FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16
OF THE SECURITIES EXCHANGE ACT OF 1934
For February 2, 2006
BLUEPHOENIX SOLUTIONS LTD.
(Translation of Registrant's Name into English)
8 MASKIT STREET, HERZLIA 46120, ISRAEL
(Address of Principal Executive Offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [_]
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [_] No [X]
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-.....................
This report on Form 6-K is hereby incorporated by reference in the Registration
Statement on Form F-3 (Registration No. 333-116044) as amended, filed by
BluePhoenix Solutions Ltd. under the Securities Act of 1933, to the extent not
superseded by documents or reports subsequently filed by BluePhoenix Solutions
Ltd. under the Securities Act of 1933 or the Securities Exchange Act of 1934.
Attached hereto and incorporated by reference herein are portions of the
prospectus made public in Israel in connection with underwritten public offering
in Israel. The attachment hereto contains updated information regarding the
Registrant, including new information not previously disclosed by Registrant and
updates of information previously disclosed in the Registrant's public filings
with the Securities and Exchange Commission.
The securities offered pursuant to the prospectus in Israel have not been and
will not be registered under the U.S. Securities Act of 1933, as amended, and
may not be offered or sold in the United States or to U.S. persons, absent
registration or an applicable exemption from registration requirements.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BLUEPHOENIX SOLUTIONS LTD.
(Registrant)
By: /S/ Yael Peretz
-------------------
Yael Peretz
Legal Advisor
Dated: February 2, 2006
SECTIONS OF ISRAELI PROSPECTUS FILED WITH THE ISRAEL SECURITIES AUTHORITY
General 4
Forward Looking Statements 4
Summary Information Regarding the Company 5
Summary Terms of the offer 7
The Offer and Listing 8
Selected Consolidated Financial Data 9
Risk Factors 10
Recent Developments 26
Use of Proceeds 27
Capitalization 27
Additional Information Regarding Financing Facilities 28
Major Shareholders 29
Related Party Transactions 30
Additional Information 32
Legal Proceedings 34
Underwriting 35
Expenses of the Offering 35
Incorporation of Certain Information by Reference 35
Directors 36
Board Practices 37
Exculpation, Insurance, and Indemnification of Directors and Officers 41
Where You Can Find More Information 43
Legal Matters 43
Experts 43
GENERAL
As used in this prospectus, references to "we", "our", "ours" and "us" refer to
BluePhoenix Solutions Ltd. and its consolidated subsidiaries, unless otherwise
indicated. References to "BluePhoenix" refer to BluePhoenix Solutions Ltd. In
addition, references to our "financial statements" are to our consolidated
financial statements except as the context otherwise requires.
We prepare our financial statements in United States dollars and in accordance
with generally accepted accounting principles as applied in the United States,
referred to as U.S. GAAP. In this prospectus, references to "$" and "dollars"
are to United States dollars and references to "NIS" and "shekels" are to New
Israeli Shekels.
FORWARD LOOKING STATEMENTS
This prospectus (including documents incorporated by reference herein) may
contain forward-looking statements that involve substantial risks and
uncertainties regarding future events or our future performance. Forward-looking
statements convey our current expectations or forecasts of future events. You
can identify these statements by the fact that they do not relate strictly to
historic or current facts. We use words like "anticipates", "believes",
"expects", "future", "intends", and similar expressions to mean that the
statements are forward-looking.
Any or all of our forward-looking statements in this prospectus may turn out to
be wrong. They can be affected by inaccurate assumptions we might make or by
known or unknown risks and uncertainties. Consequently, no forward-looking
statement can be guaranteed. Actual results may differ materially from the
results currently expected. Factors that could cause such differences include,
but are not limited to:
o our ability to successfully penetrate into new markets in which have
limited history and gain market acceptance for our new tools and services;
o our ability to accurately predict and respond to market developments or
demands;
o the impact of failures to accurately estimate the costs of fixed-price
projects which may result in lower margins or losses;
o fluctuations in inflation and currency rates;
o delays in collection of our fees from large modernization projects which
may result in cash flow shortages;
o the competitive nature of the modernization market in which we operate,
including the functionality of the tools developed and marketed by our
competitors;
as well as the risks discussed under the section titled "Risk Factors" below and
in "Item 4. Information on the Company" and "Item 5. Operating and Financial
Review and Prospects" of our annual report on Form 20-F for the fiscal year
ended December 31, 2004 filed with the Securities and Exchange Commission on
March 30, 2005, referred to as the Form 20-F for 2004, incorporated by reference
into this prospectus. In addition, you should note that our past financial and
operational performance is not necessarily indicative of future financial and
operational performance.
We undertake no obligation to update any forward-looking statements, whether as
a result of new information, future events or otherwise.
4
SUMMARY INFORMATION REGARDING THE COMPANY
You should read the following summary together with the more detailed
information REGARDING US AND THE SECURITIES BEING SOLD IN THIS OFFERING,
INCLUDING THE RISKS DISCUSSED UNDER THE HEADING "RISK FACTORS," CONTAINED IN
THIS PROSPECTUS. YOU SHOULD ALSO READ CAREFULLY THE CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO AND THE OTHER INFORMATION ABOUT US THAT IS
INCORPORATED BY REFERENCE INTO THIS PROSPECTUS, INCLUDING OUR FORM 20-F FOR 2004
AND OUR FORMS 6-K REGARDING OUR 2005 FINANCIAL RESULTS THROUGH SEPTEMBER 30,
2005, ALL INCORPORATED BY REFERENCE INTO THIS PROSPECTUS.
We were incorporated in Israel in 1987. Our registered office is located at 8
Maskit Street, Herzlia, 46120 Israel and our telephone number is 972-9-9526110.
We develop and market unique enterprise information technology, or IT,
modernization solutions that enable companies to automate the process of
modernizing and upgrading their mainframe and distributed IT infrastructure and
to effectively compete in today's environment. Our solutions, which include
technology for UNDERSTANDING, MIGRATION, REMEDIATION, and REDEVELOPMENT, allow
companies to fully leverage their current systems and applications, speed up and
reduce the cost of the renewal process, and effectively update their systems in
order to adapt to new business demands.
Our solution portfolio includes invasive and noninvasive software products,
software tools and support services that address the most pressing challenges
organizations and companies face today.
Our comprehensive enterprise technologies span mainframe, midrange, and
client/server computing platforms. We have enhanced our expertise through the
successful completion of projects for many large organizations over the past 19
years, establishing our credibility and achieving international recognition and
presence. Based on BluePhoenix's technology and that of our affiliates, we
develop and market software products, tools, and related methodologies. We
deliver our tools and methodologies together with training and support in order
to provide enterprises with comprehensive solutions, primarily for the
modernization of existing IT systems.
In 1997, we introduced our C-MILL millennium conversion tool, which was
developed based on our generic modernization technology, and we were awarded
significant contracts from leading international system integrators. In 1997 and
1998, we derived substantially all of our revenues from millennium conversion
projects. Since 2000, we have derived all of our revenues from providing legacy
modernization and porting solutions.
We provide our modernization solutions directly or through our strategic
partners, such as IBM, Capgemini, EDS, Temenos, T-Systems and TACT.
Additionally, from time to time, other IT services companies license our
technologies for use in modernization projects in various markets. Our partners
are usually system integrators who assist us in increasing our penetration and
exposure in the market. We provide solutions to our partners' customers in
collaboration with the system integrator's team. In most cases, the partners
provide related services to the customers. Our arrangements with our partners
vary. We may enter into distribution agreements with the partners under which we
grant license rights to the partners or the partners' customers, provide related
services or a combination of both. Alternatively, we may enter into
subcontractor relationships with our strategic partners. Our direct customers,
as well as those introduced to us by our partners, include among others:
FINANCIAL SERVICES INSURANCE OTHER INDUSTRIES
- ------------------ --------- ----------------
o Banca Carige S.p.A. o AXA Sunlife Services, o Ansys Inc. Canonburg
PCL (UK)
o CitiBank o DesJardins General o Altera Corporation
Insurance Group Inc.
o Credit Suisse o EuropeAssistance o Business Objects Corp.
5
FINANCIAL SERVICES INSURANCE OTHER INDUSTRIES
- ------------------ --------- ----------------
o Fidelity o Friends Provident o Commonwealth of
International Management Services Australia
Resource Ltd.
Management
o Intensa Sistemi E o Haphoenix Ltd. o Computer Associates
Servizi Islandia
o Rabobank o Legal and General o CSC Denmark A/S
Netherland BV Resources
o Nordea Bank o Mutual of America o Daimler Chrysler AG
Denmark A/S
o Rural Servicios o Scottish Equitable o Electronic Data
Informaticos (Spain) Plc. Systems Corp
o SDC Udvikling o Erhervs-og
(Denmark) Selskabsstyrelsen
o Standard Life o Fudicia
Assurance Co. Ltd. Informationszentra AG
o Global Exchange
Services Inc.
o Group One/Sagent
Technology
o IBM Hellas
o IBM Japan Ltd.
o IBM (Rational
Software)
o Lawson Products
o Mentor Graphics
Corporation
o Microsoft
Corporation
o Ministry of Defence
(Israel)
o Temenos Group
o Underwriterls Labs
o Woolwich Plc
Each of the customers mentioned in the table above contributed at least $600,000
to our annual revenues for a project performed in 2005 and 2004.
RATIO OF EARNINGS TO FIXED CHARGES
Our ratio of earnings to fixed charges for the periods indicated is provided in
the table below. Our pro-forma ratio of earnings to fixed charges gives effect
to the payment to FIMI for the promissory notes out of the proceeds from this
offering. For more information, see the section titled "Use of Proceeds" below.
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- --------------------------------------------
2005 2005 2004 2004 2003 2002 2001 2000
---- ---- ---- ---- ---- ---- ---- ----
PRO FORMA PRO FORMA
--------- ---------
Ratio of earnings to
fixed charges 2.2 1.9 5.3 4.4 5.4 - - 12.7
Our ratio of earnings to fixed charges is calculated by dividing (i) income
(loss) from ordinary activities before income taxes plus fixed charges by (ii)
fixed charges. Fixed charges consist of interest expensed and capitalized and
amortization of issuance costs related to convertible debentures. In 2001 and
2002, our earnings were insufficient to cover the fixed charges. The negative
amount was $2.1 million in 2002 and $13.6 million in 2001.
6
SUMMARY TERMS OF THE OFFER
The following summary is not intended to be complete. For a more detailed
description of the offering, please read the entire prospectus.
Issuer BluePhoenix Solutions Ltd.
Securities Offered Up to NIS 53,938,000 aggregate principal amount of
series A notes convertible into ordinary shares of
BluePhoenix, referred to as the notes or the
convertible notes.
Denomination The convertible notes will be issued in 53,938
units, each in the principal amount of NIS 1,000.
Offering Price Each convertible note will be offered at a price
equal to at least 94.5% of the face amount of the
note.
Principal Payment Dates Principal payable in four equal annual
installments on February 1, 2008, February 1,
2009, February 1, 2010 and February 1, 2011.
Maturity February 1, 2011, unless earlier converted.
Interest Rate LIBOR 3 months + 1.5% per annum.
Interest Payment Dates Interest on the notes is payable on May 1, August
1 and November 1, 2006 and February 1, May 1,
August 1 and November 1 of each of 2007 through
2010 with the last payment to be made on February
1, 2011.
Linkage Principal and interest will be linked to the
dollar.
Ranking Unsecured debt.
Conversion Holders may convert their notes into BluePhoenix's
ordinary shares on any trading day, beginning on
the date the notes are first listed for trading
and until the close of trading on January 16,
2011, provided, however, that the notes will not
be convertible for a period of sixteen days prior
to each of the principal payment dates. The
conversion rate is one ordinary share NIS 0.01 par
value per NIS 26 principal amount of notes,
subject to adjustments.
Conversion Rate Adjustments As described in this prospectus, the conversion
rate may be adjusted upon the occurrence of
certain events.
7
Trading We have applied to the TASE to list the notes for
trading.
Use of Proceeds We intend to use the net proceeds for working
capital; general corporate purposes; payment to
FIMI for 5% promissory notes issued by Intercomp
Ltd., one of our subsidiaries, in an aggregate
amount of $4.4 million (including interest accrued
thereon); and investments or acquisitions, as we
shall determine from time to time.
Governing Law Israel.
Trustee Hermetic Trust (1975) Ltd.
THE OFFER AND LISTING
For a description of the manner of determination of the offering price for the
convertible notes offered by this prospectus, see the section titled
"Description of Securities Offered Hereby" (in the Hebrew language).
Our ordinary shares are traded in the United States on the NASDAQ National
Market under the symbol BPHX. On January 21, 2001, we listed our ordinary shares
for trading on the Tel Aviv Stock Exchange, or the TASE. Our ordinary shares are
traded on the TASE under the symbol BPHX.
The following table shows the high and low closing price for our ordinary shares
on the NASDAQ National Market for the periods indicated.
CALENDAR PERIOD PRICE PER SHARE
- --------------- ---------------
HIGH LOW
---- ---
(IN $)
2005 4.75 3.81
First Quarter 4.75 3.90
Second Quarter 4.49 3.91
Third Quarter 4.30 3.85
Fourth Quarter 4.30 3.81
July 4.25 3.85
August 4.16 3.85
September 4.30 3.87
October 4.30 3.81
November 4.10 3.85
December 4.20 3.90
2006
January (through January 26) 4.31 3.85
The following table shows the high and low closing price for our ordinary shares
on the TASE for the periods indicated.
8
CALENDAR PERIOD PRICE PER SHARE
- --------------- ---------------
HIGH LOW
---- ---
(IN NIS)
2005 21.95 16.01
First Quarter 21.95 17.00
Second Quarter 19.83 16.01
Third Quarter 19.05 17.30
Fourth Quarter 19.75 17.80
July 19.00 18.00
August 18.90 17.30
September 19.05 17.31
October 19.75 19.74
November 19.50 19.00
December 19.40 17.80
2006
January (through January 26) 20.20 17.41
The closing price of our ordinary shares as quoted on the NASDAQ National Market
on January 26, 2006 was $4.25. The closing price of our ordinary shares as
reported on the TASE on January 26, 2006 was NIS 19.37.
