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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-13012
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, 2001, the Registrant had 11,498,436
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 [ ]
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 [ ] Item 18 [X]
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, this Form
20-F and the Company's other filings with the Securities and Exchange Commission
during the past 12 months.
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, 2001 and 2000 and for the three years ended December 31, 2001,
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, 1999,
1998 and 1997 and for the years ended December 31, 1998 and 1997 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.
Since December 2000, as a result of the decline of the Company's
interest in StoreAge Networking Technologies Ltd. ("StoreAge") to 39%, the
Company's and StoreAge's operations are no longer reported on a consolidated
basis and the Company's investment in StoreAge is accounted for in accordance
with the equity method.
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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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1997 1998 1999 2000 2001
------- -------- ------- ------- -------
Sales revenues $37,981 $ 31,481 $ 5,408 $ 96 $ 83
Revenues from related party -- -- -- -- 251
Maintenance and other services 6,417 4,467 547 -- --
Total revenues 44,398 35,948 5,955 96 334
Cost of sales 26,930 23,327 4,484 27 28
Cost of revenues from related party -- -- -- -- 155
Inventories write off -- 5,442 -- -- --
Cost of maintenance and other services 5,316 2,836 429 -- --
Total cost of revenues 32,246 31,605 4,913 27 183
Gross profit 12,152 4,343 1,042 69 151
Research and 2,719 2,410 686 925 479
development costs, net
Selling and marketing expenses 9,245 7,589 1,417 639 21
General and administrative expenses 6,465 5,870 1,777 899 888
Write-off of trade receivables -- 470 -- -- --
Restructuring charges -- 1,071 467 -- --
Non recurring income -- -- -- -- (180)
Operating loss (6,277) (13,067) (3,305) (2,394) (1,057)
Financial income (expenses), net from (203) (1,022) 173 277 (56)
operation
Financial expenses from conversion of -- -- -- -- (1,491)
convertible debentures
Financial income (expenses) (203) (1,022) 173 277 (1,547)
Other income (expenses), net (36) (267) (1,770) (12) --
Loss before equity in losses of affiliate (6,516) (14,356) (4,902) (2,129) (2,604)
and minority interest in losses of
subsidiaries
Income taxes 75 -- -- -- --
Equity in losses of affiliate -- -- -- -- (877)
Minority interest in losses of subsidiary -- -- 55 740 --
Net loss $(6,591) $(14,356) $(4,847) $(1,389) $(3,481)
Basic and diluted net earnings (loss) per $ (1.41) $ (2.55) $ (0.55) $ (0.16) $ (0.37)
share
Weighted average number of shares 4,649 5,621 8,860 8,901 9,409
used in computing basic and diluted net
earnings (loss) per share (in thousands)
2
At December 31,
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Balance Sheet Data (in thousands): 1997 1998 1999 2000 2001
- ---------------------------------- ------- -------- ------- ------- -------
Working capital $14,175 $ 3,761 $ 5,590 $ 2,254 $ 1,024
Cash and cash equivalents 5,958 5,661 7,350 3,077 1,556
Total assets 35,326 17,992 8,496 6,349 3,233
Short-term bank credits 2,370 3,588 142 10 10
Long-term debt 2,706 568 122 2,839 1
Shareholders' equity $16,289 $ 4,005 $ 2,757 $ 1,882 $ 2,535
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 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 $3.5 million during the year ended December 31, 2001, $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, and
$6.6 million during the year ended December 31, 1997. 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 following StoreAge's private
placement, completed in January 2001, 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.
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(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 private placement in January 2001, 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.
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.
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.
4
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 iSCSI Business is Only in its First Stages of Market Penetration.
The Internet Small Computer Systems Interface ("iSCSI") market is highly
volatile and end users adaptation of iSCSI technology has been much slower than
anticipated. In addition, iSCSI standardization is not yet complete and its
completion is required before the introduction of products to the market by
storage vendors. Although the potential exists in the iSCSI market, we
anticipate fierce competition for testing tools products from large companies,
which are better financed, and have larger marketing resources.
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 promulgated under the Securities Act,
or otherwise. 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 Be Subject to a Delisting Action by the Nasdaq SmallCap Stock
Market. Our Ordinary Shares are quoted on the Nasdaq SmallCap Market under the
symbol "IISL". In order for our Ordinary Shares to continue to be quoted on the
Nasdaq SmallCap Market, we must satisfy various listing maintenance standards,
including certain net tangible assets and shareholders' equity tests established
by Nasdaq. Although we currently have sufficient shareholders' equity and net
tangible assets to meet the requirements for continued inclusion on the Nasdaq
SmallCap Market, there can be no assurance that we will be able to continue to
meet these requirements and the other listing requirements of the Nasdaq
SmallCap Market. A delisting action by the Nasdaq SmallCap Market would have a
material adverse effect on the liquidity of our Ordinary Shares and may have a
material adverse effect on its trading value.
We Do Not Presently Intend To 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.
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-
5
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 of 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 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
6
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 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
7
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.
Risk Factors Relating to Our Operations in Israel
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. 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. In recent months there has been
a marked deterioration in the conflict, which culminated in several lethal
suicide attacks in Israel and in response the Israeli Army called up a large
number of reserve duty soldiers and has made incursions into most
Palestinian-controlled cities and towns. The continued hostilities between the
Palestinian community and Israel and the failure to settle the conflict has had
and continues to have a material adverse effect on the Israeli economy and may
have a material adverse effect on our business and that of StoreAge. Further
deterioration of hostilities might require more widespread military reserve
service by our and StoreAge'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.
Most of Our Directors, Officers and Employees are Obligated to Perform
Annual Military Reserve Duty in Israel. We cannot assess the potential impact of
these obligations on our business. Our directors, officers and employees who are
male adult citizens and permanent residents of Israel under the age of 48 are,
unless exempt, obligated to perform annual military reserve duty and are subject
to being called to active duty at any time under emergency circumstances. We
cannot assess the full impact of these requirements on our workforce or business
if conditions should change, and we cannot predict the effect on us if there is
any expansion or reduction of these obligations.
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We May be Adversely Affected by Proposed Tax Reform in Israel. In
February 2002, the Minister of Finance appointed a committee to review and make
recommendations with respect to the current Israeli tax structure. The committee
presented its recommendations to the Minister of Finance on June 12, 2002. If
implemented, the recommendations might result in the imposition of Israeli
capital gains taxes at the rate of 15% to 35% on sales of securities of Israeli
companies by Israeli residents. In addition, the committee has proposed that a
tax be imposed on all income of Israeli residents (individuals and corporations)
regardless of the territorial source of income and a tax will be imposed on
income of foreign corporations controlled by Israeli residents if the majority
of profits or income of such foreign corporations originate from "passive
income", including interest, dividends, royalties and rental income. We cannot
predict whether, and to what extent, such recommendations will be adopted and
eventually enacted into law.
Anti-takeover Provisions Could Negatively Impact Our Shareholders.
Some of the provisions of Israeli law could:
. discourage potential acquisition proposals;
. delay or prevent a change in control over us; and
. limit the price that investors might be willing to pay in the
future for our ordinary shares.
Generally, under Israeli corporate law, a merger must be approved by the board
of directors and the shareholders of each of the merging companies. If the share
capital of the non-surviving company consisted of more than one class of shares,
the approval of each class is also required. In certain cases, court approval is
also required. Under the Companies Law, a merger may be completed only after 70
days have elapsed from the date all the necessary approvals and the merger
proposals have been submitted to the Israeli Companies Registrar. The Companies
Law also provides that an acquisition of shares of a public company must be made
by means of a tender offer if, as a result of such acquisition, the purchaser
would become a 25% or more shareholder of the company. This rule does not apply
if there is already another 25% shareholder of the company. Similarly, the
Companies Law provides that an acquisition of shares in a public company must be
made by means of tender offer if, as a result of the acquisition, the purchaser
would become a 45% shareholder of the company, unless someone else already holds
a majority of the voting power of the company. These rules may not apply if the
acquisition is made by way of a merger. The requirements of Israeli corporate
law generally make these forms of acquisition significantly more difficult than
under United States corporate laws. Other potential means of acquiring a public
Israeli company might involve significant obstacles, such as a requirement for
court approval for the acquisition. In addition, a body of case law has not yet
developed with respect to the new Companies Law. Until this happens,
uncertainties will exist regarding its interpretation.
9
Item 4. INFORMATION ON THE COMPANY
--------------------------
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.
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 storage networking solutions
for the SAN market with a focus on storage over IP applications.
In December 2000, the Company completed a private placement of $3
million in the issuance of convertible secured 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.
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.
10
In order to maintain its Nasdaq SmallCap Market listing, the Company
completed a transaction with the holders of its convertible secured debentures
and warrants (the "Purchasers") to exchange such securities for the Company's
Ordinary Shares and cash. Under the terms of the transaction, the Purchasers
converted $2,426,576.40 principal amount of the debentures into an aggregate of
1,797,464 of the Company's Ordinary Shares, received a cash payment of
$573,423.60 and relinquished all of the warrants. The warrants and the remaining
debentures were cancelled. As a result of the completion of the transaction in
December 2001, the Company had sufficient shareholders' equity and net tangible
assets to meet the requirements for continued inclusion on the Nasdaq SmallCap
Market.
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 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.
11
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,
production and marketing 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) Virtualization of storage networks
for Open Systems (including Windows 2000, NT, Linux and UNIX), (ii) storage
networking middleware (distributed RAID, volume management), (iii) storage
management software, and (iv) storage related applications including disaster
recovery and backup solutions, 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, Value Added Resellers ("VAR") and systems
integrator 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 ("iSWAT"(TM))
software, an advanced suite of applications for enhanced development, testing
and conformance of storage solutions based on the Internet Small Computer
Systems Interface ("iSCSI") communication protocol 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 networking infrastructure built over many years for a Local Area
Network ("LAN"). iSCSI enables the implementation of cost-effective and
high-performance storage solutions designed for the SAN over regular Ethernet
offering management and transfer of storage data without sacrificing ease of
access. The iSWAT is designed for developers and vendors of iSCSI products. It
leverages iSCSI development and creates a single test environment that
incorporates all professional features and functionality required for error
injection, validation and conformance testing. It emulates iSCSI environment
components and traffic to simplify and shorten development and Quality Assurance
("QA") processes.
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 and virtual storage allocations for all servers
and storage connected to the Fibre Channel loop or fabric. It provides a common
graphical user interface ("GUI") through which storage is virtualized and
12
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 disaster and recovery and backup
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. SVM(TM)
provides significant scalability, performance, reliability and price advantages
over alternative architectures. The SVM offers a particular advantage for high
scale SAN installations (large number of
13
servers) and demanding environments such as video and television related
applications due to its extremely large number of devices supported and off the
data path architecture.
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 EMC Corporation 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. The office re-located to Irvine, California in early 2002.
In addition to the Irvine sales and technical support headquarters, StoreAge has
also hired local U.S. salespeople on the East Coast. Additionally, certain
members of senior management participate in sales and marketing.
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
14
data storage products for open systems environments. The Company's research and
development staff 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 1999:
Year Ended December 31,
-----------------------
1999 2000 2001
(in thousands)
Company-funded research and $686 $ 925 $479
development expenditures
Chief Scientist participation $223 $ 403 $ 0
---- ------ ----
Total outlay for research and
development $909 $1,328 $479
==== ====== ====
In 1999, 2000 and 2001 the Company incurred royalty expenses of
approximately $63,000, $15,000 and $0 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 11.5%
of total revenues for the year ended December 31, 1999 and such expenses
exceeded total revenues by $829,000 and $145,000 for the years ended December
31, 2000 and December 31, 2001, respectively.
As of December 31, 2001, the Company and StoreAge had a research and
development staff of 9 and 32 employees, respectively. All such employees are
engineers and technicians engaged in applied research, development of new
products and enhancement of existing products.
15
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 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 California is providing the first line of support to its
OEM customers and system integrators.
A local distributor through several regional sales offices is
distributing and supporting the iSWAT product line in the U.S. The Company's
development team is taking responsibility of second line technical support.
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. Compaq Computer Corporation (which recently merged into
Hewlett-Packard Company), EMC Corporation, Veritas Software and TrueSAN
Networks, Inc. are developing products with an 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,
16
FalconStor, StorageApps Inc. (recently acquired by Hewlett-Packard Company) 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 user benefits, such as incremental
growth capability, scalability, availability and performance, and OEM benefits,
such as 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.
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., EMC Corporation,
Hewlett-Packard Company, IBM Corp., Legato Systems, 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 1999. 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
17
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.
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
9,400 square foot rented facility located in Nesher, Israel. The annual rent for
this space is approximately $132,500, with total annual occupancy costs,
including local taxes, utilities, maintenance and other costs of approximately
$35,600 (excluding parking costs of $20,340). StoreAge also leases space of
8,700 square feet for its sales and marketing office located in Irvine,
California. The annual rent for this space is approximately $112,700, with total
annual occupancy costs, including local taxes, utilities, maintenance and other
costs of approximately $38,600.
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
18
for any reason. We disclaim any obligation to update our forward looking
statements. See "Risk Factors" for more information.
Critical Accounting Policies
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an on-going basis, management evaluates its estimates
and judgments. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Under different assumptions or conditions, actual
results may differ from these estimates.
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
Work force
During November 2000, the Company acquired all the activities, assets
and rights, and assumed certain obligations of Eastek. The excess cost over the
fair value of net assets acquired was allocated to the assembled work force
which was amortized on a straight-line basis over a three-year period.
According to Statement of Financial Accounting Standard No. 142
"Goodwill and Other Intangible Assets" ("SFAS 142") effective as of January 1,
2002, goodwill and intangible assets with indefinite lives are no longer
amortized but are reviewed annually (or more frequently if impairment indicators
arise) for impairment. Therefore, work force will be subject to annual
amortization impairment tests based on management's estimates and judgment.
Legal Contingencies
As discussed in note 9 to the Company's financial statements included
herewith, the Company is involved in certain legal proceedings. As of December
31, 2001, management has accrued its estimates of the probable costs for the
resolution of these claims. Management arrived at this estimate after
consultation with outside counsel handling the Company's defense in these
matters and is based upon an analysis of potential outcomes. Management does not
believe these proceedings will have a material adverse effect on the Company's
consolidated financial position. It is possible, however, that future results of
operations for any particular quarterly or annual period could be materially
affected by changes in the Company's assumptions and estimates related to these
proceedings or the outcome of these proceedings.
