AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 28, 2000
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------
XACCT TECHNOLOGIES (1997) LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-------------
ISRAEL 7372 NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
XACCT TECHNOLOGIES (1997) LTD.
31 HALECHI ST., BNEI-BRAK
51200, ISRAEL
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------
ERIC GRIES
CHIEF EXECUTIVE OFFICER
XACCT TECHNOLOGIES, INC.
2900 LAKESIDE DRIVE
SANTA CLARA, CALIFORNIA 95054
(408) 654-9900
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
-------------
Copies to:
JOHN T. SHERIDAN, ESQ. CHARLES B. GOTTLIEB, ADV. MAYA LIQUORNIK, ADV. WILLIAM D. SHERMAN, ESQ.
JUNLING MA, ESQ. SARIT MOLCHO, ADV. MEITAR, LIQUORNIK, GEVA & CO. JUSTIN L. BASTIAN, ESQ.
ANTHONY KIKUTA, ESQ. S. FRIEDMAN & CO. 16 ABBA HILLEL STREET JACLYN LIU, ESQ.
WILSON SONSINI GOODRICH & ROSATI ADVOCATES AND NOTARIES RAMAT-GAN, ISRAEL MORRISON & FOERSTER LLP
PROFESSIONAL CORPORATION 3 DANIEL FRISCH STREET (972-3) 610-3100 775 PAGE MILL ROAD
650 PAGE MILL ROAD TEL AVIV, ISRAEL PALO ALTO, CALIFORNIA 94304-1018
PALO ALTO, CALIFORNIA 94304-1050 (972-3) 696-0183 (650) 813-5600
(650) 493-9300
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement is declared effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box./ /
If this Form is to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering./ /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering./ /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering./ /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box./ /
-------------
CALCULATION OF REGISTRATION FEE
===========================================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE (1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------
Voting Ordinary Shares, nominal value NIS 0.01 per share.................. $75,000,000 $19,800
===========================================================================================================================
(1) Estimated solely for the purpose of computing the amount of the
registration fee in accordance with Rule 457(a) promulgated under the
Securities Act of 1933.
-------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
===============================================================================
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
*******************************************************************************
SUBJECT TO COMPLETION, DATED MARCH 28, 2000
Shares
[XACCT LOGO]
Ordinary Shares
-------------------
Prior to this offering, there has been no public market for our ordinary
shares. The initial public offering price of the ordinary shares is expected to
be between $ and $ per share. We have applied to list our
ordinary shares on The Nasdaq Stock Market's National Market under the symbol
"XCCT."
The underwriters have an option to purchase a maximum of additional
ordinary shares to cover over-allotments of shares.
INVESTING IN OUR ORDINARY SHARES INVOLVES RISKS. SEE "RISK FACTORS" ON
PAGE 8.
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS XACCT
----------------- ----------------- ----------------
Per Share............................................ $ $ $
Total................................................ $ $ $
Delivery of the ordinary shares will be made on or about , 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We have received from the Securities Authority of the State of Israel an
exemption from Israel's prospectus publication requirements. You should not
construe such exemption as authenticating the matters contained in this
prospectus or as an approval of their reliability or adequacy or as an
expression of opinion as to the quality of the securities offered in this
prospectus.
CREDIT SUISSE FIRST BOSTON
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
The date of this prospectus is , 2000.
[Diagram of XACCT business infrastructure; listing of systems integrators,
value-added resellers, network infrastructure vendors and software applications
vendors with whom we have formed collaborative relationships or strategic
alliances through our XACCTREADY program, including company logos]
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TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY.................................................... 4
RISK FACTORS.......................................................... 8
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS.......................................................... 23
USE OF PROCEEDS....................................................... 24
DIVIDEND POLICY....................................................... 24
CAPITALIZATION........................................................ 25
DILUTION.............................................................. 26
SELECTED CONSOLIDATED FINANCIAL DATA.................................. 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................... 28
BUSINESS.............................................................. 34
MANAGEMENT............................................................ 45
RELATED PARTY TRANSACTIONS............................................ 60
PRINCIPAL SHAREHOLDERS................................................ 63
DESCRIPTION OF SHARE CAPITAL.......................................... 65
SHARES ELIGIBLE FOR FUTURE SALE....................................... 69
U.S. TAX CONSIDERATIONS............................................... 71
ISRAELI TAXATION...................................................... 74
CONDITIONS IN ISRAEL.................................................. 77
UNDERWRITING.......................................................... 79
NOTICE TO CANADIAN RESIDENTS.......................................... 81
LEGAL MATTERS......................................................... 82
EXPERTS............................................................... 82
ENFORCEABILITY OF CIVIL LIABILITIES................................... 83
WHERE YOU CAN FIND MORE INFORMATION................................... 84
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................ F-1
-------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF
THIS OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
3
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the ordinary shares being sold in this
offering and our consolidated financial statements and the related notes
appearing elsewhere in this prospectus.
XACCT
We are a leading provider of intelligent business infrastructure software
for telecommunications carriers, Internet service providers, enterprise network
operators and cable network operators, which we refer to collectively as network
service providers. Our infrastructure platform allows network service providers
to leverage the rapid growth of Internet services and data traffic to increase
revenue opportunities. This foundation technology provides a single point of
interface between the operations and business support systems of network service
providers and the physical network. Network service providers use our platform's
comprehensive real-time data collection, data aggregation and automated user
account provisioning capabilities to deploy new business models and
higher-margin, enhanced services. As of December 31, 1999, we had licensed our
business software to over 20 network service providers. Our customers include
Bell Nexxia, Global One, GTE Internetworking, Harvard University, Mannesman
Ipulsys, MCI Worldcom, Siemens, TV Cabo, Verio and UUNET. In addition, we have
developed strategic alliances or collaborative relationships with a group of
over 70 system integrators, value-added resellers, network infrastructure
vendors and software applications vendors.
As the volume of global Internet traffic has grown and demand for high
value-added, Internet-based services has increased, network service providers
have found that their inability to capture, aggregate and transform the raw data
carried over their networks into meaningful business information has constrained
their revenue generation potential. Network service providers are actively
seeking ways to offer higher-margin, enhanced services, which require a flexible
and scalable software platform that dynamically monitors, aggregates, provisions
and configures multiple service-types across their networks. The Yankee Group
estimates that the market for Internet business infrastructure will grow from
$207 million in 1999 to $7.7 billion in 2004. In addition, The Insight Research
Corporation estimates that the market for operations support systems will grow
from $33.9 billion in 2000 to $58.4 billion in 2005.
Our platform enables network service providers to support flexible,
sophisticated business models with differentiated pricing and services. Our
business infrastructure platform collects and synthesizes a high volume of
network usage data from multiple sources and all layers of the network. Network
service providers can use this real-time data to offer and charge appropriately
for service level agreements or for services based on quality of service,
transactions, events, content or volume. This detailed network information can
also be used to support customer relationship management, customer retention and
fraud management applications. In addition, our platform provides for automated
user account provisioning and user self-provisioning. User self-provisioning
allows a network service provider's users to activate, modify or deactivate
services without the intervention of the network service provider. By automating
the provisioning process, network service providers reduce their costs,
accelerate their time to revenue and increase user satisfaction.
Our infrastructure software has been engineered to meet the demanding and
evolving performance requirements of network service providers. Our software
platform's distributed architecture is designed to support carrier-class network
service providers. By deploying software modules throughout the network, our
distributed software architecture captures usage information from all layers of
the network and scales with the growth of our customers' networks and network
traffic while maintaining data integrity and high system availability. We
believe our solution is fully adaptable to all major network infrastructure
technologies, including hardware, software and operations and business support
systems. We have also designed our products to work with industry standard
protocols to allow for the rapid and seamless assimilation of new, emerging
network standards, devices and applications. Our solution also offers a wide
range of web-based monitoring, management and reporting capabilities.
4
Our objective is to be the leading provider of business infrastructure
solutions to network service providers. Key elements of our strategy for
achieving this objective include:
- Enhancing our product line and extending our technology leadership;
- Expanding our collaborative relationships with technology providers to
enhance our product offerings;
- Expanding and leveraging our relationships with systems integrators
and value-added resellers;
- Leveraging our installed customer base to create new or additional
sales opportunities; and
- Delivering our solution in strategically targeted international
markets.
Our principal executive offices are located at 2900 Lakeside Drive, Santa
Clara, California 95054 and our telephone number is (408) 654-9900. Our World
Wide Web address is www.xacct.com. The information on our web site is not part
of this prospectus.
-------------------
XACCT is a registered trademark in Israel. This prospectus also
contains trademarks and trade names of other companies.
5
THE OFFERING
Ordinary shares offered..................... ordinary shares
Ordinary shares to be outstanding after this
offering................................. ordinary shares
Use of proceeds............................. For expansion of sales, marketing
and distribution activities,
expansion of research and
development activities, working
capital and other general
corporate purposes. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol...... XCCT
The number of ordinary shares to be outstanding after this offering is
based on the number of shares outstanding as of December 31, 1999 and assumes
the exercise of warrants to purchase 2,058,371 preferred shares outstanding as
of December 31, 1999 that expire upon the completion of this offering if
unexercised and the conversion of preferred shares into ordinary shares on a
one-to-one basis, but does not include:
- 1,227,235 preferred shares sold in March 2000;
- 3,113,439 ordinary shares issuable upon exercise of options
outstanding as of December 31, 1999 with a weighted average exercise
price of $0.68 per share;
- 29,050 ordinary shares issuable upon exercise of warrants to purchase
ordinary shares outstanding as of December 31, 1999 with a weighted
average exercise price of $0.30 per share, which warrants do not
expire upon the completion of this offering;
- 3,104,866 ordinary shares available for future issuance under our
share option plans, plus the ordinary shares available for issuance
upon board of director approval under our Section 3(i) share option
plan; and
- 750,000 ordinary shares that will be available for issuance under
our employee share purchase plan.
-------------------
IN THIS PROSPECTUS, "XACCT," "WE," "US" AND "OUR" REFER TO XACCT
TECHNOLOGIES (1997) LTD., A COMPANY ORGANIZED UNDER THE LAWS OF THE STATE OF
ISRAEL AND ITS WHOLLY-OWNED SUBSIDIARIES.
EXCEPT AS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS IS BASED ON
THE FOLLOWING ASSUMPTIONS:
- THE EXERCISE OF OUTSTANDING WARRANTS AS OF DECEMBER 31, 1999 TO
PURCHASE 2,058,371 PREFERRED SHARES AT A WEIGHTED AVERAGE EXERCISE
PRICE OF $6.19, WHICH WARRANTS IF UNEXERCISED WOULD EXPIRE UPON THE
CLOSING OF THIS OFFERING;
- THE CONVERSION OF ALL OF OUR OUTSTANDING PREFERRED SHARES INTO
ORDINARY SHARES UPON THE CLOSING OF THIS OFFERING;
- THE OCCURRENCE OF A RECAPITALIZATION, A RECLASSIFICATION AND A
RIGHTS OFFERING THAT OCCURRED ON JANUARY 31, 2000 IN WHICH EXISTING
SHAREHOLDERS, OPTIONHOLDERS AND WARRANTHOLDERS RECEIVED SIX PREFERRED
OR ORDINARY SHARES FOR EACH PREFERRED OR ORDINARY SHARE HELD AS OF
THAT DATE; AND
- NO EXERCISE OF THE UNDERWRITERS' OVERALLOTMENT OPTION.
UNLESS OTHERWISE SPECIFIED IN THIS PROSPECTUS, ORDINARY SHARES REFER TO
VOTING ORDINARY SHARES AND NON-VOTING ORDINARY SHARES, AND PREFERRED SHARES
REFER TO VOTING PREFERRED SHARES AND NON-VOTING PREFERRED SHARES. PLEASE SEE
"DESCRIPTION OF SHARE CAPITAL" FOR A MORE DETAILED DESCRIPTION OF OUR ORDINARY
AND PREFERRED SHARES.
6
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FROM INCEPTION
(JUNE 1997) TO YEAR ENDED DECEMBER 31,
DECEMBER 31, --------------------------
1997 1998 1999
------------------ ------------ ------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues...................................................... $ -- $ -- $ 1,194
Gross profit.................................................. -- -- 954
Research and development ..................................... 390 1,511 2,243
Sales and marketing .......................................... 127 1,995 6,472
General and administrative ................................... 152 1,033 1,204
Operating loss................................................ (669) (4,539) (9,346)
Net loss...................................................... $ (662) $ (4,434) $ (9,078)
================== ============ =============
Basic and diluted net loss per share.......................... $ (0.30) $ (1.17) $ (2.34)
================== ============ =============
Weighted average number of shares used in computing basic 2,192,400 3,804,874 3,886,495
and diluted net loss per share.............................================== ============ =============
Pro forma basic and diluted net loss per share................ $ (0.67)
=============
Pro forma weighted average number of shares used in 13,566,732
computing basic and diluted net loss per share............. =============
DECEMBER 31, 1999
-------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
------------- ------------ ------------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..................................... $ 17,309 $ 44,183 $
Working capital............................................... 17,356 44,230
Total assets.................................................. 20,086 46,960
Shareholders' equity.......................................... 17,827 44,701
See note 2 to our consolidated financial statements for an explanation of
the number of shares used to compute basic and diluted net loss per share.
The pro forma consolidated balance sheet data reflects:
- the receipt of net proceeds of $14.3 million from the sale of
1,227,235 preferred shares in March 2000;
- the exercise of outstanding warrants as of December 31, 1999 to
purchase 2,058,371 preferred shares at a weighted average exercise
price of $6.19 per share, which warrants if unexercised would
expire upon the completion of this offering; and
- the conversion of all issued and outstanding preferred shares into
ordinary shares.
The pro forma as adjusted consolidated balance sheet data reflects the
application of the net proceeds from the sale by us of ordinary shares in this
offering at the assumed initial public offering price of $ per ordinary share,
after deducting estimated underwriting discounts and estimated offering expenses
payable by us.
7
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR ORDINARY SHARES.
ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE
CURRENTLY SEE AS IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF
THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE HARMED, THE TRADING
PRICE OF OUR ORDINARY SHARES COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT.
RISKS RELATED TO THE COMPANY
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR PROSPECTS AND
THE MERITS OF INVESTING IN OUR ORDINARY SHARES, AND OUR FUTURE FINANCIAL
PERFORMANCE MAY DISAPPOINT SECURITIES ANALYSTS OR INVESTORS AND RESULT IN A
DECLINE IN OUR SHARE PRICE.
We were incorporated in June 1997. Until December 1998, we were engaged
primarily in the research and development of our initial product. We entered
into our first commercial license in January 1999 and have only recently
expanded our sales and service organizations. As a result of our limited
operating history, we have limited financial data that you can use to evaluate
our business. Moreover, the revenue and profitability potential of our market is
unproven. You must consider our prospects in light of the risks, expenses and
challenges we might encounter because we are at an early stage of development in
a new and rapidly evolving market. We may not successfully address these risks,
and our business strategy may not prove successful.
WE HAVE A LARGE ACCUMULATED DEFICIT, WE EXPECT FUTURE LOSSES AND WE MAY NOT
ACHIEVE OR MAINTAIN PROFITABILITY.
We have incurred substantial losses since our inception as we funded the
development of our product and technologies, and expanded our sales and
marketing organizations. Our net losses were $4.4 million for 1998 and $9.1
million for 1999. As of December 31, 1999, we had an accumulated deficit of
$14.2 million.
In order to become profitable, we must increase our revenues. We may not be
able to increase or even maintain our revenues, and we cannot predict when we
will operate profitably, if at all. Even if sales of our XACCTUSAGE product line
continue to grow, we expect to incur net losses for the foreseeable future due
to anticipated spending increases primarily on sales, marketing and research and
development efforts. Moreover, expected increases in competition will make it
difficult to increase our revenues. Even if we are able to increase revenues, we
may experience price competition, which could lower our gross margins and our
profitability. In addition, we anticipate that we may increase the percentage of
our revenues derived from indirect channels and services, which may carry lower
margin percentages than our direct sales and consequently may lower our gross
margin percentages. Even if we do achieve profitability, we may not sustain or
increase profitability on a quarterly or annual basis.
OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY, AND AN UNANTICIPATED DECLINE IN
REVENUES MAY DISAPPOINT SECURITIES ANALYSTS OR INVESTORS AND RESULT IN A DECLINE
IN OUR SHARE PRICE.
Our growth rates may not be sustainable and you should not use our past
performance to predict future operating margins or results. We believe that
period-to-period comparisons of our historical results of operations are not
meaningful and are not a good predictor of our future performance. Our quarterly
operating results have fluctuated significantly in the past and we expect them
to fluctuate significantly in the future. Factors that could cause quarterly
fluctuations in our operating results include:
- variations in demand for the XACCTUSAGE platform and related products
and services;
- our ability to develop, introduce and attain market acceptance of
enhancements to XACCTUSAGE and new related products and services on a
timely basis;
- new product and service introductions and pricing changes by our
competitors;
- the mix of products and services sold by us and our competitors;
- the mix of sales channels through which our products and services are
sold;
8
- the mix of our U.S. and international sales;
- the timing and nature of new product announcements, introductions or
modifications by vendors of software applications, computer hardware
and software platforms and networking products that work with our
product line; and
- our ability to expand our operations, and the amount and timing of
expenditures to expand our operations, including costs related to
acquisitions of technologies and businesses.
We forecast the volume and timing of orders for operational planning, but
these forecasts are based on many factors and subjective judgments. We
cannot assure you of their accuracy. If our forecasts for revenues or expenses
were to prove materially inaccurate, our financial results could be harmed.
Because of our limited operating history, we have limited insight into trends
that may emerge in our market and affect our business. Forecasting for
operational planning is further complicated by our recent rapid growth.
As a result of the foregoing factors, it is likely that in some future
quarters or years our operating results will fall below the expectations of
securities analysts or investors, causing our share price to decline.
OUR REVENUES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AS A RESULT OF
VARIATIONS IN THE TIMING AND VOLUME OF CUSTOMER ORDERS FOR XACCTUSAGE AND
RELATED PRODUCTS AND SERVICES, WHICH MAY RESULT IN A DECLINE IN OUR ORDINARY
SHARE PRICE.
Our revenues and operating results in any given quarter or year depend upon
the volume and timing of customer orders and payments and the date of product
delivery. Historically, a substantial portion of our revenues in any given
quarter has been recorded in the third month of that quarter, and specifically
the last week of that quarter. We expect this trend to continue and intensify.
Since our operating expenses are based on anticipated revenues and because a
high percentage of these expenses are relatively fixed, a delay in a sale or
revenue recognition for a sale could cause significant variations in our
operating results from quarter to quarter and cause unexpected results.
Significant sales may also occur earlier than expected, which could cause
operating results for later quarters to compare unfavorably with operating
results for earlier quarters.
We primarily depend upon new contracts and purchase orders to generate
revenues for each quarter. However, new contracts may not result in revenues in
the quarter in which the contracts were signed, and we may not be able to
predict accurately when revenues from those contracts will be recognized.
As a result of the foregoing factors, it is likely that in some future
quarters our revenues will fall below our expectations and our financial
performance will be harmed.
BECAUSE OUR SALES AND IMPLEMENTATION CYCLES FOR OUR PRODUCTS ARE LONG AND OFTEN
UNPREDICTABLE, OUR REVENUES AND OPERATING RESULTS MAY VARY SIGNIFICANTLY FROM
QUARTER TO QUARTER, WHICH MAY CAUSE OUR ORDINARY SHARE PRICE TO FLUCTUATE.
Customers often use our product line to deploy mission-critical solutions
for their businesses. Our customers generally consider a wide range of issues
before committing to license our products, including assessing the benefits of
our products and our competitors' products, as well as assessing the ability of
our products to operate with existing and future computer systems and
accommodate increased transaction volume and product reliability. Many of our
customers will be addressing these issues for the first time. As a result, we or
other parties, including system integrators, must educate potential customers on
the use and benefits of our products and services. In addition, the purchase of
our products generally involves a significant commitment of capital and other
resources by a customer. This commitment often requires significant technical
review, assessment of competitive products, approval at a number of management
levels within the customer's organization and dedication of personnel support to
facilitate the deployment of our products.
Because of these considerations and challenges, our sales cycle, from
initial evaluation to installation and acceptance, generally has ranged from
three to nine months and is difficult to predict for any particular transaction
or customer. Our customers often begin by licensing our products on a trial
basis before committing to additional licenses for full deployment. Furthermore,
our customers tend to deploy the XACCTUSAGE infrastructure slowly, depending
upon the customer's capabilities, the size of deployment, the complexity of the
customer's network environment and the quantity of the hardware and the degree
of hardware configuration necessary to deploy our
9
products. The long and often unpredictable sales and implementation cycles
for our products may cause revenues and operating results to vary significantly
from quarter to quarter.
BECAUSE A SMALL NUMBER OF CUSTOMERS ACCOUNT FOR AND ARE LIKELY TO CONTINUE TO
ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR REVENUES, THE LOSS OF ONE OF THESE
CUSTOMERS OR THE CANCELLATION OR DEFERMENT OF A CUSTOMER'S ORDER WOULD CAUSE OUR
REVENUES TO DECLINE SUBSTANTIALLY AND MAY RESULT IN A DECLINE IN OUR SHARE
PRICE.
A relatively small number of customers account for a significant portion of
our total revenues. In 1999, sales to our ten largest customers accounted for
83.6% of our revenues. In 1999, sales to TV Cabo, UUNET, GTE Internetworkings
and Verio accounted for 51.4% of our revenues. Moreover, some of the companies
in our target market of network service providers are consolidating, which could
reduce the number of available potential customers. The loss of a single
customer might cause our revenues to decline substantially or fall short of our
expectations. In addition, we derive and expect to continue to derive a
significant portion of our software license revenues in each quarter from a
small number of relatively large customer orders. For example, in each of the
four quarters in the period ended December 31, 1999, we had at least one
customer that accounted for at least 17.5% of our revenues for the quarter. If a
large order is canceled or deferred or if an anticipated order does not
materialize, our operating results for a particular quarter could be
significantly harmed.
IF WE DO NOT CONTINUE TO ADD NEW CUSTOMERS, WE WILL NOT BE ABLE TO INCREASE OR
SUSTAIN OUR REVENUES.
Our license agreements do not generally provide for substantial ongoing
license payments. Therefore, our future revenue growth depends on our success in
attracting new customers or expanding our relationships with existing customers.
Our ability to attract new customers and expand our relationships with existing
customers will depend on a variety of factors, including the performance,
quality, breadth and depth of our current and future products. Our failure to
add new customers or expand our relationships with existing customers would
reduce our future revenues.
IF WE CANNOT CONVINCE NETWORK SERVICE PROVIDERS THAT OUR SOLUTION PROVIDES A
MEANS TO EXPAND THEIR REVENUE GENERATION POTENTIAL, WE WILL BE UNABLE TO
INCREASE OR SUSTAIN OUR REVENUES.
Our solution offers a business infrastructure platform that is designed to
enable network service providers to implement new business models and offer
higher-margin, enhanced services to expand their revenue generation potential.
The market for business infrastructure software for network service providers
has only recently emerged and is rapidly evolving. A viable market for business
infrastructure software, and for XACCTusage in particular, may not develop and
our product line may not achieve or sustain market acceptance. Our solution has
achieved only limited adoption and there is limited information upon which to
evaluate whether a large number of potential customers will purchase our
solution to replace or expand their existing revenue generation models. In
addition, we cannot assure you that a superior solution enabling network service
providers to better capitalize on the growth of Internet services and data
traffic will not emerge. If we cannot convince network service providers that
our solution is superior to their current revenue generation models that are
based on flat-fee pricing or if we cannot educate potential customers, and
specifically their senior management, on the use and benefits of our products,
we will be unable to increase or sustain revenues. Further, if network service
providers develop their own business infrastructure solutions or decrease their
spending on business infrastructure or if we fail to penetrate these markets,
our operating results will suffer.
IF WE CANNOT MEET THE TECHNICAL AND CAPACITY REQUIREMENTS OF NETWORK SERVICE
PROVIDERS, WE WILL BE UNABLE TO INCREASE OR SUSTAIN OUR REVENUES.
Our product line may not be capable of satisfying the demanding technical
and capacity requirements of network service providers, many of which require
performance levels far in excess of that for which our products have been used
to date. We have only licensed our product line to a small number of customers,
and only a portion of these customers has commenced commercial deployment.
Moreover, network service providers will likely have changing requirements that
will require us to change our product designs or features, sales methods,
support capabilities or pricing policies. We may not successfully upgrade
XACCTusage, and we may not successfully develop new products or services
that meet the expanding needs of network service providers. If we
cannot continue to meet the expanding requirements of network service providers,
we will be unable to increase or sustain our revenues.
10
OUR OPERATING RESULTS TO DATE HAVE DEPENDED UPON REVENUES FROM ONE PRODUCT LINE,
XACCTUSAGE, AND OUR BUSINESS COULD BE MATERIALLY HARMED BY FACTORS THAT
ADVERSELY AFFECT THE PRICING AND DEMAND FOR THAT PRODUCT LINE.
Our future growth depends upon the commercial success of XACCTUSAGE. We
currently derive all of our revenues from the licensing, maintenance and support
of our XACCTUSAGE product line. We expect that we will continue to rely on new
and enhanced versions of XACCTUSAGE for a substantial portion of our revenues
for the foreseeable future. However, the limited sales and deployment of our
product line make our future prospects difficult to predict.
Any decline in demand for XACCTUSAGE as a result of competition,
technological change or other factors would significantly reduce our revenues.
IF OUR PRODUCT LINE FAILS TO OPERATE WITH THE MANY HARDWARE, SOFTWARE AND
NETWORKING PLATFORMS USED BY OUR CUSTOMERS, OUR BUSINESS MAY FAIL.
We currently target a customer base that uses a wide variety of constantly
changing software applications and programming tools, network infrastructure
products and hardware and software platforms. The success of our product
line depends upon our ability to address technical challenges, including:
- integrating our XACCTUSAGE product line with multiple software
applications and programming tools, network infrastructure products,
hardware and software platforms and existing systems, and modifying
our product line as new applications, platforms, products and systems
are introduced;
- expanding the functionality of our product line, particularly the
number of operating systems and databases that our product line can
source or target and the ability of our products to process a high
number of transactions per second;
- anticipating and supporting new standards, especially Internet
standards; and
- integrating additional software modules under development with our
existing product line.
If our product line fails to satisfy these demanding and rapidly changing
technological challenges, our customers will be dissatisfied and we may be
unable to generate significant future sales.
IF WE DO NOT DEVELOP AND MAINTAIN SUCCESSFUL RELATIONSHIPS WITH SYSTEMS
INTEGRATORS AND OTHER TECHNOLOGY PROVIDERS, OUR ABILITY TO MARKET AND SELL OUR
PRODUCTS BE HARMED.
We have entered into relationships with third-party systems integrators
that implement and increasingly resell XACCTUSAGE and related products and
services. We also have relationships with software applications, networking
products, hardware and software platform vendors to increase the flexibility of
our software platform and to pursue joint sales and marketing opportunities. We
have derived, and anticipate that we will continue to derive, a significant
portion of our revenues from customers that have relationships with these
technology providers. We could lose sales and marketing opportunities if we fail
to work effectively with these parties or fail to grow our base of applications,
networking products or platform vendors. We are currently investing and plan to
continue to invest significant resources to develop these relationships. Our
operating results could be adversely affected if these efforts do not generate
license and service revenues necessary to offset our significant investment in
building these relationships.
Many of our technology providers also work with competing software
companies. Our success will depend upon the willingness of these providers to
select our solution as superior to competing alternatives and to devote
sufficient resources to market our product. We may not be able to enter into
additional, or maintain our existing, strategic relationships on commercially
reasonable terms, or at all. Our agreements with these parties typically are in
the form of nonexclusive agreements. Competing priorities may limit their
willingness to aggressively market and sell our products. Further,
notwithstanding our agreements with these parties, any party may discontinue
marketing our products or terminate our relationship without cause or on limited
notice. If these relationships fail, we will have to devote substantially more
resources to the distribution, sales, marketing, implementation and support of
our XACCTUSAGE product line than we would otherwise, and our singular efforts
may not be as effective as joint efforts. Technology providers may also pursue
other relationships and may attempt to develop or acquire products and services
that compete with our products and services. Our strategic relationships may
also interfere with our ability to enter into other desirable strategic
relationships.
11
OUR BUSINESS WILL SUFFER IF WE FAIL TO INTRODUCE NEW VERSIONS AND RELEASES OF
OUR PRODUCTS IN A TIMELY MANNER.
In the past we have failed to release some new products and upgrades on
time. We cannot assure you that we will meet project milestones for new versions
and releases. If we fail to develop and introduce new versions and releases of
our products in a timely manner and on a cost-effective basis, we could
experience:
- loss of or delay in revenues and loss of market share;
- customer dissatisfaction, loss of customers and cancellation of orders
and license agreements;
- failure to achieve market acceptance;
- diversion of development resources;
- negative publicity and injury to our reputation;
- increased service and warranty costs;
- legal actions by customers against us; and
- increased insurance costs.
IF OUR SOFTWARE CONTAINS ERRORS OR DESIGN FLAWS OR HAS AN ADVERSE IMPACT UPON
OUR CUSTOMERS' NETWORKS, WE MAY LOSE CUSTOMERS, OUR COSTS WILL INCREASE AND
REVENUES MAY BE DELAYED OR LOST.
Computer software such as ours generally contains undetected errors and may
contain design flaws that may adversely impact a user's networks. Because
customers use XACCTUSAGE to perform mission-critical applications, any problem
caused by our products may cause negative publicity and seriously harm our
reputation. Contractual limitations on liability contained in our license
agreements may not be enforceable, and we may be subject to claims based on
errors or design flaws in our software or mistakes in performing our services,
including claims relating to damages to our customers' internal systems. A
product liability claim, whether or not successful, could harm our business by
increasing our costs, damaging our reputation and distracting our management and
technical personnel.
THE UNAVAILABILITY OF AND DEFECTS IN THIRD PARTY SOFTWARE THAT WE INCORPORATE
INTO XACCTUSAGE COULD RESULT IN DELAYED OR LOST SALES AND INCREASED EXPENSES.
Portions of XACCTUSAGE incorporate software developed and maintained by
third-party software vendors, such as operating systems, tools and database
vendors. For example, our programs use Java programming technology provided by
Sun Microsystems and database servers provided by Oracle. We expect that we may
have to incorporate software from third party vendors and developers to a larger
degree in our future products. Any significant interruption in the availability
of these third-party software products or defects in these products or future
products could harm our sales unless and until we can secure another source. We
may not be able to replace the functionality provided by third-party software
currently offered with our products if that software becomes obsolete, defective
or incompatible with future versions of our products or is not adequately
maintained or updated. The absence of, or any significant delay in, the
replacement of that functionality could result in delayed or lost sales and
increased costs and could harm our business.
We also depend upon access to application programming interfaces used for
communication between external software products and packaged application
software. Application providers control our access to their application
programming interfaces. If these application providers deny or delay our access
to application programming interfaces, our business may be harmed. Some
application providers may become competitors or establish alliances with our
competitors, thereby, increasing the likelihood that we would not be granted
access to their application programming interfaces.
IF WE CANNOT SUCCESSFULLY EXPAND OUR SALES AND DISTRIBUTION CAPABILITIES, WE MAY
BE UNABLE TO INCREASE MARKET AWARENESS AND SALES OF OUR XACCTUSAGE PRODUCT LINE.
We must expand our direct and indirect sales operations to increase market
acceptance of XACCTUSAGE and related product and services and to increase our
revenues. We may not be successful in these efforts. There is a shortage of
direct sales personnel with the skills and expertise necessary to sell our
products. Moreover, because our product line and services require sophisticated
sales efforts targeted at the senior management of our prospective
12
customers, new hires will require training before they can achieve productivity.
We may not be able to hire enough qualified individuals in the future, and our
recently hired sales personnel may not achieve expected productivity levels. We
also plan to expand our relationships with systems integrators and other third
party resellers to build an indirect sales channel. Accordingly, we will need to
manage potential conflicts between our direct and indirect sales forces. Failure
to expand our sales channels and manage their expansion would harm our revenues
and operating results and place us at a competitive disadvantage.
OUR GROWTH MAY SUFFER IF WE ARE UNABLE TO IMPLEMENT OUR PRODUCTS IN A TIMELY
MANNER.
The use of our products by our customers requires consulting and
implementation services. While we have recently established relationships with
some third party providers, we continue to be the primary provider of consulting
and implementation services for our products. It is difficult and expensive to
recruit, train and retain qualified personnel to perform these services, and we
may from time to time have inadequate levels of staffing to perform these
services. As a result, our growth could be limited due to our lack of capacity
to provide consulting and implementation services or our inability to
subcontract these services to qualified third parties. In addition, we could
experience deterioration in service levels or decreased customer satisfaction,
any of which could harm our reputation and operating results.
UNANTICIPATED DIFFICULTIES IN IMPLEMENTING OUR PRODUCTS COULD SIGNIFICANTLY HARM
OUR REPUTATION WITH CUSTOMERS, INCREASE OUR COSTS AND DIMINISH OUR ABILITY TO
LICENSE ADDITIONAL PRODUCTS TO OUR CUSTOMERS.
Our products are often purchased as part of large projects undertaken by
our customers. The costs of our products and services represent only a portion
of the related hardware, software, development, training and consulting costs of
these projects. The significant involvement of third parties, including system
integrators, reduces the control we have over the implementation of our products
and the level, quality and timeliness of service provided to customers that
license our software. These projects are complex, time consuming and expensive
and typically involve working with sophisticated software, computing and
communications systems. In many cases, our customers must interact with, modify
or replace significant elements of their existing computer systems. Some
customers may require us to develop costly customized features or capabilities,
which increase our costs and consume our limited professional service and
customer support resources. Failure by customers to successfully deploy our
products, or the failure by third-party consultants or us to ensure customer
satisfaction, could damage our reputation with existing and future customers and
reduce future revenues.
If we experience difficulties with an implementation or do not meet project
milestones in a timely manner, we could be obligated to devote more customer
support, engineering and other resources to a particular project and to provide
these services at reduced or no cost.
IF WE ARE UNABLE TO INCREASE SERVICE REVENUES, OUR OPERATING RESULTS WILL BE
ADVERSELY AFFECTED.
Our service revenues are derived from support and maintenance arrangements,
including product upgrades, consulting and training, and are becoming a larger
component of our revenues. Service revenues constituted 25% of our revenues in
1999. The level of service revenues depends significantly on our ability to
continue to obtain renewals of customer support contracts by our installed
customer base, to provide effective customer care services and to release
product updates and modifications on a timely basis. Customer service,
support and maintenance contracts typically have 12-month terms and the growth
of our service revenues depend in part upon the renewal rates of those
contracts. If third party organizations such as systems integrators become
proficient in installing or servicing our product line, we may lose customer
support contracts and our service revenues could decline. In addition, if we are
unable to increase the scale of our service organization, including successfully
recruiting and training a sufficient number of qualified services personnel, we
may not be able to increase service revenues.
IF WE FAIL TO PROTECT OUR XACCT TRADEMARK, THE VALUE OF THE XACCT NAME WOULD
DECREASE AND WE MAY LOSE CUSTOMERS TO COMPETITORS.
We have received an initial refusal of our application to register our
XACCT trademark in the United States. We are currently preparing a response to
the United States trademark office. If we receive a final rejection of our
application to register the XACCT trademark, we will likely experience greater
expense and difficulty in protecting the XACCT mark and its derivations. We may
not be able to enforce rights in our trademarks, and we may not be able to use
our trademarks in all jurisdictions. If the XACCT trademark is invalidated
through legal action, or if we
13
were prevented from using our trademarks, we would need to rebuild our brand
identity and reputation with our customers, system integrators, value-added
resellers, network infrastructure vendors and software application vendors. We
would also have to devise new collateral materials. If we needed to rebuild our
brand identity or devise new collateral materials, our operating expenses would
substantially increase and our business would be harmed. Conversely, we may be
unable to stop others from using similar marks in connection with other goods
and services. If that happens, our existing and potential customers and system
integrators, value-added resellers, network infrastructure vendors and software
application vendors could confuse us and our products and services with another
company and its products and services. This could weaken the value of the XACCT
name and result in the loss of business to our competitors, either of which
would harm our operating results.
WE COULD BE CHARGED WITH TRADEMARK INFRINGEMENT AND INCUR SIGNIFICANT COSTS IN
CONTESTING THESE CHARGES AND FOR ANY RELATED LIABILITY.