For additional information regarding the market price of our ordinary shares,
see "Item. 9.A - Offer and Listing Details" of our Form 20-F for 2004.
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables present our selected consolidated statement of operations
and balance sheet data for the periods and as of the dates indicated. We derived
the statement of operations data for each of the years ended December 31, 2002,
2003 and 2004 and the balance sheet data as of December 31, 2003 and 2004 from
our consolidated financial statements included in our Form 20-F for 2004, which
have been prepared in accordance with U.S. GAAP. Our consolidated financial
statements have been audited by Ziv Haft certified public accountants (Isr.), a
BDO member firm. The selected consolidated financial data as of December 31,
2000, 2001 and 2002 and for the years ended December 31, 2000 and 2001 is
derived from our audited financial statements not included in our Form 20-F for
2004, and have also been prepared in accordance with U.S. GAAP.
We derived the selected consolidated financial and other data as of and for the
nine months ended September 30, 2004 and September 30, 2005 from our unaudited
consolidated financial statements incorporated by reference into this
prospectus. In the opinion of our management, our unaudited consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of our financial
position, results of operations and cash flows. The results of operations for
the nine months ended September 30, 2004 and September 30, 2005 are not
necessarily indicative of the operating results to be expected for the full
fiscal years encompassing such periods.
You should read the selected consolidated financial data set forth below
together with our consolidated financial statements and "Item 5. Operating and
Financial Review and Prospects" of our Form 20-F for 2004, as well as our
financial statements for the nine months ended September 30, 2005, incorporated
by reference into this prospectus.
9
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
2005 2004 2004 2003 2002 2001 2000
-------- -------- -------- -------- -------- -------- --------
(Unaudited)
$
--------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 43,504 $ 42,643 $ 57,186 $ 54,340 $ 36,668 $ 38,438 $ 49,245
Cost of revenues 18,947 18,046 24,253 24,115 15,220 17,722 20,065
-------- -------- -------- -------- -------- -------- --------
Gross profit 24,557 24,597 32,933 30,225 21,448 20,716 29,180
Software development costs 5,916 6,073 8,055 8,138 7,387 8,868 9,487
Selling, general, and administrative
expenses 16,237 15,844 21,388 20,140 13,245 19,794 17,461
-------- -------- -------- -------- -------- -------- --------
2,404 2,680 3,490 1,947 816 (7,946) 2,232
Goodwill impairment, restructuring
costs, and non-recurring expenses - - - - 472 4,467 -
-------- -------- -------- -------- -------- -------- --------
Operating income (loss) 2,404 2,680 3,490 1,947 344 (12,413) 2,232
Financial income (expenses), net (1,521) (928) (882) 165 (195) (62) 1,370
Gain on realization of shareholdings - - 112 376 - 693 2,444
Other income (expenses), net 97 1,087 975 567 (1,581) (2,649) 66
-------- -------- -------- -------- -------- -------- --------
Income (loss) before taxes on income 980 2,839 3,695 3,055 (1,432) (14,431) 6,112
Income tax expense 3 5 260 152 160 115 184
-------- -------- -------- -------- -------- -------- --------
977 2,834 3,435 2,903 (1,592) (14,546) 5,928
Equity in losses of affiliated - (424) (516) (898) (1,336) (1,304) (1,114)
companies, net
Minority interest 3 (196) (73) (154) (702) 863 (1,700)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 980 $ 2,214 $ 2,846 $ 1,851 $ (3,630) $(14,987) $ 3,114
======== ======== ======== ======== ======== ======== ========
Basic earning (loss) per share $ 0.07 $ 0.16 $ 0.21 $ 0.14 $ (0.35) $ (1.52) $ 0.31
Diluted earnings (loss) per share $ 0.07 $ 0.16 $ 0.21 $ 0.14 $ (0.35) $ (1.52) $ 0.30
Weighted average number of shares
outstanding 13,568 13,519 13,523 13,451 10,517 9,872 10,149
Weighted average number of shares
outstanding assuming dilution 14,951 14,713 14,679 13,644 10,517 9,872 10,363
AT SEPTEMBER
30, AT DECEMBER 31,
2005 2004 2003 2002 2001 2000
------- ------- ------- ------- ------- -------
(UNAUDITED)
-----------
$
--------------
CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS)
Working capital $ 1,206 $ 6,357 $ 246 $ 1,310 $ 9,901 $29,961
Total assets 96,111 90,882 80,820 87,481 54,667 69,137
Total liabilities 45,163 42,251 35,422 40,760 19,410 17,728
Shareholders' equity 50,948 48,631 45,398 46,721 35,257 51,409
Except as otherwise disclosed in this prospectus, there has been no material
change in our financial position since September 30, 2005.
RISK FACTORS
You should carefully consider the risks described below and in the other
sections of, and the documents we have incorporated by reference into, this
prospectus, when deciding whether to invest in the notes and the ordinary
shares. The risks and uncertainties described below and in the documents we have
incorporated by reference into this prospectus are not the only ones we face.
Additional risks and uncertainties that we are not aware of or that we currently
believe are immaterial may also adversely affect our business, financial
condition, results of operations and our liquidity. Our business, financial
condition, or results of operations could be materially adversely affected by
any of these risks. Our ability to make payments on the notes might be impaired
by, and the trading price of the notes and our ordinary shares could decline due
to, any of these risks, and you may lose all or part of your investment.
10
RISKS RELATED TO OUR BUSINESS
IF IT SPENDING SLOWS DOWN, OUR BUSINESS MIGHT BE SERIOUSLY HARMED.
We are affected by global economic changes, in particular trends in capital
spending in the information technology sector. During 2001 through 2003,
uncertainties in the North American and European markets influenced the
purchasing patterns of leading software developers who delayed their planned
orders and caused developers to reduce the amount of their planned license
commitment. These changes in purchasing patterns in the IT industry directly
affected our operating results. Although we believe that during the last two
years the IT market has begun to recover, we cannot know whether the global
market recovery will continue in the future, and how the economic conditions
will continue to affect our business. Accordingly, we cannot assure you that we
will be able to increase our revenues or keep our revenues at the same level as
in 2004 and the first three quarters of 2005.
IF WE FAIL TO SUCCESSFULLY LEVERAGE THE MERGER WITH LIRAZ AND PENETRATE NEW
MARKETS, OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED.
In March 2003, we completed the acquisition of the entire outstanding share
capital of Liraz Systems Ltd., an Israeli company then publicly-traded on the
TASE. During 2004, we completed the integration of Liraz's business within our
business. We expect that as a result of the integration of our business with
that of Liraz, the combined companies will be able to realize greater operating
efficiencies and will benefit from a broader product line with a larger and more
diversified marketing and support network. In addition, we anticipate that the
combination of our respective technical personnel will enhance our product
development capabilities. We cannot assure you that the integration of Liraz's
business within ours will contribute to our business to the extent anticipated.
ANY FUTURE ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY DISTRACT OUR MANAGEMENT
AND DISRUPT OUR BUSINESS.
As part of our growth strategy, we have been investing in and acquiring control
of various companies to expand our solution portfolio. We intend to continue
seeking investment opportunities. In addition, as part of our expansion
strategy, we increased our controlling interest in some of our subsidiaries and
fully integrated them within our business. We cannot assure you that we will be
able to identify future suitable acquisition or investment candidates or, if we
do identify suitable candidates, that we will be able to make the acquisitions
or investments on commercially acceptable terms or at all. If we acquire, invest
in, or increase our control interest in another company, we could have
difficulty assimilating that company's personnel, operations, technology, or
products and service offerings into our own. In addition, the key personnel of
the acquired company may decide not to work for us. These difficulties could
disrupt our ongoing business, distract our management and employees, increase
our expenses, and adversely affect our results of operations. Acquisitions of
new companies also involve the risk of penetrating markets in which we have no
or limited experience. We may incur indebtedness or issue equity securities to
pay for any future acquisitions. The issuance of equity securities could be
dilutive to our existing shareholders.
11
WE HAVE A LIMITED OPERATING HISTORY IN OUR CURRENT PRINCIPAL MARKETS, WHICH WILL
MAKE IT DIFFICULT OR IMPOSSIBLE FOR YOU TO PREDICT OUR FUTURE RESULTS OF
OPERATIONS.
We have experienced major fluctuations in our net results. In the first three
quarters of 2005, we had net income of $980,000 and in 2004 and 2003, we had net
income of $2.8 million and $1.9 million, respectively. However, in 2002 and 2001
we had a net loss of $3.6 million and $15.0 million, respectively. The net loss
in 2002 and 2001 was a reversal from prior years in which we had net income. The
fluctuations in our net results are mainly attributable to the changes in the
suite of modernization tools we have been offering to our customers, the limited
experience we have had in the markets for these tools, and the difficulties we
have encountered in introducing our tools to their respective markets, as well
as global economic conditions. Most of the solutions we offer to our customers
are based on tools that share a common generic technology and methodology.
However, the introduction of new tools to new markets involves increased selling
and marketing expenses, which in turn increases our operating expenses and
directly affects our results of operations. Because of our limited experience in
our principal markets and with our new products, we cannot assure you that our
strategy for operating in these markets or selling these products will be
successful. You should not rely on our historical results of operations as
indications of future performance.
IF WE ARE UNABLE TO ACCURATELY PREDICT AND RESPOND TO MARKET DEVELOPMENTS
OR DEMANDS, OUR BUSINESS WILL BE ADVERSELY AFFECTED.
The IT modernization business is characterized by rapidly evolving technology
and methodologies. This makes it difficult to predict demand and market
acceptance for our modernization tools and services. In order to succeed, we
need to adapt the tools and services we offer to keep up with technological
developments and changes in customer needs. We cannot guarantee that we will
succeed in enhancing our tools and services or developing or acquiring new
modernization tools and services that adequately address changing technologies
and customer requirements. We also cannot assure you that the tools and services
we offer will be accepted by customers. If our tools and services are not
accepted by customers, our future revenues and profitability will be adversely
affected. Changes in technologies, industry standards, the regulatory
environment, customer requirements, and new product introductions by existing or
future competitors could render our existing solutions obsolete and
unmarketable, or require us to enhance our current tools or develop new tools.
This may require us to expend significant amounts of money, time, and other
resources to meet the demand. This could strain our personnel and financial
resources.
WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR ANNUAL AND QUARTERLY RESULTS,
WHICH MAKES IT DIFFICULT FOR OUR SHAREHOLDERS TO MAKE RELIABLE PERIOD-TO-PERIOD
COMPARISONS AND MAY CONTRIBUTE TO VOLATILITY IN THE MARKET PRICE OF OUR ORDINARY
SHARES.
Our quarterly and annual revenues, gross profits, and results of operations have
fluctuated significantly in the past and we expect them to continue to fluctuate
significantly in the future. These fluctuations are the result of risks related
to the introduction of new products as described above and any of the following
events:
o adverse economic conditions in various geographic areas where our customers
and potential customers operate;
o acquisitions and dispositions of companies;
o timing of completion of specified milestones and delays in implementation;
o timing of product releases;
o timing of contracts;
o increases in selling and marketing expenses, as well as other operating
expenses; and
o currency fluctuations.
12
In addition, unexpected events that do not occur on a regular basis and that are
difficult to predict may cause fluctuations in our operating results. As a
result, we believe that period-to-period comparisons of our historical results
of operations are not necessarily meaningful and that you should not rely on
them as an indication for future performance. Also, it is possible that our
quarterly and annual results of operations may be below the expectations of
public market analysts and investors.
A DELAY IN COLLECTION OF OUR FEES COULD RESULT IN CASH FLOW SHORTAGES, WHICH IN
TURN MAY SIGNIFICANTLY IMPACT OUR FINANCIAL RESULTS.
Typical modernization projects, which deploy our solutions, are long-term
projects, and therefore, payment for these projects or a substantial portion of
our fees may be delayed until the successful completion of specified milestones.
In addition, the payment of our fees is dependent upon customer acceptance of
the completed work, and our ability to collect the fees. Further, although the
timing of receipt of our fees varies, we incur the majority of our expenses on a
current basis. As a result, a delay in the collection of our fees could result
in cash flow shortages. To date, we have not experienced any significant payment
delays that resulted in cash flow shortages. Any significant variation in
estimated and actual revenues obtained may significantly impact our financial
results in any given period.
THE ABILITY OF OUR SUBSIDIARY, MAINSOFT, TO CONTINUE TO MARKET THE
CROSS-PLATFORM PRODUCTS FOR THE UNIX ENVIRONMENT (VISUAL MAINWIN FOR UNIX) IS
DEPENDENT UPON MAINSOFT OBTAINING FROM MICROSOFT ACCESS TO UPDATED AND
ADDITIONAL SOURCE CODE.
In August 1998, our subsidiary, Mainsoft Corporation, entered into a Windows
source-code licensing agreement. Pursuant to this agreement and the amendments
thereto, Microsoft granted Mainsoft access to specified Microsoft source code,
including new versions, service packs, and upgrade releases for Windows.
Microsoft also granted Mainsoft distribution rights to the Windows object code
licensed as a component in Mainsoft's products. Mainsoft's ability to continue
to market the Visual MainWin for Unix depends upon Microsoft providing access to
updated and additional source code. We anticipate that in the future, we will
pursue a source code license from Microsoft for any subsequent code we may
benefit from. However, we cannot assure you that we will be able to negotiate
successfully any additional license rights on a timely basis or at all, or that
these license rights would be on terms acceptable to us. If we are unable to
develop future products under a source code license agreement with Microsoft, we
may encounter difficulties in selling updated versions of our cross-platform
products and as a result, our business, results of operations, and financial
condition could be adversely affected.
The rights that Microsoft granted to Mainsoft are non-exclusive. We cannot
assure you that Microsoft has not granted, or will not grant, similar or more
extensive rights to use its technology on similar or more favorable terms to our
existing or new competitors, which could have an adverse effect on our ability
to market our cross-platform products. Furthermore, we cannot assure you that
Microsoft will not internally develop or otherwise acquire its own
cross-platform development solution, thereby becoming a direct competitor of
ours. The emergence of Microsoft as a direct or indirect competitor of ours
would intensify competition in the environment in which we operate.