Investment in StoreAge
The Company currently holds a 39% interest in StoreAge. In order to
determine whether its investment in StoreAge has experienced a decline in value
(other than a temporary decline) and therefore requires an impairment charge,
management evaluates its investment based on its estimates, judgments and
understanding of the economic environment in which StoreAge operates. Future
adverse changes in market conditions or poor operating results of StoreAge could
result in losses or an inability to recover
19
the carrying value of the investment that may not be reflected in the
investment's current carrying value, thereby possibly requiring an impairment
charge in the future.
A. Operating Results.
General
The Company currently holds a 39% equity interest in StoreAge. Since
December 2000, the operations of the Company and StoreAge are no longer reported
on a consolidated basis and the Company's investment in StoreAge is accounted
for using the equity method. Accordingly, this change in reporting practice
should be taken into account when reviewing the comparison of the results of
operations of the Company for the fiscal year ended December 31, 2001 to the
consolidated results of operations of the Company and StoreAge for prior periods
set forth below.
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.
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
are 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. In 2000, approximately 58.3% of the Company's revenues were derived
from sales and services outside of Israel in United States dollars and other
non-Israeli currencies compared to 5.7% in 2001. 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. 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.
20
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,
------------------------
----- ----- -----
1999 2000 2001
----- ----- -----
Sales revenues 90.8% 100.0% 24.9%
Revenues from related party 0 0 75.1
Maintenance and other services revenues 9.2 0 0
----- ----- -----
Total revenues 100.0% 100.0% 100.0%
----- ----- -----
Cost of sales 75.3 28.1 8.4
Cost of revenues from related party -- -- 46.4
Cost of maintenance and other services 7.2 0 0
----- ----- -----
Total cost of revenues 82.5 28.1 54.8
----- ----- -----
Gross profit 17.5 71.9 45.2
Research and development costs, net 11.5 * *
Selling, marketing, general and administrative
expenses 53.6 * *
----- ----- -----
Non recurring charges (income) and restructuring 7.8 -- (53.9)
Operating loss (55.5) * *
----- ----- -----
Financial and other
income (expenses), net (26.8) * *
Loss before minority interest in losses of subsidiary (82.3) * *
Minority interest in losses of subsidiary 0.9 * *
===== ===== =====
Net loss (81.4%) * *
- ----------
* Greater than revenues
The Company currently holds a 39% equity interest in StoreAge. Since
December 2000, the operations of the Company and StoreAge are no longer reported
on a consolidated basis and the Company's investment in StoreAge is accounted
for using the equity method. Accordingly, this change in reporting practice
should be taken into account when reviewing the following comparison of the
results of operations of the Company for the fiscal year ended December 31, 2001
to the consolidated results of operations of the Company and StoreAge for prior
periods.
Years Ended December 31, 2001, 2000 and 1999
In 2001, total revenues increased by $238,000 or 348% to $334,000
compared with $96,000 in 2000, and in 2000 total revenues decreased by
$5,859,000 or 98.4% from $5,955,000 in 1999. The increase in 2001 was mainly as
a result of research and development services provided to a related party
(StoreAge).
Revenues from sales and services to unaffiliated customers outside of
Israel represented approximately 5.7% of revenues in 2001 and 58.3% of revenues
in 2000 compared with 72.9% of revenues in 1999. See Note 12 to the Company's
Consolidated Financial Statements for additional information regarding the
geographic distribution of the Company's revenues since 1999. Substantially
21
all 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 45.2%
in 2001 compared with 71.9% in 2000 and 17.5% in 1999. The decrease in 2001 was
primarily due to less profitable research and development services fees from a
related party (StoreAge). The increase in 2000 was primarily due to sales of
more profitable StoreAge products and other software products.
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
$479,000 in 2001 from $1.33 million in 2000 and approximately $909,000
in 1999. The net cost to the Company of such outlays was $479,000 ($145,000
greater than revenues) in 2001 compared with $925,000 ($829,000 greater than
revenues) in 2000, and approximately $686,000 (11.5% of revenues) in 1999. The
Company 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 $21,000
(6.3% of revenues) in 2001 from approximately $639,000 in 2000 ($543,000 greater
than revenues) and $1.4 million in 1999 (23.8% of revenues). General and
administrative expenses decreased to approximately $888,000 ($554,000 greater
than revenues) in 2001 from approximately $899,000 in 2000 ($803,000 greater
than revenues) and $1.8 million in 1999 (29.8% of revenues). The decrease in
expenses reflects the effects of the Company's current structure and the
completion of the Restructuring.
In 2001, the Company recorded an operating loss of approximately $1.06
million compared with $2.39 million in 2000 and an operating loss of
approximately $3.31 million in 1999. The 2001 operating loss reflects the
increased investment in iSCSI research and development. The lower operating
loss in 2000 compared to 1999 reflects the Company's current structure.
There were no taxes on income in 2001, 2000 or 1999. See "Effective
Corporate Tax Rate".
As a result of the foregoing factors, the Company recorded a net loss
of approximately $3.48 million in 2001, net loss of approximately $1.39 million
in 2000, and a net loss of approximately $4.85 million in 1999.
The Company does not expect to be profitable in the foreseeable
future.
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
22
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 1999, 2000 and 2001, the
NIS was devalued (appreciated) approximately (3.2%), (5.5%) and 7.02%
respectively, against the currency basket, and approximately (0.17%), (2.7%) and
9.28% 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.
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 2002 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."
23
Net loss carry forwards of the Company totaled approximately $76
million as of December 31, 2001 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 2002 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
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.
In February 2002, the Minister of Finance appointed a committee to
review and make recommendations with respect to the current Israeli tax
structure. The committee presented its recommendations to the Minister of
Finance on June 12, 2002. If implemented, the recommendations might result in
the imposition of Israeli capital gains taxes at the rate of 15% to 35% on sales
of securities of Israeli companies by Israeli residents. In addition, the
committee has proposed that a tax be imposed on all income of Israeli residents
(individuals and corporations) regardless of the territorial source of income
and a tax will be imposed on income of foreign corporations controlled by
Israeli residents if the majority of profits or income of such foreign
corporations originate from "passive income", including interest, dividends,
royalties and rental income. We cannot predict whether, and to what extent, such
recommendations will be adopted and eventually enacted into law.
Political Conditions
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. Since September 2000 there has been a
significant deterioration in the relationship between Israel and the Palestinian
Authority, and as a result of riots in Gaza and the West Bank and a spate of
terrorist attacks inside Israel, the peace process between the parties has
stagnated. Efforts to
24
resolve the problem have failed to result in an agreeable solution. In recent
months there has been a marked deterioration in the conflict, which culminated
in several lethal suicide attacks in Israel and in response the Israeli Army
called up a large number of reserve duty soldiers and has made incursions into
most Palestinian-controlled cities and towns. The continued hostilities between
the Palestinian community and Israel and the failure to settle the conflict has
had and continues to have a material adverse effect on the Israeli economy and
may have a material adverse effect on our business and us.
Despite the peace between Israel and Egypt and Jordan, some countries,
companies and organizations continue to participate in a boycott of Israeli
firms and others doing business with Israel or with Israeli companies. Although
we are precluded from marketing our products to such countries, we believe that
in the past the boycott has not had a material adverse effect on us. In
addition, as a result of the Israeli military activities in the West Bank during
April 2002, several European countries are considering to participate in a
boycott of Israeli firms as well as on the shipment of weapons and other
military supply to Israel. Restrictive laws, policies or practices directed
towards Israel or Israeli businesses could have an adverse impact on the
expansion of our business.
All male adult citizens and permanent residents of Israel under the
age of 48 are, unless exempt, obligated to perform up to 30 days of military
reserve duty annually. Additionally, all such residents are subject to being
called to active duty at any time under emergency circumstances. Many of our
officers and employees and those of StoreAge are currently obligated to perform
annual reserve duty. While we have operated effectively under these requirements
since we began operations, we cannot assess the full impact of such requirements
on our workforce or business if conditions should change, and we cannot predict
the effect on us of any expansion or reduction of such obligations.
Economic Conditions
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980s, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. The Israeli government has, for these and other reasons,
intervened in various sectors of the economy, by utilizing, among other means,
fiscal and monetary policies, import duties, foreign currency restrictions and
control of wages, prices and foreign currency exchange rates. In 1998, the
Israeli currency control regulations were liberalized significantly, as a result
of which Israeli residents may deal in foreign currency and non-residents of
Israel may purchase and sell Israeli currency and assets. The Israeli government
has periodically changed its policies in all these areas. There are currently no
Israeli currency control restrictions on remittances of dividends on ordinary
shares or the proceeds from the sale of shares; however, legislation remains in
effect pursuant to which currency controls can be imposed by administrative
action at any time. In addition, Israeli residents are required to file reports
pertaining to specific types of actions or transactions.
The Israeli government's monetary policy contributed to relative price
and exchange rate stability in recent years, despite fluctuating rates of
economic growth and a high rate of unemployment. In addition, as a result of the
political instability, the continuous hostilities with the Palestinian Authority
and the world-wide economic crisis in the hi-tech and communication industries,
during 2001 and especially during the first five months of 2002 the Israeli rate
of economic growth has deteriorated, the Israeli currency has been devalued and
the rate of inflation has increased. The Israeli
25
government has proposed certain budgetary cuts and other changes but it is not
certain if such measures will be adopted by the Israeli Parliament and what will
be the impact of these and other measures, if adopted, on the Israeli economy.
In addition, certain credit agencies such as Standard & Poors have announced
that they are reviewing the credit rating of Israel. Should such agencies
resolve to decrease Israel's credit rating, the ability of the Israeli
government to generate foreign financial and economic assistance may be
adversely affected. We cannot assure you that the Israeli government will be
successful in its attempts to stabilize the Israeli economy or to maintain the
current credit rating of Israel. Economic decline as well as price and
exchange rate instability may have a material adverse effect on us and on
StoreAge.
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 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 secured debentures and warrants to
qualified investors. The Company subsequently entered into a securities purchase
agreement (the "Securities Purchase Agreement") with such qualified investors
dated as of January 31, 2001 pursuant to which the convertible secured
debentures in an aggregate principal amount of $3,000,000, exercisable at $3.00
per share and warrants to purchase up to 300,000 Ordinary Shares at $4.50 per
share were issued. 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.
In order to maintain its Nasdaq SmallCap Market listing, the Company
entered into an agreement dated as of December 5, 2001 to amend the Securities
Purchase Agreement with the holders of its convertible secured debentures and
warrants (the "Purchasers") to exchange such securities for the Company's
Ordinary Shares and cash. Under the terms of the agreement, the Purchasers
converted part of the debentures, the warrants and the floating charge
registered on the Company's assets were cancelled and the Company repaid the
Purchasers the principal amount of the debentures which was not converted, plus
interest accrued up to the date of the agreement. As a result of the completion
of the transaction in December 2001, the Company had sufficient shareholders'
equity and net tangible assets to meet the requirements for continued inclusion
on the Nasdaq SmallCap Market.
26
Under the terms of the transaction, the Purchasers converted
$2,426,576.40 principal amount of the debentures into an aggregate of 1,797,464
of the Company's Ordinary Shares, received a cash payment of $573,423.60 and
relinquished all of the warrants. The warrants and the remaining debentures were
cancelled. The transaction represented an implied exchange value of at least
$1.35 per Ordinary Share based solely on the debt amounts extinguished, without
giving any effect to the cancelled warrants, and represented a substantial
premium over the market price of the Company's Ordinary Shares at the time the
agreements in principle with the Purchasers were reached.
The Company had cash and cash equivalents of approximately $7.35
million at December 31, 1999, $3.08 million at December 31, 2000 and $1.56
million at December 31, 2001. The ratio of current assets to current liabilities
was 3.59:1.00 at December 31, 1999, 2.42:1.00 at December 31, 2000 and 2.52:1.00
at December 31, 2001. The decrease in the current ratio in 2000 was primarily
due to operating losses and de-consolidation of StoreAge. The increase in the
current ratio in 2001 was primarily due to elimination of certain liabilities,
including $180,000 with respect to sales tax in the United States that the
Company recorded as non-recurring income. For a discussion of the primary
currency in which the operations of the Company are conducted see Item 5.A.,
"Operating Results," above.
In 2001, the Company recorded a net negative cash flow from operations
of approximately $(1.68) million and in 2000, the Company recorded a net
negative cash flow from operations of approximately $(2.04) million, compared
with a net negative cash flow from operations of approximately $(2.19) million
in 1999. Net cash flow from operations in 1999, 2000 and 2001 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.
27
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.
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
- ------- ------------------------------------------
A. Directors and Senior Management.
The Company's executive officers and directors as of June 1, 2002 were
as follows:
- -------------------------------------------------------------------
Name Age Position with the Company
- ---- --- -------------------------
- -------------------------------------------------------------------
Robi Hartman 41 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
- -------------------------------------------------------------------
Jonathan Nativ* 54 External Director
- -------------------------------------------------------------------
Danny Shavit 46 Chief Technology Officer
- -------------------------------------------------------------------
* Member of the Audit Committee and Compensation 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. and is a General Partner in Hyperion Israel Advisors Ltd., a venture
capital firm. From 1991 to 2000 he served as Chief Executive Officer of ECI
Telecom Ltd. Previous to his appointment as Chief Executive Officer, Mr. Rubner
served in various management positions at ECI Telecom. Mr. Rubner is Chairman of
the Board of ECtel Ltd., a publicly traded subsidiary of ECI Telecom, and serves
on the board of directors of Checkpoint Software Ltd., Koor Industries Ltd. and
a number of privately held companies. Additionally, Mr. Rubner serves on the
Board of Governors of Bar-Ilan University, Jerusalem College of Technology and
Sha'arei Tzedek Hospital. Mr. Rubner was a recipient of the Industry Prize for
1995.
28
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.
Dr. Yael Ilan has been a director of the Company since November 1997.
She is the President of Yedatel Ltd., an economic consulting company, and is a
director of CI Systems Ltd. Until October 2001, Dr. Ilan served as the Chief
Executive Officer of Optichrom Ltd., an optical components private company.
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. Until December 2000, Dr. Ilan served as the
head of the Broadband Communication Programs administration, a consortium 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.
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.
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. Mr. Nativ 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.
29
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
counsel 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.