Other companies that use or have registrations for terms similar to XACCT
for various products and services or for their company or brand name could claim
that we are infringing their federal or state trademark rights by our use of the
mark XACCT or its derivations. An infringement claim of that nature, whether
meritorious or not, could be time consuming and result in the diversion of
management resources and costly litigation. In addition, it could result in our
loss of the right to use the mark XACCT and its derivations, including the right
to use them:
- in our corporate name;
- as part of the services we offer; and
- as part of our web site address, which is currently WWW.XACCT.COM.
Litigation or settlement of an infringement claim could also require us to
pay damages or enter into royalty or licensing agreements on terms that are
unfavorable to us. If we are unable to use the mark XACCT and its derivations,
we will be required to adopt a new company and brand name and to market our
products and services under a new name. To do so, we will be required to incur
significant costs. Any of those events could significantly harm our business.
OUR GROWTH CONTINUES TO PLACE A SIGNIFICANT STRAIN ON OUR MANAGEMENT SYSTEMS AND
RESOURCES, AND IF WE FAIL TO MANAGE OUR GROWTH, OUR ABILITY TO MARKET AND SELL
OUR XACCTUSAGE PRODUCT LINE AND DEVELOP NEW PRODUCTS MAY BE HARMED.
We must plan and manage our growth in order to effectively market and sell
our product line and services and achieve revenue growth and profitability in a
rapidly evolving market. Our growth has and will continue to place a significant
strain on our management systems and resources, and we may not be able to
effectively manage our growth in the future. We continue to increase the scope
of our operations both in the U.S. and internationally, and have added a number
of employees. For example, the number of our employees grew from 40 at December
31, 1997 to 94 at December 31, 1999. In particular, our sales force grew from
one person at December 31, 1997 to 22 people at December 31, 1999. For us to
effectively manage our growth, we must continue to do the following:
- improve our operational, financial and management controls;
- improve our reporting systems and procedures;
- install new management and information control systems; and
- expand, train, motivate and manage our workforce.
Additionally, we expect that we will have to continue to expand our
facilities and may face difficulties and significant expenses identifying and
moving into suitable office space. Expanding our operations will require
significant management attention and financial resources. We cannot be certain
that our investments in our growth will produce desired levels of revenue. Our
business will suffer dramatically if we fail to effectively manage our growth.
14
IF WE FAIL TO ATTRACT AND RETAIN QUALIFIED PERSONNEL, OR IF OUR MANAGEMENT FAILS
TO OPERATE EFFECTIVELY, WE WILL NOT BE ABLE TO IMPLEMENT OUR BUSINESS STRATEGY
OR OPERATE OUR BUSINESS EFFECTIVELY.
Our success depends upon the continued services of our senior management
and other key personnel, many of whom would be difficult to replace. The loss of
any of these individuals would harm our ability to implement our business
strategy and to operate our business effectively. In particular, the services of
Eric Gries, our President and Chief Executive Officer, and Eran Wagner, our
Executive Vice President, Technology, would be difficult to replace. None of our
officers or key employees is bound by an employment agreement for any specific
term.
We believe our success depends significantly upon our management's ability
to operate effectively, both individually and as a group. Richard Van Hoesen,
who was hired as Chief Financial Officer in January 2000, and certain other
members of the management team, have only recently joined us. We therefore
cannot assure you that our management will be able to perform effectively in
their respective roles and as a team.
Our success also depends upon our ability to continue to attract, retain
and motivate skilled employees. Competition for employees in our industry is
intense, especially in the San Francisco Bay Area and Israel. We believe that
there are only a limited number of persons with the requisite skills to serve in
many key positions and it is becoming increasingly difficult to hire, retain and
motivate these persons. We have in the past experienced, and we expect to
continue to experience, difficulty in hiring and retaining skilled employees.
Competitors and others in the past have attempted, and may in the future
attempt, to recruit our employees. We believe that we will incur increasing
salaries, benefits and recruiting expenses because of the difficulty in hiring
and retaining employees.
ACQUISITIONS OF NEW COMPANIES OR TECHNOLOGIES MAY RESULT IN DISRUPTIONS TO OUR
BUSINESS AND STRAIN MANAGEMENT RESOURCES DUE TO DIFFICULTIES IN ASSIMILATING
PERSONNEL AND OPERATIONS.
Although we have not done so in the past, we may make future acquisitions
or investments in other companies, products or technologies. If we make any
acquisitions, we will be required to assimilate the operations, products and
personnel of the acquired businesses and train, retain and motivate key
personnel from the acquired businesses. We may be unable to maintain uniform
standards, controls, procedures and policies if we fail in these efforts.
Similarly, acquisitions may cause disruptions in our operations and divert
management's attention from day-to-day operations, which could impair our
relationships with our current employees, customers and strategic partners. The
issuance of equity securities for any acquisition could be substantially
dilutive to our shareholders. In addition, our profitability may suffer because
of acquisition-related costs or amortization costs for acquired goodwill and
other intangible assets.
RISKS RELATED TO OUR INDUSTRY
IF WE DO NOT KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE, CHANGING CUSTOMER
DEMANDS AND EVOLVING INDUSTRY STANDARDS, WE WILL NOT BE ABLE TO COMPETE.
Our industry is characterized by rapid technological change, frequent
product introductions and enhancements, changes in customer demands and evolving
industry standards. The technological life cycle of our products is difficult
to estimate. Future versions of software applications and networking products,
hardware and software platforms embodying new technologies and the emergence of
new industry standards could render our product line obsolete. XACCTUSAGE may
not operate correctly on future networking environments, hardware and software
platforms, programming languages, database environments and software
applications that our customers may use. We may not be able to successfully
continue to enhance our current product line to address these challenges.
Moreover, we may not be able to develop and introduce new products that
anticipate emerging technology standards and keep pace with competitive and
technological developments to address the increasingly sophisticated needs of
our customers on a timely basis. Our failure to do so would render our products
obsolete and would harm our ability to compete.
WE COULD BE PREVENTED FROM SELLING OR DEVELOPING OUR PRODUCTS IF THE GNU GENERAL
PUBLIC LICENSE AND SIMILAR LICENSES UNDER WHICH SOME OF THE SOFTWARE
INCORPORATED INTO OUR PRODUCTS IS DEVELOPED AND LICENSED, ARE NOT ENFORCEABLE,
OR ARE NOT EFFECTIVELY ENFORCED.
Some of the software incorporated into our products has been developed and
licensed under the GNU General Public License, and similar open source licenses.
These licenses require that any software program licensed under
15
them may be copied, used, modified and distributed freely, so long as all
modifications are also freely made available and licensed under the same
conditions. We know of no instance in which a party has challenged the validity
of these licenses or in which these licenses have been interpreted in a legal
proceeding. To date, all compliance with these licenses has been voluntary. It
is possible that a court would hold one or more of these licenses to be
unenforceable in the event that someone were to file a claim asserting
proprietary rights in a program developed and distributed under them. Any ruling
by a court that these licenses are not enforceable, or that the software
incorporated into our products or significant portions of the software may not
be copied, modified or distributed freely, would have the effect of preventing
us from selling or developing our products, unless we are able to negotiate a
license for the use of the software or replace the affected portions.
WE MAY SUFFER PRICE REDUCTIONS, LOSS OF CUSTOMERS, REDUCED GROSS MARGINS AND
LOSS OF MARKET SHARE DUE TO INCREASING COMPETITION.
The market for our product line is new, evolving and subject to rapid
technological changes. To date, our primary competition has come from solutions
developed by the in-house technology departments of potential customers or
partners. We have experienced and expect to continue to experience increased
competition from current and potential competitors. Many of these companies have
greater name recognition, longer operating histories, larger customer bases and
significantly greater financial, technical, marketing, public relations, sales,
distribution and other resources. Some of our potential competitors are among
the largest and most well capitalized software, hardware and communications
companies in the world. Our competitors include:
- in-house information technology departments of potential customers or
partners that have developed or may develop systems that substitute
for some or all of the functionality of our XACCTUSAGE product;
- companies with products that address our market, such as Hewlett
Packard, Lucent, EHPT and Narus; and
- companies that have developed software that addresses only certain
components of Internet Protocol mediation.
We are also aware of numerous other companies that are focusing significant
resources on developing and marketing products that will compete with
XACCTUSAGE. Additional competitors could come from a number of companies that
produce application integration or communications software.
We expect that competition will increase in the near term and that our
primary long-term competitors may not have entered the market yet. If any of our
competitors were to become the industry standard or were to enter into or expand
relationships with significantly larger companies through mergers, acquisitions
or otherwise, our business and operating results could be significantly harmed.
Current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to offer a single solution
and increase the ability of their products to address customer needs. Increased
competition could result in price reductions, fewer customer orders, reduced
gross margins and loss of market share, any of which could reduce our future
revenues. We may not compete successfully against current and potential
competitors, especially those with significantly greater resources.
THE GROWTH OF OUR BUSINESS DEPENDS ON THE INCREASING USE OF THE INTERNET AND
OTHER PUBLIC AND PRIVATE NETWORKS.
We sell XACCTUSAGE to organizations providing Internet-based services. If
the use of the Internet and other public and private networks does not grow as
anticipated, our revenues could decline and our business would be significantly
harmed. We depend on the increased acceptance and use of the Internet as a
medium for electronic communications and commerce and its adoption for
transacting business processes. Rapid growth in the use of the Internet is a
recent occurrence. As a result, acceptance and use may not continue to develop
at historical rates and a sufficiently broad base of users may not adopt or
continue to use the Internet as a medium of communications and commerce. Demand
and market acceptance for recently introduced services and products for the
Internet are subject to a high level of uncertainty, and there exist few proven
services and products.
16
FUTURE REGULATION OF THE INTERNET MAY SLOW ITS GROWTH, RESULTING IN DECREASED
DEMAND FOR OUR PRODUCTS AND SERVICES AND INCREASED COSTS OF DOING BUSINESS.
Due to the increasing popularity and use of the Internet, it is possible
that state and federal regulators will adopt laws and regulations that may
impose additional burdens on those companies conducting business over the
Internet. The growth and development of the market for Internet-based services
may prompt calls for more stringent consumer protection laws. The adoption of
any additional laws or regulations may decrease the expansion of the Internet. A
decline in the growth of the Internet could decrease demand for our products and
services or otherwise harm our business. Moreover, the applicability to the
Internet of existing laws in various jurisdictions governing issues such as
communications, property ownership, sales tax, libel and personal privacy is
uncertain and may take years to resolve. Any new legislation or regulation, the
application of laws and regulations from jurisdictions whose laws do not
currently apply to our business, or the application of existing laws and
regulations to the Internet and other on-line services could harm our growth.
IF WE FAIL TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, WE MAY LOSE THESE
RIGHTS AND OUR BUSINESS WOULD BE SERIOUSLY HARMED.
Our success and ability to compete depend upon our internally developed
technology and other proprietary rights, which we protect through a combination
of copyright, trademark and trade secret laws, as well as confidentiality
agreements and licensing arrangements. In addition, we have made two patent
applications in the United States regarding certain aspects of our technology.
However, existing laws afford only limited protection. Competitors and potential
competitors may develop products with the same functionality as our products.
Moreover, competitors and potential competitors may attempt to copy or reverse
engineer aspects of our product line or to obtain and use information that we
regard as proprietary. Policing the unauthorized use of our products is
difficult, and we cannot be certain that we will be able to prevent
misappropriation of our technology, particularly in foreign countries where the
laws may not protect proprietary rights as fully as do the laws of the United
States. Use by others of our proprietary rights could materially harm our
business, and expensive litigation may be necessary in the future to enforce our
intellectual property rights.
IF OUR SOURCE CODE IS RELEASED TO OUR CUSTOMERS, OUR ABILITY TO PROTECT OUR
PROPRIETARY RIGHTS COULD BE JEOPARDIZED AND OUR REVENUES COULD DECLINE.
Some of our license agreements require us to place the source code for our
products in escrow. These agreements generally provide these customers with a
limited, non-exclusive license to use this code if:
- there is a bankruptcy, insolvency or winding-up proceeding involving
us;
- we cease to do business without a successor; or
- we do not provide contractually agreed maintenance and support.
Our revenues could decline and our business could be seriously harmed if
customers were granted access to our source code.
OUR PRODUCTS COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH
MIGHT RESULT IN COSTLY LITIGATION AND THE LOSS OF SIGNIFICANT RIGHTS.
It is possible that third parties will claim that we have infringed their
intellectual property rights. Substantial litigation regarding intellectual
property rights exists in the software industry, and we expect that software
developers will be increasingly subject to infringement claims as the number of
competitors in our industry segment grows and the functionality of products in
different industry segments overlaps. Some of our competitors may have filed or
may intend to file patent applications covering aspects of their technology upon
which they may claim our technology infringes. Any claims, with or without
merit, could be time-consuming, result in costly litigation, prevent or delay
product shipment, divert the attention and resources of our management or
technical personnel or require us to develop non-infringing technology or to
enter into royalty or licensing agreements, any of which could harm our
business. Patent litigation in particular has complex technical issues and
inherent uncertainties. In the event an infringement claim against us was
successful and we could not obtain a license on acceptable terms, license a
substitute technology or redesign to avoid infringement, our business would be
harmed. Furthermore, former
17
employers of our current and future employees may assert that our employees have
improperly disclosed to us or are using confidential or proprietary information.
RISKS RELATED TO OUR OFFERING
THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE NEAR
FUTURE MAY CAUSE THE MARKET PRICE OF OUR ORDINARY SHARES TO DECLINE.
Our current shareholders hold a substantial number of our ordinary shares
that they will be able to sell in the public market in the near future. Sales of
a substantial number of shares after this offering could significantly reduce
the market price of our ordinary shares. Even the perception that our current
shareholders might sell ordinary shares could depress the trading price of the
ordinary shares. These sales, and the possibility of these sales, could make it
more difficult for us to sell equity or equity-related securities in the future
at a time and price that we deem appropriate.
Holders of 15,394,526 ordinary shares, which will represent approximately
% of our outstanding share capital after completion of this
offering, have the right to require us to register their ordinary shares with
the Securities and Exchange Commission. In addition, after this offering, we
intend to register all ordinary shares that we may issue under our share plans
and employee share purchase plan. Once we register these shares, they can be
freely sold in the public market upon issuance. If these holders cause a large
number of securities to be sold in the public market, the sales could reduce the
trading price of our ordinary shares. These sales also could impede our ability
to raise future capital.
WE EXPECT TO EXPERIENCE VOLATILITY IN OUR SHARE PRICE, WHICH COULD NEGATIVELY
AFFECT YOUR INVESTMENT.
Our ordinary shares have never been sold in a public market and an active
trading market for our shares may not develop or be sustained. If you purchase
our ordinary shares in this offering, you will pay a price that was
not established in a competitive market. Rather, you will pay a price that we
negotiated with the representatives of the underwriters. The price of our
ordinary shares that will prevail in the market may be lower that the price you
pay.
The market price of the ordinary shares may fluctuate significantly in
response to the following factors, most of which are beyond our control:
- variations in our quarterly operating results;
- changes in securities analysts' estimates of our financial
performance;
- changes in market valuations of similar companies;
- announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- loss of a major customer or failure to complete significant license
transactions; and
- additions or departures of key personnel.
Moreover, the market for technology and Internet-related companies has
experienced extreme volatility that often has been unrelated to the operating
performance of particular companies. These fluctuations may adversely affect the
trading price of our ordinary shares, regardless of our actual operating
performance. As a result, you may be unable to sell your ordinary shares at or
above the offering price.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED SHARE
PRICE VOLATILITY.
In the past, securities class action litigation has often been brought
against a company following a decline in the market price of its securities.
This risk is especially acute for us because technology companies have
experienced greater than average share price volatility in recent years and, as
a result, have been subject to, on average, a greater number of securities class
action claims than companies in other industries. We may in the future be the
target of similar litigation. Securities litigation could result in substantial
costs and divert management's attention and resources, and could seriously harm
our business.
18
CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING EXECUTIVE OFFICERS, DIRECTORS AND
PRINCIPAL SHAREHOLDERS MAY PREVENT NEW INVESTORS FROM INFLUENCING SIGNIFICANT
CORPORATE DECISIONS.
Upon completion of this offering, our executive officers, directors and
principal shareholders will beneficially own, in the aggregate, approximately
% of our outstanding ordinary shares. As a result, these
shareholders, if acting together, will be able to exercise control over all
matters requiring shareholder approval, including the election of directors and
approval of significant corporate transactions. This concentration of control
could disadvantage other shareholders with interests different from those of our
officers, directors and principal shareholders. For example, our officers,
directors and principal shareholders could delay or prevent an acquisition or
merger even if the transaction would benefit other shareholders. Please see
"Principal Shareholders" for a more detailed description of our share ownership.
FAILURE TO RAISE ADDITIONAL CAPITAL OR TO GENERATE THE SIGNIFICANT CAPITAL
NECESSARY TO EXPAND OUR OPERATIONS AND INVEST IN NEW PRODUCTS COULD REDUCE OUR
ABILITY TO COMPETE AND RESULT IN LOWER REVENUES.
We expect that the net proceeds from this offering, our cash reserves and
any cash flows from operations will be sufficient to meet our working capital
and capital expenditure needs for at least the next 12 months. However, our
limited operating history makes it difficult to predict whether these funds will
be sufficient to finance our anticipated growth. We may need to raise additional
funds if our estimates of revenues or if our working capital or capital
expenditure requirements change or prove inaccurate, if we are required to
respond to unforeseen technological or marketing hurdles or if we choose to take
advantage of unanticipated opportunities. Additional funds might not be
available at acceptable terms, if at all. If additional funds are raised through
the issuance of equity securities, the percentage ownership of our then current
shareholders would be reduced and the value of their investments might decline.
In addition, any new securities issued might have rights, preferences or
privileges senior to those of the securities held by our shareholders. If we
raise additional funds through the issuance of debt, we might become subject to
restrictive covenants.
If we need additional capital and cannot raise it on acceptable terms and
on a timely basis, we may not be able to, among other things:
- develop or enhance our products and services;
- acquire new technologies, products or businesses;
- expand operations, in the United States or internationally;
- hire, train and retain employees; or
- respond to competitive pressures or unanticipated capital
requirements.
Our failure to do any of these things could result in lower revenues and could
seriously harm our business.
WE MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DO NOT INCREASE OUR
OPERATING RESULTS OR THE VALUE OF YOUR INVESTMENT.
We will have broad discretion in how we use the proceeds from this
offering, and we may spend these proceeds in ways that do not increase our
operating results or the value of your investment. You will not have the
opportunity to evaluate the economic, financial or other information on which we
base our decisions regarding how to use the proceeds from this offering.
WE DO NOT INTEND TO PAY DIVIDENDS ON OUR ORDINARY SHARES.
We have never declared or paid any cash dividend on our share capital. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future.
NEW INVESTORS IN OUR ORDINARY SHARES WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION IN THE BOOK VALUE OF THEIR INVESTMENT.
The initial public offering price of our ordinary shares will be
substantially higher than the net tangible book value per share of our ordinary
shares immediately after this offering. Therefore, if you purchase our ordinary
shares in this offering, you will incur an immediate dilution of $
in net tangible book value per share of
19
ordinary shares from the price you paid, based on an assumed initial public
offering price of $ per share. The exercise of outstanding
options and warrants may result in further dilution. For a further description
of the dilution that you may experience immediately after this offering, please
see "Dilution."
RISKS RELATED TO INTERNATIONAL OPERATIONS
WE ARE SUSCEPTIBLE TO ADDITIONAL RISKS FROM INTERNATIONAL OPERATIONS.
We derived 37% of our revenues in 1999 from sales outside North America. As
a result, we face additional risks from doing business internationally
including:
- reduced protection of intellectual property rights in some countries;
- licenses, tariffs and other trade barriers;
- difficulties in staffing and managing foreign operations;
- longer sales and payment cycles;
- greater difficulties in collecting accounts receivable;
- seasonal reductions in business activity;
- potentially adverse tax consequences;
- laws and business practices favoring local competition;
- costs and difficulties of customizing products for foreign countries;
- compliance with a wide variety of complex foreign laws and treaties;
- political and economic instability; and
- variance and unexpected changes in local laws and regulations.
Our research and development facilities are located in Israel, and our
directors, executive officers and other key employees are located primarily in
Israel, the United States and Europe. In addition, we maintain offices in
Germany, Sweden and the United Kingdom to market and sell our products in those
countries and surrounding regions. We have sold XACCTUSAGE internationally for
only a few years, and we have limited experience in developing localized
versions of XACCTUSAGE and marketing and distributing them internationally.
If we fail to overcome the challenges encountered in our international
operations, we could experience slower than expected revenue growth and our
business could be harmed.
EXCHANGE RATE FLUCTUATIONS BETWEEN THE U.S. DOLLAR AND THE NIS MAY NEGATIVELY
AFFECT OUR EARNINGS.
Although most of our revenues and a majority of our expenses are
denominated in U.S. dollars, a significant portion of our research and
development expenses are incurred in New Israeli Shekels, or NIS. As a result,
we may be negatively affected by fluctuations in the exchange rate between the
U.S. dollar and the NIS. Further, because most of our international revenues are
denominated in U.S. dollars, a strengthening of the dollar versus other
currencies could make our products less competitive in foreign markets and
collection of receivables more difficult. We do not currently engage in currency
hedging activities but we may choose to do so in the future.
BECAUSE WE HAVE IMPORTANT FACILITIES AND RESOURCES LOCATED IN ISRAEL, ANY MAJOR
ADVERSE DEVELOPMENT IN ITS POLITICAL OR ECONOMIC CONDITIONS COULD CAUSE OUR
BUSINESS TO SUFFER.
Our principal research and development facilities are located in Israel.
Any major hostilities involving Israel or the interruption or curtailment of
trade between Israel and its present trading partners could significantly harm
our business. Since establishment in 1948, the State of Israel has been and
continues to be in a state of hostility with its neighbors, varying from time to
time in intensity and degree.
Some of our senior officers and key employees who are citizens and
residents of Israel under the age of 48 are currently or may be obligated to
perform annual reserve duty in the Israeli Defense Forces and are subject to
being
20
called for active military duty at any time. Fulfillment of these obligations
may deprive us of key employees for extended periods of time.
Further, inflation in Israel and devaluation of the NIS could have an
impact on our financial results. Although Israel has experienced substantially
reduced rates of inflation and devaluation in recent years, they are still
relatively high compared to those in the United States. Our business could be
harmed by inflation or devaluation. If inflation rates in Israel increase again
and hurt Israel's economy as a whole, our operations and financial condition
could suffer.
ANY FUTURE PROFITABILITY MAY BE DIMINISHED IF TAX BENEFITS FROM THE STATE OF
ISRAEL ARE REDUCED OR WITHHELD.
Pursuant to the Israeli Law for the Encouragement of Capital Investments,
the Israeli government has granted "Approved Enterprise" status to all of our
existing capital investment programs in Israel. Consequently, we are eligible
for tax benefits for the first several years in which we generate taxable
income. Our future profitability may be diminished if all or a portion of these
tax benefits are reduced. These tax benefits may be cancelled in the event of
changes in Israeli government policies or if we fail to comply with requisite
conditions and criteria. Currently the most significant conditions that we must
continue to meet include making specified investments in fixed assets,
maintaining the development and production nature of our facilities and
financing at least 30% of these investments through the issuance of share
capital. We may not satisfy these requirements in the future. We cannot assure
you that these tax benefits will be continued in the future at their current
levels, if at all. If these tax benefits were reduced or eliminated, the taxes
we would have to pay are likely to increase.
ISRAELI COURTS MIGHT NOT ENFORCE JUDGMENTS RENDERED OUTSIDE OF ISRAEL, WHICH MAY
MAKE IT DIFFICULT TO COLLECT ON JUDGMENTS RENDERED AGAINST US.
Some of our directors and executive officers are not residents of the
United States and some of their assets and our assets are located outside the
United States. Service of process upon our non-U.S. resident directors and
executive officers and the enforcement of judgments obtained in the United
States against us, and our directors and executive officers outside of the
United States, may be difficult to obtain. XACCT Technologies, Inc., our U.S.
subsidiary, is the U.S. agent authorized to receive service of process in any
action against us in any federal or state court arising out of this offering or
any related purchase or sale of securities. We have not given consent for this
agent to accept service of process in connection with any other claim.
We have been informed by our legal counsel in Israel that there is doubt as
to the enforceability of civil liabilities under U.S. securities laws in
original actions instituted in Israel. Moreover, an Israeli court generally will
not enforce a foreign judgment if it was given in a state whose laws do not
provide for the enforcement of judgments of Israeli courts or if its enforcement
is likely to prejudice the sovereignty, the law, public policy or the security
of the State of Israel. An Israeli court also will not declare a foreign
judgment enforceable if:
- the judgment was obtained by fraud;
- adequate service of process was not effected or the defendant did not
have a reasonable opportunity to present his or her arguments and
evidence;
- the judgment was rendered by a court not competent to render it
according to the laws of private international law in Israel;
- the judgment is at variance with another judgment that was given in
the same matter between the same parties and which is still valid; or
- at the time the action was brought in the foreign court a suit in the
same matter and between the same parties was pending before a court or
tribunal in Israel.
WE HAVE ADOPTED ANTI-TAKEOVER PROVISIONS THAT COULD DELAY OR PREVENT AN
ACQUISITION OF XACCT, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL TO OUR
SHAREHOLDERS.
Our articles of association provide for a staggered board of directors and
the ability of our board of directors to issue, without further shareholder
action, preferred shares with rights and privileges which may be senior to our
ordinary shares. These provisions may inhibit or may have the effect of
delaying, preventing or making more difficult a merger or other acquisition of
XACCT, even if doing so would be beneficial to our shareholders. Please
21
see "Description of Share Capital--Anti-Takeover Provisions Under Israeli Law"
for a further discussion of anti-takeover provisions.
ISRAELI LAW CONTAINS CERTAIN ANTI-TAKEOVER PROVISIONS THAT COULD DELAY OR
PREVENT AN ACQUISITION OF XACCT, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL TO
OUR SHAREHOLDERS.
Israeli law regulates mergers, votes required to approve a merger,
acquisition of shares through tender offers and transactions involving
significant shareholders in a manner that may discourage or delay potential
acquisition proposals, even if they are beneficial to our shareholders. Please
see "Description of Share Capital--Anti-Takeover Provisions Under Israeli Law"
for a further discussion of anti-takeover provisions.
THE NEW ISRAELI COMPANIES LAW IMPOSES SUBSTANTIAL DUTIES ON SHAREHOLDERS AND MAY
CAUSE UNCERTAINTIES REGARDING CORPORATE GOVERNANCE.
The Israeli Companies Law, which became effective on February 1, 2000,
brought about significant changes to Israeli corporate law. The new law includes
provisions imposing substantial duties on certain controlling and
non-controlling shareholders. Please see "Management--Approval of Certain
Transactions--Duties of Shareholders" for a more detailed discussion of
shareholder duties under the Companies Law. In addition, uncertainties regarding
certain aspects of corporate governance may persist until Israeli courts
adequately interpret the Companies Law. These uncertainties could
inhibit takeover attempts, other transactions and other corporate decisions and
actions that may be beneficial to shareholders.
22
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements in "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue" or the negative of these terms or other comparable
terminology. These statements are only predictions and involve known and unknown
risks, uncertainties and other factors, including the risks outlined under "Risk
Factors," that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed of implied by
these forward-looking statements.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Moreover, neither we nor any
other person assume responsibility for the accuracy and completeness of these
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform these statements to actual results.
23
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the
ordinary shares that we are selling in this offering,
after deducting estimated underwriting discounts and estimated offering expenses
payable by us, will be approximately $ at an assumed initial
public offering price of $ per share.
We intend to use the net proceeds to finance the growth of our business
through the expansion of sales, marketing and distribution activities and
increased research and development activities with respect to enhancements to
existing products and new products, and for working capital and general
corporate purposes. We may use a portion of the proceeds of this offering to
acquire new businesses, products or technologies that may be complementary to
our current or future business. We do not currently have any specific plan or
program with respect to any such acquisitions. Pending use of the net proceeds
of this offering, we intend to invest the net proceeds in interest-bearing,
investment-grade securities.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our ordinary shares in
the past. We do not expect to pay cash dividends on our ordinary shares in the
foreseeable future and intend to retain our future earnings, if any, to finance
the development of our business.
In the event that cash dividends are declared in the future, we will pay
those dividends in New Israeli Shekels, or NIS, or in foreign currency, subject
to any statutory limitations. Under current Israeli regulations, any dividends
or other distributions paid with respect to ordinary shares will be freely
repatriable in such non-Israeli currencies at the rate of exchange prevailing at
the time of conversion, provided that Israeli income tax has been paid on, or
withheld from, these payments. Because exchange rates between the NIS and the
U.S. dollar fluctuate, a United States shareholder will bear the risks of
currency fluctuations during the period between the date the dividend is
declared and paid by us in NIS and the date conversion is made by the
shareholder into U.S. dollars.
24
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
- on an actual basis;
- on a pro forma basis giving effect to (1) the receipt of net proceeds
of approximately $14.3 million from the sale of 1,227,235 preferred
shares in March 2000, (2) the exercise of warrants outstanding as of
December 31, 1999 to purchase 2,058,371 preferred shares at a weighted
average exercise price of $6.19 per share, which warrants if
unexercised would expire upon the closing of this offering and (3) the
conversion of all issued and outstanding preferred shares into
ordinary shares; and
- on a pro forma as adjusted basis to reflect the sale of the ordinary
shares in this offering at an assumed initial public offering price of
$ per ordinary share after deducting estimated
underwriting discounts and the estimated expenses of this offering
payable by us.
You should read the table below in conjunction with our consolidated
financial statements and the related notes included elsewhere in this
prospectus.
DECEMBER 31, 1999
---------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
-------- --------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Shareholders' equity:
Preferred shares, NIS 0.01 nominal value, 18,550,000 shares
authorized; 13,336,155 shares issued and outstanding,
actual; no shares issued and outstanding pro forma and pro
forma as adjusted............................................ 33 --
Ordinary shares, NIS 0.01 nominal value, 37,630,000 voting
shares and 1,820,000 non-voting shares authorized;
4,345,775 voting shares and no non-voting shares issued
and outstanding, actual; 19,575,898 voting shares and
1,391,638 non-voting shares issued and outstanding, pro
forma; and voting shares and
non-voting shares issued and outstanding,
pro forma as adjusted........................................ $11 $52
Additional paid-in capital..................................... 34,781 61,647
Deferred stock compensation.................................... (2,824) (2,824)
Accumulated deficit............................................ (14,174) (14,174)
-------- ---------
Total shareholders' equity........................................ 17,827 44,701
======== ========= ============
Total capitalization.............................................. $17,827 $44,701
======== ========= ============
The table excludes:
- 3,113,439 ordinary shares issuable upon exercise of options
outstanding as of December 31, 1999 with a weighted average exercise
price of $0.68 per share;
- 29,050 ordinary shares issuable upon exercise of warrants to purchase
ordinary shares outstanding as of December 31, 1999 with a weighted
average exercise price of $0.30 per share, which warrants do not
expire upon the completion of this offering;
- 3,104,866 ordinary shares available for future issuance under our
share option plans, plus the ordinary shares available for issuance
upon board of director approval under our Section 3(i) share option
plan; and
- 750,000 ordinary shares that will be available for issuance under our
employee share purchase plan.
25
DILUTION
If you invest in our ordinary shares, your interest will be diluted to the
extent of the difference between the public offering price per share of our
ordinary shares and the pro forma as adjusted net tangible book value per share
of our ordinary shares immediately after this offering.
Investors participating in this offering will incur immediate, substantial
dilution. The pro forma net tangible book value of our ordinary shares as of
December 31, 1999 was $44.7 million, or $2.13 per ordinary share. Pro forma net
tangible book value per share represents the amount of our total tangible assets
less total liabilities, divided by the number of ordinary shares outstanding
after giving effect to the sale of 1,227,235 preferred shares for aggregate net
proceeds of $14.3 million in March 2000, and assuming the exercise of warrants
to purchase 2,058,371 preferred shares outstanding as of December 31, 1999,
which warrants if unexercised would expire upon the completion of this offering.
Assuming our sale of ordinary shares offered by this prospectus at an assumed
initial public offering price of $ per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses payable,
our pro forma as adjusted net tangible book value at December 31, 1999 would
have been $ , or $ per ordinary share. This represents an immediate increase in
pro forma net tangible book value of $ per share to existing shareholders and an
immediate dilution of $ per share to new investors purchasing ordinary shares in
this offering. The following table illustrates this dilution on a per ordinary
share basis:
Assumed initial public offering price
per ordinary share.......................................... $
Pro forma net tangible book value
per ordinary share as of December 31, 1999.............$2.13
Increase per share attributable to new investors.........
-------
Pro forma as adjusted net tangible book value per ordinary
share after this offering...................................
-------
Dilution per ordinary share to new investors.................. $
=======
The following table sets forth on a pro forma as adjusted basis, as of
December 31, 1999, the differences between the number of ordinary shares
purchased from us, the total consideration paid and the average price per share
paid by existing holders of ordinary shares and by the new investors, before
deducting the estimated underwriting discount and estimated offering expenses
payable by us.
Shares Purchased Total Consideration Average
----------------------- ------------------------- Price
Number Percent Amount Percent Per Share
------------ ---------- -------------- ---------- ------------
Existing shareholders.............................. 20,967,536 % $60,560,894 % $ 2.89
New investors......................................
------------ ---------- -------------- ----------
Total.................................. 100% $ 100%
============ ========== ============== ==========
The foregoing discussion and tables assume no exercise of options
outstanding as of December 31, 1999 to purchase 3,113,439 ordinary shares at a
weighted average exercise price of $0.68 per share and assumes no exercise of
warrants outstanding to purchase 29,050 ordinary shares at a weighted average
exercise price of $0.30 per share, which warrants do not expire upon the
completion of this offering. To the extent these options and warrants are
exercised, there will be further dilution to new investors.
If the underwriters' over-allotment option is exercised in full, the number
of shares held by new investors increase to , or % of the
total ordinary shares outstanding after this offering.
26
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following selected consolidated financial data as of December 31, 1998
and 1999 and for the period from our inception in June 1997 through December 31,
1997 and for the years ended December 31, 1998 and 1999 have been derived from
our consolidated financial statements and the related notes set forth elsewhere
in this prospectus. These consolidated financial statements have been prepared
in accordance with generally accepted accounting principles in the United
States. The selected consolidated financial data as of December 31, 1997 have
been derived from audited consolidated financial statements not included in this
prospectus, which have also been prepared in accordance with generally accepted
accounting principles in the United States. You should read the selected
consolidated financial data set forth below in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
our consolidated financial statements and the related notes included elsewhere
in this prospectus. Our historical results are not necessarily indicative of
future results.
INCEPTION
(JUNE 1997)
TO DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------
1997 1998 1999
-------------- ----------- -------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
License........................................................... $-- $-- $ 898
Service........................................................... -- -- 296
-------------- ----------- -------------
Total revenues.................................................. -- -- 1,194
-------------- ----------- -------------
Cost of revenues:
License........................................................... -- -- 48
Service........................................................... -- -- 192
-------------- ----------- -------------
Total cost of revenues.......................................... -- -- 240
-------------- ----------- -------------
Gross profit......................................................... -- -- 954
-------------- ----------- -------------
Operating expenses:
Research and development.......................................... 390 1,511 2,243
Sales and marketing............................................... 127 1,995 6,472
General and administrative........................................ 152 1,033 1,204
Amortization of deferred stock compensation....................... -- -- 381
-------------- ----------- -------------
Total operating expenses........................................ 669 4,539 10,300
-------------- ----------- -------------
Operating loss....................................................... (669) (4,539) (9,346)
Interest and other income, net....................................... 7 105 268
-------------- ----------- -------------
Net loss............................................................. $ (662) $(4,434) $(9,078)
============== =========== =============
Basic and diluted net loss per share................................. $ (0.30) $ (1.17) $ (2.34)
============== =========== =============
Weighted average number of shares used in computing basic and
diluted net loss per share........................................ 2,192,400 3,804,874 3,886,495
============== =========== =============
Pro forma basic and diluted net loss per share (unaudited)........... $ (0.67)
=============
Pro forma weighted average number of shares used in computing
basic and diluted net loss per share (unaudited).................. 13,566,732
=============
DECEMBER 31,
----------------------------------------
1997 1998 1999
------------- ---------- ------------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................................ $366 $5,445 $17,309
Working capital...................................................... 243 5,021 17,356
Total assets......................................................... 518 6,064 20,086
Shareholders' equity................................................. 338 4,973 17,827
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH
THE "SELECTED CONSOLIDATED FINANCIAL DATA" AND OUR CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. WE
BELIEVE THAT PERIOD-TO-PERIOD COMPARISONS OF OUR RESULTS OF OPERATIONS ARE NOT
NECESSARILY MEANINGFUL AND SHOULD NOT BE RELIED UPON AS INDICATIONS OF FUTURE
PERFORMANCE.
