-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MQNsO05f2nbQOYo9oENQ81gxzZWvvJqu9RU3de//xdzzc3ICS19X8YSu72/VC7Uh BwVD+6uiQpASIGV8YkS+XQ== /in/edgar/work/20000803/0000927016-00-002705/0000927016-00-002705.txt : 20000921 0000927016-00-002705.hdr.sgml : 20000921 ACCESSION NUMBER: 0000927016-00-002705 CONFORMED SUBMISSION TYPE: F-1/A PUBLIC DOCUMENT COUNT: 27 FILED AS OF DATE: 20000803 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VIRYANET LTD CENTRAL INDEX KEY: 0001119744 STANDARD INDUSTRIAL CLASSIFICATION: [7372 ] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: F-1/A SEC ACT: SEC FILE NUMBER: 333-42158 FILM NUMBER: 685214 BUSINESS ADDRESS: STREET 1: 5 KIRYAT HAMADA STREET STREET 2: PO BOX 23052, HAR HOTZVIM, ISRAEL CITY: JERUSALEM 91230 BUSINESS PHONE: 5084908600 F-1/A 1 0001.txt FORM F-1/A As filed with the Securities and Exchange Commission on August 3, 2000 Registration No. 333-42158 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- AMENDMENT NO. 1 TO FORM F-1 REGISTRATION STATEMENT Under The Securities Act of 1933 --------------- VIRYANET LTD. (Exact name of Registrant as specified in its charter) Not Applicable (Exact name of Registrant's name in English) --------------- Israel 7372 Not Applicable (State or other (Primary Standard Industrial (I.R.S. Employer jurisdiction of Classification Code Number) Identification Number) incorporation or organization) 5 Kiryat Hamada Street Science Based Industries Campus P.O. Box 23052, Har Hotzvim Jerusalem 91230, Israel (972-2) 581-1462 (Address and telephone number of Registrant's principal executive offices) --------------- ViryaNet, Inc. 2 Willow Street Southborough, MA 01745-1027 (508) 490-8600 (Name, address and telephone number of agent for service) --------------- Copies to: Howard S. Dan Geva, Adv. Aner Berger, Adv. Brian B. Margolis, Rosenblum, Esq. Meitar, Liquornik, Herzog, Fox & Neeman Esq. Testa, Hurwitz & Geva & Co. Asia House Nanci I. Prado, Esq. Thibeault, LLP 16 Abba Hillel 4 Weizmann Street Brobeck, Phleger & High Street Tower Silver Road Tel Aviv 64239 Harrison LLP 125 High Street Ramat Gan 52506, Israel 1633 Broadway, 47th Boston, MA 02110 Israel (972-3) 692-2020 Floor (617) 248-7000 (972-3) 610-3100 New York, NY 10019 (212) 581-1600
--------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] --------------- Calculation of Registration Fee - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum Aggregate Amount of Title of Each Class of Amount to be Offering Price Offering Price Registration Securities to be Registered Registered (1) per Share (2) (2) Fee(3) - ------------------------------------------------------------------------------------------------------- Ordinary shares, par value NIS 0.1 per share.................................. 5,175,000 $12.00 $62,100,000 $16,395 - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
(1) Includes 675,000 shares that the underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the amount of the registration fee, in accordance with Rule 457(a) promulgated under the Securities Act of 1933. (3) Previously paid. --------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and we are not soliciting offers to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED August 3, 2000. PROSPECTUS 4,500,000 Ordinary Shares [LOGO OF VIRYANET] This is an initial public offering of ordinary shares by ViryaNet Ltd. We are selling 4,500,000 ordinary shares. We anticipate the initial public offering price to be between $10.00 and $12.00 per ordinary share. ------------- No public market currently exists for our ordinary shares. We propose to list our ordinary shares on the Nasdaq National Market under the symbol VRYA. -------------
Per Share Total --------- -------- Initial public offering price............................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds to ViryaNet, before expenses....................... $ $
We have granted the underwriters an option for a period of 30 days to purchase up to 675,000 additional ordinary shares. ------------- Investing in our ordinary shares involves a high degree of risk. See Risk Factors beginning on page 7. ------------- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. Chase H&Q Salomon Smith Barney Dain Rauscher Wessels , 2000 TABLE OF CONTENTS
Page ---- Prospectus Summary................................................. 1 Risk Factors....................................................... 7 Forward-Looking Statements......................................... 16 Use of Proceeds.................................................... 16 Dividend Policy.................................................... 16 Capitalization..................................................... 17 Dilution........................................................... 18 Selected Consolidated Financial Data............................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 21 Business........................................................... 34 Management......................................................... 47 Related Party Transactions......................................... 55 Principal Shareholders............................................. 58 Description of Share Capital....................................... 60 Shares Eligible for Future Sale.................................... 63 United States Federal Income Tax Considerations.................... 65 Israeli Taxation and Investment Programs........................... 71 Conditions in Israel............................................... 76 Enforceability of Civil Liabilities................................ 78 Underwriting....................................................... 79 Legal Matters...................................................... 83 Experts............................................................ 83 Where You Can Find More Information................................ 83 Index to Consolidated Financial Statements......................... F-1
i [ViryaNet logo in upper left-hand corner. Text in upper right-hand corner reads: "Using ViryaNet Service Hub, a service organization's entire service community, including its internal employees and field engineers, customers, suppliers and vendors, can immediately access service information, share documents, collaborate with other users and obtain service." Eight photographs arranged in a circle in the lower two thirds of page. Starting from top and reading clockwise, photographs are labeled: "Customer," "Reseller," "Field Engineer," "Subcontractor," "Supplier," "Contract Administrator," "Shipper," and "Call Center Agent." In center of circle, text reads: "ViryaNet Service Hub." Arrows connect photographs and center text.] PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our ordinary shares. You should read the entire prospectus carefully, including Risk Factors and the consolidated financial statements, before making an investment decision. ViryaNet Ltd. Our Business We develop, market and support software products which provide companies with business-to-business internet solutions for service communities. Service communities encompass all participants in the service management and delivery process, including service organizations and their field engineers, customers, partners, vendors and suppliers. ViryaNet Service Hub, our internet solution, supports a variety of service business processes and models based on our extensive expertise in providing software products and services to the service industry. Our solutions include workforce management, service level agreement management, customer self-service, repair return automation and auction-based procurement and replenishment. Service Hub is designed to meet the needs of service organizations of companies with large, complex product service commitments as well as third-party service providers who fulfill these commitments on an outsourced basis. Since its introduction in the fourth quarter of 1999, we have licensed Service Hub to Symbol, ITC Deltacom, Broadwing, CapRock and Teraoka Seiko. During the second quarter of 2000, we signed letters of intent to license Service Hub to an additional six customers, and we are targeting our sales and marketing efforts to other companies in the high technology, telecommunications, utilities and industrial automation industries. Before we introduced Service Hub, we derived substantially all of our revenues from licensing Service Suite, a suite of enterprise applications for managing service delivery. These applications, which may be incorporated into our Service Hub solution, enable service organizations to combine many of the processes required for service fulfillment, including contract management, workforce management, repair depot operations and supply chain logistics. Customers of Service Suite include EMC Corporation, GE Medical Systems, NTL and Sun Microsystems. Our Market In the intensely competitive global business environment, businesses have increasingly adopted the internet to streamline their business processes, interact more meaningfully with customers, make their employees more productive and collaborate more effectively with their business partners. The process of providing service is a combination of numerous, complex processes distributed across a wide service community of interacting constituents who typically rely on separate systems and applications. To capitalize on the opportunities offered by the internet, service organizations need a solution that supports their complex service delivery requirements while enabling collaboration of the service community to achieve high quality and cost-effective service delivery. Our Products Using Service Hub, a service organization's employees, customers, suppliers and vendors can immediately access service information, share documents, collaborate with other users and obtain service. Service Hub can be rapidly deployed and combined with existing service management and other critical business applications. Service Hub is designed to be highly scalable, enabling organizations to interact with large service communities through the internet and other platforms. The remote access features of Service Hub allow users of wireless devices like mobile telephones and handheld computers to view service reports and provide information about their service operations. Companies can employ our solution on a global scale to manage, monitor and enhance all aspects of service delivery in multiple currencies and time zones. 1 Where You Can Contact Us We were incorporated in Israel under the name R.T.S. Relational Technology Systems Ltd. We changed our name to RTS Business Systems Ltd. in September 1997 and to RTS Software Ltd. in February 1998. In April 2000, we changed our name to ViryaNet Ltd. Our principal executive offices are located at 5 Kiryat Hamada Street, Science Based Industries Campus, P.O. Box 23052, Har Hotzvim, Jerusalem, 91230, Israel and our telephone number is 972-2-581-1462. Our United States subsidiary, ViryaNet, Inc., is located at 2 Willow Street, Southborough, Massachusetts 01745-1027 and its telephone number is 508-490-8600. 2 The Offering Ordinary shares offered by us....................... 4,500,000 shares Ordinary shares to be outstanding after this offering........................................... 21,905,510 shares
Use of proceeds............................. . expand internationally; . expand our sales and marketing channels; . invest in research and development activities; . repay our working capital lines of credit; and . working capital and general corporate purposes, including possible acquisitions of complementary products, technologies or businesses. Proposed Nasdaq National Market symbol.............. VRYA
------------------ The number of ordinary shares to be outstanding after this offering is based on the number of ordinary shares outstanding as of July 20, 2000 and does not include: . 5,912,050 ordinary shares subject to options outstanding as of July 20, 2000 with a weighted average exercise price of $4.63 per share; . 249,635 ordinary shares available for grant at July 20, 2000 under our option plans; and . 764,619 ordinary shares issuable upon exercise of warrants outstanding as of July 20, 2000 with a weighted average exercise price of $5.84 per share. Unless otherwise noted, ordinary share and per ordinary share amounts in this prospectus: . give effect to the conversion of all outstanding preferred shares and convertible debentures into 12,578,304 ordinary shares immediately before the completion of the offering; . assume the exercise of warrants outstanding on July 20, 2000 to purchase 2,112,066 ordinary shares, at exercise prices which are below the price of the offering and range from $2.00 to $5.75 per share, and which would otherwise expire upon the completion of this offering; and . assume no exercise of the underwriters' over-allotment option. ------------------ As used in this prospectus, references to we, our, ours, us and ViryaNet refer to ViryaNet Ltd. and its subsidiaries. We have prepared our consolidated financial statements under United States GAAP in United States dollars. All references in this prospectus to dollars or $ are to United States dollars and all references to NIS are to new Israeli shekels. While financial numbers have been rounded for presentation in the prospectus, all percentages were calculated based on actual numbers, which can be found in our financial statements. 3 The following are trademarks of ViryaNet: .ViryaNet; .ViryaNet Service Hub; .ViryaNet Access; .ViryaNet Service Exchange; .ViryaNet Service Suite; .ViryaNet Service Portal; .ViryaNet Service Process; .ViryaNet Service Intelligence; .ViryaNet Integration Server; .ViryaNet mService Gateway; .ViryaNet Service Contract; .ViryaNet WorkForce Management; .ViryaNet Depot Repair; .ViryaNet Service Supply Chain; and .the ViryaNet logo. This prospectus also contains trademarks, trade names and service marks of other companies. 4 Summary Consolidated Financial Information This table summarizes our consolidated statement of operations data for the periods presented. The pro forma information gives effect to the conversion of all of our outstanding preferred shares and convertible debentures into ordinary shares automatically upon the closing of the offering.
Three Months Year Ended December 31, Ended March 31, --------------------------- ----------------- 1997 1998 1999 1999 2000 ------- -------- -------- ------- -------- (unaudited) (in thousands, except per share data) Consolidated Statement of Operations Data: Revenues: Software licenses............ $ 1,067 $ 1,801 $ 4,269 $ 746 $ 3,209 Maintenance and services..... 12,400 11,724 11,533 2,607 1,954 ------- -------- -------- ------- -------- Total revenues............. 13,467 13,525 15,802 3,353 5,163 Cost of revenues: Software licenses............ 106 146 952 245 300 Maintenance and services..... 8,817 9,709 9,978 2,354 1,574 ------- -------- -------- ------- -------- Total cost of revenues..... 8,923 9,855 10,930 2,599 1,874 Gross profit................... 4,544 3,670 4,872 754 3,289 ------- -------- -------- ------- -------- Operating loss................. (4,643) (13,366) (19,846) (5,352) (2,801) ------- -------- -------- ------- -------- Net loss....................... $(4,728) $(13,132) $(20,411) (5,481) (3,082) ======= ======== ======== ======= ======== Preferred shares deemed dividend...................... $ (116) $ (61) $ -- $ -- $ -- ------- -------- -------- ------- -------- Net loss to shareholders of ordinary shares............... $(4,844) $(13,193) $(20,411) $(5,481) $ (3,082) ======= ======== ======== ======= ======== Financial expenses related to conversion of convertible debentures.................... -- 5,000 -------- -------- Pro forma net loss............. $(20,411) $ (8,082) ======== ======== Basic and diluted net loss per share......................... $ (1.91) $ (5.16) $ (7.63) $ (2.05) $ (1.14) ======= ======== ======== ======= ======== Weighted average number of shares used in computing basic and diluted net loss per share......................... 2,537 2,555 2,676 2,669 2,701 ======= ======== ======== ======= ======== Pro forma basic and diluted net loss per share (unaudited).... $ (1.71) $ (0.62) ======== ======== Weighted average number of shares used in computing pro forma basic and diluted net loss per share (unaudited).... 11,953 12,973 ======== ========
5
March 31, 2000 ---------------------------- Pro Forma as Actual Pro Forma Adjusted ------- --------- --------- (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents........................ $ 6,215 $23,700 $61,392 Working capital (deficit)........................ (8,744) 8,792 52,792 Total assets..................................... 12,535 30,020 67,712 Convertible debentures........................... 4,497 -- -- Total shareholders' equity (deficiency).......... (12,542) 9,494 53,494
The balance sheet above summarizes our balance sheet at March 31, 2000: . on an actual basis; . on a pro forma basis to give effect to (a) the automatic conversion of all outstanding convertible debentures and 10,146,387 preferred shares into 12,578,304 ordinary shares immediately before the completion of the offering; (b) one-time financing expenses of approximately $16.5 million regarding conversion of convertible debentures; (c) the exercise of warrants to purchase 2,112,066 ordinary shares at exercise prices which are below the price of this offering and which would otherwise expire upon the completion of the offering; and (d) the increase of our authorized share capital to 35,000,000 shares; and . on a pro forma as adjusted basis to give effect to (a) the issuance and sale by us of 4,500,000 ordinary shares; and (b) our anticipated application of the net proceeds of the offering. Recent Developments While our final results of operations for the three months ended June 30, 2000 are not yet available, we expect that our revenues and net loss for such period will be approximately as follows. These estimates are preliminary in nature and are subject to completion of various internal analyses and procedures necessary to finalize our review of our results of operations for the three months ended June 30, 2000.
Three Months Ended June 30, ---------------- 1999 2000 ------- ------- (unaudited) (in thousands) Revenues: Software licenses.......................................... $ 866 $ 3,754 Maintenance and services................................... 2,869 2,503 ------- ------- Total revenues.......................................... $ 3,735 $ 6,257 ======= ======= Net loss...................................................... $(5,903) $(2,970) ======= =======
6 RISK FACTORS Investing in our ordinary shares involves a high degree of risk. Any of the following risks could harm our business, operating results and financial condition and could result in a complete loss of your investment. Risks Related to Our Business We have a limited operating history in our current principal market, which will make it difficult or impossible for you to predict our future results of operations. We began operations in March 1988 as a general software services company. In 1995, we changed our strategic focus to the development of service delivery chain management applications, including Service Suite. We did not introduce our first internet-based service community management product, Service Hub, until the fourth quarter of 1999. Each of these changes has required us to adjust our business processes and make a number of significant personnel additions and changes. Historically, most of our revenues were generated from our services activities. Substantially all of our revenues in 1998, 1999 and the three months ended March 31, 2000 were generated from our service delivery chain management applications, including Service Suite, which represented 84% of our total license revenues in 1998, 70% in 1999 and 92% in the three months ended March 31, 2000. In the remainder of 2000, we anticipate that the substantial majority of our revenues will be generated from transactions which will include the Service Hub and related products. Our prospects must be considered in light of the risks and difficulties frequently encountered by companies dependent upon operating revenues from a new product line in an emerging and rapidly evolving market. Because of our limited experience in our principal market and with our principal product, we cannot assure you that our strategy for operating in that market or selling that product will be successful. You should not rely on our historical results of operations as indications of future performance. We have a history of losses and we cannot assure you that we will operate profitably in the future. We incurred net losses of approximately $4.7 million in 1997, $13.0 million in 1998, $20.4 million in 1999 and $3.1 million for the three months ended March 31, 2000. As of March 31, 2000, we had an accumulated deficit of approximately $51.2 million. As a result, we will need to generate significant revenues to achieve and maintain profitability. If we do achieve profitability, we cannot be certain that we can sustain or increase it in the future. We may experience significant fluctuations in our quarterly results, which makes it difficult for investors to make reliable period-to-period comparisons and may contribute to volatility in the market price for our ordinary shares. Our quarterly 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. The following events may cause fluctuations: . changes in demand or timing of orders, especially large orders, for our products and services; . timing of product releases; . the dollar value and timing of contracts; . delays in implementation; . changes in the proportion of service and license revenues; . price and product competition; 7 . increases in selling and marketing expenses, as well as other operating expenses; . technological changes; . adverse economic conditions and currency fluctuations; and . consolidation of our clients. A substantial portion of our expenses, including most product development and selling and marketing expenses, must be incurred in advance of when revenue is generated. If our projected revenue does not meet our expectations, we are likely to experience an even larger shortfall in our operating profit relative to our expectations. 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 results of operations may be below the expectations of public market analysts and investors. If this happens, the price of our ordinary shares will likely decrease. Historically, our revenues have been concentrated in a few large orders and a small number of clients and our business could be adversely affected if we lose a key customer. A significant portion of our revenues each year has been derived from large orders from a small number of clients. In 1997, 1998, 1999 and the three months ended March 31, 2000, we derived 73%, 55%, 55% and 8% of our revenues from two customers, Sun Microsystems and GE Medical, who are shareholders or warrant holders. In 1999, 71% of our revenues were derived from four clients, including Sun Microsystems and GE Medical, and no one client accounted for more than 33% of our revenues. In the three months ended March 31, 2000, one additional customer, Winstar, represented 42% of our revenues. We do not expect that Winstar, Sun Microsystems or GE Medical will represent a substantial percentage of our revenues in the future. However, we do expect that a significant portion of our future revenues will continue to be derived from a relatively small number of customers. We cannot assure you that other clients will purchase our products and services in the future. The loss of key customers or the occurrence of significant reductions in sales from a key customer would cause our revenues to decrease and make it more difficult for us to reach profitability. Our sales cycle is variable and sometimes long and involves significant resources on our part, but may never result in actual sales. Our sales cycle has historically been lengthy and is variable, ranging between three to twelve months from our initial contact with a potential client to the signing of a license agreement. We expect the sales cycle for Service Hub to decrease to three to six months in the future, but have not seen any significant decrease in the sales cycle. We generally must educate our potential clients about the use and benefit of our products and services, which can require the investment of significant time and resources. The purchasing decisions of our clients are subject to the uncertainties and delays associated with the budgeting, approval and competitive evaluation processes that typically accompany significant capital expenditures. Any delays in sales could cause our operating results to vary widely. If our sales cycle shortens, our quarterly operating results may become less predictable and may fluctuate more widely than in the past. A number of companies decide which products to buy through a request for proposal process. In those situations, we run the risk of investing significant resources in a proposal, only to lose to our competition. Since we have historically depended upon Service Suite applications, the failure of these products in the marketplace in the future could adversely affect our revenues. Revenues from licensing Service Suite applications accounted for approximately 11% of our total revenues, or 84% of total license revenues, during 1998, 19% of our total revenues, or 70% of total license 8 revenues, during 1999 and 57% of our total revenues, or 92% of total license revenues, during the three months ended March 31, 2000. We expect license revenues from Service Suite applications to account for a portion of our future total revenues. Our future success depends on market acceptance of our new Service Hub internet-based products, as well as continued acceptance of our Service Suite and related applications. We have licensed applications to only a small number of clients. If our products do not achieve or maintain market acceptance or if our competitors release new products that achieve quicker market acceptance, have more advanced features, offer better performance or are more price competitive, license revenues for our products may not grow and may even decline. If we are unable to accurately predict and respond to market developments or demands, our business will be adversely affected. The market for internet-based service community platforms has only recently begun to develop and is rapidly evolving. This makes it difficult to predict demand and market acceptance for our products. We cannot guarantee that the market for our internet-based products will grow or that our products will become widely accepted. If the market for our internet-based products does not develop as quickly as we expect or if our internet-based products are not accepted by clients, our future revenues and profitability will be adversely affected. Changes in technologies, industry standards, the regulatory environment, client requirements and new product introductions by existing or future competitors could render our existing products obsolete and unmarketable, or require us to develop new products. A significant increase in the number of clients, or a significant increase in our development of new product offerings, or both, could require us to expend significant amounts of money, time and other resources to meet the demand. This could strain our personnel and financial resources. If we fail to achieve or improve our margins on service revenues in the future, our results of operations could suffer. Our margins on service revenues have declined from 29% in 1997 to 17% in 1998 and 13% in 1999. Our margins on service revenues improved to 19% in the first quarter of 2000, but this trend may not continue. These decreases are primarily caused by the additional costs associated with our transition from providing customization services to our major clients to providing implementation services to a larger number of clients. To improve our margins, we are working on increasing our service revenues and decreasing our cost of service revenues. Failure to improve our margins on service revenues could cause our business to be less profitable. If we fail to expand our relationships with third parties, we may be unable to increase our revenues. To focus more effectively on our core business of developing and licensing software solutions, we need to establish relationships with third parties that can provide implementation and consulting services to our customers. Third- party implementation and consulting firms can also be influential in the choice of service community management solutions by new customers. If we cannot establish and maintain effective, long-term relationships with implementation and consulting providers, or if these providers do not meet the needs or expectations of our customers, we may be unable to increase our revenues and our business could be seriously harmed. As a result of the limited resources and capacities of many third-party implementation providers, we may be unable to attain sufficient focus and resources from the third-party providers to meet all of our customers' needs, even if we establish relationships with these third parties. If sufficient resources are unavailable, we will be required to provide these services internally, which could limit our ability to expand our base of customers. A number of our competitors have significantly more established relationships with these third parties and, as a result, these third parties may be more likely to recommend competitors' products and services rather than our own. Even if we are successful in developing relationships with third-party implementation and consulting providers, we will be subject to significant risk as we cannot control the level and quality of service provided by third-party implementation and consulting partners. 9 Undetected defects may increase our costs and impair the market acceptance of our products and technology. Our software products are complex and may contain undetected defects, particularly when first introduced or when new versions or enhancements are released. Testing of our products is particularly challenging because it is difficult to simulate the wide variety of client environments into which our products are deployed. Despite testing conducted by us and our clients, we have in the past shipped product releases with some defects, certain customers have cited possible defects, and have otherwise discovered other defects in our products after their commercial shipment. Our products are frequently critical to our clients' operations. As a result, our clients and potential clients have a greater sensitivity to product defects than do clients of software products generally. Defects may be found in current or future products and versions after the start of commercial shipment. This could result in: . a delay or failure of our products to achieve market acceptance; . adverse client reaction; . negative publicity and damage to our reputation; . diversion of resources; and . increased service and maintenance costs. Defects could also subject us to legal claims. Although our license agreements contain limitation of liability provisions, these provisions may not be sufficient to protect us against these legal claims. The sale and support of our products may also expose us to product liability claims. Decisions by clients to develop their own service management solutions or greater market acceptance of our competitors' products could result in reduced revenues or gross margins. The market for third-party internet-based service community platforms is relatively immature, but has begun to develop rapidly and competition is intense. This market and the market for service management solutions is fragmented and stratified. We compete for the business of global or nationwide organizations that seek to support complex and sophisticated products across a variety of industries. Our competitors may be in a better position to devote significant resources to the development, promotion and sale of their products, and to respond more quickly to new or emerging technologies and changes in client requirements. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase their ability to successfully market their products. We also expect that competition will increase as a result of consolidations in the industry. As we develop new products, we may begin to compete with companies with which we have not previously competed. We cannot assure you that competition will not result in price reductions for our products and services, fewer client orders, reduced gross margins or loss of market share, any of which could materially adversely affect our business, financial condition and results of operations. We rely on software from third parties. If we lose that software, we would have to spend additional capital to redesign our existing software or develop new software. We integrate various third-party software products as components of our products. Our business would be disrupted if functional versions of this software were either no longer available to us or no longer offered to us on commercially reasonable terms. In either case, we would be required to spend additional capital to either redesign our software to function with alternate third-party software or develop these components ourselves. We might be forced to limit the features available in our current or future product offerings and the commercial release of our products could be delayed. 10 We may be unable to expand our sales, marketing and support organizations which may hinder our ability to grow and meet customer demands. We have sold our products primarily through our direct sales force and we have supported our clients through our technical and customer support staff. We need to substantially expand our direct and indirect sales and marketing operations to increase market awareness and sales of our products. We will also need to increase our technical and customer support staff to support new clients and the expanding needs of existing clients. Qualified individuals are in great demand throughout the software industry and there is intense competition for qualified personnel. Competition for qualified people may lead to increased labor and personnel costs. If we do not succeed in retaining our personnel or in attracting new employees, our business could suffer significantly. 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. As our business continues to grow, we will need to hire additional qualified engineering, administrative, operational, sales and technical support personnel. The process of locating, training and successfully integrating qualified personnel into our operations can be lengthy and expensive. We may not be able to compete effectively for the personnel we need. Many of our senior management, including our president, chief financial officer and vice president of worldwide marketing, were only recently hired. Our future success depends on our ability to absorb and retain senior employees and to attract, motivate and retain highly qualified professional employees. Competition for these employees is intense in both Israel and the United States. Any loss of members of senior management or key technical personnel, or any failure to attract or retain highly qualified employees as needed, could materially adversely affect our ability to carry out our business plan. If we fail to address the strain on our resources caused by our growth, we will be unable to effectively manage our business. Our business has grown in size and complexity over the past few years. Total revenues increased from $13.5 million in 1997 and 1998 to $15.8 million in 1999 and $5.2 million in the three months ended March 31, 2000. The number of employees increased from 119 as of January 1, 1997 to 189 as of June 30, 2000. This growth has placed and will continue to place a strain on our personnel and resources. Our ability to manage any future 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 manage our growth effectively our business, financial condition and results of operations could be materially adversely affected. 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. Other than our trademarks, most of our intellectual property consists of proprietary or confidential information that is not subject to patent or similar protection. We filed one patent application covering some of our technologies for creating and supporting service communities on the internet. 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 received a notice from a third party claiming that our use of the Service Hub name infringes on this third party's trademark rights. We have responded and denied this claim. We cannot predict whether 11 this third party will prevail, or other third parties will assert claims of infringement against us, or whether any past or future assertions or prosecutions will harm our business. If we are forced to defend against this claim or any other claims, whether they are with or without merit or determined in our favor, then we may face costly litigation, diversion of management resources or, if any claims prevail, damages or significant increases in development or marketing costs. We have placed, and in the future may place, our software in escrow. The software may, under specified circumstances, be made available to our clients. We have provided our software directly to clients. This may increase the likelihood of misappropriation or other misuse of our software. Substantial litigation over intellectual property rights exists in the software industry. We expect that software products may be increasingly subject to third-party infringement claims as the functionality of products in different industry segments overlaps. We believe that many industry participants have filed or intend to file patent and trademark applications covering aspects of their technology. We cannot be certain that they will not make a claim of infringement against us based on our products and technology. Any claims, with or without merit, could: . be expensive and time-consuming to defend; . cause product shipment and installation delays; . divert management's attention and resources; or . 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. Marketing and distributing our products outside of North America may require increased expenses and greater exposure to risks that we may not be able to successfully address. We market and sell our products and services in North America, Europe and Asia and we plan to establish additional facilities in these and other parts of the world. We received 17% of our total revenues in 1997, 26% of our total revenues in 1998, 24% of our total revenues in 1999 and 27% of our total revenues in the three months ended March 31, 2000 from sales to customers located outside of North America. The expansion of our existing operations and entry into additional international markets will require significant management attention and financial resources. We currently have limited experience in developing localized versions of our products and marketing and distributing our products outside of North America. We are subject to a number of risks customary for international operations, including: . changing product and service requirements in response to the formation of economic and marketing unions, including the European Economic Union; . economic or political changes in international markets; . greater difficulty in accounts receivable collection and longer collection periods; . unexpected changes in regulatory requirements; . difficulties and costs of staffing and managing foreign operations; . the uncertainty of protection for intellectual property rights in some countries; . multiple and possibly overlapping tax structures; and . currency and exchange rate fluctuations. Any future acquisitions of companies or technologies may distract our management and disrupt our business. We may acquire or make investments in complementary businesses, technologies, services or products if appropriate opportunities arise. We may engage in discussions and negotiations with companies 12 about our acquiring or investing in those companies' businesses, products, services or technologies. We cannot make assurances 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 or invest in another company, we could have difficulty assimilating that company's personnel, operations, technology or products and service offerings into our own. 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. 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. We do not now have any agreement to enter into any material investment or acquisition transaction. Risks Related to the Internet Our business is dependent on the internet and if clients do not continue to use the internet, our business will suffer. Our market is relatively new and rapidly evolving. Our future success will depend on the acceptance by clients of the internet and business-to-business internet solutions as an integral part of their business model. Demand for and market acceptance of recently introduced services are each subject to a high level of uncertainty. If use of the internet does not continue to develop, or develops more slowly than expected, we may not be able to execute our business plan successfully. The level of demand and acceptance of internet business-to-business services may not increase for a number of reasons, including: . inadequate network infrastructure and congestion of traffic on the internet; . actual or perceived lack of security of information; . inconsistent quality of service; . lack of availability of cost-effective, high-speed service; . lack of access and ease of use; . excessive governmental regulation; and . uncertainty over intellectual property ownership. We cannot assure you that the internet infrastructure will be able to support expected growth or that the performance and reliability of the internet will not decline as a result of this growth. Many internet sites have experienced a variety of interruptions in their service as a result of outages and other delays occurring throughout the internet network infrastructure. If these outages or delays frequently occur in the future, internet usage could grow more slowly than anticipated or even decline. If acceptance and growth of the internet as a medium for business-to- business commerce does not continue, our business strategy may not be successful because there may not be a continuing market demand for our services. Any well-publicized compromise of security could deter businesses from using the internet to conduct transactions that involve transmitting confidential information. Computer viruses that spread over the internet could disable or damage the systems we develop for our clients. Decreased internet traffic as a result of general security concerns or viruses could cause companies to reduce their amount of technology spending, which could hurt our results of operations. Risks Related to This Offering The market price of our ordinary shares may be volatile and you may not be able to resell your shares at or above the price you paid, or at all. The stock market in general has recently experienced extreme price and volume fluctuations. The market prices of securities of technology companies, particularly internet-related companies, have been extremely volatile, and have experienced fluctuations that have often been unrelated or disproportionate to 13 the operating performance of those companies. These broad market fluctuations could adversely affect the market price of our ordinary shares. The market price of the ordinary shares may fluctuate substantially due to a variety of factors, including: . any actual or anticipated fluctuations in our financial condition and operating results; . public announcements concerning us or our competitors, or the internet industry; . the introduction or market acceptance of new service offerings by us or our competitors; . changes in security analysts' financial estimates; . changes in accounting principles; . sales of our ordinary shares by existing shareholders; and . the loss of any of our key personnel. In the past, securities class action litigation has often been brought against companies following periods of volatility in the market prices of their securities. We may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert our management's attention and resources, which could cause serious harm to our business. Future sales of our ordinary shares in the public market or issuances of additonal securities could cause the market price for our ordinary shares to fall. After this offering, we will have 21,905,510 ordinary shares outstanding and will have reserved an additional 6,926,304 ordinary shares for issuance under our option plans and outstanding warrants. We intend to register for resale the ordinary shares reserved for issuance under our option plans approximately 90 days after the date of this prospectus. If a large number of our ordinary shares are sold following this offering, the price of our ordinary shares would likely decrease. In addition, we have made commitments to issue warrants to certain of our customers, and such warrants may be exercised at per share prices below the price of this offering. We may continue to issue warrants to certain of our customers, and the issuance of such securities could be dilutive to our shareholders. Our executive officers, directors and affiliated entities will be able to influence matters requiring shareholder approval and they may disapprove actions that you voted to approve. We anticipate that our executive officers, directors and entities affiliated with them will, in the aggregate, beneficially own approximately 33.9% of our outstanding ordinary shares following the completion of this offering. These shareholders, if acting together, will be able to significantly influence all matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combination transactions. Risks Related to Our Location in Israel It may be difficult to effect service of process and enforce judgements against directors, officers and experts in Israel. We are incorporated in Israel. Many of our executive officers and directors and some of the experts named in this prospectus are nonresidents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult to enforce a judgment obtained in the United States against us or any of those persons. It may also be difficult to enforce civil liabilities under United States federal securities laws in actions instituted in Israel. Political, economic and military conditions in Israel could negatively impact our business. We are organized under the laws of the State of Israel. Our principal research and development facilities are located in Israel. Although all of our sales are currently being made to customers outside Israel we are directly influenced by the political, economic and military conditions affecting Israel. Since the establishment of the state of Israel in 1948, a number of armed conflicts have taken place between Israel 14 and its Arab neighbors and a state of hostility, which varies in degree and intensity, has caused security and economic problems in Israel. Any major hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could adversely affect our operations. We cannot assure you that ongoing or revived hostilities or other events related to Israel will not have a material adverse effect on us or our business. Several Arab countries still restrict business with Israeli companies. We could be adversely affected by restrictive laws or policies directed towards Israel and Israeli businesses. 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. Most of our revenues are in dollars or are linked to the dollar, while a portion of our expenses, principally salaries and the related personnel expenses, are in new Israeli shekels, or NIS. As a result, we are exposed to the risk that the rate of inflation in Israel will exceed the rate of devaluation of the NIS in relation to the dollar or that the timing of this devaluation lags behind inflation in Israel. This would have the effect of increasing the dollar cost of our operations. In 1997 and 1998, the rate of devaluation of the NIS against the dollar exceeded the rate of inflation, a reversal from prior years. However, in 1999 and the first six months of 2000, while the rate of inflation was low, there was a devaluation of the dollar against the NIS. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation of the NIS against the dollar. If the dollar cost of our operations in Israel increases, our dollar-measured results of operations will 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 have received grants in the past and currently receive tax benefits under Israeli government programs. To maintain our eligibility for these programs and benefits, we must continue to meet specified conditions, including making specified investments in fixed assets. Some of these programs restrict our ability to manufacture particular products or transfer particular technology outside of Israel. If we fail to comply with these conditions in the future, the benefits received could be canceled and we could be required to refund any payments previously received under these programs or pay increased taxes. The government of Israel has reduced the benefits available under these programs recently and these programs and tax benefits may be discontinued or reduced in the future. In May 2000, the Israeli government approved in principle a tax reform proposal that would reduce or eliminate some of these benefits in the future. Legislation will be required to implement these changes, and we are not certain whether legislation will be enacted. If these tax benefits and programs are terminated or reduced, we could pay increased taxes in the future, which could decrease our profits. Our United States investors could suffer adverse tax consequences if we are characterized as a passive foreign investment company. Although we do not believe that we were a passive foreign investment company for U.S. federal income tax purposes during 1999, we cannot assure you that we will not be treated as a passive foreign investment company in 2000 or in future years. We would be a passive foreign investment company if 75% or more of our gross income in a taxable year is passive income. We would also be a passive foreign investment company if at least 50% of the average value, or possibly the adjusted bases of our assets in particular circumstances, of our assets in a taxable year produce, or are held for the production of, passive income. Passive income includes interest, dividends, royalties, rents and annuities. If we are or become a passive foreign investment company, many of you will be subject to adverse tax consequences, including: . taxation at the highest ordinary income tax rates in effect during your holding period on some distributions on our ordinary shares, and gain from the sale or other disposition of our ordinary shares; . paying interest on taxes allocable to prior periods; and . no increase in the tax basis of our ordinary shares to fair market value at the date of your death. 15 FORWARD-LOOKING STATEMENTS Some of our statements in this prospectus, including those in the Prospectus Summary, Risk Factors, Use of Proceeds, Management's Discussion and Analysis of Financial Condition and Results of Operations and Business sections, are forward-looking statements that involve risks and uncertainties. These forward-looking statements include statements about our plans, objectives, strategies, expectations, intentions, future financial performance and other statements that are not historical facts. We use words like anticipates, believes, expects, future and intends, and similar expressions to mean that the statement is forward-looking. You should not unduly rely on these forward-looking statements, which apply only as of the date of this prospectus. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks described under Risk Factors. USE OF PROCEEDS The net proceeds to us from the sale of the 4,500,000 ordinary shares we are offering are estimated to be $44.0 million, based on an assumed public offering price of $11.00 per share, after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. If the over- allotment option is exercised in full, the net proceeds to us are estimated to be $50.8 million. We intend to use the net proceeds: . to expand internationally; . to expand our sales and marketing channels; . to invest in research and development activities; . to repay the outstanding balance on our working capital revolving lines of credit; and . for working capital and general corporate purposes. As of June 30, 2000, the outstanding balance on our working capital revolving lines of credit was $200,000, $25,000 of which was outstanding under our working capital revolving line of credit with Bank Hapoalim. The working capital revolving line of credit with Bank Hapoalim bears interest annually at the London interbank offered rate plus 1.5%. Our other lines of credit bear interest at annual rates equal to the prime rate of the lending bank plus 1% or the prime rate of the lending bank plus 0.25%. We may use a portion of the net proceeds to acquire complementary products, technologies or businesses. However, we have no commitments or agreements for any specific acquisition and are not involved in any negotiations for any acquisition transactions. Pending use of the net proceeds of this offering, we intend to invest the net proceeds in short-term, interest-bearing investments, or bank deposits with interest and principal linked to a non-Israeli currency or consumer price index, or deposit the net proceeds in non-Israeli currency or non-Israeli currency linked bank accounts in Israel or outside of Israel. DIVIDEND POLICY We have never declared or paid dividends to our shareholders and we currently do not intend to pay dividends in the future. We anticipate that we will retain all of our future earnings for use in the expansion and operation of our business and, therefore, do not expect to pay any dividends in the future. 16 CAPITALIZATION This table describes our capitalization as of March 31, 2000. We present capitalization on: . an actual basis; . a pro forma basis to give effect to: (a) the automatic conversion of preferred shares and $16.0 million of convertible debentures into ordinary shares upon completion of this offering; (b) one-time financing expenses of approximately $16.5 million regarding conversion of convertible debentures; (c) the exercise of the warrants to purchase 2,112,066 ordinary shares, at exercise prices which are below the price of this offering and range from $2.00 to $5.75 per share, and which would otherwise expire upon the completion of this offering; and (d) the increase of our authorized share capital to 35,000,000 shares; and . a pro forma as adjusted basis to give further effect to: (a) the issuance and sale by us of the ordinary shares at an assumed public offering price of $11.00 per share, after deducting estimated underwriting discounts and commissions and offering expenses payable by us; and (b) our anticipated application of the net proceeds of this offering.
March 31, 2000 -------------------------------- Pro Pro Forma as Actual Forma Adjusted -------- -------- ------------ (in thousands, except share data) Short-term bank credit........................ $ 6,308 $ 6,308 $ -- Current maturities of long-term loans......... 4 4 4 Convertible debentures........................ 4,497 -- -- Shareholders' equity (deficiency): Preferred shares, NIS 0.1 par value: 13,100,000 shares authorized; 10,146,387 shares issued and outstanding, actual; no shares issued and outstanding, pro forma and pro forma as adjusted.................. 294 -- -- Ordinary shares, NIS 0.1 par value: 6,900,000, 35,000,000 and 35,000,000 shares authorized, actual, pro forma and pro forma as adjusted; 2,702,140, 17,392,510 and 21,892,510 shares issued and outstanding, actual, pro forma and pro forma as adjusted................................... 103 508 618 Additional paid-in capital.................. 39,956 78,432 122,322 Deferred stock compensation................. (1,736) (1,736) (1,736) Accumulated deficit......................... (51,159) (67,710) (67,710) -------- -------- ------- Total shareholders' equity (deficiency).... (12,542) 9,494 53,494 -------- -------- ------- Total capitalization...................... $ (1,733) $ 15,806 $53,498 ======== ======== =======
This table is based on the number of ordinary shares outstanding at March 31, 2000 and does not include: . 5,912,050 ordinary shares subject to options outstanding as of July 20, 2000 with a weighted average exercise price of $4.63 per share; . 249,635 ordinary shares available for grant at July 20, 2000 under our option plans; and . 764,619 ordinary shares issuable upon exercise of warrants outstanding as of July 20, 2000 with a weighted average exercise price of $5.84 per share. This table should be read with our consolidated financial statements and the notes to our consolidated financial statements included in this prospectus. Par value, as used in the table above, is an assigned amount used to compute the accounting value of our preferred shares and ordinary shares on our balance sheet. Par value has no relation to market value. 17 DILUTION If you invest in our ordinary shares, your interest will be diluted by the amount of the difference between the initial public offering price per share and the pro forma consolidated net tangible book value per share after this offering. We calculate pro forma consolidated net tangible book value per share by dividing the pro forma consolidated net tangible book value, which is total assets less intangible assets and total liabilities, by the number of outstanding ordinary shares assuming the conversion of all outstanding preferred shares and convertible debentures into ordinary shares and the exercise of warrants which expire upon the completion of this offering. Our consolidated net tangible book value as of March 31, 2000 was approximately $9.5 million or approximately $0.55 per ordinary share. After giving effect to the sale of the 4,500,000 ordinary shares by us at an assumed public offering price of $11.00 per share and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us, our pro forma consolidated net tangible book value at March 31, 2000 would have been $53.5 million or approximately $2.44 per ordinary share. This represents an immediate increase in pro forma consolidated net tangible book value of $1.89 per ordinary share to existing shareholders and an immediate dilution in pro forma net tangible book value of $8.56 per ordinary share to new investors in this offering. This table illustrates this dilution on a per ordinary share basis: Assumed initial public offering price per ordinary share.......... $11.00 Pro forma consolidated net tangible book value per ordinary share as of March 31, 2000..................................... $0.55 Consolidated increase in pro forma net tangible book value per ordinary share attributable to new investors................... 1.89 ----- Adjusted pro forma consolidated net tangible book value per ordinary share after the offering................................ 2.44 ------ Dilution in pro forma consolidated net tangible book value per ordinary share to new investors.................................. $ 8.56 ======
This table shows, on a pro forma basis as of July 20, 2000, the number of ordinary shares purchased from us, the total consideration paid to us and the average price per ordinary share paid by the existing shareholders and by the new investors purchasing ordinary shares in this offering, before deducting the estimated underwriting discounts and commissions and offering expenses payable by us. The table assumes the conversion of all outstanding preferred shares and convertible debentures into ordinary shares and the exercise of warrants which expire upon the completion of this offering.
Average Shares Purchased Total Consideration Price --------------------- ----------------------- Per Number Percentage Amount Percentage Share ---------- ---------- ------------ ---------- ------- Existing shareholders..... 17,405,510 79.5% $ 60,867,000 55.1% $ 3.50 New investors............. 4,500,000 20.5 49,500,000 44.9 11.00 ---------- ---- ------------ ---- Total................... 21,905,510 100% $110,367,000 100% ========== ==== ============ ====
18 SELECTED CONSOLIDATED FINANCIAL DATA The tables that follow present portions of our financial statements and are not complete. You should read the following selected financial data with our consolidated financial statements, notes to our consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus. We derived the selected consolidated statements of operations data below for the years ended December 31, 1997, 1998 and 1999, and the selected consolidated balance sheet data as of December 31, 1998 and 1999, from our audited consolidated financial statements which are included elsewhere in this prospectus. These financial statements have been prepared under United States GAAP. We derived the consolidated statements of operations data for the years ended December 31, 1995 and 1996 and the selected consolidated balance sheet data as of December 31, 1995, 1996 and 1997 from audited consolidated financial statements that are not included in this prospectus. We derived the selected consolidated statement of operations data below for the three months ended March 31, 1999 and 2000 and the selected consolidated balance sheet data as of March 31, 2000 from our unaudited consolidated financial statements which are included elsewhere in this prospectus. Our unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, that our management considers necessary for a fair presentation of our financial position and results of operations for those periods. Our operating results for the three months ended March 31, 2000 are not necessarily indicative of the results that you can expect for future periods or the entire year.