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, 2001, the aggregate
remuneration paid to all officers and directors of the Company as a group (then
eight persons) was approximately $346,000. 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. The first installment of 30,000 Ordinary Shares has been delivered
to Mr. Shavit. 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.
No options were granted to officers or directors during the fiscal
year ended December 31, 2001. 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
the date of grant and expire six years after the date of grant. Mr. Hartman
holds a total of 356,550 options, of which 206,550 are currently fully
exercisable and expire on November 30, 2006. The other 150,000 options held by
Mr. Hartman become exercisable in two equal annual installments from March 22,
2003 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.
30
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"). Dr. Ilan has served as a director of the Company since November
1997, was re-elected to serve as a director at the 2001 annual meeting, and will
continue to serve until the 2004 annual meeting and until her successor has been
elected and qualified. Gideon Marks, who served as a director of the Company
since July 2000 and whose term of office expired at the Company's 2001 annual
meeting, did not seek re-election to such position. 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 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.
31
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 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.
32
Audit Committee
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.
Internal Auditor
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, 2001 the Company and StoreAge employed 13 and 59
persons, respectively: 41 in engineering and research and development, 19 in
sales and marketing and technical support and 12 in general management and
administration.
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
33
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
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 June 26, 2002. Each shareholder listed below
enjoys the same voting rights with respect to each share.
Number of Percentage of
Title of Shares Shares
-------- Beneficially Beneficially
Name Class Owned/(1)/ Owned (%)/(2)/ Options/(3)/
- ---- ----- ------------ ------------- ------------
Ordinary
David Rubner Shares -- * 50,000
Ordinary
Robi Hartman Shares 1,111,414 9.60% 356,550
Ordinary
Yael Ilan Shares -- * 50,000
Ordinary
Aharon Jacobowitz Shares -- * 50,000
Ordinary --
Jonathan Nativ Shares * 50,000
Ordinary --
Moshe Kahn Shares * 50,000
Ordinary
Danny Shavit Shares 180,000/(4)/ 1.55% --
- ----------
34
* 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 11,576,539 shares outstanding as of
June 25, 2002.
(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 the date of grant and expire six years
after the date of grant. Mr. Hartman holds a total of 356,550 options,
of which 206,550 are currently fully exercisable and expire on
November 30, 2006. The other 150,000 options held by Mr. Hartman
become exercisable in two equal annual installments from March 22,
2003 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. The first installment of 30,000 Ordinary Shares has been
delivered to Mr. Shavit. 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 delivered the remaining 20,000 Ordinary Shares to Eastek
on the first anniversary of the acquisition.
Stock Option Plans
In August 1993, the existing 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 1,192,929 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, 2001, options to purchase up to 1,066,803 Ordinary
Shares were outstanding, exercisable at prices ranging from $3.63 to $67.14 per
share, with expiration dates ranging from February 2002 to November 2006, of
which options to purchase up to 606,550 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.
35
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
- ------- -------------------------------------------------
A. Major Shareholders.
As reported on its Schedule 13G filed with the Securities & Exchange
Commission, dated January 14, 2002, CDC Holdings Ltd. acquired 1,258,255
Ordinary Shares upon its conversion of convertible secured debentures in
connection with that certain amendment agreement dated as of December 5, 2001 by
and between the Company and the holders of its convertible secured debentures
and warrants.
During the period from July 24, 2001 to June 25, 2002, Mr. Hartman
purchased an aggregate of 539,600 of the Company's Ordinary Shares and as a
result of prior acquisitions of shares and such purchases owns 9.60% of the
Company's outstanding Ordinary Shares.
In December 2001, the Company was advised that Europlan Trust Company
Ltd. disposed of its entire position of the Company's securities, an aggregate
of 887,145 Ordinary Shares, in the public market. Accordingly, the Company
believes that Europlan Trust Company Ltd. is no longer the beneficial owner of
5% or more of the Company's outstanding Ordinary Shares.
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.
The following table sets forth, as of June 26, 2002, 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
Ordinary Shares Percentage of
Beneficially Ordinary Shares
Name and Address Owned/(1)/ Beneficially Owned/(2)/
- ---------------- --------------- -----------------------
CDC Holdings Ltd.................... 1,258,225/(3)/ 10.87%
Robi Hartman........................ 1,111,414/(4)/ 9.60%
All directors and officers
as a group.......................... 1,305,814/(5)/ 11.28%
- ----------
(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 11,576,539 shares outstanding as of
June 25, 2002.
(3) As reported on Schedule 13G filed with the Securities & Exchange
Commission, dated January 14, 2002.
36
(4) As reported on Amendment No. 8 to Schedule 13G filed with the
Securities & Exchange Commission, dated June 26, 2002. Mr. Hartman is
Chief Executive Officer and Chairman of the Company.
(5) Includes 100,000 and 80,000 shares issued to Danny Shavit, the
Company's Chief Technology Officer, and Eastek, respectively, in
connection with the Company's acquisition of the assets of Eastek in
November 2000. 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. The first
installment of 30,000 Ordinary Shares has been delivered to Mr.
Shavit. 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 delivered
the remaining 20,000 Ordinary Shares to Eastek on the first
anniversary of the acquisition.
As of June 11, 2002, approximately 82.4% of the outstanding Ordinary
Shares of the Company were held of record by approximately 61 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,
the Company, StoreAge and certain investors entered into a shareholders' rights
agreement (the "Rights Agreement"). 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.
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 general and administrative
services 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. During 2000, the Company signed an
agreement with StoreAge according to which the Company will provide StoreAge
iSCSI capabilities to StoreAge's products in consideration of $200,000 according
to the milestones defined in the agreement. During 2001, the companies agreed to
expand this agreement to provide that the Company may receive an additional
$150,000 in consideration for its services. As of December 31, 2001, the Company
had recorded accumulated research and development services revenues of $270,000
related to these services.
37
C. Interests of Experts and Counsel.
Not applicable.
Item 8. FINANCIAL INFORMATION
- ------- ---------------------
A. Consolidated Statements and Other Financial Information.
See pages F-1 - F-30 of the Company's financial statements and pages 1
- - 24 of StoreAge's financial statements following Item 19.
Legal Proceedings
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.
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, 2001, 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.
38
The following table sets forth, for the periods indicated, the annual
high and low closing sales price quotes of the Ordinary Shares as reported by
Nasdaq for the five most recent full financial years, the quarterly high and low
closing sales price quotes for the two most recent full financial years and
first quarter 2002 and the monthly high and low price quotes for the most recent
six months.
High Low
----- -----
Year ended December 31, 1997 $7.88 $3.00
Year ended December 31, 1998 $3.94 $0.28
Year ended December 31, 1999 $7.00 $0.34
Year ended December 31, 2000 $9.56 $1.56
Year ended December 31, 2001 $4.25 $0.75
2000
- ----
First Quarter $9.56 $4.06
Second Quarter 7.06 3.63
Third Quarter 6.88 3.88
Fourth Quarter 5.31 1.56
2001
- ----
First Quarter $4.25 $1.66
Second Quarter 2.95 1.52
Third Quarter 2.39 1.20
Fourth Quarter 1.68 0.75
Most Recent Six Months
- ----------------------
December 2001 $1.53 $1.17
January 2002 1.39 1.08
February 2002 1.30 1.08
March 2002 1.24 1.11
April 2002 1.10 0.75
May 2002 1.02 0.77
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.
39
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 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.
40
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.
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 that held office
initially for a term that expired 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. The class of directors
41
whose term expires at the annual 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 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
42
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 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
43
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.
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
44
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 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.
45
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. See also "Anti-Takeover Provisions;
Merger and Acquisitions under Israeli 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 Related Party Transactions Under Israeli Law
The Companies Law codifies the fiduciary duties that "office holders,"
including directors and executive officers, owe to a company. An office holder's
fiduciary duties consist of a duty of care and a duty of loyalty. The duty of
care requires an office holder to act at a level of care that a reasonable
office holder in the same position would employ under the same circumstances.
The duty of loyalty includes avoiding any conflict of interest between the
office holder's position in the company and his personal affairs, avoiding any
competition with the company, avoiding exploiting any business opportunity of
the company in order to receive personal gain for the office holder or others,
and disclosing to the company any information or documents relating to the
company's affairs which the office holder has received due to his position as an
office holder. Each person listed as a director or executive officer in the
table under "Directors, Senior Management and Employees--Directors and Senior
Management" above is an office holder. Under the Companies Law, all arrangements
as to compensation of office holders who are not directors require approval of
our board of directors, and the compensation of office holders who are directors
must be approved by our audit committee, board of directors and shareholders.
The Companies Law requires that an office holder promptly disclose any
personal interest that he or she may have and all related material information
known to him or her, in connection with any existing or proposed transaction by
us. In addition, if the transaction is an extraordinary transaction, that is, a
transaction other than in the ordinary course of business, other than on market
terms, or likely to have a material impact on the company's profitability,
assets or liabilities, the office holder must also disclose any personal
interest held by the office holder's spouse, siblings, parents, grandparents,
descendants, spouse's descendants and the spouses of any of the foregoing, or by
any corporation in which the office holder or a relative 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. Some transactions, actions
and arrangements involving an office holder (or a third party in which an office
holder has an interest) must be approved by the board of directors or as
otherwise provided for in a company's articles of association, as not being
adverse to the company's interest. In some cases, such a transaction must be
approved by the audit committee and by the board of directors itself (with
further shareholder approval required in the case of extraordinary
transactions). An office holder who has a personal interest in a matter, which
is considered at a meeting of the board of directors or the audit committee, may
not be present during the board of directors or audit committee discussions and
may not vote on this matter, unless the majority of the members of the board or
the audit committee have a personal interest, as the case may be.
46
The Companies Law also provides that some transactions between a
public company and a controlling shareholder, or transactions in which a
controlling 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.
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.
Moreover, an extraordinary transaction with a controlling shareholder
or the terms of compensation of a controlling 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 shareholdings of those shareholders who have no
personal interest and voted against the transaction do not represent more than
one percent of the voting rights in the company.
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 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 committee or of the board of directors have a personal
interest in such approval.
However, under the Companies Regulations (Relief From Related Party
Transactions), 5760-2000, promulgated under the Companies Law and amended in
January 2002, certain transactions between a company and its controlling
shareholder(s) do not require shareholder approval. In addition, pursuant to the
recent amendment to these regulations directors' compensation and employment
arrangements do not require the approval of the shareholders if both the audit
committee and the board of directors approve that such arrangements are for the
benefit of the company.
If the director or the office holder is a controlling shareholder of
the company then the employment and compensation arrangement of such director or
office holder does not require the approval of the shareholders if it meets
certain criteria.
47
The above relief shall not apply if one or more shareholders, holding
at least 1% of the issued and outstanding share capital of the company or of the
company's voting rights objects to the grant of such relief, providing that such
objection is submitted to the company in writing not later than seven (7) days
from the date of the filing of a report regarding the adoption of such
resolution by the company pursuant to the requirements of the Israeli Securities
Law. If such objection is duly and timely submitted then the compensation
arrangement of the directors will require shareholders' approval as detailed
above.
Indemnification of Directors and Officers
The Companies Law provides that an Israeli company cannot exculpate an
office holder from liability with respect to a breach of his duty of loyalty,
but may exculpate in advance an office holder from his liability to the company,
in whole or in part, with respect to a breach of his duty of care. Our articles
of association provide that, subject to any restrictions imposed by corporate
law, we may enter into a contract for the insurance of the liability of any of
our office holders with respect to:
. a breach of his duty of care to us or to another person;
. breach of his duty of loyalty to us, provided that the office
holder acted in good faith and had reasonable cause to assume
that his act would not prejudice our interests; or
. a financial liability imposed upon him in favor of another person
in respect of an act performed by him in his capacity as an
office holder.
In addition, we may indemnify an office holder against:
. a financial liability imposed on him in favor of another person
by any judgment, including a settlement or an arbitrator's award
approved by a court in respect of an act performed in his
capacity as an office holder; and
. reasonable litigation expenses, including attorneys' fees,
expended by such office holder or charged to him by a court, in
proceedings we institute against him or instituted on our behalf
or by another person, or in a criminal charge from which he was
acquitted, all in respect of an act performed in his capacity as
an office holder.
These provisions are specifically limited in their scope by the
Companies Law, which provides that a company may not indemnify an office holder,
nor enter into an insurance contract which would provide coverage for any
monetary liability incurred as a result of certain improper actions.
Pursuant to the Companies Law, indemnification of, and procurement of
insurance coverage for, our office holders must be approved by our audit
committee and our board of directors and, in specified circumstances, by our
shareholders.
We have undertaken to indemnify our office holders to the fullest
extent permitted by law. In addition, we currently maintain directors and
officers liability insurance.
48
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 more than 90% of that class of
shares. 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
for this purpose. In addition, in certain cases court approval of a merger may
be required. 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.
49
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 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
(Meitav) 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. The first installment
of 30,000 Ordinary Shares has been delivered to Mr. Shavit.
On December 20, 2000, we entered into agreements in principle with
qualified investors and subsequently entered into a securities purchase
agreement dated as of January 31, 2001 (the "Securities Purchase Agreement")
with CDC Holdings Ltd., Armour Investments Ltd., Industrial Systems & Equipment
Co., Meir Noga and Nachum Ezra (the "Purchasers"). In accordance with the
Securities Purchase Agreement, we issued units, each consisting of $100,000
principal amount of our convertible
50
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.
In connection with StoreAge's private placement, in January 2001,
StoreAge entered into a shareholders' rights agreement (the "Rights Agreement")
with 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.
In order to maintain its Nasdaq SmallCap Market listing, the Company
entered into an agreement dated as of December 5, 2001 to amend the Securities
Purchase Agreement with the Purchasers to exchange their Debentures and Warrants
for the Company's Ordinary Shares and cash. Under the terms of the agreement,
the Purchasers converted part of the Debentures, the Warrants and the floating
charge registered on the Company's assets was cancelled and the Company repaid
the Purchasers the principal amount of the Debentures which was not converted,
plus interest accrued up to the date of the agreement. As a result of the
completion of the transaction in December 2001, the Company had sufficient
shareholders' equity and net tangible assets to meet the requirements for
continued inclusion on the Nasdaq SmallCap Market.