Under the license agreement between Mainsoft and Microsoft, Mainsoft may request
that Microsoft waive certain Microsoft royalties for particular customers. In
the past, Microsoft generally has granted these customers specific royalty
waivers. However, we cannot assure you that Microsoft will continue to grant
such waivers. An increase in royalties would require us to raise the prices of
specific products or reduce our gross margins, either of which could harm our
business.
13
On February 13, 2004, there were public reports that a leak of Microsoft source
code had occurred on the Internet. These reports indicated that the source code
contained trace references to the Mainsoft servers and personnel. Mainsoft's
management team immediately adopted an open door policy of full cooperation with
local authorities, the FBI, and Microsoft in their respective investigations.
All parties conducting investigations have found no trace of a security breach
after that date. The FBI notified us that as of December 31, 2004, the
investigation has not yet been completed. We have not received any update from
the FBI since then.
While Mainsoft believes its relationship with Microsoft will continue on terms
acceptable to us, a change in the relationship could adversely affect our
business, results of operations, and financial condition.
IF WE FAIL TO ADDRESS THE STRAIN ON OUR RESOURCES CAUSED BY CHANGES IN OUR
COMPANY, WE WILL BE UNABLE TO EFFECTIVELY MANAGE OUR BUSINESS.
In the past few years, we have undergone significant changes in our product
offerings. These changes include developing and marketing new modernization and
porting tools and expanding the sales of our products further into the North
American market. This has placed and will continue to place substantial demands
upon our management, systems, and resources, including our sales, project
management, consulting personnel, and software development operations. Our
ability to manage any future changes or growth depends on our ability to
continue to implement and improve our operational, financial, and management
information control and reporting systems on a timely basis, and to expand,
train, motivate, and manage our work force. If we cannot respond effectively to
changing business conditions, our business, financial condition, and results of
operations could be materially adversely affected.
IF WE ARE UNABLE TO MANAGE THE EFFECTS OF THE VARIATIONS IN OUR OFFERING
PORTFOLIO, OUR RESULTS WILL BE ADVERSELY AFFECTED.
We specialize in the development and implementation of sophisticated software
modernization and porting tools and products. We leverage our know-how,
experience and generic technologies, to develop and introduce new software tools
that enable the modernization of legacy systems. The need for our modernization
solutions changes over time, and recent regulations or newly introduced
technologies may create new needs for modernization solutions. As part of our
growth strategy, as a new need evolves, we typically conduct a market analysis
to qualify and quantify the market opportunity. If the results justify the
investment required for the development of new products or tools, then we begin
the development process of the new product. In order to maintain our position in
the market, and our ability to address the constantly changing needs of the
marketplace, we continually invest in the development of new products. The net
annual expense related to research and development varied between $7 million and
$8 million during 2002, 2003 and 2004.
In order to properly introduce a new product to the marketplace or to introduce
our current products into new markets, we continuously update our marketing
materials, educate our sales force and make changes to our operations. If these
activities are not completed in a timely manner, our new product introduction
may be delayed.
IF WE ARE UNABLE TO ATTRACT, TRAIN, AND RETAIN QUALIFIED PERSONNEL, WE MAY NOT
BE ABLE TO ACHIEVE OUR OBJECTIVES AND OUR BUSINESS COULD BE HARMED.
In order to achieve our objectives, we may need to hire additional, qualified
software, administrative, operational, sales, and technical support personnel.
The process of attracting, training, and successfully integrating qualified
personnel can be lengthy and expensive. We may not be able to compete
effectively for the personnel we need. Our future success depends on our ability
to absorb and retain senior employees and to attract, motivate, and retain
highly qualified professional employees.
14
IF WE FAIL TO ESTIMATE ACCURATELY THE COSTS OF FIXED-PRICE CONTRACTS, WE MAY
INCUR LOSSES.
We derive a portion of our revenues from engagements on a fixed-price basis. We
price these commitments upon estimates of future costs. We bear the risk of
faulty estimates and cost overruns in connection with these commitments. Our
failure to accurately estimate the resources required for a fixed-price project,
to accurately anticipate potential wage increases, or to complete our
contractual obligations in a manner consistent with the project plan could
materially adversely affect our business, operating results, and financial
condition. In addition, we may agree to a price before the design specifications
are finalized, which could result in a fixed price that is too low, resulting in
lower margins or losses to us.
IF OUR TOOLS OR SOLUTIONS DO NOT FUNCTION EFFICIENTLY, WE MAY INCUR ADDITIONAL
EXPENSES.
In the past years, we have successfully used our software modernization tools in
numerous software projects. In the course of providing our modernization
solutions, the project team conducts testing to detect the existence of
failures, errors and bugs. In addition, we have instituted a quality assurance
procedure for correcting errors and bugs in our tools. The amount of failures,
errors and bugs detected in modernization projects to date, and the cost of
correcting them, have not been significant. However, if our modernization
solutions fail to function efficiently or if errors or bugs are detected in our
tools, we might incur significant expenditures in an attempt to remedy the
problem. The consequences of failures, errors, and bugs could have a material
adverse effect on our business, operating results, and financial condition.
IF WE FAIL TO SATISFY OUR CUSTOMERS' EXPECTATIONS REGARDING OUR SOLUTIONS, OUR
CONTRACTS MAY BE CANCELLED AND WE MAY BE THE SUBJECT OF DAMAGES CLAIMS.
In the event that we fail to satisfy our customers' expectations from the
results of the implementation of our solutions, or if we fail to timely deliver
our solutions to our customers, these customers may suffer damages. When and if
this occurs, customers may have the ability to cancel our contracts. Any
cancellation of a contract could cause us to suffer damages, since we might not
be paid for costs that we incurred in performing services prior to the date of
cancellation. In addition, from time to time we may be subject to claims as a
result of not delivering our products on time or in a satisfactory manner. Such
disputes or others may lead to material damages.
WE ARE EXPOSED TO SIGNIFICANT CLAIMS FOR DAMAGE CAUSED TO OUR CUSTOMERS'
INFORMATION SYSTEMS.
Some of the products, tools, and services we provide involve key aspects of our
customers' information systems. These systems are frequently critical to our
customers' operations. As a result, our customers have a greater sensitivity to
failures in these systems than do customers of other software products
generally. We have never been the subject of a material damages claim related to
our modernization solutions or modernization services. However, if a customer's
system fails during or following the provision of modernization solutions or
services by us, or if we fail to provide customers with proper support for our
modernization solutions, we are exposed to the risk of a claim for substantial
damages against us, regardless of our responsibility for the failure. When
possible, we limit our liability under our product and service contracts.
However, we cannot guarantee that these limitations of liability, if any, would
be sufficient to protect us against legal claims. We maintain professional
errors and omissions and general liability insurance coverage. However, we
cannot assure you that our insurance coverage will be sufficient to cover one or
more large claims, or that the insurer will not disclaim coverage as to any
future claim. If we lose one or more large claims against us that exceed
available insurance coverage, it may have a material adverse effect on our
business, operating results, and financial condition. In addition, the filing of
legal claims against us in connection with contract liability may cause us
negative publicity and damage to our reputation.
15
IF THIRD PARTIES ASSERT CLAIMS OF INFRINGEMENT AGAINST US, WE MAY SUFFER
SUBSTANTIAL COSTS AND DIVERSION OF MANAGEMENT'S ATTENTION.
Substantial litigation over intellectual property rights exists in the software
industry. Software products may be increasingly subject to third-party
infringement claims as the functionality of products in different industry
segments overlaps. Although our products and services have never been the
subject of an infringement proceeding, we cannot predict whether third parties
will assert claims of infringement against us. In addition, our employees and
contractors have access to software licensed by us from third parties. A breach
of the non-disclosure undertakings by any of our employees or contractors may
lead to a claim of infringement against us. Any claim, with or without merit,
could:
o be expensive and time-consuming to defend;
o divert management's attention and resources; or
o require us to enter into royalty or licensing agreements to obtain the
right to use a necessary product or component.
Royalty or licensing agreements, if required, may not be available on acceptable
terms, if at all. A successful claim of product infringement against us and our
failure or inability to license the infringed or similar technology could have a
material adverse effect on our business, financial condition, and results of
operations.
16
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, WHICH MAY LIMIT
OUR ABILITY TO COMPETE EFFECTIVELY.
Our success and ability to compete are substantially dependent upon our
internally developed technology. Most of our intellectual property consists of
proprietary or confidential information that is not subject to patent or similar
protection. Our employees and contractors have direct access to our technology.
In general, we have relied on a combination of technical leadership, trade
secret, copyright, and trademark law and nondisclosure agreements to protect our
proprietary know-how. Unauthorized third parties may attempt to copy or obtain
and use the technology protected by those rights. Any infringement of our
intellectual property could have a material adverse effect on our business,
financial condition, and results of operations. Policing unauthorized use of our
products is difficult and costly, particularly in countries where the laws may
not protect our proprietary rights as fully as in the United States. We have
placed, and in the future may place, certain of our software in escrow. The
software may, under specified circumstances, be made available to our customers.
We have also provided our software directly to customers. This may increase the
likelihood of misappropriation or other misuse of our software.
WE ARE EXPOSED TO LITIGATION THAT COULD RESULT IN CONSIDERABLE FINANCIAL
LIABILITIES.
In July 2003, a former Liraz shareholder filed an application with the Tel-Aviv
- - Jaffa District Court to approve a claim filed by him against us, as a class
action. The claim relates to the acquisition of Liraz shares, which we completed
in March 2003. The shareholder alleges that the share price we paid to Liraz's
shareholders in the tender offer and in a subsequent mandatory purchase was
lower than the fair price of Liraz shares. The maximum amount of the claim is
approximately $5.8 million in the aggregate. Under Israeli law, the court's
approval is required for the plaintiff to represent all of the shareholders of
Liraz who sold their shareholdings to us pursuant to the tender offer and the
mandatory acquisition. The plaintiff has applied for such approval in the
lawsuit. A preliminary hearing is scheduled for February 21, 2006. Based on our
analysis of the statement of claim, our management believes that the claim is
without merit. However, if we are not successful in defending this claim, we
could be exposed to considerable financial liabilities and as a result, our
financial condition could be materially adversely harmed.
OUR LARGEST SHAREHOLDER, FORMULA, CONTROLS A MAJORITY OF OUR ORDINARY SHARES AND
INFLUENCES THE OUTCOME OF MATTERS THAT REQUIRE SHAREHOLDER APPROVAL.
Formula Systems (1985) Ltd. owns, as of January 26, 2006, 58.7% of our
outstanding ordinary shares. Therefore, Formula has the power to control the
outcome of most matters requiring shareholder approval, including the election
of directors and approval of significant corporate transactions. In addition,
Dan Goldstein, a member of our board of directors and chairman and chief
executive officer of Formula, and Gad Goldstein, the chairman of our board and a
director and president of Formula, own, in the aggregate, 755,138 ordinary
shares, representing 5.5% of our outstanding ordinary shares. These individuals
have entered into agreements that require them to vote their shares as
instructed by Formula. Accordingly, Formula is deemed to beneficially own
approximately 64.2% of our outstanding ordinary shares. In addition, Dan
Goldstein holds, through a wholly owned company, 50% interest in FIMGold LP
which owns 33% of the outstanding shares of Formula and Gad Goldstein owns 2.5%
of the outstanding shares of Formula.
This share ownership may have the effect of delaying or preventing a change in
control. In addition, potential conflicts of interest may arise in the event
that we enter into agreements or transactions with these persons. Although
Israeli law imposes certain procedures (including shareholder approval) for
approval of certain related party transactions, including certain of those
between us and Formula, we cannot assure you that these procedures will
eliminate the possible detrimental effects of conflicts of interest. All of the
members of our audit committee are independent directors. The audit committee
reviews potential conflict of interest situations where appropriate. If certain
transactions are not approved in accordance with required procedures under
applicable Israeli law, these transactions may be void or voidable.
17
WE WILL BE REQUIRED TO RECORD A COMPENSATION EXPENSE IN CONNECTION WITH STOCK
OPTION GRANTS AND, AS A RESULT, OUR PROFITABILITY MAY BE REDUCED SIGNIFICANTLY.
The financial Accounting Standards Board ("FASB") has issued in December 2004 an
accounting standard that will require that the fair value of all equity-based
awards granted to employees be recognized in the statement of operations as a
compensation expense, beginning in January 2006. The various methods for
determining the fair value of stock options are based on, among other things,
the volatility of the underlying stock. The impact of the adoption of this
standard is dependent, among others, on levels of share based compensation
granted by the company. Had we adopted this standard in prior periods, however,
the impact would have had an adverse effect on our profitability. The adoption
of this standard could materially adversely affect our profitability in the
future. Such adoption could also limit our ability to continue to use stock
options as an incentive and retention tool, which could, in turn, hurt our
ability to recruit employees and retain existing employees.
RISKS RELATING TO INTERNATIONAL OPERATIONS
MARKETING OUR TOOLS AND SOLUTIONS IN INTERNATIONAL MARKETS MAY CAUSE
INCREASED EXPENSES AND GREATER EXPOSURE TO RISKS THAT WE MAY NOT BE ABLE TO
SUCCESSFULLY ADDRESS.
We intend to continue to expand our international operations, which will require
significant management attention and financial resources. In order to continue
to expand worldwide sales, we need to establish additional marketing and sales
operations, hire additional personnel and recruit additional resellers
internationally. To the extent that we are unable to do so effectively, our
growth is likely to be limited and our business, operating results and financial
condition will be materially adversely affected.
We have generated approximately 45% and 54% of our international revenues in
2004 and the nine months ended September 30, 2005, from sales to European
customers. Additional risks inherent in our European and other worldwide
business activities generally include unexpected changes in regulatory
requirements, tariffs and other trade barriers, costs of localizing products for
foreign countries, lack of acceptance of localized products in European and
other foreign countries, longer accounts receivable payment cycles, difficulties
in operations of management, potentially adverse tax consequences, including
restrictions on the repatriation of earnings, and the burdens of complying with
a wide variety of European and other foreign laws. We cannot assure you that
these factors will not have a material adverse effect on our future European and
other international sales and, consequently, on our business, operating results
and financial condition.