Three Months Ended Year Ended December 31, March 31, --------------------------------------------- ---------------- 1995 1996 1997 1998 1999 1999 2000 ------- ------- ------- -------- -------- ------- ------- (unaudited) (in thousands, except per share data) Statement of Operations Data: Revenues: Software licenses...... $ 30 $ 916 $ 1,067 $ 1,801 $ 4,269 $ 746 $ 3,209 Maintenance and services.............. 4,198 10,547 12,400 11,724 11,533 2,607 1,954 ------- ------- ------- -------- -------- ------- ------- Total revenues......... 4,228 11,463 13,467 13,525 15,802 3,353 5,163 Cost of revenues: Software licenses...... -- 120 106 146 952 245 300 Maintenance and services.............. 2,415 6,342 8,817 9,709 9,978 2,354 1,574 ------- ------- ------- -------- -------- ------- ------- Total cost of revenues.............. 2,415 6,462 8,923 9,855 10,930 2,599 1,874 Gross profit............ 1,813 5,001 4,544 3,670 4,872 754 3,289 ------- ------- ------- -------- -------- ------- ------- Operating expenses: Research and development, net...... 870 953 3,443 5,322 6,865 1,504 1,685 Sales and marketing, net................... 2,405 1,124 3,329 8,862 13,537 3,773 3,224 General and administrative........ 719 2,049 2,403 2,602 3,518 798 853 Amortization of deferred stock compensation (1)...... -- -- 12 250 798 31 328 Write-off of goodwill.. 2,035 -- -- -- -- -- -- ------- ------- ------- -------- -------- ------- ------- Total operating expenses.............. 6,029 4,126 9,187 17,036 24,718 6,106 6,090 Operating income (loss)................. (4,216) 875 (4,643) (13,366) (19,846) (5,352) (2,801) Financial income (expenses), net........ (206) (105) (85) 234 (565) (129) (281) ------- ------- ------- -------- -------- ------- ------- Income (loss) from continued operations... (4,422) 770 (4,728) (13,132) (20,411) (5,481) (3,082) Loss from discontinued operations............. (1,295) -- -- -- -- -- ------- ------- ------- -------- -------- ------- ------- Net income (loss)....... $(5,717) $ 770 $(4,728) $(13,132) $(20,411) $(5,481) $(3,082) ======= ======= ======= ======== ======== ======= ======= Preferred shares deemed dividend............... $ -- $ -- $ (116) $ (61) $ -- $ -- $ -- ------- ------- ------- -------- -------- ------- ------- Net income (loss) to shareholders of ordinary shares........ $(5,717) $ 770 $(4,844) $(13,193) $(20,411) $(5,481) $(3,082) ======= ======= ======= ======== ======== ======= ======= Basic net earnings (loss) per share from continuing operations.. $ (1.90) $ 0.31 $ (1.91) $ (5.16) $ (7.63) $ (2.05) $ (1.14) ------- ------- ------- -------- -------- ------- ------- Basic net earnings (loss) per share from discontinued operations............. $ (0.56) -- -- -- -- -- -- ------- ------- ------- -------- -------- ------- ------- Basic net earnings (loss) per share....... $ (2.46) $ 0.31 $ (1.91) $ (5.16) $ (7.63) $ (2.05) $ (1.14) ------- ------- ------- -------- -------- ------- ------- Diluted net earnings (loss) per share from continuing operations.. $ (1.90) $ 0.23 $ (1.91) $ (5.16) $ (7.63) $ (2.05) $ (1.14) ------- ------- ------- -------- -------- ------- ------- Diluted net earnings (loss) per share from discontinued operations............. $ (0.56) -- -- -- -- -- -- ------- ------- ------- -------- -------- ------- ------- Diluted net earnings (loss) per share....... $ (2.46) $ 0.23 $ (1.91) $ (5.16) $ (7.63) $ (2.05) $ (1.14) ------- ------- ------- -------- -------- ------- -------
- ------------------ (1) Amortization of deferred stock compensation relates to the following: Cost of revenues....... -- -- -- -- $ 16 -- $ 12 Research and development, net...... -- -- -- -- 391 -- -- Sales and marketing.... -- -- -- $ 120 39 $ 13 36 General and adminstrative......... -- -- $ 12 130 352 18 280 ------- ------- ------- -------- -------- ------- ------- -- -- $ 12 $ 250 $ 798 $ 31 $ 328 ======= ======= ======= ======== ======== ======= =======
19
December 31, ----------------------------------------- March 31, 1995 1996 1997 1998 1999 2000 ------- ------ ------ ------- -------- ----------- (unaudited) (in thousands) Balance Sheet Data: Cash and cash equivalents............ $ 453 $ 905 $ 817 $ 554 $ 1,886 $ 6,215 Working capital (deficit).............. (2,787) 1,425 (519) (2,343) (11,305) (8,744) Total assets............ (2,760) 8,699 7,333 8,638 8,692 12,535 Long-term loan, including current maturities............. 1,767 671 133 62 11 4 Convertible debentures.. -- -- -- -- -- 4,497 Shareholders' equity (deficiency)........... (3,833) 1,569 69 (1,452) (10,555) (12,542)
20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We develop, market and support software products which provide companies with business-to-business internet solutions for service communities. Service communities encompass all participants in the service management and delivery process, including service organizations, their field engineers, customers, partners, vendors and suppliers. We were founded in 1988. Through 1997, we generated revenue primarily from the sale of customized systems for customer service and product support and related services and invested relatively few resources in developing software products. In the first quarter of 1997, we began to develop standardized service delivery chain management software. During 1997 and 1998, we intensified our research and development activities and, in the second quarter of 1998, we commercially released our service delivery chain management product, Service Suite. Concurrently with the release, we began to build our direct sales force and expand our marketing activities. In the fourth quarter of 1999, we introduced our initial internet-based product, Service Hub. Where We Derive Our Revenues We derive revenues from licenses of our software products and from related services, which include implementation, consulting, customer customization and integration, post-contract customer support and training. Our products are typically licensed directly to customers for a perpetual term. Before the first quarter of 2000, all of our license revenues were derived from licenses of Service Suite products. In the first quarter of 2000, we also started to recognize revenues relating to licenses and implementation of Service Hub. We bill customers according to contract terms. Amounts collected from customers in excess of revenues recognized are recorded as deferred revenue. How We Recognize Revenue We recognize license and services revenues on contracts involving significant implementation or customization by us using the percentage-of- completion method. We classify revenue from these arrangements as license and service revenues based on the estimated fair value of each element. Provision for estimated contract losses are recognized in the period in which the loss becomes probable and can be reasonably estimated. Most of our license and service revenues were recognized using this percentage-of-completion method. License revenues on contracts that do not involve significant implementation or customization by us are recognized, under Statement of Position No. 97-2, when persuasive evidence of an arrangement exists, the fee is fixed and determinable, collection is probable and delivery has occurred. Where software arrangements involve multiple elements, revenue is allocated to each element based on vendor-specific objective evidence of the relative fair values of each element in the arrangement. Our vendor-specific objective evidence used to allocate the sales price to professional services and maintenance is based on the price charged when these elements are sold separately. License revenues are recorded based on the residual method, in accordance with SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with respect to certain transactions." Under the residual method, revenue is recognized for the delivered elements when (1) there is vendor-specific objective evidence of the fair values of all the undelivered elements, (2) vendor-specific objective evidence of fair value does not exist for one or more of the delivered elements in the arrangement, and (3) all revenue recognition criteria of SOP 97-2, as amended, are satisfied. Under the residual method, any discount in the arrangement is allocated to the delivered element. Service revenues from professional services and training are recognized as these services are performed. Service revenues from post-contract maintenance services are recognized pro-rata over the contractual support term, generally one year. 21 Maintenance and Services Revenues Maintenance and services revenues as a percentage of total revenues were 92% in 1997, 87% in 1998, 73% in 1999 and 38% in the three months ended March 31, 2000. We expect that service revenues as a percentage of total revenues will remain below the levels we experienced in 1999 and prior years due to the increased built-in functionality of our products that enables us to implement our products at customer sites faster and with little or no modification. We are starting to use the services of third-party system integrators in the implementation of our products. These integrators may bill our customers directly for their services and, as a result, service revenues as a percentage of total revenues will be further reduced. How We Sell Our Products We sell our products through our direct sales force, and expand our sales efforts through relationships with system integrators and vendors of complementary products. Our revenues are derived from customers in the United States, United Kingdom and Japan. We price our products based on the market conditions in each jurisdiction where we operate. A significant portion of our revenues has been derived from a small number of relatively large companies. In 1997, 1998, 1999 and the three months ended March 31, 2000, we derived 73%, 55%, 55% and 8% of our revenues from two customers, Sun Microsystems and GE Medical, who are shareholders or warrant holders. In 1999, 71% of our revenues were derived from four clients, including Sun Microsystems and GE Medical, and no one client accounted for more than 33% of our revenues. In the three months ended March 31, 2000, one additional customer, Winstar, represented 42% of our revenues. We do not expect that Winstar, Sun Microsystems or GE Medical will represent a substantial percentage of our revenues in the future. However, we do expect that a significant portion of our future revenues will continue to be derived from a relatively small number of customers. We expect this portion to decrease as a percentage of our total revenues. We do not believe that the loss of Winstar, Sun Microsystems or GE Medical as customers would have a material adverse effect on us. Our Reporting Currency Our reporting currency is the United States dollar. Transactions and balances of subsidiaries whose functional currency is not the dollar have been translated to dollars under the principles described in Financial Accounting Standards Board Statement No. 52. Assets and liabilities have been translated at period-end exchange rates. Results of operations have been translated at average exchange rates. Exchange gains and losses arising from these re- measurements are recorded as financial expenses. Stock-Based Compensation We have recorded unearned stock compensation related to stock option grants to our employees and consultants totaling $3.1 million through March 31, 2000, of which $1.7 million remains to be amortized. This amount represents the difference between the exercise price and the estimated fair value of our ordinary shares on the date these stock options were granted. This amount is included as a component of shareholders' equity and is being amortized by charges to operations over the vesting period of the options, consistent with the method described in Accounting Principles Board Opinion No. 25 and Statement of Financial Accounting Standards No. 123. We recorded amortization of unearned stock compensation of $798,000 in 1999. The amortization of the remaining unearned stock compensation will result in additional charges to operations through 2004. The amortization of stock compensation is classified as a separate component of operating expenses in our consolidated statement of operations. Private Placements In February and March 2000, some of our shareholders loaned us an aggregate of $5.0 million. These convertible loans converted into the convertible debentures issued in April 2000 as described below. These shareholders were also issued warrants to purchase up to an aggregate of 124,999 ordinary shares at an 22 exercise price of $6.27 per share. The warrants which may be exercised until the earlier of five years from the date of issuance, our merger or the sale of all or substantially all of our shares or assets were valued at $505,000. In April 2000, we issued convertible debentures to three additional investors in an aggregate amount of $11.0 million. All of the debentures bear annual interest at the London interbank offered rate plus 2%. All of the convertible debentures are automatically convertible into ordinary shares upon the completion of this offering at a conversion price per share reflecting a discount of 40% to 50% of the price per share in this offering, depending on the timing of the offering. If this offering is completed by December 20, 2000, the discount will be 40% and we will be required to issue to these investors, together with those investors who provided us with the convertible loans, 2,431,917 of our ordinary shares at an implied price per share of $6.60. We expect that this conversion will cause us to record, on the effectiveness of our initial public offering, a one-time financing expense of approximately $16.5 million. Recent Developments For the three months ended June 30, 2000, we expect that total revenues will increase approximately 67% from $3.7 million in the three months ended June 30, 1999 to approximately $6.3 million in the three months ended June 30, 2000. We expect that software license revenues will increase from $0.9 million in the three months ended June 30, 1999 to approximately $3.8 million in the three months ended June 30, 2000. This increase is primarily attributable to revenues from contracts with two customers that accounted for approximately $2.2 million of our software license revenues as well as software license revenues from other customers. We expect that maintenance and services revenues will decrease approximately 13% from $2.9 million in the three months ended June 30, 1999 to approximately $2.5 million in the three months ended June 30, 2000. This decrease is primarily due to a reduction in customization services of approximately $0.7 million, partially offset by increases in maintenance revenues of approximately $0.1 million. We expect that software licenses revenues will comprise 60% of our revenues in the three months ended June 30, 2000, compared to 23% of our revenues during the three months ended June 30, 1999. We expect that the total cost of revenues will decrease approximately 30% from $2.9 million in the three months ended June 30, 1999 to approximately $2.0 million in the three months ended June 30, 2000. We expect that our net loss will decrease approximately 50% from $5.9 million in the three months ended June 30, 1999 to approximately $3.0 million in the three months ended June 30, 2000. All of the above estimates are preliminary in nature and are subject to completion of various internal analyses and procedures necessary to finalize our review of our results of operations for the three months ended June 30, 2000. 23 Results of Operations The following table describes, for the periods indicated, the percentage of revenues represented by each of the items on our consolidated statements of operations:
Three Months Year Ended Ended March December 31, 31, ---------------------- -------------- 1997 1998 1999 1999 2000 ----- ----- ------ ------ ----- (unaudited) Revenues: Software licenses.................. 7.9% 13.3% 27.0% 22.2% 62.2% Maintenance and services........... 92.1 86.7 73.0 77.8 37.8 ----- ----- ------ ------ ----- Total revenues.................... 100.0 100.0 100.0 100.0 100.0 Cost of revenues: Software licenses.................. 0.8 1.1 6.0 7.3 5.8 Maintenance and services........... 65.5 71.8 63.1 70.2 30.5 ----- ----- ------ ------ ----- Total costs of revenues........... 66.3 72.9 69.1 77.5 36.3 Gross profit........................ 33.7 27.1 30.9 22.5 63.7 ----- ----- ------ ------ ----- Operating expenses: Research and development, net...... 25.6 39.3 43.4 44.9 32.6 Sales and marketing................ 24.7 65.5 85.7 112.5 62.4 General and administrative......... 17.8 19.2 22.3 23.8 16.5 Amortization of deferred stock compensation...................... 0.1 1.8 5.0 0.9 6.5 ----- ----- ------ ------ ----- Total operating expenses.......... 68.2 125.8 156.4 182.1 118.0 Operating loss...................... (34.5) (98.7) (125.5) (159.6) (54.3) Financial income (expenses), net.... (0.6) 1.7 (3.6) (3.9) (5.4) ----- ----- ------ ------ ----- Net loss............................ (35.1) (97.0) (129.2) (163.5) (59.7) ===== ===== ====== ====== ===== Preferred shares deemed dividend.... 0.9 0.5 -- -- -- ----- ----- ------ ------ ----- Net loss to shareholders of ordinary shares............................. (36.0)% (97.5)% (129.2)% (163.5)% (59.7)% ===== ===== ====== ====== =====
Geographic Distribution While our products are sold in specified countries, the implementation of these products may be performed for global clients on a worldwide basis. The following table summarizes the revenues from our products and services by country, stated as a percentage of total revenues for the periods indicated.
Three Months Year Ended Ended December 31, March 31, ---------------- ------------- Country 1997 1998 1999 1999 2000 - ------- ---- ---- ---- ----- ----- (unaudited) United States.................................... 83% 74% 76% 72% 73% United Kingdom................................... 17 22 19 25 11 Japan............................................ -- 4 5 3 16
24 Three Months Ended March 31, 1999 and 2000 Revenues Total revenues increased 54% from $3.4 million in the three months ended March 31, 1999 to $5.2 million in the three months ended March 31, 2000. Software Licenses. Software licenses revenues consist of licenses of our software as well as third-party software. Third-party software consists of software that is either embedded in our software or enhances the functionality of our software. We resell third-party software to our customers at margins that are lower than margins that we earn on our software. Software licenses revenues increased 330% from $746,000 in the three months ended March 31, 1999 to $3.2 million in the three months ended March 31, 2000. This increase was primarily attributable to software licenses revenues recognized from contracts with one customer that accounted for $2.0 million of revenues and additional customers that accounted for the remainder of the revenues. Maintenance and Services. Maintenance and services revenues consist of consulting, implementation, customization and integration, post-contract customer maintenance and training. Our maintenance and services revenues decreased 25% from $2.6 million in the three months ended March 31, 1999 to $2.0 million in the three months ended March 31, 2000. This decrease was primarily due to a reduction in customization and implementation services of approximately $700,000 from the three months ended March 31, 1999 to the three months ended March 31, 2000. This decrease was partially offset by increases in maintenance revenues of approximately $100,000. Maintenance and services revenues comprised 78% of our revenues in the three months ended March 31, 1999 and 38% in the three months ended March 31, 2000. This decrease was a result of our efforts to increase sales of software licenses and limit the scope of projects involving significant customization. Cost of Revenues Total cost of revenues decreased 28% from $2.6 million in the three months ended March 31, 1999 to $1.9 million in the three months ended March 31, 2000. Software Licenses. Cost of software licenses revenues consists primarily of royalties paid to third parties in connection with our reselling of their software. Software licenses costs increased 22% from $245,000 in the three months ended March 31, 1999 to $300,000 in the three months ended March 31, 2000. This increase was primarily due to higher revenues from software licenses which included a component of third party software. Cost of software licenses as a percentage of revenues from software licenses declined from 33% in the three months ended March 31, 1999 to 9% in the three months ended March 31, 2000. This decline was primarily due to a contract with one client in the three months ended March 31, 1999 that involved an unusually large component of third-party software. Maintenance and Services. Cost of maintenance and services revenues consists primarily of salaries and facility costs. Maintenance and service costs decreased 33% from $2.3 million in the three months ended March 31, 1999 to $1.6 million in the three months ended March 31, 2000. This decrease resulted primarily from streamlining of support and training personnel. Maintenance and services costs as a percentage of related maintenance and services revenues was 90% in the three months ended March 31, 1999 and 81% in the three months ended March 31, 2000. The decrease in maintenance and services costs as a percentage of maintenance and services revenues results primarily from the personnel reductions which we implemented in the fourth quarter of 1999. We expect that the cost of service revenues will increase in dollar amount as we expand our professional service organization to meet anticipated customer demand. Operating Expenses Research and Development, Net. Research and development, net includes costs relating to the development of our products. These costs consist primarily of employee salaries and benefits, facilities costs, 25 and the cost of consulting resources that supplement our internal development team. Due to the relatively short time between the date our products achieve technological feasibility and the date they generally become available to customers, costs subject to capitalization under SFAS No. 86 have been immaterial and have been expensed as incurred. Research and development, net expenses increased 12% from $1.5 million in three months ended March 31, 1999 to $1.7 million in the three months ended March 31, 2000. This increase was attributable to the increase of personnel costs due to the hiring of new personnel for our ongoing development efforts. We expect that we will continue to devote substantial resources to research and development and that these expenses will continue to increase. Sales and Marketing. Sales and marketing expenses consist of salaries, commissions, field office expenses, travel and entertainment, promotional expenses and facility costs. Sales and marketing expenses decreased 15% from $3.8 million in the three months ended March 31, 1999 to $3.2 million in the three months ended March 31, 2000. The decrease of $549,000 was attributable to a decrease in personnel which occurred in March 1999. We expect that sales and marketing expenses will continue to increase as we continue to expand our sales efforts and increase promotional activities. General and Administrative. General and administrative expenses consist of salaries for administrative, executive and finance personnel, information system costs, professional services and allocated facilities costs. These costs increased 7% from $798,000 in the three months ended March 31, 1999 to $853,000 in the three months ended March 31, 2000. This increase was attributable to increases in personnel expenses. We believe that our general and administrative expenses will continue to increase as a result of growing operations and additional expenses associated with operating as a public company. Amortization of Stock-Based Compensation. Amortization of stock-based compensation includes the amortization of unearned employee stock-based compensation and expenses for stock granted to consultants in exchange for services. Stock-based compensation expense is amortized over the vesting schedule of the option, typically four years, using the straight line approach. In connection with the grant of some stock options, we recorded aggregate unearned stock-based compensation expense of $3.1 million through March 31, 2000. Stock-based compensation included in operating expenses totaled $31,000 in the three months ended March 31, 1999 and $328,000 in the three months ended March 31, 2000. Financial Income and Financial Expenses. Financial expenses were $129,000 in the three months ended March 31, 1999 compared to financial expenses of $281,000 in the three months ended March 31, 2000. This increase in financial expenses resulted from interest expenses associated with the use of bank lines of credit. Years Ended December 31, 1998 and 1999 Revenues Total revenues increased 17% from $13.5 million in 1998 to $15.8 million in 1999. Software Licenses. Software licenses revenues increased 137% from $1.8 million in 1998 to $4.3 million in 1999. This increase was primarily attributable to software licenses revenues recognized from contracts with two major customers that accounted for $3.0 million in 1999 compared to $424,000 in 1998. In 1998 and 1999, revenues from licenses of third-party software were 16% and 30% of total software licenses revenues. Maintenance and Services. Our maintenance and services revenues decreased 2% from $11.7 million in 1998 to $11.5 million in 1999. The reason for the decrease was a reduction in customization services of $1.9 million from 1998 to 1999. This decrease was offset by increases in revenues from other professional services generated by the implementation of our software and by increases in maintenance revenues. Service revenues from the implementation of our software and post-contract maintenance increased by $1.7 million from 1998 to 1999. Maintenance and services revenues comprised 87% of our 26 revenues in 1998 and 73% in 1999. This decrease was a result of our efforts to increase sales of software licenses and limit the scope of projects involving significant customization. Cost of Revenues Total cost of revenues increased 11% from $9.9 million in 1998 to $10.9 million in 1999. Software Licenses. Software licenses costs increased from $146,000 in 1998 to $952,000 in 1999. This increase was primarily due to a contract with one client in 1999 that involved a large component of third-party software. Maintenance and Services. Maintenance and service costs increased 3% from $9.7 million in 1998 to $10.0 million in 1999. This increase resulted primarily from hiring and training additional consulting, support and training personnel to support our growing client base. Maintenance and services costs as a percentage of related maintenance and services revenues was 83% in 1998 and 87% in 1999. The increase in maintenance and services costs as a percentage of maintenance and services revenues resulted primarily from the additional costs of our transition from providing customization services to two major clients to providing implementation services to a larger number of clients. We expect that the cost of service revenues will increase in dollar amount as we expand our professional service organization to meet anticipated customer demand. Operating Expenses Research and Development, Net. Research and development expenses increased 29% from $5.3 million in 1998 to $6.9 million in 1999. This increase in research and development expenses was attributable to the increase of personnel costs due to the hiring of new personnel for our ongoing development efforts. Sales and Marketing. Sales and marketing expenses increased 53% from $8.9 million in 1998 to $13.5 million in 1999. The increase of $4.6 million for 1999 compared to 1998 was attributable to a $3.6 million increase in personnel expenses and a $1.0 million increase in marketing costs. General and Administrative. General and administrative costs increased 35% from $2.6 million in 1998 to $3.5 million in 1999. This increase was attributable to increases of $810,000 in personnel expenses and $230,000 in professional services expenses. Amortization of Stock-Based Compensation. Stock-based compensation included in operating expenses totaled $250,000 in 1998 and $798,000 in 1999. Financial Income and Financial Expenses. Financial income was $234,000 in 1998 compared to a financial expense of $565,000 in 1999. The financial income in 1998 consists of interest income due to higher average cash and cash equivalent and short-term investment balances over the period and higher income from foreign currency re-measurement. The increase in financial expenses in 1999 resulted from interest expenses incurred in connection with our bank lines of credit. Years ended December 31, 1997 and 1998 Revenues Total revenues were $13.5 million in 1997 and $13.5 million in 1998. Software Licenses. Software licenses revenues increased 69%, from $1.1 million in 1997 to $1.8 million in 1998. The increase was a result of additional customers that licensed our software, offset by the completion of some projects that began in 1997. 27 Maintenance and Services. Our maintenance and services revenues decreased 6% from $12.4 million in 1997 to $11.7 million in 1998. This decrease was primarily due to a $1.0 million reduction in customization services from 1997 to 1998, partially offset by increases in revenues from other professional services from the implementation of our software and by increases in maintenance revenues. Services revenues from the implementation of our software and post-contract maintenance increased by $349,000 from 1997 to 1998. Maintenance and services revenues were equal to 92% of our revenues in 1997 and 87% in 1998. This decrease was a result of our efforts to increase sales of software licenses and limit the scope of projects involving significant customization. Cost of Revenues Total cost of revenues increased 10%, from $8.9 million in 1997 to $9.9 million in 1998. Software Licenses. Cost of software licenses revenues remained approximately unchanged at $106,000 in 1997 and $146,000 in 1998. Maintenance and Services. Cost of maintenance and service revenues increased 10% from $8.8 million in 1997 to $9.7 million in 1998. This increase resulted primarily from hiring and training consulting, support and training personnel to support our growing client base. Maintenance and services costs as a percentage of maintenance and services revenues was 71% in 1997 and 83% in 1998. This increase was primarily due to the additional costs of our transition from providing customization services to one major client to providing implementation services to a larger number of clients. Operating Expenses Research and Development, Net. Research and development, net expenses increased 55% from $3.4 million in 1997 to $5.3 million in 1998. The increase in research and development expenses was attributable to increased personnel costs due to the hiring of additional personnel for our ongoing research and development efforts. Sales and Marketing. Sales and marketing expenses increased 166% from $3.3 million in 1997 to $8.9 million in 1998. The increase in these expenses in 1998 was attributable to increases of $4.9 million in personnel expenses due to the addition of new personnel and $710,000 in marketing costs. General and Administrative. General and administrative costs increased 3% from $2.4 million in 1997 to $2.5 million in 1998. This increase was due to an increase in personnel expenses. Amortization of Stock-Based Compensation. Amortization of stock-based compensation included in operating expenses totaled $12,000 in 1997 and $250,000 in 1998. Financial Income and Financial Expenses. Financial expenses were $85,000 in 1997 due to interest expenses from bank lines of credit and financial income was $234,000 in 1998 due to higher average cash and cash equivalent and short- term investment balances over the period. 28 Selected Quarterly Operating Results The following table presents statement of operations data derived from our unaudited consolidated financial statements for the nine quarters ended March 31, 2000. This data is expressed both in dollar amounts and as a percentage of total revenues for each quarter. This data has been prepared on the same basis as the audited consolidated financial statements appearing elsewhere in this prospectus and reflects all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of our financial condition and results of operations at that date and for that period. The operating results for any quarter are not necessarily indicative of results for any future quarter.
Quarter Ended --------------------------------------------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, 1998 1998 1998 1998 1999 1999 1999 1999 2000 --------- -------- --------- -------- --------- -------- --------- -------- --------- Statement of Operations Data: Revenues: Software licenses..... $ 591 $ 355 $ 283 $ 572 $ 746 $ 866 $ 1,260 $ 1,397 $ 3,209 Maintenance and services............. 3,126 2,978 3,019 2,601 2,607 2,869 2,782 3,275 1,954 -------- -------- -------- -------- -------- -------- -------- -------- -------- Total revenues...... $ 3,717 $ 3,333 $ 3,302 $ 3,173 $ 3,353 $ 3,735 $ 4,042 $ 4,672 $ 5,163 Cost of revenues: Software licenses..... 13 31 39 63 245 303 258 146 300 Maintenance and services............. 2,328 2,269 2,627 2,485 2,354 2,560 2,357 2,707 1,574 -------- -------- -------- -------- -------- -------- -------- -------- -------- Total cost of revenues........... 2,341 2,300 2,666 2,548 2,599 2,863 2,615 2,853 1,874 Gross profit............ 1,376 1,033 636 625 754 872 1,427 1,819 3,289 -------- -------- -------- -------- -------- -------- -------- -------- -------- Operating expenses: Research and development, net..... 1,221 1,356 1,144 1,601 1,504 1,698 1,798 1,865 1,685 Sales and marketing, net.................. 1,401 1,940 2,400 3,121 3,773 3,841 2,931 2,992 3,224 General and administrative....... 724 630 582 666 798 890 959 871 853 Amortization of deferred stock compensation......... -- -- 33 217 31 204 81 482 328 -------- -------- -------- -------- -------- -------- -------- -------- -------- Total operating expenses........... 3,346 3,926 4,159 5,605 6,106 6,633 5,769 6,210 6,090 Operating loss.......... (1,970) (2,893) (3,523) (4,980) (5,352) (5,761) (4,342) (4,391) (2,801) Financial income (expense), net......... (86) 76 73 171 (129) (142) (20) (274) (281) -------- -------- -------- -------- -------- -------- -------- -------- -------- Net loss................ $ (2,056) $ (2,817) $ (3,450) $ (4,809) $ (5,481) $ (5,903) $ (4,362) $ (4,665) $ (3,082) ======== ======== ======== ======== ======== ======== ======== ======== ======== Preferred shares deemed dividend............... (61) -- -- -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net loss to shareholders of ordinary shares..... $ (2,117) $ (2,817) $ (3,450) $ (4,809) $ (5,481) $ (5,903) $ (4,362) $ (4,665) $ (3,082) ======== ======== ======== ======== ======== ======== ======== ======== ======== Basic and diluted net loss per share......... $ (0.83) $ (1.10) $ (1.32) $ (1.84) $ (2.05) $ (2.18) $ (1.61) $ (1.71) $ (1.14) ======== ======== ======== ======== ======== ======== ======== ======== ======== Weighted average number of shares used in computing basic and diluted net loss per share.............. 2,564 2,575 2,609 2,613 2,669 2,701 2,706 2,725 2,701 ======== ======== ======== ======== ======== ======== ======== ======== ========
29
Quarter Ended ------------------------------------------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, 1998 1998 1998 1998 1999 1999 1999 1999 2000 --------- -------- --------- -------- --------- -------- --------- -------- --------- As a percentage of total revenues: Revenues: Software licenses..... 15.9% 10.7% 8.6% 18.0% 22.2% 23.2% 31.2% 29.9% 62.2% Maintenance and services............. 84.1 89.3 91.4 82.0 77.8 76.8 68.8 70.1 37.8 ----- ----- ------- ------ ------ ------ ------ ----- ----- Total revenues...... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Cost of revenues: Software licenses..... 0.3 0.9 1.2 2.0 7.3 8.1 6.4 3.1 5.8 Maintenance and services............. 62.6 68.1 79.6 78.3 70.2 68.5 58.3 57.9 30.5 ----- ----- ------- ------ ------ ------ ------ ----- ----- Total cost of revenues........... 62.9 69.0 80.8 80.3 77.5 76.6 64.7 61.0 36.3 Gross profit............ 37.1 31.0 19.2 19.7 22.5 23.4 35.3 39.0 63.7 ----- ----- ------- ------ ------ ------ ------ ----- ----- Operating expenses: Research and development, net..... 32.8 40.7 34.6 50.5 44.9 45.5 44.5 39.9 32.6 Sales and marketing, net.................. 37.7 58.2 72.7 98.4 112.5 102.8 72.5 64.0 62.4 General and administrative....... 19.5 18.9 17.6 21.0 23.8 23.8 23.7 18.6 16.5 Amortization of deferred stock compensation......... -- -- 1.0 6.8 0.9 5.5 2.0 10.3 6.5 ----- ----- ------- ------ ------ ------ ------ ----- ----- Total operating expenses........... 90.0 117.8 125.9 176.7 182.1 177.6 142.7 132.8 118.0 Operating loss.......... (52.9) (86.8) (106.7) (157.0) (159.6) (154.2) (107.4) (93.8) (54.3) Financial income (expense), net......... (2.3) 2.3 2.2 5.4 (3.8) (3.8) (0.5) (5.9) (5.4) ----- ----- ------- ------ ------ ------ ------ ----- ----- Net loss................ (55.2) (84.5) (104.5) (151.6) (163.4) (158.0) (107.9) (99.7) (59.7) ===== ===== ======= ====== ====== ====== ====== ===== ===== Preferred shares deemed dividend............... (1.6) -- -- -- -- -- -- -- -- ----- ----- ------- ------ ------ ------ ------ ----- ----- Net loss to shareholders of ordinary shares..... (56.8)% (84.5)% (104.5)% (151.6)% (163.4)% (158.0)% (107.9)% (99.7)% (59.7)% ===== ===== ======= ====== ====== ====== ====== ===== =====
Our gross margins declined during the first three quarters of 1998 and have improved in each quarter since then. The decline was primarily due to decreases in our software licenses revenues in dollar amount and as a percentage of revenues. Gross margins from software licenses revenues historically have been higher than those from maintenance and services revenues. Software licenses revenues decreased during the first three quarters of 1998 due to the winding down of projects which began in 1997, and have increased in each quarter since the fourth quarter of 1998 due to increased software licenses and implementations. The impact of gross profit from maintenance and service revenues on our overall gross profit has been declining due to the decrease in these revenues as a percentage of total revenues, and also because gross margins on maintenance and service revenues are substantially lower than gross margins on software licenses revenues. The large increase in sales and marketing expenses in the first quarter of 1999 was due to the personnel expenses related to the hiring of additional personnel and severance payments made to several terminated employees. The increase in sales and marketing costs in the second quarter of 1999 was due to the inclusion of a $1.0 million commission to a reseller under an arrangement that was terminated during the second quarter, net of the non-recurring personnel expenses mentioned above. As a result of market and technological changes, we cannot accurately forecast operating expenses based on historical results. Most of our expenses are fixed, and we may not be able to quickly reduce spending if revenues are lower than projected. Our ability to forecast accurately our quarterly revenues is limited due to the long sales cycle of our software products, which makes it difficult to predict the quarter in which the product license revenues and the related professional services revenues will occur. Our operating results will be materially adversely affected if revenues do not meet projections. 30 Liquidity and Capital Resources How We Have Financed Our Business We have primarily financed our operations through private placements of our ordinary and preferred shares and convertible debentures. Through April 30, 2000, gross proceeds from private placements of ordinary and preferred shares and convertible debentures totaled $54.1 million. To a lesser extent, we have financed our operations through short-term bank facilities and other financing arrangements. In March 1999 and January 2000 we issued warrants to purchase an aggregate of 286,956 ordinary shares to a subsidiary of Bank Hapoalim, at exercise prices ranging from $4.60 to $5.75 per share. The warrants expire upon the completion of this offering. During the first four months of 2000, we sold an aggregate of $16.0 million in principal amount of convertible debentures, bearing interest at the London interbank offered rate plus 2%, payable on a quarterly basis starting in April 2001. $5.0 million of the $16.0 million was received in February and March 2000 and $11.0 million was received in April 2000. The convertible debentures are due in April 2003 but will be convertible, including unpaid interest, into ordinary shares at a discount to the price of the shares sold in this offering. Cash As of March 31, 2000, we had cash and cash equivalents of $6.2 million and we had a working capital deficit of $8.8 million, including $6.4 million of short-term borrowings, $6.2 million of which we repaid after March 31, 2000 with the proceeds of our convertible debentures financing. We intend to repay the remaining outstanding balances from the proceeds of this offering. As of March 31, 2000, we did not have any long-term borrowings other than the convertible debentures. Net cash used in operating activities was $1.9 million in 1997, $9.4 million in 1998, $13.1 million in 1999 and $1.8 million in the three months ended March 31, 2000. Net cash used in investing activities was $763,000 in 1997, $944,000 in 1998, $931,000 in 1999 and $18,000 in the three months ended March 31, 2000. Investing activities consisted primarily of purchases of property and equipment. Net cash provided by financing activities was $2.5 million in 1997, $10.1 million in 1998, $15.4 million in 1999 and $6.2 million in the three months ended March 31, 2000. Net cash provided by financing activities consists primarily of net proceeds from the issuances of preferred and ordinary shares as well as long term convertible debentures and, in 1999, from a net increase in our short-term bank line of credit of $5.1 million. Lines of Credit As of June 30, 2000, we had a line of credit with Bank Hapoalim which allowed us to borrow up to an aggregate of $6.0 million. Borrowings under the line of credit with Bank Hapoalim are in United States dollars and bear interest annually at the London interbank offered rate plus 1.5%. All borrowings under the line of credit with Bank Hopoalim are secured by a lien on our assets. We have working capital revolving lines of credit in the amount of $500,000 with other banks denominated in NIS, which bear annual interest at a rate of prime plus 1%. We also have an additional working capital revolving line of credit in the amount of $250,000 with a U.S. Bank which is denominated in dollars and bears an annual interest at a rate of prime plus 0.25%. Borrowings under the lines are not limited by the amount of our assets and do not require us to meet financial ratios or tests. As of June 30, 2000, we had $200,000 of outstanding indebtedness under our lines of credit. Operating Leases Payments under non-cancelable operating lease agreements for facilities and other equipment expire on various dates through 2005, resulting in aggregate lease expenses ranging from $430,000 to $880,000 per year. Future Cash Needs We expect to continue to experience growth in our operating expenses and we anticipate that operating expenses and capital expenditures will continue to be a material use of our cash resources. We may utilize cash resources to fund acquisitions or investments in other businesses, technologies, or 31 product lines. We believe that available cash and cash equivalents and the net proceeds from the sale of ordinary shares in this offering will be sufficient to meet our working capital and operating requirements for at least the next 12 months. After that period, we may require additional funds to support our working capital and operating expense requirements and may seek to raise additional funds through public or private debt or equity financings. We cannot assure you that this additional financing will be available, or if available will be on reasonable terms. Research and Development Grants We conduct our research and development activities primarily at our principal offices in Israel. Our research and development efforts have been financed, in part, through grants from the office of the chief scientist of Israel. Under these grants royalties are payable to the Israeli government, generally at the rate of 3% during the first three years, 4% over the following three years and 5% in the seventh year and future years, on the revenues derived from products developed by us according to those programs. The maximum aggregate royalties will not exceed 100%, 150% in some circumstances, of the total grant received. During 1996, we paid all royalties due to the office of the chief scientist amounting to a total of $676,000. Therefore, we are under no further obligation to pay royalties to the office of the chief scientist on the sale of products funded by the office of the chief scientist. The government of Israel does not own proprietary rights in the technology developed using its funding and there is no restriction on the export of the products manufactured using the technology. Some restrictions on the technology do apply, however, including the obligation to manufacture the product based on the technology in Israel and to obtain the office of the chief scientist's consent for the transfer of the technology to a third party. These restrictions continue to apply to us although we have paid the full amount of royalties payable under these grants. If the office of the chief scientist consents to the manufacture of the products outside Israel, the regulations allow the office of the chief scientist to require the payment of increased royalties, ranging from 120% to 300% of the amount of the office of the chief scientist grant, depending on the percentage of foreign manufacture. If the chief scientist consents to the manufacture of our products outside Israel, we cannot assure you that we will not be required to pay the office of the chief scientist additional royalties. In 1998, we received a grant from the United States-Israel Binational Industrial Research and Development Foundation for a development project on our Service Suite line of products conducted by us and a United States partner. Under the terms of this grant, we are obligated to pay to the foundation royalties of 5% of the revenues derived from sales of products developed in this project, up to an aggregate amount equal to 100-150% of the grant, linked to the dollar and to the U.S. consumer price index. The cumulative amount of grants recognized was $330,000 as of December 31, 1999. Effects of Currency Fluctuations Revenues generated and costs incurred outside of the United States are generally denominated in non-dollar currencies. In 1997, 1998, 1999 and the three months ended March 31, 2000, 17%, 26%, 24% and 27% of our revenues were denominated in non-dollar currencies. Costs not effectively denominated in United States dollars are translated to United States dollars, when recorded, at the prevailing exchange rates for the purposes of our financial statements. Consequently, fluctuations in the rates of exchange between the dollar and non- dollar currencies will affect our results of operations. An increase in the value of a particular currency relative to the dollar will increase the dollar reporting value for transactions in that particular currency, and a decrease in the value of that currency relative to the dollar will decrease the dollar reporting value for those transactions. This effect on the dollar reporting value for transactions is generally only partially offset by the impact that currency fluctuations may have on costs. In 1998, we had net income due to currency fluctuations of $275,000. In 1997, 1999 and the three months ended March 31, 2000, we had a net loss of $91,000, $47,000 and $105,000 due to currency fluctuations. We do not generally engage in currency hedging transactions to offset the risks with variations in currency exchange rates. Consequently, significant foreign currency fluctuations and other foreign exchange risks may have a material adverse effect on our business, financial condition and results of operations. 32 Impact of Inflation Since all of our revenues are generated in United States dollars and other currencies, and a portion of our expenses is incurred and will continue to be incurred in NIS, we are exposed to risk by the amount that the rate of inflation in Israel exceeds the rate of devaluation of the NIS in relation to the dollar and other currencies or if the timing of the devaluation lags behind inflation in Israel. In 1994, 1995 and 1996, the inflation rate in Israel exceeded the rate of devaluation of the NIS against the dollar and other currencies. This trend was reversed during 1997 and 1998. In 1999 and the first six months of 2000, while the rate of inflation was low, there was a devaluation of the dollar against the NIS. We do not engage in any hedging or other transactions intended to manage risks relating to foreign currency exchange rate or interest rate fluctuations. We also do not own any market risk sensitive instruments. However, we may in the future undertake hedging or other transactions or invest in market risk sensitive instruments if we determine that it is necessary to offset these risks. Effective Corporate Tax Rate Our tax rate will reflect a mix of the United States and the United Kingdom statutory tax rates on our United States and United Kingdom income and the Israeli tax rate discussed below. We expect that most of our taxable income will be generated in Israel. Israeli companies are generally subject to income tax at the rate of 36%. The majority of our income, however, is derived from our three investment programs with approved enterprise status under the law for the encouragement of capital investments and is eligible for some tax benefits. Under our first investment program we will enjoy a reduced tax rate of 10- 25% during a period of seven years in which this investment program produces taxable income. Under our other two investment programs we will enjoy a tax exemption on income derived during the first ten years in which these investment programs produce taxable income, provided that we do not distribute the income as dividends. All of these tax benefits are subject to various conditions and restrictions. As of December 31, 1999, we had net operating loss carryforwards for tax reporting purposes of approximately $18.4 in the United States, $6.4 million in Israel, $10.8 million in the United Kingdom and $1.2 million in Japan. In the United States, the internal revenue code limits the use in any future period of net operating loss carryforwards following a significant change in ownership interests. Since we have incurred tax losses through December 31, 1999, we have not used these net operating losses. Adaptation to New Euro Currency In January 1999, a new currency called the euro was introduced in Austria, Belgium, Finland, France, Germany, Italy, Luxembourg, the Netherlands, Portugal, the Republic of Ireland and Spain. By June 30, 2002, at the latest, all participating European Monetary Union countries are expected to be operating with the euro as their single currency. Computer systems and software products will need to be designed or modified to accept the euro currency and, during the transitional phase, may need to accept both the euro and local currencies. Conversion to the euro will require restructuring of databases and internal accounting systems and the conversion of historical data. We believe that all products offered by us are adapted to the euro. Since the introduction of the euro we have not experienced any difficulties or complaints from the adaptation of our products to the euro. However, we did not contact our clients or suppliers to determine their preparedness for the adoption of the euro. We have not incurred any material expenses from the adaptation of our products to the euro and we do not expect to incur any expenses from future adaptation to the euro. However, we cannot assure you that our products or software provided to our clients by other vendors, or developed internally by our clients, will ensure an errorless transition to the euro. Even if our products and services satisfy these requirements, the products and services provided to our clients by other software vendors or developed internally by our clients may not be euro compliant and may disrupt our clients' ability to use our products. 33 BUSINESS Overview We develop, market and support software products which provide companies with business-to-business internet solutions for service communities. Service communities encompass all participants in the service management and delivery process, including service organizations, their field engineers, customers, partners, vendors, and suppliers. To capitalize on the opportunity offered by the internet, service organizations need solutions that support complex service delivery requirements while enabling collaboration of the service community to achieve high quality and cost effective service delivery. Our solution is designed to meet the needs of service organizations of companies with large, complex product service commitments, as well as third-party service providers who fulfill these commitments on an outsourced basis, by offering real-time management and collaboration of the entire service community. Our solutions include workforce management, service level agreement management, customer self-service, repair return automation and auction-based procurement and replenishment. We have developed and sold a suite of flexible and scalable software products for the management of service operations in organizations. These service delivery chain management products, called Service Suite, help organizations that provide field service to customers, develop proposals for and track commitments under service contracts, manage inventory and field service personnel, follow customer calls and generate accurate and detailed bills. Service Suite customers of these products include EMC Corporation, GE Medical Systems, NTL and Sun Microsystems. Our Service Hub internet-based products contain models of service and definitions of service processes that are based on our experience and knowledge in developing and selling these service delivery chain software products. Since their introduction in the fourth quarter of 1999, we have licensed our internet-based products to CapRock, Broadwing, ITC Deltacom, Symbol and Teraoka Seiko. During the second quarter of 2000, we signed letters of intent to license Service Hub to an additional six customers, and we are targeting our sales and marketing efforts to companies in the high technology, telecommunications, utilities and industrial automation industries. Industry Overview Growth of the Internet The internet has emerged as a revolutionary global communications medium, enabling millions of individual consumers and business users to share information and conduct business electronically. The efficient, pervasive and interactive nature of the internet makes it a necessary platform for relevant content exchange and e-commerce transactions from business-to-business. According to the Gartner Group, the worldwide business-to-business market is forecast to grow from $145 billion in 1999 to over $7.0 trillion in 2004. In the intensely competitive global business environment, businesses have increasingly adopted the internet to streamline their business processes and make their employees more productive. Growing Importance of Customer Service Companies that sell products have always recognized the importance of product maintenance and support services. As a result, the sale of a product has always engendered a commitment to respond to a customer call for maintenance and support for that product. Traditionally, the division that provides maintenance and support services often is not integrated with other divisions in the organization that are involved with the product sales cycle. Today, organizations increasingly stress, and their customers increasingly demand, high-quality service as a major factor in distinguishing a product. This focus on quality results in increased customer loyalty and a reduction in customer churn and creates a competitive advantage in the marketplace. In fact, in 34 many organizations, service is replacing products as a primary focus and customers' perception of the quality of service is considered a matter of primary importance. This is due to a number of trends, including: . competition in the global marketplace; . shrinking profit margins from the manufacture and sale of products; . increasing complexity and commoditization of products, including personal computers; and . importance of customer retention due to the costs of new customer acquisition. The Challenges of Providing Customer Service The process of providing service is a combination of numerous, complex processes distributed across a wide service community of interacting constituents. This service community includes customers, service organization employees like call center operators, field engineers, warehouse managers and contract administrators, as well as third-party suppliers and vendors. The members of this community each play an important role in the service delivery process. For instance, the service delivery process is often performed on a pre-set schedule or is initiated by end-users contacting customer support call centers or help desks. These call centers or help desks field customer calls, dispatch and direct responses to calls and allocate resources between various customer requests for service. Effective dispatch from call centers requires communication with field service personnel, mainly service engineers, and tracking of repairs in process and spare parts inventories. When engineers or warehouse managers see that replenishment of inventory is required, service organizations contact third-party vendors to procure additional parts. Alternatively, many service organizations are streamlining their parts and repair processes by outsourcing parts inventory and repair to their vendors. Throughout this process, the service organization must be able to effectively manage many other matters, including contract administration, entitlement, tracking, shipping, repair depot operations, pricing and invoicing. For global organizations with widely dispersed service communities, the challenges of managing the service delivery process are heightened further by the need to manage and coordinate service delivery for remote and geographically dispersed customers over various time zones, with revenues and costs incurred in many local currencies. Shortcomings of the Traditional Approach to Service Delivery The traditional process of creating or renewing service contracts typically begins with a contract requisition and continues to customer administration, contract administration and back to the customer in multiple iterations. The delays caused by this process negatively impact customer satisfaction and contract renewal rates. Service organizations handle requests for service based on these contracts in a reactionary, fragmented structure involving serial and rigid procedures that can create unnecessary delays and inefficiencies. This approach attempts to solve the immediate customer needs with only those resources available at that particular time and fails to consider how attending to a particular request for service will impact the rest of the organization. Therefore, customer service is provided in an inefficient manner and does not allow real-time collaboration among many different constituents of the service community. This approach offers limited real-time visibility to end-users and the rest of the service community on the progress being made on a request for service. The Internet and the Wireless Internet as a Medium for Customer Service and Support The internet has made it possible to deploy applications that reach all employees in an organization and to connect the organization to corporate partners, vendors and service providers. A new business model is emerging under which companies will manage and control their customer service delivery using the internet. The growth in the use of the internet has caused a trend towards active customer involvement and collaboration in the customer service process. The ability to conduct sophisticated business transactions in a point-and-click self-help environment has also raised customer expectations: customers now expect quick, timely and comprehensive solutions to their problems. Likewise, businesses have become increasingly aware of the advantages of managing supply chains and transacting with third-party suppliers and vendors over the internet and are using this ability as a strategic tool to increase revenues and improve profitability. 35 According to IDC, spending on collaborative service and support technologies within the services industry is expected to grow from $2.7 billion in 1999 to $8.7 billion in 2003. IDC defines collaborative service and support technology as the core enabling technology of the emerging internet-based, interactive e- service and support world, which is growing rapidly in strategic and tactical importance. While customer interactions and business transactions conducted over the internet have grown significantly, they are not likely to replace more traditional means of managing and controlling the service community. For example, many organizations continue to rely on older systems and applications and telephone-based call centers to provide customer service. Rather than replacing systems that support existing service delivery operations, companies are actively seeking ways to extend the life of their existing but often outdated solutions by integrating their internal traditional service management applications, databases and forms of customer interaction with innovative internet-based interfaces to their service communities. While the internet has the potential to enable personalized and collaborative customer service, companies have been limited by available software applications. These applications are generally HTML conversions of existing client/server service management applications that typically restrict customer service to a predefined transaction available in a generic form to all customers. Existing products, originally designed for an organization's internal use, generally fail to provide the flexibility, functionality and scalability required for conducting business over the internet. Wireless devices, like cellular phones, personal digital assistants, and other mobile computing devices, have always been in use in the area of service delivery. Recently, the abundance of information and applications on the internet have caused the internet and wireless technology to converge, creating the wireless internet. We believe that the wireless internet creates a new and better way to manage service delivery resources, including engineers, technicians and spare parts, and thus creates higher quality service delivery. The wireless internet allows the workforce in the field to access information and applications in a continuous manner. This in turn means that information about the service delivery, such as the technician's whereabouts, the estimated time the technician will arrive at the customer site, the status of a part order or customer entitlements, can be updated in real time from a mobile or wireless device and forwarded to the customer using the internet. To realize the potential of the internet to reshape business processes in the service industry, companies must be able to offer customer service through a single internet solution. This solution must be configured on the basis of pre-determined business processes, service knowledge and databases and allow universal access to all members of the service community through web browsers, cellular telephones, personal digital assistants and other wireless devices. The ViryaNet Solution We provide business-to-business internet solutions for service communities. Our Service Hub is a single integrated internet-based platform through which the service organization of a company, together with its customers, partners, vendors and suppliers, collaborate in real-time in one service community. This collaboration takes place on the basis of built-in knowledge of service functionalities, databases and business processes to enable the cost-effective delivery of high-quality service. Our Service Hub benefits service communities in the following ways: Real-Time Management and Collaboration of the Entire Service Community Service Hub integrates the business processes of all members of the service community, including customers, the service organization and its employees, third-party vendors and suppliers. For instance, our internet-based solution was designed to enable organizations to increase the efficiency and connectivity of field personnel on a real-time basis. It allows field personnel equipped only with wireless communications devices to be connected to the organization when located at a remote site. By enabling real-time 36 collaboration between all members of the service community, Service Hub streamlines the service delivery process while offering opportunities for novel and improved business processes and creating new revenue streams, including personalization techniques to segment customers based on their individual profiles or roles in the service community. Increased Efficiency and Evaluation of Quality of Service Service Hub's universal access makes all relevant service information visible to each member of the service community. This allows the service operation to be handled in an efficient manner, improving the use of all of the service resources available. Service Hub covers the entire range of the service delivery cycle, from contract quotation and signing, to implementation of services under the contract and to billing. Service Hub facilitates an on-going evaluation of the service process by offering a series of key performance indicators that continuously measure various aspects of the service operations on the basis of parameters tailored by the company. Rapid Deployment of an Internet-Based Solution While Preserving Investments in Existing Systems Service Hub allows organizations to quickly and efficiently turn their complex existing service management applications into an internet-based solution, without disrupting existing operations and processes. Service Hub's interoperability with existing service applications, databases and enterprise resource planning systems allows organizations to set up their internet-based service platforms without the long delays and significant expenses that normally result from a replacement of existing systems. Using our solution, after enabling an immediate internet-based service delivery management system, organizations are able to gradually update and replace their existing service systems according to their own priorities. Scalability and Flexibility Service Hub is designed to be highly scalable, enabling organizations to interact with large numbers of customers, suppliers and vendors through the internet and other platforms, including cellular telephones and wireless devices. Service Hub's flexibility and open architecture allows companies to independently determine their business processes and work flow and to integrate Service Hub with their existing service applications, customer service management applications, customer relationship management applications, data warehouses, enterprise resource planning applications and web sites. Enabling Management of Service Operations on a Global Scale Our solutions enable service delivery on a global or nationwide scale. Service Hub is designed to allow customer service professionals to efficiently manage, monitor and improve all aspects of service delivery in the context of complex global service contracts. Our customers can do this across many geographic locations of all members of the service community despite time zone or currency differences. Strategy Our objective is to become the leading global provider of business-to- business internet-based solutions for service communities. Key elements of our strategy include: Maintain Technological Leadership of our Internet-Based Solutions for Service Communities We believe that we have established ourselves as a technology leader in providing internet-based solutions for a broad range of service applications and have filed a patent application covering some of our technologies for creating and supporting service communities on the internet. We intend to continue to enhance our internet-based solutions by incorporating new advances in internet technology. We place considerable emphasis on research and development to improve and expand the functionality of our technology and to develop new applications. We believe that our future success will depend upon our ability to maintain our technological leadership, to enhance our existing products and to introduce new commercially viable products addressing the needs of our customers on a timely basis. 