Under the terms of the transaction, the Purchasers converted
$2,426,576.40 principal amount of the Debentures into an aggregate of 1,797,464
of the Company's Ordinary Shares, received a cash payment of $573,423.60 and
relinquished all of the Warrants. The Warrants and the remaining Debentures were
cancelled. The transaction represented an implied exchange value of at least
$1.35 per Ordinary Share based solely on the debt amounts extinguished, without
giving any effect to the cancelled Warrants, and represented a substantial
premium over the market price of the Company's Ordinary Shares at the time the
agreements in principle with the Purchasers were reached.
During 2000, the Company signed an agreement with its affiliate
StoreAge according to which the Company will provide StoreAge iSCSI capabilities
to StoreAge's products in consideration of
51
$200,000 according to the milestones defined in the agreement. During 2001, the
companies agreed to expand this agreement to provide that the Company may
receive an additional $150,000 in consideration for its services. As of December
31, 2001, the Company had recorded accumulated research and development services
revenues of $270,000 related to these services.
D. Exchange Controls.
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 (including U.S. dollars) at the 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 most foreign currencies fluctuate continuously, non-Israeli
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 fail to maintain our status as an Industrial Company (of which
there can be no assurance), the applicable Israeli capital gains 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
double-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.
52
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.
Proposed Reform of Income Taxes in Israel
In February 2002, the Minister of Finance appointed a committee to
review and make recommendations with respect to the current Israeli tax
structure. The committee presented its recommendations to the Minister of
Finance on June 12, 2002. If implemented, the recommendations might result in
the imposition of Israeli capital gains taxes at the rate of 15% to 35% on sales
of securities of Israeli companies by Israeli residents. In addition, the
committee has proposed that a tax be imposed on all income of Israeli residents
(individuals and corporations) regardless of the territorial source of income
and a tax will be imposed on income of foreign corporations controlled by
Israeli residents if the majority of profits or income of such foreign
corporations originate from "passive income", including interest, dividends,
royalties and rental income. We cannot predict whether, and to what extent, such
recommendations will be adopted and eventually enacted into law.
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,
53
. 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.
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.
54
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.
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 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
55
be U.S.-source for purposes of the foreign tax credit limitation; losses, will
generally be allocated against U.S. source income. Under the U.S.-Israel Income
Tax Convention, gain on the disposition of Ordinary Shares may be treated as
Israeli source, if the shareholder has held 10% or more of the voting power of
the company at any time during the 12 months preceding the date of disposition.
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
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 (i) 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:
56
. 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.
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 come within certain exempt categories, and demonstrate
the fact when so required, or (ii) furnish a correct taxpayer identification
number and make any other required certification. Any amount withheld under
these rules may be credited against a shareholder's federal income tax
liability.
57
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 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.
58
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, 2001. The
market values for foreign exchange risk are computed based on spot rates in
effect at December 31, 2001. The market values that result from these
computations are compared to the market values of these financial instruments at
June 30, 2001. 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, 2001.
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, 2001.
Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
- -------- ------------------------------------------------------
Not applicable.
59
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) and (b).
Item 19. FINANCIAL STATEMENTS AND EXHIBITS
- -------- ---------------------------------
(a) Index to Financial Statements of the Company: Page
----
Report of Independent Auditors on Consolidated
Financial Statements of the Company and its subsidiaries..................................F-2
Consolidated Balance Sheets at December 31, 2001 and 2000..............................F-3 - F-4
Consolidated Statements of Operations for the Three Years ended
December 31, 2001.........................................................................F-5
Consolidated Statements of Changes in Shareholders' Equity
for the Three Years ended December 31, 2001...............................................F-6
Consolidated Statements of Cash Flows for the Three Years ended
December 31, 2001...................................................................F-7 - F-8
Notes to the Consolidated Financial Statements........................................F-9 - F-30
60
(b) Index to Financial Statements of the StoreAge Networking Technologies Ltd.: Page
----
Report of Independent Auditors on Consolidated
Financial Statements of StoreAge and its subsidiaries.......................................2
Consolidated Balance Sheets at December 31, 2001 and 2000..................................3 - 4
Consolidated Statements of Operations for the Two Years ended
December 31, 2001...........................................................................5
Consolidated Statements of Changes in Shareholders' Equity
for the Two Years ended December 31, 2001...................................................6
Consolidated Statements of Cash Flows for the Two Years ended
December 31, 2001...........................................................................7
Notes to the Consolidated Financial Statements............................................8 - 24
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.
(c) 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.**
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 Shareholders' Rights Agreement dated as of January 18, 2001 between the
Company, StoreAge and certain investors.**
4.5 Research & Development Subcontracting Agreement effective as of October 15,
2000, between the Company and StoreAge Networking Technologies Ltd.
8.1 List of significant subsidiaries of the Company.
10.1 Consent of Kost Forer and Gabbay, a Member of Ernst & Young International.
10.2 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.
** Incorporated by reference to the corresponding exhibit to the Company's
Annual Report on Form 20-F for the year ended December 31, 2000.
61
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 27, 2002
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001
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-30
----------
[LOGO] Ernst & Young 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, 2001 and 2000, 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, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We 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 provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above,
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiaries as of December 31, 2001 and 2000, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
Tel-Aviv, Israel /s/ Kost Forer & Gabbay
March 21, 2002 KOST FORER & GABBAY
A Member of Ernst & Young Global
F-2
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
U.S. dollars in thousands
December 31,
---------------
2001 2000
------ ------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,556 $3,077
Restricted deposit -- 600
Trade receivables 13 43
Affiliate 21 79
Other accounts receivable and prepaid expenses (Note 3) 109 45
------ ------
Total current assets 1,699 3,844
- ----- ------ ------
SEVERANCE PAY FUND 10 32
------ ------
INVESTMENT IN AN AFFILIATE (Note 4) 1,250 2,127
------ ------
PROPERTY AND EQUIPMENT, NET (Note 5) 88 63
------ ------
WORK FORCE, NET (Note 6) 186 283
------ ------
$3,233 $6,349
====== ======
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,
-------------------
2001 2000
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term bank loans (Note 8a) $ 10 $ 10
Trade payables 119 177
Other accounts payable and accrued expenses (Note 7) 546 1,403
-------- --------
Total current liabilities 675 1,590
- ----- -------- --------
LONG-TERM LIABILITIES:
Long-term bank loans, net of current maturities (Note 8a) 1 11
Convertible debentures (Note 8b) -- 2,828
Accrued severance pay 22 38
-------- --------
Total long-term liabilities 23 2,877
- ----- -------- --------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY: (Note 10)
Ordinary shares of NIS 0.003 par value
Authorized: 16,666,667 shares as of December 31, 2001 and 2000;
Issued and outstanding: 11,428,436 and 8,987,324 shares as of
December 31, 2001 and 2000, respectively; 55 54
Additional paid-in capital 41,419 37,435
Receivables on account of shares -- (16)
Deferred stock compensation (89) (222)
Accumulated deficit (38,850) (35,369)
-------- --------
Total shareholders' equity 2,535 1,882
- ----- -------- --------
$ 3,233 $ 6,349
======== ========
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 share data)
Year ended December 31,
---------------------------
2001 2000 1999
------- ------- -------
Revenues: (Note 12)
Products $ 83 $ 96 $ 5,408
Revenues from related party 251 -- --
Maintenance and other services -- -- 547
------- ------- -------
334 96 5,955
------- ------- -------
Cost of revenues:
Products 28 27 4,484
Revenues from related party 155 -- --
Maintenance and other services -- -- 429
------- ------- -------
183 27 4,913
------- ------- -------
Gross profit 151 69 1,042
------- ------- -------
Operating expenses:
Research and development, net (Note 14a) 479 925 686
Selling and marketing 21 639 1,417
General and administrative 888 899 1,777
Restructuring and reorganization (Note 1) -- -- 467
Non recurring income (Note 9c) (180) -- --
------- ------- -------
Total operating expenses 1,208 2,463 4,347
- ----- ------- ------- -------
Operating loss (1,057) (2,394) (3,305)
Financial income (expenses), net from operations (56) 277 173
Financial expenses in respect of conversion
of convertible debentures (Note 8b) (1,491) -- --
------- ------- -------
Financial income (expenses),net (Note 14b) (1,547) 277 173
Other expenses, net (Note 14c) -- (12) (1,770)
------- ------- -------
Loss before equity in losses of an affiliate and minority
interest in losses of subsidiary (2,604) (2,129) (4,902)
Equity in losses of an affiliate (877) -- --
Minority interest in losses of subsidiary -- 740 55
------- ------- -------
Net loss $(3,481) $(1,389) $(4,847)
======= ======= =======
Basic and diluted net loss per share $ (0.37) $ (0.16) $ (0.55)
======= ======= =======
Number of shares used in computing basic
and diluted net loss per share (in thousands) 9,409 8,901 8,860
======= ======= =======
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 (except share data)
Share capital Additional Receivables Deferred
------------------- paid-in on account stock
Shares Amount capital of shares compensation
---------- ------ ---------- ----------- ------------
Balance as of January 1, 1999 8,860,394 $ 54 $33,874 $ -- $ --
Comprehensive loss:
Foreign currency translation adjustments -- -- -- -- --
Net loss -- -- -- -- --
Total comprehensive loss
Compensation in respect of warrants issued upon
settlement of lawsuit -- -- 2,809 -- --
Foreign currency translation adjustment due to
realization of investment in subsidiaries -- -- -- -- --
---------- ----- ------- ---- -----
Balance as of December 31, 1999 8,860,394 54 36,683 -- --
Comprehensive loss:
Net loss -- -- -- -- --
Total comprehensive loss
Issuance of shares upon acquisition of Eastek 80,000 (*-- 160 -- --
Issuance of warrants related to convertible debentures -- -- 147 -- --
Exercise of options 46,930 (*-- 208 (16) --
Deferred stock compensation related to shares in
escrow issued upon acquisition of Eastek -- -- 237 -- (237)
Amortization of deferred stock compensation -- -- -- -- 15
---------- ----- ------- ---- -----
Balance as of December 31, 2000 8,987,324 54 37,435 (16) (222)
Comprehensive loss:
Net loss -- -- -- -- --
Total comprehensive loss
Conversion of convertible debentures 1,797,464 1 2,426 -- --
Payments of receivable on account of shares -- -- -- 16 --
Exercise of warrants 613,648 (*-- 183 -- --
Vested shares of key employee 30,000 (*-- -- -- --
Amortization of deferred stock compensation -- -- -- -- 133
Stock based compensation related to options
granted to employees of an affiliate -- -- 29 -- --
Beneficial conversion feature in respect of
conversion of convertible debentures -- -- 1,346 -- --
---------- ----- ------- ---- -----
Balance as of December 31, 2001 11,428,436 $ 55 $41,419 $ -- $ (89)
========== ===== ======= ==== =====
Accumulated
other Total Total
comprehensive Accumulated comprehensive shareholders'
loss deficit loss equity
------------- ----------- ------------- -------------
Balance as of January 1, 1999 $(790) $(29,133) $ 4,005
Comprehensive loss:
Foreign currency translation adjustments 73 -- $ 73 73
Net loss -- (4,847) (4,847) (4,847)
-------
Total comprehensive loss $(4,774)
=======
Compensation in respect of warrants issued upon
settlement of lawsuit -- -- 2,809
Foreign currency translation adjustment due to
realization of investment in subsidiaries 717 -- 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 upon acquisition of Eastek -- -- --
Amortization of deferred stock compensation -- -- 15
----- --------- -------
Balance as of December 31, 2000 -- (35,369) 1,882
Comprehensive loss:
Net loss -- (3,481) $(3,481) (3,481)
-------
Total comprehensive loss $(3,481)
=======
Conversion of convertible debentures -- -- 2,427
Payments of receivable on account of shares -- -- 16
Exercise of warrants -- -- 183
Vested shares of key employee -- -- --
Amortization of deferred stock compensation -- -- 133
Stock based compensation related to options
granted to employees of an affiliate -- -- 29
Beneficial conversion feature in respect of
conversion of convertible debentures -- -- 1,346
----- -------- -------
Balance as of December 31, 2001 $ -- $(38,850) $ 2,535
===== ======== =======
*) 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 STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
U.S. Dollars in thousands
Year ended December 31,
---------------------------
2001 2000 1999
------- ------- -------
Cash flows from operating activities:
- -------------------------------------
Net loss $(3,481) $(1,389) $(4,847)
Adjustments to reconcile net loss to net cash
used in operating activities:
Gain on sale of investment in subsidiaries -- -- (996)
Depreciation and amortization 127 151 146
Impairment of property and equipment -- -- 467
Amortization of deferred stock compensation 133 15 --
Stock based compensation related to options granted
to employees of an affiliate 29 -- --
Loss (gain) on sale of property and equipment (1) 37 (43)
Amortization of discount on convertible debentures 172 -- --
Minority interest in losses of subsidiaries -- (740) (55)
Equity in losses of an affiliate 877 -- --
Beneficial conversion feature in respect of
conversion of convertible debentures 1,346 -- --
Compensation in respect of warrants issued
upon settlement of lawsuit -- -- 2,809
Decrease (increase) in trade receivables 30 (96) 1,396
Decrease (increase) in other accounts receivable
and prepaid expenses (6) 11 (220)
Decrease (increase) in inventories -- (102) 785
Increase (decrease) in trade payables (58) 199 (411)
Decrease in other accounts payable and accrued expenses (857) (63) (659)
Decrease in provision for warranties -- -- (47)
Accrued severance pay, net 6 (58) (517)
------- ------- -------
Net cash used in operating activities (1,683) (2,035) (2,192)
------- ------- -------
Cash flows from investing activities:
- -------------------------------------
Proceeds from sale of property and equipment 1 3 93
Purchase of property and equipment (55) (446) (131)
Investment in restricted deposit -- (600) --
Proceeds from 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 previously consolidated subsidiary -- (4,228) --
------- ------- -------
Net cash provided by (used in) investing activities 546 (5,271) 787
------- ------- -------
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 STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
U.S. Dollars in thousands
Year ended December 31,
--------------------------
2001 2000 1999
------- ------- ------
Cash flows from financing activities:
- -------------------------------------
Proceeds from issuance of Preferred shares of
subsidiary to third party, net -- -- 3,122
Exercise of options -- 192 --
Payments of receivable on account of shares 16 -- --
Issuance of warrants related to convertible debentures -- 147 --
Exercise of warrants 183 -- --
Proceeds from long-term bank loans -- 29 61
Repayment of long-term bank loans (10) (95) (129)
Repayment of convertible debentures (573) -- --
Short-term bank credit, net -- (68) --
Proceeds from issuance of convertible debentures, net -- 2,828 --
------- ------- ------
Net cash provided by (used in) financing activities (384) 3,033 3,054
------- ------- ------
Effect of exchange rate changes on cash and cash equivalents -- -- 40
------- ------- ------
Increase (decrease) in cash and cash equivalents (1,521) (4,273) 1,689
Cash and cash equivalents at the beginning of the year 3,077 7,350 5,661
------- ------- ------
Cash and cash equivalents at the end of the year $ 1,556 $ 3,077 $7,350
======= ======= ======
Non-cash transactions:
- ----------------------
Conversion of convertible debentures $ 2,427 $ -- $ --
======= ======= ======
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)
-------
Issuance of share capital $ 160
=======
Supplemental disclosure of cash flows activities:
- -------------------------------------------------
Interest paid during the year $ 145 $ 20 $ 39
======= ======= ======
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 shares and per share data)
NOTE 1:- GENERAL
a.. Until late 1998, I.I.S. Intelligent Information Systems Limited
("IIS" or the "Company") was engaged in the development,
manufacturing, 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 holds a 38.9%
interest in StoreAge Networking Technologies ("StoreAge"), an
Israeli company, which is engaged in the development and
marketing of products based on its SAN Virtualization technology
(see b below). The Company currently designs, develops and
provides enterprise storage solutions for the Internet Small
Computer Systems Interface ("iSCSI"). The Company's products are
customized software implementation projects for the development
and integration of iSCSI interface into existing storage devices
and a family of comprehensive IP storage testing tools, for iSCSI
protocol analysis of SAN devices.