OVERVIEW
We are a leading provider of intelligent business infrastructure software
for network service providers. Our infrastructure platform allows network
service providers to implement new value- and usage-based business models and to
offer higher-margin, enhanced services through comprehensive real-time data
collection, data aggregation and automated user account provisioning. The XACCT
platform is a foundation technology that provides a single point of interface
between the operations and business support systems of network service providers
and the physical network. We have designed our solution to provide the
carrier-class scalability, reliability, manageability and flexibility that our
customers demand to run their mission-critical business applications.
We were incorporated in Israel and commenced operations in June 1997. We
were a development stage company from our inception in June 1997 through
December 1998. We began shipping our initial product in January 1999. We have
spent a substantial amount to date developing our initial products and
establishing our operations. At December 31, 1999, we had an accumulated deficit
of $14.2 million.
We derive our revenues principally from software licenses and related
services. Customer payments received prior to the recognition of revenues are
recorded as deferred revenue. To date, our license revenues have been derived
from licenses of XACCTUSAGE, our server-based software platform that resides at
the network service provider site, as well as information source modules and
gatherers which reside near the switches, routers, hubs and other elements of
the network. In each case, we record license revenue when a software license
agreement has been executed or a definitive purchase order has been received and
the product has been delivered to the end customers, no significant obligations
with regard to implementation remain, the fee is fixed and determinable and
collectibility is probable.
Service revenues include product maintenance and support, consulting and
training. Customers who license our products usually purchase maintenance
contracts. These contracts provide unspecified software upgrades, as well as
technical support, over a specified term, which typically is 12 months.
Maintenance contracts are usually paid in advance, and revenues from these
contracts are recognized ratably over the term of the contract. Customers
typically purchase additional consulting services from us to support their
implementation activities. These consulting services generally are sold on a
time and materials basis. Consulting and training revenues are deferred and
recognized when provided to the customer. Customer advances and billed amounts
due from customers in excess of recognized revenues are recorded as deferred
revenues.
We market our products through our direct sales force and through
relationships with system integrators, value-added resellers and technology
vendors. Revenues attributable to indirect sales are recognized upon acceptance
by the end customer. In 1999, we derived 63% of our revenues from customers
located in North America and approximately 37% of our revenues from customers
outside North America, substantially all of which was in Europe. In the first
quarter of 2000, we opened three offices in Europe. We plan to expand our
operations into Asia and further across Europe.
Our limited operating history makes it difficult to predict our
future operating results. We believe our future success will depend on our
ability to expand our customer base and enhance our products. We intend to
continue to invest significantly in sales, marketing and research and
development and expect to incur operating losses for the foreseeable future. A
delay in the revenue recognition from one or more license transactions could
cause significant variations in operating results from quarter to quarter and
could result in larger-than-anticipated losses.
In 1999, a small number of customers accounted for a significant portion of
our total revenues. During that year, revenues from four customers accounted for
51% of total revenues. We expect that revenues from a limited number of
customers will continue to account for a large percentage of total revenues in
future quarters. TV Cabo, UUNET, GTE Internetworking and Verio each accounted
for at least 10% of total revenues in 1999.
28
STOCK-BASED COMPENSATION
Deferred stock compensation represents the difference between the estimated fair
value of the ordinary shares for accounting purposes and the option exercise
price at the date of grant. We have recorded deferred stock compensation of $3.2
million in connection with stock options we have granted. This amount is
amortized over the four year vesting period of the options using the multiple
option approach. Based on options granted through December 31, 1999, we expect
to record stock-based compensation expense of $356,000 in the quarter ending
March 31, 2000. We expect that stock-based compensation expense recorded in
quarters after March 31, 2000 will decrease sequentially. We anticipate this
expense to decrease consistently in future periods. Unearned compensation
expense will be reduced for future periods to the extent that options are
terminated prior to full vesting. Please see note 7 to our consolidated
financial statements for a further description of stock-based compensation
expense.
NET OPERATING LOSS CARRYFORWARDS
From our inception in June 1997 through December 31, 1999, we had $4.7
million of Israeli net operating loss carryforwards and $6.9 million of U.S.
federal and state net operating loss carryforwards to offset future taxable
income. These net operating loss carryforwards expire in varying amounts from
2006 to 2019. Given our limited operating history and our losses incurred to
date, coupled with the difficulty of forecasting future results, a full
valuation allowance has been recorded. Furthermore, as a result of changes in
our equity ownership from our preferred share offerings and this offering, use
of net operating losses and tax credits may be subject to substantial annual
limitations. This is due to the ownership change limitations provided in the
United States Internal Revenue Code and similar state provisions. The degree of
any such limitation cannot presently be estimated. To date, we have not
performed an evaluation to determine if such a limitation exists, and we may not
perform that evaluation until and unless we are profitable in the future. The
annual limitation may result in the expiration of net operating losses and tax
credits before utilization. Please see note 8 to our consolidated financial
statements for a further discussion of net operating loss carryforwards.
RESULTS OF OPERATIONS
FOUR QUARTERS ENDED DECEMBER 31, 1999
We first began shipping products in the first quarter of 1999 and, as a
result, we believe that annual comparisons of our operating results and
quarterly results of operations involving periods prior to December 31, 1998 are
less meaningful than an analysis of recent quarterly operating results.
Accordingly, we are providing a discussion and analysis of our quarterly
operating results for the four quarters ended December 31, 1999. The following
table lists the operating results for the four most recent quarters as well as,
for the periods indicated, each line item as a percentage of total revenues:
QUARTERS ENDED
----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
----------- --------- ------------- -------------
(IN THOUSANDS)
Revenues:
License................................................. $ 81 $ 186 $ 252 $ 379
Service................................................. 4 44 49 199
----------- --------- ------------- -------------
Total revenues........................................ 85 230 301 578
Cost of revenues:
License................................................. 7 9 14 18
Service................................................. 15 33 64 80
----------- --------- ------------- -------------
Total cost of revenues................................ 22 42 78 98
----------- --------- ------------- -------------
Gross profit .............................................. 63 188 223 480
----------- --------- ------------- -------------
Operating expenses:
Research and development................................ 529 497 509 708
Sales and marketing..................................... 1,131 1,278 1,640 2,423
General and administrative.............................. 194 235 257 518
Amortization of deferred stock compensation ............ -- -- 44 337
----------- --------- ------------- -------------
Total operating expenses.............................. 1,854 2,010 2,450 3,986
----------- --------- ------------- -------------
Operating loss............................................. (1,791) (1,822) (2,227) (3,506)
Interest and other income, net............................. 95 19 8 146
----------- --------- ------------- -------------
Net loss................................................... $(1,696) $(1,803) $(2,219) $(3,360)
=========== ========= ============= =============
29
QUARTERS ENDED
-----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
----------- --------- -------------- -------------
(% OF REVENUES)
Revenues:
License................................................ 95% 81% 84% 66%
Service................................................ 5 19 16 34
----------- --------- -------------- -------------
Total revenues....................................... 100 100 100 100
----------- --------- -------------- -------------
Cost of revenues:
License................................................ 8 4 5 3
Service................................................ 18 14 21 14
----------- --------- -------------- -------------
Total cost of revenues............................... 26 18 26 17
----------- --------- -------------- -------------
Gross profit.............................................. 74 82 74 83
----------- --------- -------------- -------------
Operating expenses:
Research and development............................... 622 216 169 122
Sales and marketing.................................... 1,331 556 545 419
General and administrative............................. 228 102 85 90
Amortization of deferred stock compensation............ -- -- 15 59
----------- --------- -------------- -------------
Total operating expenses............................. 2,181 874 814 690
----------- --------- -------------- -------------
Operating loss............................................ (2,107) (792) (740) (607)
Interest and other income, net............................ 112 8 3 26
----------- --------- -------------- -------------
Net loss.................................................. (1,995)% (784)% (737)% (581)%
=========== ========= ============== =============
REVENUES
Total revenues increased sequentially on a quarterly basis from $85,000 for
the quarter ended March 31, 1999 to $578,000 for the quarter ended December 31,
1999. We began to generate revenues in 1999 following the commercial release of
our initial product in the fourth quarter of 1998. These revenues grew
sequentially in 1999 as our customer base and our average transaction size
increased. Our customer base increased from three at March 31, 1999 to 25 at
December 31, 1999. Average transaction size increased from approximately
$22,000 in the quarter ended March 31, 1999 to approximately $110,000 in the
quarter ended December 31, 1999 primarily as a result of larger initial
deployments by our customers.
LICENSE. License revenues increased sequentially on a quarterly basis from
$81,000 for the quarter ended March 31, 1999 to $379,000 for the quarter ended
December 31, 1999.
SERVICE. Service revenues increased from $4,000 for the quarter ended March
31, 1999 to $199,000 for the quarter ended December 31, 1999. This increase
resulted primarily from increased software licenses following the introduction
of our products and the expansion of our professional service organization. The
increase in service revenues in the quarter ended December 31, 1999 was
primarily due to approximately $140,000 in fees generated from the custom
development and implementation activities performed for a large customer. We
anticipate that service revenue will decline as a percentage of total revenue in
the short term.
COST OF REVENUES
Total cost of revenues increased sequentially on a quarterly basis from
$22,000 for the quarter ended March 31, 1999 to $98,000 for the quarter ended
December 31, 1999.
LICENSE. Cost of license revenues consists of product and documentation
production costs, packaging and shipping and third-party software license
payments. Cost of license revenues has grown sequentially since the beginning of
1999 to support increased software licenses following the introduction of our
initial product. We expect that cost of license revenues will increase in
dollar amounts but remain relatively flat as a percentage of total revenues in
the long term.
SERVICE. Cost of service revenues consists of salaries and related payroll
and facility expenses for service, support and training personnel. Cost of
service revenues increased sequentially on a quarterly basis during 1999. This
increase was due primarily to our hiring of additional service personnel in 1999
in anticipation of supporting larger service obligations necessary to support a
larger customer base. This investment substantially increased cost of service
revenues as a percentage of service revenue in the third quarter of 1999. We
expect that cost of service
30
revenues will continue to increase in dollar amount as we continue to expand our
customer support organization in advance of anticipated customer demand.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses include
salaries and related payroll and facilities expenses for engineering and
technical personnel, as well as the cost of third party development consultants.
We expense all of these costs as incurred. A significant majority of our
research and development personnel are located in Israel. Research and
development expenses increased from $509,000 for the quarter ended September 30,
1999 to $708,000 for the quarter ended December 31, 1999 due primarily to the
hiring of seven additional engineering personnel during the quarter ended
December 31, 1999. We intend to spend significant amounts on enhancing existing
products and developing new products. As a result, we anticipate that research
and development expenses will increase significantly in dollar amounts in future
periods.
SALES AND MARKETING. Sales and marketing expenses consist of salaries,
commissions and related overhead expenses for sales and marketing personnel, as
well as advertising, promotional and travel expenses. Sales and marketing
expenses increased from $1.1 million for the quarter ended March 31, 1999 to
$2.4 million for the quarter ended December 31, 1999 due primarily to increased
commissions and our hiring of additional sales and marketing personnel. We
increased our sales and marketing department from 12 employees at December 31,
1998 to 48 employees at December 31, 1999. We anticipate that sales and
marketing expenses will increase significantly in dollar amounts as we continue
to expand our sales and marketing organization.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
salaries for administrative, executive and finance personnel and related
overhead expenses, recruiting costs and professional service fees. General and
administrative expenses increased from $194,000 in the quarter ended March 31,
1999 to $518,000 in the quarter ended December 31, 1999. This sequential
increase was primarily attributable to the hiring of additional administrative
and finance personnel, and higher recruiting and professional service fees. We
believe that our general and administrative expenses will continue to increase
in dollar amounts as our operations grow and as we incur the expenses associated
with operating as a public company.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. We amortized employee
stock-based compensation expense of $381,000 in 1999.
INTEREST AND OTHER INCOME, NET. Interest and other income, net consists
primarily of interest received on invested cash balances. Interest and other
income, net increased from $8,000 in the quarter ended September 30, 1999 to
$146,000 in the quarter ended December 31, 1999 due primarily to higher cash
balances in the fourth quarter following an equity financing completed in
October 1999.
INCEPTION (JUNE 1997) TO DECEMBER 31, 1998 AND YEAR ENDED DECEMBER 31, 1999
REVENUES
LICENSE. We recorded no license revenues for the period from our inception
in June 1997 to December 31, 1998. License revenues in 1999 were $898,000
following the commercial release of our initial product in the fourth quarter of
1998 and the initiation of sales activities.
SERVICE. We recorded no revenues for the period from our inception to
December 31, 1998. Service revenues in 1999 totaled $296,000.
COST OF REVENUES
LICENSE. We recorded no cost of license revenues for the period from our
inception to December 31, 1998. We incurred $48,000 in cost of license revenues
in 1999 primarily for the packaging and documentation of our software.
SERVICE. We recorded no cost of service revenues for the period from our
inception to December 31, 1998. We incurred $192,000 in cost of service revenues
in 1999 to support the installation and implementation of our software and as we
expanded our professional service organization.
31
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$1.9 million for the period from our inception to December 31, 1998 to $2.2
million in 1999. The increase was primarily attributable to the hiring of
additional engineering personnel.
SALES AND MARKETING. Sales and marketing expenses increased from $2.1
million for the period from our inception to December 31, 1998 to $6.5 million
in 1999. The increase was attributable primarily to increased sales and
marketing efforts and higher sales commissions resulting from increased sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $1.2
million in the period from our inception to December 31, 1998 and were $1.2
million in 1999.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. We recorded no deferred
stock-based compensation in the period from our inception to December 31, 1998.
We recorded $3.2 million in deferred stock-based compensation in 1999 and
amortized $381,000 of deferred stock compensation expense in 1999.
INTEREST AND OTHER INCOME, NET. Interest and other income, net increased
from $112,000 for the period from our inception to December 31, 1998 to $268,000
in 1999 as a result of higher average cash balances.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through the
private sale of $32.3 million of our securities. We anticipate that we will
receive $12.7 million on or prior to the closing of this offering from the
exercise of outstanding warrants for the purchase of 2,058,371 ordinary shares
at a weighted average exercise price of $6.19 per share, which warrants expire
upon the completion of this public offering.
Net cash used in operating activities was $4.2 million in the period from
our inception through December 31, 1998 and $8.2 million in 1999 and was
primarily attributable to net losses during these periods.
Net cash used in investing activities was $437,000 in the period from our
inception through December 31, 1998 and $1.5 million in 1999. Net cash used in
investing activities consists primarily of purchases of computer hardware and
software, office furniture and equipment and, in 1999, investment in short-term
term bank deposits.
Net cash provided by financing activities was $10.1 million in the period
from inception through December 31, 1998 and $21.6 million in 1999. Net cash
provided by financing activities consists primarily of net proceeds from the
issuance of preferred shares.
We expect to experience significant growth in our operating expenses for
the foreseeable future in order to execute our business plan. As a result, we
anticipate that operating expenses and planned capital expenditures will
constitute a material use of our cash resources. In addition, we may use cash
resources to fund acquisitions or investments in other businesses, technologies
or product lines. We believe that available cash and cash equivalents and the
net proceeds from this offering and the exercise of warrants upon closing of
this offering and any cash flows from operations, will be sufficient to meet our
working capital and operating expense requirements for at least the next 12
months. However, we may require additional funds to support our working capital
and operating expense requirements or for other purposes and may seek to raise
these additional funds through public or private debt or equity financings. We
cannot assure you that this additional financing will be available, or if
available, will be available on reasonable terms and not dilutive to our
shareholders.
YEAR 2000 COMPLIANCE
We have not experienced any Year 2000-related disruption in our products
and the operation of our systems. To our knowledge, none of our material
suppliers or vendors experienced any material Year 2000 problems. Although most
Year 2000 problems should have become evident on January 1, 2000 or February 29,
2000, additional Year 2000-related problems may become evident in the future.
TAXATION
Our tax rate will reflect a mix of the United States statutory tax rate on
our United States income and the Israeli tax rate discussed below. We expect
that most of our taxable income will be generated in Israel. Israeli
32
companies are generally subject to corporate income tax at the rate of 36%.
However, the effective rate of tax of a company that derives income from an
approved enterprise, as discussed below, may be considerably lower.
Our production facilities have been granted approved enterprise status
pursuant to the Israeli Law for the Encouragement of Capital Investments,
5719-1959, referred to as the Investment Law. The primary tax benefits resulting
from approved enterprise status are described below.
Income derived from our approved enterprise is tax exempt for two years of
the ten-year tax benefit period, and is subject to a reduced tax rate of 10% to
25%, depending on the rate of non-Israeli investments in the company, during the
remainder of the period. The tax benefit period for this approved enterprise has
not yet commenced. The tax benefit period will commence in the year in which we
first recognize Israeli taxable income. The tax benefit period is subject to
limits of the earlier of 12 years from the commencement of production, or 14
years from receipt of the approval. Accordingly, the period relating to this
approved enterprise will expire in 2012.
In the period from our inception in June 1997 through December 31, 1997 and
in the years ended December 31, 1998 and 1999, we incurred losses for tax
purposes. Accordingly, we did not provide for taxes on income in any of the
reported periods.
INFLATION AND MARKET RISK
Most of our sales traditionally have been made in U.S. dollars, and most of
our expenses have been incurred in U.S. dollars or denominated in NIS, which is
linked to the dollar. We have not been materially affected by currency
fluctuations between the NIS and the U.S. dollar or by the Israeli rate of
inflation.
We do not currently use financial instruments for trading purposes and do
not currently hold any derivative financial instruments which could expose us to
significant market risk. We invest our funds primarily in low-risk, short-term
banking instruments yielding fixed interest rates.
FUNCTIONAL CURRENCY
The U.S. dollar is the primary currency in the economic environment in
which we and our subsidiaries operate. Substantially all of our sales are made
outside of Israel and are denominated in U.S. dollars. Most of our expenses,
including marketing and service costs, are made outside of Israel and are
incurred in U.S. dollars. As a result, our functional currency is the U.S.
dollar.
33
BUSINESS
OVERVIEW
We are a leading provider of intelligent business infrastructure software
for next-generation networks. The XACCT platform is a foundation technology that
provides a single point of interface between the operations and business support
systems of network service providers and the physical network. Our software
platform allows network service providers to implement new value- and
usage-based business models and to offer higher-margin, enhanced services
through comprehensive real-time data collection, data aggregation and automated
user account provisioning. We have designed our solution to provide the
carrier-class scalability, reliability, manageability and flexibility that our
customers demand to run their mission-critical business applications. As of
December 31, 1999, we had over 20 network service providers customers. Our
customers include Bell Nexxia, Global One, GTE Internetworking, Harvard
University, Mannesman Ipulsys, MCI Worldcom, Siemens, TV Cabo, Verio and UUNET.
In addition, we have developed strategic alliances or collaborative
relationships with a group of over 70 system integrators, value-added resellers,
network infrastructure vendors and software applications vendors.
INDUSTRY BACKGROUND
GROWTH OF INTERNET SERVICES AND DATA TRAFFIC. The Internet is a global
network of interconnected public and private networks that enables millions of
people to communicate, collaborate, access information and conduct business
electronically. International Data Corporation estimates that the number of
worldwide Internet users will grow from 159 million at the end of 1998 to 602
million by 2003. This increased connectivity to the Internet and the
availability of new communications technologies are making Internet-based video,
voice and data communications an integral part of the services offered by
telecommunications carriers, cable TV operators, enterprise network operators
and Internet service providers, which we refer to collectively as network
service providers. The networks of the early 1990s, however, were not designed
to handle these new service offerings or the dramatic increases in data traffic
and users. As the variety of service offerings and the amount of network data
traffic have increased, network service providers have begun to transform their
traditional networks into converged, packet-based networks for integrated voice
and data services, or next-generation networks.
INCREASING COMPETITION AMONG NETWORK SERVICE PROVIDERS. Increased
acceptance and use of the Internet has forced network service providers to
quickly transition to newer communications technologies to support their new
service offerings. Network service providers seek to differentiate themselves
from their competitors through value-added services such as Internet-based video
and voice transmission, which require rapid and large investments in physical
networks and operations and business support systems. The availability of these
new services to Internet users is causing further acceleration in the growth of
Internet usage and data traffic.
NETWORK SERVICE PROVIDERS SEEK TO LEVERAGE THE GROWTH OF INTERNET
SERVICES AND DATA TRAFFIC. Network service providers seek to take advantage of
the significant revenue opportunities that have been created by the growing
volume of global Internet traffic and the increasing demand for high value-added
Internet-based communications services. To date, the growth of these
opportunities has been limited by problems associated with Internet access,
bandwidth, security and the quality and range of applications available. As
these issues are being addressed, however, network service providers are finding
that their inability to aggregate and transform the raw data carried over their
networks into meaningful business information has constrained their revenue
generation potential. Increasingly, network service providers are looking for
methods to move away from flat-fee pricing to flexible, sophisticated business
models based on value to the user and cost to the network service provider.
These new business models will increase revenues by enabling flexible service
offerings, programs to increase customer satisfaction and differentiation based
on quality of service. We believe that the principal limitation on the ability
of network service providers to generate revenues from the Internet is their
lack of a business infrastructure, or Internet back office, necessary to support
these new business models. This Internet back office is analogous to the
infrastructure that allows traditional telecommunications companies to manage,
measure, monitor and analyze traffic across telephone networks.
In order to fully capitalize on the opportunities created by the growth
of the Internet and compete effectively, network service providers need a
business infrastructure that enables the following capabilities:
o value-based pricing of services and price modeling;
o differentiated service levels and quality-of-service metering;
34
o intelligent analysis of real-time network usage data;
o customer care/customer relationship management;
o fraud prevention and management;
o carrier-class scalability, reliability, manageability and
flexibility;
o integration with both next-generation and legacy back-office business
systems; and
o rapid assimilation of new network elements and technologies.
EXISTING SOLUTIONS ARE LIMITED. Network service providers have attempted
to address these challenges by implementing custom-made, expensive systems
tools. These single-purpose utilities have proven inadequate for multi-service,
multi-vendor and multi-technology global networks. They are typically difficult
to adapt to purposes beyond those for which they originally were constructed and
do not scale to either the types of data traffic or the new technologies,
devices and services that are characteristic of next-generation networks.
Moreover, these solutions rely on separate collection and analysis of network
data, delayed analysis of the data collected and manual service provisioning.
Consequently, current solutions do not provide network service providers with
the Internet back office functionality needed to create flexible new business
models and manage a dynamic range of customers, service offerings and pricing
structures. This has forced many network service providers to price their
service offerings on a simple, flat-fee basis.
MARKET OPPORTUNITY FOR A BUSINESS INFRASTRUCTURE THAT EXPANDS REVENUE
GENERATION MODELS. Network service providers can benefit from a new class of
intelligent business infrastructure that will allow them to leverage the rapid
growth of Internet services and data traffic into increased opportunities for
revenue generation. We believe that there is significant demand for
infrastructure software that addresses the limitations of existing solutions and
enables network service providers to rapidly capitalize on the growth of the
Internet and to implement higher-margin, enhanced service offerings. This
solution must support high-volume, real-time data collection from multiple
sources and all layers of the network; operate non-intrusively; and have
sufficiently robust quality and reliability for the largest carrier-class
network service providers. Network service providers also require a flexible,
extensible software platform that allows them to dynamically monitor, provision
and configure multiple service-types across their networks. Moreover, any
solution must readily adapt to the full range of network devices and standards
associated with next-generation networks. The immediate opportunity for a
solution that combines these attributes is in the market for Internet business
infrastructure software, which The Yankee Group estimates will grow from $207
million in 1999 to $7.7 billion in 2004. We believe, however, that such a
solution could claim a substantial portion of the larger market for operations
support systems, which The Insight Research Corporation estimates will grow from
$33.9 billion in 2000 to $58.4 billion in 2005.
XACCT SOLUTION
We are a leading provider of business infrastructure software for the
next-generation public network. Our intelligent business infrastructure platform
allows network service providers to implement new value- and usage-based
business models and offer higher-margin, enhanced services. The XACCT platform
is a foundation technology that provides a single point of interface between
Internet back office operations and business support systems and the physical
network. Network service providers utilize our platform to run mission-critical
business applications that require comprehensive real-time data collection, data
aggregation and automated user account provisioning. We have designed our
solution to provide the carrier-class scalability, reliability, manageability
and flexibility that our customers demand.
The following diagram illustrates the interface that the XACCT platform
provides between the operations and business support systems of network service
providers and the physical network:
[DIAGRAM OF OUR BUSINESS INFRASTRUCTURE PLATFORM]
35
Our solution offers our customers the following benefits:
ENABLES INTELLIGENT PRICING OF VALUE-ADDED SERVICES. Our business
infrastructure system captures, aggregates and analyzes in real-time the data
necessary to allow network service providers to price their services based on
value to the user and cost to the network service provider. For example, instead
of charging a flat-rate fee for simple connectivity, network service providers
can use our solution to offer and charge appropriately for service level
agreements or for services based on quality of service, transactions, events,
content, or volume. Our solution also provides detailed network information that
can be used to support customer relationship management, customer retention and
fraud management applications.
ENABLES AUTOMATED USER ACCOUNT PROVISIONING. Our platform is designed to
allow network service providers to implement automated user account
provisioning, including self-provisioning, meaning that the network service
provider's users can activate, modify or deactivate services without the
intervention of the network service provider. Automated user account
provisioning reduces a network service provider's costs and time to revenue by
streamlining user interactions and increasing user satisfaction.
CARRIER-CLASS SCALABILITY AND RELIABILITY. Internet-based services
generate significant amounts of data that must be aggregated, correlated,
processed and analyzed in real-time. We have designed our solution with a
distributed software architecture designed to scale with the growth of our
customers' networks and the growth of network traffic. This distributed
architecture helps ensure data integrity and high system availability by placing
intelligent software agents throughout the network, enabling redundant data
collection and transmission to multiple data repositories.
FLEXIBILITY AND EXTENSIBILITY. We believe our solution is fully adaptable
to all major network infrastructure technologies, including hardware, software
and operations and business support systems. In addition, our products are
designed to work with industry standard protocols to allow for the rapid and
seamless assimilation of new, emerging network standards, devices and
applications. For example, we are currently extending our platform to
incorporate the wireless application protocol, or WAP, as it continues to
develop. Our platform's flexible architecture is designed to enable our systems
to evolve and grow with our customers. As a result, when network technology
providers introduce new hardware or software, we typically need only four to
eight weeks to plan, develop and test a software module to interface with the
new network element.
MANAGEABILITY. We offer a secure, easy-to-use browser interface through
which network administrators can centrally manage the XACCT business
infrastructure. Our platform enables system-wide and component-specific
upgrades, configuration changes and activation of components. In addition, our
solution offers a wide range of monitoring and built-in reporting capabilities.
STRATEGY
Our objective is to be the leading provider of business infrastructure
solutions to network service providers. Key elements of our strategy to achieve
this objective include:
EXTEND PRODUCT AND TECHNOLOGY LEADERSHIP. We created the first
commercially available, carrier-class business infrastructure solution to
combine multi-source, multi-layer data collection and aggregation with automated
user account provisioning on a single platform. We will continue to expand our
research and development efforts and enhance our products to expand our market
leadership position as the adoption of next-generation networks continues. In
addition, we intend to continue to introduce new products and services that will
enable network service providers to leverage the rapid growth of Internet
services and data traffic into increased opportunities for revenue generation.
EXPAND COLLABORATIVE RELATIONSHIPS WITH TECHNOLOGY PROVIDERS. We plan to
leverage our collaborative relationships with key technology providers to
enhance our overall product offerings and better serve our customers. Our
XACCTREADY alliance program, launched in June 1999, now has over 70 members
worldwide, including business applications providers, network hardware and
software vendors and value-added systems integrators. By offering compatibility
with an increasing number of business applications and network hardware and
software platforms, we intend to facilitate broad acceptance of and demand for
our solutions.
LEVERAGE AND EXPAND STRATEGIC ALLIANCES. We believe that forging
strategic alliances with key systems integrators is critical to delivering
comprehensive business infrastructure solutions. We work closely with major
36
systems integrators to integrate our solutions into our customers' networks, and
we intend to continue to leverage these relationships to reinforce our position
as the preferred infrastructure platform for next-generation applications
deployment. We also intend to develop additional systems integrator
relationships to increase market penetration and extend the scope of our
customer reach.
LEVERAGE INSTALLED CUSTOMER BASE. We intend to further penetrate our
existing customers and obtain new customers by capitalizing on the success of
our initial installations and leveraging our ability to deliver scalable,
reliable, carrier-class solutions. The strategic importance of our products to
our customers allows us to develop relationships with our customers' senior
decisionmakers, which in turn facilitates rapid adoption and deployment of our
platform throughout our customers' organizations.
BROADEN INTERNATIONAL PRESENCE. In addition to our three sales offices in
the United States, we currently maintain direct sales offices in Germany,
Israel, Sweden and the United Kingdom. We plan to expand our direct and indirect
sales channels to include Asia and Latin America, with particular focus on those
areas that are adopting next-generation networks.
PRODUCTS AND TECHNOLOGY
XACCTUSAGE is a carrier-class software platform that provides two basic
functions: network usage data collection and automated user account
provisioning. The XACCTUSAGE product family includes a Service Provider Edition
and an Enterprise Edition, each of which is optimized to meet the special needs
of its respective audience.
The Service Provider Edition is targeted to:
o LECS--traditional telecommunications providers, also known as local
exchange carriers;
o CLECS--competitive local exchange carriers;
o wireless data service providers;
o cable operators that deliver data services;
o ISPS--Internet service providers; and
o ASPS--applications service providers.
The Enterprise Edition of XACCTUSAGE is designed for large businesses
that operate networks within the extended enterprise but that do not need the
full range of functionality contained in the Service Provider Edition. Both
editions are based on XACCTUSAGE's core multi-source, multi-layer network usage
metering and multi-service user account provisioning platform. Both editions are
designed to scale to meet the demands of the largest networks while allowing
changes to the network devices and business applications to be made
independently, without disrupting the operation of business applications or the
network.
XACCTUSAGE captures in real-time the Internet protocol session and
transaction information produced and logged by the individual network elements
and, with its real-time enhancement process, transforms this raw data into
meaningful business information. It utilizes a variety of device-specific, as
well as general purpose, software agents called information source modules, or
ISMs. These software modules capture, filter, aggregate, correlate and merge
data collected from the various network elements such as routers, switches,
firewalls, authentication servers, lightweight directory access protocol, or
LDAP, servers, domain name servers, or DNS, web servers, email servers, video
servers, voice over IP gateways and hundreds of other network elements. Because
they are located near these network elements, our ISMs and other modules
comprise a distributed software architecture that allows XACCTUSAGE to capture
usage information from all layers of the network, from the physical layer to the
application layer.
DATA COLLECTION AND USAGE. Our platform tracks or meters a variety of
parameters such as actual session quality of service, bandwidth used, bit-rate,
duration and applications launched by the end-user, and transforms this data
into a clear and detailed picture of user-level service utilization. We refer to
this output as extensible detail records. Extensible detail records are
comprehensive and extensible usage records that are roughly analogous to the
telephone communications industry's call detail records. Unlike call detail
records, however, extensible detail records can be configured to virtually any
data format and transport and can therefore be readily integrated with the
existing operations support and business support systems of network service
providers. Thus, extensible detail
37
records also allow network service providers to use this data for a variety of
business planning and decision support purposes such as:
o usage-based pricing for network services;
o user and application profiling;
o service usage audits;
o capacity planning; and
o other traffic engineering purposes.
USER ACCOUNT PROVISIONING. The automated, end-to-end user account
provisioning capabilities of the XACCTUSAGE platform enable network service
providers to implement real-time subscriber activation, authentication,
authorization and management. Instead of manually configuring services for an
existing or a new subscriber, the network service providers' customer service
application passes the information to XACCTUSAGE via its application programming
interface. The XACCT service provisioning modules, in turn, configure the
relevant application servers automatically in real-time and notify the network
service provider's customer service representative upon completion. In the case
of bundled services, if while configuring multiple services the system
encounters a problem with a specific service, the XACCT system has the
intelligence to roll back the entire operation upon identifying a specific
problem and alert the network service provider so that corrective actions can be
promptly taken.
In addition, network service providers can offer customer self-care
programs that allow the customers to add, delete and modify their services and
service plans, in real-time, without using the network service provider's call
center. This feature allows network service providers to reduce their call
center costs, improve customer satisfaction and shorten their time to revenue.
The XACCT architecture is composed of several well-defined functional
layers, which together provide for the scalability, flexibility, availability
and manageability of our platform:
NON-INTRUSIVE NETWORK INTERFACES FOR COLLECTION AND PROVISIONING.
XACCTUSAGE's non-intrusive operation does not interfere or disrupt the operation
of any network elements or services. XACCT software agents can be activated
without any adverse impact on network elements, enabling them to perform
multi-service data collection spanning a wide range of network devices and
services from the physical layer to the application layer.
MODULAR, DISTRIBUTED DATA PROCESSING CAPABILITIES. The XACCTUSAGE
architecture is designed to work in distributed heterogeneous environments and
is capable of running on multiple platforms. The modular, distributed design
also enables at-source data filtering and aggregation to reduce system capacity
bottlenecks and excessive bandwidth utilization caused by the collection
process. The real-time, policy-based filtering, aggregation, enhancement and
merging capabilities enable XACCTUSAGE to scale and adapt to the large and
complex networks of our customers.
OPEN, EXTENSIBLE DATA OUTPUT AND PROVISIONING INTERFACES. The XACCT
Interface Server can be configured to produce specified data formats and
transport methods to match downstream applications, as well as to allow for
quick and easy integration with back office applications. XACCT Interface
Server's real-time provisioning transaction server enables automated
provisioning of complex services.
UNIFIED, SECURED, WEB-BASED MANAGEMENT. Our web-based user interface
allows secure access to the system with off-the-shelf browsers, locally or
remotely. Our user interface server allows for efficient, centralized system
administration to allow easy system reconfigurations and field upgrades. Our
user interface server also includes a customizable reporting system with
built-in report generation. An open database connectivity compliant interface is
also available to enable the use of off-the-shelf graphical reporting packages.
38
CUSTOMERS AND CASE STUDIES
We have initially targeted network service providers and integrated
communications providers such as local exchange carriers, competitive local
exchange carriers, cable operators, wireless operators, Internet service
providers and application service providers. As of December 31, 1999, over 20
customers had licensed XACCTUSAGE, including the following:
Bell Nexxia (Canada) MCI Worldcom (U.S.)
Global One (U.S. and Belgium) Siemens (Canada)
GTE Internetworking (U.S.) TV Cabo (Portugal)
Harvard University (U.S.) Verio (U.S.)
Mannesman Ipulsys (Europe) UUNET (U.S.)
The following case studies illustrate how some of our customers are using
XACCTUSAGE:
BROADWING
Broadwing Communications is a wholly-owned subsidiary of Broadwing Inc.
Broadwing Inc. is an integrated communications company that delivers voice, data
and Internet solutions to a variety of customers nationwide.
CHALLENGE: Broadwing needed to build a flexible business
infrastructure that could support the rapid deployment of new network
services differentiated by value-based pricing.
SOLUTION: We designed and implemented a solution for Broadwing that
normalizes data collected from multiple network elements in order to
measure customer bandwidth utilization. The ability of XACCTUSAGE to
selectively filter and aggregate incoming data allows the system to
handle large volumes of incoming data with minimal network impact.
Real-time correlation of this data with Broadwing's operational databases
allows Broadwing to measure the bandwidth delivered for each type of
service on a per customer basis. A key benefit of the adoption of
XACCTUSAGE is the granular view into network management traffic data now
available to Broadwing. The seamless integration of XACCTUSAGE with
Broadwing's existing Kenan billing system enables Broadwing to offer new
services quickly and with minimal disruption.
GLOBALONE
GlobalOne is a worldwide provider of voice, data and Internet Protocol,
or IP, network services. GlobalOne is a subsidiary of France Telecom.
CHALLENGE: GlobalOne needed to deploy a single, scalable and
flexible platform that would provide it with bandwidth utilization and
service management metrics by customer and that would enable it to offer
differentiated, usage-based, bandwidth-on-demand services.