37 Build on Our Expertise in Service Management Solutions Through our extensive experience in developing software products for the management of service operations, we have gathered significant expertise in understanding the specific needs of service organizations and their manner of operation. We have gathered substantial knowledge in designing business processes and workflow for a wide variety of service organizations. We intend to continue to build on many of the solutions and concepts that were embedded in our enterprise software products as we enhance our existing products and develop new internet-based products. Continue to Support Open Architecture We will continue to develop products with an open architecture which conforms to emerging industry standards and enables integration and interoperability with other applications. For example, our internet-based solution uses the XML standard for the description of data, which facilitates integration between different applications. Our open architecture enables our customers to exchange large volumes of different types of data, information, ideas and knowledge regardless of their information technology infrastructures, systems or software. We believe that the flexibility offered by our open architecture enables companies to manage their service community more efficiently and to reduce costs. Expand Our Market Share by Focusing on Selected Industries We intend to focus our marketing efforts on three primary industries: high technology, telecommunications, utilities and industrial automation. We believe that these industries often have extensive service commitments for relatively complex products and place significant importance on customer satisfaction, and are more likely to use the internet for their business operations. We employ people with expertise in these industries to both market to and support our clients in these industries. Extend Strategic Relationships with Third Parties, Including Application Service Providers We intend to expand our marketing and implementation capacity by entering into relationships with third parties, including systems integrators and vendors of complementary products. By employing third parties in the marketing and implementation process, we expect to enhance sales by taking advantage of the market presence of these third parties, devote more resources to making additional sales and reduce the cost of each sale. We also intend to expand our distribution capability by offering some of our products through application service providers, who may offer Service Hub to customers on a subscription basis, allowing customers to reduce their initial costs. Products ViryaNet Service Hub Service Hub, which was introduced in the fourth quarter of 1999, is a business-to-business internet platform for service communities. Each component of Service Hub shares a consistent, easy-to-use, browser-based graphical user interface. The components share a common underlying technology architecture and a common data model which allows them to work together and share information. The components are also universally accessible, allowing employees to work anywhere using desktop or mobile computers, mobile telephones, personal digital assistants or other handheld devices. Service Hub contains a built-in service model that determines rules under which service processes are implemented and enables the different members of the service community to collaborate and share information on service related matters such as management of service contracts, entitlement tracking, availability of service or spare parts, inventories, shipping, call dispatch and tracking, administration of filed service personnel, repair depot operations, pricing and invoicing. 38 Service Hub contains the following key elements: [GRAPH APPEARS HERE] [Graphic of computer screen in upper left-hand corner; graphic of personal digital assistant in center of left-hand side; graphic of cellular phone in lower left-hand corner. Box with three columns in center. Text in top of left-hand column reads "Service Portal" with an arrow pointing to graphic of computer screen. Text in bottom of left-hand column reads "mService Gateway" with an arrow pointing to graphics of hand-held device and cellular phone. Text in center column reads from top: "Service Suite," "Service Process," "Service Intelligence," and "Service Engine." Text in right-hand column reads: "Integration Server." Text in upper right hand corner reads: "External Web Applications, Markets, Sites." Text in center of right-hand side reads "Enterprise Applications Legacy, Customer Relationship Management (CRM), Enterprise Resource Planning (ERP)." Text in lower right-hand corner reads: "Data Warehouses." Service Portal Service Portal is a personalized gateway that allows internal users as well as customers, field employees and external partners, suppliers and vendors to interface with Service Hub using the internet. Service Portal, when used in conjunction with the other components of Service Hub, allows users to access service information in real time, share documents, collaborate with other users and obtain service. Service Portal is designed to be seamlessly integrated with other corporate portals of an organization. Service Portal allows the creation of users' profiles and includes a registration process that enables Service Hub to categorize the user and determine for security and efficiency purposes the scope of access and use of the system that is permitted for that user. Commonly used internet-based collaboration capabilities, including chat, forums and customer feedback are facilitated through Service Portal. Using a standard browser, each user can configure a customized display of active monitors, graphs and notification queues. A user can subscribe to a variety of information sources from enterprise knowledge bases and receive updates on a timely basis. mService Gateway mService Gateway provides mobile users, like field engineers, with remote access to Service Hub and its applications and data. With mService Gateway, field engineers can acknowledge being dispatched to a customer service location through a variety of mobile devices like PalmOS and WindowsCE personal digital assistants, web-enabled phones, and I-mode Docomo phones that are dominant in Japan. Once dispatched, engineers can view their work orders, report work that they have done on service requests, create part activity reports, create new tasks to be performed in the context of a request, request that assistance be provided in order to complete the new tasks and create new service requests. These actions can be sent to the Service Hub through the mService Gateway if the mobile device has an internet connection. If the device has no immediately- available internet connection, the transactions can be stored locally and transferred to the Service Hub through the mService Gateway the next time the device is connected to the internet. Through our arrangement with AvantGo, a provider of mobile infrastructure software and services, we will resell the AvantGo Enterprise product integrated with mService Gateway. This bundled solution is designed to enable field service technicians to remotely process data from a wide range of enterprise applications using a variety of wireless and remote devices that support the AvantGo browser. 39 Service Suite We also provide a suite of enterprise applications for managing service delivery, which enables service organizations to automate many of the processes required for service fulfillment. These applications include: . WorkForce Management, which enables the efficient management of service company employee resources; . Service Contract, which provides comprehensive and flexible contract management; . Depot Repair, which manages high volume depot repair operations; and . Service Supply Chain, which manages the service logistics infrastructure. Each module within Service Suite can be installed independently or with other elements of Service Hub. These modules were designed to work in either a traditional client/server environment or an internet architecture. Service Process Service Process allows the customer to define business processes and workflows that facilitate the interaction between the user and the various service applications and databases. With Service Process, users can view relevant information, initiate service calls, track the progress of a service call, order parts and receive periodic reports. Service Process is based on our extensive knowledge of commonly used service business processes. Service Process includes workforce management, management of service level agreements, customer self-service, automation of repair returns and auction-based procurement and replenishment. One of the modules within Service Process, Mobile FE, works in conjunction with the wireless support of mService Gateway to extend workforce management to mobile field engineers using wireless devices like mobile computers and mobile telephones. Service Intelligence Service Intelligence allows users to analyze service operations and facilitates the production of related reports. Service Intelligence is based on a collection of key performance indicators that track data on the basis of criteria like financial trends, service performance, service rates, revenue and cost per product type. It further allows companies to define their own performance indicators, monitors and reports, and create graphs and charts. For each key performance indicator and monitor, a user can determine the data thresholds that the system must control and the alerts or messages that the system must send out to appropriate members of the service community. Service Engine Service Engine contains the shared business definitions and rules used by Service Suite, Service Process and Service Intelligence. Integration Server Integration Server uses application program interfaces that integrate Service Hub with the customer's other applications, including enterprise resource planning applications, customer relationship management applications, data warehouses and other commonly used service applications. Through Integration Server, users of Service Hub can directly access applications and databases required to provide comprehensive customer service. 40 Products Under Development We are in the process of adding functionality to our Service Hub products to better accommodate two strategic goals for the future: . Improving support for application service providers to allow the service organization of multiple companies to be deployed from a single Service Hub installation. This functionality has been designed and will be implemented later in 2000. We expect that this effort will not require significant development resources prior to its commercial release. . Extending our concept of managing service communities to service trading web sites. These trading web sites will enable vendors to bid for services and parts in auctions. It is our intent to integrate services from those sites into our customer's business processes, as well as participate in the formation of service web trading communities. This functionality has been designed and we expect to implement it in the first half of 2001. We expect that this effort will not require significant development resources prior to its commercial release. Professional Services and Maintenance and Technical Support Professional Services We believe that the availability of effective professional services is an important factor in achieving widespread market acceptance. We provide a broad range of professional services, consulting, training, application implementation and project management to customers implementing our solutions. Professional services are aimed at both generating additional revenues and ensuring successful implementation of our technology. Professional services can be purchased separately or as part of an overall application implementation and deployment project. We intend to migrate a portion of our implementation activities to third parties, including systems integrators. We believe that this will allow us to increase our margins while providing the appropriate level of service to an expanding customer base. Maintenance and Technical Support We offer our customers annual maintenance contracts providing for upgrades and new versions of our products for an additional fee. Our standard maintenance contract extends for one year. We believe that a high level of customer support is important to the successful marketing and sale of our products. We believe that effective technical support during product evaluation as well as after the product is sold has substantially contributed to product acceptance and customer satisfaction and will continue to do so in the future. Our in-house technical support group provides product evaluation and post-sale support. Clients Service Suite Since its introduction in 1998, we have licensed our Service Suite applications to a number of organizations for use in various aspects of managing service delivery operations. Customers of our Service Suite products include: . Computeraid . EMC Corporation . GE Medical Systems . Granada Business Systems . NTL . Sun Microsystems 41 Many of these clients have purchased multiple modules of Service Suite and all have paid license and service fees in excess of $500,000 for our software as of June 30, 2000. Service Hub As of June 30, 2000, Service Hub had been licensed by CapRock, Broadwing, ITC Deltacom, Symbol and Teraoka Seiko. In addition, we have signed letters of intent to license Service Hub to an additional six customers. The following summaries illustrate how ITC Deltacom, Symbol and Teraoka Seiko are implementing Service Hub. Each company reviewed its summary for accuracy, but you should not interpret these summaries as endorsements by any of these companies of our products or services. ITC Deltacom ITC Deltacom, a full-service telecommunications provider serving business customers throughout the southeastern United States, is implementing Service Hub to create operational efficiencies and increase customer satisfaction. ITC Deltacom has implemented the contract administration, workforce management and service supply chain modules of Service Suite, along with parts of Service Hub required for internet access. By using Service Hub technology, ITC Deltacom is integrating several of its existing applications, including systems provisioning, customer relationship management and accounting. In addition, Service Hub can make data from our Service Suite modules accessible over the internet and allow ITC's 250 field engineers to access call information through an internet connection from their laptops. ITC Deltacom is also engaged in a pilot program to manage field engineers via handheld devices connected to our Mobile FE product over the internet. Symbol Technologies Symbol Technologies is a provider of wireless and internet-based mobile data management systems and services installed at more than 45,000 customer locations worldwide. Symbol provides its customer base with a broad-based package for support called SymbolCare. Symbol chose Service Hub to upgrade its existing systems, particularly in the areas of parts logistics and repair, and serve as the technology platform for delivering this service over the internet. Symbol's application will use mService Gateway to enable its approximately 75 field representatives to log information about parts, expenses and calls made on customers. SymbolCare over the internet, called MySymbolCare, is in the process of being tested at six customer and partner locations. Symbol plans to implement this application for its base of 5,500 customers and partners. Using Service Hub, Symbol will be able to integrate information from third-party call centers and financial applications, as well as from the supply chain and repair center modules of our Service Suite that Symbol previously purchased from us. Service Hub's interfaces to Symbol's existing applications will allow these applications to be phased out in a gradual fashion rather than forcing an abrupt and costly conversion. Using Service Hub, Symbol expects to reduce the number of call center requests, improve management of spare parts and increase field workforce efficiency. Teraoka Seiko Teraoka Seiko, a Japanese manufacturer of tracking and point-of-sale devices and weighing scales focused on the supermarket industry, has over 200 field engineers in 40 centers in Japan and services 80,000 pieces of equipment. Teraoka also works with a global network of third-party distributors that sell and service Teraoka's products outside of Japan. Teraoka Seiko decided to replace its existing system with Service Suite to support its service business and increase service revenues, engineer productivity and customer satisfaction. Teraoka Seiko implemented two of Service Suite's modules, WorkForce Management and Service Contract. In the future, Teraoka Seiko plans to implement Supply Chain and Repair Depot. These implementations included interfaces with Teraoka Seiko's accounting and database systems. Teraoka Seiko is in the process of implementing our Service Hub to manage its community of field engineers as well 42 as the field engineers of its global network of third-party distributors and vendors. This field engineering solution will provide field engineers with a call reporting utility to enable field engineers to issue accurate invoices on site by using wireless devices. Teraoka Seiko also plans to offer to third- party vendors an internet-based parts ordering system to facilitate faster and less costly parts shipments. Sales and Marketing We target companies in the high-technology, telecommunications, utilities and industrial automation industries that have extensive service commitments and complex products, strong commitments to customer satisfaction and an internet presence. Due to the relative immaturity of our market, we have a number of different marketing programs to increase our market presence and awareness of the benefits our products provide. We also emphasize and use a variety of lead generation programs. Due to the comprehensiveness of our solutions, our sales cycles have generally been three to twelve months. We expect the sales cycle for Service Hub to be three to six months or less due to our belief that the decision period for implementing business-to-business internet solutions is shorter than the decision period for enterprise software applications. Some of our sales are made through a request for proposals process conducted by the potential client. This also contributes to the lead time involved in our sales and marketing process. Our sales and marketing staff consists of professionals in a variety of fields, including marketing and media relations, direct sales, technical sales consultants, product management, advertising and business management consulting. As of June 30, 2000, we employed 47 sales and marketing personnel. The majority of our sales personnel operate through our United States subsidiary and the balance operate through our United Kingdom and Japan subsidiaries. Our United Kingdom subsidiary is responsible for sales and marketing in Europe. Although the majority of our sales have resulted from using our own marketing lead generation and direct sales, we have recently entered into several marketing partnership agreements with Akili, Cap Gemini Ernst & Young, Stonebridge, MetaSolv and Symbol. Cap Gemini Ernst & Young, Akili and Stonebridge provide consulting and implementation services to telecommunications companies; MetaSolv provides order management and service fulfillment solutions to telecommunications companies; and Symbol provides handheld computers and scanner devices to the retail and industrial markets. We expect to benefit from marketing programs and leads generated by these partners, as well as cooperation from the sales forces of these partners in sales opportunities identified by them. We intend to expand our marketing and implementation capacity through the use of third parties, including systems integrators, vendors of complementary products and providers of service applications. By employing third parties in the marketing and implementation process we expect to enhance sales by taking advantage of the market presence of these third parties and devote more resources to making additional sales and reduce the cost of each sale. We also intend to explore and establish indirect channels through relationships with additional resellers who offer complementary products as well as application service providers. Resellers will be primarily used to sell special versions of our product configured for specific market targets, to be combined with their complementary products. Application service providers will be used to provide our product to customers who wish to avoid the high initial cost of our product combined with the required hardware platforms and infrastructure investments and prefer a monthly rental or subscription billing process provided by application service providers. We believe that this application service provider channel will be effective for reaching segments of the market for which the higher costs of a direct sales channel are not appropriate. Indirect reseller sales are expected to begin in the third quarter of 2000, and application service provider sales are expected in the fourth quarter of 2000. We have created an alliances and partnership team to serve as an intermediary between us and our business partners, including systems integrators, complementary product vendors and application service providers. 43 Technology Advanced Software Technologies Service Hub uses a number of advanced software technologies to provide our products with the capability of handling complex, large-volume, global service management assignments. For example, the use of rule-based technology allows us and our customers to incorporate complex business rules into the service delivery management process and to administer complex global service contracts through a single tool. This eliminates the need to modify system code to reflect evolving business rules or the application of complex contractual terms. Similarly, the use of data extraction techniques enables us and our customers to extract useful data from tracking systems and allows the software to assist in decision making and strategic planning. Industry Standards We base our modules on leading infrastructure software, including IBM's WebSphere application server with its advanced workload management, high throughput and performance, scalability, and fault tolerance capabilities. We believe that conforming to industry standards not only ensures that we have the best possible architectures but also that we can benefit from and reuse widely available internet-centric components. By conforming to industry standards, we ensure that we provide an open architecture which enables us to interface our products with our clients' existing service management systems. It also allows our clients to use a broad range of hardware platforms and a variety of network and operating system environments. The technology within Service Hub is designed to make it fully accessible using any number of devices including web browsers, personal digital assistants and mobile telephones. This is possible due to a design that separates the presentation layer from the underlying application logic. This universal access is an intrinsic core technology of Service Hub. Software Architecture Our software is organized in four tiers. The first tier, the database, has been designed to be scalable in large customer installations and ensures support for high transaction volumes and global operations. The second tier, the business object layer, is an object-oriented packaging of the service entities that are used for the business processes and for implementing service communities. The third tier, the communications layer, is based on the XML framework, allowing features encapsulated within the object model to be accessed by external systems or exported as XML documents. The final tier, the presentation layer, allows business functions to be used in multiple formats including HTML browsers, wireless devices or desktop software, using a single code. Intellectual Property Rights We regard our technology as proprietary and have filed a patent application covering some of our technologies for creating and supporting service communities on an internet platform. In general, we have relied on a combination of technical leadership, trade secret, copyright and trademark law and nondisclosure agreements to protect our unpatented proprietary know-how. Our proprietary technology incorporates processes, methods, algorithms and software that we believe are not easily copied. Despite these precautions, it may be possible for unauthorized third parties to copy aspects of our products or to obtain and use information that we regard as proprietary. We believe that, because of the rapid pace of technological change in the industry, patent and copyright protection are less significant to our competitive position than factors such as the knowledge, ability and experience of our personnel, new product development and ongoing product maintenance and support. Competition The market for internet-based solutions to manage service organizations is relatively new and immature. However, with the rapid growth of the internet and its use for business processes, this market is expected to evolve and develop quickly. We face competition from different markets and segments. This market is also fragmented and stratified. 44 Our competitors include companies in various sectors of the internet business-to-business market as well as in the broader customer relationship management software market, including: . the market for internet-based customer support and customer service solutions, including companies like E.piphany, mySAP and Kana; . the market for enterprise based service management software solutions, including companies like Clarify and Siebel Systems; and . the market for enterprise resource planning solutions, including companies like Oracle, PeopleSoft and SAP. Competitors may also include companies offering other business-to-business applications over the internet, vendors of new internet application deployment products, portal vendors and system integrators. Because it is a logical extension of their corporate and product strategies to penetrate our sector, we also believe that other companies in the internet sector and in the customer relationship management software sector will seek to penetrate our market both by developing their own solutions and by acquiring companies already operating in the field. Companies have for many years developed their own in-house automated client/server service management applications. As a result, our prospective Service Suite clients will often decide against purchasing and implementing externally developed and produced enterprise solutions. Increased competition from any of the competitors, or from new competitors, could detract from our market share. Many of our competitors are large, publicly-traded corporations with significantly greater resources than us and are likely to enjoy substantial competitive advantages, including: . longer operating histories; . greater financial, technical, marketing and other resources; . greater name recognition; . larger installed base of clients; . well-established relationships with our current and potential clients; and . extensive knowledge of the internet or the service delivery chain management industry. We believe that competition in our field is, to a large extent, based upon the functionality of the products, accessibility to all relevant users, as well as the ability to integrate with other products and display global or nationwide capabilities. We expect that competition will increase as a result of consolidations in the industry. Research and Development We believe that our future success depends, to a significant extent, on our ability to maintain and extend our technological leadership through our research and development activities. We employ product managers in our research and development activities. These managers provide a critical interface between our research scientists and client needs and industry developments. This interface helps focus our research and development personnel on developing market-driven applications. By using information provided by our product managers, we can also prioritize our research and development resources to address perceived market trends. As of June 30, 2000, we employed 64 people in our research and development efforts in our offices in Jerusalem, Israel. Our research and development expenditures for 1997, 1998, 1999 and the three months ended March 31, 2000 were $3.4 million, $5.3 million, $6.9 million and $1.7 million. We will continue to devote substantial resources to research and development. Part of our funding for research and development activity has historically come from various Israeli government programs. 45 Employees As of March 31, 2000, we had 85 employees in Israel, 80 in the United States, 17 in the United Kingdom and 7 in Japan. Of our 189 employees, 64 were engaged in research and development, 47 in sales, marketing and business development, 47 in professional services and technical support and 31 in finance, administration and operations. None of our employees is represented by a labor union. We are not a party to any collective bargaining agreement with our employees. However, some provisions of the collective bargaining agreement between the Histadrut, the General Federation of Labor in Israel, and the Coordination Bureau of Economic Organizations, including the Industrialists' Association of Israel, are applicable to our Israeli employees under expansion orders of the Israeli Ministry of Labor and Welfare. These provisions principally concern the length of the work day and the work week, minimum wages for workers, contributions to pension funds, insurance for work-related accidents, procedures for dismissing employees and determination of severance pay. Under these provisions, the wages of most of our employees are automatically adjusted based on changes in the Israeli consumer price index. The amount and frequency of these adjustments are modified occasionally. We consider our relationship with our employees to be good and have never experienced a strike or work stoppage. We have to comply with various labor and immigration laws throughout the world, including laws and regulations in Israel, the United States, the United Kingdom and Japan. Compliance with these laws has not been a material burden for us. As the number of our employees increases over time, our compliance with these regulations could become more burdensome. Facilities We do not own any real property. Our administrative, engineering and development facilities occupy approximately 16,950 square feet and are located in Jerusalem, Israel. The premises are leased under a lease agreement which will terminate on December 31, 2002. However, we have a right to terminate the lease agreement before that date by providing six month's prior written notice before specified dates. The annual rent for the facility is approximately $265,000. Our subsidiaries occupy, in the aggregate, approximately 22,629 square feet in the United States, the United Kingdom and Japan under leases expiring at various dates through 2005 with a total annual rent of approximately $224,000. We entered into a lease for approximately 13,807 square feet of office space in Southborough, Massachusetts and we relocated our United States headquarters there in May 2000. This lease expires in 2005 with a total annual rent of approximately $331,000. We believe that these facilities are adequate to serve our current needs. However, when we expand our operations in the future, we will need additional space in Israel and abroad. Legal Proceedings In December 1999, our former vice president of marketing and sales filed an action in Israel against us and our chief executive officer seeking damages in the amount of up to $1,364,000. The former employee alleges wrongful denial of his right to exercise options, loss of compensation, including options to purchase shares granted to him by his previous employer, severance payment and other social benefits, as well as damage to his reputation. In March 2000, we filed a counter action against the former employee seeking damages in the amount of approximately $970,000. We alleged that the former employee has acted in bad faith, breached his fiduciary duty and did not perform his duties as required. We are unable to determine with any certainty the ultimate outcome of the litigation and its effect on our business, financial condition and results of operations. We intend to vigorously defend this action. 46 MANAGEMENT The following table describes information about our executive officers and directors as of June 30, 2000. Executive Officers and Directors
Name Age Position - ---- --- -------- Samuel I. HaCohen................... 43 Chief Executive Officer and Chairman of the Board of Directors Ethan Allen......................... 53 President and Chief Operating Officer Vladimir Morgenstern................ 42 Executive Vice President, Corporate Program and Director Yoram Bibring....................... 42 Chief Financial Officer Ron Ben-Natan....................... 33 Senior Vice President and Chief Technology Officer Winfried A. Burke................... 51 Senior Vice President of Worldwide Marketing, Strategy and Business Development Amnon Shoham........................ 43 Director Jay B. Morisson..................... 52 Director Steven N. Baloff.................... 44 Director Lawrence W. Hambly.................. 53 Director Hillel Milo......................... 49 Director
Samuel I. HaCohen co-founded ViryaNet in March 1988 and has since then served as our president, chief executive officer and as a director. Before co- founding ViryaNet, Mr. HaCohen held senior systems management positions in John Bryce Systems Ltd. and the Hadassah Hospital, Jerusalem. Mr. HaCohen holds a BS degree in computer science and statistics from the Hebrew University of Jerusalem and has completed all course work for an MSc degree in statistics. Ethan Allen has served as our president and chief operating officer since February 2000. From April 1998 to January 2000 he served as senior vice president of the aviion server division of Data General Inc., an information technology company. From November 1990 through 1998 he served as vice president for worldwide professional & customer service division of Data General, Inc. Mr. Allen holds a BS in business from Norwich University, a MS in education from Boston College and an MBA from Babson College. Vladimir Morgenstern co-founded ViryaNet with Mr. HaCohen. Since November 1999 Mr. Morganstern has served as our executive vice president, corporate program. He served as our technical manager and chief technology officer from March 1988 until November 1999 and became a director in July 1999. Before co- founding ViryaNet, Mr. Morgenstern also held senior systems management positions in John Bryce Systems Ltd. and the Hadassah Hospital, Jerusalem. Mr. Morgenstern holds a BSc degree in physics from Vilnius University in Lithuania and has completed all course work for a MSc degree in applied mathematics. Yoram Bibring has served as our chief financial officer since April 1999. From December 1998 until April 1999, Mr. Bibring provided financial management services to various companies, including ViryaNet. From February 1998 to November 1998, Mr. Bibring served as chief financial officer of Americash Inc., an operator of a nationwide ATM network in the United States. From January 1990 to September 1995, Mr. Bibring served as the chief financial officer of Geotek Communications, a wireless communications solution provider, and from October 1995 to January 1998, he was president of Geotek Communications' international division. Geotek Communications filed for bankruptcy in June 1998. Before 1990, Mr. Bibring worked in various public accounting firms in Israel and the United States. Mr. Bibring holds a degree in accounting and economics from the Tel Aviv University and is a certified public accountant in both Israel and the United States. 47 Ron Ben-Natan has served as our chief technology officer since November 1999 and has served as senior vice president of engineering since February 2000. From June 1998 to November 1999, Mr. Ben-Natan served as our vice president product development. From July 1995 to June 1998, Mr. Ben-Natan served as the chief technology officer of Entity Object Technology, a company he co-founded, which was a software consulting company. Mr. Ben-Natan holds a Ph.D. in computer sciences from the Hebrew University of Jerusalem. Winfried A. Burke has served as our senior vice president of worldwide marketing since joining us in October 1999. From January 1999 until October 1999, Mr. Burke served as vice president of sales and marketing for ViewSoft. From July 1997 until December 1998, Mr. Burke served as general manager of North American operations and vice president of worldwide channels and strategic alliances at Gentia Software. From August 1994 until July 1997, Mr. Burke was a merger and acquisition consultant. From 1991 until 1994, Mr. Burke served as vice president of sales and marketing for Oberon Software. Mr. Burke has also held various positions in product management, marketing and sales at Prime Computer, Apollo, Sequoia and Wang. He began his career as a software engineer at the Massachusetts Institute of Technology Instrumentation Laboratory, Draper Laboratory, where he worked on the Apollo and Space Shuttle projects, followed by software development assignments at the Massachusetts Institute of Technology Lincoln Laboratory and Data General. Mr. Burke holds a BS in computer science from the Massachusetts Institute of Technology. Amnon Shoham has served as one of our directors since 1996. Mr. Shoham is the managing director of Cedar (Israel) Financial Advisors Ltd., a position he has held since 1997. From 1993 to 1997, Mr. Shoham served as a managing partner of Star Ventures in Israel. Mr. Shoham serves as a director on the board of directors of Jacada Ltd., a software company. Jay B. Morisson has served as one of our directors since 1996. Dr. Morisson is the founder and managing general partner of Newbury Ventures, Inc., a United States venture capital firm established in 1992. Dr. Morisson is a general partner of Jerusalem Pacific Ventures (1994), L.P., one of our shareholders. Before 1992, Dr. Morisson held a number of positions with Govett & Co. Ltd. and European International Fund Management Company including the positions of chief financial officer and president of its venture capital subsidiary. Dr. Morisson serves as a director of Fundtech Ltd., a software company, Jacada Ltd., a software company, and of several privately held technology companies. He holds undergraduate and masters degrees in operational research from Ohio State University and a doctorate in business administration from the Haas School of Business at the University of California at Berkeley. Steven N. Baloff has served as one of our directors since 1996. Mr. Baloff has served as a managing director and general partner of Advanced Technology Ventures, a United States venture capital firm, since 1996. Before joining Advanced Technology Ventures, from 1989 to 1995 Mr. Baloff served as president and chief executive officer of Worldview Systems Corp., an electronic travel industry information service. Lawrence W. Hambly has served as one of our directors since 1998. Since 1993, Mr. Hambly has served as president of the enterprise services division and corporate quality officer of Sun Microsystems, Inc. Mr. Hambly serves as a member of Sun's executive management group. From 1990 to 1993, Mr. Hambly served as vice president of worldwide marketing of computer systems and as corporate executive officer. From 1988 to 1990, Mr. Hambly served as president of Federal Systems. Before joining Sun, Mr. Hambly served in field sales, sales management and engineering positions with Symbolics, Data General, General Research, Logicon and Rockwell International. Hillel Milo has served as one of our directors since June 2000. Since 1995, he has been the chief executive officer of Clal Venture Capital Fund Limited Partnership. In 1997, he co-founded Infinity Venture Capital Fund Limited Partnership and served as its chief executive officer until June 1999. From 1993 to 1994, Mr. Milo was the co-founder and the general partner of the Walden Israel venture capital fund. Previously, Mr. Milo served as a director and executive officer in a privately-owned European financial and 48 industrial investment company. Mr. Milo serves on the board of directors of Breezecom, a manufacturer of wireless access products, and Radvision, a developer of internet and network based communications products. Mr. Milo has a BA degree in mechanical engineering and an MA degree in management science from the University of Alabama. Board of Directors Our articles of association, to be adopted before the completion of this offering, provide that directors are elected at our annual general meeting of the shareholders by a vote of the holders of a majority of the voting power represented at that meeting. Each director, except for the external directors described below, holds office until the next annual general meeting of the shareholders. Committees Our board of directors has formed an audit committee, an executive committee and a compensation committee. The audit committee exercises the powers of the board of directors for our accounting, reporting and financial control practices. Our executive committee is responsible for managing our daily operations and acting on behalf of our board of directors in exigent circumstances. Our compensation committee sets the annual compensation for our executive officers and, to the extent permitted under the companies law, administers our option plans. Messrs. Morisson, Shoham, Baloff and Milo are members of our audit committee. Messrs. HaCohen, Shoham, Morisson and Baloff are members of our executive committee. Messrs. Shoham, Morisson and Baloff are members of our compensation committee. Independent Directors Upon the completion of this offering, our ordinary shares will be listed for quotation on the Nasdaq National Market and we will be subject to the rules of the Nasdaq National Market applicable to quoted companies. Under the Nasdaq rules, we are required to appoint a minimum of three independent directors. The independence standard under the Nasdaq rules excludes any person who is a current or former employee of a company as well as the immediate family members of an executive officer of a company. Messrs. Morisson, Shoham and Baloff meet the independence standard of the Nasdaq rules. External Directors Israeli Companies Law We are subject to the provisions of the new Israeli Companies Law, 5759- 1999, which became effective on February 1, 2000 and supersedes most of the provisions of the Israeli Companies Ordinance, New Version, 5743-1983. Who May Be Appointed Under 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 two external directors. A person may not be appointed as an external 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 external director, or had, during the two years preceding that date, any affiliation with the company, any entity controlling the company or any entity controlled by the company or by a controlling shareholder of the company. The term affiliation includes: . an employment relationship; . a business or professional relationship maintained on a regular basis; . control; and . service as an office holder. 49 Conflicts of Interest No person can serve as an external director if the person's position or other business creates, or may create, conflicts of interests with the person's responsibilities as an external director. Until the lapse of two years from termination of office, a company may not engage an external director to serve as an office holder and cannot employ or receive services from that person, either directly or indirectly, including through a corporation controlled by that person. How External Directors Are Elected External directors are generally elected by a majority vote at a shareholders' meeting, provided that either: . the majority of the 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 the election; or . the total number of shares of non-controlling shareholders voted against the election of the external director does not exceed one percent of the aggregate voting rights in the company. However, the board of directors of companies whose shares are traded outside Israel may determine that a director, who was appointed before February 1, 2000 and complies with the non-affiliation requirements of an external director, will be designated as an external director. Messrs. Shoham and Morisson are designated as the external directors. Term of Service The initial term of an external director is three years and may be extended for an additional three years. If, at the time that we elect an external director, all of our directors are of the same gender, then the next director must be of the other gender. Each committee exercising powers of the board of directors is required to include at least one external director. Audit Committee Nasdaq Rules and Israeli Companies Law Under the Nasdaq rules, we are required to form an audit committee consisting of at least three independent directors, all of whom are financially literate and one of whom has accounting or related financial management expertise. The responsibilities of the audit committee under the Nasdaq rules include evaluating the independence of a company's outside auditors. Our current audit committee complies with the Nasdaq rules. Under the companies law, the board of directors of any company that is required to nominate external directors must also appoint an audit committee. The audit committee must be comprised of at least three directors, including all of the external directors, but excluding: . a chairman of the board of directors; . a controlling shareholder or the relative of a controlling shareholder; or . any director employed by the company, or someone who provides services to the company on a regular basis. Role of Audit Committee The role of the audit committee is to examine flaws in the business management of the company in consultation with the internal auditor and the company's independent accountants, and suggest appropriate course of action. The approval of the audit committee is required to engage in specified actions and transactions with office holders, controlling shareholders and third parties in which office holders and controlling shareholders have an interest. 50 Conflicts of Interest An audit committee may not approve an action or a transaction with an interested party, an office holder, a controlling shareholder, or an entity in which they have a personal interest unless at the time of approval the two external directors are serving as members of the audit committee and at least one was present at the meeting in which an approval was granted. Our external directors are members of our audit committee. Internal Auditor Under the companies law, the board of directors must also appoint an internal auditor nominated by the audit committee. The role of the internal auditor is to examine whether the company's actions comply with the law and orderly business procedure. Under the companies law, the internal auditor may not be an interested party, an office holder, or a relative of an interested party or an office holder, nor may the internal auditor be the company's independent accountant or its representative. We intend to appoint an internal auditor to comply with the companies law after this offering. Approval of Specified Related Party Transactions Under Israeli Law The companies law imposes a duty of care and a duty of loyalty on all office holders of a company, including directors and executive officers. The duty of care requires an office holder to act with the level of care which a reasonable office holder in the same position would have acted under the same circumstances. An office holder under the companies law includes any director, general manager, chief executive officer or any other managers directly subordinate to the general manager or the chief executive officer, and any person who serves in a similar position regardless of title. Each person listed in the table under Directors and Executive Officers above, is an office holder. Under the companies law, the board of directors must approve all compensation arrangements of office holders who are not directors. Director's compensation arrangements also require audit committee approval before board approval and shareholder approval. The companies law requires that an office holder of a company disclose to the company any personal interest that he may have and all related material information known to him about any existing or proposed transaction by the company. The office holder is required to make this disclosure within a reasonable time before the discussion of the proposed transaction and no later than the first meeting of the board of directors at which the proposed transaction is discussed. Once an office holder complies with these disclosure requirements, the board of directors may approve a transaction between the company and an office holder, or a third party in which an office holder has a personal interest, unless the articles of association provide otherwise. A transaction that is adverse to the company's interest cannot be approved. If the transaction is an extraordinary transaction, both the audit committee and the board of directors must approve the transaction. Under specific circumstances, shareholder approval may also be required. Under the companies law, the disclosure requirements which apply to an office holder also apply to a controlling shareholder of a public company. A controlling shareholder includes a shareholder that holds 25% or more of the voting rights in a public company if no other shareholder owns more than 50% of the voting rights in the company. 51 Exculpation, Insurance and Indemnification of Directors and Officers Under the companies law, an Israeli company may not exempt an office holder from liability for 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, for a breach of his duty of care. Office Holder Insurance Our articles of association provide that, subject to the provisions of the companies law, we may enter into a contract for the insurance of the liability of any of our office holders for acts which he performed in his capacity as an office holder in relation to: . a breach of his duty of care to us or to another person; . 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 his act would not prejudice our interests; or . a financial liability imposed upon him in favor of another person. Indemnification of Office Holders Our articles of association provide that we may indemnify an office holder against: . a financial liability imposed on him in favor of another person by any judgment, including a settlement or an arbitrator's award approved by a court concerning an act performed in his capacity as an office holder; and . reasonable litigation expenses, including attorneys' fees, expended by the office holder or charged to him by a court in proceedings we institute against him, instituted on our behalf, or instituted by another person, in each case relating to an act performed in his capacity as an office holder; and . reasonable litigation expenses relating to an act performed in his capacity as an office holder, including attorneys' fees, expended by the office holder or charged to him by a court in a criminal proceeding from which he was acquitted, or a criminal proceeding in which he was convicted for a criminal offense that does not require proof of intent. Our articles of association also include: . authorization to undertake, in advance, to indemnify an office holder, provided that the undertaking is limited to specified events which the board of directors believes are anticipated and limited in amount determined by the board of directors to be reasonable under the circumstances; and . authorization to indemnify retroactively an office holder. Limitations on Insurance and Indemnification The companies law provides that a company may not indemnify an office holder nor enter into an insurance contract which would provide coverage for any monetary liability incurred as a result of: . a breach by the office holder of his duty of loyalty unless the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; . a breach by the office holder of his duty of care if the breach was done intentionally or recklessly; . any act or omission done with the intent to derive an illegal personal benefit; or . any fine levied against the office holder. 52 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 agreed to indemnify our office holders pursuant to indemnification agreements with each office holder. We have also exempted and agreed to indemnify our office holders from liabilities resulting from acts performed by them in their capacity as an officer holder to the maximum extent permitted under the companies law. Before this offering, we intend to obtain directors and officers liability insurance for the benefit of our office holders. Management Employment Agreements We have entered into employment agreements with Messrs. HaCohen, Allen, Morgenstern, Bibring and Burke. These employment agreements contain various provisions, including provisions relating to assignment of intellectual property rights to us, non-competition and confidentiality and are in effect until terminated by either party upon advance notice of 30 or 60 days or under specified circumstances under the terms of the particular agreement. We have also entered into executive incentive bonus plans with these executives. These plans provide for quarterly bonus payments upon achievement by us of targeted levels in specific business performance categories. Compensation of Directors and Officers The aggregate remuneration we paid for the year ended December 31, 1999 to our directors and executive officers as a group was $803,000 in salaries, fees, commissions and bonuses. This amount does not include payments to Mr. Allen, who was not an employee in 1999. This amount includes $157,000 set aside or accrued to provide for pension, retirement or similar benefits provided to our directors and executive officers. Our directors who are not executive officers do not receive compensation for their service on the board of directors or any board committee. However, all non-management directors are reimbursed for their expenses for each board meeting attended. As of July 20, 2000, options to purchase 2,618,000 ordinary shares granted to our directors and executive officers under our option plans were outstanding. The weighted average exercise price of these options was $4.32 per share. Of these options, options to purchase 1,105,081 ordinary shares are currently exercisable or will become exercisable within 60 days of July 20, 2000. Option Plans We currently maintain four option plans, the 1996 option plan, the 1997 option plan, the 1998 option plan and the 1999 option plan. The purpose of the option plans is to afford an incentive to our officers, directors, employees and consultants, or any of our subsidiaries, to acquire a proprietary interest in us, to continue as officers, directors, employees and consultants, to increase their efforts on behalf of ViryaNet and to promote the success of our business. The 1996 Option Plan In 1996, we adopted the 1996 option plan and reserved 1,400,000 ordinary shares for issuance to employees. As of July 20, 2000, options to purchase 1,177,920 ordinary shares were outstanding under the 1996 option plan. In 2000, the 17,740 additional ordinary shares that were available for grants of additional options were transferred to the 1999 option plan. The exercise price of options granted under the 1996 option plan range from $0.61 to $1.00. 53 The 1997 Option Plan In 1997, we adopted the 1997 option plan and reserved options to purchase an aggregate of 500,000 ordinary shares. As of July 20, 2000, options to purchase 249,650 ordinary shares were outstanding under the 1997 option plan. In 2000, the 226,375 additional ordinary shares that were available for grants of additional options were transferred to the 1999 option plan. The exercise price of the options granted under the 1997 option plan is $2.30. The 1998 Option Plan In 1998, we adopted the 1998 option plan and reserved options to purchase an aggregate of 1,500,000 ordinary shares to employees. As of July 20, 2000, options to purchase 846,125 ordinary shares were outstanding under the 1998 option plan. In 2000, the 646,625 additional ordinary shares that were available for grants of additional options were transferred to the 1999 option plan. The exercise price of the options granted under the 1998 option plan range from $1.00 to $3.90. The 1999 Option Plan In 1999, we adopted the 1999 option plan and reserved options to purchase an aggregate of 3,000,000 ordinary shares to employees and transferred an additional 890,740 ordinary shares to the 1999 option plan from the 1996 option plan, the 1997 option plan and the 1998 option plan. As of July 20, 2000, options to purchase 3,638,355 ordinary shares were outstanding under the 1999 option plan and 249,635 additional ordinary shares were available for grants of additional options. The exercise price of the options granted under the 1999 option plan range from $3.20 to $12.00. Administration of Our Option Plans Our option plans are administered by the board of directors. Under the option plans, options to purchase our ordinary shares may be granted to our officers, directors, employees or consultants or our subsidiaries. Under the option plans, the exercise price of options shall be determined by the committee but may not be less than NIS 0.1. The vesting schedule of the options is also determined by the committee but generally the options vest over a four year period. Each option granted under the option plans is exercisable until seven years from the date of the grant of the option. The 1996 option plan, the 1997 option plan, the 1998 option plan and the 1999 option plan will expire on December 31, 2005, 2006, 2007 and 2008. 54 RELATED PARTY TRANSACTIONS Preferred Shares Financing Series A and Series B Preferred Shares. In October 1996, we issued and sold an aggregate of 2,500,000 of our series A preferred shares at a price of $2.00 per share. Investors owning ten percent or more of our shares who purchased shares in that transaction and the number of shares each purchased include:
Number of Series A Investor Preferred Shares Purchased -------- -------------------------- The Star Group................................... 687,500 Advanced Technology Ventures Group............... 687,500 The Clal Group................................... 437,500 We issued warrants to purchase an aggregate of 785,420 series A preferred shares to these investors at an exercise price of $3.00 per share. In December 1996, we converted 500,000 series A preferred shares held by the Advanced Technology Ventures Group into 500,000 series B non-voting preferred shares. Warrants to purchase 216,670 series A preferred shares issued to Advanced Technology Ventures Group were converted into warrants to purchase 216,670 series B non-voting preferred shares. In April 1997, 150,000 series A preferred shares held by Advanced Technology Ventures were converted into 150,000 series B non-voting preferred shares and 77,460 ordinary shares held by the Gilde Group were converted into 77,460 series A preferred shares. Series C-1 Preferred Shares. In March and April 1998, we issued and sold an aggregate of 3,205,128 of our series C-1 preferred shares at a price of $3.90 per share. These shares included 794,871 shares issued to shareholders who invested in ViryaNet in August and November 1997. We agreed to issue shares to those investors as part of a subsequent equity financing. The first equity financing to occur after those investments was the series C-1 preferred financing. Investors owning ten percent or more of our shares who purchased series C-1 preferred shares in March and April 1998 and the number of shares each purchased include: Number of Series C-1 Investor Preferred Shares Purchased -------- -------------------------- The Star Group................................... 367,206 Advanced Technology Ventures Group............... 169,614 The Clal Group................................... 374,635 GE Capital Equity Holdings....................... 641,026
We issued warrants to purchase 3,077, 4,103 and 6,666 series C-1 preferred shares to the Star Group, Advanced Technology Ventures and the Clal Group. The exercise price of these warrants is NIS 0.10 per share. We also issued a warrant to GE Capital Equity Holdings, Inc. to purchase 512,820 series C-1 preferred shares at an exercise price of $3.90 per share. GE Capital exercised its warrant in whole in September 1998. Series C-2 Preferred Shares. In June 1999, we sold an aggregate of 1,739,132 of our series C-2 preferred shares. 1,022,610 of these shares were sold to existing shareholders and 716,522 of these shares were sold to Eucalyptus Ventures L.P. and its affiliates, Access Technology Partners, L.P. and Chase Securities Inc. and its affiliates at a purchase price of $5.75 per share. We issued warrants to these shareholders and investors enabling them to purchase up to 347,826 of our series C-2 preferred shares at a purchase price of $5.75 per share. The warrants contain a cashless exercise feature and may be exercised until the earlier of five years of the date of issuance, a merger of ViryaNet, or the sale of all or substantially all of our issued share capital. Investors owning ten percent or more of our shares and officers who purchased series C-2 preferred shares in June 1999 and the number of shares each purchased include: 55
Number of Series C-2 Investor Preferred Shares Purchased -------- -------------------------- Samuel HaCohen................................... 17,390 Advanced Technology Ventures Group............... 139,190 The Clal Group................................... 366,020 GE Capital Equity Holdings....................... 364,420
We issued warrants to purchase an aggregate of 177,404 series C-2 preferred shares to these investors and officers. The exercise price of each of these warrants is $5.75. We loaned Mr. HaCohen $100,000 to purchase his series C-2 preferred shares. Convertible Debentures Financing In February and March 2000, some of our shareholders loaned ViryaNet an aggregate of $5 million. These convertible loans converted into the convertible debentures issued later in April 2000 as described below. These shareholders were also issued warrants to purchase up to an aggregate of 124,999 ordinary shares at an exercise price of $6.27 per share. The warrants may be exercised until the earlier of 5 years from the date of issuance, a merger of ViryaNet or the sale of all or substantially all of our shares or assets. In April 2000, we issued convertible debentures to three additional investors in an aggregate amount of $11 million, bearing interest at the London interbank offered rate plus 2%. The convertible debentures are automatically convertible into ordinary shares upon the completion of this offering at a conversion price per share reflecting a discount of 40% to 50% of the price per share in this offering, depending on the timing of the offering. If this offering is completed by December 20, 2000, the discount will be 40% and we will be required to issued to these investors, together with those investors who provided loans as described in the preceding paragraph, 2,431,917 of our ordinary shares reflecting an implied price per share of $6.60. Relationship with Sun Microsystems In September 1995, we entered into a software license agreement with Sun Microsystems, Inc. Sun Microsystems holds a warrant to purchase 300,000 of our series A preferred shares at an exercise price of $2 per share. Mr. Lawrence W. Hambly who is a member of our board of directors, serves as the president of the enterprise services division and corporate quality officer of Sun Microsystems. We granted Sun Microsystems a non-exclusive license to use our products identified in the license and we provided Sun Microsystems with a copy of the software and related source documentation for the licensed products. We granted Sun Microsystems a non-transferable and non-exclusive, irrevocable and perpetual license to use, copy, modify and create derivative works of the software. Sun Microsystems may terminate the agreement upon 90 days' prior notice if Sun Microsystems considers the termination to be necessary to protect Sun Microsystems' interests or upon 30 days' prior notice if we materially breach the agreement. Following termination of the agreement, Sun Microsystems is entitled to retain the then current software for the licensed products but has agreed it will not use that software to compete with us. As part of a December 1998 amendment to the agreement, we were engaged by Sun Microsystems to develop and implement a software quoting system. All components other than some third party software embedded in the quote software will be delivered by us to Sun Microsystems. 56 Relationship with General Electric In April 1998, we entered into a share purchase agreement with GE Capital Equity Holdings, Inc., a subsidiary of General Electric. General Electric acquired series C-1 preferred shares representing approximately 6% of our then outstanding shares for $2.5 million and received a warrant to acquire 512,820 additional series C-1 preferred shares at an aggregate exercise price of $2 million. In September 1998, General Electric exercised its warrant. In June 1998, we entered into an agreement for software license and support with GE Medical Systems., a division of General Electric. Under this agreement, we granted GE Medical a perpetual non-exclusive license to use our products identified in the agreement. In December 1998, we entered into an amendment to the software license agreement with GE Medical under which we licensed an additional product to them. In November 1999, GE Medical notified us of its intention not to further deploy our products. In December 1999, we entered into an agreement with GE under which GE paid us outstanding receivables of $1.5 million. Under the terms of the agreement we are obligated to provide GE, until December 31, 2001, with free maintenance and support services including future upgrades and enhancements of specified products. We issued to GE Medical warrants to purchase 50,000 of our ordinary shares at an exercise price of $5.75 per share. In March 1999, we entered into a license agreement with GE Power, a subsidiary of General Electric, under which we granted GE Power a non-exclusive right and license to use our products identified in the agreement. We are required to provide GE Power with support and maintenance services. Neither we nor GE Power may assign our rights under the agreement. A merger, consolidation, combination or restructuring by us, the transfer of more than 20% of our share capital or the sale of all or substantially all of our assets would be considered an assignment under the terms of the license agreement. In June 1999, we sold shares of series C-2 preferred shares and related warrants to GE Capital Equity Holdings as described above. Other Clients From June 1999 through July 20, 2000, we issued to some of our clients warrants to purchase an aggregate of 310,000 ordinary shares. The exercise price of these warrants ranges from $5.75 to $12.00 per share. Warrants to purchase 50,000 ordinary shares will expire upon the completion of this offering and the remaining warrants to purchase 260,000 ordinary shares expire on dates ranging from January 2002 to January 2003. 57 PRINCIPAL SHAREHOLDERS The following table summarizes information about the beneficial ownership of our outstanding ordinary shares as of July 20, 2000 for: . each person or group that we know owns more than 10% of our ordinary shares; and . all of our directors and executive officers as a group. We determine beneficial ownership of shares under the rules of the Securities and Exchange Commission and includes any ordinary shares over which a person exercises sole or shared voting or investment power, or of which a person has the right to acquire ownership at any time within 60 days of July 20, 2000. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power for all ordinary shares held by them. Applicable percentage ownership in the following table is based on 17,405,510 ordinary shares outstanding as of July 20, 2000 and 21,905,510 ordinary shares outstanding immediately following the completion of this offering. These numbers assume the conversion of all outstanding preferred shares and convertible debentures into ordinary shares and the exercise of warrants to acquire ordinary shares which expire upon the completion of this offering. Unless otherwise indicated, the address of each shareholder is c/o ViryaNet, Inc., 2 Willow Street, Southborough, Massachusetts 01745-1027.