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 an
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 1999, the Company recorded restructuring charges of
approximately $467. The restructuring cost consist of impairment
of property and equipment.
b. In January 1999, 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
storage in return for the entire share capital of StoreAge.
F-9
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands (except shares and per share data)
NOTE 1:- GENERAL (cont.)
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 a
loan, given to StoreAge during 1999, 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.
In January 2001 as part of the aforementioned financing round,
StoreAge issued additional 3,346,567 Preferred B shares for a
total consideration of $11,000. The Company's equity interest in
StoreAge was reduced to 39% and no gain or loss from reduction of
holdings was created (see Note 4).
c. 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 research and development
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 were deposited with a trustee and were delivered
twelve months after the closing.
The Company also granted a key employee of Eastek 100,000 shares
as an incentive to his employment with the Company. The shares
are held in escrow and being released annually in three
installments of 30,000, 35,000 and 35,000 shares (see Note 10c).
The transaction was accounted for by the purchase method of
accounting whereby the purchase price of the Eastek acquisition
was allocated based on the fair value of assets acquired and
liabilities assumed. Eastek's operations were consolidated as of
the date of acquisition. The excess cost over the fair value of
net assets acquired amounting $291 was allocated to the assembled
work force and it is being amortized on a straight-line basis
over a three-year period (see Note 2h).
F-10
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands (except shares and per share data)
NOTE 1:- GENERAL (cont.)
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)
======= =======
d. In December 2000, the Company completed a private placement of
$3,000 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 8b).
In December 2001, the Company signed an agreement with its
lenders according to which the Company converted $2,427 of the
principal amount into 1,797,464 Ordinary shares at a price per
share of $1.35 and prepaid the remaining principal in the amount
of $573. In addition, the lenders agreed to the cancellation of
the warrants granted as part of the convertible debentures
agreement (see Note 8b).
e. During 2000, the Company signed an agreement with its affiliate
StoreAge according to which the Company will provide StoreAge
iSCSI capabilities to StoreAge's products in consideration of
$200, according to the milestones defined in the agreement.
During 2001, the Company and StoreAge agreed to extend this
agreement by additional $70. As of December 31, 2001, the Company
recorded revenues of $251 related to these services (see Note
2k).
StoreAge participates in the Company's general and administrative
expenses based on services the Company provides to StoreAge.
F-11
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands (except shares and per share data)
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 ("dollar"), as the 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 dollars.
Financing and investing activities including loans, equity
transactions and cash investments, are made in dollars.
Accordingly, monetary accounts maintained in currencies other
than the dollar are remeasured into dollars in accordance with
Statement of Financial Accounting Standard ("SFAS No. 52")
"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.
The affiliate's transactions are recorded in new Israeli Shekels
("NIS"); however, the majority of the revenues of the affiliate
and its subsidiary are generated in dollars. In addition, a
substantial portion of the affiliate's costs is incurred in
dollars. Thus, the functional and reporting currency of the
affiliate and its subsidiary is the dollar.
The financial statements of foreign subsidiaries whose functional
currency is their local currency, have been translated into
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 loss".
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.
F-12
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands (except shares and per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (cont.)
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. Investment in an affiliate:
Investments in affiliate are investments in companies held to the
extent of 20% or more (which are not subsidiaries), in which the
Company can exercise significant influence over operating and
financial policy. The investment in affiliates is accounted for
by 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.
f. Restricted deposit:
The restricted deposit pertained to the security for the
settlement of a lawsuit (see Note 9).
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:
%
-------
Machinery and equipment 10 - 33
Office furniture and equipment 6 - 10
Motor vehicles 15
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 Statement of Financial Accounting
Standards ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
As of December 31, 2001, no impairment losses have been
identified.
F-13
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands (except shares and per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (cont.)
h. Work force:
The work force is stated at cost, net of accumulated
amortization. Amortization is calculated by 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 undiscounted 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, 2001, no impairment
losses have been identified.
i. Research and development costs:
Statement of Financial Accounting Standards No. 86 "Accounting
for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed", requires capitalization of certain software
development costs subsequent to the establishment of
technological feasibility.
Based on the Company's product development process, technological
feasibility is established upon completion of a working model.
The Company does not incur material costs between the completion
of the working model and the point at which the products are
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 subsidiaries 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 (see Note 14a).
k. Revenue recognition:
The Company and its subsidiaries have derived revenues from
research and development services to an affiliate, licensing fees
for its products, maintenance and hardware. The Company sells its
products primarily through its direct sales force.
Research and development services to an affiliate are recognized
according to milestones determined in an agreement.
F-14
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands (except shares and per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (cont.)
Revenue from software license agreements are recognized when all
criteria outlined in Statement Of Position (SOP) 97-2 "Software
Revenue Recognition" (as amended) are met. Therefore, revenue
from license fees is recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, no
significant obligations with regard to implementation remain, the
fee is fixed or determinable and collectability 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.
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 collectability is
probable.
l. Concentrations of credit risk:
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. 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 and its subsidiaries'
investments are financially sound and, accordingly, minimal risk
exists with respect to these investments.
The trade receivables of the Company and its subsidiaries 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, 2001,
no allowance for doubtful accounts was provided.
The Company has no significant off-balance-sheet concentration of
credit risk such as foreign exchange contracts, option contracts
or other foreign hedging arrangements.
m. Basic and diluted net loss per share:
Basic net loss per share is computed based on the weighted
average number of Ordinary shares outstanding during each year.
Diluted net loss 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 Statement of Financial
Accounting Standard No. 128, "Earnings Per Share" ("SFAS No.
128").
F-15
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands (except shares and per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (cont.)
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 1,109,328, 1,570,193 and 687,808
for the years ended December 31, 2001, 2000 and 1999,
respectively.
n. 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 value of these policies is recorded as an asset in the
Company's balance sheet.
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, 2001,
2000 and 1999 amount to approximately, $33, $81 and $292,
respectively.
o. Accounting for stock based compensation:
The Company has elected to follow Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB
25") and FASB 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 No. 123") are provided in Note 10.
The Company applies SFAS No. 123 and Emerging Issues Task Force
No. 96-18 "Accounting for Equity Instruments That are Issued to
Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" ("EITF 96-18") with respect to
options issued to non-employees and affiliate employees (see Note
10c). SFAS No. 123 requires the use of an option valuation model
to measure the fair value of the options at the date of grant.
F-16
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands (except shares and per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (cont.)
p. Income taxes:
The Company and its subsidiaries account for income taxes in
accordance with Statement of Financial Accounting Standard No.
109, "Accounting for Income Taxes" ("SFAS No. 109"). 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 and its
subsidiaries provide a valuation allowance, if necessary, to
reduce deferred tax assets to their estimated realizable value.
q. 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 and trade payables
approximate their fair value due to the short-term maturity of
such instruments.
Convertible debentures 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.
r. Impact of recently issued accounting standards:
1. In July 2001, the Financial Accounting Standards Board,
issued Statement of Financial Accounting Standard No. 141
"Business Combinations" ("SFAS 141") and Statement of
Financial Accounting Standard No. 142 "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 requires all
business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under SFAS 142,
goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment.
Separable intangible assets that are not deemed to have
indefinite lives will continue to be amortized over their
useful lives (but with no maximum life). The amortization
provisions of SFAS 142 apply to goodwill and intangible
assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1,
2001, the Company is required to adopt SFAS 142 effective
January 1, 2002. The Company will apply the new rules on
accounting for goodwill and other intangible assets
beginning in the first quarter of 2002.
F-17
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands (except shares and per share data)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (cont.)
Application of the non-amortization provision of the
statements is expected to result in a decrease in the net
loss of $97 and $89 for 2002 and 2003, respectively, and a
decrease in the net loss per share of $0.01 per year. The
Company will reclassify an assembled workforce intangible
asset with the unamortized balance of $186 to goodwill at
the date of adoption.
2. In August 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived
Assets" ("FAS 144"), which addresses financial accounting
and reporting for the impairment or disposal of long-lived
assets and superseded SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", and the accounting and reporting provisions
of APB Opinion No. 30, "Reporting the Results of Operations
for a Disposal of a Segment of a Business". FAS 144 is
effective for fiscal years beginning after December 15,
2001, with earlier application encouraged. The Company
expects to adopt FAS 144 as of January 1, 2002 and it does
not expect that the adoption of the Statement will have a
significant impact on the Company's financial position and
results of operations.
NOTE 3:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
December 31,
------------
2001 2000
---- ----
Prepaid expenses $ 48 $30
Government authorities 13 12
Employees 48 --
Other -- 3
---- ---
$109 $45
==== ===
F-18
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands (except shares and per share data)
NOTE 4:- INVESTMENT IN AN AFFILIATE
December 31,
-----------------
2001 2000
------- -------
Investment in StoreAge:
Investment in Ordinary shares of affiliate in January,
1999 (representing 31% and 39% of voting rights as
of December 31, 2001 and 2000, respectively) $(* -- $(* --
Investment in Preferred shares of affiliate in December,
2000 (representing 8% and 10% of voting rights as of
December 31, 2001 and 2000, respectively) 4,220 4,220
Equity losses (2,970) (2,093)
------- -------
Total investment (representing 39% and 49% of voting
rights as of December 31, 2001 and 2000, respectively) $ 1,250 $ 2,127
======= =======
*) Represents an amount lower than $1.
NOTE 5:- PROPERTY AND EQUIPMENT, NET
Cost:
Machinery and equipment $ 73 $ 29
Office furniture and equipment 74 70
Motor vehicles 47 47
------- -------
194 146
------- -------
Accumulated depreciation:
Machinery and equipment 21 2
Office furniture and equipment 58 60
Motor vehicles 27 21
------- -------
106 83
------- -------
Depreciated cost $ 88 $ 63
======= =======
Depreciation expenses for the years ended December 2001, 2000 and 1999
amounted to approximately $30, $143 and $146, respectively.
As for charges, see Note 9b.
F-19
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands (except shares and per share data)
NOTE 6:- WORK FORCE, NET
December 31,
------------
2001 2000
---- -----
Work force $291 $291
Less - accumulated amortization 105 8
---- -----
Amortized cost $186 $283
==== =====
Amortization expense (included in "General and administrative
expenses") for the years ended December 2001 and 2000 amounted to $97
and $8, respectively.
NOTE 7:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
December 31,
--------------
2001 2000
----- ------
Employees and payroll accruals $ 68 $ 44
Government authorities 13 8
Provision for litigation and others 313 931
Accrued expenses 152 420
---- ------
$546 $1,403
==== ======
NOTE 8:- FINANCING ARRANGEMENTS
a. Long-term bank loans:
December 31,
------------------------------------
2001 2000
----------------- ----------------
Interest Interest
rate Amount rate Amount
-------- ------ -------- ------
U.S. dollar 2.9% $11 7.3% $21
Less - current maturities 10 10
--- ---
$ 1 $11
=== ===
As for charges see Note 9b.
F-20
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands (except shares and per share data)
NOTE 8:- FINANCING ARRANGEMENTS (cont.)
b. Convertible debentures:
In December 2000, the Company issued to investors, convertible
debentures and warrants to purchase 300,000 Ordinary shares in
consideration of $3,000. The Debentures were convertible, all or
in part, at any time in which these debentures were outstanding,
into the Company's Ordinary shares, at a price per share of $3.
The warrants granted were exercisable into the Company's Ordinary
shares at any time until December 2003 at a price per share of
$4.5.
The discount on convertible debentures at the date of grant
amounted to $145.
The Company accounted for these convertible debentures in
accordance with Emerging Issues Task Force No. 98-5 "Accounting
for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios" ("EITF 98-5") and
Emerging Issues Task Force No. 00-27 "Application of EITF Issue
No. 98-5 to Certain Convertible Instruments" ("EITF 00-27").
There was no beneficial conversion feature at the date of grant.
In December 2001, the Company signed an agreement with its
lenders according to which the Company converted $2,427 of the
principal amount into 1,797,646 Ordinary shares at a price per
share of $1.35 and prepaid the remaining principal in the amount
of $ 573. In addition, the lenders agreed to the cancellation of
the warrants granted as part of the convertible debenture
agreement.
The Company accounted for the adjustments resulted from the
inducement conversion offer of the debentures and the
cancellation of the warrants in accordance with Statement of
Financial Accounting Standard No. 84 "Induced Conversions of
Convertible Debt" ("SFAS No. 84").
The Company recorded $1,346 as financial expenses related to the
beneficial conversion feature from the induced conversion offer
and additional $145 in respect of the discount on the convertible
debentures.
NOTE 9:- COMMITMENTS AND CONTINGENT LIABILITIES
a. Litigation:
1. The Company, certain of its officers and directors and the
underwriters of the Company's August 1993 public offering
were 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
alleged 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.
