - 825 -
De-consolidation of a previously consolidated
subsidiary (4,228) - -
------ ------ ------
Net cash provided by (used in) investing activities (5,271) 787 1,495
------ ------ ------
The accompanying notes are an integral part of the consolidated
financial statements.
F-7
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED STATMENTS OF CASH FLOWS
U.S. Dollars in thousands
- -------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------------------------------------
2000 1999 1998
------------------ ------------------ ------------------
Cash flows from financing activities:
- ------------------------------------------------------
Proceeds from issuance of Preferred shares of
subsidiary to third party, net - 3,122 -
Exercise of options 192 - -
Proceeds from issuance of warrants 147 - -
Proceeds from long-term bank loans 29 61 305
Repayment of long-term bank loans (95) (129) (339)
Short-term bank credit, net (68) - 1,173
Proceeds from issuance of convertible debentures, net 2,828 - -
------- ------ ------
Net cash provided by financing activities 3,033 3,054 1,139
------- ------ ------
Effect of exchange rate changes on cash and
cash equivalents - 40 (47)
------- ------ ------
Increase (decrease) in cash and cash equivalents (4,273) 1,689 (297)
Cash and cash equivalents at the beginning of the year 7,350 5,661 5,958
------- ------ ------
Cash and cash equivalents at the end of the year $ 3,077 $7,350 $5,661
======= ====== ======
Non-cash activities:
Conversion of convertible debentures $ - $ - $1,753
======= ====== ======
Issuance of shares upon acquisition of Eastek:
Estimated fair value of assets acquired and
liabilities assumed at the date of acquisition:
Working capital deficiency (excluding cash and cash
equivalents) (30)
Property and equipment 15
Work force 291
Long-term liabilities (116)
-------
$ 160
=======
Supplemental disclosure of cash flows activities:
Cash paid during the year for:
Income taxes $ - $ - $ 42
======= ====== ======
Interest $ 20 $ 39 $ 450
======= ====== ======
The accompanying notes are an integral part of the consolidated
financial statements.
F-8
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands (except share and per share data)
- -------------------------------------------------------------------------------
NOTE 1:- GENERAL
1. Until early 1999, I.I.S. Intelligent Information Systems Limited
("IIS" or the "Company") was engaged in the development, manufacture,
marketing and servicing of data communications and intelligent
peripheral products targeted at the International Business Machines
("IBM") midrange, IBM mainframe and open systems computing
environments. The Company owned 49% of StoreAge Networking
Technologies ("StoreAge"), an Israeli Company, which is engaged in
the development and marketing of products based on its SAN
Virtualization technology. The Company is currently engaged in the
Internet Small Computer Systems Interface ("iSCSI") space and is
looking into new applications for its iSCSI and storage expertise.
In late 1998, the Company implemented a restructuring plan (the
"Restructuring Plan"), which resulted in the disposal of most of the
assets of the Company, substantial changes in the Company's structure
and a focus exclusively on storage area networking ("SAN").
In January 1999, the Company divested itself of its 62.3% equity
interest in NetWiz Ltd., an Israeli development-stage company
("NetWiz"). In the transaction, it transferred its entire interest in
NetWiz to a non-affiliated third party and such non-affiliated third
party assumed all liabilities associated with such interest. The
divestiture required from the Company in expenditure of $945. Net
gain realized as a result of the sale of NetWiz amounted to $616.
In February 1999, the Company disposed of its networking products and
network integration services division, which is comprised of Adanet
Communications, Ltd. ("Adanet"), an Israeli company, which the
Company acquired in June 1994, and I.I.S Computer Maintenance and
Services (1983) Limited ("I.I.S Maintenance"), an Israeli company.
The Company realized net proceeds of $ 1,506 and a net gain of $175
as a result of the sale of Adanet and I.I.S maintenance.
In March 1999, the Company sold most of the assets and liabilities of
its Decision Data Division ("Decision Data") which comprises all of
the Company's U.S., United Kingdom and Germany operations. The
Company realized net proceeds of $2,487 and a net gain of $ 205 as a
result of the sale of Decision Data.
During the first quarter of 1999 and the last quarter of 1998 (as
discussed above), the Company incurred costs of $ 467 and $ 6,983,
respectively, in implementing its worldwide restructuring plan. The
following is a breakdown of the restructuring costs incurred:
YEAR ENDED
DECEMBER 31,
---------------------------------------
1999 1998
----------------- -----------------
Inventories write off $ - $5,442 Included in cost of revenues
----------------- -----------------
Trade receivables write off - 470 Included in operating expenses
----------------- -----------------
Termination costs - 268
Impairment of goodwill - 574
Other costs, net 467 229
----------------- -----------------
467 1,071 Included in operating expenses
----------------- -----------------
$ 467 $6,983
================ ================
F-9
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands (except share and per share data)
- -------------------------------------------------------------------------------
2. In January 1999, StoreAge Network Technologies Ltd., an Israeli
company, ("StoreAge") was organized as a wholly-owned subsidiary of
IIS and commenced the development and marketing of products based on
its SAN Virtualization technology, accordingly, on January 1, 1999,
IIS transferred to StoreAge all of its know-how, operations, assets
and liabilities in the area of Fiber Channel in return for the entire
share capital of StoreAge.