SOLUTION: XACCTUSAGE captures, aggregates and consolidates all IP
traffic data from GlobalOne's worldwide network of Cisco routers in
real-time and correlates this data with customer information in
GlobalOne's operational database, enabling it to support customer service
level agreements. XACCTUSAGE also extracts information on network
performance and data transmission burst rates. The XACCTUSAGE system
correlates information in multiple formats into a single, normalized
billing record that incorporates bandwidth utilization, network
performance and service level metrics. The resulting record is presented
in formats that can be processed by any of the several billing systems in
use at GlobalOne. Our solution allows GlobalOne to provide data in
support of service level agreements, and to offer differentiated,
usage-based pricing models that allow it to offer bandwidth-on-demand
service.
SALES AND MARKETING
We license our products and sell services primarily through our direct
sales organization, complemented by the selling and support efforts of our
authorized value-added resellers, including system integrators, and other
strategic partners. As of December 31, 1999, our sales force consisted of 22
sales professionals and 21 technical field professionals. We have sales offices
in the greater metropolitan areas of Atlanta, Denver, San Francisco, Tel
39
Aviv, Israel, London, England, Stockholm, Sweden and Berlin, Germany. System
engineers who provide pre-sales support to potential customers on product
information and deployment capabilities complement our direct sales
professionals. We plan to significantly expand the size of our direct sales
organization and to establish additional sales offices domestically and
internationally.
Our sales process requires that we work closely with targeted customers
to identify short-term technical needs and long-term goals. Our sales team,
which includes both sales and technical professionals, then works with the
customer to develop a proposal to address these needs. In many cases, we
collaborate with our customers' senior management to develop mission-critical
applications. The level of customer analysis and financial commitment required
for many of our product implementations has caused our sales cycle generally to
range from three to nine months.
We focus our marketing efforts on educating potential customers,
generating new sales opportunities, and creating awareness of our product and
their applications. We conduct a variety of marketing programs to educate our
target market, including seminars, trade shows, direct mail campaigns, press
relations and industry analyst programs.
COLLABORATIVE RELATIONSHIPS AND STRATEGIC ALLIANCES
To enhance the productivity of our sales and service organizations, we
have established relationships with system integrators, value-added resellers,
network infrastructure vendors and software applications vendors through our
XACCTREADY program.
SYSTEM INTEGRATORS AND VALUE-ADDED RESELLERS. We have established
strategic relationships with a number of leading system integrators. Many of our
system integrators have established relationships across a broad range of
network service providers and enterprise customers and our relationships with
these system integrators often enable us to reach key decision-makers within
these enterprises more quickly, thus reducing sales cycles. Working with system
integrators enables us to leverage their professional services and integration
resources and shorten solution implementation time. In addition, by leveraging
our partners' domain expertise, we can more effectively and rapidly penetrate
vertical markets. We also market XACCTUSAGE through value-added resellers.
Value-added resellers enable us to seed the market with specific pre-packaged
solutions built on the XACCTUSAGE platform. Many of these value-added resellers
specialize in providing solutions to particular market segments, including the
network service provider, government and large enterprise segments. We intend to
leverage the domain expertise of our value-added resellers to deliver solutions
that accelerate our penetration in key markets.
We had relationships with the following system integrators and
value-added resellers as of December 31, 1999:
Atos Integration Group Federal Network Services, Inc. The Management Network Group, Inc.
Cap Gemini Telecom and Media Group Steria SCA Transtema AB
Consultancy and Project Group (CPG) Logica plc UNISYS Corporation
Danet, Inc. Maxnet Systems, Inc. WeMM
Etnoteam S.p.A Nissho Iwai Infocom Corporation
Federal Data Corporation Telesoft Corporation
NETWORK INFRASTRUCTURE VENDORS. We work with leading vendors of network
hardware and software infrastructure products to help ensure compatibility of
XACCTUSAGE with their products. We worked with the following network hardware
and software infrastructure vendors as of December 31, 1999:
Abatis Systems Corporation Data General Corporation Sun Microsystems, Inc.
Bridgewater Systems Corporation Ennovate Networks, Inc. Unisphere Solutions, Inc.
Cisco Systems, Inc. IP Highway, Inc.
40
SOFTWARE APPLICATIONS VENDORS. We work with leading application software
and database vendors and operations support and billing systems integrators to
help ensure compatibility or integration of XACCTUSAGE with their products. We
worked with the following application software and database vendors and
operations support and billing systems integrators as of December 31, 1999:
ADC Telecommunications (Saville) Info Directions, Inc. Proxima Systems Ltd.
Alpha Software Consulting Billing Infocomm International Corporation Savera Systems, Inc.
Satyam Computer Services, Ltd. Intasys Corporation Sepro Telecom International Ltd.
Solutions Independent Technology Systems Sigma Systems Group, Inc.
American Management Systems Integretel, Inc. SLP InfoWare
Aptis Software, Inc. Kingston-SCL Ltd. Smarten Software
Ascom AG LHS Communications Systems, Inc. Solect Technology Group
Certis Ltd. MaxBill Limited Teleknowledge Group Ltd.
Comptel AB Mer Telemanagement Solutions Ltd. USHA Communications Technology
Convergys Corporation Mindport Integrated Business Systems BV Veramark Technologies, Inc.
CSG Systems, Inc. Net Toll Version Software (PTY) Ltd.
Daleen Technologies, Inc. OAN Services, Inc. Vitria Technology, Inc.
DST Innovis (CableData, Inc.) Portal Software, Inc.
FileTek, Inc.
Geneva Technology Ltd.
SERVICE AND SUPPORT
The primary function of our professional services organization is to
facilitate the implementation of our product by customers and system
integrators. We provide services directly to our customers and to system
integrators for XACCTUSAGE project planning, implementation and performance. Our
professional services organization works closely with system integrators to
train their personnel in the design and implementation of our product line.
We offer different customer support options to our customers, ranging
from local business hour support to seven days a week, 24 hours-a-day support
with a dedicated customer support representative.
Our professional services and customer support groups deliver education
and product training to our customers and strategic partners relating to the
design of business solutions using XACCTUSAGE, as well as the technical aspects
of deployment, use and maintenance. Our professional service and customer
support organizations consisted of 21 employees as of December 31, 1999.
RESEARCH AND DEVELOPMENT
As of December 31, 1999, our engineering group consisted of 31 employees,
divided into the following groups:
CORE RESEARCH AND DEVELOPMENT. This group researches and develops
advanced architectures and technologies and works to improve the performance,
quality, features, coverage and manageability of the XACCTUSAGE product and
related information source modules. This group also closely monitors
developments in industry standards related to eBusiness, Internet technologies,
operating systems, networks and software applications.
APPLICATIONS. This group develops back office applications that, when
combined with XACCTUSAGE, will provide a vertically integrated solution for
select back office functions.
TECHNICAL PUBLICATIONS. This group is responsible for the technical
writing for our products.
QUALITY ASSURANCE. This group designs and manages a process designed to
identify and prevent software defects throughout the development cycle.
Since our inception, we have focused our research and development efforts
on developing and enhancing XACCTUSAGE. We are currently working to increase the
performance, quality, features, coverage and manageability of our XACCTUSAGE
product and to develop back office applications. Research and development
expenses were
41
$390,000 in the period from our inception in June 1997 through December 31,
1997, $1.5 million in 1998 and $2.2 million in 1999.
COMPETITION
The market for our product is new, evolving and subject to rapid
technological change. To date, our primary competition has come from solutions
developed by the in-house technology departments of potential customers or
partners. We have experienced and expect to continue to experience increased
competition from current and potential competitors. Many of these companies have
greater name recognition, longer operating histories, larger customer bases and
significantly greater financial, technical, marketing, public relations, sales,
distribution and other resources. Some of our potential competitors are among
the largest and most well capitalized software, hardware and communications
companies in the world. Our competitors include:
o in-house information technology departments of potential customers or
partners that have developed or may develop systems that substitute
for some or all of the functionality of our XACCTUSAGE product;
o companies with products that address our market, such as Hewlett
Packard, Lucent, EHPT and Narus; and
o companies that have developed software that addresses only certain
components of Internet Protocol mediation.
We are also aware of numerous other companies that are focusing
significant resources on developing and marketing products that will compete
with XACCTUSAGE. Additional competitors could come from a number of companies
that produce application integration or communication software.
We expect that competition will increase in the near-term and that our
primary long-term competitors may not have entered the market yet. If any of our
competitors were to become the industry standard or were to enter into or expand
relationships with significantly larger companies through mergers, acquisitions
or otherwise, our business and operating results could be significantly harmed.
In addition, potential competitors may bundle their products or incorporate
functionality into existing products in a manner that discourages users from
purchasing our products. Increased competition could result in price reductions,
fewer customer orders, reduced gross margin and loss of market share, any of
which could cause our business to suffer.
We believe that the principal competitive factors in our market include:
o product quality, scalability, performance and reliability;
o the ability of products to operate with multiple software
applications;
o the ability of products to operate with multi-vendor network
infrastructure products, hardware and software platforms;
o establishment of a significant base of reference customers;
o ability to implement solutions quickly;
o customer service;
o relationship with system integrators and value-added resellers;
o strength of core technology; and
o product price.
Although we believe that we compete favorably with respect to these
factors, our market is relatively new and is evolving rapidly. We may not
compete successfully against current and potential competitors.
INTELLECTUAL PROPERTY AND OTHER PROPERTY RIGHTS
Our success is dependent upon our ability to develop and protect our
proprietary technology and intellectual proprietary rights. To protect our
proprietary technology and intellectual property, we rely primarily on a
combination of contractual provisions, confidentiality procedures, trade
secrets, and copyright and trademark laws.
42
However, we believe that factors such as the technological and creative skills
of personnel, new product developments, frequent product enhancements and
reliable product maintenance are more essential to establishing and maintaining
a technology leadership position. We cannot assure you that others will not
develop technologies that are similar or superior to our technology.
We license XACCTUSAGE pursuant to non-exclusive license agreements that
impose restrictions on customers' ability to utilize the software. In addition,
we seek to avoid disclosure of our trade secrets, including but not limited to,
requiring employees, customers and others with access to our proprietary
information to execute confidentiality agreements with us and restricting access
to our source code. We also seek to protect our software, documentation and
other written materials under trade secret and copyright laws.
Some of our license agreements require us to place the source code for
XACCTUSAGE into escrow. These agreements generally provide that these parties
will have a limited, non-exclusive right to use this code if:
o there is a bankruptcy, insolvency or winding-up proceeding involving
us;
o we cease to do business without a successor; or
o we do not provide contractually agreed maintenance and support.
We have two U.S. patent applications pending. It is possible that the
patents that we have applied for, if issued, or our potential future patents may
be successfully challenged or that no patent will be issued from our patent
application. It is also possible that we may not develop proprietary products or
technologies that are patentable, that any patent issued to us may not provide
us with any competitive advantages, or that the patents of others will seriously
harm our ability to do business.
We have received an initial refusal of our application to register our
XACCT trademark in the United States. We are currently preparing a response to
the United States trademark office.
EMPLOYEES
As of December 31, 1999, we had a total of 92 full time employees. Of the
total number of employees, 31 were engaged in research and development, 22 in
sales, seven in marketing, 21 in customer support, professional services and
training, and 11 in administration and finance. None of our employees are bound
by an employment agreement requiring service for any defined period of time.
None of our employees are represented by a labor union. We have not experienced
any work stoppage and consider our relations with our employees to be good.
As of December 31, 1999, 47 of our employees were located in Israel. We are
not a party to any collective bargaining agreement with our employees. However,
Israeli law and certain provisions of the nationwide collective bargaining
agreements between the government of Israel, the Histadrut which is the General
Federation of Labor in Israel, and the Coordinating Bureau of Economic
Organizations which is the Israeli federation of employers' organizations, apply
to our Israeli employees by way of expansion orders of the Israeli Ministry of
Labor and Welfare. These provisions and other mandatory provisions of Israel law
principally concern the maximum length of the work day and the work week,
minimum wages, contributions to a pension fund, insurance for work-related
accidents, procedures for dismissing employees, determination of severance
payment and other conditions of employment. Furthermore, pursuant to such
provisions, the wages of most of our employees are subject to increase as a
result of cost of living adjustments, based on changes in the Israeli Consumer
Price Index. The formulas for those adjustments and their amounts and frequency
are modified from time to time according to the agreements reached between the
government of Israel, the Manufacturers Association and the General Federation
of Labor in Israel. Israeli law generally requires the payment of severance pay
upon the retirement or death of an employee or upon termination of employment by
the employer or, in certain circumstances, by the employee. We currently fund
most of our ongoing severance obligations for our Israeli employees by making
monthly payments for insurance policies to cover these obligations.
FACILITIES
We lease approximately 8,100 square feet in a single office building
located in Bnei-Brak, Israel and approximately 16,200 square feet in a single
office building located in Santa Clara, California. The leases for the office
space in Bnei-Brak, Israel expire in April 2000. We have entered into a lease
for office space in Ramat Gan,
43
Israel for approximately 18,300 square feet commencing April 2000 that will
expire in April 2003 with an option for an additional three years. The lease for
the office space in Santa Clara, California expires in December 2004.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
44
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
individuals who will be our directors and executive officers as of February 29,
2000. All of these individuals are presently serving in the respective
capacities described below.
NAME AGE POSITION
- ------ --------- ----------------------------------------------------------------
Eric Gries........................... 40 President, Chief Executive Officer and Director
Eran Wagner.......................... 32 Executive Vice President, Technology and Chairman of the
Board
Richard Van Hoesen................... 44 Vice President and Chief Financial Officer
Limor Schweitzer..................... 31 Chief Technology Officer and Director
Anil Uberoi.......................... 50 Vice President, Product Marketing
Robert C. Hawk....................... 47 Director
Nitsan Yanovski...................... 38 Director
Jon Q. Reynolds, Jr.................. 32 Director
Todd Springer........................ 33 Director
- -------------------
ERIC GRIES has served as our President, Chief Executive Officer and a
director since March 1998. From January 1996 to January 1998, Mr. Gries was the
General Manager of the Network and Systems Management Division at Compuware
Corporation, a global software company. From March 1992 to December 1995, Mr.
Gries was the Vice President of Product Marketing for ACI, Ltd., a publisher of
database development tools. Mr. Gries received his Bachelor of Science and
Master of Business Administration from Northeastern University.
ERAN WAGNER is a co-founder of our company and has served as our Executive
Vice President, Technology since January 2000, a director since June 1997 and
Chairman of the Board since June 1997. From June 1997 to January 1998, Mr.
Wagner served as our Chief Executive Officer. Prior to founding our company, Mr.
Wagner was President and Chief Executive Officer of Xpert UNIX Systems Ltd., a
company he co-founded in 1993 that provides global networking solutions and
specializes in the areas of network billing and accounting, network security,
software development and systems integration. Mr. Wagner served in an elite
technology unit of the Israel Defense Forces. Mr. Wagner holds a Bachelor of
Science in Mathematics and Computer Science, from Tel Aviv University.
RICHARD VAN HOESEN has served as our Vice President and Chief Financial
Officer since February 2000. From November 1998 to January 2000, Mr. Van Hoesen
was Senior Vice President and General Manager of the Micro Focus Division of
Merant plc, a global software company. From March 1998 to November 1998, Mr. Van
Hoesen was Senior Vice President and Chief Financial Officer of Merant. From May
1996 to March 1998, Mr. Van Hoesen was the Vice President, Finance, Chief
Financial Officer and Treasurer of Wall Data Incorporated, a software company.
From October 1994 to May 1996, Mr. Van Hoesen was Vice President and Chief
Financial Officer of Consilium, an enterprise manufacturing software company.
Mr. Van Hoesen holds a Bachelor of Science in Engineering from Lehigh University
and a Master of Business Administration from the Wharton School at the
University of Pennsylvania.
LIMOR SCHWEITZER is a co-founder of our company and has served as a
director since June 1997 and our Chief Technology Officer since January 1998.
From June 1997 to January 1998, Mr. Schweitzer served as our Product Architect
and Research and Development Manager. In 1993, Mr. Schweitzer co-founded Xpert
UNIX Systems Ltd., a provider of global networking solutions specializing in the
areas of network billing and accounting, network security, software development
and systems integration. Mr. Schweitzer has served as the Chief Operations
Officer and the Vice President, Technology of Xpert UNIX Systems Ltd. since its
inception through June 1997. Mr. Schweitzer served in an elite technology unit
of the Israel Defense Forces. Mr. Schweitzer holds a Bachelor of Science in
Mathematics and Physics from Tel-Aviv University.
45
ANIL UBEROI has served as our Vice President, Product Marketing of XACCT
Technologies, Inc., one of our wholly-owned subsidiaries, since April 1998. From
January 1996 to March 1998 Mr. Uberoi was the director of high-speed Internet
connectivity solutions at Netopia, Inc., which was formerly Farallon
Communications. From February 1990 to January 1996, Uberoi was Group Marketing
Manager for all networking products at Sun Microsystems Computer Company. Mr.
Uberoi has done graduate work at Stanford University and University of
California at Berkeley in addition to having a Master of Business Administration
from Santa Clara University, a Master of Business Administration from Bombay
University, and a Bachelor of Engineering from Vikram University, India.
ROBERT C. HAWK has been a director of XACCT since July 1998. Mr. Hawk has
been the President of Hawk Communications, Inc., a telecommunications consulting
company, since May 1997. From May 1986 to April 1997, Mr. Hawk was the President
and Chief Executive Officer of US WEST Multimedia Communications. Mr. Hawk was
President of the Carrier Division of US WEST Communications, a regional
telecommunications service provider, from September 1990 to May 1996. Prior to
that time, Mr. Hawk was Vice President, Marketing and Strategic Planning for CXC
Corporation. Prior to joining CXC Corporation, Mr. Hawk was Director of Advanced
Systems Development for AT&T/American Bell, a telecommunications company. Mr.
Hawk is on the board of directors of Covad, Efficient Networks, Pairgain
Technologies, Concord Communications, Centillium and Com 21. Mr. Hawk received a
Bachelor of Business Administration from University of Iowa and a Master of
Business Administration from University of San Francisco.
NITSAN YANOVSKI has been a director of XACCT since June 1997. Mr. Yanovski
has been Vice President, Business Development of Ampal Industries (Israel) Ltd.
since 1996, and was the Deputy Director General of Ampal Industries (Israel)
Ltd. from 1993 to 1996.Mr. Yanovski serves as a director on the boards of Ampal
Industries (Israel) Ltd., Ampal (Israel) Ltd., Ampal Development (Israel) Ltd.,
Shellcase Ltd. and Xpert Integrated Systems Ltd. Mr. Yanovski received a
Bachelor of Arts in Economics from Tel-Aviv University.
JON Q. REYNOLDS, JR. has served as a director of XACCT since October 1999.
Mr. Reynolds has been employed at Technology Crossover Ventures since July 1997,
most recently as a general partner. From July 1993 to December 1995, Mr.
Reynolds was an associate at General Atlantic Partners, a private equity firm
focusing on information technology. From December 1991 to July 1993, Mr.
Reynolds was a member of the mergers and acquisitions group at Lazard Freres &
Co. Mr. Reynolds is on the board of directors of Inventa Technologies. Mr.
Reynolds received an Associate Bachelor in Geography from Dartmouth College and
a Master of Business Administration from Columbia Business School.
TODD A. SPRINGER has served as a director of XACCT since November 1998. Mr.
Springer has been a Managing Director of Trident Capital, a venture capital
firm, since June 1998. From March 1996 to June 1998, Mr. Springer served as Vice
President of Trident Capital. From September 1994 to February 1996, Mr. Springer
was an associate in corporate finance with Jefferies & Company, Inc., an
investment bank. Mr. Springer is on the board of directors of Newgen Results
Corporation. Mr. Springer received his Bachelor of Science in Economics from
Wharton School at the University of Pennsylvania and his Master of Business
Administration from Stanford Graduate School of Business.
BOARD OF DIRECTORS
Immediately following this offering, our board of directors will consist of
7 directors. As set forth in our articles of association, the person serving as
our Chief Executive Officer will be appointed automatically to the board,
subject to annual shareholder approval. The remaining six directors will be
divided into three classes with each class serving an initial term ranging from
less than one year to three years and thereafter for additional three year
terms. As of August 2000, we will be required under Israeli law to have two
outside or independent directors who will serve a three year term that can be
extended for one additional three year term.
At each annual general meetings of shareholders, the directors who are up
for election to succeed those directors who resign or whose terms are expiring
will be elected by the holders representing the requisite majority of our
ordinary shares as may be required by law. In addition, our articles of
association provide that our authorized number of directors may be changed by
modifying the articles of association by an affirmative vote of 75% of those
present and voting at a general meeting of shareholders. This classification of
the board of directors may have the effect of delaying or preventing changes in
the effective control of our company.
46
ALTERNATIVE DIRECTOR
Our articles of association allow a director to appoint an alternative
director possessing all the rights and obligations of the director who appointed
him or her, except that the alternate has no standing at any meeting while the
appointing director is present and is not entitled to remuneration. A person who
is not qualified to be appointed as a director, or a person who already serves
as a director or an alternative director, may not be appointed as an alternative
director. Unless the appointing director limits the time or scope of the
appointment, the appointment is effective for all purposes until the appointing
director ceases to be a director or terminates the appointment. The appointment
of an alternative director does not in itself diminish the directorship
responsibilities of the appointing director.
OUTSIDE OR INDEPENDENT DIRECTORS
Under the new Israeli Companies Law, 1999-5759, or the Companies Law,
effective as of February 1, 2000, companies incorporated under the laws of the
State of Israel whose shares have been offered to the public in or outside of
Israel are required to appoint at least two outside or independent directors.
The Companies Law provides that a person may not be appointed as an outside
director if such person or such person's relative, partner, employer or any
entity under such person's control, has, as of the date of such person's
appointment as an outside director, or had, during the two years preceding that
date, any affiliation with the company or any entity controlling, controlled by
or under common control with the company. The term "affiliation" includes:
o an employment relationship;
o a business or professional relationship maintained on a regular basis;
o control; and
o service as an office holder.
The Companies Law requires that the outside directors be residents of
Israel. However, the Minister of Justice of the State of Israel has promulgated
regulations exempting certain qualifying foreign companies such as our company
from the applicability of certain provisions of the Companies Law. A "foreign
company" is defined in The Companies Regulations (Concessions for Public
Companies Whose Shares are Registered in a Stock Exchange Outside Israel),
5760-2000, or the regulations, as a public company whose shares were offered to
the public solely outside of Israel or are registered only on a stock exchange
outside of Israel. Pursuant to the regulations, the effective date for
appointment of outside directors for a foreign company has been postponed until
August 1, 2000, and the outside directors of the foreign company need not be an
Israeli resident. No person may serve as an outside director if such person's
position or other business activities create, or may create, a conflict of
interest with the person's responsibilities as an outside director, or may
otherwise interfere with the person's ability to serve as an outside director.
If at the time of the appointment of the outside directors our board shall be
comprised of members of only one gender, then at least one of the outside
directors must be of the other gender.
Outside directors are to be elected by a majority vote at a shareholders'
meeting, provided that either:
o 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 election of the outside director; or
o the total number of shares of non-controlling shareholders voted
against the election of the outside director does not exceed 1% of
the aggregate voting rights in the company.
The initial term of an Israeli outside director is three years and it may
be extended for one additional three year term. Each committee of a company's
board of directors is required to include at least one outside director, except
for the audit committee which must include both outside directors, as also
required by the Nasdaq National Market. Within the statutory period as provided
for in the Companies Law and the regulations, we intend to take all actions
necessary to comply with the Companies Law and its requirements relating to the
appointment of outside directors.
47
An outside director is entitled to compensation as provided in the
regulations that have been adopted pursuant to the Companies Law, and the
outside director is otherwise prohibited from receiving any other compensation,
directly or indirectly, in connection with his or her services as an outside
director.
BOARD COMMITTEES
COMPENSATION COMMITTEE. The board of directors has a compensation committee
that was established in November 1998. The compensation committee, currently
comprised of Messrs. Hawk, Springer and Yanovski, makes recommendations with
respect to share option plans and share purchase plans, and all matters
concerning executive compensation and employee agreements.
AUDIT COMMITTEE. The Companies Law requires public companies such as our
company to appoint an audit committee. Our audit committee was formed in
November 1998 and is currently comprised of Messrs. Reynolds, Springer and
Yanovski. The responsibilities of the audit committee under the Companies Law
include identifying irregularities in the management of the company's business
and approving related party transactions as required by Israeli law. Under the
Companies Law, an audit committee must consist of at least three directors,
including two outside directors. The chairman of the board of directors, any
director employed by or otherwise providing services to the company, and any
controlling shareholder or any relative of a controlling shareholder, may not be
a member of the audit committee. In addition, pursuant to the listing
requirements of the Nasdaq National Market, we will be required to have at least
two independent directors on our audit committee. The audit committee of our
board of directors performs the following functions:
o monitors our system of internal controls;
o monitors corporate financial reporting and internal and external
audits;
o provides the board of directors with the results of its examinations
and recommendations;
o outlines to the board of directors the improvements made or to be made
in internal accounting controls;
o nominates independent auditors; and
o provides the board of directors with other financial information and
materials necessary to make the board of directors aware of
significant financial matters.
INTERNAL AUDITOR
Under the 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 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 accordance with the requirements of the Companies
Law upon the completion of this offering.
DIRECTOR COMPENSATION
We do not currently pay cash compensation to our directors in their
capacity as directors, except for reimbursement of business, travel and other
related expenses.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee is currently comprised of Messrs. Hawk, Springer
and Yanovski. None of these committee members has at any time been an officer or
employee of our company. You should note the following relationships and
transactions with members of the compensation committee and their affiliates:
ROBERT C. HAWK. In July 1998, Mr. Hawk purchased 63,455 ordinary shares at
$0.19 per share, pursuant to a restricted stock purchase agreement. Under the
restricted stock purchase agreement, Eran Wagner and Limor Schweitzer have the
right to repurchase those ordinary shares. The right of Eran Wagner and Limor
Schweitzer to repurchase those ordinary shares lapsed as to one-fourth of the
total number of shares on the first anniversary of the grant date and lapses as
to 1/12th of the total shares each quarter thereafter. The lapsing of the
repurchase right is
48
dependent upon the continued service by Mr. Hawk on our board of directors. In
May 1999, Mr. Hawk received an option to purchase 24,500 shares at an exercise
price of $0.35 per share. Mr. Hawk purchased 24,500 ordinary shares upon
exercise of this option in August 1999 at an aggregate exercise price of $8,575.
These ordinary shares vest over a four year period and are subject to repurchase
until vested.
TODD A. SPRINGER. Mr. Springer is a managing director of Trident Capital
Management, an entity affiliated with Information Associates-II, L.P. and IA-II
Affiliates Fund, L.L.C., each a preferred shareholder of our company. The
following summarizes private placement transactions with Information
Associates-II, L.P. and IA-II Affiliates Fund, L.L.C.:
o OCTOBER 1998: 1,185,184 Series B-1 preferred shares and warrants to
purchase 375,046 Series B-1 preferred shares at $1.40 per share.
o OCTOBER 1998: 1,315,146 Series B-2 preferred shares at $1.40 per
share.
o DECEMBER 1999: 399,938 Series C-1 preferred shares and warrants to
purchase 140,980 Series C-1 preferred shares at $5.32 per share.
o DECEMBER 1999: 70,000 Series C-2 preferred shares at $5.32 per share.
o MARCH 2000: 375,046 Series B-1 preferred shares at $2.80 per share
upon exercise of outstanding warrants.
NITSAN YANOVSKI. Mr. Yanovski is the Vice President of Business Development
of Ampal Industries (Israel) Ltd. and several affiliated entities, which are
preferred shareholders of our company. The following summarizes private
placement transactions with Ampal Industries (Israel) Ltd. and its affiliated
entities:
o JUNE 1997: 1,491,000 Series A preferred shares at $0.71 per share.
o OCTOBER 1998: 1,071,567 Series B-1 preferred shares and warrants to
purchase 160,734 Series B-1 preferred shares at $1.40 per share.
o DECEMBER 1999: 939,883 Series C-1 preferred shares and warrants to
purchase 281,976 Series C-1 preferred shares at $5.32 per share.
Mr. Yanovski is also a non-employee director of Xpert Integrated Systems
Ltd., our Israeli reseller. Eran Wagner and Limor Schweitzer, each a director
and executive officer of our company, are also non-employee directors of Xpert
Integrated Systems Ltd.
Moreover, entities affiliated with Ampal Israel American Corporation,
including Ampal Industries (Israel) Ltd., own approximately 20% of the
outstanding shares of Xpert Integrated Systems Ltd.
No interlocking relationship exists between our board of directors or
compensation committee and the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past.
49
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation that
we paid during the fiscal year ended December 31, 1999 to our Chief Executive
Officer and our other most highly compensated officers who earned more than
$100,000 during that fiscal year. All option grants were made under our 1998
Stock Option Plan, the 1998 Section 102 Share Option Plan or Section 3(i) of the
Israeli Income Tax Ordinance.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ---------------------
--------------------- SECURITIES
NAME AND PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS
- ------------------------------------------------------ -------- -------- ---------------------
Eric Gries......................................... $201,400 $60,420 182,000
President and Chief Executive Officer
Eran Wagner........................................ 152,640 20,352 91,000
Executive Vice President, Technology
Limor Schweitzer................................... 100,000 10,000 91,000
Chief Technology Officer
Anil Uberoi........................................ 159,000 26,500 56,000
Vice President, Product Marketing
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to share options
granted to our Chief Executive Officer and our most highly compensated executive
officers during the fiscal year ended December 31, 1999. We have never granted
any share appreciation rights. All option grants listed in the table below were
made under our 1998 Stock Option Plan, the 1998 Section 102 Share Option Plan or
Section 3(i) of the Israeli Income Tax Ordinance. The exercise price per share
was equal to the fair market value of the ordinary shares on the date of grant
as determined by our board of directors. Percentage of total options is based on
an aggregate of 1,461,670 ordinary shares granted under the 1998 Stock Option
Plan, the 1998 Section 102 Share Option Plan or Section 3(i) of the Israeli
Income Tax Ordinance in the year ended December 31, 1999. The potential
realizable value is calculated based on the term of the eight-year option and
assumed rates of share appreciation of 5% and 10%, compounded annually. These
assumed rates comply with the rules of the Securities and Exchange Commission
and do not represent our estimate of future share price. Actual gains, if any,
on share option exercises will be dependent on the future performance of our
ordinary shares.
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------------- VALUE AT ASSUMED
NUMBER PERCENTAGE ANNUAL RATES OF SHARE PRICE
OF SECURITIES OF TOTAL OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------------------
NAME GRANTED FISCAL YEAR SHARE DATE 5% 10%
- --------------------- ------------- ---------------- --------- ---------- ---------- -----------
Eric Gries........... 182,000 12.45% $1.57 10/20/07 $136,138 $326,509
Eran Wagner.......... 91,000 6.23 1.57 10/20/07 68,214 163,385
Limor Schweitzer..... 91,000 6.23 1.57 10/20/07 68,214 163,385
Anil Uberoi.......... 28,000 1.92 0.35 8/12/07 4,679 11,207
28,000 1.92 1.57 10/20/07 20,989 50,272
50
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth our Chief Executive Officer and our other
most highly compensated executive officers information concerning ordinary
shares acquired upon exercise of share options in fiscal year ended December 31,
1999 and exercisable and unexercisable options held as of December 31, 1999. All
options listed in the table below were granted under our 1998 Stock Option Plan,
1998 Section 102 Share Option Plan or Section 3(i) of the Israeli Income Tax
Ordinance. The value realized is based on the assumed initial public offering
price of $ , minus the per share exercise price, multiplied by the number of
shares issued upon exercise of the option.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END
ACQUIRED ON VALUE ----------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ------------- ------------ ------------ ------------- ------------ -------------
Eric Gries............ -- -- 215,412 518,958 $ $
Eran Wagner........... -- -- 13,125 130,375
Limor Schweitzer...... -- -- 13,125 130,375
Anil Uberoi........... -- -- 103,484 207,050
EMPLOYMENT AGREEMENTS
ERIC GRIES' employment agreement, dated January 27, 1998, establishes Mr.
Gries' initial annual salary of $190,000 commencing on March 1998 and provides
for a $30,000 lump sum signing bonus and eligibility for benefits and
performance based bonuses. This agreement also provides for his nomination to
our board of directors. Mr. Gries' employment is at will and may be terminated
at any time, with or without cause. If his employment is terminated by us
without cause or if he is constructively terminated, we must pay his salary for
up to 12 additional months. Under this agreement, Mr. Gries was granted the
right to receive an option to purchase 412,370 ordinary shares at an exercise
price of $0.07 per share under the 1998 Stock Option Plan. As an incentive bonus
for 1998, Mr. Gries received an option to purchase 140,000 ordinary shares at an
exercise price of $0.35 per share under the 1998 Stock Option Plan. As an
incentive bonus for 1999, Mr. Gries received an option to purchase 182,000
ordinary shares at an exercise price of $1.57 per share under the 1998 Stock
Option Plan. As an incentive bonus for 2000, Mr. Gries received an option to
purchase 70,490 ordinary shares at an exercise price of $0.71 per share under
the 1998 Stock Option Plan. The shares subject to these options vest ratably in
quarterly installments over the four year period from the date of grant. All of
the shares subject to options held by Mr. Gries that have not vested shall vest
either upon a change of control of our company, or if Mr. Gries is terminated
without cause or is constructively terminated. As of February 29, 2000, an
aggregate of 534,677 ordinary shares have not vested.
ERAN WAGNER'S offer letter, dated August 15, 1998, provides for an initial
annual salary of $144,000 commencing on September 25, 1998, and eligibility for
benefits and performance based bonuses. As an incentive bonus for 1998, Mr.
Wagner received an option to purchase 52,500 ordinary shares at an exercise
price of $0.35 per share under the 1998 Stock Option Plan. As an incentive bonus
for 1999, Mr. Wagner received an option to purchase 91,000 ordinary shares at an
exercise price of $1.57 per share under the 1998 Stock Option Plan. As an
incentive bonus for 2000, Mr. Wagner received an option to purchase 28,490
ordinary shares at an exercise price of $0.71 per share under the 1998 Stock
Option Plan. The shares subject to these options vest ratably in quarterly
installments over the four year period from the date of grant. If Mr. Wagner is
terminated without cause, his salary and benefits will continue for six months
following effective date of termination. Mr. Wagner's employment is at will and
may be terminated at any time, with or without cause. As of February 29, 2000,
an aggregate of 146,054 shares have not vested.
RICHARD VAN HOESEN'S offer letter, dated January 14, 2000, provides for an
initial annual salary of approximately $200,000 commencing on January 14, 2000,
eligibility for benefits and performance based bonuses. Pursuant to the offer
letter, Mr. Van Hoesen received an option to purchase 447,300 ordinary shares at
an exercise price of $3.00 per share under the 1998 Stock Option Plan. The
shares subject to these options vest ratably in quarterly installments over the
four year period from the date of grant. If Mr. Van Hoesen is terminated without
cause, his salary and benefits will continue for 12 months following effective
date of termination. Mr. Van Hoesen's employment is at will and may be
terminated at any time, with or without cause. All of the shares subject to
options held by Mr. Van Hoesen that have not vested shall vest upon a change of
control of our company to the extent permitted by the relevant stock option
agreements, the stock option plan and applicable law. As of February 29, 2000,
an aggregate of 447,300 shares have not vested.
51
LIMOR SCHWEITZER'S offer letter, dated as of January 1, 2000, provides for
an initial annual salary of $165,000 commencing as of the date of the offer
letter and eligibility for benefits and performance based bonuses. Mr.
Schweitzer received an option to purchase 52,500 ordinary shares at an exercise
price of $0.35 per share under Section 3(i) of the Israeli Income Tax Ordinance.
As an incentive bonus for 1999, Mr. Schweitzer received an option to purchase
91,000 ordinary shares at an exercise price of $1.57 per share under Section
3(i) of the Israeli Income Tax Ordinance. As an incentive bonus for 2000, Mr.
Schweitzer received an option to purchase 14,000 ordinary shares at an exercise
price of $0.71 per share under the 1998 Section 102 Share Option Plan. The
shares subject to these options vest ratably in quarterly installments over the
four year period from the date of grant. If Mr. Schweitzer is terminated without
cause, his salary and benefits will continue for six months following the
effective date of termination. Mr. Schweitzer's employment is at will and may be
terminated at any time, with or without cause. As of February 29, 2000 an
aggregate of 135,187 shares have not vested.