18
WE MAY BE ADVERSELY AFFECTED IF THE RATE OF INFLATION IN ISRAEL EXCEEDS THE RATE
OF DEVALUATION OF THE NEW ISRAELI SHEKEL AGAINST THE DOLLAR OR THE EURO.
Our reporting currency is the United States dollar, which is our functional
currency. Most of our revenues are in dollars and euros, while a substantial
portion of our expenses, principally salaries and related personnel expenses,
are NIS. As a result, we are exposed to any of the following risks:
o that the inflation rate in Israel will exceed the NIS devaluation rate
against the dollar or the euro;
o that the devaluation process will lag behind the NIS inflation timing; or
o that the euro will devaluate against the dollar.
If any of these occur, the dollar or euro cost of our operations would increase,
as well as our financial expenses. We cannot predict any future trends of the
rate of inflation in Israel or the rate of devaluation of the NIS or the euro
against the dollar. An increase in our dollar or euro operational cost will
adversely affect our dollar-measured results of operations. In addition, our
operations could be adversely affected if we are unable to hedge against
currency fluctuations in the future. From time to time, we enter into currency
hedging transactions to decrease the risk of financial exposure from
fluctuations in the exchange rate of the dollar against the NIS or the euro.
However, we cannot assure you that these measures will adequately protect us
from material adverse effects arising from the impact of inflation in Israel.
For additional information relating to the exchange rates between different
relevant currencies, see "Item 5. - Our Reporting Currency" of our Form 20-F for
2004.
FLUCTUATIONS IN FOREIGN CURRENCY VALUES AFFECT THE PRICES OF OUR PRODUCTS, WHICH
IN TURN MAY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS.
Most of our worldwide sales are currently denominated in dollars and euros while
our reporting currency is the dollar. A decrease in the value of the dollar
relative to foreign currencies, in particular the euro, Danish kroner (DKK) and
the NIS would make our products more expensive and increase our operating costs
and, therefore, could adversely affect our results and harm our competitive
position in the markets in which we compete.
WE ARE SUBJECT TO MULTIPLE TAXING JURISDICTIONS. IF WE FAIL TO ESTIMATE
ACCURATELY THE AMOUNT OF INCOME TAX DUE IN ANY OF THESE JURISDICTIONS, OUR NET
INCOME MIGHT BE AFFECTED.
We operate within multiple taxing jurisdictions and are subject to taxation by
these jurisdictions at rates higher than those to which we are subject in
Israel. In addition, we may be subject to audits in these jurisdictions. These
audits can involve complex issues, which may require an extended period of time
to resolve. In our management's opinion, we have made adequate provisions for
income taxes for all past years. Although our management believes that its
estimates are reasonable, we cannot assure you that the final tax outcome of
these issues will not be different than those, which are reflected in our income
tax provisions. Such differences could have a material effect on our income tax
provision and net income in the period in which such outcome occurs.
19
RISKS RELATING TO OPERATIONS IN ISRAEL
POLITICAL, ECONOMIC, AND MILITARY CONDITIONS IN ISRAEL COULD NEGATIVELY IMPACT
OUR BUSINESS.
We are incorporated under the laws of the State of Israel, and certain of our
key management personnel as well as certain of our research and development
facilities are located in Israel. Although we generate most of our revenues from
international markets, we nonetheless are influenced by the political, economic
and military conditions affecting Israel. The execution of Israel's plan of
unilateral disengagement from the Gaza Strip and some parts of the West Bank may
affect Israel's foreign relations and the stability of the region. Major
hostilities involving Israel or the interruption or curtailment of trade between
Israel and its present trading partners could have a material adverse effect on
our business, operating results and financial condition. Furthermore, several
countries restrict business with Israeli companies. In addition, nonexempt male
adult citizens of Israel, including some of our officers and employees, are
obligated to perform military reserve duty until the age of 40 or 45 depending
on their function in the army, and are subject to being called for active duty
under emergency circumstances. While we have operated effectively under these
requirements since our incorporation, we cannot predict the full impact of such
conditions on us in the future, particularly if emergency circumstances occur.
If many of our employees are called for active duty, our operations in Israel
and our business may be adversely affected.
THE TAX BENEFITS AVAILABLE TO US FROM GOVERNMENT PROGRAMS MAY BE DISCONTINUED OR
REDUCED AT ANY TIME, WHICH WOULD LIKELY INCREASE OUR TAXES.
We receive tax benefits under Israeli government programs, particularly as a
result of the "Approved Enterprise" status of certain of our operations in
Israel. "Approved Enterprise" status is granted by the Israeli Investment Center
of the Ministry of Industry and Trade and entitles the company to a variety of
tax incentives. The incentives awarded to certain of our subsidiaries include
reduced tax rates and a tax holiday. We were granted a two year tax exemption,
followed by a five year reduced tax rate of 25% instead of 35% on income derived
from our "Approved Enterprise" investment programs. In order to qualify for
these incentives, the "Approved Enterprise" is required to provide minimum
paid-in-capital (30% of the investment), to show an increase in its export
activities, and to meet other general investing criteria. As of January 17,
2006, we have met those criteria and received tax benefits from our "Approved
Enterprise" programs, as presented in Note 14I to our financial statements
included in our Form 20-F for 2004. To maintain our eligibility for these
programs and benefits, we must meet the conditions mentioned above. We cannot
assure you that these programs and tax benefits will continue at the same level
in the future. If these tax benefits and programs are terminated or reduced, we
could pay increased taxes in the future, which could decrease our profits.
RISKS RELATED TO THE CONVERTIBLE NOTES AND ORDINARY SHARES
THERE ARE NO RESTRICTIVE COVENANTS IN THE INDENTURE FOR THE CONVERTIBLE NOTES
RELATING TO OUR ABILITY TO INCUR INDEBTEDNESS (INCLUDING SECURED INDEBTEDNESS),
PAY DIVIDENDS OR COMPLETE OTHER TRANSACTIONS.
The indenture governing the convertible notes does not contain any financial
covenants, or restrictions on the payment of dividends. The indenture does not
restrict the issuance or repurchase of securities by us or our subsidiaries. The
indenture contains no covenants or other provisions to afford you protection in
the event of a highly leveraged transaction, such as a leveraged
recapitalization, that would increase the level of our indebtedness, or a change
in control. The indenture governing the convertible notes does not restrict us
from incurring additional debt or guaranteeing indebtedness, nor does it limit
the amount of indebtedness that we can issue in the future. If we incur
additional debt or liabilities, our ability to pay our obligations on the
convertible notes could be adversely affected. If an event of default occurs
under secured indebtedness, the lenders thereunder will have the right to
exercise the remedies (such as foreclosure) available to a secured lender under
applicable law and the agreements governing the indebtedness. Since the
convertible notes are unsecured, the lenders under secured indebtedness would
have a prior claim on our assets.
20
OUR INDEBTEDNESS AND DEBT SERVICE OBLIGATIONS WILL INCREASE WITH THE ISSUANCE OF
THE CONVERTIBLE NOTES, WHICH MAY ADVERSELY AFFECT OUR CASH FLOW, CASH POSITION
AND SHARE PRICE.
We intend to fulfill our debt service obligations from existing cash,
investments and our operations. In the future, if we are unable to generate cash
or raise additional cash financings sufficient to meet these obligations and
need to use existing cash or liquidate investments in order to fund these
obligations, we may have to delay or curtail research and development programs.
Our indebtedness could have significant additional negative consequences,
including, without limitation:
o requiring the dedication of a portion of our expected cash flow to service
our indebtedness, thereby reducing the amount of our expected cash flow
available for other purposes, including funding our research and
development programs and other capital expenditures;
o increasing our vulnerability to general adverse economic conditions;
o limiting our ability to obtain additional financing; and
o placing us at a possible competitive disadvantage to less leveraged
competitors and competitors that have better access to capital resources.
THE CONVERTIBLE NOTES THAT WE ARE OFFERING ARE NOT SECURED BY ANY OF OUR ASSETS.
HOWEVER, WE MAY INCUR ADDITIONAL LIABILITIES THAT MAY BE SECURED BY OUR ASSETS
AND, THEREFORE, OUR FUTURE LENDERS MAY HAVE A PRIOR CLAIM ON OUR ASSETS.
The convertible notes are not secured by any of our assets. However, we may
enter into financing arrangements with future lenders that are secured by a
pledge of our assets. If we become insolvent or are liquidated, or if payment
under any of the instruments governing our secured debt is accelerated, the
lenders under these instruments will be entitled to exercise the remedies
available to a secured lender under applicable laws and pursuant to instruments
governing such debt. Accordingly, these lenders may have a prior claim on
certain of our assets. Because the convertible notes are not secured by any of
our assets, it is possible that our remaining assets might be insufficient to
satisfy your claims in full.
THE TRADING PRICE OF THE CONVERTIBLE NOTES MAY BE VOLATILE.
The trading price of the convertible notes could be subject to significant
fluctuation and future trading prices of the convertible notes will depend on
many factors, including but not limited to prevailing interest rates, our
operating results, the price of our ordinary shares, the market for similar
securities, securities analysts' recommendations regarding our securities and
general economic conditions. Additionally, it is possible that the market for
the convertible notes will be subject to disruptions that may have a negative
effect on the holders of the convertible notes, regardless of our prospects or
financial performance.
THE CONVERTIBLE NOTES ARE A NEW ISSUANCE OF SECURITIES FOR WHICH THERE HAS BEEN
NO PRIOR PUBLIC TRADING MARKET, AND WE CANNOT ASSURE YOU THAT AN ACTIVE TRADING
MARKET WILL DEVELOP FOR THE NOTES.
The convertible notes will be listed on the TASE. However, there has been no
prior market for the convertible notes. We cannot predict whether an active
trading market for the convertible notes will develop or, if such market
develops, how liquid it will be. If an active trading market for the convertible
notes does not develop, the market price and liquidity of the convertible notes
may be adversely affected.
21
THE MARKET PRICE OF OUR ORDINARY SHARES MAY BE VOLATILE AND YOU MAY NOT BE ABLE
TO RESELL THE SHARES ISSUED TO YOU UPON CONVERSION OF THE NOTES AT OR ABOVE THE
PRICE YOU PAID, OR AT ALL.
The stock markets in general have experienced during the past few years extreme
price and volume fluctuations. The market prices of securities of technology
companies have been extremely volatile, and have experienced fluctuations that
have often been unrelated or disproportionate to the operating performance of
those companies. These broad market fluctuations could adversely affect the
market price of our ordinary shares. During 2003, for example, the market price
of our ordinary shares traded on the NASDAQ fluctuated between $7.04 and $2.10,
during 2004, the market price of our ordinary shares fluctuated between $7.49
and $3.92, and during 2005, the market price fluctuated between $4.90 and $3.60.
The market price of our ordinary shares may continue to fluctuate substantially
due to a variety of factors, including:
o any actual or anticipated fluctuations in our or our competitors' quarterly
revenues and operating results;
o shortfalls in our operating results from levels forecast by securities
analysts;
o public announcements concerning us or our competitors;
o the introduction or market acceptance of new products or service offerings
by us or by our competitors;
o changes in product pricing policies by us or our competitors;
o changes in security analysts' financial estimates;
o changes in accounting principles;
o sales of our shares by existing shareholders; and
o the loss of any of our key personnel.
In addition, economic, political, and market conditions and military conflicts
and, in particular, those specifically related to the State of Israel, may
affect the market price of our shares.
OUR ORDINARY SHARES ARE TRADED ON MORE THAN ONE MARKET AND THIS MAY RESULT IN
PRICE VARIATIONS.
Our ordinary shares trade on the Nasdaq National Market and the Tel Aviv Stock
Exchange. Trading in our ordinary shares on these markets will take place in
different currencies (dollars on the Nasdaq National Market and NIS on the Tel
Aviv Stock Exchange), and at different times (resulting from different time
zones, different trading days and different public holidays in the United States
and Israel). The trading prices of our ordinary shares on these two markets may
differ due to these and other factors. Any decrease in the trading price of our
ordinary shares on one of these markets could cause a decrease in the trading
price of our ordinary shares on the other market.
FUTURE SALES OF OUR SHARES IN THE PUBLIC MARKET OR ISSUANCES OF ADDITIONAL
SECURITIES COULD CAUSE THE MARKET PRICE FOR OUR ORDINARY SHARES TO FALL.
As of January 26, 2006, we had 13,695,838 ordinary shares outstanding (excluding
1,734,565 held by two of our wholly owned subsidiaries). In addition, we have
reserved 2,765,817 ordinary shares for issuance under our option plans. We also
have certain commitments described below to issue BluePhoenix ordinary shares
and register them for resale.
22
We have made a commitment to purchase from First Israel Mezzanine Investors
Ltd., known as FIMI, promissory notes issued by Intercomp Ltd., one of our
subsidiaries, in an aggregate principal amount of $3.5 million plus interest
accrued since January 2001 at an annual rate of 5%. Of the principal amount of
such promissory notes, $1.16 million plus the interest accrued may be paid,
subject to FIMI's approval, in BluePhoenix's ordinary shares. We agreed to
register the shares underlying FIMI's option for resale in the event that we
repay the promissory notes in shares. We also issued to FIMI warrants to
purchase up to 140,000 BluePhoenix's ordinary shares and undertook to issue to
FIMI additional warrants to purchase up to 133,000 ordinary shares. Under
certain circumstances, we will be obliged to register for resale the shares
underlying the warrants to purchase up to 133,000 ordinary shares to be issued
to FIMI.
In addition, as part of a $5 million private placement we completed on March 30,
2004, we issued to each of the participating four institutional investors,
convertible debentures and warrants exercisable into BluePhoenix's ordinary
shares. If all such debentures, including interest, are converted into
BluePhoenix's ordinary shares and the warrants are fully exercised, we would be
required to issue to the investors up to 1,238,095 ordinary shares, subject to
adjustments. Under certain circumstances, the investors are entitled to purchase
additional convertible debentures and warrants, which if converted and exercised
in full, would increase the number of issued shares by an additional 866,666
ordinary shares. In connection with the private placement, we filed a
registration statement for the resale of the ordinary shares underlying the
convertible debentures and warrants.