Ordinary Shares Ordinary Shares Beneficially Owned Beneficially Owned Before the Offering After the Offering ----------------------- --------------------- Name and Address Number Percent Number Percent - ---------------- ------------ ---------- ----------- --------- SVM Star Ventures Management GmbH No. 3 (1)......................... 2,016,719 11.6% 2,016,719 9.2% Possaertsrassa 9 D-81679 Munich, Germany Advanced Technology Ventures IV L.P. (2).......................... 2,090,507 12.0 2,090,507 9.5 485 Ramona Street, Suite 200 Palo Alto, CA 94301 United States GE Capital Equity Holdings, Inc. (3)............................... 1,746,337 10.0 1,746,337 7.9 120 Long Ridge Road Stamford, CT 06927 United States The Clal Group (4)................. 2,881,434 16.5 2,881,434 13.1 Kiriat Atidim Ramat Hachayal P.O. Box 61581, Tel Aviv 58177, Israel All executive officers and directors as a group (ten people) (5) (6).............. 7,934,168 41.9 7,934,168 33.9
- ------------------ (1) Includes: . 436,857 ordinary shares and warrants to purchase 659 ordinary shares exercisable within 60 days of July 20, 2000 held by STAR Management of Investments (1993) Limited Partnership; . 351,900 ordinary shares and warrants to purchase 531 ordinary shares exercisable within 60 days of July 20, 2000 held by SVE STAR Ventures Enterprises No. III, a German civil law partnership with limitation of liability; . 29,425 ordinary shares and warrants to purchase 45 ordinary shares exercisable within 60 days of July 20, 2000 held by SVE STAR Ventures Enterprises No. IIIA, a German civil law partnership with limitation of liability; 58 . 154,841 ordinary shares and warrants to purchase 234 ordinary shares exercisable within 60 days of July 20, 2000 held by SVM STAR Ventures Managementgesellschaft GmbH Nr. 3 & Co. Beteiligungs KG; . 687,413 ordinary shares and warrants to purchase 1,038 ordinary shares exercisable within 60 days of July 20, 2000 held by SVE STAR Ventures Enterprises No. V, a German civil law partnership with limitation of liability; and . 353,206 ordinary shares and warrants to purchase 570 ordinary shares exercisable within 60 days of July 20, 2000 held by SVM STAR Ventures Management GmbH No. 3. SVM STAR Ventures Management GmbH No. 3 has the sole power to vote or direct the vote of the ordinary shares held by the STAR entities and is therefore considered the beneficial owner of the shares beneficially held by the STAR entities. (2) Includes warrants to purchase 47,964 ordinary shares exercisable within 60 days of July 20, 2000 held by Advanced Technology Ventures IV L.P. (3) Includes warrants to purchase 86,657 ordinary shares exercisable within 60 days of July 20, 2000 held by GE Capital Equity Holdings, Inc. and warrants to purchase 50,000 ordinary shares exercisable within 60 days of July 20, 2000 held by GE Medical. (4) Includes: . 725,134 ordinary shares and warrants to purchase 15,833 ordinary shares exercisable within 60 days of July 20, 2000 held by Clal Venture Capital Fund L.P.; . 776,320 ordinary shares and warrants to purchase 15,833 ordinary shares exercisable within 60 days of July 20, 2000 held by Clalit Capital Fund L.P.; . 637,555 ordinary shares and warrants to purchase 36,602 ordinary shares exercisable within 60 days of July 20, 2000 held by Clal Industries and Investments Ltd.; and . 637,555 ordinary shares and warrants to purchase 36,602 ordinary shares exercisable within 60 days of July 20, 2000 held by Clal Electronics Industries Ltd. (5) Includes: . options and warrants to purchase 1,105,081 ordinary shares held by all executive officers and directors, which are exercisable within 60 days of July 20, 2000; . 2,042,543 ordinary shares and warrants to purchase 47,964 ordinary shares which are exercisable within 60 days of July 20, 2000 held by Advanced Technology Ventures, which Mr. Baloff, the managing director and general partner of Advanced Technology Ventures, may be considered to beneficially own, but disclaims beneficial ownership; . 1,101,793 ordinary shares and warrants to purchase 8,814 ordinary shares which are exercisable within 60 days of July 20, 2000 held by Jerusalem Pacific Ventures (1994), L.P., which Dr. Morisson, the fund manager of Jerusalem Pacific Ventures may be considered to beneficially own, but disclaims beneficial ownership; . 300,000 ordinary shares held by Sun Microsystems which Mr. Hambly, an officer of Sun Microsystems, may be considered to beneficially own, but disclaims beneficial ownership; and . 2,776,564 ordinary shares and warrants to purchase 104,870 ordinary shares which are exercisable within 60 days of July 20, 2000 which Mr. Milo, the managing partner of Clal Venture Capital Fund L.P., may be considered to beneficially own but disclaims beneficial ownership. (6) Does not include an aggregate of 37,500 ordinary shares which may be acquired immediately prior to this offering from two of our executive officers pursuant to an option agreement executed in 1998. 59 DESCRIPTION OF SHARE CAPITAL Description of Shares The following is a summary of the material provisions of our share capital. This description reflects the adoption of our amended and restated articles of association before the completion of this offering. This summary is not complete and should be read together with our memorandum of association and articles of association, a copy of each of which has been filed as an exhibit to the registration statement of which this prospectus forms a part. Our authorized share capital consists of 35,000,000 ordinary shares, NIS 0.1 par value per share, of which 21,905,510 ordinary shares will be issued and outstanding at the conclusion of this offering, 22,580,510 ordinary shares if the underwriters' over-allotment option is exercised in full. Par value is an assigned amount used to compute the accounting value of our shares on our balance sheet and has no relation to market value. Description of Ordinary Shares All of our issued and outstanding ordinary shares are, and the ordinary shares offered in this offering when issued and paid for will be duly authorized and validly issued, fully paid and non-assessable. The ordinary shares do not have preemptive rights. Neither our memorandum of association or articles of association, nor the laws of the State of Israel restrict in any way the ownership or voting of ordinary shares by non-residents of Israel, except for subjects of countries which are in a state of war with Israel. Dividend and Liquidation Rights We may declare a dividend to be paid to the holders of ordinary shares according to their rights and interests in our profits. If we liquidate, after satisfying liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion to their holdings. This right may be affected by the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future. The board of directors may declare interim dividends and the final dividend for any fiscal year only out of retained earnings, or earnings derived during the two most recent years, whichever is higher. Under the companies law, the declaration of a dividend does not require the approval of the shareholders of the company, unless the company's articles of association require otherwise. Our articles of association provide that our board of directors may declare and pay dividends without any future action of our shareholders. Voting, Shareholder Meetings and Resolutions Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. These voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future. The quorum required for an ordinary meeting of shareholders consists of at least two shareholders present in person or by proxy who hold or represent between them at least 33% of the issued share capital. A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time and place or any time and place as the directors designate in a notice to the shareholders. At the reconvened meeting the required quorum consists of any two shareholders present in person or by proxy. An ordinary resolution requires approval by the holders of a majority of the voting rights represented at the meeting in person, by proxy or by written ballot, and voting on the resolution. Under the companies law, unless otherwise provided in the articles of association or applicable law, all resolutions of the shareholders require a simple majority and all shareholders meetings require prior notice of at least 21 days. 60 Under the companies law, a shareholder has a duty to act in good faith towards the company in which he holds shares and towards other shareholders and to refrain from abusing his power in the company including voting in the general meeting of shareholders on: . any amendment to the articles of association; . an increase of the company's authorized share capital; . a merger; or . approval of some of the acts and transactions which require shareholder approval. A shareholder has the general duty to refrain from depriving rights of other shareholders. Any controlling shareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder vote and any shareholder that, under the provisions of the articles of association, has the power to appoint an office holder in the company, is under a duty to act in fairness towards the company. The companies law does not describe the substance of this duty. Transfer of Shares Fully paid ordinary shares are issued in registered form and may be freely transferred under our articles of association unless the transfer is restricted or prohibited by another instrument. Modification of Class Rights Under our articles of association, the rights attached to any class unless otherwise provided by the terms of the class including voting, rights to dividends and the like, may be varied by adoption of the necessary amendment to the articles of association, provided that the affected shareholders approve the change by a class meeting in which a simple majority of the voting power of the class represented at the meeting and voting on the matter approves the change. Election of Directors Our ordinary shares do not have cumulative voting rights in the election of directors. As a result, the holders of ordinary shares that represent more than 50% of the voting power represented at a shareholders meeting have the power to elect most of our directors. Registration Rights We have granted registration rights to some of our shareholders and warrant holders and to all our holders of convertible debentures. Assuming this offering is completed before December 20, 2000 and the conversion of all outstanding convertible debentures and preferred shares, holders of 15,889,688 ordinary shares and warrants to purchase 764,563 ordinary shares have the right in some circumstances to register their ordinary shares for sale if we at any time propose to register any of our securities for sale. Holders of 15,839,688 ordinary shares and warrants to purchase 504,563 ordinary shares will have, following this offering, the right in some circumstances to require us to register their ordinary shares for resale to the public provided that the aggregate price to the public will be at least $5 million, or $1 million if the registration is filed on Form F-3. We will not be required to complete more than six of these registrations. Anti-Takeover Provisions; Mergers and Acquisitions under Israeli Law Mergers The companies law includes provisions that allow a merger transaction, and requires that each company that is party to a merger approve the transaction by its board of directors and a vote of the majority of its shares, present and voting on the proposed merger, at a shareholders' meeting called on at least 21 days' prior notice. In determining whether a majority has approved the merger, shares held by the other party to the merger or any person holding at least 25% of the other party to the merger are excluded from the vote. 61 The companies law does not require court approval of a merger other than in specified situations. However, upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. A merger may not be completed unless at least 70 days have passed from the time that a proposal for approval of the merger has been filed with the Israeli registrar of companies. Tender Offers The companies law also provides that an acquisition of shares in a public company on the open market must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% shareholder of the company. The rule does not apply if there is already another 25% shareholder of the company. Similarly, the companies law provides that an acquisition of shares in a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become a 45% shareholder of the company, unless there is a 50% shareholder of the company. These rules do not apply if the acquisition is made by way of a merger as opposed to a tender offer. Regulations adopted under the companies law provide that these tender offer requirements do not apply to companies whose shares are listed for trading outside of Israel if, according to the law in the country in which the shares are traded, including the rules and regulations of the stock exchange on which the shares are traded, there is either a limitation on acquisition of any level of control of the company, or the acquisition of any level of control requires the purchaser to do so by means of a tender offer to the public. 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 of 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 and acquire 95% of all shares not held by or for the benefit of the acquirer prior to the acquisition. 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. Tax Rules Finally, Israeli tax law treats specified acquisitions, including a stock- for-stock swap between an Israeli company and a foreign company, less favorably than does United States federal tax law. Transfer Agent and Registrar The transfer agent and registrar for our ordinary shares is American Stock Transfer & Trust Company, New York, New York. 62 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering and assuming this offering is completed before December 20, 2000, we will have outstanding 21,905,510 ordinary shares. This assumes the issuance of ordinary 4,500,000 shares in this offering, conversion of all shares of preferred shares and convertible debentures into ordinary shares, exercise of warrants that expire upon the completion of this offering and no exercise of options or other warrants. Of these ordinary shares, the 4,500,000 ordinary shares sold in this offering will be freely tradable without restriction. However, if shares are purchased by a person that controls us, such as an officer, director or significant shareholder, their sales of ordinary shares would be subject to the limitations and restrictions that are described below. Outstanding Shares The remaining 17,405,510 ordinary shares, assuming conversion of all preferred shares and convertible debentures held by existing shareholders as of July 20, 2000 and exercise of warrants that expire on the closing of this offering, were issued and sold by us in reliance on exemptions from the registration requirements of the Securities Act. Of these ordinary shares, 17,265,010 ordinary shares will be subject to lock-up agreements described below on the effective date of the offering. Upon expiration of the lock-up agreements 180 days after the effective date or with the prior written consent of Chase Securities Inc., ordinary shares will become eligible for sale, subject in most cases to the limitations of Rules 144 and 701. Holders of stock options and warrants could exercise their options and warrants and sell the shares issued upon exercise as described below under the heading Outstanding Warrants and Options. The 17,405,510 ordinary shares are eligible for sale in the public market as follows:
Ordinary Shares Which Become Eligible Date for Sale Comment ------------------------ ------------ ------- Upon effectiveness...... 4,500,000 Ordinary shares sold in the offering 90 days after effectiveness.......... 140,500 Ordinary shares saleable under Rules 144 and 701 that are not subject to the lock-up 180 days after effectiveness.......... 14,833,093 Lock-up released; ordinary shares will become saleable (subject, in some cases, to volume limitations) At various times after 180 days after effectiveness.......... 2,431,917 Ordinary shares will become saleable at various times (subject, in some cases, to volume limitations)
Outstanding Warrants and Options As of July 20, 2000, there were a total of 764,619 ordinary shares that could be issued upon exercise of outstanding warrants. 604,619 of these shares are subject to lock-up agreements. As of July 20, 2000, there were a total of 5,912,050 ordinary shares subject to outstanding options under our stock plans, 2,525,386 of which were vested. However, 1,939,336 of these shares are subject to lock-up agreements. Promptly after the completion of the offering, we intend to file registration statements on Form S-8 under the Securities Act to register all of the ordinary shares issued or reserved for future issuance under our option plans. After the effective dates of the registration statements on Form S-8, ordinary shares purchased upon exercise of options granted under our 1996 stock option plan, 1997 stock option plan, 1998 stock option plan and 1999 stock option plan generally would be available for resale in the public market. 63 Lock-ups Our officers, directors and most of our shareholders have agreed not to sell or dispose of any of their ordinary shares for a period of 180 days after the date of this prospectus. Chase Securities Inc., however, may in its sole discretion, at any time and in most cases without notice, release all or any portion of the shares subject to lock-up agreements. Rule 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned ordinary shares for at least one year would be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of: . 1% of the number of ordinary shares then outstanding, which will equal approximately shares immediately after the effective date of this offering; or . the average weekly trading volume of the ordinary shares on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 for the sale. Sales under Rule 144 are also subject to other requirements for the manner of sale, notice filing and the availability of current public information about us. Rule 701 In general, under Rule 701, any of our employees, directors, officers, consultants or advisors who purchases shares from us under a compensatory stock or option plan or other written agreement before the effective date of the offering is entitled to resell these ordinary shares 90 days after the effective date of this offering in reliance on Rule 144, without having to comply with some of the restrictions contained in Rule 144, including the holding period. The Securities and Exchange Commission has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Securities Exchange Act of 1934, along with the ordinary shares acquired upon exercise of these options including exercises after the date of this prospectus. Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning 90 days after the date of this prospectus, may be sold by persons other than affiliates subject only to the manner of sale provisions of Rule 144 and by affiliates under Rule 144 without compliance with its one year minimum holding period holding requirement. Following this offering the holders of 15,839,688 ordinary shares and of warrants exercisable for 504,563 ordinary shares will have rights to require us to register their shares for future sale. 64 UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS The following discussion describes the material United States federal income tax consequences to you from the purchase, ownership, and disposition of our ordinary shares acquired in this offering. The following discussion is based on the internal revenue code, current and proposed treasury regulations, judicial decisions and published positions of the internal revenue service, all as in effect on the date of this prospectus, and all of which are subject to change, possibly with retroactive effect. This discussion does not address all aspects of United States federal income taxation that may be relevant to you based on your particular circumstances. For example, the following discussion does not address the United States federal income tax consequences of the purchase, ownership and disposition of the ordinary shares if you, . own, directly, indirectly or through attribution 10% or more of our shares by vote or value; . are a broker-dealer, insurance company, tax-exempt organization, or financial institution; . hold ordinary shares as part of an integrated investment comprised of ordinary shares and one or more other positions; or . have a functional currency that is not the United States dollar. The following discussion also does not address any aspect of state, local or non-United States tax laws or any aspect of United States estate or gift taxation. Further, this summary generally considers only United States holders that hold their ordinary shares as capital assets and does not consider the tax treatment of holders who are partnerships or who hold ordinary shares through a partnership or other pass-through entity. This discussion also assumes that we will not be treated as a controlled foreign corporation as defined in the internal revenue code. If you are not a United States holder, or if you hold shares other than ordinary shares, or if you did not acquire your ordinary shares in this offering, this discussion does not apply to you. For purposes of this discussion, you are a United States holder if you hold ordinary shares and if you are: . a citizen or resident of the United States; . a partnership or a corporation or other entity taxable as a corporation organized under the laws of the United States or of any state of the United States or the District of Columbia; . an estate the income of which is includible in gross income for United States federal income tax purposes regardless of source; or . a trust, if a United States court is able to exercise primary supervision over its administration and one or more United States persons have the authority to control all of its substantial decisions. You are advised to consult your own tax advisor about the specific tax consequences to you of the purchase, ownership and disposition of the ordinary shares acquired in this offering. In particular, you should be aware that this summary is not a comprehensive description of all the tax considerations that may be relevant to your decision to purchase our ordinary shares. Distributions We have never paid dividends, and currently do not intend to pay dividends in the future. In general, and subject to the passive foreign investment company rules discussion in this prospectus, if we do make a distribution on the ordinary shares, the distribution will be treated as a dividend for United States federal income tax purposes to the extent of our current and accumulated earnings and profits, as calculated under United States federal income tax principles. If the amount of the distribution exceeds our earnings and profits, the excess will first be treated as a non-taxable return of a United States holder's tax basis in the ordinary shares that reduces that United States holder's tax basis dollar-for-dollar, and then as gain from the constructive disposition of the ordinary shares. 65 The amount received by a United States holder that is treated as a dividend for United States federal income tax purposes: . will be includible in the United States holder's gross income; . will be subject to tax at the rates applicable to ordinary income; and . will not qualify for the dividends received deduction applicable in some cases to United States corporations. The amount of dividend income will include the amount of Israeli taxes, if any, withheld by us on the dividends we paid, as described below in this prospectus under Israeli Taxation and Investment Programs. Thus, if withholding taxes are imposed, a United States holder will be required to report income in an amount greater than the cash or the value of other property it receives on the ordinary shares. However, a United States holder may be eligible to claim as a credit against its United States federal income tax liability the amount of tax withheld by us on the dividends we paid. The amount of foreign income taxes which may be claimed as a credit in any year is subject to complex limitations and restrictions, which must be determined on an individual basis by each United States holder. In general, the total amount of allowable foreign tax credits in any year cannot exceed the pre-credit United States tax liability for the year attributable to each of nine categories of foreign source taxable income. Dividends received by a United States holder with respect to stock of a foreign corporation, such as our ordinary shares, are generally treated as foreign source income within the category of passive income for this purpose, but are subject to being reclassified as United States source income in specific circumstances. Because distributions in excess of our current and accumulated earnings and profits generally will not give rise to foreign source income, you may be unable to claim a foreign tax credit in respect of Israeli withholding tax imposed on the excess amount unless, subject to applicable limitations, you have other foreign source income. A United States holder's foreign tax credit may be further limited or restricted based on that United States holder's particular circumstances, including the length of time the United States holder owned our ordinary shares and whether the alternative minimum tax provisions of the internal revenue code apply. If a United States holder's foreign tax credit is restricted in one taxable year, the excess foreign tax credit generally can be carried back for two taxable years and forward for five taxable years, subject to the limitations described above. If a United States holder receives a dividend in NIS or other non-United States currency, the amount of the distribution for United States federal income tax purposes will be the United States dollar value of the distribution determined by the spot rate of exchange on the date the distribution is received, or is treated or received. A United States holder will have a tax basis in the foreign currency for United States federal income tax purposes equal to the United States dollar value of the foreign currency as determined under the preceding sentence. A United States holder generally will recognize exchange gain or loss upon the subsequent disposition of the foreign currency equal to the difference between the amount realized on the disposition and the United States holder's tax basis in the foreign currency. The gain or loss generally will be ordinary gain or loss and will generally be treated as United States source gain or loss for United States federal income tax purposes. Alternatively, a United States holder may elect to claim a United States federal income tax deduction for the Israeli tax paid or withheld, but only for a taxable year in which the United States holder elects to deduct all foreign income taxes. A non-corporate United States holder, however, may not elect to deduct Israeli taxes if that United States holder does not itemize deductions. 66 Sale, Exchange or Other Disposition Subject to the passive foreign investment company rules discussion below, a United States holder generally will recognize capital gain or loss for United States federal income tax purposes upon the sale or other disposition of the United States holder's ordinary shares equal to the difference between the amount realized on the sale or other disposition and the United States holder's tax basis in its ordinary shares. The capital gain or loss will be long-term capital gain or loss if the ordinary shares have been held for more than one year at the time of sale or other disposition. In general, any gain or loss recognized by a United States holder on the sale or other disposition of ordinary shares will be United States source income or loss for foreign tax credit purposes. In some cases, however, losses upon the sale or other disposition of ordinary shares may be required to be allocated to foreign source income. Personal Holding Companies A foreign corporation may be classified as a personal holding company for United States federal income tax purposes if both of the following two tests are satisfied: . if at any time during the last half of the company's taxable year, five or fewer individuals without regard to their citizenship or residency actually or constructively own, under attribution rules, more than 50% of the stock of the corporation by value; and . 60% or more of the foreign corporation's gross income derived from United States sources or effectively connected with a United States trade or business, as specifically adjusted, is from passive sources like dividends and royalty payments. A personal holding company generally is taxed currently at a rate of 39.6% of undistributed personal holding company income, which is generally calculated based on the corporation's taxable income, after making adjustments including deducting dividends paid and income taxes. We believe that we were not a personal holding company in 1999. We cannot assure you that either test will not be satisfied in 2000 or future years because it is difficult to make accurate predictions of future income and the amount of stock an individual will actually or constructively own in us. Foreign Personal Holding Companies A foreign corporation will be classified as a foreign personal holding company for United States federal income tax purposes if both of the following two tests are satisfied: . five or fewer individuals who are United States citizens or residents actually or constructively own, under attribution rules, more than 50% of all classes of the corporation's stock measured by voting power or value at any time during the corporation's taxable year; and . the corporation receives at least 60%, 50% if previously a foreign personal holding company, of its gross income regardless of source, as specifically adjusted, from passive sources. If a corporation is classified as a foreign personal holding company, a portion of its undistributed foreign personal holding company income, as defined for United States federal income tax purposes, would be imputed to all of its shareholders who are United States holders on the last taxable day of the corporation's taxable year, or, if earlier, the last day on which it is classifiable as a foreign personal holding company. The imputed income would be taxable as a dividend, even if no cash dividend is actually paid. United States holders who dispose of their shares before that date would not be subject to United States federal income tax under these rules. We believe that we were not a foreign personal holding company in 1999. We cannot assure you that we will not qualify as a foreign personal holding company in 2000 or future years because it is difficult to make accurate predictions of future income and the amount of stock a United States citizen or resident will actually or constructively own in us. 67 Foreign Investment Companies A foreign corporation may be classified as a foreign investment company if, at any time during a taxable year when 50% or more by vote or value of the corporation's outstanding stock is owned, directly or indirectly, by United States holders, it is: . registered under the Investment Company Act of 1940 as a management company or unit investment trust; or . engaged, or holding itself out as being engaged, primarily in the business of investing, reinvesting, or trading in securities, commodities, or any interest, including a futures or forward contract or option, in securities or commodities. In general, if a corporation is classified as a foreign investment company at any time during the period a United States holder holds the corporation's stock, any gain from the sale or exchange (or distribution treated as an exchange) of stock in that corporation by the United States holder will be taxable as ordinary income to the extent of the United States holder's ratable share of the corporation's accumulated earnings and profits. We believe that we were not a foreign investment company in 1999. We cannot assure you that we will not become a foreign investment company in 2000 or future years because it is difficult to make accurate predictions of the amount of stock United States holders will directly or indirectly own in us. Passive Foreign Investment Company Rules In general, a foreign corporation will be a passive foreign investment company if: . 75% or more of its gross income, including the pro rata share of the gross income of any United States or foreign company in which the corporation is considered to own 25% or more of the shares by value, in a taxable year is passive income; or . at least 50% of the average value of the assets of the corporation, including the pro rata share of the assets of any United States or foreign company in which the corporation is considered to own 25% or more of the shares by value, in a taxable year are held for the production of, or produce, passive income. If the foreign corporation is a publicly traded corporation for its entire taxable year, this 50% test is based on the average value of its assets. This 50% test may instead be based on the adjusted bases of the foreign corporation's assets, rather than value, if the foreign corporation is not a publicly traded corporation for a portion of its taxable year and either the foreign corporation is a controlled foreign corporation or elects to use the adjusted bases of its assets for purposes of this test. If we were a passive foreign investment company, and a United States holder did not make a qualifying election either to treat us as a qualified electing fund or mark our shares to market: . excess distributions by us to a United States holder would be taxed in a special way. Excess distributions are amounts received by a United States holder with respect to our ordinary shares in any taxable year that exceed 125% of the average distributions received by the United States holder from us in the shorter of either the three previous years or the United States holder's holding period for ordinary shares before the current taxable year. Excess distributions must be allocated ratably to each day that a United States holder has held our ordinary shares. A United States holder must include amounts allocated to the current taxable year and to pre-passive foreign investment company years in its gross income as ordinary income for the current taxable year. A United States holder must pay tax on amounts allocated to each prior taxable year for which we were a passive foreign investment company at the highest rate in effect for that year on ordinary income and the tax is subject to an interest charge at the rate applicable to deficiencies for income tax. 68 . the entire amount of gain that is recognized by a United States holder upon the sale or other disposition of ordinary shares will also be considered an excess distribution and will be subject to tax as described above. . if a corporation is a passive foreign investment company, a United States holder who acquires ordinary shares in the corporation from a decedent who was a United States shareholder is denied the normally available step-up in the tax basis of the ordinary shares to fair market value at the date of death and instead will hold the ordinary shares with a tax basis equal to the decedent's basis, if lower than the fair market value. A United States holder cannot avoid this result, however, by electing to mark our ordinary shares to market. If a United States holder has made a qualified electing fund election for all taxable years during which the United States holder owned our ordinary shares and we were a passive foreign investment company, the passive foreign investment company rules described above will not apply to the United States holder. Instead, a United States holder of a qualified electing fund is required for each taxable year to include in income a pro rata share of the ordinary earnings of the qualified electing fund as ordinary income and a pro rata share of the net capital gain of the qualified electing fund as long-term capital gain, subject to a separate election to defer payment of taxes and incur an interest charge. The qualified electing fund election is made on a shareholder-by-shareholder basis and can be revoked only with the consent of the internal revenue service. A United States holder generally makes a qualified electing fund election by obtaining and retaining the passive foreign investment company annual information statement, attaching a completed internal revenue service Form 8621 to a timely filed United States federal income tax return and by filing the form with the internal revenue service center in Philadelphia, Pennsylvania. Even if a qualified electing fund election is not made, a shareholder in a passive foreign investment company who is a United States holder generally must file a completed internal revenue service Form 8621 every year. A United States holder of publicly traded passive foreign investment company stock could elect to mark the stock to market annually and generally could be subject to specific rules for each of the United States holder's taxable years, including: . if the fair market value of the United States holder's passive foreign investment company stock exceeds the United States holder's adjusted tax basis in that stock as of the close of the United States holder's taxable year, the United States holder will recognize the amount of the excess as ordinary income; . if the fair market value of the United States holder's passive foreign investment company stock is less than the United States holder's adjusted tax basis in that stock as of the close of the United States holder's taxable year, the United States holder may recognize the amount of the difference as ordinary loss. Losses would be allowed only for the amount of net gain previously included by the United States holder under the election for prior taxable years; and . if the United States holder has elected to mark our ordinary shares to market for all taxable years during which the United States holder owned our ordinary shares and we were a passive foreign investment company, the passive foreign investment company rules generally will not apply to the United States holder. United States holders who hold ordinary shares during a period when we are a passive foreign investment company will be subject to the preceding rules, even if we cease to be a passive foreign investment company, subject to exceptions for United States holders who made a qualified electing fund election. United States holders are urged to consult their tax advisors about the passive foreign investment company rules, including the specific rules and requirements applicable to making qualified electing fund and other elections. 69 Status of ViryaNet as a Passive Foreign Investment Company We believe that in 1999 we were not a passive foreign investment company and currently expect that we also will not be a passive foreign investment company in 2000. However, passive foreign investment company status is determined as of the end of each taxable year and is dependent upon a number of factors, including the value of a corporation's assets and the amount and type of its gross income. The determination of whether we are a passive foreign investment company will be affected by how rapidly we use our cash and investment assets in our business. Also, a significant decline in the market price of our ordinary shares may result in our being classified as a passive foreign investment company. Therefore, we cannot assure you that we will not become a passive foreign investment company. Backup Withholding and Information Reporting United States holders generally are subject to information reporting requirements on dividends paid in the United States on ordinary shares. Under existing regulations, dividends generally are not subject to backup withholding. United States holders generally are subject to information reporting and backup withholding at a rate of 31% on proceeds paid from the disposition of ordinary shares unless the United States holder provides internal revenue service Form W-9 or establishes an exemption. Treasury regulations generally effective January 1, 2001 may alter the information reporting and backup withholding rules. You should consult your tax advisors concerning the effect, if any, of these treasury regulations on an investment in our ordinary shares. The amount of any backup withholding will be allowed as a credit against a United States holder's United States federal income tax liability and may entitle that United States holder to a refund, provided that required information is furnished to the internal revenue service. 70 ISRAELI TAXATION AND INVESTMENT PROGRAMS The following is a summary of the principal tax laws applicable to companies in Israel, with special reference to their effect on us, and Israeli government programs benefiting us. This section also contains a discussion of Israeli tax consequences to you if you acquire ordinary shares in the offering. This summary does not discuss all the acts of Israeli tax law that may be relevant to you in light of your personal investment circumstances or if you are subject to special treatment under Israeli law. To the extent that the discussion is based on new tax legislation which has not been subject to judicial or administrative interpretation, we cannot assure you that the views expressed in this discussion will be accepted by the tax authorities. The discussion should not be understood as legal or professional tax advice and is not exhaustive of all possible tax considerations. You are urged to consult your own tax advisors about the Israeli or other tax consequences of the purchase, ownership and disposition of our ordinary shares, including, in particular, the effect of any foreign, state or local taxes. General Corporate Tax Structure The general corporate tax rate in Israel is currently 36%. However, the effective tax rate payable by a company which derives income from an approved enterprise may be considerably less. Law for the Encouragement of Industry, Taxes, 1969 We currently qualify as an industrial company under the Law for the Encouragement of Industry (Taxes), 1969, otherwise known as the industry encouragement law. A company qualifies as an industrial company under the industry encouragement law if it resides in Israel and at least 90% of its income in a given tax year, exclusive of income from specified loans, marketable securities, capital gains, interest and dividends, is derived from an industrial enterprise owned by the company. An industrial enterprise is defined as an enterprise whose major activity in a given tax year is industrial manufacturing. Under the industry encouragement law, an industrial company is entitled to deduct the purchase price of know how, patents or rights over a period of eight years beginning with the year in which the rights were first used. The tax laws and regulations dealing with the adjustment of taxable income for inflation in Israel also provide that industrial enterprises, like ours, are eligible for special rates of depreciation deductions. These rates vary in the case of plant and machinery according to the number of shifts in which the equipment is operated and range from 20% to 40% on a straight-line basis, or from 30% to 50% on a declining balance basis for equipment first put into operation on or after June 1, 1989, instead of the regular rates, which are applied on a straight-line basis. Industrial enterprises which are approved enterprises can also choose between . the special rates referred to above; and . accelerated rates of depreciation applied on a straight-line basis on property and equipment, generally ranging from 200% on equipment to 400% of the ordinary depreciation rates on buildings during the first five years of service of the assets subject to a ceiling of 20% per year on depreciation of buildings. Qualification as an industrial company under the industrial encouragement law is not conditioned upon the receipt of prior approval from any Israeli government authority. No assurance can be given that we will continue to qualify as an industrial company or will in the future be able to avail itself of any benefits available to companies so qualifying. 71 Law for the Encouragement of Capital Investments, 1959 The Law for Encouragement of Capital Investments, 1959, which is referred to below as the capital investments law, provides that capital investments in a production facility or other eligible assets may, upon application to the Israeli Investment Center of the Ministry of Industry and Commerce, be designated as an approved enterprise. Each certificate of approval for an approved enterprise relates to a specific investment program in the approved enterprise, delineated both by the financial scope of the investment and by the physical characteristics of the facility or the asset. An approved enterprise is entitled to benefits, including Israeli government cash grants and tax benefits. Tax Benefits Taxable income derived from an approved enterprise is subject to a reduced corporate tax rate of 25%. That income is eligible for further reductions in tax rates depending on the percentage of the foreign investment in our share capital (conferring rights to profits, voting and appointment of directors) and the percentage of our combined share and loan capital owned by non-Israeli residents. The tax rate is 20% if the foreign investment is 49% or more but less than 74%, 15% if the foreign investment is 74% or more but less than 90% and 10% if the foreign investment is 90% or more. The lowest level of foreign investment during the year will be used to determine the relevant tax rate for that year. These tax benefits described above are granted for a limited period of time and begin when a company is operational and profitable. The benefits are granted for up to 7 years, or 10 years for a company that has 25% or more of its shares owned by non-Israeli shareholders, from the first year in which the approved enterprise has taxable income, other than income subject to capital gains tax. The period of benefits may not, however, exceed the lesser of 12 years from the year in which the production began or 14 years from the year of receipt of approved enterprise status. An approved enterprise approved after April 1, 1986 may elect to forego any entitlement to the grants otherwise available under the capital investments law or may participate in an alternative benefits program, under which the undistributed income from the approved enterprise is fully exempt from corporate tax for a defined period of time. The period of tax exemption ranges between two and ten years, depending upon the location within Israel of the approved enterprise and the type of the approved enterprise. Alternatively, approved enterprises approved after January 1, 1997 in national priority region "A" may elect to receive grants and a two-year tax exemption for undistributed profits derived from the approved enterprise program. We cannot assure you that the current benefit programs will continue to be available or that we will continue to qualify for benefits under the current programs. We currently have three approved enterprise programs under the capital investments law, which entitle us to some tax benefits. The tax benefit period for these programs has not yet begun. We have elected to participate in a government grant approved enterprise program and have received grants from the investment center. Income derived from the government grant approved enterprise program is subject to a reduced tax rate of 10% to 25% (depending on the percentage of foreign investment in the company) for a period of seven years starting on the first year in which we generate taxable income from the approved enterprise. We have elected to participate in two additional alternative benefit programs. Income derived from our alternative benefit programs is exempt from tax for a period of ten years, starting in the first year in which we generate taxable income from the approved enterprise. If dividends are paid out of tax-exempt profit derived from our approved enterprise, we will be liable for corporate tax on the gross amount of distributed profits before company tax at the rate that would have been applied if we had not elected the alternative tax benefit. This rate is generally 10% to 25%, depending on the percentage of a company's shares held by foreign shareholders. We will also be required to withhold on behalf of the dividend recipients an additional 15% of the amount after company tax distributed as dividends. Cash dividends paid by an Israeli company are normally subject to a withholding tax, except for dividends that are paid to an Israeli company, in which case no tax is withheld unless the dividend is paid in 72 respect of earnings from an approved enterprise. Since we have received certain benefits under Israeli laws relating to approved enterprises, payment of dividends may subject us to certain Israeli taxes to which we would not otherwise be subject. The Israeli government has discussed reducing the benefits available to companies under the capital investments law. The termination or substantial reduction of any of the benefits available under the capital investments law could materially impact the cost of future investments by us. Each application to the investment center is reviewed separately, and a decision about whether or not to approve the application is based on the then prevailing criteria in the capital investments law, on the specific objectives of the applicant company in the application and on financial criteria of the applicant company. We cannot assure you that any application will be approved. The benefits available to an approved enterprise are conditional upon the fulfillment of conditions stipulated in the capital investments law and its regulations and the criteria in the specific certificate of approval, as described above. If these conditions are violated, in whole or in part, we would be required to refund the amount of tax benefits, together with linkage differences to the Israeli consumer price index and interest. We believe that our approved enterprise programs operate in compliance with all of these conditions and criteria. Taxation Under Inflationary Conditions The Income Tax, Inflationary Adjustment, Law, 1985, which is referred to below as the inflationary adjustments law, attempts to overcome some of the problems presented to a traditional tax system by an economy experiencing rapid inflation, which was the case in Israel at the time the law was enacted. Generally, the inflationary adjustments law provides significant tax adjustments, based on net equity less fixed assets, to depreciation methods and tax loss carry forwards to compensate for loss of value resulting from an inflationary economy. Our taxable income is subject to the provisions of this law. The inflationary adjustments law allows foreign-invested companies, which maintain their accounts in dollars in compliance with regulations published by the Israeli minister of finance to deviate from the principles of the inflationary adjustments law. These companies may either base their tax returns on their operating results as reflected in the dollar financial statements or adjust their tax returns based on exchange rate changes rather than changes in the Israeli consumer price index. For these purposes, a foreign-invested company is a company more than 25% of whose share capital (in terms of rights to profits, voting and appointment of directors) and of whose combined share and loan capital is held by persons who are not residents of Israel. A company that elects to measure its results for tax purposes based on the dollar exchange rate cannot change that election for a period of three tax years following the election. We believe that we qualify as a foreign investment company within the meaning of the inflationary adjustment law. We have not yet elected to measure our results for tax purposes based on the dollar exchange rate, but may do so in the future, during a 30-day period in the beginning of each tax year. Tax Benefits of Research and Development Israeli tax law permits, under some conditions, a tax deduction in the year incurred for expenditures, including capital expenditures, in scientific research and development projects, if the expenditures are approved by the relevant government ministry and if the research and development is for the promotion of the enterprise and is carried out by, or on behalf of, a company seeking the deduction. Certain of our research and development programs have been approved by the chief scientist and we have been able to deduct, for tax purposes, a portion of our research and development expenses net of the grants received. Other research and development expenses not approved, may be deducted, for tax purposes, in 3 equal installments during a 3-year period. 