F-21
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands (except shares and per share data)
NOTE 9:- COMMITMENTS AND CONTINGENT LIABILITIES (cont.)
The plaintiffs also contended 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 $0.3 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-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" (see Note 14c).
As of December 31, 2001, 613,648 of the settlement's
warrants were exercised into the Company's Ordinary shares.
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 counsels, 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 counsels are unable to estimate the outcome
of this suit. The Company also recorded an accrual in the
amount of $250 in respect of this claim.
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 counsels estimate that the
Company's exposure does not exceed $50. The Company recorded
an accrual in the amount of $50 in respect of this claim.
b. Charges:
The Company had recorded charges on some of its vehicles in favor
of banks and lenders.
F-22
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands (except shares and per share data)
NOTE 9:- COMMITMENTS AND CONTINGENT LIABILITIES (cont.)
c. Sales taxes:
During 1999, the Company was obligated to pay sales taxes in U.S,
in a total amount of $350, the Company recorded a full provision
in respect of this commitment. In late 2001, the Company reached
a compromise settlement with the tax authorities in U.S,
according to which the obligation was reduced to $152. The
Company recorded a non recurring income in the amount of $180.
NOTE 10:- SHARE CAPITAL
a. Ordinary shares:
The Ordinary shares of the Company are quoted on NASDAQ in the
United States.
b. Warrants:
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. As part of the agreement for the dismissal of a lawsuit the
Company issued warrants with right to purchase up to 886,039
of the Company's Ordinary shares with an exercise price of
$0.3 (see Note 9a).
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, 2001, amounted to 126,126.
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 as an incentive to his employment with
the Company.
F-23
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands (except shares and per share data)
NOTE 10:- SHARE CAPITAL (cont.)
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, to be amortized to the
statement of operations over the vesting period. Amortization
expenses in 2001, 2000 and 1999 amounted to $133, $15 and $0,
respectively.
A summary of the Company's stock option activity and related
information:
2001 2000 1999
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
average average average
Number exercise Number exercise Number exercise
of options price of options price of options price
---------- -------- ---------- -------- ---------- --------
Outstanding at the beginning
of the year 1,148,150 $10.90 499,138 $19.08 664,635 $17.39
Granted 26,000 $ 3.62 716,050 $ 3.63 -- --
Exercised -- -- (46,930) $ 4.43 -- --
Forfeited (107,347) $31.67 (20,108) $15.91 (165,497) $12.12
--------- --------- -------
Outstanding at the end of the year 1,066,803 $ 7.77 1,148,150 $10.09 499,138 $19.08
========= ========= =======
Exercisable at the end of the year 553,136 $11.61 488,650 $18.83 487,808 $19.44
========= ========= =======
The options outstanding as of December 31, 2001, have been
separated into ranges of exercise price, as follows:
Options Weighted Weighted Options Weighted
Ranges of outstanding as of average average exercisable as of average
exercise December 31, remaining exercise December 31, exercise
price 2001 contractual life price 2001 price
- --------------- ----------------- ---------------- -------- ----------------- --------
(Years)
$3.63 740,050 5.02 $ 3.63 226,369 $ 3.63
$3.93 - $5.79 123,933 4.69 $ 5.48 123,933 $ 5.48
$6.06 - $8.82 112,967 3.15 $ 7.89 112,967 $ 7.89
$12.75 - $18.50 36,653 0.47 $18.49 36,667 $18.48
$24.00 - $28.89 5,000 2.34 $25.50 5,000 $25.50
$58.65 - $67.14 48,200 1.54 $66.94 48,200 $66.94
--------- -------
1,066,803 4.45 $ 7.77 553,136 $11.61
========= =======
F-24
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands (except shares and per share data)
NOTE 10:- SHARE CAPITAL (cont.)
Under SFAS No. 123, pro forma information regarding net income
(loss) and net earnings (loss) 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 for the years ended December 31,
2001 and 2000 (no options were granted during 1999): risk-free
interest rates of 6% and 3%, respectively, dividend yields of 0%
for each year, volatility factors of the expected market price of
the Company's Ordinary shares of 1.25 and 0.96, respectively, and
a weighted-average expected life of an option of four years for
each year.
Pro forma information under SFAS No. 123:
Year ended December 31,
---------------------------
2001 2000 1999
------- ------- -------
Net loss as reported $(3,481) $(1,389) $(4,847)
======= ======= =======
Pro forma net loss $(3,850) $(1,674) $(4,905)
======= ======= =======
Pro forma basic and diluted net loss
per share $ (0.41) $ (0.19) $ (0.55)
======= ======= =======
The total compensation expense included in the pro forma
information for 2001, 2000 and 1999 is $369, $285 and $58,
respectively.
Weighted average fair values and weighted average exercise prices
of options whose exercise price is equal or exceeds market price
of the shares at date of grant are as follows:
Year ended December 31,
---------------------------------------------------------------------------
2001 2000
----------------------------------- -------------------------------------
Weighted Weighted Weighted Weighted
average fair average exercise average fair average exercise
value of options price of options value of options price of options
granted at granted at grants at exercise granted at
exercise price exercise price price exercise price
---------------- ---------------- ------------------ ----------------
Equal to market price
at date of grant $ -- $ -- $2.94 $3.63
===== ===== ===== =====
Exceeds market price
at date of grant $0.92 $3.62 $1.15 $3.63
===== ===== ===== =====
For purposes of pro forma disclosure, the estimated fair value of
the options is amortized as an expense over the options' vesting
period.
F-25
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands (except shares and per share data)
NOTE 10:- SHARE CAPITAL (cont.)
During 2000, as a result of the decrease in the Company's equity
interest in StoreAge (see Note 1), and the de-consolidation of
StoreAge, the status of StoreAge's employees was changed from
employees to non-employees of the Company, in addition during
2001, three employees of the Company became StoreAge's employees.
Options granted to abovementioned employees were remeasured at
the date of change in status under the fair value method,
according to FIN 44 "Accounting for Certain Transactions
Involving Stock Compensation" and SFAS No. 123.
The fair value for these options was estimated using the
Black-Scholes option valuation model with the following
weighted-average assumptions for October 2001 and May 2000:
risk-free interest rates of 3% and 6% respectively , dividend
yields of 0% for each date, volatility factors of the expected
market price of the Company's Ordinary shares of 1.18 and 0.96,
respectively, and a weighted-average expected life of an option
of four years for each date. The weighted average fair value of
these options is $0.93 and $1 per option, respectively.
Compensation expenses of approximately $29 and $17 were
recognized during the years ended December 31, 2001 and 2000,
respectively.
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.
NOTE 11:- INCOME TAXES
a. Tax benefits under the Law for the Encouragement of Industry
(Taxes), 1969:
The Company is an "industrial company", as defined by this law
and, as such, is entitled to certain tax benefits, 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.
F-26
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands (except shares and per share data)
NOTE 11:- INCOME TAXES (cont.)
b. Measurement of taxable income under the Income Tax (Inflationary
Adjustments) Law, 1985:
Results of the Company and its Israeli subsidiaries 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 and
Israeli subsidiaries has not provided deferred income taxes on
the difference between the reporting currency and the tax bases
of assets and liabilities.
c. Loss before equity in losses of an affiliate and minority
interest in losses of subsidiary:
Year ended December 31,
------------------------
2001 2000 1999
------ ------ ------
Domestic $2,604 $2,129 $4,014
Foreign -- -- 888
------ ------ ------
$2,604 $2,129 $4,902
====== ====== ======
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.
Significant components of the Company's deferred tax liabilities
and assets are as follows:
December 31,
-------------------
2001 2000
-------- --------
Tax loss carryforward $ 27,440 $ 26,506
Reserves and allowances 9 7
-------- --------
Net deferred assets before valuation allowance 27,449 26,513
Valuation allowance (27,449) (26,513)
-------- --------
Net deferred tax asset $ -- $ --
======== ========
F-27
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands (except shares and per share data)
NOTE 11:- INCOME TAXES (cont.)
As of December 31, 2001, the Company and its subsidiaries have
increased their valuation allowances from approximately $936 to
approximately $27,449 in respect of deferred tax assets resulting
from tax loss carryforwards and other temporary differences.
Management currently believes that since the Company and its
subsidiaries have 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, 2001, the Company has carryforward tax losses
in the amount of approximately $76,211, which may be carried
forward and offset against taxable income in the future for an
indefinite period.
NOTE 12:- CUSTOMERS AND GEOGRAPHIC INFORMATION
The Company adopted Statement of Financial Accounting Standard
No. 131, "Disclosures About Segments of an Enterprise and Related
Information", ("SFAS No. 131"). 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 areas based on the location of the end customer.
The following presents total revenues for the years ended
December 31, 2001, 2000 and 1999 and long-lived assets as of
December 31, 2001, 2000 and 1999:
Year ended December 31,
-----------------------
2001 2000 1999
----- ----- ------
Sales and maintenance to unaffiliated
customers:
United States $ 19 $ 41 $3,867
Israel 64 40 1,611
Europe -- 15 477
----- ----- ------
$ 83 $ 96 $5,955
===== ===== ======
December 31,
----------------------
2001 2000 1999
----- ----- ------
Long-lived assets:
Israel $ 274 $ 346 $ 431
===== ===== ======
F-28
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands (except shares and per share data)
NOTE 13:- RELATED PARTIES TRANSACTIONS
The balances with, the revenues, services and expenses derived
from related parties were as follows:
a. Balances with related parties:
December 31,
------------
2001 2000
---- ----
Other accounts receivable:
StoreAge $21 $79
==== ====
(*) The balance is linked to the $ and bears no interest.
ii. Revenues, services and expenses from related parties:
Year ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Revenues from related party $251 $ -- $--
==== ==== ===
Related Party's participation in
general and administrative expenses 108 123 73
==== ==== ===
Rent to related party $ 35 $ -- $--
==== ==== ===
NOTE 14:- SELECTED STATEMENTS OF OPERATIONS DATA
a. Research and development
expenses, net:
Total costs $479 $1,328 $ 909
Less - royalty-bearing grants -- (403) (223)
---- ------ -----
$479 $ 925 $ 686
==== ====== =====
F-29
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. dollars in thousands (except shares and per share data)
NOTE 14:- SELECTED STATEMENTS OF OPERATIONS DATA (cont.)
Year ended December 31,
-----------------------
2001 2000 1999
------- ----- -----
b. Financial income (expenses), net:
Interest income $ 131 $ 389 $ 289
------- ----- -----
Financial expenses:
Interest expenses (170) (67) (76)
Foreign currency translation
differences (17) (45) (40)
Beneficial conversion feature and
amortization of discount of
convertible debentures (1,491) -- --
------- ----- -----
(1,678) (112) (116)
------- ----- -----
$(1,547) $ 277 $ 173
======= ===== =====
c. Other expenses, net:
Compensation in respect of warrants
issued upon settlement of lawsuit $ -- $ -- $2,809
Gain on sale of investment in
subsidiaries -- -- (996)
Other -- 12 (43)
------- ----- ------
$ -- $ 12 $1,770
======= ===== ======
- - - - - - - - - - - -
F-30
STOREAGE NETWORKING TECHNOLOGIES LTD.
AND ITS SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001
IN U.S. DOLLARS
INDEX
Page
----
Report of Independent Auditors 2
Consolidated Balance Sheets 3-4
Consolidated Statements of Operations 5
Statements of Changes in Shareholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8-24
[LOGO] ERNST & YOUNG 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
STOREAGE NETWORKING TECHNOLOGIES LTD.
We have audited the accompanying consolidated balance sheets of
StoreAge Networking Technologies Ltd. ("the Company") and its subsidiary as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the two
years in the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We 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 provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of the Company and its subsidiary as of December 31, 2001 and 2000, and
the consolidated results of their operations and cash flows for each of the two
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ Kost, Forer & Gabbay
Tel Aviv, Israel KOST, FORER & GABBAY
March 13, 2002 A Member of Ernst & Young International
-2-
STOREAGE NETWORKING TECHNOLOGIES LTD. AND ITS SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
U.S. Dollars in thousands
December 31,
-----------------
2001 2000
------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $18,852 $13,943
Trade receivables 80 53
Other accounts receivable and prepaid expenses (Note 3) 195 260
Inventories (Note 4) 254 102
------- -------
Total current assets 19,381 14,358
- ----- ------- -------
LONG-TERM INVESTMENTS:
Loan to employee (Note 5) 111 --
Restricted long-term bank deposits 141 --
Long-term prepaid expenses 89 --
------- -------
Total Long term receivables 341 --
- ----- ------- -------
PROPERTY AND EQUIPMENT, NET (Note 6) 1,086 646
------- -------
Total assets $20,808 $15,004
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
STOREAGE NETWORKING TECHNOLOGIES LTD. AND ITS SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
U.S. Dollars in thousands (except share data)
December 31,
-----------------
2001 2000
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term loans $ 36 $ 69
Trade payables 337 267
Employees and payroll accruals 508 289
Other accounts payable (Note 7) 97 200
Related party (Note 8) 20 96
------- -------
Total current liabilities 998 921
- ----- ------- -------
LONG-TERM LOANS, NET OF CURRENT MATURITIES (Note 9) 1 40
------- -------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 10) -- --
------- -------
SHAREHOLDERS' EQUITY (Note 11):
Ordinary shares of NIS 0.01 par value -
Authorized: 35,981,370 shares at December 31, 2001 and 2000;
Issued and outstanding: 5,025,000 shares at December 31, 2001 and
2000 12 12
Preferred A shares of NIS 0.01 par value -
Authorized: 3,537,790 shares at December 31, 2001 and 2000;
Issued and outstanding: 3,537,790 shares at December 31, 2001 and
2000; Aggregate liquidation preference of approximately $ 3,200 at
December 31, 2001 and 2000 9 9
Preferred B shares of NIS 0.01 par value -
Authorized: 10,480,840 shares at December 31, 2001 and 2000;
Issued and outstanding: 7,605,836 and 4,259,268 at December 31,
2001 and 2000, respectively; Aggregate liquidation preference of
approximately $ 27,012 and $ 14,000 at December 31, 2001 and
2000, respectively 18 10
Additional paid-in capital 27,145 16,900
Accumulated deficit (7,375) (2,888)
------- -------
Total shareholders' equity 19,809 14,043
- ----- ------- -------
Total liabilities and shareholders' equity $20,808 $15,004
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
STOREAGE NETWORKING TECHNOLOGIES LTD. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
U.S. Dollars in thousands
Year ended
December 31,
---------------
2001 2000
------ ------
Revenues $ 683 $ 66
Cost of revenues 307 15
------ ------
Gross profit 376 51
------ ------
Operating expenses:
Research and development, net (Note 13a) 3,212 902
Sales and marketing, net (Note 13b) 1,404 639
General and administrative 979 326
------ ------
Total operating expenses 5,595 1,867
------ ------
Operating loss 5,219 1,816
Financial income, net (748) (67)
Other expenses 16 37
------ ------
Net loss $4,487 $1,786
====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
-5-
STOREAGE NETWORKING TECHNOLOGIES LTD. AND ITS SUBSIDIARY
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
U.S. Dollars in thousands (except share data)
Ordinary shares Preferred shares Additional Total
------------------ ------------------- paid-in Accumulated shareholders'
Shares Amount Shares Amount capital deficit equity
--------- ------ ---------- ------ ---------- ----------- -------------
Balance as of January 1, 2000 5,000,000 $ 2 3,537,790 $ 2 $ 3,129 $(1,102) $ 2,031
Stock split effected as stock dividend -- 10 -- 7 (17) -- -
Exercise of options, net 25,000 (*-- -- -- 3 -- 3
Issuance of Preferred B shares and
warrants, net -- -- 4,259,268 10 13,785 -- 13,795
Net loss -- -- -- -- -- (1,786) (1,786)
--------- ----- ---------- --- ------- ------- -------
Balance as of December 31, 2000 5,025,000 12 7,797,058 19 16,900 (2,888) 14,043
Issuance of Preferred B shares and
warrants, net -- -- 3,346,568 8 10,243 -- 10,251
Stock based compensation related to
options granted to consultants -- -- -- -- 2 -- 2
Net loss -- -- -- -- -- (4,487) (4,487)
--------- ----- ---------- --- ------- ------- -------
Balance as of December 31, 2001 5,025,000 $ 12 11,143,626 $27 $27,145 $(7,375) $19,809
========= ===== ========== === ======= ======= =======
*) Represents an amount lower than $ 1.