For more information about the $5 million private placement, see "Item 6.E.
Share Ownership" of our Form 20-F for 2004.
In addition, under an agreement entered into in April 2004 between us and Israel
Infinity Venture Capital Partners Ltd., referred to as Infinity, upon the
exercise of certain options contemplated in the agreement, we may be obliged to
issue to Infinity, 100,000 BluePhoenix's ordinary shares and an additional
amount of shares to be calculated in accordance with the terms of the agreement.
For more information about this agreement, see "Item 4.B. Business Overview
- -Investments and Acquisitions" of our Form 20-F for 2004.
In addition, certain of our shareholders, holding in the aggregate 10,186,401
ordinary shares, have registration rights with respect to the shares they hold,
including piggyback rights.
If a large number of our ordinary shares are sold in a short period, the price
of our ordinary shares would likely decrease.
In addition, the price of our ordinary shares could be affected by possible
sales of our ordinary shares by investors who view the convertible notes as a
more attractive means of equity participation in our company and by hedging or
arbitrage trading activity that may develop involving our ordinary shares. The
hedging or arbitrage could, in turn, affect the trading prices of the
convertible notes.
THE TRADING PRICE OF THE CONVERTIBLE NOTES COULD BE SIGNIFICANTLY AFFECTED BY
THE TRADING PRICE OF OUR ORDINARY SHARES.
We expect that the trading price of the convertible notes will be significantly
affected by the trading price of our ordinary shares, the general level of
interest rates and our credit quality. This may result in greater volatility in
the trading price of the convertible notes than would be expected for
nonconvertible debt securities. It is impossible to predict whether the price of
our ordinary shares or interest rates will rise or fall. Trading price of our
ordinary shares will be influenced by our operating results and prospects and by
economic, financial, regulatory and other factors including those described in
this prospectus. In addition, general market conditions, including the level of,
and fluctuations in, the trading prices of stocks generally, could affect the
trading price of our ordinary shares, and therefore the trading price of the
convertible notes.
23
IF YOU HOLD CONVERTIBLE NOTES, YOU WILL NOT BE ENTITLED TO ANY RIGHTS WITH
RESPECT TO OUR ORDINARY SHARES, BUT YOU WILL BE SUBJECT TO CERTAIN CHANGES MADE
WITH RESPECT TO OUR ORDINARY SHARES.
If you hold convertible notes, you will not be entitled to any rights with
respect to our ordinary shares (including, without limitation, voting rights and
rights to receive dividends, if any, or other distributions on our ordinary
shares), but you will be subject to certain changes affecting the ordinary
shares. You will only be entitled to rights on the ordinary shares if and when
we deliver ordinary shares to you in exchange for your convertible notes. For
example, in the event that an amendment is proposed to our Articles of
Association requiring shareholder approval and the record date for determining
the shareholders of record entitled to vote on the amendment occurs prior to
delivery to you of our ordinary shares, you will not be entitled to vote on the
amendment, although you will nevertheless be subject to any changes in the
powers, preferences or special rights of our ordinary shares.
CONVERSION OF THE CONVERTIBLE NOTES WOULD DILUTE THE OWNERSHIP INTEREST OF OUR
EXISTING SHAREHOLDERS.
The conversion of some or all of the convertible notes would dilute the
ownership interests of our existing shareholders. Any sales in the public market
of our ordinary shares issuable upon such conversion could adversely affect the
prevailing market prices of our ordinary shares. In addition, the existence of
the convertible notes may encourage short selling by market participants because
the conversion of the convertible notes could depress the price of our ordinary
shares.
THE CONVERSION RATE OF THE CONVERTIBLE NOTES MAY NOT BE ADJUSTED FOR ALL
DILUTIVE EVENTS.
The conversion rate of the convertible notes is subject to adjustment for
certain events, including, but not limited to, the issuance of bonus shares,
stock dividends on our ordinary shares, certain issuances of rights or warrants,
subdivisions, combinations and certain cash dividends as described in the
sections titled "Adjustment of Conversion Shares" and "Provisions Protecting the
Noteholders during the Conversion Period" (in the Hebrew language). The
conversion rate will not be adjusted for other events, such as a third party
tender or exchange offer or an issuance of ordinary shares for cash, which
events may adversely affect the trading price of the convertible notes or of our
ordinary shares. An event that adversely affects the value of the convertible
notes may occur which does not result in an adjustment to the conversion rate.
WE MAY NOT BE ABLE TO MAKE OUR DEBT PAYMENTS IN THE FUTURE.
Our ability to meet our debt obligations will depend on whether we can
successfully implement our strategy, as well as on financial, competitive, and
other factors, including some factors that are beyond our control. If we are
unable to generate sufficient cash flow from operations to meet principal and
interest payments on our debt, we may have to refinance all or part of our
indebtedness. In addition, cash flows from our operations may be insufficient to
repay in full at maturity the convertible notes, in which case the convertible
notes may need to be refinanced. Our ability to refinance our indebtedness,
including the convertible notes, will depend on, among other things:
o our financial condition at the time;
o restrictions in agreements governing our debt; and
o other factors, including market conditions.
24
We cannot ensure that any such refinancing would be possible on terms that we
could accept or that we could obtain additional financing. If refinancing will
not be possible or if additional financing will not be available, we may have to
sell our assets under circumstances that might not yield the highest prices, or
default on our debt obligations, including the convertible notes, which would
permit our noteholders and holders of other outstanding indebtedness to
accelerate their maturity dates.
OUR EXISTING CREDIT FACILITIES CONTAIN A NUMBER OF RESTRICTIONS AND OBLIGATIONS
THAT LIMIT OUR OPERATING AND FINANCIAL FLEXIBILITY.
Our credit facilities contain a number of restrictive covenants that limit our
operating and financial flexibility. These covenants, among other things,
restrict our ability to pledge our assets, dispose of assets, make loans or give
guarantees, make certain acquisitions and engage in mergers or consolidations.
Our credit facilities also contain covenants regarding maintaining certain
financial ratios. See the section titled "Capitalization" below.
Our ability to continue to comply with these and other obligations depends in
part on the future performance of our business. There can be no assurance that
such obligations will not materially adversely affect our ability to finance our
future operations or the manner in which we operate our business. In particular,
any non-compliance with performance-related covenants and other undertakings of
our credit facilities could result in an acceleration of our outstanding debt
under our credit facilities and restrict our ability to obtain additional funds,
which could have a material adverse effect on our business, financial condition
and results of operations.
In some circumstances, a change of control of BluePhoenix will constitute an
event of default under our credit facilities and we could be required to repay
our debts to the banks. If thiss occurs, we may not have the financial resources
to make the necessary repayments of the notes.
WE WILL HAVE BROAD DISCRETION IN HOW TO USE THE PROCEEDS FROM THIS OFFERING AND
WE MAY APPLY THE PROCEEDS FOR USES WITH WHICH YOU DO NOT AGREE.
We intend to use the net proceeds from the offering for working capital, general
corporate purposes, payment to FIMI for promissory notes and funding of
potential acquisitions and investments in complementary business, technologies
or products. We currently do not have commitments for specific acquisitions or
investments and our management retains the right to use the proceeds as it
determines appropriate. Our ability to use broad discretion with the proceeds
from this offering may result in our shareholders disagreeing with our business
practices and being generally dissatisfied with their investment.
25
RECENT DEVELOPMENTS
ZULU SOFTWARE INC.
In February 2005, we entered into an agreement to purchase up to 20% of the
outstanding share capital of Zulu Software, Inc., or Zulu, on a fully diluted
basis. Under the purchase agreement, the purchase price was divided into four
installments, each to be paid subject to fulfillment of a certain milestone. We
paid the first installment of $350,000 in February 2005 against the issuance to
us of 8% of Zulu's outstanding share capital. We have not made additional
payments on account of the purchase price pursuant to the purchase agreement
since the agreed milestones have not been met. In January 2006, we purchased
from the other shareholders of Zulu additional shares of Zulu increasing our
holdings in Zulu to 72% of Zulu's outstanding share capital. The aggregate
consideration we paid for this additional purchase was $2.4 million. In
addition, in February 2005, we entered into an alliance agreement with Zulu for
cooperation in marketing and selling Zulu's and our software tools and services.
For more information about Zulu's software solutions, see "Item 4.B Enterprise
IT Migration--BluePhoenix(TM) LanguageMigrator" of our Form 20-F for 2004.
I-TER/INFORMATICA & TERRITORIO S.P.A.
In the second quarter of 2005, we entered into an agreement to purchase the
entire outstanding share capital of I-Ter/Informatica & Territorio S.p.A., or
I-Ter. At the first closing, held in June 2005, we purchased 51% of I-Ter's
share capital, in consideration for $1.3 million. Under the terms of the
transaction, we agreed to pay to the selling shareholders of I-Ter an additional
consideration up to $725,000 calculated based on I-Ter's cumulative earnings
before interest and taxes, referred to as EBIT, as follows: if the EBIT in any
calendar year during the three-year period commencing on January 1, 2005, is
equal to or greater than $6,000, we will pay the selling shareholders an
additional $240,000 with respect to each such year.
In addition, we agreed to pay to the selling shareholders, at the end of the
three-year period mentioned above, an additional amount equal to five times of
the yearly average EBIT in the three-year period commencing on January 1, 2005,
less the amounts already paid to the selling shareholders for the purchased
shares.
In accordance with the purchase agreement, we undertook to purchase the
remaining 49% of I-Ter's share capital, at such date which is 15 business days
following the date on which the EBIT report for the year ended on December 31,
2007 is final. The consideration to be paid to the selling shareholders at the
second closing shall be equal to seven times of the yearly average EBIT in the
three-year period commencing on January 1, 2005, less the amounts already paid
to the selling shareholders for the 51% interest. In addition, in the event that
the yearly average EBIT in the three-year period commencing on January 1, 2005
is greater than $600,000, we shall pay the selling shareholders an amount equal
to nine times of the difference between the yearly average EBIT in the
three-year period commencing on January 1, 2005 and $600,000.
I-Ter is a developer and marketer of software solutions for migration from DL1
to DB2, and from IMS/DC to CICS, porting of applications from mainframe and Unix
Sun Solaris. In the second quarter of 2005, we entered into an alliance
agreement with I-Ter for cooperation in marketing and selling I-Ter's and our
software tools and services.
26
USE OF PROCEEDS
We estimate that the net proceeds from the offering will be approximately NIS 50
million after deduction of the underwriters' fees and commissions and the
estimated expenses of the offering.
We intend to use the net proceeds from this offering for working capital;
general corporate purposes; payment to FIMI for 5% promissory notes issued by
Intercomp Ltd., one of our subsidiaries (in an aggregate amount of approximately
$4.4 million, including interest accrued thereon); and potential acquisitions
of, or investments in, related businesses and technologies, as to be determined
by our board of directors from time to time. We currently do not have
commitments for specific acquisitions or investments. We cannot assure you that
the uses will not be different. We believe that the proceeds from the offering
will provide us with more financial flexibility.
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 2005:
o on an actual basis; and
o as adjusted to reflect the sale of NIS 53,938,000 of convertible notes and
the receipt by us of the net proceeds therefrom after deducting the
discounts and underwriters' commissions and estimated offering expenses,
and the application of such proceeds in the manner described in "Use of
Proceeds" above.
This table should be read in conjunction with "Item 5. Operating and Financial
Review and Prospects" of our Form 20-F for 2004 and our consolidated financial
statements and related notes included or incorporated by reference in this
prospectus.
AS OF
SEPTEMBER 30, 2005
--------------------------
ACTUAL AS ADJUSTED
-------- ---------
(UNAUDITED)
IN THOUSANDS OF US DOLLARS
Long term debt $ 12,814 $ 12,814
Short term debt 27,439 27,439
Convertible notes - 11,500
Minority interest 4,910 4,910
Shareholders' equity:
Share capital - ordinary shares of NIS 0.01 par value: authorized
- September 30, 2005- 30,000,000 shares; issued: September 30,
2005 15,428,103 shares; 31 31
Capital surplus 56,173 56,173
Accumulated other comprehensive income (loss) (1,514) (1,514)
Retained earnings 10,966 10,966
Cost of 1,870,565 shares held by subsidiaries (14,708) (14,708)
-------- ---------
Total Shareholders' equity 50,948 50,948
======== =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 96,111 $ 107,611
======== =========
The discussion and table above do not give effect to the sale of 136,000
ordinary shares by a wholly owned subsidiary in January 2006. In addition, the
discussion and table above do not include 2,765,817 ordinary shares issuable
upon exercise of outstanding options; 285,714 ordinary shares issuable upon
exercise of outstanding warrants; 954,198 ordinary shares issuable upon
conversion of outstanding convertible debentures; and approximately 2,100,000
ordinary shares issuable upon conversion of the convertible notes offered
hereunder.
27
ADDITIONAL INFORMATION REGARDING FINANCING FACILITIES
CREDIT FACILITIES WITH BANKS
We have entered into credit facilities with Bank Discount Le'Israel Ltd., Bank
Ha'poalim Ltd., Bank Leumi Le'Israel Ltd. and the First International Bank of
Israel Ltd. of up to $21.4 million, as of January 27, 2006. The aggregate amount
outstanding under these credit facilities as of January 27, 2006 is $16.6
million. We may use these credit facilities from time to time for interim
financing, in accordance with our cash requirements. These credit facilities
provide for loans in various currencies and bear various interest rates. In
connection with these credit facilities extended to us by these banks, we are
committed to certain covenants related to our operations, such as:
o maintaining a minimum level of shareholders' equity of no less than 40% of
our total assets and no less than $40 million;
o maintaining a level of annual operating income before depreciation and
amortization of no less than $5 million; and
o maintaining a ratio of our bank liabilities to current assets, excluding
other current assets, of no more than 55%.
TO DATE, WE HAVE MET ALL SUCH COVENANTS.
ISSUANCE OF CONVERTIBLE DEBENTURES TO INSTITUTIONAL INVESTORS
On March 30, 2004, we completed a $5 million private placement to institutional
investors. The terms of this transaction were amended on February 18, 2005.