In late 1999, 707,558 Preferred A shares of StoreAge were issued to
outside investors for a total net consideration of $3,122.
Accordingly, the Company's equity interest in StoreAge was reduced to
58.56%. The excess of the value of the investment in StoreAge derived
from the issuance of Preferred shares by StoreAge to outside
investors, over the amount invested, in the amount of $2,236 was
recorded as a quasi-equity item, Preferred shares of a subsidiary.
In December 2000 4,259,268 Preferred B shares of StoreAge were issued
for a total consideration of $14,000. The Company has invested
$4,220, of which $543 was made by the conversion of loan to StoreAge,
in exchange of 1,283,866 Preferred B shares. Accordingly, the
Company's equity interest in StoreAge was reduced to 49%. Thus
StoreAge's operations were de-consolidated since December 2000, and
the Company's investment in StoreAge was accounted for in accordance
with the equity method.
As part of this financing round, StoreAge issued, in January 2001, an
additional 3,346,567 Preferred B shares for a total consideration of
$11,000, and the Company's equity interest in StoreAge was reduced to
38.9%.
3. During November 2000, the Company acquired all the activities, assets
and rights, and assumed certain obligations of Eastek Embedded
Systems (Meitav) Ltd. ("Eastek") a private Israeli software company,
to enhance its R&D capabilities in order to develop synergetic
software solutions for the SAN market. In consideration of this
acquisition the Company issued 80,000 Ordinary shares of the Company,
of which 20,000 shares will be deposited with a trustee and shall be
delivered twelve months after the closing - provided that no claims
are made against Eastek. The value of shares issued in this
transaction was $2 per share in the aggregate amount of $160.
The Company also granted a key employee of Eastek 100,000 shares in
escrow which will be released annually in three installments of
30,000 shares, 35,000 shares and 35,000 shares. (See Note 10).
The transaction was accounted for by the purchase method of
accounting, and Eastek's operations are consolidated as of the date
of acquisition. The excess cost over the fair value of net assets
acquired was allocated to the assembled work force in the amount of
$291 which is to be amortized on a straight-line basis over a three-
year period. The allocation of the purchase price of the Eastek
acquisition is based on the fair value of assets acquired and
liabilities assumed. The following is a summary of the assets
acquired:
Working capital deficiency $ (30)
Property and equipment 15
Work force (amortized over three years) 291
Long-term liabilities (116)
-----
$ 160
=====
F-10
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands (except share and per share data)
- -------------------------------------------------------------------------------
The following represents the unaudited pro-forma results of
operations for the years ended December 31, 2000 and 1999 assuming
that the Eastek acquisition had been consummated as of January 1,
2000 and January 1, 1999, respectively:
YEAR ENDED
DECEMBER 31,
------------------------------------------
2000 1999
------------------ ------------------
Sales $ 283 $ 6,283
======= =======
Net loss $(1,465) $(4,897)
======= =======
Basic and diluted net loss per share $ (0.16) $ (0.55)
======= =======
4. In December 2000, the Company completed a private placement of $3
million in the issuance of convertible subordinated debentures and
warrants to qualified investors. The net proceeds from the offering
were used to fund the Company's investment in StoreAge's second round
of financing (see Note 8c).
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the
United States ("U.S. GAAP").
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 U.S. DOLLARS:
The functional currency of the Company and its subsidiaries is the
U.S dollar, as the U.S. dollar is the primary currency of the
economic environment in which the Company and its subsidiaries have
operated and expect to continue to operate in the foreseeable future.
The majority of the Company's operations is currently conducted in
Israel and most of the Israeli expenses are currently paid in new
Israeli shekels ("NIS"); however, most of the expenses are
denominated and determined in U.S. dollars. Financing and investing
activities including loans, equity transactions and cash investments,
are made in U.S. dollars.
Accordingly, monetary accounts maintained in currencies other than
the dollar are remeasured into U.S. dollars in accordance with
Statement No. 52 of the Financial Accounting Standard Board ("FASB")
"Foreign Currency Translation". All transactions gains and losses of
the remeasurement of monetary balance sheet items are reflected in
the statement of operations as financial income or expenses as
appropriate.
F-11
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands (except share and per share data)
- -------------------------------------------------------------------------------
The financial statements of foreign subsidiaries whose functional
currency is their local currency, have been translated into U.S.
dollars. All balance sheet accounts have been translated using the
exchange rates in effect at the balance sheet date.
Statement of operations amounts have been translated using the
average exchange rate for the period. The resulting translation
adjustments are reported as a component of shareholders' equity -
accumulated other comprehensive income (loss). Such subsidiaries
were realized during 1999.
C. PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements of the Company include the
accounts of the Company and its subsidiaries. Intercompany balances
and transactions have been eliminated upon consolidation.
D. CASH EQUIVALENTS:
The Company considers all highly liquid investments that are readily
convertible to cash with original maturities of three months or less
to be cash equivalents.