ANIL UBEROI'S offer letter, dated March 26, 1998, provides for an initial
annual salary of $150,000 commencing on April 1, 1998, and eligibility for
benefits and performance based bonuses. Pursuant to the offer letter, Mr. Uberoi
received an option to purchase 212,534 ordinary shares at an exercise price of
$0.14 per share under the 1998 Stock Option Plan. As an incentive bonus for
1998, Mr. Uberoi received an option to purchase 42,000 ordinary shares at an
exercise price of $0.35 per share under the 1998 Stock Option Plan. As an
incentive bonus for 1999, Mr. Uberoi received an option to purchase 28,000
ordinary shares at an exercise price of $0.35 per share and 28,000 ordinary
shares at an exercise price of $1.57 per share under the 1998 Stock Option Plan.
As an incentive bonus for 2000, Mr. Uberoi received an option to purchase 37,100
ordinary shares at an exercise price of $0.71 per share under the 1998 Stock
Option Plan. The shares subject to these options vest ratably in quarterly
installments over the four year period from the date of grant. If Mr. Uberoi is
terminated without cause, his salary and benefits will continue for three months
following effective date of termination. Mr. Uberoi's employment is at will and
may be terminated at any time, with or without cause. All of the shares subject
to options held by Mr. Uberoi that have not vested shall vest upon a change of
control of our company to the extent permitted by the relevant stock option
agreements, the stock option plan and applicable law. As of February 29, 2000,
an aggregate of 229,625 shares have not vested.
OTHER AGREEMENTS
We require each of our employees to enter into proprietary rights and
invention assignment agreements prohibiting the employee from disclosing any of
our confidential or proprietary information. In addition, the agreements
generally provide that upon termination the employee will not solicit our
employees for a period of 12 months. Substantially all of our key employees in
Israel have agreed not to compete with us for one year following the termination
of their employment with us. At the time of commencement of employment, our U.S.
employees also generally sign offer letters specifying certain basic terms and
conditions of employment and our Israel employees generally sign employment
agreements specifying certain basic terms and conditions of employment,
including customary notice provisions for termination consistent with Israeli
law.
EMPLOYEE BENEFIT PLANS
SECTION 102 SHARE OPTION PLAN
In July 1998, our board of directors adopted a share option plan in
accordance with Section 102 of the Israeli Income Tax Ordinance, or the 102
Plan. The 102 Plan expires in 2006. As of February 29, 2000, we had outstanding
options to purchase 803,600 ordinary shares under the 102 Plan at a weighted
average exercise price of $0.77 per ordinary share. As of that date, our
officers held options to purchase 192,724 ordinary shares under the 102 Plan,
and no director held any options issued under the 102 Plan. We believe that our
issuance of options to Israeli employees has been done in compliance with
Israeli securities laws. However, due to uncertainty relating to the proper
interpretation of these laws, we cannot be certain the Israel Securities
Authority will not challenge our position.
NUMBER OF ORDINARY SHARES AVAILABLE UNDER THE SECTION 102 SHARE OPTION
PLAN. Under the 102 Plan, we have reserved an aggregate of 2,060,000 voting
ordinary shares for grant to our Israeli employees.
EXERCISE PRICE AND FORM OF OPTIONS. Our board of directors determines the
exercise prices of options granted under the 102 Plan at the time of the grant.
The options granted under the 102 Plan typically expire no later than
52
eight years from the date of grant. Any shares subject to options that are
cancelled or not exercised before expiration become available for future grant.
ADMINISTRATION OF SECTION 102 SHARE OPTION PLAN. In general, our board of
directors administers the 102 Plan. The administrator has the power to determine
the terms of the options granted, including the exercise price, the number of
ordinary shares subject to each option, the exercisability of the options and
the form of consideration payable upon exercise.
RIGHTS UPON TERMINATION. Pursuant to the 102 Plan, if the employment of any
optionee is terminated as a result of death or disability of such optionee, the
optionee or his or her heirs may, within a period of three months following the
termination, exercise the options that were already vested upon such
termination.
TRANSFERABILITY OF OPTIONS. Except for transfer as a result of death, the
102 Plan does not allow for the transfer of options and only the optionee may
exercise an option.
ADJUSTMENTS UPON MERGER. The 102 Plan provides that in the event of a
merger with or into another corporation, the successor corporation shall assume
or substitute equivalent options for each option. However, in the event that the
successor corporation will not agree to assume the options, then all outstanding
options will accelerate and become fully vested ten days prior to the close of
the merger.
PROXY. Until we become a public company, any shares purchased through the
exercise of an option granted under the 102 Plan are voted by proxy pursuant to
the directions of our board of directors, with the proxy to be given to the
person or persons designated by our board of directors. Currently, Eran Wagner
and Limor Schweitzer are the persons designated by our board of directors to
vote the proxies.
TAXATION. Pursuant to Section 102 of the Israeli Income Tax Ordinance and
the rules promulgated thereunder (including the requirement that the options and
the underlying shares be deposited with a trustee for a period of at-least two
years), the tax on the benefit arising to the employee from the grant and
exercise of options as well as from the allotment of ordinary shares under these
options is deferred until the transfer of the options and ordinary shares to the
employee's name or upon the sale of those options and/or ordinary shares. We
will be allowed to claim as an expense for tax purposes the amounts credited to
the employees as a benefit upon sale of the shares allotted under the plan. The
benefit is equal to the difference between the market price and the exercise
price. The related capital gains tax is payable by the employee.
SECTION 3(i) SHARE OPTION PLAN
Section 3(i) of the Israeli Income Tax Ordinance governs the tax treatment
of share options not issued pursuant to Section 102 of the Israeli Income Tax
Ordinance. As of February 29, 2000, we had issued an aggregate of 459,214
options that will be taxed in accordance with Section 3(i) of the Israeli Income
Tax Ordinance. Prior to the completion of this offering, we intend to adopt a
formal, written share option plan in accordance with Section 3(i) of the Israeli
Income Tax Ordinance, or the 3(i) Plan. The 3(i) Plan will be effective for a
period of ten years commencing upon the date of its adoption.
NUMBER OF ORDINARY SHARES AVAILABLE UNDER THE SECTION 3(i) SHARE OPTION
PLAN. Under the 3(i) Plan, our board of directors has authority to grant options
to purchase ordinary shares to our Israeli employees, subject to shareholder
approval upon reaching specified thresholds. Any shares subject to options that
are cancelled or not exercised before expiration become available for future
grant.
ADMINISTRATION OF SECTION 3(i) SHARE OPTION PLAN. In general, our board of
directors will administer the 3(i) Plan. Our board of directors will determine
the terms and conditions of the options, as well as the identity of the
participants in the 3(i) Plan and the number of ordinary shares covered by each
option granted under the 3(i) Plan, based upon a recommendation of the
compensation committee.
RIGHTS UPON TERMINATION. The 3(i) Plan will provide that in case the
employment of any optionee is terminated as a result of death or disability of
such optionee, the optionee or his or her heirs may, within a period of 12
months following the termination, exercise the options that were already vested
upon the time of the termination. This period may be extended by our board of
directors for a period not to exceed the period during which the options by
their terms would otherwise have been exercisable.
53
TRANSFERABILITY. Except for transfer as a result of death, the 3(i) Plan
will not allow for the transfer of options and only the optionee will be allowed
to exercise an option.
ADJUSTMENTS UPON MERGER OR ASSET SALE. The 3(i) Plan will provide that in
the event of a merger with or into another corporation or a sale of all or
substantially all of our assets, the successor corporation shall assume or
substitute equivalent options for each outstanding option. However, in the event
that the successor corporation will not agree to assume or substitute the
options, then all outstanding options will accelerate and become fully vested
ten days prior to the close of the merger or sale.
TAXATION. The options and the underlying shares will be exercisable or
available for sale immediately upon vesting and are not required to be deposited
in trust. The participants in the 3(i) Plan are not eligible for any tax
benefits or deferrals. We will be allowed to claim as an expense for tax
purposes the amounts credited to the employees as a benefit upon sale of the
shares allotted under the plan. The related income tax or capital gain tax shall
be paid by the participants.
1998 SHARE OPTION PLAN
Our board of directors adopted the 1998 Share Option Plan in July 1998. Our
1998 Share Option Plan provides for the grant of incentive share options, within
the meaning of Section 422 of the Internal Revenue Code, to our employees, and
for the grant of nonstatutory share options to our employees, directors and
consultants.
NUMBER OF ORDINARY SHARES AVAILABLE UNDER THE 1998 SHARE OPTION PLAN. As of
February 29, 2000, a total of 5 million of our ordinary shares were reserved for
issuance pursuant to the 1998 Share Option Plan, of which options to acquire
2,723,702 ordinary shares at a weighted average exercise price of $1.41 per
share were issued and outstanding, 317,232 ordinary shares had been issued upon
exercise of outstanding options and 1,959,066 ordinary shares remain available
for issuance.
ADMINISTRATION OF THE 1998 SHARE OPTION PLAN. In general, our board of
directors or a committee maintained by our board for such purpose administers
the 1998 Share Option Plan. The administrator has the power to determine the
terms of the options granted, including the exercise price, the number of
ordinary shares subject to each option, the exercisability of the options and
the form of consideration payable upon exercise.
EXERCISE PRICE AND FORM OF OPTIONS. The administrator determines the
exercise price of options granted under the 1998 Share Option Plan. In the case
of an incentive share option, the exercise price must at least be equal to the
fair market value of our ordinary shares on the date of grant. In addition, the
term of an option may not exceed ten years.
LIMITATION ON OPTION GRANTS. After termination of an employee, director or
consultant, he or she may exercise his or her vested options for the period of
time stated in the option agreement. Generally, if termination is due to death
or disability, the option will remain exercisable for 12 months. In all other
cases, the option will generally remain exercisable for 3 months. An option may
generally not be exercised later than the expiration of its original term.
TRANSFERABILITY OF OPTIONS. Unless otherwise determined by the
administrator, our 1998 Share Option Plan generally does not allow for the
transfer of options and only the optionee may exercise an option during his or
her lifetime.
ADJUSTMENTS UPON MERGER OR ASSET SALE. Our 1998 Share Option Plan provides
that in the event of our merger with or into another corporation or a sale of
substantially all of our assets, the successor corporation will assume or
substitute equivalent options for each option. If the outstanding options are
not assumed or substituted, all outstanding options will accelerate and become
fully vested prior to the close of such merger or sale of assets.
AMENDMENT AND TERMINATION OF OUR 1998 SHARE OPTION PLAN. Our 1998 Share
Option Plan will automatically terminate on July 23, 2003, 60 months from the
day of adoption. In addition, our board of directors has the authority to amend,
suspend or terminate the 1998 Share Option Plan, provided it does not adversely
affect any previously granted option.
54
2000 SHARE OPTION PLAN
Our board of directors intends to adopt the 2000 Share Option Plan prior to
the completion of this offering. The 2000 Share Option Plan will provide for the
grant of incentive share options, within the meaning of Section 422 of the
Internal Revenue Code, to our employees, and for the grant of nonstatutory share
options to our employees, directors and consultants.
NUMBER OF ORDINARY SHARES AVAILABLE UNDER THE 2000 SHARE OPTION PLAN. We
intend to reserve a total of 5,300,000 of our ordinary shares for issuance
pursuant to the 2000 Share Option Plan. Our 2000 Share Option Plan will provide
for annual increases in the number of shares available for issuance on the first
day of each fiscal year, beginning 2001, equal to the LESSER of 5% of the
outstanding ordinary shares on the first day of each fiscal year, 1,500,000
ordinary shares or another amount determined by our board.
ADMINISTRATION OF THE 2000 SHARE OPTION PLAN. In general, our board of
directors will administer the 2000 Share Option Plan. The administrator will
have the power to determine the terms of the options granted, including the
exercise price, the number of ordinary shares subject to each option, the
exercisability of the options and the form of consideration payable upon
exercise.
EXERCISE PRICE AND FORM OF OPTIONS. The administrator will determine the
exercise price of options granted under the 2000 Share Option Plan, but with
respect to all incentive share options, the exercise price must at least be
equal to the fair market value of our ordinary shares on the date of grant. In
addition, the term of an option may not exceed ten years.
LIMITATION ON OPTION GRANTS. No optionee may be granted an option to
purchase more than 1,500,000 ordinary shares in any fiscal year. In connection
with his or her initial service, an optionee may be granted an additional option
to purchase up to 3,000,000 ordinary shares.
RIGHTS UPON TERMINATION. After termination of one of our employees,
directors or consultants, he or she may exercise his or her option for the
period of time stated in the option agreement. Generally, if termination is due
to death or disability, the option will remain exercisable for 12 months. In all
other cases, the option will generally remain exercisable for three months.
However, an option generally may not be exercised later than the expiration of
its original term.
TRANSFERABILITY OF OPTIONS. Unless otherwise determined by the
administrator, our 2000 Share Option Plan generally will not allow for the
transfer of options and only the optionee may exercise an option during his or
her lifetime.
ADJUSTMENTS UPON MERGER OR ASSET SALE. Our 2000 Share Option Plan will
provide that in the event of our merger with or into another corporation or a
sale of substantially all of our assets, the successor corporation will assume
or substitute equivalent options for each option. If the outstanding options are
not assumed or substituted, all outstanding options will accelerate and become
fully vested prior to the close of such merger or sale of assets.
AMENDMENT AND TERMINATION OF OUR 2000 SHARE OPTION PLAN. Our 2000 Share
Option Plan will automatically terminate in 2010, unless we terminate it sooner.
In addition, our board of directors will have the authority to amend, suspend or
terminate the 2000 Share Option Plan provided it does not adversely affect any
previously granted option.
2000 EMPLOYEE SHARE PURCHASE PLAN
Our board of directors intend to adopt the 2000 Employee Share Purchase
Plan prior to the completion of this offering.
NUMBER OF ORDINARY SHARES AVAILABLE UNDER THE 2000 EMPLOYEE SHARE PURCHASE
PLAN. A total of 750,000 of our ordinary shares will be made available for sale
under our 2000 Employee Share Purchase Plan. In addition, our 2000 Employee
Share Purchase Plan will provide for annual increases in the number of ordinary
shares available for issuance on the first day of each fiscal year, beginning
2001, equal to the lesser of 2.0% of the outstanding ordinary shares on the
first day of each fiscal year, 750,000 ordinary shares or another amount
determined by our board of directors.
55
ADMINISTRATION OF THE PURCHASE PLAN. Generally, our board of directors will
administer the 2000 Employee Share Purchase Plan. Our board of directors or a
committee appointed by the board will have full and exclusive authority to
interpret the terms of the purchase plan and determine eligibility.
ELIGIBILITY TO PARTICIPATE. All of our employees will be eligible to
participate if they are customarily employed by us or any participating
subsidiary for at least 20 hours per week and more than five months in any
calendar year. However, an employee will not be granted an option to purchase
shares under the 2000 Employee Share Purchase Plan if such employee:
o immediately after grant owns shares possessing 5% or more of the total
combined voting power or value of all classes of our capital shares,
OR
o whose rights to purchase shares under all of our employee share
purchase plans accrues at a rate that exceeds $25,000 worth of shares
for each calendar year.
OFFERING PERIODS; PARTICIPATION. Our 2000 Employee Share Purchase Plan is
intended to qualify under Section 423 of the Internal Revenue Code and contains
consecutive, overlapping 24-month offering periods. Each offering period
includes four six-month purchase periods. The offering periods generally start
on the first trading day on or after May 1st and November 1st of each year,
except for the first offering period, which will commence on the first trading
day on or after the effective date of this offering and will end on the first
trading day on or after November 1st.
Our 2000 Employee Share Purchase Plan will permit participants to purchase
ordinary shares through payroll deductions of up to 15% of their compensation.
For purposes of our 2000 Employee Share Purchase Plan, compensation will include
base salary, wages, overtime pay, commissions, bonuses and other compensation
paid directly to the employee. A participant will be able to purchase a maximum
of 5,000 ordinary shares during a six-month purchase period.
PURCHASE OF SHARES. Amounts deducted and accumulated by the participant
will be used to purchase full ordinary shares at the end of each six-month
purchase period. The price will be 85% of the lower of the fair market value of
our ordinary shares at the beginning of an offering period or at the end of a
purchase period. If the fair market value at the end of a purchase period is
less than the fair market value at the beginning of the offering period,
participants will be withdrawn from the current offering period following their
purchase of shares and will be automatically re-enrolled in a new offering
period. Participants will be able to end their participation at any time during
an offering period and will be paid their payroll deductions to date.
Participation in our 2000 Employee Share Purchase Plan will end automatically
upon termination of employment with us.
TRANSFERABILITY OF RIGHTS. A participant will not be able to transfer
rights granted under our 2000 Employee Share Purchase Plan other than by will,
the laws of descent and distribution or as otherwise provided under the 2000
Employee Share Purchase Plan.
ADJUSTMENTS UPON MERGER OR ASSET SALE. In the event of our merger with or
into another corporation or a sale of all or substantially all of our assets, a
successor corporation may assume or substitute for each outstanding option. If
the successor corporation refuses to assume or substitute for the outstanding
options, the offering period then in progress will be shortened, and a new
exercise date will be set prior to the closing of the merger or sale of assets.
AMENDMENT AND TERMINATION OF THE 2000 EMPLOYEE SHARE PURCHASE PLAN. Our
2000 Employee Share Purchase Plan will terminate in 2010. However, our board of
directors will have the authority to amend or terminate our 2000 Employee Share
Purchase Plan, except that, subject to certain exceptions, no such action may
adversely affect any outstanding rights to purchase shares.
APPROVAL OF CERTAIN TRANSACTIONS
DUTIES OF OFFICE HOLDERS
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 loyalty and a duty of care. The duty of
loyalty includes:
o avoiding any conflict of interest between the office holder's position
in the company and his or her personal affairs;
56
o avoiding any activity that is competitive with the company;
o avoiding exploiting any business opportunity of the company in order
to receive personal advantage for himself or herself or others; and
o revealing to the company any information or documents relating to the
company's affairs which the office holder has received due to his or
her position as an office holder.
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. This includes the duty to utilize reasonable means to obtain:
o information regarding the appropriateness of a given action brought
for his or her approval or performed by him or her by virtue of his or
her position; and
o all other information of importance pertaining to the foregoing
actions.
An office holder is defined in the Companies Law to include a director, the
general manager or chief executive officer, chief business manager or chief
operating officer, deputy general manager or executive vice-president,
vice-president, any other officer or manager directly subordinated to the
general manager and any other person assuming the responsibilities of any of the
above mentioned positions without regard to that person's title. Each person
listed in the table under "Executive Officers and Directors" is an office
holder. Under the Companies Law, all arrangements as to compensation and terms
of service of office holders require approval of the board of directors.
Arrangements regarding compensation and terms of service of directors, and
directors who are also managers of the company, require the approval by the
audit committee, the board of directors and the shareholders.
The Companies Law requires that an office holder of the company 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 the company. In addition, if the transaction is an extraordinary
transaction as such term is defined under the Companies Law, 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. In addition, the office holder must also
disclose any interest held by any corporate entity in which the office holder 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. An
extraordinary transaction is defined in the Companies Law as 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.
After the office holder complies with the above disclosure requirements, a
transaction that is not an extraordinary transaction requires only board
approval unless the articles of association of the company provide otherwise. If
the transaction in which the office holder has a personal interest is an
extraordinary transaction, then, in addition to any approval stipulated by the
articles of association, it must also be approved by the company's audit
committee and then by the board of directors, and, under certain circumstances,
by a meeting of the shareholders of the company. Generally, a director who has a
personal interest in a matter which is to be considered at a meeting of the
board of directors or of the audit committee may not be present during the board
of director's or audit committee's discussions and may not vote on this matter.
DUTIES OF SHAREHOLDERS
The Companies Law applies the same disclosure requirements to a controlling
shareholder of a public company. A shareholder that holds 25% or more of the
voting rights in the company is deemed to be a controlling shareholder if no
other shareholder owns more than 50% of the voting rights in the company.
Extraordinary transactions with a controlling shareholder or in which a
controlling shareholder has a personal interest, and the terms of compensation
of a controlling shareholder who is an office holder, require the approval of
the audit committee, the board of directors and the shareholders of the company.
The shareholder approval must include at least one-third of the shareholders who
have no personal interest in the transaction and are present, in person or by
proxy, at the meeting or, alternatively, the total shareholdings of those who
have no personal interest in the transaction who vote against the transaction
must not represent more than 1% of the voting rights in the company. The
Companies Law requires that every shareholder that votes by proxy indicate
whether or not that shareholder has a personal interest in the vote in question,
a failure of which results in the invalidation of that shareholder's vote.
57
Under the Companies Law, a shareholder has a duty to act in good faith
towards the company and the other shareholders of the company and to refrain
from abusing that shareholder's power in the company including, among other
things, voting in a general meeting of shareholders on the following matters:
o any amendment to the articles of association;
o an increase of the company's authorized share capital;
o a merger; or
o approval of interested party transactions, which require shareholder
approval.
The Companies Law further provides that a shareholder shall refrain from
oppressing other shareholders.
In addition, any controlling shareholder, any shareholder who knows that it
possesses power to determine the outcome of a shareholder vote and any
shareholder who, pursuant to the provisions of a company's articles of
association, has the power to appoint or prevent the appointment of an office
holder in the company, or has any other power over the company, is under a duty
to act with fairness towards the company. A breach of the above duty of fairness
shall be considered as a breach of the fiduciary duty of an office holder as
described above.
For information concerning the direct and indirect personal interests of
some of our office holders and principal shareholders in transactions with us,
please see "Related Party Transactions" and "Description of Share
Capital--Anti-Takeover Provisions Under Israeli Law."
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Companies Law provides that an Israeli company cannot exonerate an
office holder from liability with respect to a breach of his or her duty of
loyalty, but may exonerate in advance an office holder from his or her liability
to the company, in whole or in part, with respect to a breach of his or her duty
of care. Our articles of association provide that, subject to any restrictions
imposed by the Companies Law, we may enter into an insurance contract providing
coverage for the liability of any of our office holders with respect to:
o a breach of his or her duty of care to us or to another person;
o a breach of his or her duty of loyalty to us, provided that the office
holder acted in good faith and had reasonable grounds to assume that
his or her act would not prejudice our interests; or
o a financial liability imposed upon him or her in favor of another
person with respect to an act performed by him or her in his or her
capacity as an office holder.
In addition, we may indemnify an office holder against the following
expenses or liabilities imposed upon him or her in his or her capacity as an
office holder:
o a financial liability imposed on him or her in favor of another person
by any judgment, including a settlement or an arbitrator's award
approved by a court; and
o reasonable litigation expenses, including attorneys' fees, incurred by
such office holder or imposed upon him or her by a court, in relation
to proceedings instigated by us against him or her or that are
instigated on our behalf or by another person, or as a result of a
criminal charge from which he or she was acquitted or a criminal
charge in which he or she was convicted for a criminal offense that
does not require proof of intent.
The Companies Law 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 any of the following:
o a breach by the officer holder of his or her duty of loyalty unless
the office holder acted in good faith and had a reasonable basis to
believe that the act would not prejudice the company;
o a breach by the office holder of his or her duty of care if such
breach was committed intentionally or recklessly;
o an act or omission with the intent to unlawfully derive a personal
benefit; or
o a fine levied against the office holder as a result of a criminal
offense.
58
Under the Companies Law, the shareholders of a company may include or amend
its articles of association to include either of the following provisions:
o a provision authorizing the company to grant in advance an undertaking
to indemnify an office holder, provided that the undertaking is
limited to specified classes of events which the board of directors
deem foreseeable at the time of grant and limited to an amount
determined by the board of directors to be reasonable under the
circumstances, or
o a provision authorizing the company to retroactively indemnify an
office holder.
In addition, pursuant to the Companies Law, indemnification of, and
procurement of insurance coverage for, a company's office holders must be
approved by the audit committee and the board of directors. In the case of
directors, approval by the shareholders is also required.
Our articles of association allow us to insure and indemnify our office
holders to the fullest extent permitted by Israeli law, provided that the
insurance or indemnification is approved by the audit committee of our board of
directors and, if required by the Companies Law, also by our shareholders.
59
RELATED PARTY TRANSACTIONS
We describe below transactions and series of similar transactions, as of
February 29, 2000, to which we were or will be a party:
o in which the amounts involved exceeded or will exceed $60,000; and
o in which any director, executive officer, holder of more than 5% of
our ordinary shares or any member of their immediate family had or
will have a direct or indirect material interest.
EQUITY INVESTMENT TRANSACTIONS
Between June 1997 through March 1998, we sold 3,617,250 Series A preferred
shares at $0.71 and $0.93 per share. Between November 1998 and February 1999, we
sold 4,399,864 shares of Series B-1 preferred shares and 1,315,146 shares of
Series B-2 non-voting preferred shares at $1.40 per share. In November 1999, we
sold 3,933,895 shares of Series C-1 preferred shares and 70,000 shares of Series
C-2 non-voting preferred shares at $5.32 per share. Listed below are the
directors, executive officers and shareholders who beneficially own 5% or more
of our securities who participated in these financings.
WARRANTS
FOR WARRANTS
SERIES SERIES SERIES FOR SERIES SERIES
SERIES A B-1 B-1 B-2 SERIES C-1 C-1 C-2 AGGREGATE
DIRECTORS, EXECUTIVE OFFICERS PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED CASH
AND 5% SHAREHOLDERS SHARES SHARES SHARES SHARES SHARES SHARES SHARES CONSIDERATION
- ---------------------------------- ---------- ---------- ---------- ---------- ----------- ----------- ---------- --------------
Entities affiliated with Ampal
American Israel Corporation.... 1,491,000 1,071,567 160,734 -- 939,883 281,967 -- $ 7,773,294
Entities affiliated with Israel
Seed L.P....................... 1,491,000 357,182 53,564 -- 56,392 16,912 -- 2,186,900
Entities affiliated with Trident
Capital........................ -- 1,185,184 375,046 1,315,146 399,938 140,980 70,000 6,000,532
Entities affiliated with Eucalyptus
Ventures L.P................... -- 1,071,560 160,720 -- 281,967 84,588 -- 3,000,248
Entities affiliated with Technology
Crossover Ventures III L.P..... -- -- -- -- 1,315,832 394,751 -- 7,000,226
Technorov Holdings (1993) Ltd..... 635,250 285,747 42,861 -- 93,989 28,196 -- 1,379,993
Entities affiliated with WSG
Capital, L.P................... -- 428,624 64,288 -- 93,989 28,196 -- 1,100,096
Entities affiliated with Ampal Israel American Corporation that
participated in the financings include Ampal Israel American Corporation, Ampal
Industries (Israel) Ltd., Marinera Ltd. and Inveco International Inc. Nitsan
Yanovski, a director of our company, is the Vice President, Business Development
of Ampal Industries (Israel) Ltd. He disclaims beneficial ownership of the
securities held by these entities except for his proportional interest in these
entities and except to the extent of his right to acquire 71,435 of our ordinary
shares held by Ampal Industries (Israel) Ltd.
Entities affiliated with Israel Seed L.P. that participated in the
financings include Israel Seed L.P. and Israel Seed II L.P.
Entities affiliated with Trident Capital that participated in the
financings include Information Associates-II, L.P. and IA-II Affiliates Fund,
L.L.C. Trident Capital Management is the general partner of Information
Associates-II, L.P. Todd Springer, a director of our company, is a managing
director of Trident Capital Management, and the general partner of IA-II
Affiliates Fund, L.L.C. Mr. Springer disclaims beneficial ownership of the
securities held by these entities except for his proportional interest in these
entities.
Entities affiliated with Eucalyptus Ventures L.P. that participated in the
financings include Eucalyptus Ventures (Israel) L.P., Eucalyptus Ventures
(Cayman) L.P. and Eucalyptus Ventures Affiliated Fund L.P.
Entities affiliated with Technology Crossover Ventures III L.P. that
participated in the financings include TCV III (GP), TCV III, LP, TCV III (Q),
L.P. and TCV III Strategic Partners, L.P. Jon Q. Reynolds, Jr., a director of
our company, is a general partner of Technology Crossover Ventures. Mr. Reynolds
disclaims beneficial ownership of the securities held by these entities except
for his proportional interest in these entities.
60
Entities affiliated with WSG Capital, L.P. that participated in the
financings include WSG Capital, L.P. and WSG Capital II, L.P. Eric Gries, Eran
Wagner and Limor Schweitzer, who are each executive officers and directors of
our company, are each partners in WSG Management LLC. WSG Management LLC is the
general partner of WSG Capital, L.P. and WSG Capital II, L.P. Mr. Gries, Mr.
Wagner and Mr. Schweitzer disclaim beneficial ownership of the securities held
by these entities except for their proportional interest in these entities.
On various occasions during 1999 and the two preceding fiscal years, we
granted the following options to purchase our ordinary shares to the following
executive officers, directors and shareholders who beneficially own 5% or more
of our securities:
SHARES UNDERLYING
NAME OPTIONS GRANTED PRICE PER SHARE DATE OF GRANT
- -------------------------------------- ----------------- --------------- -------------
Eric Gries................................. 412,370 $0.07 02/01/98
140,000 0.35 12/21/98
182,000 1.57 10/20/99
70,490 0.71 01/01/00
Eran Wagner................................ 52,500 $0.35 12/21/98
91,000 1.57 10/20/99
28,490 0.71 01/01/00
Limor Schweitzer........................... 52,500 $0.35 12/21/98
91,000 1.57 10/20/99
14,000 0.71 01/01/00
Rick Van Hoesen............................ 447,300 $3.00 01/14/00
Anil Uberoi................................ 212,534 $0.14 04/01/98
42,000 0.35 12/21/98
28,000 0.35 08/12/99
28,000 1.57 10/20/99
37,100 0.71 01/01/00
Robert Hawk................................ 24,500 0.35 05/18/99
The options listed above generally vest over a four year period. On August
1, 1999, Mr. Hawk exercised his option to purchase 24,500 ordinary shares for an
aggregate exercise price of $8,575. These shares are subject to repurchase by
the Company until vested.
In July 1998, Robert Hawk purchased 63,455 ordinary shares at $0.19 per
share, pursuant to a restricted stock purchase agreement. Under the restricted
stock purchase agreement, Eran Wagner and Limor Schweitzer have the right to
repurchase those ordinary shares. The right of Eran Wagner and Limor Schweitzer
to repurchase those ordinary shares lapsed as to one-fourth of the total number
of shares on the first anniversary of the grant date and lapses as to 1/12th of
the total shares each quarter thereafter. The lapsing of the repurchase right is
dependent upon the continued service by Mr. Hawk on our board of directors.
LOANS TO OFFICERS
XACCT Technologies Inc. plans to extend a home improvement loan to Eric
Gries in the amount of $175,000 with an interest rate of 6.45% per annum. The
principal plus interest on the loan are due upon the earlier of his date of
termination or two years from the date of loan. We have a security interest in
the proceeds of any severance payments due to Mr. Gries under his employment
agreement.
OTHER RELATED PARTY TRANSACTIONS
Eran Wagner and Limor Schweitzer, who are our directors and officers, are
each a board member of Xpert Integrated Systems Ltd. Xpert Integrated Systems
Ltd. is our Israeli reseller, and we also retain that entity to perform our
system administration tasks. In addition, Mr. Wagner and Mr. Schweitzer are each
a director and shareholder of
61
Xpert UNIX Systems Ltd., which owns approximately 53.3% of Xpert Integrated
Systems Ltd. Mr. Wagner and Mr. Schweitzer each own 100 ordinary shares of Xpert
UNIX Systems Ltd., which together constitute 100% of the outstanding shares of
Xpert UNIX Systems Ltd. Both Mr. Wagner and Mr. Schweitzer disclaim beneficial
ownership of the securities held by Xpert Integrated Systems Ltd. except for
their proportional interest in that entity through Xpert Unix Systems Ltd.
In addition, Nitsan Yanovski, one of our directors, is also a director of
Xpert Integrated Systems Ltd. While none of our other directors or officers are
affiliated with Xpert UNIX Systems Ltd. or with Xpert Integrated Systems Ltd.,
entities affiliated with Ampal Israel American Corporation own approximately 20%
of the outstanding shares of Xpert Integrated Systems Ltd.
We have procured indemnification insurance for our directors and office
holders.
Holders of preferred shares are entitled to certain registration rights
with respect to the ordinary shares issued or issuable upon conversion of the
preferred shares. Please see "Description of Share Capital--Registration
Rights."
We believe that all related-party transactions described above were on
terms no less favorable than could have been otherwise obtained from unrelated
third parties.
62
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our ordinary shares, as of February 29, 2000, and as
adjusted to reflect the sale of ordinary shares offered by us in this offering,
for:
- each person who we know beneficially owns more than 5% of our ordinary
shares;
- each of our directors;
- each executive officer named in the Summary Compensation Table; and
- all of our directors and officers as a group.
Unless otherwise indicated, the principal address of each of the
shareholders below is c/o XACCT Technologies, Inc., 2900 Lakeside Drive, Suite
100, Santa Clara, California 95054. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and includes
voting or investment power with respect to the securities. Except as indicated
by footnote, and subject to applicable community property laws, each person
identified in the table possesses sole voting and investment power with respect
to all ordinary shares shown to be held by them. The number of ordinary shares
outstanding used in calculating the percentage for each listed person or entity
includes ordinary shares underlying options or warrants held by such person that
are exercisable within 60 days of February 29, 2000, but excludes ordinary
shares underlying options or warrants held by any other person or entity.
Percentage of beneficial ownership is based on 19,652,583 ordinary shares
outstanding as of February 29, 2000, after giving effect to the conversion of
all outstanding preferred shares upon the closing of this offering. The numbers
shown in the table assume no exercise by the underwriters of their
over-allotment option.
PERCENTAGE
NUMBER OF BENEFICIALLY OWNED
SHARES ----------------------------------
BENEFICIALLY AFTER
5% SHAREHOLDERS OWNED BEFORE OFFERING OFFERING
- --------------- ------------- ------------------ --------------
Entities affiliated with Ampal Israel American Corporation(1) 3,945,151 19.1%
Entities affiliated with Israel Seed L.P.(2)................ 1,975,050 10.0%
Entities affiliated with Trident Capital(3)................. 3,486,294 17.3%
Entities affiliated with Eucalyptus Ventures L.P.(4)........ 1,598,835 8.0%
Entities affiliated with Technology Crossover Ventures III 1,710,583 8.5%
L.P.(5)..................................................
Technorov Holdings (1997) Ltd.(6)........................... 1,086,043 5.5%
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------
Eric Gries (7).............................................. 1,202,542 6.0%
Eran Wagner (8)............................................. 2,541,781 12.8%
Limor Schweitzer (9)........................................ 2,537,253 12.8%
Richard Van Hoesen (10)..................................... 27,956 0.1%
Anil Uberoi (11)............................................ 137,986 0.7%
Robert C. Hawk (12)......................................... 87,995 0.4%
Nitsan Yanovski (1)......................................... 3,502,450 17.8%
Todd A. Springer (3)........................................ 3,486,294 17.3%
Jon Q. Reynolds Jr. (5)..................................... 1,710,583 8.5%
All executive officers and directors as a group (nine 15,234,800 71.3%
Persons) (13)............................................
- ---------------------
(1) Principal address is 1177 Avenue of the Americas, New York, New York
10036. Number of shares includes 1,491,000 shares held by Ampal American Israel
Corporation, 2,242,821 shares held by Ampal Industries (Israel) Ltd., 128,578
shares held by Marinera Ltd., and 82,152 shares held by Inveco International
Inc. In addition, Ampal Industries (Israel) Ltd. has a proxy to vote 82,152
shares issuable upon exercise of warrants held by Inveco International Inc. Mr.
Yanovski, Vice President of Business Development of Ampal (Israel) Ltd. and a
director of our company, disclaims beneficial ownership of the securities held
by these entities except for his proportional
63
interest in these entities and except to the extent of his right to acquire
71,435 of our ordinary shares held by Ampal Industries (Israel) Ltd. Ampal
Industries (Israel) Ltd. has the right to vote the shares of Marinera Ltd. and
Inveco International, Inc.
(2) Principal address is Countanche House, 66-68 Espande Street, Helier,
Jersey, Channel Islands. Number of shares includes 987,625 shares held by Israel
Seed L.P. and 987,625 shares held by Israel Seed II L.P.
(3) Principal address is 11150 Santa Monica Boulevard, Suite 320, Los
Angeles, CA 90025. Number of shares includes 3,294,137 shares held by
Information Associates-II, L.P., and 192,157 preferred shares held by IA-II
Affiliates Fund L.L.C. Mr. Springer, one of our directors, is a managing
director of Trident Capital Management-II, L.L.C., and the general partner of
IA-II Affiliates Fund, L.L.C. Mr. Springer disclaims beneficial ownership of the
shares held by these entities, except to the extent of his pecuniary interest in
those shares arising from his interest in Trident Capital.