Under the terms of this transaction as amended, we issued to the institutional
investors convertible debentures, bearing interest at a rate of LIBOR calculated
on a semi-annual basis. The debentures are convertible into BluePhoenix's
ordinary shares at a conversion price of $5.25 per share, which was recently
adjusted to $5.24 per share, as a result of the sale of 136,000 ordinary shares
by a wholly owned subsidiary. In addition, the institutional investors were
granted warrants to purchase up to 285,714 of BluePhoenix's ordinary shares at
an exercise price of $6.50 per share, subject to (i) adjustment for stock
dividends, stock splits, recapitalization and other similar events and (ii)
anti-dilution adjustment. The warrants are exercisable during a period of five
years commencing on September 2004. Under certain circumstances, the
institutional investors may increase their investment by an additional $3
million of debentures convertible into BluePhoenix's ordinary shares at a price
of $4.50 per share, and receive warrants on the same terms as the initial
warrants, exercisable into such number of BluePhoenix's ordinary shares equal to
30% of the ordinary shares into which the debentures are convertible.
For more information regarding our financing facilities, see "Item 5. Operating
and Financial Review and Prospects - Liquidity and Capital Resources" and "Item
6.E. Share Ownership-Arrangements Involving the Issuance of BluePhoenix's Shares
or Grant of Options to Purchase Shares" of our Form 20-F for 2004.
28
MAJOR SHAREHOLDERS
The following table presents information regarding the ownership of our ordinary
shares at January 26, 2006 by each person known to us to be the beneficial owner
of 5% or more of our ordinary shares. Except where we indicated otherwise, we
believe, based on information furnished by these owners, that the beneficial
owners of our shares listed below have sole investment and voting power with
respect to the shares.
ORDINARY SHARES
NAME AND ADDRESS BENEFICIALLY OWNED
- ---------------- ------------------
NUMBER PERCENT (1)
------ -----------
Formula Systems (1985) Ltd. 8,788,164 (2) 64.2% (2)
Aaron Crystal 789,038 (3) 5.8%
Arie Kilman 1,305,866 (4) 9.0% (5)
- ----------
(1) UNLESS OTHERWISE INDICATED, PERCENTAGES IN THE ABOVE TABLE ARE BASED ON
13,695,838 ORDINARY SHARES OUTSTANDING AS OF JANUARY 26, 2006, AND DO NOT
INCLUDE 1,734,565 ORDINARY SHARES THAT TWO OF OUR SUBSIDIARIES HOLD.
PURSUANT TO ISRAELI LAW, THESE SHARES DO NOT CONFER UPON OUR SUBSIDIARIES
ANY VOTING RIGHTS (ALTHOUGH ENTITLE THEIR HOLDERS TO PARTICIPATION RIGHTS
UPON DISTRIBUTION). IN JANUARY 2006, ONE OF OUR SUBSIDIARIES SOLD 136,000
SHARES HELD BY IT TO ISRAELI INSTITUTIONAL INVESTORS IN ISRAEL.
29
(2) FORMULA OWNS OF RECORD 8,033,026 ORDINARY SHARES CONSTITUTING APPROXIMATELY
58.7% OF OUR OUTSTANDING ORDINARY SHARES. DURING 2003 THROUGH 2005, FORMULA
PURCHASED 183,135 ORDINARY SHARES IN THE OPEN MARKET. DAN GOLDSTEIN, A
MEMBER OF OUR BOARD OF DIRECTORS AND CHIEF EXECUTIVE OFFICER AND CHAIRMAN
OF THE BOARD OF FORMULA, OWNS 424,510 ORDINARY SHARES. GAD GOLDSTEIN, THE
CHAIRMAN OF OUR BOARD OF DIRECTORS AND A DIRECTOR AND PRESIDENT OF FORMULA,
OWNS 330,628 ORDINARY SHARES. MESSRS. DAN GOLDSTEIN AND GAD GOLDSTEIN HAVE
ENTERED INTO AGREEMENTS, WHICH REQUIRE THEM TO VOTE THEIR ORDINARY SHARES
AS INSTRUCTED BY FORMULA. AS A RESULT OF THESE VOTING AGREEMENTS, FORMULA
BENEFICIALLY OWNS APPROXIMATELY 64.2% OF OUR OUTSTANDING SHARES. DAN
GOLDSTEIN HOLDS, THROUGH A WHOLLY OWNED COMPANY, 50% INTEREST IN FIMGOLD LP
WHICH OWNS 33% OF THE OUTSTANDING SHARES OF FORMULA. GAD GOLDSTEIN OWNS
3.0% OF THE OUTSTANDING SHARES OF FORMULA. MESSRS. DAN AND GAD GOLDSTEIN
ARE BROTHERS. BASED ON THE FOREGOING, DAN GOLDSTEIN AND GAD GOLDSTEIN EACH
MAY BE DEEMED TO SHARE WITH FORMULA THE POWER TO VOTE AND DISPOSE OF OUR
ORDINARY SHARES BENEFICIALLY OWNED BY FORMULA. EACH OF DAN GOLDSTEIN AND
GAD GOLDSTEIN DISCLAIMS BENEFICIAL OWNERSHIP OF THE ORDINARY SHARES
BENEFICIALLY OWNED BY FORMULA.
(3) INCLUDES 294 SHARES THAT ANAT CRYSTAL, MR. CRYSTAL'S SPOUSE, BENEFICIALLY
OWNS. DURING 2003 THROUGH 2005, MR. CRYSTAL SOLD 404,662 ORDINARY SHARES IN
THE OPEN MARKET.
(4) INCLUDES CURRENTLY EXERCISABLE OPTIONS TO PURCHASE 696,667 ORDINARY SHARES.
THE PERCENTAGE OF HOLDINGS INCLUDES THOSE OPTIONS. IN NOVEMBER 2002, AS
PART OF THE SHARE EXCHANGE TRANSACTION WITH LIRAZ, WE ISSUED TO ARIE
KILMAN, A FORMER SHAREHOLDER OF LIRAZ, 625,183 OF OUR ORDINARY SHARES. IN
2003, MR. KILMAN SOLD 33,369 ORDINARY SHARES IN THE OPEN MARKET AND IN
2005, MR. KILMAN PURCHASED 17,385 ORDINARY SHARES IN THE OPEN MARKET.
(5) PERCENTAGE IS CALCULATED BASED ON 14,556,380 ORDINARY SHARES OUTSTANDING,
WHICH INCLUDE CURRENTLY EXERCISABLE OPTIONS TO PURCHASE 860,542 ORDINARY
SHARES HELD BY TWO OFFICERS OF THE COMPANY.
ALL OF OUR ORDINARY SHARES HAVE EQUAL VOTING RIGHTS. UNDER OUR TWO BUY-BACK
PROGRAMS (AS DESCRIBED IN "ITEM 5.B. LIQUIDITY AND CAPITAL RESOURCES" OF OUR
FORM 20-F FOR 2004), TWO OF OUR SUBSIDIARIES PURCHASED 1,870,565 OF OUR ORDINARY
SHARES, OF WHICH 136,000 SHARES WERE SOLD IN JANUARY 2006 TO ISRAELI
INSTITUTIONAL INVESTORS IN ISRAEL. UNDER APPLICABLE ISRAELI LAW, SO LONG AS THE
SHARES ARE HELD BY OUR SUBSIDIARIES, THEY HAVE NO VOTING RIGHTS BUT CONFER UPON
THEIR HOLDERS PARTICIPATION RIGHTS UPON DISTRIBUTION.
AS OF JANUARY 13, 2006, THERE WERE 32 RECORD HOLDERS OF OUR ORDINARY SHARES. OF
THESE RECORD HOLDERS, 18 HOLDERS HAD MAILING ADDRESSES IN THE UNITED STATES
OWNING AN AGGREGATE OF APPROXIMATELY 20% OF OUR OUTSTANDING ORDINARY SHARES. AS
OF JANUARY 13, 2006, WE HAD APPROXIMATELY 1,200 BENEFICIAL SHAREHOLDERS.
RELATED PARTY TRANSACTIONS
In addition to the information included in "Item 7.B. Related Party
Transactions" of our Form 20-F for 2004, the following related party
transactions have been entered during the last three financial years preceding
the date of this prospectus:
30
PURCHASE OF LETMEKNOW SHARES AND POLYGLOT SHARES BY FORMULA VISION
In September 2001, we entered into an agreement with Formula Vision Technologies
(F.V.T.) Ltd., pursuant to which we sold to Formula Vision our entire
shareholdings in LetMeKnow Ltd. and Polyglot Ltd., for aggregate consideration
of $1.5 million. The consideration was determined in negotiations between the
parties, and reflects in our opinion the fair price of the sold shares in each
of the companies. In addition, we transferred to Formula Vision our undertakings
in connection with convertible loans in an aggregate of $400,000 and guarantees
of $600,000 extended to LetMeKnow, and a shareholders' loan of $82,000 and
guarantees of up to $1.1 million extended to Polyglot. As a result, we were
released from all of our obligations in connection therewith. In connection with
this transaction, Formula Vision has granted us an option, exercisable within
three years from the date of closing, to purchase up to 10% of the shares sold
to Formula Vision, at the same purchase price set out in the agreement between
the parties. The option has not been exercised and has expired. This transaction
is considered a related party transaction since Dan and Gad Goldstein serve as
directors of Formula Vision and of our company.
PURCHASE OF ALPHATEC SHARES FROM INTERCOMP
In December 2003, we purchased from Intercomp a 65% controlling interest in
BluePhoenix Solutions SRL. (formerly known as Alphatech (2000) Srl.) for an
aggregate consideration of $100,000. The amount of consideration was negotiated
between the parties. Alphatech, a company incorporated in Romania, provides
software development services. Alphatech employs 40 employees, of which 35 are
professional software engineers.
INDEMNIFICATION OF OFFICE HOLDERS
Since July 2003, we grant to our office holders indemnification letters covering
acts performed in their capacity as office holders of our company. On December
27, 2005, our shareholders approved an amendment to those indemnification
letters, following a recent amendment to the Companies Law, 1999. Pursuant to
the new indemnification letters, we undertake to indemnify each office holder to
the maximum extent permitted by law in respect of the following for any act or
omission taken or made by the office holder in his or her capacity as an office
holder of our company:
o any financial obligation imposed on the office holder in favor of another
person by a court judgment, including a settlement or an arbitrator's award
approved by court,
o all reasonable litigation expenses, including attorney's fees, expended by
the office holder as a result of an investigation or proceeding instituted
against the office holder by a competent authority, provided that such
investigation or proceeding concluded without the filing of an indictment
against the office holder and either (a) concluded without the imposition
of any financial liability in lieu of criminal proceedings; or (b)
concluded with the imposition of a financial liability in lieu of criminal
proceeding but relates to a criminal offense that does not require proof of
MENS REA (criminal intent); and
o all reasonable litigation expenses, including attorney's fees, expended by
the office holder or charged to him or her by a court in a proceeding
instituted against the office holder by us or on our behalf or by another
person, or in any criminal proceedings in which the office holder is
acquitted, or in any criminal proceedings of a crime which does not require
proof of MENS REA (criminal intent) in which the office holder is
convicted.
The indemnification also applies to any action taken by the office holder in
respect of an act performed in his or her capacity as an office holder or an
employee of one of our subsidiaries or as a director or observer at board of
directors' meetings of one of our affiliates. Our undertaking for
indemnification is limited to up to 25% of our shareholders' equity at the time
of the claim for indemnification.
31
Our undertaking for indemnification does not apply to a liability incurred as a
result of any of the following:
o a breach by the office holder of his or her duty of loyalty, unless, to the
extent permitted by law, the office holder acted in good faith and had
reasonable cause to assume that such act would not prejudice the interests
of our company;
o a willful breach by the office holder of his or her duty of care, unless
such breach was solely due to negligence;
o an action taken or not taken with the intent of unlawfully realizing
personal gain;
o a fine or penalty imposed on the office holder for an offense; and
o a counterclaim made by us in connection with a claim against us filed by
the office holder.
Our undertaking for indemnification is limited to such events specified in the
indemnification letter and determined by our board of directors to be
foreseeable in light of the company's operations.
Under the indemnification letters, we exempt our office holders to the fullest
extent permitted by law, from liability for damages caused as a result of a
breach by the office holder of his or her duty of care to the company.
ADDITIONAL INFORMATION
SHARE CAPITAL
We are authorized to issue 30,000,000 ordinary shares, par value NIS 0.01 par
share. As of September 30, 2005, we had 13,557,538 ordinary shares issued and
outstanding and as of January 26, 2006, we had 13,695,838 ordinary shares issued
and outstanding. These numbers of outstanding shares exclude 1,870,565 ordinary
shares held by two of our wholly owned subsidiaries as of September 30, 2005.
Under Israeli law, the shares held by our subsidiaries do not confer any voting
rights as long they are held by the subsidiaries (although entitle their holders
to participation rights upon distribution). In January 2006, one of our
subsidiaries sold 136,000 ordinary shares held by it, and as of January 27,
2006, 1,734,565 ordinary shares are held by our subsidiaries.
Since January 2002, we have issued the following ordinary shares:
o In November 2002, we purchased through a share exchange transaction 86% of
the outstanding share capital of Liraz. As part of the transaction, we
issued to Liraz's selling shareholders, including Formula, 3,478,624 of our
ordinary shares, constituting an aggregate of 26% of our outstanding share
capital. Of these shares, we issued to Formula 2,343,113 ordinary shares.
o During the years 2002, 2003, 2004 and 2005, we issued 90,000, 35,267,
33,767, and 10,099 of our ordinary shares, respectively, upon exercise of
options by our employees and directors. The price paid upon exercise of
these options varies between $2.30 and $4.50 per share.
o In January 2004, we purchased the entire outstanding share capital of
CePost Ltd. As part of the transaction, we issued to the selling
shareholders an aggregate of 31,496 ordinary shares.
32
All of our outstanding ordinary shares, including the ordinary shares held by
two of our wholly owned subsidiaries, are validly issued and fully paid and will
not have preemptive rights, rights of first refusal or co-sale rights. The
ownership or voting of our ordinary shares by non-residents of Israel is not
restricted in any way by our memorandum of association, articles of association
or the laws of Israel.