The accompanying notes are an integral part of the consolidated financial
statements.
-6-
STOREAGE NETWORKING TECHNOLOGIES LTD. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
U.S. Dollars in thousands
Year ended
December 31,
-----------------
2001 2000
------- -------
Cash flows from operating activities:
- -------------------------------------
Net loss $(4,487) $(1,786)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 328 135
Accrued severance pay, net -- (55)
Increase in trade receivables (27) (53)
Decrease (increase) in accounts receivable and prepaid expenses (24) 26
Increase in inventories (152) (102)
Increase in trade payables 70 172
Increase in Employees and payroll accruals and other accounts payable 256 182
Related party, net (76) 96
Loss on sale of property and equipment 16 37
Other 5 --
------- -------
Net cash used in operating activities (4,091) (1,348)
------- -------
Cash flows from investing activities:
- -------------------------------------
Loan to employee (110) --
Restricted deposits (145) --
Purchase of property and equipment (795) (471)
Proceeds from sale of property and equipment 11 3
------- -------
Net cash used in investing activities (1,039) (468)
------- -------
Cash flows from financing activities:
- -------------------------------------
Related party -- (543)
Short-term bank credit, net -- (69)
Principal payment of long-term loans (72) (68)
Proceeds from long-term loans -- 29
Proceeds from issuance of share capital, net 10,111 13,935
Exercise of options, net -- 3
------- -------
Net cash provided by financing activities 10,039 13,287
------- -------
Increase in cash and cash equivalents 4,909 11,471
Cash and cash equivalents at the beginning of the year 13,943 2,472
------- -------
Cash and cash equivalents at the end of the year $18,852 $13,943
======= =======
Supplemental disclosure of cash flows information:
- --------------------------------------------------
Cash paid during the year for:
- ------------------------------
Interest $ 5 $ 24
======= =======
Non-cash transactions:
- ----------------------
Issuance expenses $ -- $ 140
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
-7-
STOREAGE NETWORKING TECHNOLOGIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. Dollars in thousands (except share data)
NOTE 1:- GENERAL
a. StoreAge Networking Technologies Ltd. ("the Company") was
incorporated in January 1999. The Company develops data storage
networking solutions for open system, host independent,
multi-server environments.
During 2000 the Company established a wholly owned subsidiary -
StoreAge Networking Technologies Inc. ("the subsidiary"), which
is engaged in selling and marketing of the Company's products in
the United States.
b. During 1999, the Company reached an agreement with a related
company - I.I.S. Intelligent Information Systems Ltd. ("I.I.S") -
to purchase by way of assignment all of the I.I.S's activities,
assets, rights and obligations in the field of fibre channel
technology in consideration of 5,000,000 Ordinary shares. The
assets and liabilities were transferred at their carrying amount.
As part of the aforementioned agreement, the Company agreed to
assume the I.I.S's obligations to pay royalties to the Office of
Chief Scientist ("OCS") on sale proceeds from products in which
the OCS participates in their research and development in the
field of storage. Total commitment assumed by the Company
aggregates to $ 764.
During 2000, the Company signed a agreement with I.I.S. according
to which I.I.S. will provide the Company research and development
services for the development of software in consideration of
$200, according to the milestones defined in the agreement.
During 2001, the companies agreed to expand this agreement. As of
December 31, 2001, the Company recorded accumulated research and
development costs of $ 270 related to these services (see Note
8).
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States.
a. Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
-8-
STOREAGE NETWORKING TECHNOLOGIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. Dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (cont.)
b. Financial statements in U.S. Dollars:
The Company's transactions are recorded in new Israeli Shekels
("NIS"); however, the majority of the revenues of the Company and
its subsidiary are generated in U.S. Dollars ("Dollar"). In
addition, a substantial portion of the Company's costs is
incurred in Dollars. Company's management believes that the
Dollar is the primary currency of the economic environment in
which the Company and its subsidiary operate. Thus, the
functional and reporting currency of the Company and its
subsidiary is the Dollar.
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"). All transactions gains and losses from the
remeasurement of monetary balance sheet items are reflected in
the statements of operations as financial income or expenses, as
appropriate.
c. Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its subsidiary. Intercompany transactions and
balances, including profits from intercompany sales not yet
realized outside the Group, have been eliminated upon
consolidation.
d. Cash equivalents:
Cash equivalents include short-term highly liquid investments
that are readily convertible to cash with original maturities of
three months or less.
e. Restricted cash:
Restricted cash is primarily invested in certificates of deposit,
which mature within four years and is used as security for the
Company's office lease.
f. Inventories:
Inventories are stated at the lower of cost or market value.
Inventory write-offs are provided to cover risks arising from
slow-moving items or technological obsolescence.
Cost is determined as follows:
Raw materials and parts - using the "first-in, first-out" method.
Finished products - on the basis of direct manufacturing costs
with the addition of allocable indirect manufacturing costs.
-9-
STOREAGE NETWORKING TECHNOLOGIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. Dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (cont.)
g. Long-term deposits:
Bank deposits with maturities of more than one year are included
in long-term investments, and presented at their cost.
h. 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:
%
--------------------------
Computers and peripheral equipment 33
Office furniture 6 - 15
Motor vehicles 15
Leasehold improvements over the term of the lease
The Company and its subsidiary 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 Statement of Financial Accounting
Standards ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
As of December 31, 2001, no impairment losses have been
identified.
i. Research and development costs:
Statement of Financial Accounting Standards ("SFAS") No. 86
"Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed", requires capitalization of certain
software development costs subsequent to the establishment of
technological feasibility.
Based on the Company's product development process, technological
feasibility is established upon completion of a working model.
The Company does not incur material costs between the completion
of the working model and the point at which the products are
ready for general release. Therefore, research and development
costs are charged to the statement of operations as incurred.
j. Warranty costs:
The Company provides a warranty for up to 12 months to its
hardware modules and 3 months to its software modules at no extra
charge. A provision is recorded for estimated warranty costs
based on the Company's experience. In 2001 and 2000, the Company
did not provide for warranty due to immateriality.
-10-
STOREAGE NETWORKING TECHNOLOGIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. Dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (cont.)
k. 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 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 and its subsidiary provide a valuation
allowance, if necessary, to reduce deferred tax assets to their
estimated realizable value.
l. Revenue recognition:
The Company derives its revenue from hardware and license fees of
its products, training and installation. The Company sells its
products primarily through its direct sales force and indirectly
through distributors.
In December 1999, the SEC issued Staff Accounting Bulletin No.
101 ("SAB 101"), as amended in June 2000, which summarizes the
staffs views in applying generally accepted accounting principles
to revenue recognition in financial statements.
The Company adopted SAB 101 and Statement of Position (SOP) 97-2,
"Software Revenue Recognition," as amended. SOP 97-2, generally
requires revenue earned on 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.
Revenue is recognized when persuasive evidence of an agreement
exists, delivery of the product has occurred, no significant
obligations with regard to implementation remain, the fee is
fixed or determinable, and collectibility is probable. The
Company does not grant a right of return to its customers. When a
right of return exists, the Company defers revenue until the
right of return expires, at which time revenue is recognized
provided that all other revenue recognition criteria have been
met. The Company considers all arrangements with payment terms
extending beyond thirty days not to be fixed or determinable. If
the fee is not fixed or determinable, revenue is recognized as
payments become due from the customer provided that all other
revenue recognition criteria have been met. When customer's
acceptance is required revenue is recognized upon the acceptance.
-11-
STOREAGE NETWORKING TECHNOLOGIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. Dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (cont.)
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. Maintenance and support revenue
included in these arrangements is deferred and recognized on a
straight-line basis over the term of the maintenance and support
agreement. The VSOE of fair value of the undelivered elements
(maintenance, support and services) is determined based on the
price charged for the undelivered element when sold separately.
m. Concentrations of credit risks:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and
cash equivalents, restricted cash and trade receivables.
The Company's cash and cash equivalents are denominated in U.S.
Dollars and invested mainly 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.
Restricted cash is invested in certificates of deposit in major
banks in Israel.
The Company's trade receivables are derived from sales to
customers located primarily in Israel, the U.S. and Europe. No
collateral is required. The allowance for doubtful accounts is
determined with respect to specific debts that are doubtful of
collection.
n. 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 11d.
The Company applies SFAS No. 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 No.123
requires use of an option valuation model to measure the fair
value of the options on the date of grant.
-12-
STOREAGE NETWORKING TECHNOLOGIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. Dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (cont.)
o. Grants and participations:
Royalty-bearing grants from the Government of Israel for funding
approved research and development projects are recognized at the
time the Company is entitled to such grants on the basis of the
related costs incurred and included as a deduction of research
and development costs. Research and development grants amounted
to $ 0 and $ 386 in 2001 and 2000, respectively.
The Company also received non-royalty-bearing grants from the
Fund for Encouragement of Marketing Activity. These grants are
recognized at the time the Company is entitled to such grants on
the basis of the costs incurred and included as a deduction of
sales and marketing expenses.
p. Severance pay:
The Company's liability for severance pay is calculated pursuant
to 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 deposited funds include profits accumulated up to the balance
sheet date. The deposited funds may be withdrawn only upon the
fulfillment of the obligation 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.
The Company's liability for all of its employees is fully
provided by monthly deposits with insurance policies pursuant to
section 14 to the Israeli severance pay law and as of December
31, 2001 there is no outstanding severance pay liability.
Severance expenses for the years ended December 31, 2001 and 2000
amounted to approximately $ 150 and $ 71, respectively.
q. Fair value of financial instruments:
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
The carrying amount of cash and cash equivalents, restricted
cash, trade receivables and trade payables approximate their fair
value due to the short-term maturity of such instruments. The
carrying amounts of long-term loans reported in the balance sheet
approximate their fair value. The fair value was estimated using
discounted cash flow analyses, based on the Company's incremental
borrowing rates for similar type of borrowing arrangements.
-13-
STOREAGE NETWORKING TECHNOLOGIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. Dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (cont.)
The carrying amounts of derivatives were recorded according to
speculative transactions under FASB 133, "Accounting for
Derivative Instruments and Hedging Activities" at their fair
value. As of the balance sheet date the Company recorded a loss
in the amount of $12 in respect of those transactions.
r. Impact of recently issued accounting standards:
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" (FAS 144),
which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and superseded SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Dispensed Of", and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations for a Disposal of a Segment of a Business".
FAS 144 is effective for fiscal years beginning after December
15, 2001, with earlier application encouraged. The Company
expects to adopt FAS 144 as of January 1, 2002 and it does not
expect that the adoption of the Statement will have a significant
impact on the Company's financial position and results of
operations.
NOTE 3:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
December 31,
------------
2001 2000
---- ----
Government authorities $ 91 $ 61
Office of the Chief Scientist -- 188
Prepaid expenses 86 6
Other 18 5
---- ----
$195 $260
==== ====
NOTE 4:- INVENTORIES
Raw materials and parts $178 $ 60
Finished products 76 42
---- ----
$254 $102
==== ====
-14-
STOREAGE NETWORKING TECHNOLOGIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. Dollars in thousands
NOTE 5:- LOAN TO EMPLOYEE
On March 19, 2001, the Company granted to a key employee a loan of
$110 (NIS 460 thousand), denominated in NIS (New Israeli Shekels),
under the following terms:
a. The principal is repayable on the earlier of the following
events: consummation of an IPO, sale of all or substantially all
of the Company's property and assets, merger or consolidation of
the Company or five years from the grant date of the loan.
b. The loan bears interest at the greater of the change in the
representative exchange rate of the U.S. Dollar during the loan
period or the change in the Israeli CPI plus annual interest of
4%.
The accrued interest is repayable upon the repayment of the principal
of the loan.
NOTE 6:- PROPERTY AND EQUIPMENT, NET
December 31,
-------------
2001 2000
------ ----
Cost :
Computers and peripheral equipment $1,096 $499
Office furniture 154 39
Motor vehicles 296 270
Leasehold improvements 47 24
------ ----
1,593 832
Accumulated depreciation 507 186
------ ----
Depreciated cost $1,086 $646
====== ====
Depreciation expenses for the years ended December 31, 2001 and 2000
were $ 328 and $ 135, respectively.
As for charges see Note 10c.