E. RESTRICTED DEPOSIT:
The restricted deposit, which is primarily invested in certificates
of deposit, which mature within one year, as security for the
settlement of a lawsuit (see Note 9).
F. INVESTMENT IN AN AFFILIATE:
The investment in StoreAge over which the Company can exercise
significant influence over operating and financing policy
(generally, entities in which the Company holds 20% to 50% of
ownership or voting rights), is presented using the equity method of
accounting and in accordance with EITF 99-10 "Percentage Used to
Determine the Amount of Equity Method Losses" which requires that
an investor should recognize equity method losses based on the
ownership level of the particular investee security held by the
investor, or the change in the investor's claim on the investee's
book value.
G. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is calculated by the straight-line method
over the estimated useful lives of the assets, at the following
annual rates:
%
------------------------------
Leasehold improvements Over the term of the lease
Machinery and equipment 10 - 33
Office furniture and equipment 6 - 10
Motor vehicles 15
F-12
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands (except share and per share data)
- -------------------------------------------------------------------------------
The Company and its subsidiaries periodically assess the
recoverability of the carrying amount of property and equipment and
provide for any possible impairment loss based upon the difference
between the carrying amount and fair value of such assets, in
accordance with the provisions of FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of". As of December 31, 2000, no
impairment losses have been identified.
H. WORK FORCE:
The work force is amortized using the straight-line method over the
estimated useful life (three years).
The carrying value of the work force is periodically reviewed by
management, based on the expected future undiscountinued operating
cash flows over the remaining amortization period of the work force.
If this review indicates that the work force will not be
recoverable, the carrying value of the work force is reduced to the
estimated fair value. As of December 31, 2000, no impairment losses
have been identified.
I. RESEARCH AND DEVELOPMENT COSTS:
Statement of Financial Accounting Standards ("SFAS") 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. The
Company does not incur material costs between the completion of the
working model and the point at which the products ready for general
release. Therefore, research and development costs are charged to
the statement of operations as incurred.
J. ROYALTY-BEARING GRANTS:
Royalty-bearing grants from the Office of the Chief Scientist
("OCS") for funding approved research and development projects are
recognized at the time the Company and its subsidiary are entitled
to such grants, on the basis of the related costs incurred. Such
grants are recorded as a reduction of research and development
costs. Research and development grants amounted to $403, $223 and
$261 in 2000, 1999 and 1998, respectively.
K. REVENUE RECOGNITION:
To date, the Company has derived its revenues from licensing fees
for its products, training, installation, maintenance and hardware.
The Company sells its products primarily through its direct sales
force.
In December 1999, the SEC issued Staff Accounting Bulletin No 101
("SAB 101"), as amended in June 2000, which summarize the staff's
views in applying generally accepted accounting principles to
revenues recognition in financial statements. The Company adopted
SAB 101 during the fourth quarter of 2000. The adoption did not have
a significant effect on the consolidated results of operations or
financial position.
F-13
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands (except share and per share data)
- -------------------------------------------------------------------------------
The Company has adopted Statement of Position (SOP) 97-2, "Software
Revenue Recognition," as amended. SOP 97-2, generally requires
revenues earned from software arrangements involving multiple
elements to be allocated to each element based on the relative fair
value of the elements. The Company has also adopted SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition with Respect
to Certain Transactions," for all transactions entered into after
January 1, 2000. SOP 98-9 requires that revenue be recognized under
the "residual method" when vendor specific objective evidence (VSOE)
of fair value exists for all undelivered elements and no VSOE exists
for the delivered elements.
Revenues from license fees are recognized when persuasive evidence
of an agreement exists, delivery of the product has occurred, no
further significant obligations exist, the fee is fixed or
determinable, and collectibility is probable. The Company generally
does not grant a right of return to its customers. If the fee is not
fixed or determinable, revenues are recognized as payments become
due from the customer provided that all other revenue recognition
criteria have been met.
Maintenance, training and installation services are evaluated to
determine whether those services are essential to the functionality
of other elements of the arrangement. When services are considered
essential, revenues under the arrangement are recognized using
contract accounting. When services are not considered essential, the
revenues allocable to the services are recognized as the services
are performed. To date, the Company had determined that the services
are not considered essential to the functionality of other elements
of the arrangement.
Revenues from hardware sales are recognized when persuasive evidence
of an agreement exists, delivery of the product has occurred, the
fee is fixed or determinable, and collectibility is probable.
When contracts contain multiple elements wherein VSOE of fair value
exists for all undelivered elements, the Company accounts for the
delivered elements in accordance with the "Residual Method"
prescribed by SOP 98-9. Training maintenance and installation
revenue included in these arrangements is deferred and recognized on
a straight-line basis over the term of the training maintenance and
installation agreement. The VSOE of fair value of the undelivered
elements is determined based on the price charged for the
undelivered element when sold separately.
L. WARRANTY COSTS:
The Company provides a warranty at no extra charge to the customer.
A provision is recorded for probable costs in connection with
warranties based on the Company's past experience and engineering
estimates. As to date warranty costs were immaterial.