Pursuant to BluePhoenix 2003 Employee Stock Option Plan, we reserved 2,765,817
ordinary shares for issuance to our and our subsidiaries' directors, officers,
consultants and employees. The table below shows the number of ordinary shares
underlying the options outstanding as of January 26, 2006 under our 2003 option
plan, the exercise price of the options and their expiration date.
NUMBER OF ORDINARY SHARES EXERCISE
UNDERLYING THE OPTIONS PRICE IN $ EXPIRATION
---------------------- ---------- ----------
451,400 5.20-6.50 2006
2,000 6.50 2007
80,000 8.00 2008
131,600 5.50 - 10.50 2010
39,183 4.50 2011
230,000 3.00 2012
840,201 2.25-6.00 2013
143,721 6.00 2014
834,712 4.00 - 6.00 2015
---------
2,765,817
For additional information with respect to our commitments to issue BluePhoenix
ordinary shares, see "Item 7.E. Share Ownership" of our Form 20-F for 2004.
ANTI-TAKEOVER PROVISIONS; MERGERS AND ACQUISITIONS UNDER ISRAELI LAW
Mergers
The Companies Law permits merger transactions if approved by each party's board
of directors and shareholders. In determining whether the required majority has
approved the merger in the event of "cross ownership" between the merging
companies, namely, if the merging company's shares are held by the other party
to the merger, or by any person holding at least 25% of the means of control of
the other party to the merger, then a vote against the merger by holders of the
majority of the shares present and voting, excluding shares held by the other
party to the merger or by such person, or anyone acting on behalf of either of
them, including any of their affiliates, is sufficient to reject the merger
transaction. In the event that the merger transaction has not been approved by
the special majority described above, the holders of at least 25% of the voting
rights of such company may apply to the court for approval of the merger. The
court may approve the merger if it is found that the merger is fair and
reasonable, taking into account the value of the parties to the merger and the
consideration offered to the shareholders. Upon the request of a creditor of
either party to the proposed merger, the court may delay or prevent the merger.
A merger may not be consummated unless at least 50 days have passed from the
time that a proposal for approval of the merger has been filed with the Israeli
Registrar of Companies and 30 days have passed from the date of the approval of
the shareholders of the merging companies.
THE COMPANIES LAW FURTHER PROVIDES THAT THE FOREGOING APPROVAL REQUIREMENTS WILL
NOT APPLY TO SHAREHOLDERS OF A WHOLLY-OWNED SUBSIDIARY IN A ROLLUP MERGER
TRANSACTION, OR TO THE SHAREHOLDERS OF THE ACQUIRER IF:
33
o the transaction does not involve an amendment to the acquirer's memorandum
or articles of association;
o the transaction does not contemplate the issuance of more than 20% of the
voting rights of the acquirer which would result in any shareholder
becoming a controlling shareholder; and
o there is no "cross ownership" of shares of the merging companies, as
described above.
TENDER OFFERS
THE COMPANIES LAW PROVIDES THAT AN ACQUISITION OF SHARES OF A PUBLIC COMPANY
MUST BE MADE BY MEANS OF A TENDER OFFER IF AS A RESULT OF THE ACQUISITION, THE
PURCHASER WOULD BECOME A HOLDER OF 25% OR MORE OF THE VOTING RIGHTS IN THE
COMPANY. THIS RULE DOES NOT APPLY IF THERE IS ALREADY ANOTHER HOLDER OF 25% OR
MORE OF THE VOTING RIGHTS IN 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
HOLDER OF MORE THAN 45% OF THE VOTING RIGHTS OF THE COMPANY, IF THERE IS NO
OTHER HOLDER OF MORE THAN 45% OF THE VOTING RIGHTS OF THE COMPANY.
THE FOREGOING PROVISIONS DO NOT APPLY TO:
o a private placement in which the company's shareholders approved such
holder owning 25% or more of the voting rights in the company (if there is
no other shareholder that holds 25% or more of the voting rights in the
company) or more than 45% of the voting rights in the company (if there is
no other shareholder that holds 45% or more of the voting rights in the
company); or
o a purchase from an existing holder of 25% or more of the voting rights in
the company that results in another person becoming a holder of 25% or more
of the voting rights in the company or a purchase from an existing holder
of more than 45% of the voting rights in the company that results in
another person becoming a holder of more than 45% of the voting rights in
the company.
The Companies Law also provides that if following any acquisition of shares, the
acquirer holds 90% or more of the company's shares or of a class of shares, the
acquisition must be made by means of a tender offer for all the target company's
shares or all the shares of the class, as applicable. An acquirer who wishes to
eliminate all minority shareholders must do so by way of a tender offer. If as a
result of a full tender offer the acquirer would own more than 95% of the
outstanding shares, then all the shares that the acquirer offered to purchase
will be transferred to it. If, however, the tender offer to acquire 95% is not
successful, the acquirer may not acquire shares tendered if by doing so the
acquirer would own more than 90% of the shares of the target company.
LEGAL PROCEEDINGS
IN JULY 2003, A FORMER LIRAZ SHAREHOLDER FILED AN APPLICATION WITH THE TEL AVIV,
JAFFA DISTRICT COURT TO APPROVE A CLAIM FILED BY HIM AGAINST US, AS A CLASS
ACTION. THE CLAIM RELATES TO THE ACQUISITION OF LIRAZ SHARES, WHICH WE COMPLETED
IN MARCH 2003. A PRELIMINARY HEARING HAS BEEN SCHEDULED FOR THIS LAWSUIT FOR
FEBRUARY 21, 2006. BASED ON OUR ANALYSIS OF THE STATEMENT OF CLAIM, INCLUDING AN
EVALUATION OF THE FAIR VALUE OF THE LIRAZ SHARES, AND THE PRICE PAID FOR LIRAZ
IN A PREVIOUS TRANSACTION IMMEDIATELY PRIOR TO THE TENDER OFFER, WE BELIEVE THAT
THE ALLEGATIONS AGAINST US IN THIS PROCEEDING ARE WITHOUT MERIT AND WE INTEND TO
VIGOROUSLY DEFEND THE CLAIM AND CONTEST THE ALLEGATIONS MADE THEREIN. FOR MORE
INFORMATION ABOUT THIS CLAIM AND OTHER LEGAL PROCEEDINGS, SEE "ITEM 8.A. LEGAL
PROCEEDINGS" OF OUR FORM 20-F FOR 2004.
34
UNDERWRITING
This offering is being underwritten by the following leading underwriters:
NAME OF UNDERWRITER ADDRESS
- ------------------- -------
Poalim I.B.I. - Underwriting & Issuing Ltd. 9 Ahad Haam St., Tel-Aviv
Clal Finance Underwriting Ltd. 37 Menachem Begin St., Tel-Aviv
Meitav Underwriting Ltd. 4 Berkowitz St., Tel-Aviv
Altshuler Shacham Management Underwriters 18 Rotschild Blvd., Tel-Aviv
and Investments Ltd.
Rosario Capital Ltd. 52 Menachem Begin Rd., Ramat-Gan
To the extent known to us, major shareholders, directors or members of our
management do not intend to subscribe in the offering at all, and to the extent
known to us, no person intends to subscribe for more than 5% of the offering,
other than the underwriters listed in the table above.
See the section titled "Underwriting Agreement" in this prospectus (in the
Hebrew language) for a description of the terms of the underwriting agreement.
Each of the underwriters committed to subscribe for such number of securities,
as provided in such section.
The underwriters are committed to take and pay for any securities not purchased
by the public in the offering.
The series A convertible notes being offered under this prospectus and the
ordinary shares issuable upon conversion of the notes offered hereby have not
been registered under the U.S. Securities Act of 1933 and may not be offered or
sold in the United States or to U.S. Persons (as such term is defined in
Regulation S promulgated under the U.S. Securities Act) unless these securities
are registered under the U.S. Securities Act, or an exemption from the
registration requirements of the U.S. Securities Act is available.
EXPENSES OF THE OFFERING
The aggregate amount that we expect to pay for consulting fees, distribution
fees and commitment fees in connection with this offering is approximately
$520,000. We estimate that our other expenses will be approximately $115,000.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
We are allowed to incorporate by reference the information we file with the
Securities and Exchange Commission (SEC), which means that we can disclose
important information to you by referring to those documents. The information
incorporated by reference is considered to be part of this prospectus. We
incorporate by reference herein the documents listed below:
(1) Our annual report on Form 20-F for the year ended December 31, 2004, as
filed with the Securities and Exchange Commission on March 31, 2005; and
35
(2) Our current reports on Form 6-K as filed with the Securities and Exchange
Commission on May 9, 2005, August 9, 2005, November 14, 2005, November 30,
2005 and January 12, 2006, two current reports on Form 6-K as filed on
January 17, 2006, our current report on Form 6-K as filed on January 31,
2006 and Form 6-K/A as filed on January 19, 2006.
As you read the above documents, you may find inconsistencies in information
from one document to another. If you find inconsistencies between the documents
and this prospectus, you should rely on the statements made in the most recent
document. All information appearing in this prospectus is qualified in its
entirety by the information and financial statements, including the notes
thereto, contained in the documents incorporated by reference herein.
You may obtain a copy of any or all of these filings at no cost, by writing or
telephoning us at the following address:
BluePhoenix Solutions Ltd.
8 Maskit Street
Herzlia 46120
Israel
Tel: (972) 9-952-6110
Fax: (972) 9-952-6111
Attention: Yael Peretz, Adv., Legal Advisor
These filings can also be found on our web site www.bphx.com under the tab
"Investor Relations."
Our ordinary shares are listed on the TASE. However, because our ordinary shares
are also listed on the NASDAQ National Market, we are exempt from certain of the
reporting obligations specified in Chapter Six of the Israeli Securities Law,
1968, that would otherwise be applicable to a company traded on the TASE,
provided that a copy of each report submitted in accordance with applicable
United States laws or NASDAQ rules is filed with the Israel Securities Authority
and the TASE within the time specified under Israeli law.
DIRECTORS AND THEIR SHARE OWNERSHIP
The following table includes a list of our directors as of the date of this
prospectus and presents information regarding the ownership of our ordinary
shares by them, as of January 26, 2006. The percentage of outstanding ordinary
shares is based on 13,695,838 ordinary shares outstanding as of January 26, 2006
(excluding 1,734,565 shares held by two of our wholly owned subsidiaries).
Unless otherwise specifically indicated, the address of each of the persons set
forth below is at c/o BluePhoenix, 8 Maskit Street, Herzlia 46120.
36
OPTIONS TO
PURCHASE
NAME SHARES BENEFICIALLY OWNED ORDINARY SHARES
- ---- ------------------------- ---------------
PERCENTAGE OF
OUTSTANDING
NUMBER ORDINARY SHARES NUMBER
------ --------------- ---------------
Arie Kilman (2) 609,199 4.4% 725,000 (2)
Dan Goldstein 424,510 3.1%
Gad Goldstein 330,628 2.4%
Aaron Crystal 789,038 (3) 5.8%
Shai Beilis(1) ___ ___
Iris Yahal(1) ___ ___ 166,000 (4)
Naamit Salomon(1) ___ ___
Gur Shomron(1) ___ ___
Michael Chill(1) ___ ___
Amira Berkovitz-Amir(1) ___ ___
All directors and officers as
a group (10 persons) (5) 3,013,917 20.7% 891,000
- ----------
(1) EACH OF THE DIRECTORS AND EXECUTIVE OFFICERS WHOSE HOLDINGS ARE NOT
SEPARATELY SPECIFIED IN THE ABOVE TABLE BENEFICIALLY OWNS LESS THAN ONE
PERCENT OF OUR OUTSTANDING ORDINARY SHARES.
(2) MR. KILMAN WAS GRANTED OPTIONS TO PURCHASE ORDINARY SHARES UNDER THE
FOLLOWING TERMS: (I) CURRENTLY EXERCISABLE OPTIONS TO PURCHASE 375,000
ORDINARY SHARES AT $2.25 PER SHARE; (II) OPTIONS TO PURCHASE 200,000
ORDINARY SHARES EXERCISABLE AT $4.00 PER SHARE, OF WHICH 171,667 ARE
CURRENTLY EXERCISABLE; AND (III) CURRENTLY EXERCISABLE OPTIONS TO PURCHASE
150,000 ORDINARY SHARES AT $6.00 PER SHARE.
(3) INCLUDES 294 SHARES THAT ANAT CRYSTAL, MR. CRYSTAL'S SPOUSE, BENEFICIALLY
OWNS.
(4) OF THE OPTIONS GRANTED TO MS. YAHAL, OPTIONS TO PURCHASE 163,875 ORDINARY
SHARES ARE CURRENTLY EXERCISABLE.
(5) INCLUDES OPTIONS TO PURCHASE 860,542 ORDINARY SHARES WHICH ARE CURRENTLY
EXERCISABLE AT A PRICE AND DURING THE TERM INDICATED IN THE TABLE BELOW:
NUMBER OF ORDINARY SHARES EXERCISE
UNDERLYING THE OPTIONS PRICE IN $ EXPIRATION
---------------------- ---------- ----------
391,000 2.25 APRIL 2013
30,000 3.00 FEBRUARY 2012
12,875 3.50 SEPTEMBER 2013
171,667 4.00 SEPTEMBER 2013
10,000 4.50 APRIL 2013
70,000 5.00 DECEMBER 2015
10,000 5.50 OCTOBER 2010
150,000 6.00 SEPTEMBER 2015
15,000 6.50 NOVEMBER 2006
BOARD PRACTICES
Pursuant to our articles of association, directors are elected at a general
meeting of our shareholders by a vote of the holders of a majority of the voting
power represented at the meeting. Additional directors may be elected between
general meetings by a majority of our directors. Our board is comprised of 10
persons, of which 3 have been determined to be independent within the meaning of
the applicable NASDAQ requirements. Two of these independent directors also
serve as outside directors mandated under Israeli law and subject to additional
criteria to help ensure their independence. See "Outside Directors," below. Each
director, except for the outside directors, holds office until the next annual
general meeting of shareholders. Officers are appointed by our board of
directors.
37
Our board of directors has appointed a compensation committee, comprised of
Messrs. Gad Goldstein, Dan Goldstein, Shai Beilis, Amira Berkovitz-Amir and Arie
Kilman. The compensation committee is responsible for granting options to
employees and setting the compensation of our executive officers.