NOTE 7:- OTHER ACCOUNTS PAYABLE
December 31,
------------
2001 2000
---- ----
Accrued expenses $41 $200
Others 56 --
--- ----
$97 $200
=== ====
-15-
STOREAGE NETWORKING TECHNOLOGIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. Dollars in thousands
NOTE 8:- BALANCES AND TRANSACTIONS WITH RELATED PARTY *)
a. Balances:
The balance is linked to the U.S. Dollar and does not bear
interest. The balance is generally paid on a quarterly basis. As
of the December 31, 2001, the outstanding balance to IIS for
administration services amounts to $ 20.
b. Transactions with I.I.S.*):
December 31,
------------
2001 2000
---- ----
Administration services $112 $131
Purchase of motor vehicles -- 29
Research and development costs 250 20
Other -- (8)
---- ----
$362 $172
==== ====
*) See also Note 1b.
NOTE 9:- LONG-TERM LOANS
Average
interest
rate
--------
%
--------
Linked to the U.S. Dollar 3.79 $37 $109
Less - current maturities 36 69
--- ----
$ 1 $ 40
=== ====
As of December 31, 2001, the aggregate annual maturities
of long-term loans are as follows:
First year (current maturities) $36 $ 69
Second year 1 39
Third year -- 1
--- ----
$37 $109
=== ====
-16-
STOREAGE NETWORKING TECHNOLOGIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. Dollars in thousands
NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES
a. Royalty commitments:
The Company participated in programs sponsored by the Israeli
Government for the support of research and development
activities. The Company is committed to pay royalties to the
Israeli Ministry of Industry and Trade ("the OCS"), amounting to
3%-5% of the proceeds from sales of products in which the
Government participated in their research and development by way
of grants. The commitment is determined on a product-by-product
basis, in an amount not to exceed the total of the grants
received (linked to the U.S. Dollar plus interest rate of LIBOR).
Royalties paid or accrued for the year ended December 31, 2001
amounted to $ 24.
As of December 31, 2001, the Company has an outstanding
contingent obligation (including $ 764 as mentioned in Note 1b)
to pay royalties in the total amount of $ 1,340.
b. Lease commitment:
The Company and its subsidiary rent their facilities under
various operating lease agreements, which expire on various
dates, the latest of which is in 2006. The minimum rental
payments under non-cancelable operating leases are as follows:
Year ended
December 31,
------------
2002 296
2003 121
2004 121
2005 121
2006 56
Total rent expenses for the years ended December 31, 2001 and
2000 were approximately $ 168 and $ 54, respectively.
c. Charges and guarantees:
Various motor vehicles of the Company are pledged at fixed
charges in favor of a bank.
The Company obtained a guarantee in the amount of $ 159 in order
to secure its lease obligation.
-17-
STOREAGE NETWORKING TECHNOLOGIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. Dollars in thousands (except share data)
NOTE 11:- SHAREHOLDERS' EQUITY
a. The rights conferred by the Company's shares:
(1) The Ordinary shares confer upon the holders the right to
receive notice, to participate and vote in general meetings
of the Company, and the right to receive dividends, if
declared.
(2) The Preferred shares ("A" and "B") have the same rights as
the Ordinary shares. In addition, the shares are convertible
into Ordinary shares, have an aggregate preference in
liquidation of $ 30,212 as of December 31, 2001, dividend
preference, anti-dilution rights, preemptive rights,
tag-along rights and preference in voting on certain
matters. The Preferred shares are convertible, at the
holders' option, or upon an IPO of the Company, into
Ordinary shares on a one-for-one basis.
b. Stock split effected as stock dividend:
During 2000, the Company effected a stock split as stock dividend
of 400% on its share capital. All share capital amounts have been
retroactively adjusted to reflect this stock dividend.
c. Investment agreements:
1. During 1999, the Company signed an investment agreement
according to which 3,537,790 Preferred A shares were issued
for the aggregate of $ 3,200.
2. From December 2000 until January 2001, the Company signed an
investment agreement, according to which 7,605,836 Preferred
B shares were issued for $ 3.287 per share in the aggregate
of $ 25,000.
As a result of the above agreement, the Company repaid during
2000 the shareholders' loans received from I.I.S. amounting to
$543.
d. Stock option plans:
Under the Company's Stock Option Plans (the "Plans"), options may
be granted to officers, directors, employees and consultants of
the Company or its subsidiary.
Pursuant to the Plans, the Company reserved for issuance
4,631,545 Ordinary shares. As of December 31, 2001, an aggregate
of 676,765 Ordinary shares of the Company are still available for
future grant.
Each option granted under the Plans is exercisable until the
earlier of ten years from the date of the grant of the option or
the expiration dates of the respective option plans.
-18-
STOREAGE NETWORKING TECHNOLOGIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. Dollars in thousands (except share data)
NOTE 11:- SHAREHOLDERS' EQUITY (cont.)
The options vest primarily over four years. Any options, which
are forfeited or not exercised before expiration, become
available for future grants.
A summary of the Company's stock option activity in 2001 and
2000:
Year ended December 31,
-------------------------------------------
2001 2000
-------------------- --------------------
Weighted Weighted
Number average Number average
of exercise of exercise
options price options price
--------- -------- --------- --------
Outstanding at beginning of year 1,877,780 $0.15 -- $ --
Granted 2,023,000 0.75 1,977,780 0.15
Exercised -- -- (25,000) 0.10
Forfeited (31,000) 0.75 (75,000) 0.10
--------- ----- --------- -----
Outstanding at end of year 3,869,780 $0.46 1,877,780 $0.15
========= ===== ========= =====
Exercisable options 894,390 $0.13 425,945 $0.10
========= ===== ========= =====
For exercise prices on the date of grant that
---------------------------------------------
Equal Exceed Are less than
fair value fair value fair value
------------ ------------ -------------
December 31, December 31, December 31,
------------ ------------ -------------
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
Weighted average
exercise prices -- -- 0.75 0.15 -- --
Weighted average fair
values on date of grant -- -- 0.08 0.05 -- --
The options outstanding as of December 31, 2001, have been
separated into ranges of exercise price as follows:
Options Weighted Weighted
Outstanding average Option average
as of remaining Weighted Exercisable at exercise price
exercise December 31, contractual average December 31, of options
price 2001 life exercise price 2001 exercisable
-------- ------------ ----------- -------------- -------------- --------------
$ Years $ $
-------- ----------- -------------- --------------
0.10 1,703,780 8.12 0.10 851,890 0.10
0.50 40,000 8.46 0.50 10,000 0.50
0.75 2,126,000 9.55 0.75 32,500 0.75
--------- -------
3,869,780 8.91 0.46 894,390 0.13
========= =======
-19-
STOREAGE NETWORKING TECHNOLOGIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. Dollars in thousands (except share data)
NOTE 11:- SHAREHOLDERS' EQUITY (cont.)
Pro forma information regarding net loss is required by SFAS No.
123 and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the
date of the grant using the Black-Scholes Option Valuation Model
with the following weighted-average assumptions for the year
ended December 31, 2001 and 2000: expected volatility of 0.5 for
each year; risk-free interest rates of 3% and 7% respectively,
dividend yields of 0% for each year, and a weighted-average
expected life of the option of 5 and 6 years, respectively.
For purposes of pro forma disclosure, the estimated fair value of
the options is amortized to expense over the options' vesting
period. Pro forma information under SFAS-123:
Year ended
December 31,
---------------
2001 2000
------ ------
Net loss as reported $4,487 $1,786
====== ======
Pro forma net loss $4,552 $1,853
====== ======
e. Options granted to consultants:
1. The Company's outstanding options to consultants as of
December 31, 2001, are as follows:
Options for Exercise
Ordinary price Options
Issuance date shares per share exercisable
----------------- ----------- --------- -----------
June 2001 (* 60,000 0.75 --
(*) The options vest over four years
2. The Company had accounted for its options to consultants
under the fair value method of SFAS No. 123 and EITF 96-18.
The fair value for these warrants was estimated using a
Black-Scholes Option-Pricing Model with the following
weighted-average assumptions for 2001: risk-free interest
rate of 3%, dividend yields of 0%, expected volatility of
0.5, and a weighted-average expected life of the warrants of
approximately 5 years.
3. In connection with the granting of stock options to
consultants, the Company recorded stock compensation
expenses totaling $ 2 through December 31, 2001.
-20-
STOREAGE NETWORKING TECHNOLOGIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. Dollars in thousands (except share data)
NOTE 11:- SHAREHOLDERS' EQUITY (cont.)
f. Warrants issued to investors:
During December 2000 and January 2001 the Company issued to
certain investors warrants to purchase 2,875,006 Preferred B
shares at a price of $ 4.93 per share. The warrants are
exercisable until the earlier of:
1 The Initial Public Offering of the Company's shares for net
proceeds of more than $ 30 million and which reflects a
pre-offering valuation of the Company of more than $ 150
million.
2. The consummation of a merger, reorganization, acquisition,
or sale of all or substantially all of the assets of the
Company in which the current holders of the Company's share
capital hold less than 50% of the voting power of the
surviving entity and which reflects a pre-transaction
valuation of more than $ 200 million.
3. Three years from the closing date of the Preferred B share
purchase agreement.
NOTE 12:- INCOME TAXES
a. Measurement of taxable income under the Income Tax (Inflationary
Adjustments) Law, 1985:
Results for tax purposes are measured in terms of earnings in NIS
after certain adjustments for increases in the Israeli Consumers
Price Index ("CPI"). As explained in Note 2b, the financial
statements are measured in U.S. Dollars. The difference between
the annual change in the Israeli CPI and in the NIS/Dollar
exchange rate causes a further difference between taxable income
and the income before taxes shown in the financial statements. In
accordance with paragraph 9(f) of SFAS No. 109, the Company has
not provided deferred income taxes on the difference between the
functional currency and the tax bases of assets and liabilities.
b. Tax benefit under the Law for the Encouragement of Capital
Investments, 1959:
The Company has been granted an "approved enterprise" status
under the above law and has elected to enjoy the "alternative
system of benefits" - waiver of grants in return to tax
exemption. Income derived from approved enterprises is tax exempt
for a period of two years out of 7-year period of benefits.
Income derived during the remaining five years of benefits is
entitled to reduction in tax rates. The period of benefits
commences with the first year in which the company has realized a
taxable income. The period of benefits relating to the approved
enterprise will expire in the years 2012 through 2014.
-21-
STOREAGE NETWORKING TECHNOLOGIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. Dollars in thousands
NOTE 12:- INCOME TAXES (cont.)
If the tax-exempt income attributable to the approved enterprise is
distributed in a manner other than in the complete liquidation of the
Company, it would be taxed at the corporate tax rate applicable to
such profits as if the Company had not chosen the alternative system
of benefits (currently - 25%).
The entitlement to the above benefits is conditional upon the
Company's fulfilling the conditions stipulated by the above law,
regulations published thereunder and the instruments of approval for
the specific investments in "approved enterprises". In the event of
failure to comply with these conditions, the benefits may be canceled
and the Company may be required to refund the amount of the benefits,
in whole or in part, including interest.
Income not eligible for "approval enterprise" benefits mentioned above
is taxed at the regular rate of 36%.
c. Deferred 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.
Significant components of the Company and its Subsidiary deferred tax
assets are as follows:
December 31,
-----------------
2001 2000
------- -------
Provision for vacation and severance pay $ 60 $ 55
Amortization 212 278
Loss carryforward 2,616 1,133
------- -------
Net deferred tax asset before valuation allowance 2,888 1,466
Valuation allowance (2,888) (1,466)
------- -------
Net deferred tax assets $ -- $ --
======= =======
As of December 31, 2001, the Company and its subsidiary have provided
valuation allowances of approximately $ 2,888 in respect of deferred
tax assets resulting from tax loss carryforwards and other temporary
differences. Management currently believes that it is more likely than
not that the deferred tax regarding the loss carryforwards and other
temporary differences will not be realized in the foreseeable future.
-22-
STOREAGE NETWORKING TECHNOLOGIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. Dollars in thousands
NOTE 12:- INCOME TAXES (cont.)
d. Net operating losses carryforward:
The Company and its subsidiary have accumulated losses for tax
purposes as of December 31, 2001, in the amount of $ 7,129; as
follows: $ 5,898 in Israel and $ 1,231 in the U.S.
Carryforward tax losses in Israel are linked to the Israeli CPI,
and can be carried forward and offset against taxable income in
the future for an indefinite period.
Carryforward tax losses in the U.S. expire from 2010 to 2012.
NOTE 13:- SELECTED STATEMENTS OF OPERATIONS DATA
a. Research and development costs, net:
Year ended
December 31,
---------------
2001 2000
------ ------
Total cost $3,212 $1,288
Less - grants and participation -- 386
------ ------
$3,212 $ 902
====== ======
b. Sales and marketing expenses, net:
Total cost $1,444 $ 639
Less - grants and participation 40 --
------ ------
$1,404 $ 639
====== ======
NOTE 14:- SEGMENT, CUSTOMERS AND GEOGRAPHIC INFORMATION
a. Summary information about geographical areas:
The Company operates in one industry segment. Operations in
Israel include research and development, selling and marketing.
Operations in the United States include selling and marketing.
The Company has adopted SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information".
-23-
STOREAGE NETWORKING TECHNOLOGIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. Dollars in thousands
NOTE 14:- SEGMENT, CUSTOMERS AND GEOGRAPHIC INFORMATION (cont.)
The following is a summary of operations within geographic areas
based on customer's location.
Year ended
December 31,
-------------
2001 2000
------ ----
Revenues from sales to unaffiliated customers:
U.S.A $ 508 $ 41
Europe 145 15
Israel -- 10
Others 30 --
------ ----
$ 683 $ 66
====== ====
Long-lived assets, by geographic areas:
Israel $1,157 $563
United States 270 83
------ ----
$1,427 $646
====== ====
b. Major customer data as percentage of total revenues:
Customer A 31% 12%
Customer B 22% 50%
Customer C 15% --
Customer D -- 15%
Customer E 3% 15%
----------
-24-
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.**
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 Shareholders' Rights Agreement dated as of January 18, 2001 between the
Company, StoreAge and certain investors.**
4.5 Research & Development Subcontracting Agreement effective as of October 15,
2000, between the Company and StoreAge Networking Technologies Ltd.
8.1 List of significant subsidiaries of the Company.
10.1 Consent of Kost Forer and Gabbay, a Member of Ernst & Young International.
10.2 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.
** Incorporated by reference to the corresponding exhibit to the Company's
Annual Report on Form 20-F for the year ended December 31, 2000.