M. CONCENTRATIONS OF CREDIT RISKS:
Financial instruments that potentially subject the Company and its
subsidiaries to concentrations of credit risk consist principally of
cash and cash equivalents, restricted deposit, trade receivables and
affiliate account receivable. The Company's cash and cash
equivalents and restricted deposit are deposited in major banks in
Israel and in the U.S. Such deposits in the U.S. may be in excess of
insured limits and are not insured in other jurisdictions.
Management believes that the financial institutions that hold the
Company's investments are financially sound and, accordingly,
minimal risk exists with respect to these investments.
F-14
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands (except share and per share data)
- -------------------------------------------------------------------------------
The trade receivables of the Company and its subsidiary are mainly
derived from sales to customers located primarily in the U.S.,
Europe and Israel. The Company performs ongoing credit evaluations
of its customers and to date has not experienced any material
losses. An allowance for doubtful accounts is determined with
respect to those amounts that the Company has determined to be
doubtful of collection. As of December 31, 2000, no allowance for
doubtful accounts was provided.
Management believes that the affiliate is financially sound and,
accordingly, minimal risk exists with respect to these receivables.
The Company and its subsidiaries have no significant off-balance-
sheet concentrations of credit risk such as foreign exchange
contracts, option contracts or other foreign hedging arrangements.
N. BASIC AND DILUTED NET LOSS PER SHARE:
Basic net earnings (loss) per share is computed based on the
weighted average number of Ordinary shares outstanding during each
year. Diluted net earnings per share is computed based on the
weighted average number of Ordinary shares outstanding during each
year, plus dilutive potential Ordinary shares considered
outstanding during the year, in accordance with FASB Statement
No. 128, "Earnings Per Share".
All outstanding convertible debentures, stock options and warrants
have been excluded from the calculation of the diluted net loss per
Ordinary share because all such securities are antidilutive for all
periods presented. The total weighted average number of Ordinary
shares related to convertible debentures, options and warrants
excluded from the calculation of diluted net loss per share were
1,570,193, 687,808 and 697,252 for the years ended December 31,
2000, 1999 and 1998, respectively.
O. SEVERANCE PAY:
The Company's liability for severance pay is calculated pursuant to
the Israeli Severance Pay Law based on the most recent salary of the
employees multiplied by the number of years of employment as of the
balance sheet date. Employees are entitled to one month's salary for
each year of employment, or a portion thereof. The Company's
liability is fully provided by monthly deposits into severance pay
funds, insurance policies and by an accrual.
The deposited funds include profits accumulated up to the balance
sheet date. The deposited funds may be withdrawn only upon the
fulfillment of the obligations pursuant to Israeli severance pay law
or labor agreements. The value of the deposited funds are based on
the cash surrendered value of these policies and include immaterial
profits.
Severance pay expenses for the years ended December 31, 2000, 1999
and 1998 amount to approximately, $10, $292 and $ 973, respectively.
F-15
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands (except share and per share data)
- -------------------------------------------------------------------------------
P. 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")
and Interpretation No. 44 "Accounting for Certain Transactions
Involving Stock Compensation" ("FIN 44") in accounting for its
employee stock option plans. Under APB 25, when the exercise price
of the Company's share options is less than the market price of the
underlying shares on the date of grant, compensation expense is
recognized. The pro forma disclosures required by SFAS No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123"), are provided
in Note 10.
The Company applies SFAS 123 and EITF 96-18 "Accounting for Equity
Instruments That Are Issued to Other than Employees for Acquiring,
or in Conjunction with Selling, Goods or Services" with respect to
options issued to non-employees. SFAS 123 requires use of an option
valuation model to measure the fair value of the options at the
grant date.
Q. INCOME TAXES:
The Company and its subsidiary account for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS)
No. 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 the 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.
R. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used by the Company and
its subsidiaries in estimating their fair value disclosure for
financial instruments:
The carrying values of cash and cash equivalents, restricted
deposit, trade receivables, affiliate account receivable, short-term
bank credit and trade payables approximate their fair value due to
the short-term maturities of these instruments.
Convertible loan and long-term bank loans - the carrying amounts
reported in the balance sheet 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.
S. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended, which is required to be adopted in
years beginning after June 15, 2000. Because of the Company's
minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on
earnings or the financial position of the Company.