(4) Principal address is One Bush Street, San Francisco, CA 94104. Number
of shares includes 1,460,718 shares held by Eucalyptus Ventures L.P., 73,381
shares held by Eucalyptus Ventures (Israel) L.P., 44,114 shares held by
Eucalyptus Ventures (Cayman) L.P., and 20,622 shares held by Eucalyptus Ventures
Affiliated Fund L.P.
(5) Principal address is 575 High Street, Suite 400, Palo Alto, CA 94301.
Number of shares includes 1,568,147 shares held by TCV(Q), L.P., 12,425 shares
held by TCV III (GP), 58,996 shares held by TCV III, L.P., and 71,015 shares
held by TCV III Strategic Partners, L.P. Mr. Reynolds, one of our directors, is
a member of Technology Crossover Management III. Mr. Reynolds disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest in those shares arising from his interest in Technology Crossover
Management III.
(6) Principal address is 46 Rothschild Boulevard, Tel Aviv 94104, Israel.
(7) Number of shares includes 492,912 shares held by WSG Capital, L.P.,
122,195 shares held by WSG Capital II, L.P. and 294,713 ordinary shares issuable
upon the exercise of share options exercisable within 60 days of February 29,
2000. Mr. Gries, our Chief Executive Officer and President and one of our
directors, is a partner in WSG Management LLC, which is the general partner of
WSG Capital, L.P. and WSG Capital II, L.P.
(8) Number of shares includes 492,912 shares held by WSG Capital L.P.,
122,195 shares held by WSG Capital II, L.P. and 36,684 ordinary shares issuable
upon the exercise of share options exercisable within 60 days of February 29,
2000. Mr. Wagner, one of our executive officers and directors, is the managing
partner in WSG Management LLC, which is the general partner of WSG Capital, L.P.
and WSG Capital II, L.P.
(9) Number of shares includes 492,912 shares held by WSG Capital L.P.,
122,195 shares held by WSG Capital II, L.P. and 22,313 ordinary shares issuable
upon the exercise of share options exercisable within 60 days of February 29,
2000. Mr. Schweitzer, one of our executive officers and directors, is a general
partner in WSG Management LLC, which is the general partner of WSG Capital, L.P.
and WSG Capital II, L.P.
(10) Number of shares includes 27,956 ordinary shares issuable upon the
exercise of share options exercisable within 60 days of February 29, 2000.
(11) Number of shares includes 137,986 ordinary shares issuable upon the
exercise of share options exercisable within 60 days of February 29, 2000.
(12) Number of shares includes no ordinary shares issuable upon the
exercise of share options exercisable within 60 days of February 29, 2000.
(13) Number of shares includes 519,652 ordinary shares issuable upon the
exercise of share options exercisable within 60 days of February 29, 2000.
64
DESCRIPTION OF SHARE CAPITAL
DESCRIPTION OF SHARES
Below is a summary of the material provisions governing our share capital.
This summary does not purport to be complete and is subject to the terms and
conditions of our memorandum of association and articles of association, a copy
of each of which has been filed as an exhibit to the registration statement of
which this prospectus is a part.
As of December 31, 1999, our authorized share capital consisted of
37,630,000 voting ordinary shares, NIS 0.01 nominal value per share, 1,820,000
non-voting ordinary shares, NIS 0.01 nominal value per share, and 18,550,000
preferred shares, NIS 0.01 nominal value per share. Upon the closing of this
offering, assuming no exercise of the underwriters' over-allotment option, our
authorized share capital will consist of:
o 200,000,000 voting ordinary shares, of which approximately
ordinary shares will be issued and outstanding;
o 1,820,000 non-voting ordinary shares, of which approximately
non-voting ordinary shares will be issued and outstanding; and
o 5,000,000 special preferred shares, of which no preferred shares will
be issued or outstanding.
DESCRIPTION OF THE SPECIAL PREFERRED SHARES
The special preferred shares, NIS 0.01 nominal value per share, may be
issued from time to time as shares of one or more series with distinct serial
designations approved by our board of directors. The designations include, among
others, the dividend rate and the number of ordinary shares into which the
special preferred shares are convertible. We intend to authorize 5,000,000
special preferred shares upon consummation of this offering.
DESCRIPTION OF ORDINARY SHARES
All of our issued and outstanding voting and non-voting ordinary shares,
and the voting ordinary shares offered hereby when issued and paid for, will be,
duly authorized and validly issued, fully paid and non assessable. Neither our
memorandum of association nor our articles of association nor the laws of the
State of Israel restrict in any way the ownership or voting of ordinary shares
by non-residents of Israel except with respect to subjects of countries that are
in a state of war with Israel.
Each non-voting ordinary share has the same rights as the voting ordinary
shares except for voting rights, including the right to receive notice of
meetings of shareholders and to participate in and vote at such meetings. Each
non-voting ordinary share is convertible at any time after the issuance of such
share at the option of the holder thereof and without payment of any additional
consideration into one fully-paid and non-assessable voting ordinary share. The
voting and non-voting ordinary shares do not have pre-emptive rights.
LIQUIDATION AND DIVIDEND RIGHTS. If we liquidate, after satisfaction in
full of all the liabilities to our creditors, our assets will be distributed to
the holders of ordinary shares in proportion to the nominal consideration paid
by them. This liquidation right may be affected by the grant of preferential
dividend or distribution rights to the holders of our authorized special
preferred shares, if and when such shares shall be issued, or to the holders of
any other class of preferred shares that we might authorize and issue in the
future. We may declare a dividend to be paid to the holders of ordinary shares
according to their rights and interests in our profits. Under the Companies Law,
cash dividends may be paid out of retained earnings of a company and also out of
the net earnings of a company, as calculated under that law, for the two years
preceding the distribution of dividend, provided however, that there is no
reasonable concern that such distribution will prevent the company from
satisfying its existing and foreseeable obligations as they become due. The
Companies Law also permits a company to effectuate a distribution by
repurchasing its own shares provided such distribution fulfills the criteria set
forth above relating to distributions. Under our articles of association, our
board of directors may declare interim and final dividends and distributions
with respect to any fiscal period.
VOTING, SHAREHOLDERS' MEETINGS AND RESOLUTIONS. Holders of voting ordinary
shares have one vote for each voting ordinary share held on all matters
submitted to a vote of shareholders. These voting rights may be affected by the
grant of any special voting right to the holders of our authorized special
preferred shares, if and when such
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shares shall be issued, or to the holders of any other class of preferred shares
that we might authorize and issue in the future. An annual general meeting shall
be held once every year and such annual meeting must be held within a period of
not more than 15 months after the last preceding annual general meeting.
According to our articles of association, the quorum required for a general
meeting of shareholders is the presence of at least two shareholders, in person
or by proxy, who together hold or represent more than 50% of the outstanding
share capital. A meeting adjourned for lack of quorum shall be adjourned to the
same day, in the following week at the same time and the same place unless
stated otherwise in the invitation to such meeting. Under the Companies Law,
unless otherwise stated in our articles of association or applicable law, all
resolutions of shareholders require a simple majority.
Most shareholder resolutions, including resolutions for the election of
directors, the appointment of auditors or the approval of transactions with
office holders as required by the Companies Law, will be deemed adopted if
approved by the holders of a majority of the voting power represented at the
meeting, in person or by proxy, and voting thereon. Certain corporate actions
such as: (1) amending the articles of association; (2) amending the memorandum
of association; (3) a merger or consolidation; (4) a voluntary winding up; (5)
approving changes in capitalization; and (6) authorizing a new class of shares
or changing special rights of a class of shares, will be deemed adopted only if
approved by the holders of not less than 75% of the voting power represented in
person or by proxy at the meeting and voting thereon, and in some cases 75% of
the voting power of the affected class of shares. For a discussion of
shareholder duties, please see "Management--Approval of Certain Transactions."
TRANSFER OF SHARES AND NOTICES. Fully paid ordinary shares are issued in
registered form and may be transferred freely. Under the Companies Law, all
shareholders' meetings require prior notice of at least 21 days. Pursuant to
regulations promulgated pursuant to the Companies Law, such notice shall include
the type of the general meeting, the time and place of the meeting, the agenda,
a summary of the proposed resolutions and the record date. The notice shall also
include the formal address and telephone number of the company as well as the
places, including Internet sites, where the full text of the proposed
resolutions and proxies, if applicable, may be reviewed by the shareholders. For
the purposes of determining the shareholders entitled to notice and to vote at
the meeting, the board of directors may fix the record date not more than 21
days and not less then four days prior to the date of the general meeting.
MODIFICATION OF CLASS RIGHTS. As long as our share capital is divided into
different classes of shares, the rights attached to any class, unless otherwise
provided by our articles of association, may be modified or abrogated only by a
resolution of our shareholders subject to the consent in writing of
three-fourths of the holders of the issued shares of that class, or with the
adoption of a resolution by 75% of those present and voting at a separate
general meeting of the holders of the shares of that class.
OPTIONS AND WARRANTS
As of February 29, 2000, options to purchase 3,986,516 of our ordinary
shares were outstanding under our 1998 Plan, our 102 Plan and Section 3(i) of
the Israeli Income Tax Ordinance, with a weighted average exercise price of
$1.24 per share. We also have outstanding warrants as of that date to purchase
an aggregate of 2,097,921 ordinary shares at a weighted average exercise price
of $6.09 per share.
REGISTRATION RIGHTS
After this offering, the holders of approximately 15.5 million of our
ordinary shares have certain rights to register those shares under the
Securities Act of 1933 under a rights agreement. The amended and restated rights
agreement provides that if requested by holders of at least 50% of any class of
preferred shares or at least 50% of all registrable securities with respect to
the registration of not less than that number of registrable shares which would
result in an anticipated aggregate offering price, net of underwriting discount
and commissions, greater than $5,000,000, we will file a registration statement
under the Securities Act covering all registrable securities requested to be
included. We will not be obligated to effect a demand registration until six
months after this initial public offering. The managing underwriter may reduce
the number of registrable securities to be registered for marketing reasons. All
expenses incurred in connection with such registrations, other than
underwriters' and brokers' discounts and commissions, will be borne by us.
In addition, if we propose to register any of our ordinary shares under the
Securities Act other than registrations relating solely to employee share option
or purchase plans or relating solely to a transaction under Rule 145 enacted
under the Securities Act, the holders of registrable securities may require us
to include all or a
66
portion of their shares in such registration, although the managing underwriter
of any such offering has certain rights to reduce the number of shares to be
included in such registration. All expenses incurred in connection with such
registrations, other than underwriters' and brokers' discounts and commissions,
will be borne by us. The underwriters of this initial public offering have
decided to exclude all registrable securities from this offering.
RIGHTS TO PURCHASE SHARES IN OUR INITIAL PUBLIC OFFERING
The holders of our Series C preferred shares have rights to purchase an
aggregate of 83,000,000 of the ordinary shares offered in our initial public
offering, based on the mid-point of the initial price range set forth in our
preliminary prospectus. The number of shares subject to this allocation may be
reduced if our board of directors determines in good faith that the issuance of
those shares would be materially detrimental to the success of the initial
public offering. The allocation is also subject to applicable legal and
regulatory limitations. Our board has not yet considered the foregoing share
allocations, and we are continuing to review the advisability and legality of
those allocations.
ANTI-TAKEOVER PROVISIONS UNDER ISRAELI LAW
MERGERS AND ACQUISITIONS
Israeli law regulates mergers, votes required to approve mergers and
acquisitions of shares through tender offers. The law requires special approvals
for transactions involving significant shareholders and regulates other matters
that are relevant to these types of transactions.
Generally, under the Companies Law, a merger is required to be approved by
the board of directors and the shareholders of each of the merging companies. If
the share capital of the company that will not be the surviving company is
divided into different classes of shares, the approval of each class is also
required. Our articles of association requires that a merger be approved by the
holders of not less than 75% of the voting power represented in person or by
proxy at a shareholders' meeting and voting thereon. In addition, a merger can
be completed only after all approvals have been submitted to the Israeli
Registrar of Companies and 70 days have passed from the time that a proposal for
approval of the merger was filed with the Registrar.
The Companies Law also provides that an acquisition of shares in a public
company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 25% 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 a 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 do not apply if the acquisition is made by way of a merger. Regulations
promulgated under the Companies Law provide that these tender offer requirements
do not apply to companies whose shares are listed for trading outside of Israel
if, according to the law in the country in which the shares are traded,
including the rules and regulations of the stock exchange on which the shares
are traded, either:
o there is a limitation on acquisition of any level of control of the
company; or
o the acquisition of any level of control requires the purchaser to do
so by means of a tender offer to the public.
Further, Israeli tax law may treat some acquisitions, including a
stock-for-stock swap between an Israeli company and a foreign company, less
favorably than does U.S. tax law. For example, Israeli tax law may subject a
shareholder who exchanges his ordinary shares for shares in a foreign
corporation to immediate taxation.
CLASSIFIED BOARD OF DIRECTORS
Our Chief Executive Officer is appointed to our board of directors by
virtue of his office, subject to annual shareholder approval. The other
directors are divided into three classes. The directors in each class will serve
for staggered three-year terms. This system of electing and removing directors
may discourage a third party from making a tender offer or otherwise attempting
to obtain control of us, because a staggered board generally makes it more
difficult for shareholders to replace a majority of the directors.
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SPECIAL PREFERRED SHARES
The authorization of undesignated preferred shares makes it possible for
the board of directors to issue preferred shares with voting or other rights or
preferences that could impede the success of any attempt to change our control.
These and other provisions may have the effect of deferring hostile takeovers or
delaying changes in our control or management.
ISRAELI SECURITIES LAW REQUIREMENTS
We have received from the Israeli securities authority an exemption from
Israel's prospectus delivery requirements applicable to the offering. We have
also received from the Israeli securities authority an exemption from the
reporting obligations to which Israeli companies whose shares are publicly
traded are subject, provided that a copy of each of the reports filed by us
under applicable United States securities laws shall be available for public
review at our offices in Israel.
TRANSFER AGENT AND REGISTRAR
We have selected American Stock Transfer & Trust Company as the transfer
agent and registrar for our ordinary shares.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our ordinary shares.
Future sales of substantial amounts of our ordinary shares in the public market
following this offering could cause the prevailing market price of our ordinary
shares to fall and impede our ability to raise equity capital at a time and on
terms favorable to us.
Upon completion of this offering, we will have outstanding an aggregate
of ordinary shares, assuming the exercise of outstanding warrants as of
February 29, 2000 to purchase 2,058,371 preferred shares, which warrants if
unexercised would expire upon the closing of this offering, but no exercise of
the underwriters' over-allotment option and no exercise of outstanding options
or any other outstanding warrants after February 29, 2000. Of these outstanding
shares, the shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act of 1933, unless
purchased by our affiliates, as that term is defined in Rule 144 under the
Securities Act of 1933. The remaining ordinary shares outstanding
upon completion of this offering and held by existing shareholders will be
"restricted securities" as that term is defined in Rule 144 under the Securities
Act of 1933. Restricted shares may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated under the Securities Act of 1933, which rules are
summarized below, or another exemption. Sales of restricted shares in the public
market, or the availability of such shares for sale, could adversely affect the
market price of our ordinary shares.
NUMBER OF SHARES DATE
---------------- ----
After 180 days from the date of this
prospectus, the 180 day lock-up terminates and these
shares are saleable under Rule 144 (subject in some
cases to volume limitations) or Rule 144(k)
After 180 days from the date of this prospectus, the
180 day lock-up is released and these shares are
saleable under Rule 701
After 180 days from the date of this prospectus,
restricted securities that are held for less than one
year and are not yet saleable under Rule 144
LOCK-UP AGREEMENT
All officers, directors and holders of our ordinary shares and preferred
shares have entered into contractual "lock-up" agreements providing that they
will not offer, sell, contract to sell or grant any option to purchase or
otherwise dispose of ordinary shares owned by them or that could be purchased by
them through the exercise of options or warrants for a period of 180 days after
the date of this prospectus without the prior written consent of Credit Suisse
First Boston Corporation. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, additional shares will be available beginning 181
days after the effective date of this offering, subject in some cases to certain
volume limitations.
RULE 144
In general, under Rule 144 as currently in effect, beginning 91 days
after the date of this prospectus, a person, or persons whose shares are
aggregated, who has beneficially owned restricted shares for at least one year,
including persons who may be deemed to be our affiliates, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of:
o 1% of the number of ordinary shares then outstanding, which will
equal approximately shares immediately after this offering;
or
o the average weekly trading volume of the ordinary shares as reported
through the Nasdaq National Market during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of certain public
information about us.
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RULE 144(k)
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during 90 days preceding a sale, and who has beneficially owned for at
least two years the restricted shares proposed to be sold, including the holding
period of any prior owner except an affiliate, is entitled to sell such shares
without complying with the manner of sale, public information, volume limitation
or notice provisions of Rule 144.
RULE 701
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 permits resales of shares issued
prior to the date the issuer becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, pursuant to certain compensatory benefit
plans and contracts commencing 90 days after the issuer becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, in reliance upon
Rule 144 but without compliance with certain restrictions, including the holding
period requirements. In addition, the Securities and Exchange Commission has
indicated that Rule 701 will apply to typical stock options granted by an issuer
before it becomes subject to the reporting requirements of the Securities
Exchange Act of 1934, along with the shares acquired upon exercise of such
options, including exercises after the date the issuer becomes so subject.
Securities issued in reliance on Rule 701 are restricted securities and, subject
to the contractual restrictions described above, beginning 91 days after the
date of this prospectus, may be sold by persons other than affiliates subject
only to the manner of sale provisions of Rule 144 and by affiliates under Rule
144 without compliance with its one-year minimum holding period requirements.
We have entered into an agreement with the underwriters that we will not
sell or otherwise dispose of any ordinary shares or any securities convertible
into or exercisable or exchangeable for ordinary shares, or enter into any swap
or similar agreement that transfers, in whole or in part, the economic risk of
ownership of the ordinary shares, for a period of 180 days after the date of
this prospectus, without the prior written consent of Credit Suisse First Boston
Corporation, subject to limited exceptions.
REGISTRATION OF SHARES ISSUED IN CONNECTION WITH COMPENSATORY OPTION PLANS
We intend to file a registration statement under the Securities Act of
1933 covering the ordinary shares subject to outstanding options or reserved for
issuance under the share option plans and share purchase plans. Upon the
effectiveness of such registration statement, all such shares will, subject to
Rule 144 volume limitations applicable to affiliates and the expiration of a
180-day lockup period, be available for sale in the open market, except to the
extent that such shares are subject to our vesting restrictions or the
contractual restrictions described above.
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U.S. TAX CONSIDERATIONS
The following describes the material United States federal income tax
consequences of the purchase, ownership and disposition of the ordinary shares
to a U.S. holder.
For purposes of this discussion, a U.S. holder is:
o an individual citizen or resident of the United States;
o a corporation or other entity taxable as a corporation created or
organized under the laws of the United States or any political
subdivision thereof;
o an estate, the income of which is includable in gross income for
United States federal income tax purposes regardless of its source;
or
o a trust, if (1) a United States court is able to exercise primary
supervision over its administration and one or more United States
persons have the authority to control all of its substantial
decisions, or (2) the trust was in existence on August 20, 1996 and
has properly elected to continue to be treated as a United States
person.
This summary is for general information only and does not purport to be a
comprehensive description of all of the federal income tax considerations that
may be relevant to a decision to purchase the ordinary shares. This summary
generally considers only U.S. holders that will own the ordinary shares as
capital assets. This summary does not consider the United States tax
consequences to a person that is not a U.S. holder.
This discussion is based on current provisions of the Internal Revenue
Code of 1986, as amended, or the Code, current and proposed Treasury regulations
issued under the Code, and administrative and judicial interpretations of the
Code, all as in effect today and all of which are subject to change, possibly
with a retroactive effect. This discussion does not address all aspects of U.S.
federal income taxation that may be relevant to any particular U.S. holder based
on the U.S. holder's particular circumstances. In particular, this discussion
does not address the tax treatment of U.S. holders:
o who are broker-dealers;
o who own, directly, indirectly or constructively, 10% or more of our
outstanding voting shares;
o holding the ordinary shares as part of a hedging, straddle or
conversion transaction;
o whose functional currency is not the dollar; and
o who may be subject to special tax rules not discussed below,
including insurance companies, tax-exempt organizations, financial
institutions and persons subject to the alternative minimum tax.
Additionally, the tax treatment of persons who hold the ordinary shares
through a partnership or other pass-through entity is not considered, nor are
the possible application of U.S. federal estate or gift taxes or any aspect of
state, local or non-U.S. tax laws.
You are advised to consult your own tax advisor with respect to the
specific U.S. federal income tax consequences to you of purchasing, holding or
disposing of the ordinary shares.
DISTRIBUTIONS ON THE ORDINARY SHARES
The amount of a distribution with respect to the ordinary shares will
equal the amount of cash and the fair market value of any property distributed
and will also include the amount of any Israeli taxes withheld as described
below under "Israeli Taxation--Withholding and Capital Gains Taxes Applicable to
Non-Israeli Shareholders." In general, a distribution paid by us with respect to
the ordinary shares to a U.S. holder will be treated as ordinary dividend income
to the extent that the distribution does not exceed our current and accumulated
earnings and profits, as determined for U.S. federal income tax purposes. The
amount of any distribution which exceeds these earnings and profits will be
treated first as a non-taxable return of capital, reducing the U.S. holder's tax
basis in its ordinary shares to the extent thereof, and then as capital gain.
Corporate holders generally will not be allowed a deduction for dividends
received on ordinary shares.
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A dividend paid by us in NIS will be included in the income of U.S.
holders at the dollar amount of the dividend, based upon the spot rate of
exchange in effect on the date of the distribution. U.S. holders will have a tax
basis in the NIS for U.S. federal income tax purposes equal to that dollar
value. Any subsequent gain or loss on the NIS arising from exchange rate
fluctuations will be taxable as ordinary income or loss and will be U.S. source
income or loss.
Dividends paid by us generally will be foreign source passive income for
U.S. foreign tax credit purposes or, in the case of a U.S. holder that is a
financial services entity, financial services income. Subject to the limitations
in the Code, U.S. holders may elect to claim as a foreign tax credit against
their U.S. federal income tax liability the Israeli income tax withheld from
dividends received on the ordinary shares. U.S. holders that do not elect to
claim a foreign tax credit may instead claim a deduction for Israeli income tax
withheld. The rules relating to foreign tax credits are complex, and you should
consult your own tax advisor to determine whether and to what extent you would
be entitled to this credit.
DISPOSITION OF THE ORDINARY SHARES
Upon the sale, exchange or other disposition of the ordinary shares, a
U.S. holder generally will realize capital gain or loss in an amount equal to
the difference between the amount realized on the disposition and the U.S.
holder's tax basis in the ordinary shares. The gain or loss recognized on the
sale, exchange or other disposition of the ordinary shares generally will be
long-term capital gain or loss if the U.S. holder held the ordinary shares for
more than one year at the time of the disposition.
Gain or loss recognized by a U.S. holder on a sale, exchange or other
disposition of ordinary shares generally will be treated as U.S. source income
or loss for U.S. foreign tax credit purposes.
PASSIVE FOREIGN INVESTMENT COMPANIES
We believe that we were not a passive foreign investment company in 1999
and do not expect to become a passive foreign investment company. However, the
factual determination of our passive foreign investment company status is made
annually and thus may be subject to change. Therefore, we cannot assure you that
we will not become a passive foreign investment company in 2000 or in a future
year.
PASSIVE FOREIGN INVESTMENT COMPANY STATUS
In general, we will be a passive foreign investment company if for any of
our taxable years in which you held ordinary shares:
o at least 75% of our gross income for the taxable year is passive
income; or
o at least 50% of the value, determined on the basis of a quarterly
average, of our assets is attributable to assets that produce or are
held for the production of passive income.
Passive income generally includes dividends, interest, some types of
royalties and rents and gains from the sale or exchange of assets that produce
passive income. Cash and other current assets readily convertible into cash will
be treated as passive assets for purpose of the asset test. If we own directly
or indirectly at least 25% by value of the stock of another corporation, we will
be treated for purposes of the passive foreign investment company tests as
owning our proportionate share of the other corporation's assets and as directly
earning our proportionate share of the other corporation's income.
EFFECTS OF PASSIVE FOREIGN INVESTMENT COMPANY STATUS
If we were classified as a passive foreign investment company, and you
did not make either a mark-to-market election or a qualified electing fund
election, each as described below, you would be subject to special rules for:
o any gain you realize on the sale or other disposition of your
ordinary shares; and
o any excess distribution that we make to you, which means any
distribution you receive on the shares in a taxable year that is
greater than 125% of the average annual distribution received by you
on our ordinary shares in the three preceding taxable years or your
holding period for the ordinary shares, if shorter.
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Under these special tax rules:
o the gain or excess distribution would be allocated ratably over your
holding period for the ordinary shares;
o the amount allocated to the taxable year in which you realized the
gain or excess distribution and any taxable year before the first
taxable year in which we were classified as a passive foreign
investment company would be treated as ordinary income and subject to
tax at the rates currently applicable to ordinary income;
o the amount allocated to each of the other years would be subject to
tax at the highest tax rate applicable to ordinary income in effect
for that year; and
o the interest charge applicable to underpayments of tax would be
imposed on the resulting tax attributable to each year before the
current year in which we were classified as a passive foreign
investment company.
To avoid this tax consequence, a U.S. holder may elect to mark-to-market
the ordinary shares. If you make this election:
o you will include as ordinary income each year the excess, if any, of
the fair market value of your ordinary shares at the end of the
taxable year over your adjusted taxable basis in your ordinary
shares, and you will recognize additional gain, if any, on the sale
or other disposition of your ordinary shares as ordinary income for
that taxable year;
o you will be allowed to claim a deduction as an ordinary loss for the
excess, if any, of the adjusted taxable basis of your ordinary shares
over their fair market value at the end of the taxable year or over
their final sale or disposition price, but only to the extent of the
net amount of previously included income that results from the
mark-to-market election; and
o your basis in the ordinary shares will be adjusted to reflect any
income or loss amounts.
However, if we were classified as a passive foreign investment company,
persons who inherit the ordinary shares from you would not receive the normally
available increase in the tax basis in the ordinary shares to fair market value
as of the date of death, even if you have made the mark-to-market election.
Under some circumstances, U.S. holders in a passive foreign investment
company may make a qualified electing fund election as an alternative to the
mark-to-market election described above. If you make a qualified electing fund
election, you would not be subject to the passive foreign investment company
rules described above. Instead, you generally would be required to include in
your taxable income some undistributed amounts of our income. However, we do not
currently intend to take actions necessary for a U.S. holder to make a qualified
electing fund election if we are determined to be a passive foreign investment
company.
If you own ordinary shares during any year that we are a passive foreign
investment company, you must file with your U.S. income tax return IRS Form 8621
for distributions received on the ordinary shares and any gain realized on the
disposition of the ordinary shares.
Neither we nor our advisors has any duty to, or will undertake to inform,
U.S. holders of change in circumstances that would cause us to become a passive
foreign investment company. U.S. holders should consult their own tax advisors
concerning our status as a passive foreign investment company at any time after
the date of this prospectus.
BACKUP WITHHOLDING
A U.S. holder may be subject to backup withholding at a rate of 31% with
respect to dividend payments and proceeds from the disposition of the ordinary
shares. In general, backup withholding will apply only if a U.S. holder fails to
comply with certain identification procedures. Backup withholding will not apply
with respect to payments made to certain exempt recipients, such as corporations
and tax-exempt organizations. Backup withholding is not an additional tax and
may be claimed as a credit against the U.S. federal income tax liability of a
U.S. holder. Alternatively, the U.S. holder may be eligible for a refund of any
excess amounts withheld under the backup withholding rules. In either case, the
required information must be furnished to the Internal Revenue Service.
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ISRAELI TAXATION
The following is a summary of the current tax issues relating to companies
in Israel, with special reference to its effect on us. The following also
contains a discussion of certain Israeli tax consequences to persons purchasing
the ordinary shares offered hereby and certain Israeli Government programs
benefiting us. To the extent that the discussion is based on new tax legislation
that has not been subject to judicial or administrative interpretation, we
cannot assure you that the views expressed in the discussion will be accepted by
the tax authorities in question. The discussion is not intended, and should not
be construed, as legal or professional tax advice and is not exhaustive of all
possible tax considerations. You should consult your own tax advisors as to the
Israeli or other tax consequences of the purchase, ownership and disposition of
ordinary shares, including, in particular, the effect of any foreign, state or
local taxes.
You are urged to consult your own tax advisors about the Israeli or other
tax consequences of the purchase, ownership and disposition of our ordinary
shares, including, in particular, the effect of any foreign, state or local
taxes.
GENERAL CORPORATE TAX STRUCTURE
Israeli companies are subject to corporate tax at a rate of 36%. However,
the effective rate of tax of a company that derives income from an approved
enterprise, as defined below, may be considerably lower.
LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969
We currently qualify as an "industrial company" under the Law for the
Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law. A
company qualifies as an "industrial company" if it is resident in Israel and at
least 90% of its income in a given tax year, exclusive of income from certain
loans, marketable securities, capital gains, interest and dividends, is derived
from industrial enterprises owned by it. An "industrial enterprise" is defined
as an enterprise whose major activity in a particular tax year is industrial
manufacturing.
Under the Industry Encouragement Law, an industrial company is entitled to
deduct the purchase price of patents and certain other intangible property
rights, other than goodwill, over a period of eight years, beginning with the
year in which such rights were first used, and to deduct public offering
expenses ratably over a period of three years.
An industrial company may be eligible for special depreciation rates for
machinery, equipment and buildings. These rates vary, based on various factors,
including the date of commencement of operation and the number of works shifts.
An industrial company owning an approved enterprise may choose between such
special depreciation rates and the depreciation rates available to approved
enterprises.
Qualification as an industrial company under the Industry Encouragement Law
is not conditioned upon the receipt of prior approval from any Israel government
authority. We cannot assure you that we will continue to qualify as an
industrial company or that we will, in the future, be able to take advantage of
any tax benefits available to industrial companies.
LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959
The Law for the Encouragement of Capital Investments, 1959, or the
Investment Law, provides that a capital investment in eligible facilities may,
upon application to the Investment Center of the Ministry of Industry and
Commerce of the State of Israel, be designated as an approved enterprise. Each
certificate of approval for an approved enterprise relates to a specific
investment program delineated both by its financial scope, including its capital
resources, and by its physical characteristics, such as the equipment to be
purchased and utilized pursuant to the program. The tax benefits derived from
any such certificate of approval relate only to taxable income attributable to
the specific approved enterprise. If a company has more than one approval or
only a portion of its capital investments is approved, its effective tax rate is
the result of a weighted average of the applicable rates.
We have been granted the status of an "approved enterprise" under the
Investment Law, and we qualify as a "foreign investors' company" as defined in
the Investment Law. We have elected to receive the alternative package of
benefits under the Investment Law. Under the terms of our approved enterprise
program, our income from the approved enterprise will be tax exempt for a period
of two years, commencing with the year in which we first earn
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taxable income, and subject to a reduced corporate tax rate of between 10%
and 20% (depending on the level of foreign investment in the company) for an
additional period of up to a total of eight years, provided that the total
period of tax benefits will not extend past the earlier of (1) 12 years from the
year of commencement of production or (2) 14 years from the year of approval of
the approved enterprise status. The initial two-year period of benefit has not
yet commenced.
If dividends are paid out of tax-exempt profit derived from our approved
enterprise, we will be liable for corporate tax at the rate that would have been
applied if we had not elected the alternative tax benefit. This rate is
generally 10% to 20%, depending on the percentage of the company's shares held
by foreign shareholders. We will also be required to withhold on behalf of the
dividend recipients an additional 15% of the amount distributed as dividends.
Cash dividends paid by an Israeli company are normally subject to a withholding
tax, except for dividends that are paid to an Israeli company, in which case no
tax is withheld unless the dividend is paid in respect of earnings from an
approved enterprise. In addition, because we have received certain benefits
under Israeli laws relating to approved enterprises, payment of dividends may
subject us to certain Israeli taxes to which we would not otherwise be subject.
The tax-exempt income attributable to the approved enterprise can be distributed
to shareholders without subjecting us to taxes only upon our complete
liquidation.
The Investment Law also provides that an approved enterprise is entitled to
accelerated tax depreciation on property and equipment included in an approved
investment program.
Any future applications we make to the Investment Center will be reviewed
separately, and decisions as to whether or not to approve such applications will
be based, among other things, on the then prevailing criteria set forth in the
Investment Law, on the specific objective we set forth in such applications and
on certain financial criteria. Accordingly, we cannot assure you that any such
applications will be approved. In addition, the benefits available to an
approved enterprise are conditional upon our fulfilling certain conditions
stipulated in the Investment Law and its regulations and the criteria set forth
in the specific certificate of approval. If we do not meet these conditions, in
whole or in part, we would be required to refund the amount of tax benefits,
with the addition of the Israeli CPI linkage adjustment and interest thereupon.
We believe that our approved enterprise operates in substantial compliance with
each of these conditions and criteria.
TAXATION UNDER INFLATIONARY CONDITIONS
The Income Tax Law (Inflationary Adjustments), 1985, or the Inflationary
Adjustments Law, attempts to overcome some of the problems experienced in a
traditional tax system by an economy experiencing rapid inflation, which was the
case in Israel at the time the Inflationary Adjustments Law was enacted. The
Inflationary Adjustments Law was designed to neutralize the erosion of capital
investments in business and to prevent tax benefits resulting from deduction of
inflationary expenses. The Inflationary Adjustments Law applies a supplementary
set of inflationary adjustments to the normal taxable profits computed under
regular historical cost principles.
The Inflationary Adjustments Law introduced a special tax adjustment for
the preservation of equity based on changes in the Israeli CPI, whereby certain
corporate assets are classified broadly into fixed (inflation-resistant) assets
and non-fixed assets. Where shareholders' equity, as such term is defined in the
Inflationary Adjustments Law, exceeds the depreciated cost of fixed assets, a
tax deduction that takes into account the effect of the annual rate of inflation
on such excess is allowed up to a ceiling of 70% of taxable income in any single
tax year, with the unused portion permitted to be carried forward on a linked
basis, without limit. If the depreciated cost of fixed assets exceeds
shareholders' equity, then such excess, multiplied by the annual inflation rate,
is added to taxable income.
In addition, subject to certain limitations, depreciation deductions on
fixed assets and losses carried forward are adjusted for inflation on the basis
of changes in the Israeli CPI. Under the Inflationary Adjustments Law, results
for tax purposes are measured in real terms, in accordance with changes in the
Israeli CPI.
We are taxed under this law. The discrepancy between the change in (1) the
Israeli CPI and (2) the exchange rate of Israeli currency in relation to the
dollar, may in future periods cause significant differences between taxable
income, as determined for Israeli tax purposes, and the income measured in U.S.
dollars as reflected by our consolidated financial statements, which are
measured in U.S. dollars.
75
WITHHOLDING AND CAPITAL GAINS TAXES APPLICABLE TO NON-ISRAELI SHAREHOLDERS
The State of Israel imposes income tax on non-residents of Israel on income
accrued or derived from sources in Israel or received in Israel. The sources of
income include passive income such as dividends, royalties and interest, as well
as non-passive income from business conducted or services rendered in Israel.
Upon distribution of dividends other than bonus shares, I.E., stock dividends,
income tax is generally withheld at the rate of 25%, or at the rate of 15% for
dividends distributed out of income generated by an approved enterprise, unless
a different rate is provided in a treaty between Israel and the shareholder's
country of residence. Under the income tax treaty between the United States and
Israel, the maximum tax on dividends paid to a holder of ordinary shares who is
a qualifying U.S. resident is 25%.
Israeli law imposes a capital gains tax on the sale of securities and other
capital assets. Under current law, however, sales by an individual of the
ordinary shares offered by this prospectus are exempt from Israeli capital gains
tax for so long as the shares are quoted on Nasdaq or listed on a stock exchange
recognized by the Israeli Ministry of Finance, provided that we continue to
qualify as an industrial company, and provided further that the individual does
not hold such shares for business purposes. Please see "Law for Encouragement of
Industry (Taxes), 1969." If we do not maintain our status as an industrial
company then, subject to any applicable tax treaty, the Israeli capital gain tax
rates would be up to 50% for non-Israeli resident individuals and 36% for
corporations.
Under the Israel-U.S. treaty, a holder of ordinary shares who is a U.S.
resident generally will be exempted from Israeli capital gain tax on the sale of
ordinary shares if such holder owned, directly or indirectly, shares
representing less than 10% of our voting power throughout the 12-month period
before the sale. Under certain circumstances specified in the treaty, if Israeli
capital gains tax is payable, it can be credited against U.S. federal tax,
subject to limitations in U.S. tax law applicable to foreign tax credits.