Companies trading on The NASDAQ Stock Market are generally required to have a
majority of their board members be independent. We are exempt from this
requirement under the "controlled company" exemption because more than 50% of
our voting power is held by Formula.
OUTSIDE DIRECTORS
Under the Companies Law, 1999, referred to as the Companies Law, companies
incorporated under the laws of Israel whose shares have been offered to the
public in or outside of Israel, are required to appoint at least two outside
directors. The Companies Law provides that a person may not be appointed as an
outside director if the person or the person's relative, partner, employer or
any entity under the person's control, has, as of the date of the person's
appointment to serve as 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.
No person may serve as an outside director if the 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 or if the person is an
employee of the Israel Securities Authority or of an Israeli stock exchange. If,
at the time of election of an outside director, all other directors are of the
same gender, the outside director to be elected must be of the other gender.
Outside directors are elected by a majority vote at a shareholders' meeting,
provided that either:
(1) the majority of shares voted at the meeting, including at least one-third
of the shares of non-controlling shareholders or their representatives
voted at the meeting, vote in favor of election; or
(2) the total number of shares of non-controlling shareholders voted against
the election of the outside director does not exceed one percent of the
aggregate voting rights in the company.
Pursuant to a recent amendment to the Companies Law, an outside director must
have financial and accounting expertise or professional qualifications, provided
that at least one outside director will have financial and accounting expertise.
The terms "financial and accounting expertise" and "professional qualifications"
have been defined in regulations promulgated under the Companies Law.
The initial term of an outside director is three years and may be extended for
an additional three years. At present, Mr. Michael Chill and Ms. Amira
Berkovitz-Amir serve as our outside directors, Mr. Chill to hold office until
July 2009 and Ms. Berkovitz-Amir until December 2007.
38
Each committee exercising the powers of the board of directors is required to
include at least one outside director. However, the audit committee should
include all the outside directors.
An outside director is entitled to compensation as provided in regulations
promulgated under the Companies Law and is otherwise prohibited from receiving
any compensation, directly or indirectly, in connection with services provided
as an outside director. We compensate our two outside directors in accordance
with regulations promulgated under the Companies Law.
QUALIFICATIONS OF OTHER DIRECTORS
Under a recent amendment to the Companies Law, the board of directors of a
publicly traded company will be required to make a determination as to the
minimum number of directors who must have financial and accounting expertise
according to criteria which is defined in regulations promulgated under the
Companies Law effective as of January 2006. According to the Companies Law, the
determination of the board will be based, among other things, on the type of the
company, its size, the volume and complexity of its activities and the number of
directors. Our board will be required to make the determination as to the
minimum number of directors with financial and accounting expertise within 90
days of the effective date of the applicable regulations.
AUDIT COMMITTEE
The Companies Law requires public companies to appoint an audit committee,
comprised of at least three directors, including all of the outside directors.
The chairman of the board of directors, any director employed by or otherwise
providing services to the company, and a controlling shareholder or any relative
of a controlling shareholder, may not be a member of the audit committee. In
addition, under applicable NASDAQ rules, we are currently required to have at
least three independent directors and to maintain an audit committee, whose
members are independent of management. Our outside directors qualify as
independent directors under the applicable NASDAQ rules and those of the
Securities and Exchange Commission. We have established an audit committee,
consisting of our two outside directors, Mr. Michael Chill and Ms. Amira
Berkovitz-Amir, as well as Mr. Gur Shomron. The board has determined that both
Michael Chill and Amira Berkovitz-Amir are "audit committee financial experts"
as defined by applicable SEC regulations.
Under the Companies Law, the audit committee is responsible for overseeing the
business management practices of the company in consultation with the company's
internal auditor and the independent auditor, making recommendations to the
board to improve such practices and approving related party transactions as
required by the Companies Law. In accordance with the Sarbanes-Oxley Act and
NASDAQ requirements, our audit committee is directly responsible for the
appointment, compensation and oversight of our independent auditors. In
addition, the audit committee is responsible for assisting the board in
monitoring our financial statements and the effectiveness of our internal
controls. We have adopted a formal audit committee charter which we have
implemented, embodying these responsibilities.
INTERNAL AUDITOR
Under the Companies Law, the board of directors appoints 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 interested
party (i.e., a holder of 5% or more of the voting rights in the company or of
the issued share capital, the chief executive officer of the company or any of
its directors, or a person who has the authority to appoint the company's chief
executive officer or any of its directors), or a relative of an office holder or
of an interested party. In addition, the company's independent accountant or its
representative may not serve as the company's internal auditor.
39
APPROVAL OF CERTAIN TRANSACTIONS UNDER THE COMPANIES LAW
The Companies Law codifies the fiduciary duties that "office holders," including
directors and executive officers, owe to a company. An office holder's fiduciary
duties consist of a duty of care and a duty of loyalty. The duty of loyalty
includes (i) avoiding any conflict of interest between the office holder's
position in the company and his personal affairs, (ii) avoiding any competition
with the company, (iii) avoiding exploiting any business opportunity of the
company in order to receive personal advantage for himself or others and (iv)
revealing to the company any information or documents relating to the company's
affairs which the office holder has received due to his position as an office
holder. Each person listed in the table under "Directors and Senior Management"
above is an office holder. Under the Companies Law, arrangements regarding the
compensation of directors require the approval of the audit committee, the board
of directors and shareholder approval.
The Companies Law requires that an office holder of a 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 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 corporation in which the office holder owns 5% or more of the share
capital, is a 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 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.
Under the Companies Law, after the office holder complies with the disclosure
requirements described above, only board approval is required for any
transaction which is not an extraordinary transaction, unless the articles of
association of the company provide otherwise, and provided the transaction is
not adverse to the company's interest. If the transaction is an extraordinary
transaction, the company must receive any approval stipulated by its articles of
association, the approval of the audit committee and the approval of the board
of directors, as well as shareholder approval. An office holder who has a
personal interest in a matter that is considered at a meeting of the board of
directors or the audit committee may not be present at this meeting or vote on
this matter unless the majority of the board members or members of the audit
committee, as applicable, have a personal interest in such matter and in such
case, the matter should also be approved by the shareholders of the company.
The Companies Law applies the same disclosure requirements to a controlling
shareholder of a public company, which includes a shareholder that holds 25% or
more of the voting rights in the company if no other shareholder owns more than
50% of the voting rights in the company. Extraordinary transactions with a
controlling shareholder or in which a controlling shareholder has a personal
interest, and the terms of compensation of a controlling shareholder or its
relative who is an office holder or an employee of the company, 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 voting on
the subject matter 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 one percent of the voting rights in the company. In
certain cases provided in regulations promulgated under the Companies Law,
shareholder approval is not required.
The approvals of the board of directors and shareholders are required for a
private placement of securities (or a series of related private placements
during a 12-month period or that are part of one continuous transaction or
transactions conditioned upon each other) in which:
40
o the securities issued represent at least 20% of the company's actual voting
power prior to the issuance of such securities, and such issuance increases
the relative holdings of a 5% shareholder or causes any person to become a
5% shareholder, and the consideration in the transaction (or a portion
thereof) is not in cash or in securities listed on a recognized stock
exchange, or is not at a fair market value; or
o a person would become, as a result of such transaction, a controlling
shareholder of the company.
Under the Companies Law, a shareholder has a duty to act in good faith towards
the company and other shareholders and to refrain from abusing his 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 that require shareholder
approval.
In addition, any controlling shareholder, any shareholder who knowingly
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, is under a duty to act with fairness towards the company.
The Companies Law does not describe the substance of this duty.
For information concerning personal interests of certain of our office holders
and our principal shareholders in certain transactions with us, see "Item 7.B.
Related Party Transactions" of our Form 20-F for 2004 and the section titled
"Related Party Transactions" above.
EXCULPATION, INSURANCE AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Companies Law, an Israeli company may not exempt an office holder from
liability with respect to a breach of his duty of loyalty, but may exempt in
advance an office holder from his liability to the company, in whole or in part,
with respect to a breach of his duty of care, provided, however, that such a
breach is not related to a distribution of a dividend or any other distribution
by the company.
OFFICE HOLDERS INSURANCE
Our articles of association provide that, subject to the provisions of the
Companies Law, we may enter into a contract for insurance of all or a part of
the liability of any of our office holders imposed on the office holder in
respect of an act performed in his or her capacity as an office holder, in
respect of each of the following:
o a breach of his duty of care to us or to another person;
o a breach of his duty of loyalty to us, provided that the office holder
acted in good faith and had reasonable cause to assume that such act would
not prejudice our interests; or
o a financial obligation imposed on him or her in favor of another person.
41
INDEMNIFICATION OF OFFICE HOLDERS
Our articles of association provide that, subject to the provisions of the
Companies Law, we may indemnify our office holders in respect of an obligation
or expense specified below imposed on an office holder in respect of an act
performed in his or her capacity as an office holder, as follows:
(i) a financial obligation imposed on him or her in favor of another person by
a court judgment, including a compromise judgment or an arbitrator's award
approved by court;
(ii) reasonable litigation expenses, including attorney's fees, incurred by the
office holder as a result of an investigation or proceeding instituted
against the office holder by a competent authority, provided that such
investigation or proceeding concluded without the filing of an indictment
against the office holder; and either (a) concluded without the imposition
of any financial liability in lieu of a criminal proceeding; or (b) a
financial liability was imposed on him in lieu of a criminal proceeding for
an offense that does not require proof of criminal intent; and
(iii) reasonable litigation expenses, including attorney's fees, expended by the
office holder or charged to the office holder by a court, in a proceeding
instituted against the office holder by the company or on its behalf or by
another person, or in a criminal charge from which the office holder was
acquitted, or in a criminal proceeding in which the office holder was
convicted of an offense that does not require proof of criminal intent.
We may undertake to indemnify an office holder as aforesaid, (a) prospectively,
provided that in respect of (i) above, the undertaking is limited to categories
of events which in the opinion of our board of directors are foreseeable in
light of the company's operations at the time that the undertaking to indemnify
is given, and for an amount or criteria which our board has determined as
reasonable under the circumstances, and further provided that that such events
and amount or criteria are indicted in the indemnification undertaking; and (b)
retroactively.
We have entered into an undertaking to indemnify our office holders in specified
limited categories of events and in specified amounts, subject to the
limitations set by the Companies Law and our articles of association, as
described above. For more information, see the section titled "Major
Shareholders" above.
LIMITATIONS ON EXEMPTION, INSURANCE AND INDEMNIFICATION
The Companies Law provides that a company may not indemnify an office holder,
neither enter into an insurance contract that would provide coverage for any
monetary liability, nor exempt an office holder from liability, with respect to
any of the following:
o a breach by the office holder of his duty of loyalty, except that the
company may indemnify or provide insurance coverage to the office holder if
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 duty of care if the breach was done
intentionally or recklessly, except for a breach that was made in
negligence;
o any act or omission done with the intent to derive an illegal personal
benefit; or
o any fine levied against the office holder.
In addition, under the Companies Law, indemnification of, and procurement of
insurance coverage for, our office holders must be approved by our audit
committee and our board of directors and, in specified circumstances, by our
shareholders.
We have procured directors' and officers' liability insurance and obtained all
necessary approvals.
42
WHERE CAN YOU FIND MORE INFORMATION
BluePhoenix is subject to the reporting requirements of the Exchange Act of
1934, as amended, that are applicable to a foreign private issuer. In accordance
with the Exchange Act, we file with the SEC reports, including annual reports on
Form 20-F by June 30 each year. In addition, we file interim financial
information on Form 6-K on a quarterly basis. We also furnish to the SEC under
cover of Form 6-K certain other material information required to be made public
in Israel, filed with and made public by any stock exchange or distributed by us
to our shareholders. You may inspect without charge and copy at prescribed rates
such material at the public reference facilities maintained by the SEC, 100 F
Street, N.E., Washington, D.C. 20549. You may also obtain copies of such
material from the SEC at prescribed rates by writing to the Public Reference
Section of the SEC, 100 F Street, N.E., Washington, D.C. 20549. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference room.
The SEC maintains an Internet site at http://www.sec.gov that contains reports
and other material that are filed through the SEC's Electronic Data Gathering,
Analysis and Retrieval ("EDGAR") system. BluePhoenix began filing through the
EDGAR system beginning on November 14, 2002.
BluePhoenix's ordinary shares are quoted on the NASDAQ National Market. You may
inspect reports and other information concerning BluePhoenix at the offices of
the National Association of Securities Dealers, Inc., 1735 K Street, N.E.,
Washington, D.C. 20006. You may also find our reports filed with the ISA on the
Magna site whose address is http://www.magna.isa.gov.il.
Our Internet address is http://www.bphx.com. A copy of each report submitted in
accordance with applicable United States law is available for public review at
our principal executive offices.
LEGAL MATTERS
Certain legal matters with respect to the offering are being passed upon for us
by Herzog, Fox & Neeman.
EXPERTS
Ziv Haft certified public accountants (Isr.) BDO member firm, independent
auditors, have audited our consolidated financial statements included in our
Annual Report on Form 20-F for the year ended December 31, 2004, as set forth in
their report which is incorporated by reference in this prospectus and elsewhere
in the prospectus. Our financial statements are incorporated by reference in
reliance on such firm's report given on their authority as experts in accounting
and auditing. Ziv Haft certified public accountants (Isr.), a BDO member firm
located at 46-48 Menahem Begin Road, Tel Aviv, have been our auditors for the
last three years. Certain of the individual statutory auditors are members of
the Institute of Certified Public Accountants in Israel. Personal membership in
such Institute is not mandatory for individual Israeli accountants. Individual
statutory auditors are however required to be licensed by the Israeli Ministry
of Justice.
You should rely only on the information contained or incorporated by reference
in this prospectus. We have not, and the consultants have not, authorized any
other person to provide you with different information. If anyone provides you
with different or inconsistent information, you should not rely on it. We are
not, and the consultants are not, making an offer to sell these securities in
any jurisdiction where the offer or sale is not permitted. The information in
this prospectus is accurate only as of the date on the front cover of this
prospectus. Our business, financial condition, results of operations and
prospects may have change.
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