F-16
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands (except share and per share data)
- -------------------------------------------------------------------------------
NOTE 3:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
DECEMBER 31,
-------------------------------------------
2000 1999
------------------- ------------------
Prepaid expenses $ 30 $ 31
Government authorities 12 246
Other 3 118
----- -----
$ 45 $ 395
===== =====
NOTE 4:- INVESTMENT IN AN AFFILIATE
Investment in StoreAge:
- -----------------------
Investment in Ordinary shares of StoreAge in January, 1999 (39% of
voting rights) $ - $ -
Investment in Preferred shares of StoreAge in December, 2000 (10% of
voting rights) 4,220 -
Equity interest in post establishment losses (2,093) -
------- ------
Total investment (49% of voting rights) $ 2,127 $ -
======= ======
The following summarizes the aggregate information of StoreAge:
DECEMBER 31,
2000
-------------------
Current assets $14,358
Non current assets $ 646
Current liabilities $ (921)
Non current liabilities $ (40)
YEAR ENDED
DECEMBER 31,
2000
-------------------
Revenues $ 66
Gross profit $ 51
Loss from continuing operations $(1,786)
Net loss $(1,786)
F-17
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands (except share and per share data)
- -------------------------------------------------------------------------------
NOTE 5:- PROPERTY AND EQUIPMENT, NET
DECEMBER 31,
-------------------------------------------
2000 1999
------------------- ------------------
Cost:
Leasehold improvements $ - $ 2
Machinery and equipment 29 205
Office furniture and equipment 70 108
Motor vehicles 47 265
----- -----
146 580
----- -----
Accumulated depreciation:
Leasehold improvements - -
Machinery and equipment 2 43
Office furniture and equipment 60 54
Motor vehicles 21 52
----- -----
83 149
----- -----
Depreciated cost $ 63 $ 431
===== =====
Depreciation expenses for the years ended December 2000, 1999 and 1998
amounted to approximately $143, $146 and $1,559, respectively.
As for charges, see Note 9c.
NOTE 6:- WORK FORCE
As a result of the purchase of Eastek (see Note 1), the Company recorded
a work force in the amount of $291.
DECEMBER 31,
-------------------------------------------
2000 1999
------------------ -------------------
Work force $ 291 $ -
Less - accumulated amortization 8 -
------------------ -------------------
$ 283 $ -
================== ===================
Amortization expense amounted to $ 8 for the year ended December 31,
2000.
F-18
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands (except share and per share data)
- -------------------------------------------------------------------------------
NOTE 7:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 31,
------------------------------------------
2000 1999
------------------ ------------------
Employees and payroll accruals $ 44 $ 165
Government authorities 8 -
Provision for litigation 931 1,104
Accrued expenses 420 499
------ ------
$1,403 $1,768
====== ======
NOTE 8:- FINANCING ARRANGEMENTS
A. SHORT-TERM BANK CREDIT:
As of December 31, 1999, the Company and its subsidiaries have an
authorized line of credit in the amount of $80, of which $68 is
utilized. Most of the credit is denominated in unlinked NIS.
Weighted average interest rate as of December 31, 1999 was 13.5%. As
of December 31, 2000 the Company has no authorized line of credit.
B. LONG-TERM BANK LOANS:
December 31,
-------------------------------------------------------------------------------
2000 1999
------------------------------------- -------------------------------------
INTEREST RATE INTEREST RATE
% AMOUNT % AMOUNT
----------------- -------------- ----------------- ---------------
U.S. dollar 7.3 $21 8 $196
Less - current maturities 10 74
--- ----
$11 $122
=== ====
Aggregate maturities of long-term loans for the years subsequent to
December 31, 2000 are as follows:
2001 (current maturities) $10
2002 10
2003 1
---
$21
===
F-19
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands (except share and per share data)
- -------------------------------------------------------------------------------
C. CONVERTIBLE DEBENTURES:
1. In 1997, the Company issued convertible debentures and warrants
to purchase 200,000 Ordinary shares in consideration of $2,000.
All of the debentures were converted during 1998 into 4,211,047
Ordinary shares.
The warrants are exercisable into Ordinary shares at any time
until December 2002 in consideration of $4.47 per share.
2. In December 2000, the Company issued convertible debentures and
warrants to purchase 300,000 Ordinary shares in consideration of
$3,000.
The debentures bear interest at the rate of LIBOR + 1.5% and
shall be repaid commencing at the beginning of the third year
following the issuance of the debentures and ending at the end of
the fifth year.
The Debentures are convertible, all or in part, at any time in
which these are outstanding, to the Company's Ordinary shares, at
a price per share of $3.
The warrants granted are exercisable into the Company's Ordinary
shares at any time until December 2003 at a price per share of
$4.5.
The fair value for the warrants was estimated at the date of
grant using the Black-Scholes option valuation model with the
following weighted-average assumptions for 2000: risk-free
interest rates of 6%, dividend yields of 0%, volatility factors
of the expected market price of the Company's Ordinary shares of
1.092, and a weighted-average expected life of the warrants of
approximately 1.5 years.
The fair value of the warrants at the date of grant was $0.49 per
warrant, in the aggregate to $147. The fair value of the
warrants, plus debt issuance costs in the amount of $25, were
accounted for as a discount on the debentures, and shall be
amortized over the term of the debentures using the interest
method.
The Company accounted for these convertible debentures in
accordance with EITF 98-5 "Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios" and EITF 00-27 "Application of EITF Issue No.
98-5 to Certain Convertible Instruments".
F-20
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands (except share and per share data)
- -------------------------------------------------------------------------------
There has been no beneficial conversion feature in respect to
these convertible debentures. Aggregate maturities of convertible
debentures for the years subsequent to December 31, 2000 are as
follows:
2003 $1,000
2004 1,000
2005 1,000
------
3,000
Debt issuance costs (172)
------
$2,828
======
NOTE 9:- COMMITMENTS AND CONTINGENT LIABILITIES
A. LEASE COMMITMENTS:
The Company and its subsidiaries lease their facilities under an
operating lease agreement. The aggregate future minimum payment
under noncancelable operating leasing ending on December 31, 2001 is
$67.