A non-resident of Israel who receives interest, dividend or royalty income
derived from or accrued in Israel, from which Israeli tax was withheld at
source, is generally exempted from the duty to file tax returns in Israel with
respect to such income, provided such income was not derived from a business
conducted in Israel by such person and such person has no other non-passive
income from sources within Israel.
Israel presently has no estate or gift tax.
76
CONDITIONS IN ISRAEL
We are incorporated under the laws of the State of Israel, and
substantially all of our research and development facilities, and certain
Israeli and non-U.S. operations are managed from the State of Israel.
Accordingly, we are directly affected by economic, political and military
conditions in Israel. Our operations may be materially adversely affected if
major hostilities involving Israel arise or if trade between Israel and its
present trading partners is curtailed.
POLITICAL CONDITIONS
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors, and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. Additionally, from time to time since
December 1987, Israel has experienced civil unrest, primarily in the West Bank
and Gaza Strip territories administered by Israel since 1967. A peace agreement
between Israel and Egypt was signed in 1979, a peace agreement between Israel
and Jordan was signed in 1994 and, since 1993, several agreements between Israel
and Palestinian representatives have been signed. As of the date hereof, Israel
has not entered into any peace agreement with Syria or Lebanon, and there have
been delays in the negotiations and implementation of the agreements with the
Palestinians. However, Israel has recently been engaged in peace talks with
Syria under the good auspices of the United States government. We cannot predict
how the peace process will develop or what effect that it may have upon the
company.
Certain countries, companies and organizations continue to participate in a
boycott of Israeli firms and others doing business in Israel or with Israeli
companies. Although we are precluded from marketing our products to these
countries, we believe that in the past the boycott has not had a material
adverse effect on us. We cannot assure you that restrictive laws, policies or
practices directed towards Israel or Israeli businesses will not have an adverse
impact on the expansion of our business.
Generally, all male adult citizens and permanent residents of Israel under
the age of 48 are, unless exempt, obligated to perform up to 39 days of military
reserve duty annually. Additionally, all such residents are subject to being
called to active duty at any time under emergency circumstances. Some of our
male officers and employees are currently obligated to perform annual reserve
duty. Although we have operated effectively under these requirements, we cannot
assess the full impact of these requirements on our workforce or business if
conditions should change, and we cannot predict the impact on us of any
expansion of such obligations.
TRADE RELATIONS
Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development, and the International
Finance Corporation. Israel is a member of the World Trade Organization and is a
signatory to the General Agreement on Trade in Services. In addition, Israel has
been granted preferences under the Generalized System of Preferences from the
United States, Australia, Canada and Japan. These preferences allow Israel to
export products covered by such program either duty-free or at reduced tariffs.
Israel has entered into preferential trade agreements with the European
Union, the United States and the European Free Trade Association. In recent
years, Israel has established commercial and trade relations with a number of
other nations, including China, India, Russia and other nations in Asia and
Eastern Europe, with which Israel had not previously had such relations.
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, for these and other reasons, has intervened in
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. The Israeli government has in the past
periodically changed its policies in all these areas. During 1997, the monetary
policy of the Bank of Israel changed in several respects. These changes included
a decision of the Bank of Israel to reduce its intervention in the currency
markets to allow the NIS to trade more freely. In addition, the Bank of Israel
has adopted and implemented certain measures to liberalize foreign currency
regulations. There are currently no Israeli currency control restrictions on
remittance of dividends or the
77
proceeds from the sale of the ordinary shares, although legislation remains in
effect pursuant to which currency controls may be imposed by administrative
action at any time.
The Israeli government's monetary policy contributed to relative price and
exchange rate stability in recent years, despite fluctuating rates of economic
growth and unemployment. The Israeli inflation rates for the years 1997, 1998
and 1999 were 7.0%, 8.6% and 1.3%, respectively. We cannot assure you that the
Israeli government will be successful in its attempts to keep prices and
exchange rates stable.
78
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement, dated , 2000, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, Chase Securities Inc.
and U.S. Bancorp Piper Jaffray Inc. are acting as representatives, the following
respective numbers of ordinary shares:
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
Credit Suisse First Boston Corporation.......................
Chase Securities Inc.........................................
U.S. Bancorp Piper Jaffray Inc...............................
----------------
Total......................................
================
The underwriting agreement provides that the underwriters are obligated to
purchase all the ordinary shares in this offering if any are purchased, other
than those shares covered by the over-allotment option described below. The
underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of ordinary shares may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares from us at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover any over-allotments of ordinary shares.
The underwriters propose to offer the ordinary shares initially at the
public offering price on the cover page of this prospectus and to selling group
members at that price less a concession of $ per share. The underwriters
and selling group members may allow a discount of $ per share on sales
to other broker/dealers. After the initial public offering, the public offering
price and concession and discount to broker/dealers may be changed by the
representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- --------------- -------------- ---------------
Underwriting Discounts and Commissions $ $ $ $
paid by us...............................
Expenses paid by us......................... $ $ $ $
The underwriters have informed us that they do not expect discretionary
sales to exceed % of the ordinary shares being offered.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any of our ordinary shares or securities convertible into or exchangeable or
exercisable for any of our ordinary shares, or publicly disclose the intention
to make any such offer, sale, pledge, disposition or filing, without the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus.
Our officers and directors and certain other shareholders, including
holders of our ordinary shares and preferred shares, have agreed that they will
not offer, sell, contract to sell, pledge or otherwise dispose of, directly of
indirectly, any of our ordinary shares or securities convertible into or
exchangeable or exercisable for any of our ordinary shares, or publicly disclose
the intention to make any such offer, sale, pledge or disposition, without, in
each case, the prior written consent of Credit Suisse First Boston Corporation
for a period of 180 days after the date of this prospectus.
The underwriters have reserved for sale, at the initial public offering
price up to shares of the ordinary shares for employees, directors
and certain other persons associated with us who have expressed an interest
79
in purchasing ordinary shares in this offering. The number of shares available
for sale to the general public in this offering will be reduced to the extent
such persons purchase such reserved shares. Any reserved shares not so purchased
will be offered by the underwriters to the general public on the same terms as
the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
We have applied to list the ordinary shares on The Nasdaq Stock Market's
National Market under the symbol "XCCT".
In March 2000, we sold Series D preferred shares in a private placement at
a purchase price of $12.63 per share. In this private placement, Credit Suisse
First Boston Venture Fund I L.P. purchased 23,752 ordinary shares, individuals
and entities affiliated with Chase Securities Inc. purchased an aggregate of
7,917 ordinary shares and individuals affiliated with U.S. Bancorp Piper Jaffray
purchased an aggregate of 7,917 ordinary shares. These organizations purchased
these Series D preferred shares on the same terms as the other investors in the
private placement.
Prior to this offering, there has been no public market for our ordinary
shares. The initial public offering price for the ordinary shares will be
determined by negotiation between us and the underwriters, and does not reflect
the market price for the ordinary shares following this offering. Among the
principal factors to be considered in determining the initial public offering
price will be:
o the information in this prospectus and otherwise available to the
underwriters;
o market conditions for initial public offerings;
o the history of and prospects for the industry in which we will
compete;
o the ability of our management;
o our prospects for future earnings;
o the present state of our development and our current financial
condition;
o the recent market prices of, and the demand for, publicly traded
ordinary shares of generally comparable companies; and
o the general condition of the securities markets at the time of this
offering.
The underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934, as amended.
o Over-allotment involves syndicate sales in excess of the offering
size, which creates a syndicate short position.
o Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specified
maximum.
o Syndicate covering transactions involve purchases of the ordinary
shares in the open market after the distribution has been completed
in order to cover syndicate short positions.
o Penalty bids permit the underwriters to reclaim a selling concession
from a syndicate member when the ordinary shares originally sold by
the syndicate member is purchased in a stabilizing or syndicate
covering transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the ordinary shares to be higher than it would otherwise
be in the absence of these transactions. These transactions may be effected on
The Nasdaq National Market or otherwise and, if commenced, may be discontinued
at any time.
80
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the ordinary shares in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of ordinary shares are effected. Accordingly, any resale of the ordinary
shares in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or pursuant
to a discretionary exemption granted by the applicable Canadian securities
regulatory authority. Purchasers are advised to seek legal advice prior to any
resale of the ordinary shares.
REPRESENTATIONS OF PURCHASERS
Each purchaser of ordinary shares in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that: (i) such purchaser is entitled under
applicable provincial securities laws to purchase the ordinary shares without
the benefit of a prospectus qualified under the securities laws; (ii) where
required by law, such purchaser is purchasing as principal and not as agent; and
(iii) such purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or these persons. All or a substantial portion of the assets of the
issuer and these persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the issuer or such persons in
Canada or to enforce a judgment obtained in Canadian courts against the issuer
or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of ordinary shares to whom the SECURITIES ACT (British
Columbia) applies is advised that the purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any ordinary shares acquired by such purchaser in this offering. This report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one report must
be filed in respect of ordinary shares acquired on the same date and under the
same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of ordinary shares should consult with their own legal
and tax advisors with respect to the tax consequences of an investment in the
ordinary shares in their particular circumstances and with respect to the
eligibility of the ordinary shares for investment by the purchaser under
relevant Canadian legislation.
81
LEGAL MATTERS
Certain legal matters in connection with this offering with respect to
United States law will be passed upon for us by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California. The validity of the
ordinary shares offered hereby and certain other legal matters in connection
with this offering with respect to Israeli law will be passed upon for us by S.
Friedman & Co., Advocates & Notaries, Tel Aviv, Israel. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Morrison & Foerster LLP, Palo Alto, California, with respect to United States
law and by Meitar, Liquornik, Geva & Co., Israel, with respect to Israeli law.
WS Investment Company, an investment partnership composed of certain current and
former members of and persons associated with Wilson Sonsini Goodrich & Rosati,
Professional Corporation, beneficially owns an aggregate of 37,500 of our
ordinary shares. Attorneys at S. Friedman & Co., Advocates & Notaries,
beneficially own options to purchase 25,750 of our ordinary shares.
EXPERTS
Kost Forer & Gabbay, a member of Ernst & Young International, independent
auditors, have audited our consolidated financial statements as of December 31,
1998 and 1999, and for the period from our inception in June 1997 to December
31, 1997 and for each of the years in the two-year period ended December 31,
1999 as set forth in their report. We have included our consolidated financial
statements and the related notes in the prospectus and elsewhere in the
registration statement in reliance on Kost Forer & Gabbay's report, given upon
the authority of such firm as experts in accounting and auditing.
82
ENFORCEABILITY OF CIVIL LIABILITIES
We are incorporated in the State of Israel, and some of our officers,
directors and the Israeli experts named herein are not residents of the United
States and substantially all of their assets may be located outside of United
States. The service of process upon, and the enforcement of judgements against,
us, our non-U.S. resident officers, directors and the Israeli experts may be
difficult.
We have been informed by our legal counsel in Israel, S. Friedman & Co.,
that there is doubt as to the enforceability of civil liabilities under the
Securities Act or the Securities Exchange Act of 1934 in original actions
instituted in Israel. However, subject to certain time limitations, Israeli
courts may enforce foreign, final, non-appealable executory judgments in civil
matters, including a monetary or compensatory judgment in a non-civil matter,
obtained after completion of due process before a court of competent
jurisdiction, according to the laws of the state in which the judgment is given
and the rules of private international law prevailing in Israel. The rules of
private international law currently prevailing in Israel do not prohibit the
enforcement of judgments of Israeli courts, provided that:
o adequate service of process has been effected and the defendant has
had a reasonable opportunity to be heard;
o the judgment and the enforcement thereof are not contrary to the law,
public policy, security or sovereignty of the State of Israel;
o the judgment was not fraudulently obtained and does not conflict with
any other valid judgment in the same matter between the same parties;
and
o an action between the same parties in the same matter is not pending
in any Israeli court or tribunal at the time the lawsuit is instituted
in the foreign court.
We have appointed our U.S. subsidiary, XACCT Technologies, Inc., as our
agent to receive service of process in any action against us in any federal
court or court of the State of California arising out of this offering or any
purchase or sale of securities in connection with this offering. We have not
given such agent consent to accept service of process in connection with any
other claim.
If a foreign judgment is enforced by an Israeli court, it generally will
be payable in Israeli currency, which can then be converted into non-Israeli
currency and transferred out of Israel. The usual practice in an action before
an Israeli court to recover an amount in a non-Israeli currency is for the
Israeli court to render judgment for the equivalent amount in Israeli currency
at the rate of exchange in force on the date thereof, but the judgment debtor
may make payment in foreign currency. Pending collection, the amount of the
judgment of an Israeli court stated in Israeli currency ordinarily will be
linked to the Israeli CPI plus interest at the annual statutory rate set by
Israeli regulations prevailing at such time.
83
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission in connection with this offering. This prospectus, which is
part of the registration statement, does not contain all of the information
included in the registration statement and the exhibits and schedules to the
registration statement. For further information with respect to us and our
ordinary shares, we refer you to the registration statement and the exhibits and
schedules files as part of the registration statement. Statements contained in
this prospectus concerning the contents of any contract or any other document
are not necessarily complete. If a contract or document has been files as an
exhibit to the registration statement, we refer you to the copy of the contract
or document that has been filed. Each statement in this prospectus relating to a
contract or document filed as an exhibit is qualified by the filed exhibit. You
may read and copy the registration statement and any other documents we file at
the Securities and Exchange Commission's Public Reference Room at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549 or at the regional offices of
the Securities and Exchange Commission located at CitiCorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade
Center, 13th Floor, New York, New York 10048. The Securities and Exchange
Commission maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Securities and Exchange Commission at http://www.sec.gov.
We intend to make available to our shareholders annual reports containing
consolidated financial statements audited by an independent public accounting
firm and quarterly reports containing unaudited financial data for the first
three quarters of each year.
We have received from the Israel Securities Authority an exemption from the
reporting obligations to which public Israeli companies are normally subject. As
a condition to that exemption, a copy of each of the reports we file with the
Securities and Exchange Commission pursuant to applicable U.S. law will be
available for review at our headquarters in Israel.
We file reports with the Israeli Registrar of Companies regarding our
registered address, our registered capital, our shareholders of record and the
number of shares held by each shareholder, the identity of the directors and
details regarding security interests on our assets. In addition, we must file
with the Israeli Registrar of Companies our articles of association and a copy
of any special resolution adopted by a general meeting of shareholders. The
information filed with the Israeli Registrar of Companies is available to the
public. In addition to the information available to the public, our shareholders
are entitled, upon request, to review and receive copies of all minutes of
meetings of our shareholders.
84
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors................................... F-2
Consolidated Balance Sheets....................................... F-3
Consolidated Statements of Operations............................. F-4
Statements of Changes in Shareholders' Equity..................... F-5
Consolidated Statements of Cash Flows............................. F-6
Notes to Consolidated Financial Statements........................ F-7
F-1
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
XACCT TECHNOLOGIES (1997) LTD.
We have audited the accompanying consolidated balance sheets of XACCT
Technologies (1997) Ltd. and its subsidiary as of December 31, 1998 and 1999 and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for the period from June 8, 1997 (inception) through
December 31, 1997, and for each of the two years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance 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
XACCT Technologies (1997) Ltd. and its subsidiary as of December 31, 1998 and
1999, and the consolidated results of their operations and cash flows for the
period from June 8, 1997 (inception) through December 31, 1997, and for each of
the two years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles in the United States.
/s/ KOST, FORER & GABBAY
Tel-Aviv, Israel KOST, FORER & GABBAY
March 2, 2000, except for Note 10 A Member of Ernst and Young
which is dated March 28, 2000 International
F-2
XACCT TECHNOLOGIES (1997) LTD.
CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
PRO FORMA
SHAREHOLDERS'
DECEMBER 31, EQUITY AS OF
-------------------- DECEMBER 31,
1998 1999 1999
--------- --------- ---------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................... $5,445 $ 17,309
Short-term bank deposits............................................ -- 221
Marketable securities............................................... -- 465
Trade receivables................................................... 30 559
Other accounts receivable........................................... 151 396
--------- ---------
5,626 18,950
--------- ---------
Severance pay fund..................................................... 78 180
--------- ---------
Property and equipment, net............................................ 360 956
--------- ---------
$6,064 $ 20,086
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables...................................................... $ 335 $ 465
Deferred revenues................................................... -- 127
Accrued expenses and other liabilities.............................. 270 1,002
--------- ---------
605 1,594
--------- ---------
Accrued severance pay.................................................. 486 665
--------- ---------
Commitments and contingent liabilities
SHAREHOLDERS' EQUITY:
Preferred shares of NIS 0.01 par value:
Authorized: 12,950,000 as of December 31, 1998 and 18,550,000 as
of December 31, 1999;
Issued and outstanding: 8,903,636 as of December 31, 1998 and
13,336,155 as of December 31, 1999
Issued and outstanding, pro forma: no shares as of December 31,
1999; aggregate liquidation preference of $32,264 as of December 31,
1999.......................................................... 3 33 --
Ordinary shares of NIS 0.01 par value:
Authorized: 43,050,000 as of December 31, 1998 and 39,450,000 as
of December 31, 1999;
Issued and outstanding: 4,263,455 as of December 31, 1998 and
4,345,775 as of December 31, 1999
Issued and outstanding pro forma: 17,681,930 as of December 31,
1999............................................................ 2 11 $ 44
Additional paid-in capital............................................. 10,064 34,781 34,781
Deferred stock compensation............................................ -- (2,824) (2,824)
Accumulated deficit.................................................... (5,096) (14,174) (14,174)
--------- --------- ---------------
Total shareholders' equity............................................. 4,973 17,827 $ 17,827
--------- --------- ===============
$6,064 $ 20,086
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
F-3
XACCT TECHNOLOGIES (1997) LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
PERIOD FROM
JUNE 8, 1997
(INCEPTION) YEAR ENDED
UNTIL DECEMBER 31,
DECEMBER 31, ---------------------------
1997 1998 1999
------------- ------------- -------------
Revenues:
License............................................... $ -- $ -- $ 898
Service............................................... -- -- 296
------------- ------------- -------------
Total revenues...................................... -- -- 1,194
------------- ------------- -------------
Cost of revenues:
License............................................... -- -- 48
Service............................................... -- -- 192
------------- ------------- -------------
Total cost of revenues.............................. -- -- 240
------------- ------------- -------------
Gross profit............................................. -- -- 954
------------- ------------- -------------
Operating expenses:
Research and development.............................. 390 1,511 2,243
Sales and marketing................................... 127 1,995 6,472
General and administrative............................ 152 1,033 1,204
Amortization of deferred stock compensation........... -- -- 381
------------- ------------- -------------
Total operating expenses............................ 669 4,539 10,300
------------- ------------- -------------
Operating loss........................................... (669) (4,539) (9,346)
Interest and other income................................ 8 111 303
Interest and other expenses.............................. (1) (6) (35)
------------- ------------- -------------
Net loss................................................. $ (662) $ (4,434) $ (9,078)
============= ============= =============
Basic and diluted net loss per share..................... $ (0.30) $ (1.17) $ (2.34)
============= ============= =============
Weighted average number of shares used
in computing basic and diluted net loss per share..... 2,192,400 3,804,874 3,886,495
============= ============= =============
Pro forma basic and diluted net loss
per share (unaudited)................................. $ (0.67)
=============
Pro forma weighted average number of
shares used in computing basic and diluted
net loss per share (unaudited)........................ 13,566,732
=============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
XACCT TECHNOLOGIES (1997) LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
ORDINARY SHARES PREFERRED SHARES
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
Balance as of June 8, 1997 (inception)........ -- $ -- $--
Issuance of ordinary shares, net .......... 4,200,000* 1 -- --
Issuance of Preferred A shares, net ....... -- 1,540,000 --**
Net loss .................................. -- -- -- --
----------- ----------- ----------- -----------
Balance as of December 31, 1997 ............. 4,200,000 1 1,540,000 --**
Stock split by rights offering ............ -- 1 -- --**
Issuance of ordinary shares, net .......... 63,455 --** -- --
Issuance of Preferred A shares, net ....... -- -- 2,077,250 1
Issuance of Preferred B shares, net ....... -- -- 5,286,386 2
Net loss .................................. -- -- -- --
----------- ----------- ----------- -----------
Balance as of December 31, 1998 ............. 4,263,455 2 8,903,636 3
Issuance of Preferred B shares, net ....... -- -- 428,624 --**
Issuance of Preferred C shares, net ....... -- -- 4,003,895 2
Stock split by rights offering ............ -- 9 -- 28
Exercise of warrants ...................... 82,320 --** -- --
Deferred stock compensation ............... -- -- -- --
Amortization of deferred stock compensation -- -- -- --
Net loss .................................. -- -- -- --
----------- ----------- ----------- -----------
Balance as of December 31, 1999 ............. 4,345,775 $ 11 13,336,155 $ 33
=========== =========== =========== ===========
ADDITIONAL
PAID-IN DEFERRED TOTAL
STOCK STOCK ACCUMULATED SHAREHOLDERS'
CAPITAL COMPENSATION DEFICIT EQUITY
----------- ------------ ------------- -----------
Balance as of June 8, 1997 (inception)........ $ -- $ -- $ -- $ --
Issuance of ordinary shares, net .......... -- -- -- 1
Issuance of Preferred A shares, net ....... 999 -- -- 999
Net loss .................................. -- (662) (662)
----------- ----------- ----------- ----------
Balance as of December 31, 1997 ............. 999 -- (662) 338
Stock split by rights offering ............ (1) -- -- --
Issuance of ordinary shares, net .......... 12 -- -- 12
Issuance of Preferred A shares, net ....... 1,824 -- -- 1,825
Issuance of Preferred B shares, net ....... 7,230 -- -- 7,232
Net loss .................................. -- -- (4,434) (4,434)
----------- ----------- ----------- ----------
Balance as of December 31, 1998 ............. 10,064 -- (5,096) 4,973
Issuance of Preferred B shares, net ....... 574 -- -- 574
Issuance of Preferred C shares, net ....... 20,925 -- -- 20,927
Stock split by rights offering ............ (37)*** -- -- --
Exercise of warrants ...................... 50 -- -- 50
Deferred stock compensation ............... 3,205 (3,205) -- --
Amortization of deferred stock compensation -- 381 -- 381
Net loss .................................. -- -- (9,078) (9,078)
----------- ----------- ----------- ----------
Balance as of December 31, 1999 ............. $ 34,781 $ (2,824) $ (14,174) $ 17,827
=========== =========== =========== ==========
- -------------------
* Includes 420,000 shares issued to a trustee in favor of options to
employees which have not yet been exercised.
** Represents an amount lower than $1.
*** Receivables on account of shares in respect of rights offering.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
XACCT TECHNOLOGIES (1997) LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
PERIOD FROM
JUNE 8, 1997
(INCEPTION) YEAR ENDED
UNTIL DECEMBER 31,
DECEMBER 31, ----------------------------
1997 1998 1999
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................... $ (662) $ (4,434) $ (9,078)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation............................................... 11 66 178
Increase in accrued interest on short-term bank deposits... -- -- (4)
Amortization of deferred stock compensation................ -- -- 381
Increase in accrued severance pay, net..................... 6 402 77
Increase in trade receivables.............................. (4) (25) (529)
Increase in other accounts receivable...................... (47) (104) (245)
Increase in trade payables................................. 70 265 130
Increase in accrued expenses and other liabilities......... 104 165 732
Increase in deferred revenues.............................. -- -- 127
------------- ------------- -------------
Net cash used in operating activities......................... (522) (3,665) (8,231)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment......................... (112) (325) (774)
Investment in short-term bank deposits..................... -- -- (217)
Purchase of marketable securities.......................... -- -- (465)
------------- ------------- -------------
Net cash used in investing activities......................... (112) (325) (1,456)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of shares, net...................... 1,000 9,069 21,501
Proceeds from exercise of warrants......................... -- -- 50
------------- ------------- -------------
Net cash provided by financing activities..................... 1,000 9,069 21,551
------------- ------------- -------------
Increase in cash and cash equivalents......................... 366 5,079 11,864
Cash and cash equivalents at the beginning of the period...... -- 366 5,445
------------- ------------- -------------
Cash and cash equivalents at the end of the period............ $ 366 $ 5,445 $ 17,309
============= ============= =============
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest ................................................ $ -- $ 6 $ --
============= ============= =============
Non-cash transaction:
Receivables on accounts of shares in respect
of rights offering ...................................... $ -- $ -- $ 37
============= ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
XACCT TECHNOLOGIES (1997) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1. GENERAL
XACCT Technologies (1997) Ltd. ("the Company" or "XACCT") was incorporated
in Israel and commenced operations in June 1997.
The Company and its U.S. wholly-owned subsidiary, XACCT Technologies Inc.,
a Delaware corporation, develop, manufacture and market intelligent
business infrastructure software for telecommunications carriers, Internet
service providers, enterprise network operators and cable network
operators. The Company generates revenues principally from licensing its
software products and, to a lesser extent, from services such as training,
consulting, support and maintenance.
The Company's sales are made principally in North America and Europe. As
for major customers, see Note 9.
2. SIGNIFICANT ACCOUNTING POLICIES
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 consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
FINANCIAL STATEMENTS IN U.S. DOLLARS
A majority of the revenues of the Company and its subsidiary is generated
in United States dollars ("dollars"). In addition, a substantial portion of
the Company and its subsidiary's costs are incurred in dollars. Since the
dollar is the primary currency in the economic environment in which the
Company operates, the dollar is its functional and reporting currency.
Accordingly, monetary accounts maintained in currencies other than the
dollar are remeasured into dollars in accordance with Statement No. 52 of
the Financial Accounting Standard Board ("FASB"). All transaction gains and
losses from the remeasurement of monetary balance sheet items are reflected
in the statement of operations as financial income or expenses, as
appropriate.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiary. Significant inter-company transactions and balances
were eliminated in the consolidation.
CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid investments that are readily
convertible to cash with original maturities of three months or less.
SHORT-TERM DEPOSITS
Bank deposits with maturities of more than three months, but less than one
year, are included in short-term deposits.
F-7
XACCT TECHNOLOGIES (1997) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
MARKETABLE SECURITIES
In accordance with Statement of Financial Accounting Standards 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"), the Company has classified its marketable debt into the
available-for-sale category. (In applying SFAS 115 the Company is
required to classify individual debt and equity securities into one of
three categories: trading, held-to-maturity or available-for-sale).
Securities classified as available for sale are reported at fair value.
Unrecognized gains or losses on available-for-sale securities are included
in equity until their disposition. Realized gains and losses and declines
in value judged to be other than temporary on available-for-sale securities
are included in interest income. The cost of securities sold is based on
the specific identification method.
Unrealized holding losses on available-for-sale securities at December 31,
1999 were immaterial. There were no sales of securities during 1999.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. 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 and equipment........... 7-15
Leasehold improvements................... Over the term of the lease
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to statements of operations as
incurred.
Statement of Financial Accounting Standards 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS 86"),
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 any costs between
the completion of the working model and the point at which the product is
ready for general release. Therefore, through December 31, 1999, the
Company has charged all software development costs to research and
development expenses in the period incurred.
INCOME TAXES
The Company accounts for income taxes in accordance with 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 provides a valuation allowance, if necessary, to
reduce deferred tax assets to their estimated realizable value.
REVENUE RECOGNITION
The Company generates revenues from licensing the rights to use its
software products directly to end-users and indirectly through sub-license
fees from resellers. The Company also generates
F-8
XACCT TECHNOLOGIES (1997) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
revenues from sales of professional services, including consulting,
support, training and maintenance.
Revenues from software license agreements are recognized, in accordance
with Statement Of Position (SOP) 97-2 "Software Revenue Recognition" (as
amended) when a software license agreement has been executed or a
definitive purchase order has been received and the product has
been delivered to the end customers, no significant obligations with regard
to implementation remain, the fee is fixed and determinable and
collectibility is probable.
Service revenues are comprised of revenues from support arrangements,
consulting fees and training. XACCT's policy is to recognize license
revenues when these associated services are not essential to the
functionality of the product. To date, these services have not been
essential to the functionality of the product. Support arrangements provide
technical support and the right to unspecified upgrades on an
if-and-when-available basis. Revenues from support arrangements are
deferred and recognized, on a straight-line basis, as services revenues,
over the life of the related agreement, which is usually one year.
Consulting and training revenues are deferred and recognized when provided
to the customer. Customer advances and billed amounts due from customers,
in excess of recognized revenues, are recorded as deferred revenues.
In December 1998, the AICPA issued Statement of Position 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions". SOP 98-9 amends SOP 98-4 to extend the deferral of
the application of certain passages of SOP 97-2 provided by SOP 98-4
through fiscal years beginning on or before March 15, 1999. All other
provisions of SOP 98-9 are effective for transactions entered into in
fiscal years beginning after March 15, 1999.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25 ("APB-25"), "Accounting for Stock Issued to Employees" in accounting for
its employee stock option plan. Under APB-25, when the exercise price of
the Company's share options equals or is above the market price of the
underlying shares on the date of grant, no compensation expense is
recognized.
The Company applies Financial Accounting Standards Board Statement No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123") with respect to
options issued to non-employees. SFAS 123 requires use of an option
valuation model to measure the fair value of the options at the grant date.
The pro forma disclosures required by SFAS 123, are provided in Note 7.
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 Company's liability for all of its
employees, is fully provided by monthly deposits with insurance policies
and by an accrual.
The deposited funds include profits accumulated up to the balance sheet
date. The deposited funds may be withdrawn only upon the fulfillment of the
obligation pursuant to Israeli severance pay law or labor agreements. The
value of the deposited funds is based on the cash surrendered value of
these policies, and includes immaterial profits.
F-9
XACCT TECHNOLOGIES (1997) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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 amounts of cash and cash equivalents, accounts receivable,
trade receivables, short-term bank deposits and trade payables approximate
their fair value due to the short-term maturity of such instruments.
Marketable securities are based on the quoted market price.
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 FASB Statement
No. 128, "Earnings Per Share".
All convertible preferred shares, outstanding stock options, and warrants
have been excluded from the calculation of the diluted net loss per
Ordinary share because all such securities are anti-dilutive for all
periods presented. The total numbers of shares related to the outstanding
convertible preferred shares, options and warrants excluded from the
calculations of diluted net loss per share were, 1,603,700, 11,678,660 and
18,537,015 for the period from June 8, 1997 (inception) through December
31, 1997 and for the years ended December 31, 1998 and 1999, respectively.
Basic and diluted pro forma net loss per share, as presented in the
statements of operations, has been calculated as described above and also
gives effect to the automatic conversion of the convertible preferred
shares into ordinary shares that will occur upon the closing of the
offering contemplated by this prospectus (using the as-if converted
method).
The following table presents the calculation of pro forma basic and diluted
net loss per share (U.S. dollars in thousands, except share and per share
data):
YEAR ENDED
DECEMBER 31,
1999
-------------
Net loss.............................................. $ (9,078)
=============
Pro forma:
Shares used in computing basic and diluted net loss
per share........................................ 3,886,495
Effect of assumed conversion of convertible
preferred shares................................. 9,680,237
-------------
Shares used in computing pro forma basic and
diluted net loss per share (unaudited)........... 13,566,732
=============
Pro forma basic and diluted net loss per share
(unaudited)...................................... $ (0.67)
=============
PRO FORMA SHAREHOLDERS' EQUITY
If the offering contemplated by this prospectus is consummated, all of the
convertible preferred shares outstanding will automatically be converted
into ordinary shares. Pro forma shareholders' equity at December 31, 1999,
as adjusted for the assumed conversion of those shares outstanding at
December 31, 1999, is disclosed on the balance sheet.
F-10
XACCT TECHNOLOGIES (1997) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash
equivalents, short-term bank deposits and trade receivables. Cash and cash
equivalents, and short-term bank deposits, are deposited with major banks
in Israel and in the United States. Such deposits in the United States may
be in excess of insured limits and are not insured in other jurisdictions.
Management believes that the financial institutions holding the Company's
investments are financially sound, and, accordingly, minimal credit risk
exists with respect to these investments. The Company's trade receivables
are mainly derived from sales to customers in the United States and Europe.
The Company has adopted credit policies and standards intended to
accommodate industry growth and inherent risk. The Company performs ongoing
credit evaluations of its customers' financial condition and generally does
not require collateral.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
133, "Accounting for Derivative Instruments and Hedging Activities"
("Statement 133"). This Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value.
The Statement also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement and requires that a company formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 2000
and cannot be applied retroactively. The Company does not expect the impact
of this new statement on the Company's consolidated balance sheets or
results of operations to be material.
3. PROPERTY AND EQUIPMENT
DECEMBER 31,
----------------------------------
1998 1999
----------------- ---------------
Cost:
Computers and peripheral equipment................. $339 $ 747
Office furniture and equipment..................... 93 453
Leasehold improvements............................. 5 11
----------------- ---------------
437 1,211
Accumulated depreciation.............................. 77 255
----------------- ---------------
Depreciated cost...................................... $360 $ 956
================= ===============
4. ACCRUED EXPENSES AND OTHER LIABILITIES
Employees and payroll accruals........................ $202 $ 718
Accrued expenses...................................... 66 275
Other liabilities..................................... 2 9
----------------- ---------------
$270 $1,002
================= ===============
5. ACCRUED SEVERANCE PAY, NET
The Company's liability for severance pay pursuant to Israeli law is
calculated upon the employees' most recent monthly salary multiplied by the
period of employment. Part of the liability is funded
F-11
XACCT TECHNOLOGIES (1997) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
through insurance policies which are designated only for severance
payments. The value of these policies is recorded as an asset in the
Company's balance sheets.
Severance expenses for the period from June 8, 1997 (inception) until
December 31, 1997 and for the years ended December 31, 1998 and 1999, were
$26, $460 and $317, respectively.
6. COMMITMENTS AND CONTINGENT LIABILITIES
LEASE COMMITMENTS
The facilities of the Company and its U.S. subsidiary are rented under
operating leases for periods ending in 2004.
Future minimum lease commitments under non-cancelable operating leases for
the years ending December 31, are as follows:
2000......... $ 687
2001......... $ 759
2002......... $ 772
2003......... $ 498
2004......... $ 415
GUARANTEES
The Company has provided guarantees, in connection with rental agreements,
totaling approximately $30.
7. SHARE CAPITAL
GENERAL
On January 29, 2000, the Company effected a pro-rata rights offering,
pursuant to which each existing shareholder was granted six additional
shares of the same class, with a nominal value of NIS 0.01 par value each,
subject to the payment or liability for the payment of the nominal value.
Each option and warrant holder is entitled to adjustments to his respective
options or warrants.
All share and per share data included in these consolidated financial
statements have been retroactively adjusted to reflect recapitalizations of
the company, the abovementioned rights offering, as well as to reflect the
1:1 rights offering and 100:1 stock split effected on January 27, 1998 and
on February 9, 1998, respectively.
F-12
XACCT TECHNOLOGIES (1997) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
In October 1999, the Company reclassified 5,600,000 ordinary shares into
Preferred C shares.
COMPOSITION OF SHARE CAPITAL
DECEMBER 31,
---------------------------------------------------------------
1998 1999
ORIGINAL ------------------------------ --------------------------------
ISSUANCE ISSUED AND ISSUED AND
PRICE AUTHORIZED OUTSTANDING AUTHORIZED OUTSTANDING
------------------- -------------- -------------- ---------------- ---------------
NUMBER OF SHARES
---------------------------------------------------------------
Shares of NIS 0.01 par value each:
Ordinary shares ......... 41,300,000 4,263,455* 37,630,000 4,345,775*
Non-voting Ordinary
shares................. 1,750,000 -- 1,820,000 --
Preferred "A" shares..... $0.71 - $0.93 4,200,000 3,617,250 4,200,000 3,617,250
Preferred "B-1" shares... $1.40 7,000,000 3,971,240 7,000,000 4,399,864
Preferred "B-2" shares... $1.40 1,750,000 1,315,146 1,750,000 1,315,146
Preferred "C-1" shares... $5.32 -- -- 5,530,000 3,933,895
Preferred "C-2" shares... $5.32 -- -- 70,000 70,000
-------------- -------------- ---------------- ---------------
56,000,000 13,167,091 58,000,000 17,681,930
============== ============== ================ ===============
-------------------
* Includes 420,000 shares issued to a trustee in favor of options to
employees which have not yet been exercised.
ORDINARY SHARES
The voting ordinary shares confer upon the holders the right to receive
notice to participate and vote in the general meetings of the Company, the
right to receive dividends, if and when declared, and the right to appoint
directors.