73 Committee on the Reform of Taxes on Income On May 7, 2000, the Israeli government approved the recommendations of the public committee on the reform of taxes on income, to broaden the categories of taxable income and to change the tax rates imposed on employment income. The committee recommended, among other things, to: . impose an estate and gift tax; . impose a tax upon capital gains at a rate of up to 25% for individuals, including capital gains derived from the sale of shares in Israeli publicly traded companies (which are currently exempt from capital gains tax); . impose a tax upon all income of Israeli residents (individuals and corporations) regardless of the territorial source of income; . increase the tax rate from zero to 10% on the exempt period under the alternative package of benefits for Approved Enterprises under the Law for the Encouragement of Capital Investments, 1959; and . cancel the preferred benefits granted to companies with foreign investment. In order to be enacted as legislation, a draft bill incorporating the principles of the report must be approved by the knesset, and the substance of the recommendations could undergo significant revision during that process. If implemented, the recommendations might result in the imposition of Israeli capital gains taxes on non-Israeli residents if they are not eligible for an exemption under a relevant tax treaty. Withholding and Capital Gains Taxes Applicable to Non-Israeli Shareholders Nonresidents of Israel are subject to income tax on income accrued or derived from sources in Israel or received in Israel. These sources of income include passive income like dividends, royalties and interest, as well as non- passive income from business conducted or services rendered in Israel. We are generally required to withhold income tax at the rate of 25%, 15% for dividends generated by an approved enterprise, on all distributions of dividends. Israeli law imposes a capital gains tax on the sale of securities and other capital assets. The regular rate applicable to corporations is 36% and the maximum rate applicable to individuals is 50%. Under current law, however, sales of our ordinary shares offered by this prospectus are exempt from Israeli capital gains tax for so long as: . the shares are quoted on Nasdaq or listed on a stock exchange in a designated country like the United States; and . we qualify as an industrial company or industrial holding company. The above exemptions do not apply to corporations that are subject to the Inflationary Adjustments Law--1984. In general, most corporations are subject to this law. A nonresident of Israel who receives interest, dividend or royalty income derived from or accrued in Israel, from which tax was withheld at the source, is generally exempt from the duty to file tax returns in Israel on this income, provided the income was not derived from a business conducted in Israel by the nonresident during an accrued period of more than 180 days in the relevant tax year and the nonresident does not have any other non-passive income from sources within Israel. The convention between the United States and the government of the State of Israel on taxes on income, which shall be referred to as the treaty, is generally effective as of January 1, 1995. 74 Under the treaty, the following entities or individuals generally are exempt from Israeli capital gains tax on income derived from the sale, exchange or disposition of ordinary shares if these entities or individuals own, directly or indirectly, less than 10% of our outstanding voting shares during the twelve month period preceding the sale, exchange or disposition of their ordinary shares: . individuals that are residents of the United States; . corporations, or entities taxable as corporations, that are not residents of Israel and that are organized under the laws of the United States or of any state of the United States or the District of Columbia; and . other entities, to the extent that the other entities' income is taxable in the United States as the income of residents of the United States. The application of the treaty provisions applying to dividends and capital gains described above and below is conditioned upon the fact that such income is not effectively connected with a permanent establishment (as defined in the treaty) maintained by the non Israeli residents in Israel. Unless an exemption applies under domestic Israeli law, residents of the United States who own the requisite 10% or more of our outstanding voting shares are subject to Israeli tax on any gain realized on the sale, exchange or disposition of those shares but would generally be permitted under the treaty to claim a credit for those taxes against the United States income tax imposed on any gain from the sale, exchange or disposition, subject to the limitations applicable to foreign tax credits. Israel presently has no estate or gift tax, but a 10% estate and gift tax has been proposed. Under the treaty, the maximum tax on dividends paid to a holder of ordinary shares who is a resident of the United States under the treaty generally is 25%. However, dividends generally paid to a United States corporation by an Israeli company that does not enjoy the benefits of an approved enterprise will generally be subject to a 12.5% dividend withholding tax if: . the recipient corporation owns at least 10% of the outstanding voting shares of the Israeli company during the portion of the current and previous taxable years of the Israeli company preceding the date of the dividend; and . not more than 25% of the gross income of the Israeli company during the current and prior taxable years consists of interest or dividends. If the Israeli company is entitled to the Israeli tax benefits applicable to an approved enterprise and the requirements listed above are met, the withholding tax rate on dividends is 15%. 75 CONDITIONS IN ISRAEL We are incorporated under the laws of the State of Israel, and substantially all of our research and development and significant executive facilities are located in Israel. We are directly affected by political, economic and military conditions in Israel. Our operations would be materially adversely affected if major hostilities involving Israel should occur or if trade between Israel and its present trading partners should be curtailed. Political Conditions Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility has existed, varying in degree and intensity, between Israel and the Arab countries. This has led to security and economic problems in Israel. In 1979, however, a peace treaty between Israel and Egypt was signed under which full diplomatic relations were established. Economic relations remain very limited. Beginning in 1993, a joint Israeli-Palestinian declaration of principles and several agreements were signed by Israel and the Palestine Liberation Organization outlining interim Palestinian self-government arrangements. Since then, Israel has transferred the civil administration of the Gaza Strip, the major towns and villages of the West Bank and other territories in the West Bank to the Palestinian Self-Rule Authority, the Israeli army has withdrawn from these areas and some powers and governmental responsibilities have been transferred to the Palestinian Authority. In October 1994, Israel and Jordan signed a peace treaty, which provides for the start of full diplomatic relations between the two countries, including the exchange of ambassadors and consuls. This treaty also expresses the mutual desire of the parties for economic cooperation and calls for both parties to lift economic barriers and discrimination against the other and to act jointly towards the removal of any economic boycotts by third parties. There are no peace treaties between Israel and Syria or Lebanon and material progress has not been achieved in peace talks between Israel and Syria or between Israel and Lebanon. Despite the progress towards peace between Israel, its Arab neighbors and the Palestinians, several countries, companies and organizations continue to participate in a boycott of Israeli firms. We do not believe that the boycott has had a material adverse effect on our business. However, restrictive laws, policies or practices directed towards Israel or Israeli businesses may have an adverse impact on the expansion of our business. Army Service Generally, all male adult citizens and permanent residents of Israel under the age of 54, unless exempt, are obligated to perform up to 36 days of military reserve duty annually. Additionally, all of these residents are subject to being called to active duty at any time under emergency circumstances. Many of our officers and employees are obligated to perform annual reserve duty. While we have operated effectively under these requirements since we began operations, we cannot assess the full impact of these requirements on our workforce or business if conditions should change, and we cannot predict the effect on us of any expansion or reduction of these obligations. Economic Conditions Israel's economy has been subject to numerous destabilizing factors, including a period of rampant inflation in the early to mid-1980's, low foreign exchange reserves, fluctuations in world commodity prices, military conflicts and civil unrest. The Israeli government has, on occasion, intervened in various sectors of the economy, employing fiscal and monetary policies, import duties, foreign currency restrictions and control 76 of wages, prices and foreign currency exchange rates. In 1998, the Israeli currency control regulations were liberalized significantly to allow Israeli residents to deal in foreign currency and non-residents of Israel to freely purchase and sell Israeli currency and assets. The Israeli government has periodically changed its policies in all these areas. There are no Israeli currency control restrictions on remittances of dividends on the ordinary shares or the proceeds from the sale of the ordinary shares. However, under Israeli law currency controls can be imposed by administrative action at any time. Israeli residents are also required to file reports pertaining to specified types of actions or transactions. The Israeli government's monetary policy contributed to relative price and exchange rate stability in the last few years, despite fluctuating rates of economic growth and a high rate of unemployment. We cannot assure you that the Israeli government will be successful in its attempts to keep prices and exchange rates stable. Price and exchange rate instability may have a material adverse effect on us. Trade Agreements Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development and the International Finance Corporation. Israel is also a member of the World Trade Organization and is a signatory to the General Agreement on Trade in Services, which provides for reciprocal lowering of trade barriers among its members. In 1985, Israel and the United States entered into an agreement to establish a free trade area. The free trade area has eliminated all tariff and some non-tariff barriers on most trade between the two countries. Israel became associated with the European Economic Community, now known as the European Union, in a 1975 free trade agreement which confers advantages on Israeli exports to most European countries and obligates Israel to lower its tariffs on imports from those countries over a number of years. In November 1995 Israel entered into a new agreement with the European Union, which includes redefinement of rules of origin and other improvements, like providing for Israel to become a member of the research and technology programs of the European Union. In September 1992, Israel signed a free trade agreement with the European Free Trade Association whose members include Switzerland, Norway, Iceland and Liechtenstein. The agreement became effective on January 1, 1993, and establishes a free-trade zone between Israel and the other members. Israel has also established commercial and trade relations with a number of the other nations, including Russia, China, India, Turkey and other nations in Asia and Eastern Europe. 77 ENFORCEABILITY OF CIVIL LIABILITIES Service of Process Service of process upon us and our directors and officers and the Israeli experts named in this prospectus, substantially all of whom reside outside the United States, may be difficult to obtain within the United States. Since substantially all of our assets and a significant number of our directors and officers and the Israeli experts named in this prospectus are located outside the United States, any judgment obtained in the United States against us or our directors, officers or Israeli experts under the civil liability provisions of the federal securities laws of the United States may not be collectible within the United States. Enforceability of Civil Liabilities We have been informed by our legal counsel in Israel, Meitar, Liquornik, Geva & Co., that there is doubt concerning the enforceability of civil liabilities under United States securities laws in original actions instituted in Israel. However, subject to time limitations, Israeli courts may enforce United States final executory judgments in civil matters, including a monetary or compensatory judgment in a non-civil matter obtained after due process before a court of competent jurisdiction. The rules of private international law prevailing in Israel do not prohibit the enforcement of judgment of Israeli courts, provided that: . the judgment is enforceable in the state in which it was given; . adequate service of process has been made and the defendant has had a reasonable opportunity to present his arguments and evidence; . the judgment and the enforcement of the judgment are not contrary to the law, public policy, security or sovereignty of the state of Israel; . the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties; and . an action between the same parties in the same matter is not pending in any Israeli court at the time the lawsuit is instituted in the foreign court. Agent for Service of Process We have irrevocably appointed ViryaNet, Inc., our wholly-owned subsidiary, as our agent to receive service of process in any action against us in any federal court or state court in the State of New York arising out of this offering or any purchase or sale of securities through this offering. We have not given our consent for any agent to accept service of process for any other claim. These appointments are irrevocable, provided that we shall have the right to appoint a successor agent for service, if the successor is acceptable to the representatives of the underwriters, in their reasonable judgment. Currency Foreign judgments enforced by Israeli courts will generally be payable in Israeli currency and will be freely convertible into dollars or other foreign currency and may be transferred out of Israel. The usual practice in an action before an Israeli court to recover an amount in a non-Israeli currency is for the Israeli court to render judgment for the equivalent amount in Israeli currency at the rate of exchange in force on the date of the judgment. Under existing Israeli law, a foreign judgment payable in foreign currency may be paid in Israeli currency at the rate of exchange of the foreign currency on the date of payment. Pending collection, the amount of the judgment of an Israeli court stated in Israeli currency ordinarily will be linked to the Israeli consumer price index plus interest at the annual statutory rate set by Israeli regulations at that time. Judgment creditors must bear the risk of unfavorable exchange rates fluctuations. 78 UNDERWRITING Purchasers of Our Ordinary Shares. The underwriters, Chase Securities Inc., Salomon Smith Barney Inc. and Dain Rauscher Incorporated have each agreed with us, subject to the terms and conditions of the underwriting agreement, to purchase our ordinary shares in the amount listed here:
Number of Underwriter Shares ----------- --------- Chase Securities Inc.................... Salomon Smith Barney Inc................ Dain Rauscher Incorporated.............. Total................................... 4,500,000 =========
Conditions to the Underwriters' Obligations. The underwriting agreement provides that the obligations of the underwriters are subject to specified conditions, including the absence of any material adverse change in our business and the receipt of certificates, opinions and letters from us, our counsel and independent auditors. The underwriters are committed to purchase all ordinary shares offered in this prospectus if any shares are purchased. Pricing of the Ordinary Shares. The underwriters propose to offer the ordinary shares directly to the public at the public offering price on the cover page of this prospectus and to dealers at that price less a concession not in excess of $ per share. The underwriters may allow and the dealers may reallow a concession not in excess of $ per share to other dealers. After the public offering of the shares, the underwriters may change the offering price, concession and reallowance to dealers. The representatives of the underwriters have informed us that the underwriters do not intend to confirm discretionary sales in excess of 5% of the ordinary shares offered by this prospectus. The Underwriters' Option to Purchase More Ordinary Shares. We have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to 675,000 additional ordinary shares at the public offering price, less the underwriting discount set forth on the cover page of this prospectus. If the underwriters exercise this option, each underwriter will have a firm commitment to purchase approximately the same percentage of additional ordinary shares that the number of ordinary shares to be purchased by it shown in the table listing the underwriters represents as a percentage of the 4,500,000 ordinary shares offered by this prospectus. We will be obligated to sell ordinary shares to the underwriters if the option is exercised. The underwriters may exercise this option only to cover over- allotments of ordinary shares offered in this prospectus. Underwriting Discounts and Commissions. This table shows the per share and total underwriting discounts and commissions that we will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters' over-allotment option to purchase additional ordinary shares:
Total ----------------- No Full Exercise Exercise -------- -------- Per Share...................... $ $ Total.......................... $ $
79 Other Conditions to the Underwriters' Obligations. The offering of the ordinary shares is made for delivery when, as and if accepted by the underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The underwriters reserve the right to reject an order for the purchase of shares in whole or in part. Shareholder Lock-up Agreements. Each of our executive officers and directors and all other holders of our securities have agreed during the period of 180 days after the effective date of this prospectus, subject to specified exemptions, not to offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any ordinary shares or any options or warrants to purchase any ordinary shares, or any securities convertible into or exchangeable for ordinary shares owned as of the date of this prospectus or thereafter acquired directly by those holders or with respect to which they have the power of disposition, without the prior written consent of Chase Securities Inc. However, Chase Securities Inc. may, in its sole discretion and at any time or from time to time, without notice, release all or any portion of the securities subject to lock-up agreements. Company Lock-up Agreement. We have agreed that during the lock-up period we will not, without the prior written consent of Chase Securities Inc., subject to certain exceptions, consent to the disposition of any shares held by shareholders subject to lock-up agreements prior to the expiration of the lock- up period, or issue, sell, contract to sell or otherwise dispose of, any ordinary shares, any options or warrants to purchase any ordinary shares or any securities convertible into, exercisable for or exchangeable for ordinary shares other than our sale of shares in this offering, the issuance of our shares upon the exercise of outstanding options or warrants, and the issuance of options under existing stock option and incentive plans, provided that those options do not vest prior to the expiration of the lock-up period, and the issuance of warrants to customers. In addition, we may issue ordinary shares in connection with any acquisition of, or strategic relationship with, another company if the terms of such issuance provided that such ordinary shares shall not be resold prior to the expiration of the lock-up period. Factors in Pricing Our Stock in the Offering. Before this offering, there has been no public market for our ordinary shares. The initial public offering price for the ordinary shares will be determined through negotiation between us and the representatives of the underwriters. Factors to be considered in the negotiation include: . prevailing market conditions; . our financial information; . market valuations of other companies that we and the representatives of the underwriters believe to be comparable to us; . estimates of our business potential; and . the present state of our development. Market Stabilization Activities. We have been advised by the representatives that, pursuant to Regulations M under the Securities Act, some persons participating in the offering may engage in transactions, including syndicate covering transactions, stabilizing bids or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the ordinary shares at a level above that which might otherwise prevail in the open market. A syndicate covering transaction is a bid for or the purchase of ordinary shares on behalf of the underwriters to reduce a syndicate short position incurred by the underwriters from the offering. The underwriters may create a syndicate short position by making short sales of the issuer's ordinary shares and may purchase the issuer's ordinary shares on the open market to cover syndicate short positions created by short sales. Short sales involve the sale by the underwriters of a greater number of ordinary shares than they are required to purchase in the offering. Short sales can be either covered or naked. Covered short sales are 80 sales made in an amount not greater than the underwriters' over-allotment option to purchase additional shares from us in the offering. Naked short sales are sales in excess of the over-allotment option. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the ordinary shares in the open market after pricing that could adversely affect investors who purchase in the offering. If the underwriters create a syndicate short position, they may choose to reduce or cover this position by either exercising all or part of the over-allotment option to purchase additional shares from us or by engaging in syndicate covering transactions. The underwriters may close out any covered short position by either exercising their over-allotment option or purchasing shares in the open market. The underwriters must close out any naked short position by purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over- allotment option. A stabilizing bid is a bid for or the purchase of shares of common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of our common stock. A penalty bid is an arrangement that permits the representatives to reclaim the selling concession from an underwriter or a syndicate member that is purchased by the representatives in a syndicate covering transaction and therefore has not been effectively placed by the underwriter or syndicate member. We have been advised by the representatives that these transactions may happen on the Nasdaq National Market or otherwise and, if begun, may be discontinue at any time. Similar to other purchase activities, these activities may have the effect of raising or maintaining the market price of our ordinary shares or preventing or retarding a decline in the market price of our ordinary shares. As a result, the price of our ordinary shares may be higher than the price that might otherwise exist in the open market. Offering Expenses. We estimate that our share of the total expenses of this offering, excluding underwriting discounts and commissions, will be approximately $2,035,000. Indemnification. We have agreed to indemnify the underwriters against liabilities, including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make for these liabilities. Directed Shares Program and Rights to Purchase Shares in the Offering. At our request, the underwriters have reserved up to five percent of the ordinary shares to be sold in this offering to be offered for sale, exclusive of the shares subject to the over-allotment option, at the initial public offering price, to our directors, officers, employees, business associates and persons related to, or affiliated with, these persons. The number of shares of ordinary shares available for sale to the public in this offering will be reduced if these individuals and entities purchase the reserved shares. Any reserved shares that are not purchased by these persons will be offered by the underwriters to the public on the same basis as the other shares in this offering. Offers and Sales in Israel. The underwriters have agreed that: . they will offer or sell our ordinary shares in Israel to potential purchasers limited to a number and type that shall not require the publication of a prospectus under Israeli law; . they will deliver to us the names and addresses of these potential purchasers within seven days of the consummation of this offering; and . they will obtain representations from these potential purchasers who purchase our ordinary shares that they are purchasing our ordinary shares for investment purposes only, and not for the purposes of resale. 81 Underwriter's Ownership. The following table summarizes the share capital owned by an underwriter and its affiliates as of July 20, 2000:
Number of Number of Shares Shares Subject Beneficially to Owner Owned Warrants ----- ------------ --------- Chase Securities Inc. and persons associated with it................................................ 77,727 15,055 Access Technology Partners, L.P.................... 342,780 66,385 Eucalyptus Ventures, L.P. and persons associated with it........................................... 445,501 86,239
Access Technology Partners, L.P. is a fund of outside investors that is managed by a subsidiary of Chase Securities Inc. and Eucalyptus Ventures L.P. is a fund of outside investors that is managed by an affiliate of Chase Securities Inc. 82 LEGAL MATTERS Meitar, Liquornik, Geva & Co., Ramat-Gan, Israel, will represent us concerning the validity of ordinary shares offered by us and other Israeli legal matters relating to this offering. Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts, will represent us concerning United States legal matters relating to this offering. Herzog, Fox & Neeman, Tel-Aviv, Israel, will represent the underwriters concerning Israeli legal matters relating to this offering. Brobeck, Phleger, & Harrison LLP, New York, New York, will represent the underwriters concerning United States legal matters relating to this offering. Some employees and former employees in Meitar, Liquornilk, Geva & Co. hold in the aggregate options to purchase 262,000 ordinary shares. EXPERTS Kost, Forer & Gabbay, a member of Ernst & Young International, independent auditors, have audited our consolidated financial statements at December 31, 1998 and 1999, and for each of the three years in the period ended December 31, 1999, as described in their report. We have included our financial statements in the prospectus and in the registration statement in reliance on the report of Kost, Forer & Gabbay, a member of Ernst & Young International, given on their authority as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION The Commission We have filed a registration statement on Form F-1 under the Securities Act for the ordinary shares offered by us. The registration statement contains additional information that is not required to be included in this prospectus under the Securities and Exchange Commission's rules. You should refer to the registration statement and its exhibits. For copies of actual contracts or documents referred to in this prospectus, you should refer to the exhibits attached to the registration statement. The registration statement, including the exhibits and schedules, and the reports and other information filed by us with the Commission under the Exchange Act can be inspected without charge at the public reference facilities maintained by the Commission at: Room 1024 Citicorp Center 7 World Trade Center Judiciary Plaza 500 West Madison Street Suite 1300 450 Fifth Street, N.W. Suite 1400 New York, NY 10048 Washington, DC 20549 Chicago, IL 60661
Copies of this material may be obtained by mail from the public reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Periodic Reporting in the United States Upon completion of this offering, we will be subject to the informational requirements of the Exchange Act and will file periodic reports and other information with the Commission. As a foreign private issuer, we will be exempt from the rules under the Exchange Act requiring disclosure and procedural requirements for proxy solicitations, and our officers, directors and principal shareholders will be exempt from the reporting and short swing profit recovery provisions contained in Section 16 of the Exchange Act, for their purchases and sales of ordinary shares. We will not be required under the Exchange Act to file periodic reports and financial statements with the Securities and Exchange Commission as frequently or as promptly as United States companies whose securities are registered under the Exchange Act. However, we intend to furnish our shareholders with annual reports containing financial statements which will be audited 83 and reported on, with an opinion expressed, by an independent public accounting firm in Israel, prepared under United States GAAP, as well as quarterly reports containing unaudited financial information for the first three quarters of each year. Public Reporting in Israel We file reports with the Israeli registrar of companies about our registered address, registered capital, shareholders of record and the number of shares held by each, the identity of our directors and details regarding security interests on our assets. We must also file with the registrar of companies our articles of association. The information filed with the registrar of companies is available to the public. Our shareholders are also entitled to review and receive copies of all minutes of meetings of shareholders. Shareholders wishing to review or receive copies of minutes of shareholders may contact Mr. Alon Tabak, Adv., General Counsel, ViryaNet Ltd., 5 Kiriat Hamada Street, Science Based Industries Campus, P.O. Box 23052, Har Hotzvim, Jerusalem 91230, Israel, telephone number: (972-2) 5811462 and by facsimile at (972-3) 5815507. 84 VIRYANET LTD. CONSOLIDATED FINANCIAL STATEMENTS IN U.S. DOLLARS INDEX
Page --------- Report of Independent Auditors........................................ F-2 Consolidated Balance Sheets........................................... F-3--F-4 Consolidated Statements of Operations................................. F-5 Statements of Changes in Shareholders' Equity (Deficiency)............ F-6 Consolidated Statements of Cash Flows................................. F-7--F-8 Notes to Consolidated Financial Statements............................ F-9--F-27
F-1 . Kost Forer & Gabbay . Phone: 2 Kremenetski St. 972-3-6232525 Tel-Aviv 67899, Israel Fax: 972-3-5622555 REPORT OF INDEPENDENT AUDITORS To the shareholders of VIRYANET LTD. We have audited the accompanying consolidated balance sheets of ViryaNet Ltd. and its subsidiaries as of December 31, 1998 and 1999, and the related consolidated statements of operations, changes in shareholders' deficiency and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the consolidated financial position of ViryaNet Ltd. and its subsidiaries as of December 31, 1998 and 1999, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles in the United States. Tel-Aviv, Israel February 21, 2000 KOST FORER & GABBAY except for Note 15, A Member of Ernst & Young as to which the date is April 11, International 2000 F-2 VIRYANET LTD. CONSOLIDATED BALANCE SHEETS
December 31, March 31, ------------- ----------- 1998 1999 2000 ------ ------ ----------- (Audited) (Unaudited) (U.S. dollars in thousands) ------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents.......................... $ 554 $1,886 $ 6,215 Restricted cash (Note 3)........................... -- 96 -- Marketable securities.............................. 881 -- -- Trade receivables (net of allowance for doubtful accounts--$20 in 1998 and $28 in 1999)............ 1,427 2,755 1,011 Unbilled receivables............................... 2,567 708 1,944 Other receivables and prepaid expenses (Note 4).... 1,143 902 1,098 ------ ------ ------- Total current assets............................. 6,572 6,347 10,268 ------ ------ ------- SEVERANCE PAY FUND................................... 633 854 848 ------ ------ ------- PROPERTY AND EQUIPMENT, NET (Note 5)................. 1,433 1,491 1,419 ------ ------ ------- $8,638 $8,692 $12,535 ====== ====== =======
The accompanying notes are an integral part of the consolidated financial statements. F-3 VIRYANET LTD. CONSOLIDATED BALANCE SHEETS
Pro forma shareholders' December 31, equity as of ---------------- March 31, March 31, 1998 1999 2000 2000 ------- ------- --------- ------------- (Audited) (Unaudited) (U.S. dollars in thousands, except share data) ----------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) CURRENT LIABILITIES: Short-term bank credit (Note 6).. $ 185 $ 5,283 $ 6,308 Current maturities of long-term loans (Note 8).................. 51 11 4 Trade payables................... 1,617 1,303 1,269 Deferred revenues................ 3,195 7,150 6,727 Other payables and accrued expenses (Note 7)............... 3,866 3,905 4,704 ------- ------- ------- 8,914 17,652 19,012 ------- ------- ------- LONG-TERM LIABILITIES: Long-term loans (Note 8)......... 11 -- -- Convertible loans................ -- -- 4,497 Accrued severance pay............ 1,165 1,595 1,568 ------- ------- ------- 1,176 1,595 6,065 ------- ------- ------- COMMITMENTS AND CONTINGENT LIABILITIES (Note 9) SHAREHOLDERS' EQUITY (DEFICIENCY): Share capital--Preferred shares of NIS 0.1 par value--(Note 10) Authorized: 11,000,000 shares as of December 31, 1998, 13,100,000 shares as of December 31, 1999 and March 31, 2000; Issued and outstanding; 8,407,255 shares as of December 31, 1998 and 10,146,387 shares as of December 31, 1999 and March 31, 2000;........................... Issued and outstanding pro-forma: 0 shares as of March 31, 2000; aggregated liquidation preference of $39,381,000 as of December 31, 1999 and $39,242,000 as of March 31, 2000............................ 251 294 294 -- Ordinary shares--of NIS 0.1 par value--(Note 10) Authorized: 9,000,000 shares as of December 31, 1998, 6,900,000 shares as of December 31, 1999 and March 31, 2000; Issued and outstanding: 2,625,140 shares as of December 31, 1998 2,700,640 shares as of December 31, 1999 and 2,702,140 as of March 31, 2000.................. Issued and outstanding pro forma: 17,392,510 shares as of March 31, 2000........................ 102 103 103 508 Additional paid-in capital......... 26,121 37,728 39,956 78,432 Deferred stock compensation........ (260) (603) (1,736) (1,736) Accumulated deficit................ (27,666) (48,077) (51,159) (67,710) ------- ------- ------- ------- Total shareholders' equity (deficiency).................. (1,452) (10,555) (12,542) $ 9,494 ------- ------- ------- ======= $ 8,638 $ 8,692 $12,535 ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements. F-4 VIRYANET LTD. CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Year ended December 31, March 31, -------------------------------- --------------------- 1997 1998 1999 1999 2000 --------- --------- ---------- --------- ---------- (Audited) (Unaudited) (U.S. dollars in thousands, except share and per share data) ------------------------------------------------------- Revenues (Note 12a and b): Software licenses..... $ 1,067 $ 1,801 $ 4,269 $ 746 $ 3,209 Maintenance and services............. 12,400 11,724 11,533 2,607 1,954 --------- --------- ---------- --------- ---------- Total revenues...... 13,467 13,525 15,802 3,353 5,163 --------- --------- ---------- --------- ---------- Cost of revenues: Software licenses..... 106 146 952 245 300 Maintenance and services............. 8,817 9,709 9,978 2,354 1,574 --------- --------- ---------- --------- ---------- Total cost of revenues........... 8,923 9,855 10,930 2,599 1,874 --------- --------- ---------- --------- ---------- Gross profit...... 4,544 3,670 4,872 754 3,289 --------- --------- ---------- --------- ---------- Operating expenses: Research and development, net (Note 12c)........... 3,443 5,322 6,865 1,504 1,685 Sales and marketing... 3,329 8,862 13,537 3,773 3,224 General and administrative....... 2,403 2,602 3,518 798 853 Amortization of deferred stock compensation (1)..... 12 250 798 31 328 --------- --------- ---------- --------- ---------- Total operating expenses........... 9,187 17,036 24,718 6,106 6,090 --------- --------- ---------- --------- ---------- Operating loss.......... (4,643) (13,366) (19,846) (5,352) (2,801) Financial income (expenses), net (Note 12d)................... (85) 234 (565) (129) (281) --------- --------- ---------- --------- ---------- Net loss................ $ (4,728) $ (13,132) $ (20,411) $ (5,481) $ (3,082) ========= ========= ========== ========= ========== Preferred shares deemed dividend............... $ (116) $ (61) $ -- $ -- $ -- --------- --------- ---------- --------- ---------- Net loss to shareholders of Ordinary shares..... $ (4,844) $ (13,193) $ (20,411) $ (5,481) $ (3,082) ========= ========= ========== ========= ========== Basic and diluted net loss per share......... $ (1.91) $ (5.16) $ (7.63) $ (2.05) $ (1.14) ========= ========= ========== ========= ========== Weighted average number of shares used in computing basic and diluted net loss per share.................. 2,536,808 2,554,654 2,676,212 2,668,890 2,700,640 ========= ========= ========== ========= ========== Pro forma basic and diluted net loss per share (unaudited)...... $ (1.71) $ (0.62) ========== ========== Weighted average number of shares used in computing pro forma basic and diluted net loss per share (unaudited)............ 11,953,033 12,973,290 ========== ========== (1) Stock based compensation relates to the following Cost of revenues...... -- -- $ 16 -- $ 12 Research and development, net..... -- -- 391 -- -- Sales and marketing... -- $ 120 39 $ 13 36 General and administrative....... $ 12 130 352 18 280 --------- --------- ---------- --------- ---------- Total............... $ 12 $ 250 $ 798 $ 31 $ 328 ========= ========= ========== ========= ==========
The accompanying notes are an integral part of the consolidated financial statements. F-5 VIRYANET LTD. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
Additional Total paid-in capital Deferred shareholders' Preferred Ordinary Preferred Ordinary and receipts on stock Accumulated equity shares shares shares shares account of shares compensation deficit (deficiency) ---------- --------- --------- -------- ----------------- ------------ ----------- ------------- (share data) (U.S. dollars in thousands, except share data) Balance as of January 1, 1997........ 4,524,280 2,594,980 $143 $104 $11,126 $ - $ (9,806) $ 1,567 Receipts on account of shares................. -- -- -- -- 3,100 -- -- 3,100 Issuance of warrants... -- -- -- -- 118 -- -- 118 Conversion of Ordinary shares................. 77,460 (77,460) 3 (3) -- -- -- -- Deferred stock compensation........... -- -- -- -- 12 (12) -- -- Amortization of deferred stock compensation........... -- -- -- -- -- 12 -- 12 Net loss............... -- -- -- -- -- -- (4,728) (4,728) ---------- --------- ---- ---- ------- ------- -------- -------- Balance as of December 31, 1997...... 4,601,740 2,517,520 146 101 14,356 -- (14,534) 69 Issuance of Ordinary shares, net............ -- 46,870 -- * -- -- -- -- Issuance of Preferred shares, net............ 3,717,950 -- 103 -- 11,036 -- -- 11,139 Exercise of stock options, net........... -- 148,315 -- 3 95 -- -- 98 Conversion of Ordinary shares................. 87,565 (87,565) 2 (2) -- -- -- -- Investors relationship type of expenses....... -- -- -- -- 124 -- -- 124 Deferred stock compensation........... -- -- -- -- 510 (510) -- -- Amortization of deferred stock compensation........... -- -- -- -- -- 250 -- 250 Net loss............... -- -- -- -- -- -- (13,132) (13,132) ---------- --------- ---- ---- ------- ------- -------- -------- Balance as of December 31, 1998...... 8,407,255 2,625,140 251 102 26,121 (260) (27,666) (1,452) Issuance of Preferred shares, net............ 1,739,132 -- 43 -- 9,796 -- -- 9,839 Receivables on account of shares.............. -- -- -- -- (100) -- -- (100) Exercise of stock options, net........... -- 75,500 -- 1 72 -- -- 73 Issuance of warrants... -- -- -- -- 500 -- -- 500 Deferred stock compensation........... -- -- -- -- 1,141 (1,141) -- -- Compensation related to warrants to bank....... -- -- -- -- 198 -- -- 198 Amortization of deferred stock compensation........... -- -- -- -- -- 798 -- 798 Net loss............... -- -- -- -- -- -- (20,411) (20,411) ---------- --------- ---- ---- ------- ------- -------- -------- Balance as of December 31, 1999...... 10,146,387 2,700,640 294 103 37,728 (603) (48,077) (10,555) Exercise of stock options, net........... -- 1,500 -- * 9 -- -- 9 Compensation related to warrants to investors of convertible loans... -- -- -- -- 505 -- -- 505 Compensation related to warrants to bank....... -- -- -- -- 253 -- -- 253 Deferred stock compensation........... -- -- -- -- 1,461 (1,461) -- -- Amortization of deferred stock compensation........... -- -- -- -- -- 328 -- 328 Net loss............... -- -- -- -- -- -- (3,082) (3,082) ---------- --------- ---- ---- ------- ------- -------- -------- Balance as of March 31, 2000 (unaudited)............ 10,146,387 2,702,140 $294 $103 $39,956 $(1,736) $(51,159) $(12,542) ========== ========= ==== ==== ======= ======= ======== ========
- ------------ * Less than $1,000 The accompanying notes are an integral part of the consolidated financial statements. F-6 VIRYANET LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended Year ended December 31, March 31, --------------------------- ---------------- 1997 1998 1999 1999 2000 ------- -------- -------- ------- ------- (Audited) (Unaudited) (U.S. dollars in thousands) --------------------------------------------- Cash flows from operating activities: Net loss....................... $(4,728) $(13,132) $(20,411) $(5,481) $(3,082) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation................. 418 555 758 167 186 Increase (decrease) in accrued severance pay, net.. 132 135 209 48 (21) Amortization of deferred stock compensation.......... 12 250 798 31 328 Amortization of compensation related to warrants to bank........................ -- -- 198 -- 102 Investors relationship type of expenses................. -- 124 -- -- -- Marketable securities, net... 733 944 888 215 -- Loss (gain) on marketable securities.................. 51 189 (7) 209 -- Decrease (increase) in trade receivables and unbilled receivables................. 1,885 (2,154) 531 542 508 Decrease (increase) in other receivables and prepaid expenses.................... (451) (335) 241 (842) (196) Increase (decrease) in trade payables.................... 116 656 (314) (347) (34) Increase (decrease) in deferred revenues........... 115 1,515 3,955 2,628 (423) Increase (decrease) in other payables and accrued expenses.................... (159) 1,856 39 390 799 Others....................... 2 11 19 (10) -- ------- -------- -------- ------- ------- Net cash used in operating activities................ (1,874) (9,386) (13,096) (2,450) (1,833) ------- -------- -------- ------- ------- Cash flows from investing activities: Purchase of property and equipment................... (803) (968) (923) (278) (114) Proceeds from sale of property and equipment...... 40 24 88 35 -- Restricted cash, net......... -- -- (96) -- 96 ------- -------- -------- ------- ------- Net cash used in investing activities................ $ (763) $ (944) $ (931) $ (243) $ (18) ======= ======== ======== ======= =======
The accompanying notes are an integral part of the consolidated financial statements. F-7 VIRYANET LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended Year ended December 31, March 31, --------------------------- -------------- 1997 1998 1999 1999 2000 ------- -------- -------- ------ ------ (Audited) (Unaudited) (U.S. dollars in thousands) ------------------------------------------- Cash flows from financing activities: Short-term bank credit, net..... $ 526 $ (1,427) $ 5,098 $2,646 $1,176 Proceeds from issuance of share capital and exercise of stock options, net................... -- 11,562 9,812 27 9 Receipts on account of shares... 2,775 -- -- -- -- Issuance of warrants............ 118 -- 500 -- -- Proceeds from convertible loans.......................... 136 -- -- -- 5,002 Principal payment of long-term loans.......................... (651) (67) (51) (3) (7) Principal payment of shareholders' loans............ (164) -- -- -- -- Issuance expenses related to prior year..................... (192) -- -- -- -- ------- -------- -------- ------ ------ Net cash provided by financing activities................... 2,548 10,068 15,359 2,670 6,180 ------- -------- -------- ------ ------ Increase (decrease) in cash and cash equivalents................. (89) (262) 1,332 (23) 4,329 Cash and cash equivalents at the beginning of the period.......... 905 816 554 554 1,886 ------- -------- -------- ------ ------ Cash and cash equivalents at the end of the period................ $ 816 $ 554 $ 1,886 $ 531 $6,215 ======= ======== ======== ====== ====== Supplemental disclosure of cash flows activities: Cash paid during the period for: Interest:....................... $ 218 $ 94 $ 237 $ 37 $ 34 ======= ======== ======== ====== ====== Supplemental disclosure of non- cash investing and financing activities: Receivables on account of shares......................... $ 325 $ -- $ -- $ -- $ -- ======= ======== ======== ====== ====== Compensation related to warrants to investors of convertible loans.......................... $ -- $ -- $ -- $ -- $ 505 ======= ======== ======== ====== ====== Compensation related to warrants to bank........................ $ -- $ -- $ -- $ -- $ 151 ======= ======== ======== ====== ======
The accompanying notes are an integral part of the consolidated financial statements. F-8 VIRYANET LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1:-- GENERAL a. ViryaNet Ltd. (the "Company"), an Israeli corporation, develops, markets and supports software products, which provide business-to-business internet solutions and related services that enable service organizations and their field engineers, customers, partners, vendors and suppliers to collaborate in a single environment called a service community. ViryaNet Ltd. has three wholly-owned subsidiaries: in the United States ("ViryaNet US") in the United Kingdom ("ViryaNet UK") and in Japan ("ViryaNet Japan") (see also b. below). Revenues derived from the Company's two largest customers represent 73%, 55% and 55% of the Company's revenues for 1997, 1998 and 1999, respectively. The Company's sales are made in the United States and the United Kingdom. b. In March 1998, the Company established ViryaNet Japan. Until October 1999, the Company owned 95% of ViryaNet Japan. In October 1999, the Company purchased the remaining 5% of the share capital of ViryaNet Japan in exchange for a warrant to purchase 40,000 Ordinary shares of the Company at an exercise price of $5.75. In connection with the acquisition, the Company recorded goodwill in the amount of $100,000. Due to its immateriality, the goodwill was fully amortized in 1999. NOTE 2:-- SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States. a. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. b. Financial statements in United States dollars: All of the Company's and ViryaNet US's sales are made in U.S. dollars ("dollars"). In addition, a substantial portion of the costs of the Company and ViryaNet US are incurred in dollars. Since the dollar is the primary currency in the economic environment in which the Company and its U.S. subsidiary operate, the dollar is their functional and reporting currency. Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured using the foreign currency exchange rate at balance sheet date. Operational transactions and non-monetary balance sheet accounts are measured and recorded at the rate in effect at the date of the transaction. The effects of foreign currency remeasurement are reported in the statements of operations as financial income or expenses, as appropriate. The functional currency of ViryaNet UK and ViryaNet Japan has been determined to be the local currency. Assets and liabilities are translated at the year-end exchange rate and statement of operations items are translated at the average rate prevailing during the period. The effect of the foreign currency translation differences is immaterial and was included in the statement of operations. c. Principles of consolidation: The consolidated financial statements include the accounts of ViryaNet Ltd. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. F-9 VIRYANET LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) d. Cash equivalents: Cash equivalents are short-term, highly liquid investments that are readily convertible to cash, and purchased with maturities of three months or less. e. Marketable securities: In accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"), the Company has classified its marketable debt into a trading category. Under SFAS 115, marketable securities classified as trading securities are stated according to the quoted market prices as of balance sheet date. Gain and losses (realized and unrealized) related to trading securities as well as interest on such securities are included as financial income, or expenses as appropriate. f. Property and equipment: These assets are stated at cost net of accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets, at the following annual depreciation rates:
% ----- Computers and software................................................ 25-33 Office furniture and equipment........................................ 6-25 Motor vehicles........................................................ 15