Rent expenses for the years ended December 31, 2000, 1999 and 1998
were approximately $60, $122 and $602, respectively.
B. LITIGATION:
1. The Company, certain of its officers and directors and the
underwriters of the Company's August 1993 public offering are
defendants in a purported class action and two related cases
which were filed in the United States District Court for the
Eastern District of New York in September 1993, August 1994 and
February 1995. The plaintiffs' complaints allege that the Company
violated Section 12(2) of the Securities Act of 1933, as well as
Section 10(b) and Section 20 of the Securities Exchange Act of
1934 by failing to disclose early enough that revenues in both
the Company's European and United States markets were declining
and that the Company was struggling to maintain its growth
margins at past levels. The plaintiffs also contend that the
Company falsely stated that it had successfully integrated a
newly acquired business, the Decision Data Division, into the
Company's operations.
On December 14, 1999, the Company entered into stipulations of
settlement with the plaintiffs, which was approved by the court
in 2000. The Class Action Settlement provides for the dismissal
with prejudice of the Class Action and the release of all class
actions against all defendants, in exchange for (i) a cash
payment of $600 by the Company into an insured interest-bearing
escrow fund, and (ii) delivery to the plaintiff class by the
Company of newly issued freely tradable warrants with rights to
purchase, in the aggregate, 886,039 Ordinary shares of the
Company, at an exercise price of $0.30 per share. The warrants
were issued in December 1999.
The fair value for these warrants was estimated at the date of
grant using the Black-Scholes option valuation model with the
following weighted-average assumptions: risk-
F-21
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands (except share and per share data)
- -------------------------------------------------------------------------------
free interest rates of 6%, dividend yields of 0%, volatility
factors of the expected market price of the Company's Ordinary
shares of 1.369 and a weighted-average expected life of an option
of one year.
Compensation of $2,809 derived from the warrant was charged to
other expenses.
2. A suit was filed in Israel in 1995 against the Company and
certain of its officers and directors alleging inadequate
disclosure in prior years of the Company's financial position,
results of operations and prospects, and damages in the amount of
$250. The Company, based on the opinion of its legal advisors,
does not believe that the outcome of these actions will have a
material adverse effect on either its business operations or its
financial position. The Company's legal advisors are unable to
estimate the outcome of this suit.
3. A claim was filed against NetWiz Ltd. (a former subsidiary of the
Company) in respect of a breach of a lease agreement. As part of
agreement for the sale of NetWiz the Company agreed to assume the
liabilities in respect of the above claim. The Company's legal
counsel estimates that the Company's exposure does not exceed
$50. The Company recorded a full provision in respect of this
claim. The Company also recorded a guarantee in the amount of $50
in respect of this claim
4. A claim was filed by a supplier against the Company for a non-
payment of a debt. The Company rejects the claim and argues that
the price of the goods exceeded the agreed upon price. The
Company's legal counsel estimates that the Company's exposure
does not exceed $20. The Company recorded a full provision in
respect of this claim.
C. CHARGES:
The Company had recorded a charge on all of its assets in favor of
banks and lenders.
NOTE 10:- SHARE CAPITAL
A. REVERSE SPLIT
During 1998, the Company effected a 3:1 reverse share split on its
Ordinary shares from NIS 0.001 par value to NIS 0.003 par value. All
Ordinary shares and per share amounts have been adjusted to give
retroactive effect to this reverse share split for all periods
presented.
B. WARRANTS:
As for warrants issued upon issuance of debt and upon settlement of
lawsuit see Notes 8c and 9b, respectively.
F-22
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands (except share and per share data)
- -------------------------------------------------------------------------------
C. STOCK OPTION PLAN:
Under the Company's 1993 Stock Option Plan ("the Plan"), options may
be granted to employees, officers, directors and consultants of the
Company or of any subsidiary. The exercise price of options granted
under the Plan may not be less than 85% of the fair market value of
the Company's Ordinary shares on the date of the grant. The options
granted shall vest annually over a period of three to four years,
from the first vesting date and expire 6-10 years subsequent to the
date of grant. Any options, which are forfeited or canceled before
expiration, become available for future grants.
The total amount of options available for future grants as of
December 31, 2000, amounted to 44,779.
As part of the acquisition of Eastek, the Company granted a key
employee of Eastek 100,000 shares in escrow which will be released
annually in three installments of 30,000 shares, 35,000 shares and
35,000 shares. The Company accounted for this transaction in
accordance with EITF 95-8 "Accounting for Contingent Consideration
Paid to the Shareholders of an Acquired Enterprise in a Purchase
Business Combination".
Accordingly the Company recorded deferred stock compensation in the
amount of $237. Deferred compensation is amortized to the statement
of operations over the vesting period. Amortization expenses in
2000, 1999 and 1998 amounted to $15, $0 and $0, respectively.