The non-voting ordinary shares confer all of the rights of the voting
ordinary shares, except for the rights to appoint directors and to receive
notice to participate and vote in the general meetings of the Company. The
non-voting ordinary shares shall be convertible at the option of the holder
into an equal number of voting ordinary shares.
PREFERRED SHARES
The Series A, B-1 and C-1 preferred shares confer all of the rights of the
voting ordinary shares. The Series B-2 and C-2 non-voting preferred shares
confer all of the rights of the non-voting ordinary shares. All the
preferred shares confer additional rights as detailed below.
CONVERSION
Each share of Series A, B-1 and C-1 preferred shares is convertible
into an Ordinary share on a one-to-one basis.
Each share of Series B-2 and C-2 preferred shares is convertible into
Series B-1 and C-1 preferred shares, respectively, on a one-to-one
basis, or into non-voting ordinary shares, pursuant to the conversion
rate.
All preferred shares shall be automatically converted into ordinary
shares immediately prior to the consummation of an initial public
offering ("IPO").
The pro forma shareholders' equity gives effect to the conversion of
all outstanding preferred shares as if such conversion occurred on
December 31, 1999.
F-13
XACCT TECHNOLOGIES (1997) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
LIQUIDATION PREFERENCE
The preferred shares confer a preference over ordinary shares, in the
event of any liquidation, dissolution or winding up of the Company,
either voluntarily or involuntarily. The liquidation preference is
equal to the original purchase price in U.S. dollars.
OTHER PREFERENCE
In addition, all preferred shares confer preemptive rights and certain
rights of first refusal, co-sale rights and anti-dilution rights.
STOCK WARRANTS
As part of the issuance of shares in October 1999, the investors received
warrants to purchase 1,201,158 Series C-1 preferred shares, with an
exercise price of $7.82, related to 50% of the warrants, and $9.39, related
to the other 50%. The first 50% of the warrants are exercisable through the
earlier of the termination of a 24-month period, an IPO or liquidation of
the Company.
The remaining 50% of the warrants are exercisable through the earlier of
the termination of a 30-months period, consummation of an IPO, or
liquidation of the Company.
As part of the issuance of shares on October 29, 1998, the investors
received warrants to purchase 857,213 Series B preferred shares, with an
exercise price of $2.80 per share. The first 50% of the warrants are
exercisable through the earlier of the termination of an 18-month period,
an IPO or liquidation of the Company. The remaining 50% of the warrants are
exercisable through the earlier of the termination of a 24-month period, an
IPO, or liquidation of the Company.
In June 1997, in connection with an issuance of shares, the Company granted
its consultants warrants to purchase 63,700 ordinary shares at $0.71 per
share. As of December 31, 1999, 57,820 warrants, have already been
exercised. The remaining 5,880 warrants will be forfeited in June 2000.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Shares Issued to Employees" ("APB-25"), and related
interpretations, in accounting for its employee share options because, as
discussed below, the alternative fair value accounting provided for under
FASB Statement No. 123, "Accounting for Stock-Based Compensation", requires
the use of option valuation models that were not developed for use in
valuing employee share options.
As at December 31, 1999, the Company has authorized through several
Incentive Stock Option Plans, the grant of options to officers, management,
other key employees and others of up to 3,302,236 of the Company's ordinary
shares. The options granted generally become fully exercisable after four
consecutive years of employment and expire eight years from the approval
date of the option plan under the terms they were granted.
F-14
XACCT TECHNOLOGIES (1997) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
A summary of the Company's employees share option activity, and
related information is as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1998 1999
----------------------- ------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------------ ---------- ------------ ----------- ------------ ----------
Outstanding--at the beginning
of the period......... -- $ -- -- $ -- 1,830,941 $ 0.16
Granted.................. -- -- 1,840,566 0.16 1,461,670 1.28
Forfeited................ -- -- 9,625 0.07 154,672 0.18
Exercised................ -- -- -- -- 24,500 0.35
------------ ---------- ------------ ----------- ------------ ----------
Outstanding--at the
end of the period..... -- -- 1,830,941 $ 0.16 3,113,439 $ 0.68
------------ ---------- ------------ ----------- ------------ ----------
Exercisable options...... -- $ -- -- $ -- 668,120 $ 0.14
============ ========== ============ =========== ============ ==========
The options outstanding as of December 31, 1999 have been classified
by exercise price, as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- -----------------------------
OUTSTANDING WEIGHTED
AS OF WEIGHTED AVERAGE WEIGHTED EXERCISABLE AVERAGE
DECEMBER 31, REMAINING AVERAGE AS OF DECEMBER 31, EXERCISE
EXERCISE PRICE 1999 CONTRACTUAL LIFE EXERCISE PRICE 1999 PRICE
---------------- ------------ ----------------- -------------- ------------------ -----------
(IN YEARS)
$0.07 - $0.19 1,354,969 6.44 $0.11 582,544 $0.11
0.35 701,750 7.18 0.35 85,576 0.35
1.57 932,120 7.81 1.57 -- --
2.13 124,600 7.95 2.13 -- --
---------------- ------------ ---------------- ------------ ---------------- -----------
$0.68 3,113,439 7.07 $0.68 668,120 $0.14
================ ============ ================ ============ ================ ===========
Deferred compensation expenses which represent the excess of the market
value over the exercise price totaled $3,205 and are amortized to the
statements of operations over the vesting period which usually is four
years.
In 1998, the Company granted service providers options to purchase 23,170
ordinary shares at an exercise price of $ 0.19. As of December 31, 1999,
these options are fully vested. The Company accounts for these options in
accordance with the provisions of SFAS 123. No compensation expense has
been recorded in the consolidated financial statements regarding these
options due to the insignificant amount of deferred compensation.
In 1998, the Company granted a director 63,455 ordinary shares at an
exercise price of $0.19. The shares are vested over a period of four years.
Under SFAS 123, pro forma information regarding net loss and 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 a
minimum value option pricing model with the following assumptions for 1998
and 1999: risk-free interest rates of 6.00% and 5.75%, respectively,
dividend yields of 0% and an expected life of the option range between 1.5
to 4.5 years.
The minimum value options pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option
F-15
XACCT TECHNOLOGIES (1997) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics
significantly different from those traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
Weighted-average fair values of options whose exercise price (1) equals, or
(2) is less than the market price of the stock on date of grant are as
follows:
WEIGHTED-AVERAGE FAIR VALUE OPTIONS
GRANTED AT AN EXERCISE PRICE:
----------------------------------------------
DECEMBER 31,
----------------------------------------------
1997 1998 1999
-------------- -------------- ---------------
Less than fair value at date of grant............ $ -- $ -- $ 18.71
============== ============== ===============
Equals to fair value at date of grant............ $ $ 0.18 $ 0.40
============== ============== ===============
Pro forma information under SFAS 123:
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1998 1999
-------------- -------------- ---------------
Net loss as reported............................. $ 662 $ 4,434 $ 9,078
Pro forma net loss............................... $ 662 $ 4,444 $ 9,131
Pro forma basic and diluted net loss per share... $ 0.3 $ 1.17 $ 2.35
DIVIDENDS:
In the event that cash dividends are declared in the future, such dividends
will be paid in NIS. The Company does not intend to pay cash dividends in
the foreseeable future.
8. TAXES ON INCOME
TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS,
1959 ("THE LAW")
The Company has been granted the status of "Approved Enterprise" under the
law in 1998.
According to the provisions of the law, the Company has elected the
"alternative benefits" - waiver of grants in return for a tax exemption
and, accordingly, the Company's income is tax-exempt for a period of two
years commencing with the year it first earns taxable income relating to
each expansion program, and subject to corporate taxes at the reduced rate
of 10% to 20% (depending on the rate of foreign investments in the
Company), for an additional period of eight years.
As the Company currently has no taxable income, these benefits have not yet
commenced.
The tax-exempt profits that will be earned by the Company's "Approved
Enterprise" can be distributed to shareholders, without imposing a tax
liability to the Company only upon the complete liquidation of the Company.
If these retained tax-exempt profits are distributed in a manner other than
in the complete liquidation of the Company, they would be taxed at the
corporate tax rate applicable to such profits as if the Company had not
elected the alternative system of benefits. The Company's board of
directors has determined that such tax exempt income will not be
distributed as dividends.
F-16
XACCT TECHNOLOGIES (1997) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
The period of tax benefits, detailed above, is limited to the earlier of 12
years from the commencement of production, or 14 years from the approval
date. Accordingly, the period relating to the Company's approved enterprise
will expire in 2012.
Should the Company derive income in Israel from sources other than the
approved enterprises during the relevant period of benefits, such income
will be taxable at regular corporate tax rate of 36%.
MEASUREMENT OF RESULTS FOR TAX PURPOSES
Results for tax purposes are measured and reflected in real terms in
accordance with the changes in the Israeli CPI. As explained in Note 2, the
consolidated financial statements are presented in U.S. dollars. The
difference between the change in the Israeli CPI and in the NIS/U.S. dollar
exchange rate causes a difference between taxable income or loss and the
income or loss before taxes reflected in the consolidated financial
statements. In accordance with paragraph 9(f) of SFAS No. 109, the Company
has not provided deferred income taxes on this difference between the
reporting currency and the tax bases of assets and liabilities.
TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXATION),
1969
The Company is an "industrial company" under the above law and as such is
entitled to certain tax benefits, including accelerated rates of
depreciation on certain assets and deduction of expenses incurred in
respect of public issuance of securities and deduction of 12.5% per annum
of the cost of certain intangible property rights. The Company has not
utilized these tax benefits.
NET OPERATING LOSSES CARRYFORWARDS
As of December 31, 1999, the Company had approximately $4,700 of Israeli
net operating loss carryforwards. The Israeli loss carryforwards have no
expiration date. The Company expects that during the period these tax
losses are utilized, its income would be substantially tax exempt.
Accordingly, there will be no tax benefit available from such losses and no
deferred income taxes have been included in these consolidated financial
statements.
As of December 31, 1999, the U.S. subsidiary had U.S. federal and state net
operating loss carryforwards for income tax purposes in the amount of
approximately $6,900, which can be carried forward and offset against
taxable income in various amounts between the years 2006 and 2019.
Utilization of U.S. net operating losses may be subject to substantial
annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses before
utilization.
F-17
XACCT TECHNOLOGIES (1997) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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's deferred tax liabilities and assets
are as follows:
DECEMBER 31,
------------------------
1998 1999
----------- -----------
Deferred tax assets:
U.S. operating loss carryforward............. $ 553 $ 2,428
Not currently deductible reserve............. 64 91
----------- -----------
Total deferred tax asset..................... 617 2,519
Valuation allowance............................. (617) (2,519)
----------- -----------
Net deferred tax asset.......................... $ -- $ --
=========== ===========
The Company's U.S subsidiary has provided valuation allowances in respect
of deferred tax assets resulting from tax loss carryforwards. Management
currently believes that since the Company has a history of losses it is
more likely than not that the deferred tax regarding the loss carryforwards
and other temporary differences will not be realized in the foreseeable
future.
PRE-TAX LOSS
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1998 1999
------------- ------------- -------------
Domestic............ $ 662 $ 2,666 $ 3,890
Foreign............. -- 1,768 5,188
------------- ------------- -------------
$ 662 $ 4,434 $ 9,078
============= ============= =============
9. GEOGRAPHIC OPERATING INFORMATION
SUMMARY INFORMATION ABOUT GEOGRAPHICAL AREAS
The Company manages its business on a basis of one reportable segment (see
Note 1 for a brief description of the Company's business) and follows the
requirements of SFAS 131, "Disclosures About Segments of an Enterprise and
Related Information".
The total revenues are attributed to geographic information, based on the
customers' location.
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
Revenues from sales to unaffiliated
customers:
Israel............................. $ -- $ -- $ 17
United States...................... -- -- 595
Canada............................. -- -- 156
Portugal........................... -- -- 230
Europe (except Portugal)........... -- -- 196
------------ ------------ ------------
$ -- $ -- $ 1,194
============ ============ ============
F-18
XACCT TECHNOLOGIES (1997) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
Long-lived assets:
Israel............................. $ 101 $ 278 $ 413
United States...................... -- 82 543
------------ ------------ ------------
$ 101 $ 360 $ 956
============ ============ ============
Major customer data as a percentage of total revenues:
YEAR ENDED
DECEMBER 31,
1999
--------------
Customer A.............................. 19%
Customer B.............................. 12%
Customer C.............................. 10%
Customer D.............................. 10%
10. SUBSEQUENT EVENTS
PROPOSED PUBLIC OFFERING
The Board of Directors has authorized the Company to file a registration
statement with the United States Securities and Exchange Commission for an
initial public offering of its ordinary shares. In connection with the
initial public offering, all of the Company's convertible preferred shares
outstanding will be converted into ordinary shares.
SERIES D PREFERRED SHARES FINANCING
In March 2000, the Company completed a private placement of 1,227,235
shares of Series D preferred shares at $12.63 per share resulting in net
cash proceeds of approximately $14,300. In the event of voluntary or
involuntary liquidation of the Company the holders of Series D preferred
shares are entitled to a liquidation preference of $12.63 per share.
Holders of Series D preferred shares are entitled to one vote for each
ordinary share into which the preferred shares and convertible. Each
preferred share will be automatically converted into one voting ordinary
share upon the closing of a firm commitment public offering of ordinary
shares at a price per ordinary share representing a company valuation
immediately prior to such offering of at least $360,000 or with total
gross offering proceeds to the Company of at least $45,000.
On March 22, 2000, a shareholder exercised warrants to purchase 375,046
Series B-1 preferred shares at an aggregate purchase price of $1,050.
F-19
[LOGO]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the securities being registered. All amounts shown are estimates except for
the SEC registration fee, the NASD filing fee and the Nasdaq National Market
fees.
SEC registration fee..................................... $ *
NASD filing fee.......................................... *
NASDAQ National Market Fees.............................. *
Blue Sky qualification fees and expenses................. *
Israeli Fee for new shares............................... *
Travel/Road Show expenses................................ *
Printing and engraving expenses.......................... *
Transfer Agent Fee....................................... *
Accountant's fees and expenses........................... *
Legal fees and expenses.................................. *
Miscellaneous............................................ *
-------------
Total................................................. $ *
=============
------------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Companies Law provides that an Israeli company cannot exonerate an
office holder from liability with respect to a breach of his or her duty of
loyalty, but may exonerate in advance an office holder from his or her liability
to the company, in whole or in part, with respect to a breach of his or her duty
of care. Our articles of association provide that, subject to any restrictions
imposed by the Companies Law, we may enter into an insurance contract providing
coverage for the liability of any of our office holders with respect to:
o a breach of his or her duty of care to us or to another person;
o a breach of his or her duty of loyalty to us, provided that the
office holder acted in good faith and had reasonable grounds to
assume that his or her act would not prejudice our interests; or
o a financial liability imposed upon him or her in favor of another
person with respect to an act performed by him or her in his or her
capacity as an office holder.
In addition, we may indemnify an office holder against the following
expenses or liabilities imposed upon him or her in his or her capacity as an
office holder:
o a financial liability imposed on him or her in favor of another
person by any judgment, including a settlement or an arbitrator's
award approved by a court; and
o reasonable litigation expenses, including attorneys' fees, incurred
by such office holder or imposed upon him or her by a court, in
relation to proceedings instigated by us against him or her or that
are instigated on our behalf or by another person, or as a result of
a criminal charge from which he or she was acquitted.
The Companies Law 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 any of the following:
o a breach by the officer holder of his or her duty of loyalty unless
the office holder acted in good faith and had a reasonable basis to
believe that the act would not prejudice the company;
o a breach by the office holder of his or her duty of care if such
breach was committed intentionally or recklessly;
o an act or omission with the intent to unlawfully derive a personal
benefit; or
II-1
o a fine levied against the office holder as a result of a criminal
offense.
Under the Companies Law, the shareholders of a company may amend its
articles of association to include either of the following provisions:
o a provision authorizing the company to grant in advance an
undertaking to indemnify an office holder, provided that the
undertaking is limited to specified classes of events which the board
of directors deem foreseeable at the time of grant and limited to an
amount determined by the board of directors to be reasonable under
the circumstances, or
o a provision authorizing the company to retroactively indemnify an
office holder.
In addition, pursuant to the Companies Law, indemnification of, and
procurement of insurance coverage for, a company's office holders must be
approved by the audit committee and the board of directors. In the case of
directors, additional approval by the shareholders is required.
Our articles of association allow for us to insure and indemnify office
holders to the fullest extent permitted by Israeli law, provided that the
insurance or indemnification is approved by the audit committee of our board of
directors and, if required by the Companies Law, also by our shareholders.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The share numbers below reflect (i) the 100 for 1 share split that
occurred on January 27, 1998, (ii) a rights offering in which the holders of
shares outstanding as of February 9, 1998 received one share for each share
outstanding held by them and (iii) a rights offering in which the holders of
shares outstanding as of January 29, 2000 received six shares for each share
outstanding held by them.
(1) From June 8, 1997 through February 29, 2000, we issued options to
purchase an aggregate of 4,401,118 ordinary shares to employees, officers,
directors, consultants and other service providers and we issued and sold an
aggregate of 375,052 unregistered ordinary shares to an officer and director of
the Registrant for aggregate consideration of U.S.$111,254.47, upon exercise of
compensatory options. The sales and grants of the above securities are deemed to
be exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance on either Rule 701 promulgated under Section 3(b)
of the Securities Act, or on Section 4(2) of the Securities Act, and were made
without general solicitation or advertising.
(2) On June 8, 1997, we issued and sold an aggregate of 1,890,000
ordinary shares to each of Eran Wagner and Limor Schweitzer for NIS 1,350. The
sales of these securities are deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act, and were made
without general solicitation or advertising.
(3) On June 8, 1997, we issued and sold an aggregate of 420,000 ordinary
shares to Amnon Evron & Co. Trust Co. Ltd., as trustee for certain future
optionholders, for NIS 300. The sale of these securities is deemed to be exempt
from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, and was made without general solicitation or advertising.
(4) On June 9, 1997, we issued and sold an aggregate of 560,000 shares of
our Series A preferred shares to Ampal-American Israel Corporation for an
aggregate purchase price of U.S.$400,000 and we issued warrants to purchase
287,000 preferred shares for U.S.$240,000 to the same investor. These preferred
shares are convertible into an equal number of ordinary shares. The sales of
these securities are deemed to be exempt from registration under the Securities
Act in reliance on Section 4(2) of the Securities Act, and were made without
general solicitation or advertising.
(5) On June 9, 1997, we granted fully vested options to purchase an
aggregate of 49,000 ordinary shares to Foresight Business and Consulting Ltd.
for an aggregate purchase price of U.S.$35,000. Also on June 9, 1997, we granted
fully vested options to purchase an aggregate of 14,700 ordinary shares to
Jerusalem Global Ltd. for an aggregate purchase price of U.S.$10,500. These
grants of options to purchase securities are deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, and were made without general solicitation or advertising.
(6) On June 22, 1997, we issued and sold 420,000 Series A preferred
shares to Technorov Holdings (1993) Ltd. for an aggregate purchase price of
U.S.$300,000 and we issued warrants to purchase 215,250 preferred shares
II-2
for U.S.$180,000 to the same investor. These preferred shares are convertible
into an equal number of ordinary shares. The sales of these securities are
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, and were made without general solicitation
or advertising.
(7) On June 23, 1997, we issued and sold an aggregate of 420,000 Series A
preferred shares to Israel Seed Limited Partnership and Israel Seed II L.P. for
an aggregate purchase price of U.S.$300,000 and we issued warrants to purchase
215,250 preferred shares for U.S.$240,000 to the same investors. These preferred
shares are convertible into an equal number of ordinary shares. The sales of
these securities are deemed to be exempt from registration under the Securities
Act in reliance on Section 4(2) of the Securities Act, and were made without
general solicitation or advertising.
(8) On December 16, 1997, we issued and sold an aggregate of 140,000
Series A preferred shares to Israel Seed Limited Partnership and Israel Seed II
L.P. for an aggregate purchase price of U.S.$100,000. These preferred shares are
convertible into an equal number of ordinary shares. The sales of these
securities are deemed to be exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act, and were made without general
solicitation or advertising.
(9) On March 2, 1998, we issued and sold an aggregate of 717,500 Series A
preferred shares to Ampal American Israel Corporation, Technorov Holdings (1993)
Ltd., Israel Seed Limited Partnership and Israel Seed II L.P. upon exercise of
outstanding warrants for an aggregate purchase price of U.S.$600,000. These
preferred shares are convertible into an equal number of ordinary shares. The
sales of these securities are deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act, and were made
without general solicitation or advertising.
(10) On March 2, 1998, we issued and sold an aggregate of 1,288,000
Series A preferred shares to Ampal American Israel Corporation, Technorov
Holdings (1993) Ltd., Israel Seed Limited Partnership and Israel Seed II L.P.
for an aggregate exercise price of U.S.$1,196,000. These preferred shares are
convertible into an equal number of ordinary shares. The sales of these
securities are deemed to be exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act, and were made without general
solicitation or advertising.
(11) On March 2, 1998, we issued warrants to purchase an aggregate of
71,750 Series A preferred shares to Israel Seed Limited Partnership and Israel
Seed II L.P. for an aggregate exercise price of U.S.$66,625. These preferred
shares issuable upon exercise of the warrant are convertible into an equal
number of ordinary shares. The issuances of these warrants to purchase
securities are deemed to be exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act, and were made without general
solicitation or advertising.
(12) On March 18, 1998, we issued and sold an aggregate of 71,750 Series
A preferred shares to Israel Seed Limited Partnership and Israel Seed II L.P.
upon exercise of outstanding warrants for an aggregate purchase price of
U.S.$66,625. These preferred shares are convertible into an equal number of
ordinary shares. The sales of these securities are deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, and were made without general solicitation or advertising.
(13) On July 23, 1998, we issued and sold an aggregate of 63,455 ordinary
shares to Robert C. Hawk for an aggregate purchase price of U.S.$12,056.45,
pursuant to a restricted stock purchase agreement. The sale of these securities
is deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, and was made without general solicitation or
advertising.
(14) On September 1, 1998, we granted a fully vested option to purchase
an aggregate of 17,920 shares of our ordinary shares to Gallagher Public
Relations Firm for an aggregate exercise price of U.S.$3,328. This grant of an
option to purchase securities is deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act, and was made
without general solicitation or advertising.
(15) On October 29, 1998, we issued and sold an aggregate of (i)
3,971,240 Series B-1 preferred shares, (ii) 1,315,146 Series B-2 non-voting
preferred shares and (iii) warrants to purchase 792,925 Series B-1 preferred
shares to entities affiliated with Ampal American Israel Corporation, entities
affiliated with Israel Seed L.P., entities affiliated with Trident Capital,
entities affiliated with Eucalyptus Ventures L.P., and entities affiliated with
Technorov Holdings (1993) Ltd. for an aggregate purchase price of
U.S.$7,339,958.64. The Series B-1 preferred shares are convertible into an equal
number of voting ordinary shares and the Series B-2 non-voting preferred shares
are convertible into an equal number of non-voting ordinary shares. The sales of
these securities are deemed to be exempt from registration under the Securities
Act in reliance on Section 4(2) of the Securities Act and/or Rule 506
promulgated under the Securities Act, and were made without general solicitation
or advertising. Each purchaser
II-3
was a sophisticated investor and had access to all relevant information
necessary to evaluate the investment and represented to us that the shares were
being acquired for investment purposes.
(16) On November 1, 1998, we granted a fully vested option to purchase an
aggregate of 5,250 shares of our ordinary shares to Charles B. Gottlieb for an
aggregate exercise price of U.S.$975. This grant of an option to purchase
securities is deemed to be exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act, and was made without general
solicitation or advertising.
(17) On January 21, 1999, we issued and sold an aggregate of (i) 428,624
Series B-1 preferred shares and (ii) warrants to purchase 64,288 Series B-1
preferred shares to WSG Capital L.P. for an aggregate purchase price of
U.S.$599,994. These preferred shares are convertible into an equal number of
ordinary shares. The sales of these securities are deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act and/or Rule 506 promulgated under the Securities Act, and were
made without general solicitation or advertising. Each purchaser was a
sophisticated investor and had access to all relevant information necessary to
evaluate the investment and represented to us that the shares were being
acquired for investment purposes.
(18) On May 18, 1999, we granted Robert C. Hawk an option to purchase
24,500 ordinary shares at a U.S.$0.35 per share exercise price, with 6.25% of
the options vesting quarterly beginning on May 18, 1999. This grant of an option
to purchase securities is deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act, and was made
without general solicitation or advertising.
(19) On June 1, 1999, we issued and sold an aggregate of 1,470 voting
ordinary shares to Michael Eisenberg upon exercise of outstanding options for an
aggregate purchase price of U.S.$1,050. The sale of these securities is deemed
to be exempt from registration under the Securities Act in reliance on Section
4(2) of the Securities Act, and was made without general solicitation or
advertising.
(20) On June 1, 1999, we issued and sold an aggregate of 43,120 voting
ordinary shares to Forstec Holdings (1999) Ltd. upon exercise of outstanding
options for an aggregate purchase price of U.S.$30,800. The sale of these
securities is deemed to be exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act, and was made without general
solicitation or advertising.
(21) On June 1, 1999, we issued and sold an aggregate of 13,230 voting
ordinary shares to Jerusalem Global Ltd. upon exercise of outstanding options
for an aggregate purchase price of U.S$9,450. The sale of these securities is
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, and was made without general solicitation or
advertising.
(22) On August 1, 1999, we issued and sold an aggregate of 24,500
ordinary shares to Robert C. Hawk for an aggregate exercise price of U.S.$8,575
upon exercise of his option. These shares are subject to repurchase until
vested. The sale of these securities is deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, and
was made without general solicitation or advertising.
(23) On October 7, 1999, we issued and sold an aggregate of (i) 3,839,906
Series C-1 preferred shares, (ii) 70,000 Series C-2 non-voting preferred shares
and (iii) warrants to purchase 1,172,962 Series C-1 preferred shares to entities
affiliated with Ampal American Israel Corporation, entities affiliated with
Israel Seed L.P., entities affiliated with Information Associates II, L.P.,
entities affiliated with Eucalyptus Ventures L.P., Technology Crossover Ventures
III L.P., Nissho Iwai American Corporation and Deutsche Bank AG for an aggregate
purchase price of U.S.$20,799,973.13. The Series C-1 preferred shares are
convertible into an equal number of voting ordinary shares and the Series C-2
non-voting preferred shares are convertible into an equal number of non-voting
ordinary shares. The sales of these securities are deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, and were made without general solicitation or advertising.
(24) On December 21, 1999, we issued and sold an aggregate of (i) 93,989
Series C-1 preferred shares, and (ii) warrants to purchase 28,196 Series C-1
preferred shares to WSG Capital II L.P. for an aggregate purchase price of
U.S.$500,004.02. The Series C-1 preferred shares are convertible into an equal
number of voting ordinary shares. The sales of these securities are deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2) of
the Securities Act, and were made without general solicitation or advertising.
(25) On December 27, 1999, the unexercised portion of the warrant issued
on June 9, 1997 to Foresight Business and Consulting Ltd. was transferred to
Benny De-Kalo. Benny De-Kalo received a warrant to purchase 5,880 voting
ordinary shares at an aggregate exercise price of $4,200. The issuance of this
warrant to purchase
II-4
securities is deemed to be exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act, and was made without general
solicitation or advertising.
(26) On January 31, 2000, we granted Charles B. Gottlieb an option to
purchase 10,500 ordinary shares at an exercise price of U.S.$3.00 per share,
with monthly vesting over a two year period beginning on January 1, 2000, with
no service related vesting. This grant of an option to purchase securities is
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, and was made without general solicitation or
advertising.
(27) On March 8, 2000, we granted Charles B. Gottlieb an option to
purchase 10,000 ordinary shares at an exercise price of U.S.$3.00 per share,
with 6.25% of the options vesting quarterly beginning on January 1, 2000. This
option grant is subject to service and current service is terminable upon 90
days prior written notice. This grant of an option to purchase securities is
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, and was made without general solicitation or
advertising.
(28) On March 22, 2000, we issued and sold an aggregate of 375,046
preferred shares to entities affiliated with Information Associates II, L.P. for
an aggregate exercise price of $1,050,128.80 upon exercise of outstanding
warrants. This sale was made in reliance on Section 4(2) of the Securities Act
and was made without general solicitation or advertising.
(29) On March 27, 2000, we issued and sold an aggregate of 1,227,235
Series D preferred shares to Sun Microsystems, Inc., Credit Suisse First Boston
Venture Fund I L.P., individuals and entities affiliated with Chase Securities
Inc. and individuals affiliated with U.S. Bancorp Piper Jaffray, Inc. for an
aggregate purchase price of approximately U.S.$15.5 million. The Series D
preferred shares are convertible into an equal number of voting ordinary shares.
Credit Suisse First Boston Corporation served as placement agent in connection
with this offering. The sales of these securities are deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act and/or Rule 506 promulgated under the Securities Act, and were
made without general solicitation or advertising. Each purchaser was a
sophisticated investor and had access to all relevant information necessary to
evaluate the investment and represented to us that the shares were being
acquired for investment purposes.
Except as disclosed above, there were no underwriters employed in
connection with any transactions set forth in this Item 15.
II-5
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------------------------- -------------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement*
3.1 Memorandum of Association of XACCT Technologies (1997) Ltd.
3.2 Articles of Association of XACCT Technologies (1997) Ltd., as amended on March 27, 2000
4.1 Specimen of Ordinary Share Certificate*
4.2 Second Amended and Restated Rights Agreement, dated March 27, 2000, by and among the Company, the key
management and holders of preferred shares*
5.1 Opinion of S. Friedman & Co., Advocates and Notaries, as to the validity of the Shares*
9.1 Proxy by Marinera Ltd. in favor of Ampal-American Israel Corporation, dated December 28, 1998
9.2 Proxy by Inveco International Inc. - Profit Sharing Plan in favor of Ampal-American Israel Corporation,
dated December 28, 1998
9.3 Form of Proxy Agreement entered into by certain purchasers of Series D preferred shares in connection
with the Series D financing
10.1 1998 U.S. ISO Stock Option Plan and related agreements
10.2 1998 Section 102 Share Option Plan and related agreements
10.3 2000 Share Option Plan*
10.4 2000 Employee Share Purchase Plan*
10.5 Section 3(i) Share Option Plan*
10.6 Employment Agreement, dated January 1997, by and between the Registrant and Eric Gries
10.7 Offer Letter, dated March 26, 1998, by and between the Registrant and Anil Uberoi
10.8 Offer Letter, dated August 15, 1998, by and between the Registrant and Eran Wagner
10.9 Offer Letter, dated December 28, 1999, by and between the Registrant and Limor Schweitzer
10.10 Offer Letter, dated January 14, 2000, by and between the Registrant and Richard Van Hoesen
10.11 Lease Agreement, dated December 31, 1999, by and between the Registrant and Nichsei Crystal Lemischar
(Ramat-Gan)(1)
10.12 Lease Agreement, dated November 12, 1999, by and between XACCT Technologies, Inc. and Princeton
Investment Group LLC
10.13 Lease Agreement, dated January 28, 2000, by and between XACCT Technologies, Inc. and Princeton
Investment Group LLC
10.14 Form of XIS End-User License Agreement
10.15 Form of XACCTusage 3.4 End-User License Agreement
10.16 Form of Support and Maintenance Agreement
10.17 Form of Support Agreement
10.18 Form of Global Teaming Agreement
10.19 Form of Value Added Partner Agreement
21.1 Subsidiaries of the Registrant
23.1 Consent of Kost Forer & Gabbay, a Member of Ernst and Young International
23.2 Consent of S. Friedman & Co. (included in Exhibit 5.1)*
24.1 Powers of Attorney (See page II-8)
27.1 Financial Data Schedule
99.1 Officer's Certificate regarding fairness and accuracy of translations*
- --------------------------
(1) Translated in full; the original language version is on file with the
registrant and is available upon request.
* To be filed by amendment.
II-6
(b) FINANCIAL STATEMENT SCHEDULES.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Santa
Clara, the State of California, on March 28, 2000.
XACCT TECHNOLOGIES (1997) LTD.
By: /s/ Eric Gries
-------------------------------------
Eric Gries
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature
appears below constitutes and appoints, jointly and severally, Eric Gries and
Richard Van Hoesen and each of them his or her true and lawful attorney-in-fact
and agent, each with the power of substitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any amendment,
including any post-effective amendments, to this registration statement, and any
registration statement related to the offering contemplated by this registration
statement that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933 and to file the same, with all exhibits thereto and all
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that each of said attorneys-in-fact and agents or any of
them, or his or her or their substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Eric Gries President, Chief Executive Officer and Director March 28, 2000
- ------------------------------------ (Principal Executive Officer)
Eric Gries
/s/ Richard Van Hoesen Vice President and Chief Financial Officer March 28, 2000
------------------------------------ (Principal Financialand Accounting Officer)
Richard Van Hoesen
/s/ Limor Schweitzer Director and Chief Technology Officer March 28, 2000
- ------------------------------------
Limor Schweitzer
/s/ Eran Wagner Director and Executive Vice President, March 28, 2000
- ------------------------------------ Technology
Eran Wagner
/s/ Robert C. Hawk Director March 28, 2000
- ------------------------------------
Robert C. Hawk
/s/ Nitsan Yanovski Director March 28, 2000
- ------------------------------------
Nitsan Yanovski
/s/ Jon Q. Reynolds, Jr. Director March 28, 2000
- ------------------------------------
Jon Q. Reynolds, Jr.
/s/ Todd Springer Director March 28, 2000
- ------------------------------------
Todd Springer
II-8
AUTHORIZED REPRESENTATIVE IN
THE UNITED STATES
XACCT Technologies, Inc.
By: /s/ Eric Gries
-------------------------
Name: Eric Gries
Title: President & Chief Executive Officer
Date: March 28, 2000
II-9
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------------------------- -------------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement*
3.1 Memorandum of Association of XACCT Technologies (1997) Ltd.
3.2 Articles of Association of XACCT Technologies (1997) Ltd., as amended on March 27, 2000
4.1 Specimen of Ordinary Share Certificate*
4.2 Second Amended and Restated Rights Agreement, dated March 27, 2000, by and among the Company, the key
management and holders of preferred shares*
5.1 Opinion of S. Friedman & Co., Advocates and Notaries, as to the validity of the Shares*
9.1 Proxy by Marinera Ltd. in favor of Ampal-American Israel Corporation, dated December 28, 1998
9.2 Proxy by Inveco International Inc. - Profit Sharing Plan in favor of Ampal-American Israel Corporation,
dated December 28, 1998
9.3 Form of Proxy Agreement entered into by certain purchasers of Series D preferred shares in connection
with the Series D financing
10.1 1998 U.S. ISO Stock Option Plan and related agreements
10.2 1998 Section 102 Share Option Plan and related agreements
10.3 2000 Share Option Plan*
10.4 2000 Employee Share Purchase Plan*
10.5 Section 3(i) Share Option Plan*
10.6 Employment Agreement, dated January 1997, by and between the Registrant and Eric Gries
10.7 Offer Letter, dated March 26, 1998, by and between the Registrant and Anil Uberoi
10.8 Offer Letter, dated August 15, 1998, by and between the Registrant and Eran Wagner
10.9 Offer Letter, dated December 28, 1999, by and between the Registrant and Limor Schweitzer
10.10 Offer Letter, dated January 14, 2000, by and between the Registrant and Richard Van Hoesen
10.11 Lease Agreement, dated December 31, 1999, by and between the Registrant and Nichsei Crystal Lemischar
(Ramat-Gan)(1)
10.12 Lease Agreement, dated November 12, 1999, by and between XACCT Technologies, Inc. and Princeton
Investment Group LLC
10.13 Lease Agreement, dated January 28, 2000, by and between XACCT Technologies, Inc. and Princeton
Investment Group LLC
10.14 Form of XIS End-User License Agreement
10.15 Form of XACCTusage 3.4 End-User License Agreement
10.16 Form of Support and Maintenance Agreement
10.17 Form of Support Agreement
10.18 Form of Global Teaming Agreement
10.19 Form of Value Added Partner Agreement
21.1 Subsidiaries of the Registrant
23.1 Consent of Kost Forer & Gabbay, a Member of Ernst and Young International
23.2 Consent of S. Friedman & Co. (included in Exhibit 5.1)*
24.1 Powers of Attorney (See page II-8)
27.1 Financial Data Schedule
99.1 Officer's Certificate regarding fairness and accuracy of translations*
- --------------------------
(1) Translated in full; the original language version is on file with the
registrant and is available upon request.
* To be filed by amendment.