Leasehold improvements are depreciated over the related lease periods. g. Income taxes: The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) 109, "Accounting for Income Taxes". This statement prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. h. Revenue recognition: The Company generates revenues from licensing the rights to use its software products directly to end-users. The Company also generates revenues from sales of professional services, including consulting, customization, implementation, training and maintenance. Revenues from software license that require significant customization, integration and installation are recognized using contract accounting on a percentage of completion method based on the relationship of actual costs incurred to total costs estimated to be incurred over the duration of the contract. Revenues from software license agreements are recognized, in accordance with Statement Of Position (SOP) 97-2 "Software Revenue Recognition" (as amended), when persuasive evidence of an agreement exists, delivery of the software has occurred, the fee is fixed or determinable and collectibility is probable. When software arrangements involve multiple elements, revenue is allocated to each element based on vendor-specific objective evidence ("VSOE") of the relative fair values of each element in the F-10 VIRYANET LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) arrangement. The Company's VSOE used to allocate the sales price to professional services and maintenance is based on the price charged when these elements are sold separately. License revenues are recorded based on the residual method, in accordance with SOP 98-9, "Modification of SOP 97-2, software Revenue Recognition, with respect to certain transactions". Under the residual method, revenue is recognized for the delivered elements when (1) there is VSOE of the fair values of all the undelivered elements, (2) VSOE of fair value does not exist for one or more of the delivered elements in the arrangement, and (3) all revenue recognition criteria of SOP 97-2 as amended, are satisfied. Under the residual method any discount in the arrangement is allocated to the delivered element. Service revenues which include fees for consulting, customization, implementation and training services, are recognized as work is performed. Maintenance revenues are recognized ratably over the term of the maintenance agreement, which, in most cases, is one year. A provision for estimated losses on uncompleted contracts is recorded in the period in which such losses are first identified, in the amount of the estimated loss on the entire contract. Deferred revenues include unearned amounts received under maintenance and support contracts and amounts billed to customers but not recognized as revenues. i. Research and development costs: Research and development costs are charged to the statement of operations as incurred. Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed", requires capitalization of certain software development costs, subsequent to the establishment of technological feasibility. Based on the Company's product development process, technological feasibility is established upon completion of a working model. The Company does not incur any material costs between the completion of the working model and the point at which the product is ready for general release. Therefore, through December 31, 1999, the Company has charged all software development costs to research and development expenses, in the period incurred. j. Royalty-bearing grants: Royalty-bearing grants from Binational Industrial Research and Development Foundation ("BIRD-F") for funding of approved research projects are recognized at the time the Company is entitled to such grants on the basis of the related costs incurred (see Note 12c). k. Concentrations of credit risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, restricted cash, marketable securities and trade receivables. The Company's cash, cash equivalents and restricted cash are held on deposit with major banks in Israel, the United States, the United Kingdom and Japan. Management believes that the financial institutions that hold the Company's investments are financially sound and accordingly, minimal credit risk exists with respect to these investments. The Company's trade receivables are derived from sales to large and solid organizations located mainly in the United States and Europe. The Company performs ongoing credit evaluations of its customers and to date has not experienced any material losses. Most of the Company's marketable securities are Israeli Government debentures and, therefore, management believes that minimal credit risk exists with respect to those marketable securities. F-11 VIRYANET LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) l. Accounting for stock-based compensation: The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") in accounting for its employee stock options plans. Under APB 25, when the exercise price of the Company's employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company applies Financial Accounting Standards Board Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") and ETIF 96-18 "Accounting for Equity Instruments, that are Issued to Other than Employees for Acquiring, or in conjunction with Selling, Goods or Services with respect to options issued to non-employees". The pro forma disclosures required by SFAS 123 are provided in Note 10b. m. Basic and diluted net loss per share: Basic and diluted net loss per share is presented in accordance with SFAS No. 128, "Earnings per Share" ("SFAS 128"), for all periods presented. Basic net loss per share has been calculated using the weighted-average number of Ordinary shares outstanding during the period. Diluted net loss per share is calculated based on the weighted average number of Ordinary shares outstanding during each period, plus the weighted average number of dilutive potential Ordinary shares considered outstanding during the period. All convertible Preferred shares, outstanding stock options, and warrants have been excluded from the calculation of the diluted net loss per Ordinary share because all of these securities are anti-dilutive for all periods presented. The total numbers of shares related to the outstanding options, Preferred shares and warrants excluded from the calculations of diluted net loss per share were 8,590,570, 13,430,880 and 17,775,758, for the years ended December 31, 1997, 1998 and 1999, respectively. Basic and diluted pro forma net loss per share, as presented in the statements of operations, has been calculated as described above and also gives effect to the automatic conversion of the convertible Preferred shares and convertible debentures that will convert upon the closing of an IPO (using the as-if converted method). F-12 VIRYANET LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table presents the calculation of pro forma basic and diluted net loss per share (in thousands, except per share data):
Three months Year ended ended December 31, 1999 March 31, 2000 ----------------- -------------- (Audited) (Unaudited) (U.S. dollars in thousands, except per share data) -------------------------------- Net loss as reported.......................... $(20,411) $(3,082) Financial expenses related to conversion of convertible debentures....................... -- 5,000 -------- ------- Pro forma net loss............................ $(20,411) $(8,082) ======== ======= Pro forma: Shares used in computing basic and diluted net loss per share......................... 2,676 2,701 Effect of assumed conversion of convertible Preferred shares and convertible debentures (unaudited)................................ 9,277 10,272 -------- ------- Shares used in computing pro forma basic and diluted net loss per share (unaudited)..... 11,953 12,973 ======== ======= Pro forma basic and diluted net loss per share (unaudited).......................... $ (1.71) $ (0.62) ======== =======
n. Severance pay: The Company's liability for severance pay is calculated pursuant to Israeli severance pay law based on the most recent salary of the employees multiplied by the number of years of employment, as of the balance sheet date. Employees are entitled to one month's salary for each year of employment or a portion thereof. The Company's liability for all of its employees, is fully provided by monthly deposits with insurance policies and by an accrual. The value of these policies is recorded as an asset in the Company's balance sheet. The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israeli severance pay law or labor agreements. The value of the deposited funds are based on the cash surrendered value of these policies, and include immaterial profits. Severance expenses for the years ended December 31, 1997, 1998 and 1999 amounted to approximately $338,000, $734,000 and $1,070,000, respectively. o. Fair value of financial instruments: The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents, restricted cash, marketable securities, trade receivables and trade payables--The carrying amounts of these items approximate their fair value due to the short-term maturity of such instruments. Short-term bank credit and long-term loans--The carrying amounts of the Company's borrowing arrangements approximate their fair value. Fair values were estimated using discounted cash flow analyses, based on the Company's incremental borrowing rates for similar types of borrowing arrangements. F-13 VIRYANET LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) p. Future adoption of new accounting standard: In June 1998, the Financial Accounting Standards Board issued SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). This Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000 and cannot be applied retroactively. The Company does not expect that this new Statement will have any material impact on the Company's consolidated balance sheets or results of operations. On December 3, 1999, the staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements". SAB 101 summarizes some of the staff's interpretations of the application of generally accepted accounting principles to revenue recognition. The Company currently evaluates the impact of this adoption on the financial statements. In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation--an Interpretation of APB Opinion No. 25". FIN 44 clarifies the application of APB Opinion No. 25 and, among other issues clarifies the following: the definition of an employee for purposes of applying APB Opinion No. 25; the criteria for determining whether a plan qualifies as a noncompensatory; plan the accounting consequence of various modifications to the terms of the previously fixed stock options or awards; and the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44 cover specific events that occurred after either December 15, 1998 or January 12, 2000. The Company does not expect the application of FIN 44 to have a material impact on the Company's financial position or results of operations. q. Unaudited pro forma shareholders' equity: The Company's Preferred shares, convertible debentures and part of the warrants will be automatically converted into Ordinary shares upon completion of the Company's IPO. Pro forma shareholders' equity as of March 31, 2000, as adjusted for the conversion of such shares, is disclosed in the balance sheet. r. Unaudited information: The financial statements include the unaudited consolidated balance sheet as of March 31, 2000 and the related consolidated statement of operations, changes in shareholders' deficiency and cash flows for the three months ended March 31, 1999 and 2000. This unaudited information has been prepared by the Company on the same basis as the audited annual consolidated financial statements and, in management's opinion, reflects all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial information, in accordance with generally accepted accounting principles, for interim financial reporting, for the period presented. Results for interim periods are not necessarily indicative of the results to be expected for the entire year. F-14 VIRYANET LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 3:-- RESTRICTED CASH The Company recorded a fixed charge on the short-term bank deposit in order to secure a bank credit line. NOTE 4:-- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
December 31, ----------- 1998 1999 ------ ---- (U.S. dollars in thousands) ---------- Prepaid expenses............................................... $ 560 $534 Employees...................................................... 125 91 Government authorities......................................... 65 78 Other.......................................................... 393 199 ------ ---- $1,143 $902 ====== ====
NOTE 5:-- PROPERTY AND EQUIPMENT a. Cost: Computers and software....................................... $2,065 $2,858 Office furniture and equipment............................... 628 707 Motor vehicles............................................... 323 170 Leasehold improvements....................................... 173 196 ------ ------ 3,189 3,931 ------ ------ Accumulated depreciation: Computers and software..................................... 1,272 1,890 Office furniture and equipment............................. 278 342 Motor vehicles............................................. 89 67 Leasehold improvements..................................... 117 141 ------ ------ 1,756 2,440 ------ ------ Depreciated cost............................................. $1,433 $1,491 ====== ======
b. As for charges, See Note 9c. NOTE 6:-- SHORT-TERM BANK CREDIT As of December 31, 1999, the Company had authorized credit lines from several banks in the amount of $4,303,000, of which $303,000 is denominated in NIS and bears interest at the rate of prime + 1% and $4,000,000 is denominated in dollars and bears interest at LIBOR + 1.5%. Subsequent to the balance sheet date, the Company obtained an additional credit line from Bank Hapoalim with an availability of $2,000,000. (See also Note 15a). The weighted average interest rate on the credit lines as of December 31, 1999 and 1998 was approximately 8%. As for charges, See Note 9c. F-15 VIRYANET LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 7:-- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
December 31, ------------- 1998 1999 ------ ------ (U.S. dollars in thousands) ------------- Employees and payroll accruals............................... $2,423 $2,855 Accrued expenses............................................. 1,047 769 Others....................................................... 396 281 ------ ------ $3,866 $3,905 ====== ======
NOTE 8:-- LONG-TERM LOANS Linkage terms and interest rates are as follows:
December 31, Linked Average -------------------------- Currency to interest rate 1998 1999 -------- -------- ------------- ------- ------- (U.S. dollars in thousands) -------------------------- NIS Unlinked Prime $ 55 $ 11 U.S. dollar 8% 7 -- ------- ------- $ 62 $ 11 ======= ======= Aggregate maturities of long-term loans: First year (current maturities)................... $ 51 $ 11 Second year....................................... 11 -- ------- ------- $ 62 $ 11 ======= =======
NOTE 9:-- COMMITMENTS AND CONTINGENT LIABILITIES a. Royalty commitments: Under the Company's research and development agreements with BIRD-F and pursuant to applicable laws, the Company is required to pay royalties at the rate of 3%-5% of sales of products developed with funds provided by BIRD-F, up to an amount equal to 100%-150% of BIRD-F research and development grants (linked to the dollar and to the U.S. Consumer Price Index) related to such projects. As of December 31, 1999, the Company had an outstanding contingent obligation to pay royalties in the amount of $330,000. b. Lease commitments: The Company and its subsidiaries rent their facilities under various operating lease agreements, which expire on various dates, the latest of which is in 2005. The minimum rental payments under non-cancelable operating leases are as follows:
Year ended December 31 ------------- (U.S. dollars in thousands) ------------- 2000.......................................................... $ 880 2001.......................................................... 780 2002.......................................................... 716 2003.......................................................... 460 2004.......................................................... 430 2005.......................................................... 97 ------ $3,363 ======
F-16 VIRYANET LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Total rent expenses for the years ended December 31, 1997, 1998 and 1999 were approximately $449,000, $955,000 and $1,100,000 respectively. c. Charges and guarantees: Various computers and peripheral equipment and motor vehicles of the Company are pledged at fixed charges in favor of various banks and financing institutions. The Company also has a floating charge on all of its assets in favor of a bank. The Company obtained bank guarantees in the amount of $250,000 in order to secure a bankcredit line. d. Litigation: In December 1999, the Company's former vice president of marketing and sales filed an action against the Company and Company's Chief Executive Officer seeking damages in the amount of approximately $1,364,000. The former employee alleges wrongful denial of his right to exercise options, loss of compensation including options to purchase shares granted to him by his previous employer, severance payment and other social benefits as well as damage to his reputation. In March 2000, the Company filed a counter action against this former employee seeking damages in the amount of approximately $970,000. The Company alleged that the former employee has acted in bad faith, breached his fiduciary towards Company and did not perform his duties as required. The Company's management is unable to determine with any certainty the ultimate outcome of the litigation and its effect on the Company's business, operating results and financial condition. NOTE 10:-- SHARE CAPITAL a. Composition of share capital:
Authorized shares Issued and outstanding shares --------------------- ----------------------------- December 31, December 31, --------------------- ----------------------------- 1998 1999 1998 1999 ---------- ---------- -------------- -------------- Shares of NIS 0.1 par value: Ordinary shares (1)..... 9,000,000 6,900,000 2,625,140 2,700,640 Preferred "A" shares (2).................... 6,133,330 6,133,330 3,951,740 3,951,740 Preferred "B" shares (2).................... 866,670 866,670 650,000 650,000 Preferred "C-1" shares (2).................... 4,000,000 4,000,000 3,805,515 3,805,515 Preferred "C-2" shares (2).................... -- 2,100,000 -- 1,739,132 ---------- ---------- -------------- -------------- 20,000,000 20,000,000 11,032,395 12,847,027 ========== ========== ============== ==============
- ------------------ (1) The Ordinary shares confer upon the holders the right to receive notice to participate and vote in general meetings of the Company, and the right to receive dividends, if declared. F-17 VIRYANET LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (2) The Preferred shares ("A", "B" and "C") have the same rights as the Ordinary shares (except for the Preferred "B" shares, which do not confer voting rights). In addition, the shares are convertible into Ordinary shares, have an aggregate preference in liquidation of $39,381,000 as of December 31, 1999 and have veto rights in certain matters. The Preferred shares are convertible, at the holders' option, or upon an IPO of the Company, into Ordinary shares on a one-for-one basis. (3) In June 1999, the Company converted 2,100,000 authorized Ordinary shares to 2,100,000 authorized Preferred "C-2" shares. b. Stock options: 1. Under the Company's 1996, 1997, 1998 and 1999 Stock Option Plans (the "Plans"), options may be granted to officers, directors, employees and consultants of the Company or its subsidiaries. 2. Pursuant to the Plans, the Company reserved for issuance 1,400,000, 500,000, 1,500,000 and 3,000,000 Ordinary shares, respectively. As of December 31, 1999, an aggregate to 158,935 Ordinary shares of the Company were still available for future grant. 3. Each option granted under the Plans is exercisable until the earlier of seven years from the date of the grant of the option or the expiration dates of the respective option plans. The 1996, 1997, 1998 and 1999 option plans will expire on December 31, 2005, 2006, 2007 and 2008, respectively. The exercise price of the options granted under the plans may not be less than the nominal value of the shares into which such options are exercised. The options vest primarily over four years. Any options which are canceled or not exercised before expiration become available for future grants. A summary of the Company's share option activity (except options to consultants) under the Plans is as follows:
Year ended December 31, -------------------------------------------------------------- 1997 1998 1999 -------------------- -------------------- -------------------- Weighted Weighted Weighted average average average Number exercise Number exercise Number exercise of options price of options price of options price ---------- -------- ---------- -------- ---------- -------- Outstanding--beginning of the year............ 1,404,320 $0.61 1,963,720 $1.10 2,869,970 $2.20 Granted................. 569,400 2.30 1,332,000 3.35 2,810,480 5.53 Exercised............... -- -- (148,315) 0.66 (75,500) 0.96 Forfeited............... (10,000) 1.05 (277,435) 0.81 (949,700) 3.21 --------- ----- --------- ----- --------- ----- Outstanding--end of the year................... 1,963,720 $1.10 2,869,970 $2.20 4,655,250 $4.02 ========= ===== ========= ===== ========= ===== Options exercisable..... 850,383 $0.79 1,335,901 $1.40 1,570,076 $2.74 ========= ===== ========= ===== ========= =====
F-18 VIRYANET LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The options outstanding as of December 31, 1999, have been separated into ranges of exercise price, as follows:
Weighted Options Weighted Options average outstanding average Weighted exercisable exercise as of remaining average at price of December 31, contractual exercise December 31, exercisable Exercise price 1999 life years price 1999 options -------------- ------------ ----------- -------- ------------ ----------- $0.61-1.00...... 1,040,320 3.30 $0.65 684,365 $0.64 2.30............ 284,825 4.34 2.30 170,538 2.30 3.2-3.90........ 760,000 4.91 3.45 280,875 3.49 5.75............ 2,570,105 6.76 5.75 434,298 5.75 ---------------- --------- ---- ----- --------- ----- $0.61-5.75...... 4,655,250 5.54 $4.02 1,570,076 $2.74 ========= ==== ===== ========= =====
The Company recorded deferred compensation for options issued with an exercise price below the fair value of the Ordinary shares, preferred compensation is amortized and recorded as compensation expense ratably over the vesting period of the option. Compensation expenses of approximately $12,000, $104,000 and $618,000 were recognized during the years ended December 31, 1997, 1998 and 1999, respectively. Under SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), pro forma information regarding net loss and loss per share is required for grants issued after December 1994, and has been determined as if the Company had accounted for its employee share options under the fair value method of SFAS No. 123. The fair value for these options was estimated at the grant date using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997, 1998 and 1999: risk-free interest rates of 6%, 5.5% and 5.75% respectively, dividend yields of 0% for each year, volatility factors of the expected market price of the Company's Ordinary shares of 0.5 for each year, and a weighted-average expected life of the options of approximately 3.8, 3.5 and 3.4 years, respectively. The weighted average fair values of options granted for the years ended December 31, 1997, 1998 and 1999 were:
For exercise price on the grant date that: -------------------------------------------------- Equals market Exceeds Is less than price market price market price ----------------- --------------- ---------------- Year ended Year ended Year ended December 31, December 31, December 31, ----------------- --------------- ---------------- 1997 1998 1999 1997 1998 1999 1997 1998 1999 ----- ----- ----- ---- ----- ---- ---- ----- ----- Weighted average exercise prices.................... $2.30 $3.30 $5.75 $-- $3.90 $-- $-- $ 3.2 $4.18 ===== ===== ===== === ===== === === ===== ===== Weighted average fair values on grant date...... $0.98 $1.37 $2.74 $-- $1.12 $-- $-- $1.75 $3.04 ===== ===== ===== === ===== === === ===== =====
Because changes in the subjective input assumptions can materially affect the fair value estimate, it is management's opinion that the existing option pricing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. F-19 VIRYANET LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Pro forma information under SFAS No. 123 is as follows:
Year ended December 31, --------------------------- 1997 1998 1999 ------- -------- -------- U.S. dollars in thousands, except per share data --------------------------- Net loss as reported......................... $(4,728) $(13,193) $(20,411) ======= ======== ======== Pro forma net loss........................... $(4,865) $(13,491) $(20,776) ======= ======== ======== Pro forma basic and diluted net loss per share....................................... $ (1.92) $ (5.28) $ (7.76) ======= ======== ========
4. Options issued to consultants: a) The Company's outstanding options to consultants as of December 31, 1999, are as follows:
Options for Exercise ordinary price per Options Exercisable Issuance date shares share exercisable through ---------------------------- ----------- --------- ----------- ------------- December 1996............... 250,000 $1.00 250,000 (*) March 1998.................. 5,000 $3.20 1,250 February 2002 September 1998.............. 40,000 $3.75 40,000 January 2001 November 1998............... 10,000 $3.75 5,000 December 2006 November 1998............... 45,000 $1.00 45,000 December 2006 November 1999............... 12,000 $5.75 12,000 November 2006 ------- ------- Total..................... 362,000 353,250 ======= =======
- ------------------ (*) The options are exercisable through December 2000. If not exercised, they automatically renew for one additional year, each time, for up to seven years, through December 2006. The exercise price will be increased by 6% compounded each year. b) The Company had accounted for its options to consultants under the fair value method of SFAS No. 123 and EITF 96-18. The fair value for these warrants was estimated using a Black-Scholes option-pricing model with the following weighted-average assumptions for 1998 and 1999: risk-free interest rates of 5.5% and 5.75% respectively, dividend yields of 0% for each year, volatility factors of the expected market price of the Company's Ordinary shares of 0.5 for each year, and a weighted-average expected life of the options of approximately 3.5 and 2.1 years, respectively. c) In connection with the granting of stock options to consultants, the Company recorded deferred stock compensation totaling $261,000 through December 31, 1999. Compensation expenses of approximately $0, $146,000 and $80,000 were recognized during the years ended December 31, 1997, 1998 and 1999, respectively. c. Warrants: 1. Warrants issued to investors: a) As part of the investment agreement in 1996 the Company issued to certain investors warrants to purchase 1,375,110 Series A Convertible Preferred shares at an exercise price of $3.00 of which warrants to purchase 216,670 shares were converted in December 1996 into warrants to purchase 216,670 Series B Non-Voting Preferred shares. These warrants are exercisable until an IPO. b) As part of the investment agreement in February 1998, the Company issued to the shareholders warrants to purchase 31,794 convertible Series C-1 Preferred shares at an exercise price equal to the par F-20 VIRYANET LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) value of the shares. The Company recorded in 1998 investor relationship type expenses in the amount of $124,000, which was calculated at the issuance date based on the difference between the fair value of the preferred shares and the exercise price of these warrants. The warrants have no expiration date. c) As part of the investment agreement in June 1999, the Company issued to certain Series C-2 Preferred shares investors detachable warrants to purchase 347,826 Series C-2 Preferred shares at an exercise price of $5.75. The warrants contain a cashless exercise feature and expire upon the earlier of June 2004 or a merger or sale of all or substantially all of the Company's assets or issued and outstanding share capital. The cashless exercise feature allows the holder to convert the warrant into ordinary shares without the payment of any exercise price. The number of shares issuable upon exercise is determined by subtracting the exercise price of the warrant from the aggregate market value of the underlying shares, and then dividing such amount by the market value of an ordinary share. 2. Warrants issued for financing transactions: In connection with a credit line from Bank Hapoalim, the Company issued in March 1999 to a subsidiary of Bank Hapoalim, a warrant to purchase 217,391 ordinary shares of the Company in exchange for $1,000,000 in cash. The warrant contains a cashless exercise feature and is exercisable until March 31, 2002 or until an IPO, as earlier. The Company recorded compensation of approximately $250,000, which is amortized ratably over a one year period. The Company recorded $198,000 in 1999 as compensation expense and included these amounts in financial expenses. 3. Warrants issued to customers: a) In 1996, the Company entered into software license agreements with two customers, one of them a related party. In connection with these agreements, the Company issued warrants expiring upon an IPO to purchase 300,000 and 100,000 ordinary shares at an exercise of $2.00 and $3.00 per share, respectively. As of December 31, 1999, these warrants had not been exercised. At the grant date, the fair value of these warrants was estimated as $168,000 and was deducted from software revenues and amortized over the period such related revenue was recognized (1996 and 1997). The fair value of these warrants were determined using Black-Scholes pricing model, assuming a risk free rate 6.0%, a volatility factor 0.5, dividend yields of 0% and an expected life of the warrants of 5 years. b) In 1999, the Company entered into software license agreements with certain customers, one of them a related party. In connection with these agreements, the Company issued warrants expiring three years from the date of the agreements to purchase 150,000 Ordinary shares at an exercise price of $5.75 per share, and warrants exercisable until the earlier of June 28, 2002 or an IPO, to purchase 50,000 Ordinary shares at an exercise price of $5.75 in consideration of $125,000. As of December 31, 1999, the warrants had not been exercised. At the grant date, the fair value of the warrants was estimated as $375,000 and was deducted from software revenues and amortized over the period such related revenue was recognized (1998 and 1999). The fair value of these warrants was determined using the Black- Scholes pricing model, assuming a risk free rate of 5.75%, a volatility factor of 0.50, dividend yields of 0% and an expected life of the warrants of 3 years. The Company recorded proceeds from issuance of shares in the amount of $500,000. d. Deemed dividend: In 1997 and 1998 the Company converted 77,460 and 87,565 Ordinary shares, respectively, to Preferred shares. Since the Company's Preferred shares have preference rights, the Company recorded deemed dividend at the amount of $116,000 and $61,000, respectively, which were calculated as the difference between the fair value of the Preferred shares and the fair value of the Ordinary shares at the date of F-21 VIRYANET LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) conversion. The deemed dividend increases the loss applicable to Ordinary shares in the calculation of basic and diluted net loss per share for the years ended December 31, 1997 and 1998, without any effect on total shareholders' equity (deficiency). e. Dividends: In the event that cash dividends are declared in the future, such dividends will be paid in NIS. The Company does not intend to pay cash dividends in the foreseeable future. NOTE 11:-- TAXES ON INCOME a. Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (the "law"): The Company's production facilities have been granted the status of an "Approved Enterprise" under the law for three separate investment programs which were approved in February 1989, March 1995 and April 1998. According to the provisions of the law, income derived from this program during a period of seven years from the year in which it first earns taxable income is subject to reduced corporate tax of 10% - 25%, depending on the percentage of the Company share capital held by foreign residents. According to the provisions of the law, the Company has elected for its other two investment programs the "Alternative Track" (the waiver of grants in return for a tax exemption). Accordingly, income derived from these programs will be tax-exempt for a period of ten years commencing with the year in which it first earns taxable income. For the second investment program, the Company elected to enjoy a Government guaranteed long-term loan plan along with the tax exemption. These loans were repaid by the Company in January 1997. As the Company currently has no taxable income, the benefits have not yet commenced for all three programs. The tax-exempt profits that will be earned by the Company's "Approved Enterprises" can be distributed to shareholders, without tax liability to the Company only upon the complete liquidation of the Company. If these retained tax-exempt profits are distributed in a manner other than in the complete liquidation of the Company, they would be taxed at the corporate tax rate applicable to such profits as if the Company had not elected the alternative track of benefits (currently 20% for an "Approved Enterprise"). The Company's Board of Directors has determined that such tax exempted income will not be distributed as dividends. Should the Company fail to meet conditions stipulated by the law and in the letter of approval, including making specified investments in fixed assets, maintaining the development and production nature of its facilities, and financing of at least 30% the investment program through equity, it could be subject to corporate tax in Israel of 36% and could be required to refund tax benefits already received at that time (inclusive of interest and penalties). The period of tax benefits detailed above is limited to the earlier of 12 years from the commencement of production, or 14 years from receiving the approval. Accordingly, the period of the benefit relating to these investment programs will expire between 2003-2012. The law also grants entitlement to claim accelerated depreciation on equipment used by the "Approved Enterprise" during five tax years. Should the Company derive income from sources other than from an "Approved Enterprise" during the relevant period of benefits, such income will be taxed at the regular corporate tax rate of 36%. F-22 VIRYANET LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) b. Tax benefits under the Israeli Law for the Encouragement of Industry (Taxation), 1969: The Company is an "industrial company" under the Law for the Encouragement of Industry (Taxation), 1969 and, therefore, is entitled to certain tax benefits, including accelerated rates of depreciation and deduction of public offering expenses in three equal annual installments. The Company has not yet utilized this tax benefit. c. Measurement of results for tax purposes under the Income Tax Law (Inflationary Adjustments), 1985: Results for tax purposes are measured in real terms of earnings in NIS after certain adjustments for increases in the Israeli Consumer Price Index (CPI). As explained in Note 2b, the financial statements are presented in U.S. dollars. The difference between the annual change in the CPI and in the NIS/dollar exchange rate causes a difference between taxable income and the pre-tax income presented in the financial statements. In accordance with paragraph 9(f) of SFAS No. 109, the Company has not provided deferred income taxes on this difference between the reporting currency and the tax bases of assets and liabilities. d. Net operating loss carryforwards: As of December 31, 1999, the Company had approximately $6,400,000 of Israeli net operating loss carryforwards. The Israeli loss carryforwards have no expiration date. The Company expects that during the period these tax losses are utilized, its income would be substantially tax exempt. Accordingly, there will be no tax benefit available from such losses and no deferred income taxes have been included in these financial statements. As of December 31, 1999, ViryaNet UK had accumulated losses for income tax purposes, in the amount of approximately $10,800,000. The net operating loss may be carried forward and offset against taxable income for an indefinite period in the future. As of December 31, 1999, ViryaNet Japan had accumulated losses for income tax purposes, in the amount of approximately $1,200,000. The net operating loss may be carried forward and offset against taxable income for 10 years, expiring in the years 2008 and 2009. As of December 31, 1999, ViryaNet US had a U.S. federal net operating loss carryforwards for income tax purposes in the amount of approximately $18,400,000, which may be carried forward and offset against taxable income for 15 years, expiring between 2009 and 2014. Utilization of U.S. net operating losses may be subject to substantial annual limitations due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization. e. Deferred income taxes: Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows:
December 31, -------------------------- 1997 1998 1999 ------- ------- -------- (U.S. dollars in thousands) -------------------------- US net operating loss carryforwards............. $ 855 $ 3,432 $ 6,440 UK net operating loss carryforwards............. 1,328 2,084 3,240 Japan, net operating loss carryforwards......... -- 525 432 Other reserve and allowances.................... 62 175 331 ------- ------- -------- Total deferred tax assets....................... 2,245 6,216 10,443 Valuation allowance............................. (2,245) (6,216) (10,443) ------- ------- -------- Net deferred tax assets......................... $ -- $ -- $ -- ======= ======= ========
F-23 VIRYANET LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) ViryaNet UK, ViryaNet US and ViryaNet Japan have provided valuation allowances in respect of deferred tax assets resulting from tax loss carryforwards and other temporary differences, since they have a history of losses over the past years. Management currently believes that it is more likely than not that the deferred tax regarding the loss carryforwards and other temporary differences will not be realized. f. Pre-tax loss:
Year ended December 31, ------------------------- 1997 1998 1999 ------- -------- -------- (U.S. dollars in thousands) ------------------------- Domestic.......................................... $ 4,135 $ 6,774 $ 3,165 Foreign........................................... 593 6,358 17,246 ------- -------- -------- $ 4,728 $ 13,132 $ 20,411 ======= ======== ========
NOTE 12:--SELECTED STATEMENTS OF OPERATIONS DATA a. Summary information about geographical destinations: The Company manages its business on a basis of one reportable segment. See Note 1a for a brief description of the Company's business. The Company attributes revenues from external customers, on the basis of the location of product sales. The following presents total revenues and long-lived assets for the year ended December 31, 1997, 1998 and 1999:
Year ended Year ended Year ended December 31, 1997 December 31, 1998 December 31, 1999 ------------------- ------------------- ------------------- Long- Long- Long- Total lived Total lived Total lived revenues assets revenues assets revenues assets --------- -------- --------- -------- --------- -------- (U.S. dollars in thousands) ----------------------------------------------------------- Israel............ $ -- $ 736 $ -- $ 844 $ -- $ 713 United States..... 11,228 181 10,021 436 11,998 617 United Kingdom.... 2,230 141 2,958 125 3,054 101 Japan............. 9 -- 546 28 750 60 --------- -------- --------- -------- --------- -------- $ 13,467 $ 1,058 $ 13,525 $ 1,433 $ 15,802 $ 1,491 ========= ======== ========= ======== ========= ========
b. Major customers data; percentage of total revenues:
Year ended December 31, ------------------------- 1997 1998 1999 ------- ------- ------- % ------------------------- Customer A....................................... 73 41 22 Customer B....................................... -- 14 33 Customer C....................................... 7 15 5 Customer D....................................... 6 10 11
F-24 VIRYANET LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) c. Research and development expenses:
Year ended December 31, ----------------------- 1997 1998 1999 ------- ------- ------- (U.S. dollars in thousands) ----------------------- Total cost......................................... $ 3,443 $ 5,652 $ 6,865 Less--grants and participation..................... -- 330 -- ------- ------- ------- $ 3,443 $ 5,322 $ 6,865 ======= ======= =======
d. Financial income (expenses):
Year ended December 31, ---------------------------- 1997 1998 1999 --------- ------------------ (U.S. dollars in thousands) ---------------------------- Financial expenses: Interest.................................. $ 185 $ 76 $ 340 Loss from marketable securities........... 51 189 -- Other expenses............................ 94 72 56 Foreign currency translation differences.. 91 -- 47 Amortization of deferred compensation of options to Bank Hapoalim................. -- -- 198 -------- -------- --------- 421 337 641 -------- -------- --------- Financial income: Interest.................................. 336 296 69 Gain from marketable securities........... -- -- 7 Foreign currency translation differences.. -- 275 -- -------- -------- --------- 336 571 76 -------- -------- --------- $ (85) $ 234 $ (565) ======== ======== =========
NOTE 14:--RELATED PARTY TRANSACTIONS a. In September 1995, the Company entered into a sales software license and development services agreement with Sun Microsystems Inc. ("SUN"). As part of the agreement, SUN was granted a warrant to purchase 300,000 of the Company's Preferred shares at an exercise price of $2.00 per share. The Company accounted for these warrants in accordance with the requirements set forth in FAS-123 which amounted to an expense of $168,000, which was deducted from the revenues in 1996 and 1997. The fair value of this warrant was determined using Black-Scholes pricing model assuming a risk free rate 6.0%, a volatility factor 0.5, dividend yields of 0% and an expected life of the warrant of 5 years. Such agreement was amended in December 1998. According to this amendment, the Company provided additional software license sales and development services. The president of enterprise services of SUN is a member of the Company's Board of Directors. b. In April 1998, the Company signed a share purchase agreement with GE Capital Equity Holdings Inc. ("GE"), a subsidiary of General Electric. As of December 31, 1999, GE held 11.8% of the Company's outstanding shares. In June 1998, the Company entered into a software license and support agreement with GE Medical Systems Inc., another subsidiary of General Electric. Under the agreement the Company granted GE Medical a non exclusive license to use certain of the Company's products. Pursuant to the amendment to this agreement, the Company also granted GE 50,000 warrants at an exercise price of $5.75, exercisable until F-25 VIRYANET LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) December 2002. The Company accounted for those warrants in accordance with the requirements set forth in FAS 123 which amounted an expense of $125,000, which was deducted from the revenues in 1999. The fair value of this warrant was determined using Black-Scholes pricing model assuming a risk free rate 5.75%, a volatility factor of 0.5, dividend yields of 0% and an expected life of the warrants of 3 years. c. The balances with and the revenues derived from these related parties were as follows: 1. Balances with related parties:
December 31, ------------- 1998 1999 ------------- (U.S. dollars in thousands) ------------- Trade receivables: Sun MicroSystems Inc.(*)................................... $ 54 $ 546 ===== ======= GE Medical Systems Inc. (*)................................ $ 149 $ 1,083 ===== ======= Deferred revenues: Sun MicroSystems Inc. (*).................................. $ -- $ 289 ===== ======= GE Medical Systems Inc. (*)................................ $ 951 $ 31 ===== =======
------------------ (*) The balance is unlinked and bears no interest. 2. Revenues from related parties:
Year ended December 31, ----------------------- 1997 1998 1999 ------- ------- ------- (U.S. dollars in thousands) ----------------------- Sun MicroSystems Inc............................... $ 9,845 $ 5,548 $ 3,553 ======= ======= ======= GE Medical Systems Inc............................. $ -- $ 1,872 $ 5,251 ======= ======= =======
d. On June 30, 1999, the Company issued to its shareholder and Chief Executive Officer 17,390 Series C-2 Preferred Shares in consideration of $100,000, which the Company loaned to this shareholder and will be repaid to the Company not later than June 30, 2002 and will bear interest of 6.5% per annum. The debt is secured by the shares. NOTE 15:-- SUBSEQUENT EVENTS a. In January 2000, the Company obtained an additional $2,000,000 credit line for one year. Dollar-denominated borrowings bear interest at an annual rate of LIBOR plus 1.5%, and NIS-denominated credit lines from Bank Hapoalim bear interest of prime plus 1%. The credit facility is secured by a floating charge on all of the Company's assets. In connection with this additional credit line, the Company issued to a subsidiary of Bank Hapoalim, a warrant to purchase an additional 69,565 ordinary shares of the Company against payment of $400,000. The warrant contains a cashless exercise feature and is exercisable until January 2003 or an IPO, whichever is earlier. The Company will record a compensation of approximately $202,000, which is amortized ratably over a period of the line of credit. This transaction was accounted according to APB 14 "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants". The fair value of this warrant was F-26 VIRYANET LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) determined using the Black-Scholes pricing model, assuming a risk free interest rate of 5.75%, a volatility factor of 0.5, dividend yields of 0% and an expected life of the warrant of one year. b. In February and March 2000, the Company entered into convertible loan agreements with existing shareholders in the aggregate amount of approximately $5.0 million. These convertible loans converted into convertible debentures issued in April 2000 as described below. In April 2000, the Company entered into a convertible debenture agreement ("agreement") with additional investors in the aggregate amount of approximately $11.0 million. The debentures are denominated in dollars and bear annual interest at the rate of LIBOR +2%, payable quarterly, commencing in April 2001. The debentures shall be due in April 2003, and shall be convertible including accrued but unpaid interest upon any of the events which are determined in the agreement. The debentures shall be converted into the applicable number of shares at the applicable conversion ratio. Conversion will occur on the earlier of: 1. An IPO raising proceeds of at least $20 million ("Exit"); 2. A liquidation event ("Exit") 3. A subsequent further investment in the share equity of the Company of at least $10.0 million ("PPM"). In the event of an Exit, the debentures shall automatically convert into Ordinary shares equal to the principal amount and the unpaid accrued interest, divided by the Exit price discounted by 30%-50%, subject to the date of the Exit. In the event of a PPM, the debentures shall automatically convert into Series C-2 Preferred shares equal to the principal amount and the unpaid accrued interest, divided by the PPM price discounted by 25%-40%, subject to the terms of the PPM. The Company will record $16.0 million of financial expenses on the date future events occur, according to EITF 98-5 "Accounting for Convertible Securities with Beneficial Conversion Features or Contingent Adjustable Conversion ratios". In addition, the Company granted 124,999 warrants to the shareholders at the exercise price equal to 95% of the conversion price per share in the event of Exit or PPM. The warrants are exercisable upon the earlier of: 1. Five years from the date of issuance 2. A liquidation event. In connection with these warrants, the Company will record financial expenses of $505,000, which will be amortized ratably over the life period of the convertible debentures. This transaction was accounted according to APB 14 "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants". The fair value of these warrants was determined using the Black-Scholes pricing model, assuming a risk free interest rate of 5.75%, a volatility factor of 0.5, dividend yields of 0% and an expected life of six months. c. The Company resolved to increase its authorized share capital by NIS 1,500,000 which amount shall be divided into 12,000,000 Ordinary shares of nominal NIS 0.1 par value each and 3,000,000 Series C-2 Preferred shares of nominal NIS 0.1 par value each. d. The Company resolved to increase the pool of 1999 Option Plan by 1,000,000 options over and above previous increases. The total pool for 1999 shall be 3,000,000 options. F-27 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 4,500,000 Ordinary Shares [LOGO OF VIRYANET] ---------------- PROSPECTUS ---------------- Chase H&Q Salomon Smith Barney Dain Rauscher Wessels ------------- , 2000 ------------- You should rely only on information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, ordinary shares only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our ordinary shares. No action is being taken in any jurisdiction outside the United States to permit a public offering of the ordinary shares or possession or distribution of this prospectus in any of those jurisdictions. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions related to this offering and the distribution of this prospectus applicable to that jurisdiction. Until , 2000, all dealers that buy, sell or trade in our ordinary shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters of their unsold allotments or subscriptions. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The following table lists all expenses, other than the underwriting discounts and commissions, payable by the registrant in connection with the sale of the securities being registered. All amounts shown are estimates. SEC registration fee............................................ $ 20,000 NASD filing fee................................................. 7,000 Nasdaq National Market fees..................................... 22,500 Blue Sky qualification fees and expenses........................ 5,000 Israel stamp duty............................................... 570,000 Printing and engraving expenses................................. 300,000 Accountant's fees and expenses.................................. 200,000 Legal fees and expenses......................................... 500,000 Miscellaneous................................................... 410,500 ---------- Total....................................................... $2,035,000 ==========
Item 14. Indemnification of Directors and Officers. Under the companies law, an Israeli company may not exempt an office holder from liability for 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, under a breach of his duty of care. Office Holder Insurance Our articles of association provide that, subject to the provisions of the companies law, we may enter into a contract for the insurance of the liability of any of our office holders for acts which he performed in his capacity as an office holder in relation to the following: . a breach of his duty of care to us or to another person; . 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 his act would not prejudice our interests; or . a financial liability imposed upon him in favor of another person. Indemnification of Office Holders Our articles of association provide that we may indemnify an office holder against: . a financial liability imposed on him in favor of another person by any judgment, including a settlement or an arbitrator's award approved by a court concerning an act performed in his capacity as an office holder; and . reasonable litigation expenses, including attorneys' fees, expended by the office holder or charged to him by a court, in proceedings we institute against him or instituted on our behalf or instituted by another person relating to an act performed in his capacity as an office holder; . reasonable litigation expenses, relating to an act performed in his capacity as an officer, including attorney's fees, expended by the office holder or charged by a court in a criminal proceeding from which he was acquitted, or a criminal proceeding in which he was convicted for a criminal offense that does not require proof of intent. II-1 Our articles of association also include: . authorization to undertake in advance to indemnify an office holder, provided that the undertaking is limited to specified events which the board of directors considers to be anticipated and limited in amount determined by the board of directors to be reasonable under the circumstances. . authorization to indemnify retroactively an office holder. Limitations on Insurance and Indemnification The companies law provides that a company may not indemnify an office holder nor enter into an insurance contract which would provide coverage for any monetary liability incurred as a result of any of the following: . a breach by the office holder of his duty of loyalty unless the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; . a breach by the office holder of his duty of care if the breach was done intentionally or recklessly; . any act or omission done with the intent to derive an illegal personal benefit; or . 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 some circumstances, by our shareholders. We have agreed to indemnify our office holders pursuant to indemnification agreements with each office holder. We have also exempted and agreed to indemnify our office holders from liabilities resulting from acts performed by them in their capacity as an office holder to the maximum extent permitted under the companies law. Before this offering, we intend to obtain directors and officers liability insurance for the benefit of our office holders. II-2 Item 15. Recent Sales of Unregistered Securities. Since January 1, 1997, we have issued and sold (without payment of any selling commissions to any person) unregistered securities as described below. Since January 1, 1997, we have issued options to our employees, directors, officers, consultants and advisors to purchase an aggregate of 5,964,630 ordinary shares under the 1996 stock plan, the 1997 stock plan, the 1998 stock plan and the 1999 stock plan exercisable at a weighted average price of $4.45 per share. From January 1, 1997 through July 20, 2000, options to purchase 238,315 shares had been exercised. The following table lists options granted between January 1, 1997 and July 20, 2000.