A summary of the Company's stock option activity, and related
information:
2000 1999 1998
------------------------------- ------------------------------- ------------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF OPTIONS EXERCISE PRICE OF OPTIONS EXERCISE PRICE OF OPTIONS EXERCISE PRICE
------------ ---------------- ------------- ---------------- ------------ ----------------
Outstanding at the
beginning of the
year 499,138 $19.08 664,635 $17.39 787,658 $16.41
Granted 716,050 $ 3.63 - - - -
Exercised (46,954) $ 4.43 - - - -
Forfeited (20,084) $15.91 (165,497) $12.12 (123,023) $11.12
--------- -------- --------
Outstanding at
end of year 1,148,150 $10.09 499,138 $19.08 664,635 $17.39
========= ======== ========
Exercisable at the
end of the year 488,650 $18.83 487,808 $19.44 528,518 $23.61
========= ======== ========
F-23
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands (except share and per share data)
- -------------------------------------------------------------------------------
The options outstanding as of December 31, 2000, have been separated
into ranges of exercise price, as follows:
OPTIONS WEIGHTED OPTIONS
OUTSTANDING AS OF AVERAGE WEIGHTED EXERCISABLE AS OF WEIGHTED
DECEMBER 31, REMAINING AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICE 2000 CONTRACTUAL LIFE EXERCISE PRICE 2000 EXERCISE PRICE
- ---------------- ------------------ ------------------- ---------------- ------------------- -----------------
(YEARS)
$3.63 716,050 5.87 $ 3.63 56,550 $ 3.63
$3.93 - $5.79 123,933 5.69 $ 5.48 123,933 $ 5.48
$6.06 - $8.82 142,967 4.12 $ 7.88 142,967 $ 7.88
$12.75 - $18.48 73,000 1.17 $17.07 73,000 $17.07
$24 - $28.89 5,000 3.34 $25.50 5,000 $25.50
$58.65 - $67.14 87,200 2.66 $66.67 87,200 $66.67
--------- -------
1,148,150 5.08 $10.09 488,650 $18.83
========= =======
Under SFAS-123, pro forma information regarding net income and net
earnings per share is required and has been determined as if the
Company had accounted for its employee stock option under the fair
value method of that Statement. The fair value for these options was
estimated at the date of grant using the Black-Scholes option
valuation model with the following weighted-average assumptions (no
options were granted during 1998 and 1999), for 2000: risk-free
interest rates of 6%, dividend yields of 0%, volatility factors of
the expected market price of the Company's Ordinary shares of 0.98
and a weighted-average expected life of an option of four years.
Weighted average fair values and weighted average exercise prices of
options whose exercise price is less, equal or exceeds market price
of the shares at date of grant are as follows:
YEAR ENDED DECEMBER 31, 2000
--------------------------------------------------------
WEIGHTED AVERAGE FAIR WEIGHTED AVERAGE
VALUE OF OPTIONS EXERCISE PRICE OF
GRANTS AT AN EXERCISE OPTIONS GRANTS AT AN
PRICE EXERCISE PRICE
-------------------------- --------------------------
Equal to market price at date of grant $2.94 $3.63
===== =====
Exceeds market price at date of grant $1.15 $3.63
===== =====
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because the Company's
stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide
a reliable single measure of the fair value of its options.
For purposes of pro forma disclosure, the estimated fair value of
the options is amortized as an expense over the options' vesting
period.
F-24
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands (except share and per share data)
- -------------------------------------------------------------------------------
Pro forma information under SFAS-123:
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
Net loss as reported $(1,389) $(4,847) $(14,356)
======= ======= ========
Pro forma net loss $(1,674) $(4,905) $(14,543)
======= ======= ========
Pro forma basic and diluted net loss per share $ (0.19) $ (0.55) $ (2.59)
======= ======= ========
The total compensation expense included in the pro forma information
for 2000, 1999 and 1998 is $285, $58 and $187, respectively.
As a result of the decrease in the Company's equity interest in
StoreAge to 49% (see Note 1), and the de-consolidation of StoreAge,
the status of StoreAge's employees was changed in accordance with
FIN-44 "Accounting for Certain Transactions Involving Stock
Compensation" from employees to non-employees. Thus 46,000 options
granted to StoreAge's employees were remeasured at December 31,
2000, under the fair value method, and was accounted for as a
variable plan in accordance with SFAS 123 and EITF 96-18 "Accounting
for Equity Instruments that are Issued to Other than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services".
The fair value for these options was estimated at the balance sheet
date using the Black-Scholes option valuation model with the
following weighted-average assumptions: risk-free interest rates of
6%, dividend yields of 0%, volatility factors of the expected market
price of the Company's Ordinary shares of 0.96 and a weighted-
average expected life of an option of four years.
The weighted average fair values at the balance sheet date of these
options is $1 per option and the aggregate compensation as of
December 31, 2000 is $46.
Compensation expenses, derived from the change in StoreAge's
employees status, would be recognized over the remaining vesting
period of 2.4 years.
D. DIVIDENDS:
Dividends, when declared, will be paid in NIS. Dividends paid to
shareholders outside Israel will be converted into dollars, on the
basis of the exchange rate prevailing at the date of payment. The
Company does not intend to pay cash dividends in the foreseeable
future.
F-25
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands (except share and per share data)
- -------------------------------------------------------------------------------
NOTE 11:- INCOME TAXES
A. TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF INDUSTRY
(TAXES), 1969:
If the Company meets certain conditions it will be defined as an
"industrial company", as defined by this law and, as such, is
entitled to certain tax benefits, mainly accelerated depreciation of
machinery and equipment, as prescribed by regulations published
under the Inflationary Adjustments Law, the right to claim public
issuance expenses and amortization of patents and other intangible
property rights as a deduction for tax purposes.
B. MEASUREMENT OF TAXABLE INCOME UNDER THE INCOME TAX (INFLATIONARY
ADJUSTMENTS) LAW, 1985:
Results of the Company and its subsidiary for tax purposes are
measured in terms of earnings in NIS after certain adjustments for
increases in the Israeli Consumer Price Index ("CPI"). As explained
in Note 2b, the financial statements are prepared in U.S. dollars.
The difference between the annual change in the Israeli CPI and in
the NIS/U.S. dollar exchange rate results in a difference between
taxable income and the income before taxes reported in the financial
statements.
In accordance with paragraph 9(f) of SFAS No. 109, the Company has
not provided deferred income taxes on the difference between the
reporting currency and the tax bases of assets and liabilities.
C. LOSS BEFORE MINORITY INTEREST IN LOSSES OF SUBSIDIARY:
YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
Domestic $2,129 $4,014 $11,202
Foreign - 888 3,154
------ ------ -------
$2,129 $4,902 $14,356
====== ====== =======
D. 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.
F-26
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands (except share and per share data)
- -------------------------------------------------------------------------------
Significant components of the Company's deferred tax liabilities and
assets are as follows:
DECEMBER 31,
------------------------------------------
2000 1999
----------------- ------------------
Tax loss carryforward $ 26,506 $ 27,010
Reserves and allowances 7 63
-------- --------
Net deferred assets before valuation allowance 26,513 27,073
Valuation allowance (26,513) (27,073)
-------- --------
Net deferred tax asset $ - $ -
======== ========
As of December 31, 2000, the Company has decreased its valuation
allowances of approximately $560 to approximately $26,513 in respect
of deferred tax assets resulting from tax loss carryforwards and
other temporary differences. Management currently believes that
since the Company has a history of losses it is more likely than not
that the deferred tax regarding the loss carryforwards and other
temporary differences will not be realized in the foreseeable
future.
E. TAX LOSS CARRYFORWARD:
As of December 31, 2000, the Company has carryforward tax loss in
the amount of approximately $73,600, which may be carried forward
and offset against taxable income in the future for an indefinite
period.
NOTE 12:- SEGMENTS AND GEOGRAPHIC INFORMATION
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", in 1997.
The Company operates in one reportable segment (see Note 1 for a brief
description of the Company's business). The total revenues are
attributed to geographic information based on the location of the end
customer.
The following presents total revenues for the years ended December 31,
2000, 1999 and 1998 and long-lived assets as of December 31, 2000, 1999
and 1998:
Year ended December 31,
----------------------------------------------------------
2000 1999 1998
---------- ------------ ------------
Sales to unaffiliated customers:
United States $ 41 $3,867 $19,228
Israel 40 1,611 12,363
Europe 15 477 4,357
----- ------ -------
$ 96 $5,955 $35,948
===== ====== =======
F-27
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. Dollars in thousands (except share and per share data)
- -------------------------------------------------------------------------------
DECEMBER 31,
-------------------------------------------------------------
2000 1999 1998
------------ ------------- ------------
Long-lived assets:
United States $ - $ - $ 158
Israel 346 431 1,610
Europe - - 24
----- ------ -------
$ 346 $ 431 $ 1,792
===== ====== =======
NOTE 13:- SELECTED STATEMENTS OF OPERATIONS DATA
YEAR ENDED
DECEMBER 31,
------------------------------------------------------------
2000 1999 1998
------------- ----------- ------------
A. RESEARCH AND DEVELOPMENT
EXPENSES, NET:
Total costs $1,328 $ 909 $ 2,671
Less - royalty-bearing grants (403) (223) (261)
------ ------- --------
$ 925 $ 686 $ 2,410
====== ======= ========
B. FINANCIAL INCOME (EXPENSES):
Interest income $ 389 $ 289 $ 186
------ ------- --------
Financial expenses:
Interest expenses (67) (76) (446)
Foreign currency translation
differences (45) (40) (95)
Amortization of beneficial
conversion feature - - (667)
------ ------- --------
(112) (116) (1,208)
------ ------- --------
$ 277 $ 173 $(1,022)
====== ======= ========
C. OTHER EXPENSES, NET:
Amortization of compensation in
respect to warrants issued upon
settlement of lawsuit $ - $2,809 $ -
Gain on sale of investment in
subsidiaries - (996) -
Loss from sale of shares in an
investee - - 49
Other 12 (43) 218
------ ------- --------
$ 12 $1,770 $ 267
====== ======= ========
F-28