Date Shares Price ---- --------- ------ April 16, 1997............................................. 150,000 $ 2.30 July 8, 1997............................................... 299,400 $ 2.30 October 13, 1997........................................... 120,000 $ 2.30 March 5, 1998.............................................. 469,500 $ 3.20 March 5, 1998.............................................. 200,000 $ 3.90 September 3, 1998.......................................... 567,500 $ 3.20 September 3, 1998.......................................... 40,000 $ 3.75 November 17, 1998.......................................... 110,000 $ 3.75 November 17, 1998.......................................... 45,000 $ 1.00 April 26, 1999............................................. 105,000 $ 1.00 June 30, 1999.............................................. 327,000 $ 5.75 June 30, 1999.............................................. 37,000 $ 3.75 June 30, 1999.............................................. 10,000 $ 3.20 November 1, 1999........................................... 2,013,480 $ 5.75 November 4, 1999........................................... 100,000 $ 5.75 December 15, 1999.......................................... 230,000 $ 5.75 January 10, 2000........................................... 515,000 $ 5.75 February 15, 2000.......................................... 65,000 $ 5.75 March 20, 2000............................................. 12,000 $12.00 July 17, 2000.............................................. 8,500 $ 5.75 July 17, 2000.............................................. 465,250 $11.00 July 17, 2000.............................................. 70,000 $ 8.00 July 17, 2000.............................................. 5,000 $10.00
In October 1996, we issued and sold series A preferred shares convertible into an aggregate of 2,500,000 ordinary shares to various investors for a purchase price of $2.00 per share. In addition, we issued to these investors, to existing shareholders and one of our customers warrants to purchase series A preferred shares convertible into an aggregate of 1,475,110 ordinary shares. The exercise price of each of these warrants is $3.00. We also issued to Sun Microsystems, Inc. warrants to purchase series A preferred shares convertible into 300,000 ordinary shares. The exercise price of each of the Sun Microsystems warrants is $2.00. In December 1996, 500,000 series A preferred shares held by the Advanced Technology Ventures Group were converted into 500,000 series B non-voting preferred shares. In addition, warrants to purchase 216,670 series A preferred shares issued to the Advanced Technology Ventures Group were converted into warrants to purchase 216,670 series B non-voting preferred shares. In April 1997, 150,000 series A preferred shares held by Advanced Technology Ventures were converted into 150,000 series B non-voting preferred shares. In March 1998, we issued series C-1 preferred shares convertible into 2,564,104 ordinary shares at a purchase price of $3.90 per share to some of our shareholders and a group of financial investors. Of the series C-1 preferred shares, 794,871 shares were purchased by way of conversion of bridge investments provided by some of our shareholders during 1997. In addition, we issued to the shareholders who provided us with the bridge investments warrants to purchase series C-1 preferred shares convertible into 31,794 ordinary shares at an exercise price of NIS 0.1 per share. II-3 In April 1998, we issued to a strategic investor series C-1 preferred shares convertible into 641,026 ordinary shares at a purchase price of $3.90 per share. In addition, we issued to the strategic investor a warrant to purchase series C-1 preferred shares convertible into 512,820 ordinary shares, at an exercise price of $3.90 per share. In September 1998, the warrant was exercised in whole by the strategic investor. In March 1999, we issued to a subsidiary of Bank Hapoalim a warrant to purchase 217,391 ordinary shares at an exercise price of $4.60 per ordinary share. This warrant will expire upon the completion of this offering. In June 1999, we sold an aggregate of 1,739,132 of our series C-2 preferred shares to some of our shareholders and a group of financial investors at a purchase price of $5.75 per share. In addition, we issued warrants to these shareholders and investors enabling them to purchase up to 347,826 of our series C-2 preferred shares at a purchase price of $5.75 per share. The warrants contain a cashless exercise feature and expire upon the earlier of 5 years from the date of issuance, a merger of our company or a sale of all or substantially all of our shares or assets. Between June 1999 and July 20, 2000, we issued warrants to purchase an aggregate of 310,000 ordinary shares to customers at an exercise prices ranging from $5.75 to $12.00 per ordinary share. Warrants to purchase 50,000 ordinary shares will expire upon the completion of this offering and the remaining warrants to purchase 260,000 ordinary shares expire on dates ranging from January 2002 to January 2003. In January 2000, we issued to a subsidiary of Bank Hapoalim a warrant to purchase 69,565 ordinary shares at an exercise price of $5.75 per ordinary share. This warrant will expire upon the completion of this offering. In February and March 2000, some of our shareholders loaned our company an aggregate of $5,000,000. These convertible loans converted into the convertible debentures issued later in April described below. In addition, these shareholders were issued warrants to purchase up to an aggregate of 124,999 ordinary shares at an exercise price of $6.27 per share. The warrants may be exercised until the earlier of five years from the date of issuance, a merger of our company or the sale of all or substantially all of our shares or assets. In April 2000, we issued convertible debentures to three additional investors in an aggregate amount of $11.0 million bearing interest at the London interbank offered rate plus 2%. The convertible debentures are automatically convertible into ordinary shares upon the completion of this offering at a conversion price per share reflecting a discount of 40% to 50% of the price per share in this offering, depending on the timing of the offering. If this offering is completed by December 20, 2000, the discount will be 40% and we will be required to issue to these investors, together with those shareholders who provided loans as described in the preceding paragraph, 2,431,917 of our ordinary shares reflecting a price per share of $6.60. The securities referred to above were offered and sold under exemptions from registration under Section 4(2) of the Securities Act. Each of the transactions involved a private placement to a limited number of institutional investors, venture capital firms, strategic investors, customers or other investors. None of these transactions involved a general solicitation and each was completed without brokers or placement agents. II-4 Item 16. Exhibits and Financial Statement Schedules. (a) Exhibits.
Exhibit Sequential Number Description of Document Page No. ------- ----------------------- ---------- 1.1 Form of Underwriting Agreement............................ 3.1 Memorandum of Association of Registrant (English translation) dated March 8, 1988......................... Articles of Association of Registrant, dated April 11, 3.2 2000..................................................... 3.3 Form of Amended Articles of Association of Registrant..... 4.1* Specimen of ordinary share certificate.................... Form of Amended Articles of Association of Registrant 4.2 (included at Exhibit 3.3)................................ Form of opinion of Meitar, Liquornik, Geva & Co. about the 5.1 validity of the shares................................... 10.1 1996 stock option plan.................................... 10.2 1997 stock option plan.................................... 10.3 1998 stock option plan.................................... 10.4 1999 stock option plan.................................... 10.5 The 2000 Amendment and Restatement to the Investors' Rights Agreement among ViryaNet and the Investors dated April 5, 2000............................................ 10.6 Form of warrant issued by ViryaNet to purchase series A convertible preferred shares or their ordinary share equivalents.............................................. 10.7 Form of warrant issued by ViryaNet to purchase series B convertible preferred shares or their ordinary share equivalents.............................................. 10.8 Form of warrant issued by ViryaNet to purchase series C-1 convertible preferred shares or their ordinary share equivalents.............................................. 10.9 Form of warrant issued by ViryaNet to purchase series C-2 convertible preferred shares or their ordinary share equivalents.............................................. 10.10 Warrant issued by ViryaNet to Hapoalim Nechasim (Menayot) Ltd. to purchase 217,391 ordinary shares................. 10.11 Warrant issued by ViryaNet to Hapoalian Nechasim (Menayot) Ltd. to purchase approximately 69,565 ordinary shares.... 10.12 Form of warrant issued by ViryaNet to customers to purchase ordinary shares................................. 10.13 Form of warrant issued by ViryaNet to its certain shareholders in connection with the convertible loan financing................................................ 10.14 Lease for approximately 16,950 square feet of office space in Jerusalem, Israel..................................... 10.15 Lease for approximately 13,807 square feet in Southborough, Massachusetts.............................. 10.16 Form of Indemnification Agreement entered into with directors and officers of Company........................ 21.1 Subsidiaries of the Registrant............................ 23.1 Consent of Kost, Forer & Gabbay, a member of Ernst and Young International...................................... 23.2 Consent of Meitar, Liquornik, Geva & Co. (contained in Exhibit 5.1)............................................. 23.3 Consent of ITC Deltacom................................... 23.4 Consent of Symbol Technologies............................ 23.5 Consent of Teraoka Seiko.................................. 24.1+ Powers of attorney (included on page II-6)................
- ------------------ * To be filed by amendment. + Filed previously. II-5 (b) Financial Statement Schedules. II. Schedule of Valuation and Qualifying Accounts to Consolidated Financial Statements of the Registrant Item 17. Undertakings. The undersigned registrant undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant under the foregoing provisions, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. If a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant under Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered, and the offering of such securities at that time shall be deemed to be the initial bona fide offering. II-6 SIGNATURES Under the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto, duly authorized, in the City of Southborough, Massachusetts, on August 3, 2000. VIRYANET LTD. By: /s/ Samuel I. HaCohen ---------------------------------- Samuel I. HaCohen Chief Executive Officer VIRYANET, INC. Authorized U.S. Representative By: /s/ Samuel I. HaCohen ---------------------------------- Samuel I. HaCohen Chief Executive Officer Under the requirements of the Securities Act of 1933, this Amendment No. 1 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Samuel I. HaCohen Chief Executive Officer, August 3, 2000 ______________________________________ Director and Authorized Samuel I. HaCohen United States Representative (principal executive officer) /s/ Yoram Bibring* Chief Financial Officer August 3, 2000 ______________________________________ (principal finance and Yoram Bibring accounting officer) /s/ Amnon Shoham* Director August 3, 2000 ______________________________________ Amnon Shoham
II-7
Signature Title Date --------- ----- ---- /s/ Jay B. Morisson* Director August 3, 2000 ______________________________________ Jay B. Morisson /s/ Steven N. Baloff* Director August 3, 2000 ______________________________________ Steven N. Baloff /s/ Lawrence W. Hambly* Director August 3, 2000 ______________________________________ Lawrence W. Hambly /s/ Hillel Milo* Director August 3, 2000 ______________________________________ Hillel Milo
*By: /s/ Samuel I. HaCohen - --------------------------------- Samuel I. HaCohen Attorney-inFact II-8 SCHEDULE II--Valuation and Qualifying Accounts
Balance at Additions Balance the beginning charged to at the end Allowance for doubtful accounts of period expenses of period - ------------------------------- ------------- ---------- ---------- Year ended December 31, 1999................ $20 $ 8 $28 === === === Year ended December 31, 1998................ $20 -- $20 === === === Year ended December 31, 1997................ $-- $20 $20 === === ===
LIST OF EXHIBITS
Exhibit Sequential Number Description of Document Page No. ------- ----------------------- ---------- 1.1 Form of Underwriting Agreement.......................... 3.1 Memorandum of Association of Registrant (English translation) dated March 8, 1988....................... Articles of Association of Registrant, dated April 11, 3.2 2000................................................... 3.3 Form of Amended Articles of Association of Registrant... 4.1* Specimen of ordinary share certificate.................. Form of Amended Articles of Association of Registrant 4.2 (included at Exhibit 3.3).............................. Form of opinion of Meitar, Liquornik, Geva & Co. about 5.1 the validity of the shares............................. 10.1 1996 stock option plan.................................. 10.2 1997 stock option plan.................................. 10.3 1998 stock option plan.................................. 10.4 1999 stock option plan.................................. 10.5 The 2000 Amendment and Restatement to the Investors' Rights Agreement among ViryaNet and the Investors dated April 5, 2000.......................................... 10.6 Form of warrant issued by ViryaNet to purchase series A convertible preferred shares or their ordinary share equivalents............................................ 10.7 Form of warrant issued by ViryaNet to purchase series B convertible preferred shares or their ordinary share equivalents............................................ 10.8 Form of warrant issued by ViryaNet to purchase series C- 1 convertible preferred shares or their ordinary share equivalents............................................ 10.9 Form of warrant issued by ViryaNet to purchase series C- 2 convertible preferred shares or their ordinary share equivalents............................................ 10.10 Warrant issued by ViryaNet to Hapoalim Nechasim (Menayot) Ltd. to purchase 217,391 ordinary shares..... 10.11 Warrant issued by ViryaNet to Hapoalian Nechasim (Menayot) Ltd. to purchase approximately 69,565 ordinary shares........................................ 10.12 Form of warrant issued by ViryaNet to customers to purchase ordinary shares............................... 10.13 Form of warrant issued by ViryaNet to its certain shareholders in connection with the convertible loan financing.............................................. 10.14 Lease for approximately 16,950 square feet of office space in Jerusalem, Israel............................. 10.15 Lease for approximately 13,807 square feet in Southborough, Massachusetts............................ 10.16 Form of Indemnification Agreement entered into with directors and officers of Company...................... 21.1 Subsidiaries of the Registrant.......................... 23.1 Consent of Kost, Forer & Gabbay, a member of Ernst and Young International.................................... 23.2 Consent of Meitar, Liquornik, Geva & Co. (contained in Exhibit 5.1)........................................... 23.3 Consent of ITC Deltacom................................. 23.4 Consent of Symbol Technologies.......................... 23.5 Consent of Teraoka Seiko................................ 24.1+ Powers of attorney (included on page II-6).............. - ------------------ * To be filed by amendment. + Filed previously. Schedule No. -------- II Schedule of Valuation and Qualifying Accounts to Consolidated Financial Statements of the Registrant....
EX-1.1 2 0002.txt UNDERWRITING AGREEMENT EXHIBIT 1.1 VIRYANET LTD. __________ Ordinary Shares 1 UNDERWRITING AGREEMENT ---------------------- __________ , 2000 CHASE SECURITIES, INC. SALOMON SMITH BARNEY INC. DAIN RAUSCHER WESSELS c/o Chase Securities, Inc. One Bush Street San Francisco, CA 94104 Ladies and Gentlemen: ViryaNet Ltd., an Israeli corporation (herein called the Company), proposes to issue and sell __________ shares of its authorized but unissued Ordinary Shares, $____ par value NIS 0.1 per share (herein called the Ordinary Shares) of the Company (said __________ Ordinary Shares being herein called the Underwritten Shares). The Company proposes to grant to the Underwriters (as hereinafter defined) an option to purchase up to __________ additional Ordinary Shares. The additional __________ Ordinary Shares to be sold by the Company pursuant to such option are herein collectively called the Option Shares and with the Underwritten Shares herein collectively called the Shares. The Ordinary Shares are more fully described in the Registration Statement and the Prospectus hereinafter mentioned. As part of the offering contemplated by this Agreement, Chase Securities, Inc. (the "Designated Underwriter") has agreed to reserve out of the Underwritten Shares purchased by it under this Agreement, up to _______ shares, for sale to the Company's directors, officers, employees and other parties associated with the Company (collectively, "Participants"), as set forth in the Prospectus (as defined herein) under the heading "Underwriting" (the "Directed Share Program"). The Underwritten Shares to be sold by the Designated Underwriter pursuant to the Directed Share Program (the "Directed Shares") will be sold by the Designated Underwriter pursuant to this Agreement at the public offering price. Any Directed Shares not subscribed for by the end of the business day on which this Agreement is executed will be offered to the public by the Underwriters as set forth in the Prospectus. _______________________ 1 Plus an option to purchase from the Company up to an aggregate of _________________ additional shares to cover over-allotments. The Company hereby confirms the agreements made with respect to the purchase of the Shares by the several underwriters, for whom you are acting as representatives, named in Schedule I hereto (herein collectively called the Underwriters, which term shall also include any underwriter purchasing Shares pursuant to Section 3(b) hereof). You represent and warrant that you have been authorized by each of the other Underwriters to enter into this Agreement on its behalf and to act for it in the manner herein provided. 1. Registration Statement. The Company has filed with the Securities and Exchange Commission (herein called the Commission) a registration statement on Form F-1 (No. 333-_____), including the related preliminary prospectus, for the registration under the Securities Act of 1933, as amended (herein called the Securities Act) of the Shares. Copies of such registration statement and of each amendment thereto, if any, including the related preliminary prospectus (meeting the requirements of Rule 430A of the rules and regulations of the Commission) heretofore filed by the Company with the Commission have been delivered to you. The term Registration Statement as used in this agreement shall mean such registration statement, including all exhibits and financial statements, all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, in the form in which it became effective, and any registration statement filed pursuant to Rule 462(b) of the rules and regulations of the Commission with respect to the Shares (herein called a Rule 462(b) registration statement), and, in the event of any amendment thereto after the effective date of such registration statement (herein called the Effective Date), shall also mean (from and after the effectiveness of such amendment) such registration statement as so amended (including any Rule 462(b) registration statement). The term Prospectus as used in this Agreement shall mean the prospectus relating to the Shares first filed with the Commission pursuant to Rule 424(b) and Rule 430A (or if no such filing is required, as included in the Registration Statement) and, in the event of any supplement or amendment to such prospectus after the Effective Date, shall also mean (from and after the filing with the Commission of such supplement or the effectiveness of such amendment) such prospectus as so supplemented or amended. The term Preliminary Prospectus as used in this Agreement shall mean each preliminary prospectus included in such registration statement prior to the time it becomes effective. The Registration Statement has been declared effective under the Securities Act, and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. The Company has caused to be delivered to you copies of each Preliminary Prospectus and has consented to the use of such copies for the purposes permitted by the Securities Act. 2. Representations and Warranties of the Company. (a) The Company hereby represents and warrants as follows: (i) Each of the Company and its subsidiaries (herein called the Subsidiaries) has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has full corporate power and authority to own or lease its properties and conduct its business as described in the 2 Registration Statement and the Prospectus and as being conducted, and is duly qualified as a foreign corporation and in good standing in all jurisdictions in which the character of the property owned or leased or the nature of the business transacted by it makes qualification necessary, except where the failure to be so qualified would not, individually or in the aggregate, have a material adverse effect on the earnings, business, prospects, management, properties, assets, rights, condition (financial or otherwise) or results of operations of the Company and its subsidiaries, taken as a whole (herein called a Material Adverse Effect). The outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable. The capital stock in such Subsidiaries are owned by the Company or another Subsidiary free and clear of all liens, encumbrances and equities and claims; and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into shares of capital stock or ownership interests in the Subsidiaries are outstanding. The Company does not own or control, directly or indirectly, any corporation, association or other entity other than __________. (ii) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any materially adverse change in the earnings, business, prospects, management, properties, assets, rights, condition (financial or otherwise) or results of operations of the Company and its Subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, other than as set forth in the Registration Statement and the Prospectus, and since such dates, except in the ordinary course of business, neither the Company nor any of the Subsidiaries has entered into any material transaction not referred to in the Registration Statement and the Prospectus. (iii) The Registration Statement and the Prospectus comply, and on the Closing Date (as hereinafter defined) and any later date on which Option Shares are to be purchased, the Prospectus will comply, in all material respects, with the provisions of the Securities Act and the rules and regulations of the Commission thereunder; on the Effective Date, the Registration Statement did not contain any untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and, on the Effective Date the Prospectus did not and, on the Closing Date and any later date on which Option Shares are to be purchased, will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that none of the representations and warranties in this subparagraph (iii) shall apply to statements in, or omissions from, the Registration Statement or the Prospectus made in reliance upon and in conformity with information herein or otherwise furnished in writing to the Company by or on behalf of the Underwriters for use in the Registration Statement or the Prospectus. The outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; the Shares to be issued and sold by the Company have been duly authorized and, when issued and paid for as contemplated herein, will be validly issued, fully paid and non-assessable; and, except as set forth in the Prospectus, no preemptive, co-sale right, registration right, right of first refusal or other similar rights of shareholders exist with respect to any of the 3 Shares or the issue and sale thereof. No further approval or authority of the shareholders or the Board of Directors of the Company will be required for the issuance and sale of the Shares as contemplated herein. Neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of capital stock. Except as described in the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Securities Act. Except as described in the Prospectus, there are no outstanding subscriptions, rights, warrants, options, calls, convertible securities, commitments of sale or liens related to or entitling any person to purchase or otherwise to acquire any shares of the capital stock of, or other ownership interest in, the Company. (iv) The information set forth under the caption "Capitalization" in the Prospectus is true and correct in all material respects. All of the Shares conform in all material respects to the description thereof contained in the Registration Statement. The form of certificates for the Shares conforms to the legal requirements of the jurisdiction of the Company's incorporation. (v) The Commission has not issued an order preventing or suspending the use of any Prospectus relating to the proposed offering of the Shares, nor, to the best knowledge of the Company, instituted proceedings for that purpose. (vi) The Shares have been approved for listing on the Nasdaq National Market, subject only to official notice of issuance. (vii) The Company has full corporate power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement on the part of the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; the execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, (i) any bond, debenture, note or other evidence of indebtedness, or under any lease, contract, license, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which its or any of its Subsidiaries' properties may be bound, (ii) the charter or bylaws of the Company or any of its Subsidiaries, or (iii) any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or any of its 4 subsidiaries or its properties except, in the case of clause (iii), where such breach, violation or default would not have a Material Adverse Effect. No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or any of its Subsidiaries or over its or any of its Subsidiaries' properties is required for the execution and delivery of this Agreement and the consummation by the Company of the transactions herein contemplated, except such as may be required under the Securities Act or under U.S. state or other securities or Blue Sky laws, all of which requirements have been satisfied in all material respects. (viii) Neither the Company nor any of its Subsidiaries has sustained, since the date of the latest audited financial statements included in the Prospectus, any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; and, since such date, there has not been any material change in the capital stock or long-term debt of the Company or any Subsidiary or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, financial position, shareholders' equity or results of operations of the Company or any Subsidiary, otherwise than as set forth or contemplated in the Prospectus. (ix) The audited financial statements of the Company, together with the related notes and supporting schedules, and the unaudited financial statements, filed as part of the Registration Statement or included or incorporated by reference in the Prospectus, fairly present the financial condition and results of operations of the Company and its Subsidiaries at the dates and for the periods indicated, in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved. The unaudited financial statements (including related notes) filed as part of the Registration Statement or included in the Prospectus include all adjustments, consisting of normal recurring adjustments, that the Company considers necessary for a fair presentation of the financial position and results of operations for these periods. The selected and summary financial and statistical data included in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the audited financial statements presented therein. No other financial statements or schedules are required to be included in the Registration Statement. (x) Kost, Forer & Gabbay, a member of Ernst & Young International, who has audited the balance sheets of the Company as of December 31, 1998 and 1999 and the related statements of operations, shareholder's equity and cash flows, together with the related schedules and notes for each of the three (3) years in the period ended December 31, 1999, whose report appears in the Registration Statement and in the Prospectus and who have delivered the Original Letter referred to in Section 9(f) hereof, are independent public accountants as required by and within the meaning of the Securities Act and the Rules and Regulations. 5 (xi) All real property and buildings held under lease by the Company and its Subsidiaries are held by them under valid and enforceable leases except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles, with such exceptions as would not have a Material Adverse Effect. (xii) The Company and its Subsidiaries carry or maintain insurance in such amounts and covering such risks as is reasonably adequate for the conduct of their respective businesses and the value of their respective properties. Neither the Company nor its Subsidiaries has been refused any insurance coverage sought or applied for; and neither the Company nor any of its Subsidiaries has any reason to believe that they will not be able to renew their existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue their respective businesses at a cost that would not have a Material Adverse Effect. (xiii) The Company and its Subsidiaries own or possess adequate rights to use all inventions, designs, computer programs, computer code, communications protocols, security devices, trade secrets, know-how, trademarks, service marks, trade names, copyright works or other information (herein collectively called Intellectual Property) which are necessary to conduct their businesses as described in the Registration Statement and the Prospectus; the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with any rights of the Company by others with respect to any Intellectual Property which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect; the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with any rights of others with respect to any Intellectual Property which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect; none of the Intellectual Property licensed to or by the Company are unenforceable or invalid; and the Company is not aware of the granting of any patent rights to third parties or the filing of any patent applications by third parties or any other rights of third parties to any Intellectual Property owned by the Company or its Subsidiaries. (xiv) There are no legal, governmental or administrative proceedings pending to which the Company or any of its Subsidiaries is a party or of which any property or assets of the Company or any of its Subsidiaries is the subject which, if determined adversely to the Company, may have a Material Adverse Effect, and to the Company's best knowledge, no such proceedings are threatened or contemplated by governmental authorities or by others. (xv) There are no contracts or other documents which are required to be described in the Prospectus or filed as exhibits to the Registration Statement by the Securities Act or by the Rules and Regulations which have not been described in the Prospectus or filed as exhibits to the Registration Statement. (xvi) There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness 6 by the Company or any of its Subsidiaries to or for the benefit of any of the officers or directors of the Company or any of the members of the families of any of them, which is required to be disclosed in the Registration Statement and the Prospectus which is not so disclosed. No relationship, direct or indirect, exists between or among the Company or any of its Subsidiaries on the one hand, and the directors, officers, shareholders, collaboration partners, joint venturers, licensees, licensors, consultants, customers or suppliers of the Company or any of its Subsidiaries on the other hand, which is required to be described in the Prospectus which is not so described. (xvii) No labor disturbance by the employees of the Company or any of its Subsidiaries exists or, to the knowledge of the Company, is imminent which might be expected to have a Material Adverse Effect. No collective bargaining agreement exists with any of the Company's or any of its Subsidiaries' employees and, to the best of the Company's knowledge, no such agreement is imminent. (xviii) The Company and its Subsidiaries have filed all foreign, U.S. federal, state and local income and franchise tax returns required to be filed through the date hereof and have paid all taxes due thereon, and no tax deficiency has been determined adversely to the Company or its Subsidiaries which will have (nor does the Company have any knowledge of any tax deficiency which, if determined adversely to the Company, might have) a Material Adverse Effect. All tax liabilities are adequately provided for on the books of the Company and its Subsidiaries. Neither the Company nor its Subsidiaries is currently subject to any audit by any tax authorities and, to the Company's knowledge, no such audit is threatened or contemplated by any such authorities. (xix) Since the date as of which information is given in the Prospectus through the date hereof, and except as may otherwise be disclosed in the Prospectus, neither the Company nor its Subsidiaries has (i) issued or granted or obligated themselves to issue or grant any securities, other than option grants pursuant to the Company's share option plan in the ordinary course of business and consistent with past practice, (ii) incurred any liability or obligation, direct or contingent, other than liabilities and obligations which were incurred in the ordinary course of business, (iii) entered into any transaction not in the ordinary course of business or (iv) declared or paid any dividend on their capital stock. (xx) The Company and each Subsidiary (i) makes and keeps accurate books and records and (ii) maintains internal accounting controls which provide reasonable assurances that (A) transactions are executed in accordance with management's authorization, (B) transactions are recorded as necessary to permit preparation of their financial statements in conformity with generally accepted accounting principles and to maintain accountability for its assets, (C) access to its assets is permitted only in accordance with management's authorization and (D) the reported accountability for its assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 7 (xxi) Neither the Company nor its Subsidiaries (i) is in violation of their charter or bylaws, (ii) is in default in any material respect, and no event has occurred which, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant or condition contained in any license agreement, purchase order, manufacturing or supply agreement, collaboration agreement, material indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which it is a party or by which it is bound or to which any of its properties or assets is subject, other than as would not cause a Material Adverse Effect (and, to its knowledge, no other party to any such agreement is in default thereof and no event has occurred which, with notice, lapse of time or both, would constitute such a default), or (iii) is in violation in any material respect of any law, ordinance, governmental rule, regulation or court decree to which it or its property or assets may be subject and neither the Company nor its Subsidiaries has failed to obtain any material license, permit, certificate, franchise or other governmental authorization or permit necessary for the ownership of their property or to the conduct of their businesses, other than as would not cause a Material Adverse Effect. (xxii) Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional steps as may be necessary to qualify the Shares for public offering by the Underwriters under U.S. state securities or blue sky laws) has been obtained or made and is in full force and effect. (xxiii) The Company and its Subsidiaries are in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder (herein called ERISA); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company or its Subsidiaries would have any liability; neither the Company nor any Subsidiary has incurred and do not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretation thereunder (herein called the Code); and each "pension plan" for which the Company and its Subsidiaries would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, that would cause the loss of such qualification. (xxiv) Except as set forth in the Registration Statement and Prospectus, (i) and except as would not, singularly or in the aggregate have a Material Adverse Effect, the Company and its Subsidiaries are in compliance with all rules, laws and regulations relating to the use, treatment, storage and disposal of toxic substances and protection of health or the environment ("Environmental Laws") which are applicable to its business, (ii) neither the Company nor its Subsidiaries has received any notice from any governmental authority or third party of an asserted claim under Environmental 8 Laws, which claim is required to be disclosed in the Registration Statement and the Prospectus, and (iii) to the best of its knowledge, neither the Company nor its Subsidiaries will be required to make future material capital expenditures to comply with Environmental Laws. There has been no storage, disposal, generation, manufacture, refinement, transportation, handling or treatment of toxic wastes, medical wastes, hazardous wastes or hazardous substances by the Company or its Subsidiaries (or, to the knowledge of the Company, any of its or their predecessors in interest) at, upon or from any of the property now or previously owned or leased by the Company or its Subsidiaries in violation of any applicable law, ordinance, rule, regulation, order, judgment, decree or permit or which would require remedial action under any applicable law, ordinance, rule, regulation, order, judgment, decree or permit, except for any violation or remedial action which would not have, or could not be reasonably likely to have, singularly or in the aggregate with all such violations and remedial actions, a Material Adverse Effect; there has been no material spill, discharge, leak, emission, injection, escape, dumping or release of any kind onto such property or into the environment surrounding such property of any toxic wastes, medical wastes, solid wastes, hazardous wastes or hazardous substances due to or caused by the Company or its Subsidiaries or with respect to which the Company has knowledge, except for any such spill, discharge, leak, emission, injection, escape, dumping or release which would not have or would not be reasonably likely to have, singularly or in the aggregate with all such spills, discharges, leaks, emissions, injections, escapes, dumpings and releases, a Material Adverse Effect; and the terms "hazardous wastes," "toxic wastes," "hazardous substances" and "medical wastes" shall have the meanings specified in any applicable local, state, federal and foreign laws or regulations with respect to environmental protection. (xxv) The Company and its Subsidiaries possess such valid and current certificates, authorizations or permits issued by the appropriate U.S. state, federal or foreign regulatory agencies or bodies necessary to conduct their business, and neither the Company nor any of the Subsidiaries has received any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, could result in a Material Adverse Effect. (xxvi) The Company has been advised concerning the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations thereunder, and has in the past conducted, and intends in the future to conduct, its affairs in such a manner as to ensure that it will not become an "investment company" or a company "controlled" by an "investment company" within the meaning of the 1940 Act and such rules and regulations. (xxvii) Neither the Company nor any of its Subsidiaries has at any time during the last five (5) years (i) made any unlawful contribution to any candidate for foreign office or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any foreign, federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. 9 (xxviii) The statements in the Prospectus, under the heading "Certain Transactions," set forth all existing agreements, arrangements, understandings or transactions, or proposed agreements, arrangements, understandings or transactions, between or among the Company and its Subsidiaries, on the one hand, and any officer, director or shareholder of the Company, or with any partner, affiliate or associate of any of the foregoing persons or entities, on the other hand, required to be set forth or described thereunder. (xxix) The Company has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Shares to facilitate the sale or resale of the Shares. (xxx) The Company has not distributed and will not distribute prior to the later of (i) the Closing Date, or any date on which Option Shares are to be purchased, as the case may be, and (ii) completion of the distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than any Preliminary Prospectuses, the Prospectus, the Registration Statement and other materials, if any, permitted by the Securities Act. (xxxi) The Company has not had any disagreements, during its two most recent fiscal years or any subsequent interim period, with an independent accountant who was previously engaged as the principal accountant to audit the Company's financial statements and on whom the principal accountant expressed reliance in its report (either of whom resigned, indicated that it declined to stand for re-election after the completion of the current audit, or was dismissed), on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement(s) would require disclosure in the Registration Statement. (xxxii) The Company has not incurred any liability for any finder's fees or similar payments in connection with the transactions contemplated hereby. (xxxiii) Each officer and director of the Company and each beneficial owner of the outstanding issued capital stock of the Company has agreed to sign an agreement substantially in the form attached hereto as Exhibit A (the "Lock-up Agreements"). The Company has provided to counsel for the Underwriters a complete and accurate list of all securityholders of the Company and the number and type of securities held by each securityholder. The Company has provided to counsel for the Underwriters true, accurate and complete copies of all of the Lock-up Agreements presently in effect or effected hereby. No stamp, registration or similar tax or charge is required to be paid in connection with the offering and sale of the Shares by the Underwriters. (xxxiv) Except as disclosed in the Prospectus, under current laws and regulations of the State of Israel and any political subdivision thereof, all dividends and other distributions declared and payable on the Shares may be paid by the Company to the holder thereof in United States dollars or New Israeli Shekels that may be converted 10 into foreign currency and freely transferred out of Israel and all such payments made to holders thereof or therein who are non-residents of Israel will not be subject to income, withholding or other taxes under laws and regulations of Israel or any political subdivision or taxing authority thereof or therein and will otherwise be free and clear of any other tax, duty, withholding or deduction in Israel or any political subdivision or taxing authority thereof or therein and without the necessity of obtaining any governmental authorization in Israel or any political subdivision or taxing authority thereof or therein. (xxxv) The Company does not believe that, upon the consummation of the transactions contemplated hereby and the application of the proceeds as described in the Registration Statement under the caption "Use of Proceeds" it will become a passive foreign investment company (a "PFIC") as defined in Section 1297 of the Internal Revenue Code of 1986, as amended (the "Code"). (xxxvi) The Company has received an exemption from the Israel Securities Authority to offer and sell the Shares, which exemption was in full force and effect on the date hereof and which shall be in full force and effect on the date of the Prospectus, on the date that any post- effective amendment to the Registration Statement shall become effective, when any supplement or amendment to the Prospectus is filed with the Commission, and at the Closing Date. (xxxvii) Except as described in the Prospectus, the Company is in compliance with all material conditions and requirements stipulated by the instruments of approval entitling it or any of its operations to the status of "Approved Enterprise" under Israeli law and by Israeli laws and regulations relating to such Approved Enterprise status, except such non- compliance as would not have a material adverse effect on the business, financial condition or results of operations of the Company and its subsidiaries taken as a whole. All information supplied by the Company with respect to such applications was true, correct and complete in all material respects when supplied to the appropriate authorities. (xxxviii) Except as described in the Prospectus, neither the Company nor any of its subsidiaries is in material violation of any conditions or requirements stipulated by the instruments of approval granted to any of them by the Office of Chief Scientist in the Ministry of Industry & Trade and any applicable laws and regulations, with respect to any research and development grants given to it by such office, which violation, individually or in the aggregate, could have a material adverse effect on the business, financial condition, or results of operations of the Company and its subsidiaries taken as a whole. All information supplied by the Company with respect to such applications was true, correct and complete in all material respects when supplied to the appropriate authorities. (xxxix) The Company's employment agreements in Israel do not differentiate between compensation paid to employees for a 43 hour work week or for maximum daily hours, and compensation for overtime work. The Company believes that it does not have any material exposure by reason of claims by the employees due to 11 (i) the fact that most of the employees of the Company are in position of "special trust," (ii) the agreement by the employees to be compensated on a fixed basis, (iii) the payment by the Company of higher salaries, which take into account payments for additional hours, (iv) the distribution of bonuses and share options by the Company, which come in part as compensation for additional hours, (v) the fact that a non-material number of overtime hours has been reported, and (vi) the fact that most employees sign a "waiver of claims" letter upon termination of employment. (xl) No consent, approval, authorization or order of, or qualification with, any governmental body or agency, other than those obtained, is required in connection with the offering of the Directed Shares in any jurisdiction where the Directed Shares are being offered. The Company has not offered, or caused the Designated Underwriter to offer, Stock to any person pursuant to the Directed Share Program with the specific intent to unlawfully influence (i) a customer or supplier of the Company to alter the customer's or supplier's level or type of business with the Company or (ii) a trade journalist or publication to write or publish favorable information about the Company or its products. (xli) Any certificate signed by an officer of the Company and delivered to the Representatives or to counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters set forth therein. 3. PURCHASE OF THE SHARES BY THE UNDERWRITERS. (a) On the basis of the representations and warranties and subject to the terms and conditions herein set forth, the Company agrees to issue and sell __________ Underwritten Shares to the several Underwriters and each of the Underwriters agrees to purchase from the Company the respective aggregate number of Underwritten Shares set forth opposite its name in Schedule I. The price at which such Underwritten Shares shall be sold by the Company and purchased by the several Underwriters shall be $___ per share. In making this Agreement, each Underwriter is contracting severally and not jointly; except as provided in paragraphs (b) and (c) of this Section 3, the agreement of each Underwriter is to purchase only the respective number of Underwritten Shares specified in Schedule I. (b) If for any reason one or more of the Underwriters shall fail or refuse (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 8 or 9 hereof) to purchase and pay for the number of Shares agreed to be purchased by such Underwriter or Underwriters, the Company shall immediately give notice thereof to you, and the non-defaulting Underwriters shall have the right within 24 hours after the receipt by you of such notice to purchase, or procure one or more other Underwriters to purchase, in such proportions as may be agreed upon between you and such purchasing Underwriter or Underwriters and upon the terms herein set forth, all or any part of the Shares which such defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting Underwriters fail so to make such arrangements with respect to all such shares and portion, the number of Shares which each non-defaulting Underwriter is otherwise obligated to purchase under this Agreement shall be automatically increased on a pro rata basis to absorb the remaining 12 shares and portion which the defaulting Underwriter or Underwriters agreed to purchase; provided, however, that the non-defaulting Underwriters shall not be obligated to purchase the shares and portion which the defaulting Underwriter or Underwriters agreed to purchase if the aggregate number of such Shares exceeds 10% of the total number of Shares which all Underwriters agreed to purchase hereunder. If the total number of Shares which the defaulting Underwriter or Underwriters agreed to purchase shall not be purchased or absorbed in accordance with the two preceding sentences, the Company shall have the right, within 24 hours next succeeding the 24-hour period above referred to, to make arrangements with other underwriters or purchasers satisfactory to you for purchase of such shares and portion on the terms herein set forth. In any such case, either you or the Company shall have the right to postpone the Closing Date determined as provided in Section 5 hereof for not more than seven business days after the date originally fixed as the Closing Date pursuant to said Section 5 in order that any necessary changes in the Registration Statement, the Prospectus or any other documents or arrangements may be made. If neither the non-defaulting Underwriters nor the Company shall make arrangements within the 24-hour periods stated above for the purchase of all the Shares which the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall be terminated without further act or deed and without any liability on the part of the Company to any non-defaulting Underwriter and without any liability on the part of any non-defaulting Underwriter to the Company. Nothing in this paragraph (b), and no action taken hereunder, shall relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. (c) On the basis of the representations, warranties and covenants herein contained, and subject to the terms and conditions herein set forth, the Company grants an option to the several Underwriters to purchase, severally and not jointly up to ___________ Option Shares in the aggregate from such Company at the same price per share as the Underwriters shall pay for the Underwritten Shares. Said option may be exercised only to cover over-allotments in the sale of the Underwritten Shares by the Underwriters and may be exercised in whole or in part at any time (but not more than once) on or before the thirtieth day after the date of this Agreement upon written or telegraphic notice by you to the Company setting forth the aggregate number of Option Shares as to which the several Underwriters are exercising the option. Delivery of certificates for the Option Shares, and payment therefor, shall be made as provided in Section 5 hereof. The number of Option Shares to be purchased by each Underwriter shall be the same percentage of the total number of Option Shares to be purchased by the several Underwriters as such Underwriter is purchasing of the Underwritten Shares, as adjusted by you in such manner as you deem advisable to avoid fractional shares. 4. OFFERING BY UNDERWRITERS. (a) The terms of the initial public offering by the Underwriters of the Shares to be purchased by them shall be as set forth in the Prospectus. The Underwriters may from time to time change the public offering price after the closing of the initial public offering and increase or decrease the concessions and discounts to dealers as they may determine. (b) The information set forth in the last paragraph on the front cover page and in the fifth paragraph under "Underwriting" in the Registration Statement, any Preliminary Prospectus and the Prospectus relating to the Shares filed by the Company (insofar as such 13 information relates to the Underwriters) constitutes the only information furnished by the Underwriters to the Company for inclusion in the Registration Statement, any Preliminary Prospectus, and the Prospectus, and you on behalf of the respective Underwriters represent and warrant to the Company that the statements made therein are correct. (c) The Underwriters shall not, in the aggregate, offer the Shares in Israel to more than 35 offerees. The Underwriters shall obtain from such offerees in Israel written confirmation that they are acquiring the Shares for investment purposes only and not with a view toward distribution or resale and shall provide copies of these written confirmations to the Company on the Closing Date. On the Closing Date, the Underwriters shall furnish to the Company a list of such offerees, the number of Shares acquired by such offerees and the addresses of such offerees. The Company shall not, under any circumstances, offer the Shares to any prospective purchaser in Israel without the prior consent of Chase Securities, Inc. 5. DELIVERY OF AND PAYMENT FOR THE SHARES. (a) Delivery of certificates for the Underwritten Shares and the Option Shares (if the option granted by Section 3(c) hereof shall have been exercised not later than 10:00 A.M., New York time, on the date two business days preceding the Closing Date), and payment therefor, shall be made at the office of Brobeck, Phleger & Harrison LLP, 1633 Broadway, 47th Floor, New York, New York 10019, at 10:00 a.m., New York time, on the fourth business day after the date of this Agreement, or at such time on such other day, not later than seven full business days after such fourth business day, as shall be agreed upon in writing by the Company and you. The date and hour of such delivery and payment (which may be postponed as provided in Section 3(b) hereof) are herein called the Closing Date. (b) If the option granted by Section 3(c) hereof shall be exercised after 10:00 a.m., New York time, on the date two business days preceding the Closing Date, delivery of certificates for the Option Shares, and payment therefor, shall be made at the office of Brobeck, Phleger & Harrison LLP, 1633 Broadway, 47th Floor, New York, New York 10019, at 10:00 a.m., New York time, on the third business day after the exercise of such option. (c) Payment for the Shares purchased from the Company shall be made to the Company or its order in each case by one or more certified or official bank check or checks in same day funds. Such payment shall be made upon delivery of certificates for the Shares to you for the respective accounts of the several Underwriters against receipt therefor signed by you. Certificates for the Shares to be delivered to you shall be registered in such name or names and shall be in such denominations as you may request at least one business day before the Closing Date, in the case of Underwritten Shares, and at least one business day prior to the purchase thereof, in the case of the Option Shares. Such certificates will be made available to the Underwriters for inspection, checking and packaging at the offices of Lewco Securities Corporation, 2 Broadway, New York, New York 10004 on the business day prior to the Closing Date or, in the case of the Option Shares, by 3:00 p.m., New York time, on the business day preceding the date of purchase. It is understood that you, individually and not on behalf of the Underwriters, may (but shall not be obligated to) make payment to the Company for shares to be purchased by any 14 Underwriter whose check shall not have been received by you on the Closing Date or any later date on which Option Shares are purchased for the account of such Underwriter. Any such payment by you shall not relieve such Underwriter from any of its obligations hereunder. 6. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees as follows: (a) The Company will (i) prepare and timely file with the Commission under Rule 424(b) a Prospectus containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A and (ii) not file any amendment to the Registration Statement or supplement to the Prospectus of which you shall not previously have been advised and furnished with a copy or to which you shall have reasonably objected in writing or which is not in compliance with the Securities Act or the rules and regulations of the Commission. (b) The Company will promptly notify each Underwriter in the event of (i) the request by the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, (ii) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement, (iii) the institution or notice of intended institution of any action or proceeding for that purpose, (iv) the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction, or (v) the receipt by it of notice of the initiation or threatening of any proceeding for such purpose. The Company will make every reasonable effort to prevent the issuance of such a stop order and, if such an order shall at any time be issued, to obtain the withdrawal thereof at the earliest possible moment. (c) The Company will (i) on or before the Closing Date, deliver to you a signed copy of the Registration Statement as originally filed and of each amendment thereto filed prior to the time the Registration Statement becomes effective and, promptly upon the filing thereof, a signed copy of each post-effective amendment, if any, to the Registration Statement (together with, in each case, all exhibits thereto unless previously furnished to you) and will also deliver to you, for distribution to the Underwriters, a sufficient number of additional conformed copies of each of the foregoing (but without exhibits) so that one copy of each may be distributed to each Underwriter, (ii) as promptly as possible deliver to you and send to the several Underwriters, at such office or offices as you may designate, as many copies of the Prospectus as you may reasonably request, and (iii) thereafter from time to time during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, likewise send to the Underwriters as many additional copies of the Prospectus and as many copies of any supplement to the Prospectus and of any amended prospectus, filed by the Company with the Commission, as you may reasonably request for the purposes contemplated by the Securities Act. (d) If at any time during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer any event relating to or affecting the Company, or of which the Company shall be advised in writing by you, shall occur as a 15 result of which it is necessary, in the opinion of counsel for the Company or of counsel for the Underwriters, to supplement or amend the Prospectus in order to make the Prospectus not misleading in the light of the circumstances existing at the time it is delivered to a purchaser of the Shares, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended prospectus so that the Prospectus as so supplemented or amended will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time such Prospectus is delivered to such purchaser, not misleading. If, after the initial public offering of the Shares by the Underwriters and during such period, the Underwriters shall propose to vary the terms of offering thereof by reason of changes in general market conditions or otherwise, you will advise the Company in writing of the proposed variation, and, if in the opinion either of counsel for the Company or of counsel for the Underwriters such proposed variation requires that the Prospectus be supplemented or amended, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended prospectus setting forth such variation. The Company authorizes the Underwriters and all dealers to whom any of the Shares may be sold by the several Underwriters to use the Prospectus, as from time to time amended or supplemented, in connection with the sale of the Shares in accordance with the applicable provisions of the Securities Act and the applicable rules and regulations thereunder for such period. (e) Prior to the filing thereof with the Commission, the Company will submit to you, for your information, a copy of any post-effective amendment to the Registration Statement and any supplement to the Prospectus or any amended prospectus proposed to be filed. (f) The Company will cooperate, when and as requested by you, in the qualification of the Shares for offer and sale under the securities or blue sky laws of such jurisdictions as you may designate and, during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, in keeping such qualifications in good standing under said securities or blue sky laws; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation in any jurisdiction in which it is not so qualified. The Company will, from time to time, prepare and file such statements, reports, and other documents as are or may be required to continue such qualifications in effect for so long a period as you may reasonably request for distribution of the Shares. (g) During a period of five years commencing with the date hereof, the Company will furnish to you, and to each Underwriter who may so request in writing, copies of all periodic and special reports furnished to shareholders of the Company and of all information, documents and reports filed with the Commission. (h) Not later than the 45th day following the end of the fiscal quarter first occurring after the first anniversary of the Effective Date, the Company will make generally available to its security holders an earnings statement in accordance with Section 11(a) of the Securities Act and Rule 158 thereunder. 16 (i) During a period of five (5) years after the date hereof, the Company will furnish to its shareholders, annual reports (including financial statements audited by independent certified public accountants) within ninety (90) days after the end of each fiscal year and unaudited quarterly reports of operations for each of the first three quarters of the fiscal year within forty-five (45) days after the end of each fiscal quarter, and will furnish to you and the other several Underwriters hereunder, upon request (i) concurrently with furnishing such reports to its shareholders, statements of operations of the Company for each of the first three (3) quarters in the form furnished to the Company's shareholders, (ii) concurrently with furnishing to its shareholders, a balance sheet of the Company as of the end of such fiscal year, together with statements of operations, of shareholders' equity, and of cash flows of the Company for such fiscal year, accompanied by a copy of the certificate or report thereon of independent certified public accountants, (iii) as soon as they are available, copies of all reports (financial or other) mailed to shareholders, (iv) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, any securities exchange or the National Association of Securities Dealers, Inc. (herein called the NASD), (v) every material press release and every material news item or article in respect of the Company or its affairs which was generally released to shareholders or prepared by the Company or any of its subsidiaries, and (vi) any additional information of a public nature concerning the Company or its subsidiaries, or their respective businesses which is in the Company's possession and which you may reasonably request. During such five (5) year period, if the Company shall have active subsidiaries, the foregoing financial statements shall be on a consolidated basis to the extent that the accounts of the Company and its subsidiaries are consolidated, and shall be accompanied by similar financial statements for any significant subsidiary which is not so consolidated. (j) So long as the Company is required to file an annual report on Form 20-F with the Commission, the Company will file with the Commission within forty-five (45) days after the end of each of the first three fiscal quarters a report on Form 6-K containing quarterly interim reports that contain (i) an unaudited consolidated statement of operations, balance sheet, statement of cash flows and statement of changes in shareholders' equity, all prepared in accordance with U.S. generally accepted accounting principles. (k) The Company will apply the net proceeds from the sale of the Shares being sold by it in the manner set forth under the caption "Use of Proceeds" in the Prospectus. (l) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar (which may be the same entity as the transfer agent) for its Ordinary Shares. (m) The Company will conduct its affairs in such a manner to ensure that the Company will not be an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act. 17 (n) The Company will take all reasonable steps to ensure that it will not become a PFIC. (o) The Company agrees to pay all costs and expenses incident to the performance of their obligations under this Agreement, including all costs and expenses incident to (i) the preparation, printing and filing with the Commission and the NASD of the Registration Statement, any Preliminary Prospectus and the Prospectus, (ii) the furnishing to the Underwriters of copies of any Preliminary Prospectus and of the several documents required by paragraph (c) of this Section 6 to be so furnished, (iii) the printing of this Agreement and related documents delivered to the Underwriters, (iv) the preparation, printing and filing of all supplements and amendments to the Prospectus referred to in paragraph (d) of this Section 6, (v) the furnishing to you and the Underwriters of the reports and information referred to in paragraph (g) of this Section 6 and (vi) the printing and issuance of share certificates, including the transfer agent's fees. (p) The Company agrees to reimburse you, for the account of the several Underwriters, for blue sky fees and related disbursements (including counsel fees and disbursements and cost of printing memoranda for the Underwriters) paid by or for the account of the Underwriters or their counsel in qualifying the Shares under state securities or blue sky laws and in the review of the offering by the NASD. (q) The provisions of paragraphs (o) and (p) of this Section are intended to relieve the Underwriters from the payment of the expenses and costs which the Company hereby agrees to pay and shall not affect any agreement which the Company may make, or may have made, for the sharing of any such expenses and costs. (r) The Company hereby agrees that, without the prior written consent of Chase Securities, Inc. on behalf of the Underwriters, the Company will not, for a period of 180 days following the commencement of the public offering of the Shares by the Underwriters, directly or indirectly, (i) sell, offer, contract to sell, make any short sale, pledge, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any shares of Ordinary Shares or any securities convertible into or exchangeable or exercisable for or any rights to purchase or acquire Ordinary Shares or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences or ownership of Ordinary Shares, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Ordinary Shares or such other securities, in cash or otherwise. The foregoing sentence shall not apply to the Shares to be sold to the Underwriters pursuant to this Agreement. (s) If at any time during the 25-day period after the Registration Statement becomes effective any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price for the Shares has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of, and disseminate a press 18 release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (t) In connection with the Directed Share Program, the Company will ensure that the Directed Shares will be restricted to the extent required by the NASD or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of the effectiveness of the Registration Statement. The Designated Underwriter will notify the Company as to which Participants will need to be so restricted. The Company will direct the transfer agent to place stop transfer restrictions upon such securities for such period of time. (u) The Company (i) will indemnify the Designated Underwriter for any losses incurred in connection with the Directed Share Program, (ii) will comply with all applicable securities and other applicable laws, rules and regulations in each jurisdiction in which the Directed Shares are offered in connection with the Directed Share Program and (iii) will pay all reasonable fees and disbursements of counsel incurred by the Underwriters in connection with the Directed Share Program and any stamp duties, similar taxes or duties or other taxes, if any, incurred by the underwriters in connection with the Directed Share Program. 7. INDEMNIFICATION AND CONTRIBUTION. (a) Subject to the provisions of paragraph (f) of this Section 7, the Company agrees to indemnify and hold harmless each Underwriter and each person (including each partner or officer thereof) who controls any Underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Securities Exchange Act of 1934, as amended (herein called the Exchange Act), or the common law or otherwise, and the Company agrees to reimburse each such Underwriter and controlling person for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that (1) the indemnity agreements of the Company contained in this paragraph (a) shall not apply to any such losses, claims, damages, liabilities or expenses if such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise 19 furnished in writing to the Company by or on behalf of any Underwriter for use in any Preliminary Prospectus or the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto and (2) the indemnity agreement contained in this paragraph (a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Shares which is the subject thereof (or to the benefit of any person controlling such Underwriter) if at or prior to the written confirmation of the sale of such Shares a copy of the Prospectus (or the Prospectus as amended or supplemented) was not sent or delivered to such person and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented) unless the failure is the result of noncompliance by the Company with paragraph (c) of Section 6 hereof. The indemnity agreements of the Company contained in this paragraph (a) and the representations and warranties of the Company contained in Section 2 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Shares. The Company agrees to indemnify and hold harmless The Designated Underwriter and its affiliates and each person, if any, who controls The Designated Underwriter or its affiliates within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act (the "Designated Entities"), from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) (i) caused by any untrue statement or alleged untrue statement of a material fact contained in any material prepared by or with the consent of the Company for distribution to participants in connection with the Directed Share Program, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) the failure of any participant to pay for and accept delivery of Directed Shares that the participant has agreed to purchase; or (iii) related to, arising out of, or in connection with the Directed Share Program other than losses, claims, damages or liabilities (or expenses relating thereto) that are finally judicially determined to have resulted from the bad faith or gross negligence of the Designated Entities. (b) Each Underwriter severally agrees to indemnify and hold harmless the Company, each of its officers who signs the Registration Statement on his own behalf or pursuant to a power of attorney, each of its directors, each other Underwriter and each person (including each partner or officer thereof) who controls the Company or any such other Underwriter within the meaning of Section 15 of the Securities Act, from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act, or the common law or otherwise and to reimburse each of them for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b ) 20 registration statement) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) any untrue statement or alleged untrue statement of a material fact contained in the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, if such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise furnished in writing to the Company by or on behalf of such indemnifying Underwriter for use in the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto. The indemnity agreement of each Underwriter contained in this paragraph (b) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Shares. (c) Each party indemnified under the provision of paragraphs (a) and (b) of this Section 7 agrees that, upon the service of a summons or other initial legal process upon it in any action or suit instituted against it or upon its receipt of written notification of the commencement of any investigation or inquiry of, or proceeding against, it in respect of which indemnity may be sought on account of any indemnity agreement contained in such paragraphs, it will promptly give written notice (herein called the Notice) of such service or notification to the party or parties from whom indemnification may be sought hereunder. No indemnification provided for in such paragraphs shall be available to any party who shall fail so to give the Notice if the party to whom such Notice was not given was unaware of the action, suit, investigation, inquiry or proceeding to which the Notice would have related and was prejudiced by the failure to give the Notice, but the omission so to notify such indemnifying party or parties of any such service or notification shall not relieve such indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of such indemnity agreement. Any indemnifying party shall be entitled at its own expense to participate in the defense of any action, suit or proceeding against, or investigation or inquiry of, an indemnified party. Any indemnifying party shall be entitled, if it so elects within a reasonable time after receipt of the Notice by giving written notice (herein called the Notice of Defense) to the indemnified party, to assume (alone or in conjunction with any other indemnifying party or parties) the entire defense of such action, suit, investigation, inquiry or proceeding, in which event such defense shall be conducted, at the expense of the indemnifying party or parties, by counsel chosen by such indemnifying party or parties and reasonably satisfactory to the indemnified party or parties; provided, however, that (i) if the indemnified party or parties reasonably determine that there may be a conflict between the positions of the indemnifying party or parties and of the indemnified party or parties in conducting the defense of such action, suit, investigation, inquiry or proceeding or that there may be legal defenses available to such indemnified party or parties different from or in addition to those available to the indemnifying party or parties, then counsel for the indemnified party or parties shall be entitled to conduct the defense to the extent reasonably determined by such counsel to be necessary to protect the interests of the indemnified party or parties and (ii) in any event, the indemnified party or parties shall be entitled to have counsel chosen by such indemnified party or parties participate in, but not conduct, the defense. If, within a reasonable time after receipt of the Notice, an indemnifying party gives a Notice of Defense and the counsel chosen by the indemnifying party or parties is reasonably satisfactory to the indemnified party or parties, the 21 indemnifying party or parties will not be liable under paragraphs (a) through (c) of this Section 7 for any legal or other expenses subsequently incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding, except that (A) the indemnifying party or parties shall bear the legal and other expenses incurred in connection with the conduct of the defense as referred to in clause (i) of the proviso to the preceding sentence and (B) the indemnifying party or parties shall bear such other expenses as it or they have authorized to be incurred by the indemnified party or parties. If, within a reasonable time after receipt of the Notice, no Notice of Defense has been given, the indemnifying party or parties shall be responsible for any legal or other expenses incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding. (d) If the indemnification provided for in this Section 7 is unavailable or insufficient to hold harmless an indemnified party under paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such proportion as is appropriate to reflect the relative benefits received by each indemnifying party from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each indemnifying party in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, or actions in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Shares received by the Company and the total underwriting discount received by the Underwriters, as set forth in the table on the cover page of the Prospectus, bear to the aggregate public offering price of the Shares. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by each indemnifying party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties agree that it would not be just and equitable if contributions pursuant to this paragraph (d) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to in the first sentence of this paragraph (d). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities, or actions in respect thereof, referred to in the first sentence of this paragraph (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigation, preparing to defend or defending against any action or claim which is the subject of this paragraph (d). Notwithstanding the provisions of this paragraph (d), no Underwriter shall be required to contribute any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this paragraph (d) to contribute are several in proportion to their respective underwriting obligations and not joint. 22 (e) Each party entitled to contribution agrees that upon the service of a summons or other initial legal process upon it in any action instituted against it in respect of which contribution may be sought, it will promptly give written notice of such service to the party or parties from whom contribution may be sought, but the omission so to notify such party or parties of any such service shall not relieve the party from whom contribution may be sought from any obligation it may have hereunder or otherwise (except as specifically provided in paragraph (c) of this Section 7). (f) The Company will not, without the prior written consent of each Underwriter, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not such Underwriter or any person who controls such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of such Underwriter and each such controlling person from all liability arising out of such claim, action, suit or proceeding. 8. TERMINATION. This Agreement may be terminated by you at any time prior to the Closing Date by giving written notice to the Company if after the date of this Agreement trading in the Ordinary Shares shall have been suspended, or if there shall have occurred (i) the engagement in hostilities or an escalation of major hostilities by the United States or Israel, or the declaration of war or a national emergency by the United States or Israel on or after the date hereof, (ii) any outbreak of hostilities or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, calamity, crisis or change in economic or political conditions in the financial markets of the United States would, in the Underwriters' reasonable judgment, make the offering or delivery of the Shares impracticable, (iii) suspension of trading in securities generally or a material adverse decline in value of securities generally on the New York Stock Exchange, the American Stock Exchange, or The Nasdaq Stock Market, or limitations on prices (other than limitations on hours or numbers of days of trading) for securities on either such exchange or system, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of, or commencement of any proceeding or investigation by, any court, legislative body, agency or other governmental authority which in the Underwriters' reasonable opinion materially and adversely affects or will materially or adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in the Underwriters' reasonable opinion has a material adverse effect on the securities markets in the United States. If this Agreement shall be terminated pursuant to this Section 8, there shall be no liability of the Company to the Underwriters and no liability of the Underwriters to the Company; provided, however, that in the event of any such termination the Company agrees to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company under this Agreement, including all costs and expenses referred to in paragraphs (o) and (p) of Section 6 hereof. 9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several Underwriters to purchase and pay for the Shares shall be subject to the performance by the 23 Company of all its obligations to be performed hereunder at or prior to the Closing Date or any later date on which Option Shares are to be purchased, as the case may be, and to the following further conditions: (a) The Registration Statement shall have become effective; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings therefor shall be pending or threatened by the Commission. (b) The legality and sufficiency of the sale of the Shares hereunder and the validity and form of the certificates representing the Shares, all corporate proceedings and other legal matters incident to the foregoing, and the form of the Registration Statement and of the Prospectus (except as to the financial statements contained therein), shall have been approved at or prior to the Closing Date by Brobeck, Phleger & Harrison LLP and Herzog, Fox & Neeman, counsel for the Underwriters. (c) You shall have received an opinion, addressed to the Underwriters and dated the Closing Date, from (i) Testa, Hurwitz & Thibeault, LLP, U.S. counsel for the Company, covering the matters set forth in Annex A hereto, (ii) Meitar, Liquornik Geva & Co., Israeli counsel for the Company covering the matters set forth in Annex B hereto, (iii) __________, English counsel for the Company, covering the matters set forth in Annex C hereto, and (iv) _________, Japanese counsel for the Company, covering the matters set forth in Annex D hereto, and if Option Shares are purchased at any date after the Closing Date, additional opinions from each such counsel, addressed to the Underwriters and dated such later date, confirming that the statements expressed as of the Closing Date in such opinions remain valid as of such later date. (d) You shall be satisfied that (i) as of the Effective Date, the statements made in the Registration Statement and the Prospectus were true and correct and neither the Registration Statement nor the Prospectus omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, respectively, not misleading, (ii) since the Effective Date, no event has occurred which should have been set forth in a supplement or amendment to the Prospectus which has not been set forth in such a supplement or amendment, (iii) since the respective dates as of which information is given in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the business, properties, financial condition or results of operations of the Company and its Subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, and, since such dates, except in the ordinary course of business, neither the Company nor any of its Subsidiaries has entered into any material transaction not referred to in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, (iv) neither the Company nor any of its Subsidiaries has any material contingent obligations which are not disclosed in the Registration Statement and the Prospectus, (v) there are not any pending or known threatened legal proceedings to which the Company or any of its Subsidiaries is a party or of which property of the Company or any of its Subsidiaries is the subject which are material and which are not disclosed in the Registration Statement and the Prospectus, 24 (vi) there are not any franchises, contracts, leases or other documents which are required to be filed as exhibits to the Registration Statement which have not been filed as required, (vii) the representations and warranties of the Company herein are true and correct in all material respects as of the Closing Date or any later date on which Option Shares are to be purchased, as the case may be, and (viii) there has not been any material change in the market for securities in general or in political, financial or economic conditions from those reasonably foreseeable as to render it impracticable in your reasonable judgment to make a public offering of the Shares, or a material adverse change in market levels for securities in general (or those of companies in particular) or financial or economic conditions which render it inadvisable to proceed. (e) You shall have received on the Closing Date and on any later date on which Option Shares are is purchased a certificate, dated the Closing Date or such later date, as the case may be, and signed by the President and the Chief Financial Officer of the Company, stating that the respective signers of said certificate have carefully examined the Registration Statement in the form in which it originally became effective and the Prospectus contained therein and any supplements or amendments thereto, and that the statements included in clauses (i) through (viii) of paragraph (d) of this Section 9 are true and correct. (f) You shall have received from Kost, Forer & Gabbay, a member of Ernst & Young International, a letter or letters, addressed to the Underwriters and dated the Closing Date and the Option Closing Date, as the case may be, confirming that they are independent public accountants with respect to the Company within the meaning of the Securities Act and the applicable published rules and regulations thereunder and based upon the procedures described in their letter delivered to you concurrently with the execution of this Agreement (herein called the Original Letter), but carried out to a date not more than three business days prior to the Closing Date or such later date on which Option Shares is purchased (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or the Option Closing Date, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of the Original Letter or to reflect the availability of more recent financial statements, data or information. The letters shall not disclose any change, or any development involving a prospective change, in or affecting the business or properties of the Company or any of its Subsidiaries which, in your sole judgment, makes it impractical or inadvisable to proceed with the public offering of the Shares or the purchase of the Option Shares as contemplated by the Prospectus. The Original Letter shall be addressed to or for the use of the Underwriters in form and substance satisfactory to the Underwriters and shall (i) represent, to the extent true, that they are independent certified public accountants with respect to the Company within the meaning of the Securities Act and the applicable published Rules and Regulations, (ii) set forth their opinion with respect to their examination of the consolidated balance sheet of the Company as of December 31, 1999 and related consolidated statements of operations, shareholders' equity, and cash flows for the year ended December 31, 1998, (iii) state that they have performed the procedures set out in Statement on Accounting Standards No. 86 for a review of Management's 25 Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contained in the Prospectus, (iv) state that the underlying information, determinations, estimates and assumptions contained in the MD&A provide a reasonable basis for the statements contained therein, and (v) address other matters agreed upon by them and you. (g) You shall have received from Kost, Forer & Gabbay, a member of Ernst & Young International, a letter stating that their review of the Company's system of internal accounting controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's financial statements as at December 31, 1999, did not disclose any weakness in internal controls that they considered to be material weaknesses. (h) You shall have been furnished evidence in usual written or telegraphic form from the appropriate authorities of the several jurisdictions, or other evidence satisfactory to you, of the qualification referred to in paragraph (f) of Section 6 hereof. (i) Prior to the Closing Date, the Shares shall have been duly authorized for listing by the Nasdaq National Market upon official notice of issuance. (j) On or prior to the Closing Date, you shall have received from all directors, officers, and beneficial holders of the outstanding capital stock of the Company agreements, in form reasonably satisfactory to Chase Securities, Inc., stating that without the prior written consent of Chase Securities, Inc. on behalf of the Underwriters, such person or entity will not, for a period of 180 days following the commencement of the public offering of the Shares by the Underwriters, directly or indirectly, (i) sell, offer, contract to sell, make any short sale, pledge, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any Ordinary Shares or any securities convertible into or exchangeable or exercisable for or any rights to purchase or acquire Ordinary Shares or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences or ownership of Ordinary Shares, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Ordinary Shares or such other securities, in cash or otherwise. All the agreements, opinions, certificates and letters mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if Brobeck, Phleger & Harrison LLP, counsel for the Underwriters, shall be satisfied that they comply in form and scope. In case any of the conditions specified in this Section 9 shall not be fulfilled, this Agreement may be terminated by you by giving notice to the Company. Any such termination shall be without liability of the Company to the Underwriters and without liability of the Underwriters to the Company; provided, however, that (i) in the event of such termination, the Company agrees to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company under this Agreement, including all costs and expenses referred to in paragraphs (o) and (p) of Section 6 hereof, and (ii) if this Agreement is terminated by you because of any refusal, inability or failure on the part of the 26 Company to perform any agreement herein, to fulfill any of the conditions herein, or to comply with any provision hereof other than by reason of a default by any of the Underwriters, the Company will reimburse the Underwriters severally upon demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the transactions contemplated hereby. 10. CONDITIONS OF THE OBLIGATION OF THE COMPANY. The obligation of the Company to deliver the Shares shall be subject to the conditions that (a) the Registration Statement shall have become effective and (b) no stop order suspending the effectiveness thereof shall be in effect and no proceedings therefor shall be pending or threatened by the Commission. In case either of the conditions specified in this Section 10 shall not be fulfilled, this Agreement may be terminated by the Company by giving notice to you. Any such termination shall be without liability of the Company to the Underwriters and without liability of the Underwriters to the Company; provided, however, that in the event of any such termination the Company agrees to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company under this Agreement, including all costs and expenses referred to in paragraphs (o) and (p) of Section 6 hereof. 11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other obligations under Section 7 of this Agreement, the Company hereby agrees to reimburse on a quarterly basis the Underwriters for all reasonable legal and other expenses incurred in connection with investigating or defending any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the obligations under this Section 11 and the possibility that such payments might later be held to be improper; provided, however, that (i) to the extent any such payment is ultimately held to be improper, the persons receiving such payments shall promptly refund them and (ii) such persons shall provide to the Company, upon request, reasonable assurances of their ability to effect any refund, when and if due. 12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure to the benefit of the Company and the several Underwriters and, with respect to the provisions of Section 7 hereof, the several parties (in addition to the Company and the several Underwriters) indemnified under the provisions of said Section 7, and their respective personal representatives, successors and assigns. Nothing in this Agreement is intended or shall be construed to give to any other person, firm or corporation any legal or equitable remedy or claim under or in respect of this Agreement or any provision herein contained. The term "successors and assigns" as herein used shall not include any purchaser, as such purchaser, of any of the Shares from any of the several Underwriters. 13. NOTICES. Except as otherwise provided herein, all communications hereunder shall be in writing or by telegraph and, if to the Underwriters, shall be mailed, telegraphed or delivered to Chase Securities, Inc., One Bush Street, San Francisco, California 94104, with a copy to Brobeck, Phleger & Harrison LLP, 1633 Broadway, 47th Floor, New York, New York 10019, Attention: Brian B. Margolis, Esq.; and if to the Company, shall be mailed, telegraphed or delivered to it at its office, Kiryat Mada Street, Science Based Industries Campus, P.O. Box 27 23052, Har Hatzvim, Jerusalem 91230, Israel, Attention: Samuel I. HaCohen. All notices given by telegraph shall be promptly confirmed by letter. 14. CONSENT TO SERVICE; SUBMISSION TO JURISDICTION. The Company, by the execution and delivery of this Agreement, designates and appoints ViryaNet, Inc., a company incorporated under the laws of the State of Delaware as the authorized agent of the Company, upon whom process may be served in any suit, proceeding or other action against the Company instituted by any Underwriter or by any person controlling an Underwriter as to which such Underwriter or any such controlling person is a party and based upon this Agreement, or in any other action against the Company in any U.S. federal or state court sitting in the County of New York, arising out of the offering made by the Prospectus or any purchase or sale of securities in connection therewith and the Company expressly accepts the exclusive jurisdiction of any such court in respect of any such suit, proceeding or other action and, without limiting other methods of obtaining jurisdiction, each expressly submits to the exclusive personal jurisdiction of any such court in respect of any such suit, proceeding or other action. Such designations and appointment shall be irrevocable, unless and until a successor authorized agent in the County and State of New York reasonably acceptable to you shall have been appointed by the Company, such successor shall have accepted such appointment and written notice thereof shall have been given to the Underwriters. In the event that the Company at any time shall cease to own a majority of the outstanding voting securities of ViryaNet, Inc., the Company shall promptly appoint a new agent for service of process hereunder, which agent shall be reasonably acceptable to you. The Company further agrees that service of process upon its authorized agent or successor (and written notice of said service to the Company mailed by certified mail or sent by telex or delivered, as provided in Section 13 above) shall be deemed in every respect personal service of process upon the Company in any such suit, proceeding or other action. The Company hereby irrevocably waives any objection that it may have or hereafter have to the laying of venue of any such action or proceeding arising out of or based on the Shares or this Agreement, or otherwise relating to the offering, issuance and sale of the Shares in any U.S. federal or state court sitting in the County of New York and each hereby further irrevocably waives any claim that any such action or proceeding in any such court has been brought in an inconvenient forum. The Company agrees that any final judgment after exhaustion of all appeals or the expiration of time to appeal in any such action or proceeding arising out of the sale of the Shares or this Agreement rendered by any such U.S. federal court or state court shall be conclusive, and subject to applicable law, may be enforced in any other jurisdiction by suit on the judgment or in any other manner provided by law. Nothing contained in this Agreement shall affect or limit the right of the Underwriters to serve any process or notice of motion or other application in any other manner permitted by law or limit or affect the right of the Underwriters to bring any action or proceeding against the Company or any of their respective property in the courts of any other jurisdiction. The Company further agrees to take any and all actions, including the execution and filing of all such instruments and documents, as may be necessary to continue such designation and appointment or such substitute designation and appointment in full force and effect. The Company hereby agrees to the exclusive jurisdiction of the courts of the State of New York or the U.S. federal courts, in each case sitting in the County of New York, in connection with any action brought by them. 28 15. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers, and (c) delivery and payment for the Shares under this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without giving effect to the principles of conflicts of laws thereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 29 Please sign and return to the Company in care of the Company the enclosed duplicates of this letter, whereupon this letter will become a binding agreement among the Company and the several Underwriters in accordance with its terms. Very truly yours, VIRYANET LTD. By __________________________ Name: Title: The foregoing Agreement is hereby confirmed and accepted as of the date first above written. CHASE SECURITIES, INC. SALOMON SMITH BARNEY INC. DAIN RAUSCHER WESSELS By Chase Securities, Inc. By __________________________ Managing Director Acting on behalf of the several Underwriters, including themselves, named in Schedule I hereto. 30 EX-3.1 3 0003.txt ASSOCIATION OF REGISTRANT MEMORANDUM Exhibit 3.1 ----------- THE COMPANIES ORDINANCE ----------------------- PRIVATE COMPANY LIMITED BY SHARES --------------------------------- MEMORANDUM OF ASSOCIATION ------------------------- 1 The name of the Company in English is: R.T.S. Relational Technology Systems Ltd. The name of the Company in Hebrew is: [Hebrew spelling of Company's Name] 1 The objects for which the Company is established are as follows (indicate the primary object): 1.1 Development of computer software; 1.2 The purchase and acquisition of computers; 1.3 Any business activity in the field of computers; 1.4 Any other object as shall be resolved by the Company's management. 3. The liability of the members is limited. 4. The share capital of the Company shall be NIS 10,000 (ten thousand New Israeli Shekels) divided into 10,000 Ordinary Shares of par value NIS 1.0 per share. WE, the several persons or entities whose names and addresses are hereunto subscribed, are desirous of being formed into a Company in pursuance of this Memorandum of Association, and we respectively agree to subscribe for the number of shares in the capital of the Company set opposite our respective names.
- ------------------------------------------------------------------------------------------------------ Name Address No. of Signature Date Shares - ------------------------------------------------------------------------------------------------------ Dov Rozenfeld 38 Haa'rbaa' St., Jerusalem 1 /s/ Dov Rozenfeld - ------------------------------------------------------------------------------------------------------ Vladimir Morgenstern Gilo 237/89, Jerusalem 1 /s/ Vladimir Morgenstern - ------------------------------------------------------------------------------------------------------
Total shares Subscribed for: 2 Dated this 8/th/ day of March, 1988. WITNESS to the above signatures of Dov Rozenfeld and Vladimir Morgenstern. /s/ - --------------------------- EX-3.2 4 0004.txt ASSOCIATION OF REGISTRANT ARTICLES Exhibit 3.2 ----------- THE COMPANIES ORDINANCE ----------------------- A COMPANY LIMITED BY SHARES --------------------------- ARTICLES OF ASSOCIATION OF RTS SOFTWARE LTD. P R E L I M I N A R Y 1. Second Schedule Excluded ------------------------ The regulations contained in the second schedule to the Companies Ordinance (New Version), 5743-1983 shall not apply to the Company. 2. Interpretation -------------- (a) Unless the subject or the context otherwise requires: words and expressions defined in the Companies Ordinance in force on the date when these Articles or any amendment thereto, as the case may be, first became effective shall have the same meanings herein; words and expressions importing the singular shall include the plural and vice versa; words and impressions importing the masculine gender shall include the feminine gender; and words and expressions importing persons shall include bodies corporate. (Two) The captions in these Articles are for convenience only and shall not be deemed a part hereof or affect the construction of any provision hereof. (Three) In these Articles the term the Companies Ordinance, shall mean the Companies Ordinance (New Version), 5743-1983 or any statutory re- enactment or modification thereof for the time being in force including the Companies Law-1999; and any reference to any section or provision of the Companies Ordinance shall include a reference to any statutory re-enactment or modification thereof for the time being in force including the relevant provisions of the Companies Law-1999. 3. Private Company --------------- The Company is a private company and accordingly: -2- (a) the number of members for the time being of the Company (exclusive of persons who are in the employment of the Company and of persons who having been formerly in the employment of the Company were, while in such employment, and have continued after termination of such employment to be, members of the Company), shall not exceed fifty (50), but where 2 or more persons jointly own one or more shares in the Company, they shall, for the purpose of this Article be treated as a single member; (b) any invitation to the public to subscribe for any shares or debentures or debenture stock of the Company is prohibited; and (c) the right to transfer shares in the Company shall be restricted as hereinafter provided. SHARE CAPITAL 4. Share Capital ------------- (a) The registered share capital of the Company is three and a half million New Israeli Shekels (NIS 3,500,000) divided into eighteen million and nine hundred thousand (18,900,000) ordinary shares of a nominal value of ten Agorot (NIS 0.1) each (the "Ordinary Shares"), six million one hundred and thirty three thousand, three hundred and thirty (6,133,330) Series A Preferred Shares of a nominal value of ten Agorot (NIS 0.1) each (the "Series A Preferred Shares"), eight hundred sixty six thousand and six hundred and seventy (866,670) Series B Non Voting Preferred Shares of a nominal value of ten Agorot (NIS 0.1) each (the "Series B Non Voting Preferred Shares"), four million (4,000,000) Series C-1 Preferred Shares of a nominal value of ten Agorot (NIS 0.1) each (the "Series C-1 Preferred Shares") and five million and one hundred thousand (5,100,000) Series C-2 Preferred Shares of a nominal value of ten Agorot (NIS 0.1) each (the "Series C- 2 Preferred Shares"). (The Series A Preferred Shares, Series B Non Voting Preferred Shares, Series C-1 Preferred Shares and Series C-2 Preferred Shares shall be referred to herein collectively as the "Preferred Shares" and the Series C-1 Preferred Shares and Series C-2 Preferred Shares shall be referred to herein collectively as the "Series C Preferred Shares"). (b) Each Ordinary Share (including Ordinary Shares converted from the Series A Preferred Shares, the Series B Non Voting Preferred Shares and from the Series C Preferred Shares) entitles its holder to receive notice of, and to participate in, all General Meetings of the Company, and to one (1) vote in such meeting for every share, and the other rights he is legally entitled to and as specified in these Articles. -3- 5. Preferred Shares ---------------- The Preferred Shares confer on the holders thereof all rights accruing to holders of Ordinary Shares in the Company and, in addition, bear the following rights: (a) Subject to any provision hereof conferring special rights as to voting, or restricting the right to vote, every holder of Preferred Shares shall have one vote for each Ordinary Share into which the Preferred Shares held by him of record could be converted (as provided in this Article), on every resolution, without regard to whether the vote thereon is conducted by a show of hands, by written ballot or by any other means. Anything else in these Articles to the contrary notwithstanding, the Series B Non Voting Preferred Shares will not have any voting rights; provided, however, that upon the transfer from the Original Holder (i.e. the holder which holds them on the date the previous Amendment first became effective), the holder following such transfer may, by written notice to the Company delivered by hand or by air courier within fifteen (15) days following such transfer, elect that such shares will have voting rights while held by such holder, and shall thereafter be automatically converted into Series A Preferred Shares. (b) Each Preferred Share shall be convertible at the option of the holder thereof, at any time after the date of issuance of such share, at the office of the Company, into such number of fully paid and non- assessable Ordinary Shares equal to the number which is determined by dividing the applicable Original Issue Price (as defined below) by the applicable Conversion Price (as defined in and subject to adjustment under Article 5(d)) at the time in effect for such share (the "Conversion Ratio"); provided, however, that with respect to each Series C Preferred Share, its Conversion Ratio shall be further adjusted prior to its conversion into Ordinary Shares by adding the Adjustment (as such a term is defined in Article 5(d)(i)(A)(b)(iii) or Article 5(d)(i)(A)(c)(iii), as the case may be) to the applicable Conversion Ratio for the Series C Preferred Shares, such that each Series C Preferred Share shall be convertible into such number of fully paid and non assessable Ordinary Shares equal to the sum of the Series C-1 Preferred Shares or Series C-2 Preferred Shares Conversion Ratio, as the case may be, plus the appropriate Adjustment. (i) With respect to Series A Preferred Shares and Series B Non Voting Preferred Shares: in the event that fewer than an aggregate of one million five hundred and eight thousand and ninety three (1,508,093) Series A Preferred Shares and Series B Non Voting Preferred Shares, remain issued and outstanding as a result of optional conversions pursuant to Article 5(b), then the Company may, at its option, cause the conversion of each and every issued and outstanding Series A Preferred Share and Series B Non Voting Preferred Share into a number of fully paid and non-assessable Ordinary Shares equal to the number which is determined by dividing the applicable Original Issue Price by the applicable Conversion Price (subject to adjustment under -4- Article 5(d)) at the time in effect for such share, by delivery of written notice to the holders of such Preferred Shares. (ii) With respect to Series C Preferred Shares: in the event that fewer than one million, six hundred and fifty seven thousand, five hundred and eighty six (1,657,586) Series C Preferred Shares, remain issued and outstanding as a result of optional conversions pursuant to Article 5(b) then the Company may, at its option, cause the conversion of each and every issued and outstanding Series C Preferred Share into a number of fully paid and non-assessable Ordinary Shares equal to the sum of the Series C Preferred Shares Conversion Ratio then in effect plus the Adjustment (as described in Article 5(b) above), by delivery of written notice to the holders of Series C Preferred Shares. Each Preferred Share shall, immediately upon the closing of the Company's sale of its Ordinary Shares to the public in a bona fide underwriting pursuant to a registration statement under the U.S. Securities Act of 1933, as amended, the Israeli Securities Law, 1968, or similar securities laws of another jurisdiction, at a price per share of not less than six U.S. Dollars and ninety nine cents (US$6.99) (as adjusted for share combinations or subdivisions or other recapitalizations of the Company's shares) with net proceeds to the Company of not less than Seven Million Five Hundred Thousand United States Dollars (US$7,500,000) (the "IPO"), automatically be converted into such number of fully paid and non-assessable Ordinary Shares as is determined by dividing the applicable Original Issue Price by the applicable Conversion Price (subject to adjustment under Article 5(d)) at the time in effect for such share; provided, however, that each Series C Preferred Share shall instead be converted into such number of fully paid and non assessable Ordinary Shares equal to the sum of the Series C-1 Preferred Shares or Series C-2 Preferred Shares Conversion Ratio, as the case may be, plus the appropriate Adjustment (as described in Article 5(b) above). The "Original Issue Price" of the Series A Preferred Shares is two dollars and thirty-three cents (U.S.$2.33); the "Original Issue Price" of the Series B Non Voting Preferred Shares is two dollars and thirty-three cents (U.S.$2.33); the "Original Issue Price" of the Series C-1 Preferred Shares is three dollars and ninety cents (U.S.$3.90); and the "Original Issue Price" of the Series C-2 Preferred Shares is five dollars and seventy five cents (U.S.$5.75). Anything else in these Articles to the contrary notwithstanding, the Series B Non Voting Preferred Shares will not be convertible at the option of the Original Holder thereof pursuant to the first sentence of Article 5(b); provided, however, that immediately after there are fewer than 1,508,090 Series A Preferred Shares remaining issued and outstanding as a result of optional conversions pursuant to the first -5- sentence of Article 5(b) or upon the closing of the IPO, the earlier of the two, each Series B Non Voting Preferred Share shall be automatically converted, without any action by the holders of such Series B Non Voting Preferred Shares, into such number of fully-paid and non-assessable Ordinary Shares as is determined by dividing the applicable Conversion Price (subject to adjustment under Article 5(d)) at the time in effect for such share. (c) Before any holder of Preferred Shares shall be entitled (in the case of a conversion at such holder's option) to convert the same into Ordinary Shares, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Company, and shall give written notice by mail, postage prepaid, to the Company at its principal corporate office, of the election to convert the same and shall state therein the name or names of any nominee for such holder in which the certificate or certificates for Ordinary Shares are to be issued. Such conversion (in the case of a conversion at such holder's option) shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the certificate representing the Preferred Shares to be converted, and the person or persons entitled to receive the Ordinary Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Ordinary Shares as of such date. If the conversion is at the option of the Company (pursuant to subsection (i) or subsection (ii) of this Article 5(b)) or is in connection with an IPO, then the conversion shall be deemed to have taken place automatically regardless of whether the certificates representing such shares have been tendered to the Company, but from and after such conversion any such certificates not tendered to the Company shall be deemed to evidence solely the Ordinary Shares received upon such conversion and the right to receive a certificate for such Ordinary Shares. If the conversion is in connection with an IPO, the conversion may, at the option of any holder tendering Preferred Shares for conversion, be conditioned upon the closing with the underwriter of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Ordinary Shares issuable upon such conversion of the Preferred Shares shall not be deemed to have converted such Preferred Shares until immediately prior to the closing of such sale of securities. The Company shall, as soon as practicable after the conversion and tender of the certificate for the Preferred Shares converted, issue and deliver at such office to such holder of Preferred Shares or to the nominee or nominees of such holder of Preferred Shares or to the nominee or nominees of such holder, a certificate or certificates for the number of Ordinary Shares to which such holder shall be entitled as aforesaid. (d) The initial Conversion Price for the Series A Preferred Shares shall be two United States Dollars and thirty-three cents (U.S.$2.33) (subject to any adjustments under this Article 5(d), the "Series A Conversion Price"); the initial conversion price for the Series B Non Voting Preferred Shares shall be two United States Dollars and thirty- three cents (U.S.$2.33) (subject to any adjustments under this Article 5(d), the "Series B Conversion Price"); -6- the initial Conversion Price for the Series C-1 Preferred Shares shall be three United States Dollars and ninety cents (U.S.$3.90) (subject to any adjustments under this Article 5(d), the "Series C-1 Conversion Price"); and the initial Conversion Price for the Series C-2 Preferred Shares shall be five United States Dollars and seventy five cents (U.S.$5.75) (subject to any adjustments under this Article 5(d), the "Series C-2 Conversion Price"). The Series A Conversion Price, the Series B Conversion Price, the Series C-1 Conversion Price and the Series C-2 Conversion Price shall be adjusted from time to time as follows: (i) (A) (a) With respect to Series A Preferred Shares and Series B Non Voting Preferred Shares: Upon each issuance by the Company of any Additional Shares (as defined below) at a price per share less than the applicable Series A Conversion Price and/or Series B Conversion Price, as the case may be, then in effect, such Series A Conversion Price and/or Series B Conversion Price, as the case may be, will be reduced to an amount equal to a fraction (i) the numerator of which is the sum of (A) the total number of Ordinary Shares outstanding prior to the issuance of such Additional Shares (on a fully-diluted basis after giving effect to all options to purchase Ordinary Shares and assuming the conversion into Ordinary Shares of all convertible securities) multiplied by the applicable Series A Conversion Price and/or Series B Conversion Price, as the case may be, in effect prior to the issuance of such Additional Shares plus (B) the total amount of the consideration received by the Company for such Additional Shares, and (ii) the denominator of which is the sum of the total number of Ordinary Shares outstanding immediately prior to the issuance of such Additional Shares (on a fully-diluted basis after giving effect to all options to purchase Ordinary Shares and assuming the conversion into Ordinary Shares of all convertible securities) plus the number of such Additional Shares issued. (b) With respect to Series C-1 Preferred Shares: (i) Upon each issuance by the Company of any Additional Shares (as defined below) at a price per share which is less than the Series C-1 Conversion Price then in effect but which is equal to or above three U.S. Dollars and fifty cents (U.S.$3.50) per share (as adjusted for share combinations or subdivisions or other recapitalizations of the Company's shares) (the "C-1 Additional Share Price") then the Series C-1 Conversion Price will be reduced to an amount equal to the C-1 Additional Share Price. (ii) Upon each issuance by the Company of any Additional Shares (as defined below) at a price per share which is less than three U.S. Dollars and fifty cents (U.S.$3.50) -7- (as adjusted for share combinations or subdivisions or other recapitalizations of the Company's shares), such Series C-1 Conversion Price will be adjusted in two steps as follows: At the first step: the Series C-1 Conversion ---------- Price will be adjusted to the lesser of (x) the then current Series C-1 Conversion Price or (y) three U.S. Dollars and fifty cents (U.S.$3.50), (as adjusted for share combinations or subdivisions or other recapitalizations of the Company's shares) (the "Interim Series C-1 Conversion Price"); and At the second step the Series C-1 Conversion ----------- Price will be reduced to an amount equal to a fraction: (i) the numerator of which is the sum of (A) the total number of Ordinary Shares outstanding prior to the issuance of such Additional Shares (on a fully diluted basis after giving effect to all options to purchase Ordinary Shares and assuming the conversion into Ordinary Shares of all convertible securities) multiplied by the Interim Series C-1 Conversion Price calculated in the immediately preceding first step plus (B) the total amount of the consideration received by the Company for such Additional Shares, and (ii) the denominator of which is the sum of the total number of Ordinary Shares outstanding immediately prior to the issuance of such Additional Shares (on a fully diluted basis after giving effect to all options to purchase Ordinary Shares and assuming the conversion into Ordinary Shares of all convertible securities) plus the number of such Additional Shares issued. (iii) In addition to Article 5(d)(i)(A)(b)(i) and Article 5(d)(i)(A)(b)(ii) above, except for the issuance of Ordinary Shares pursuant to stock options outstanding on February 26, 1998 held by the Company's employees, consultants, contractors and directors to purchase up to 1,862,435 Ordinary Shares (as adjusted for share combinations or subdivisions or other recapitalizations of the Company's shares) (the "C-1 Existing Options"), in the event that from and after February 26, 1998 and until the IPO the Company shall grant or issue any Ordinary Shares, options to purchase Ordinary Shares or other securities convertible into or exchangeable for Ordinary Shares to its employees, consultants, contractors and/or directors (if in transactions with primarily non-financing purposes, provided, however, that all transactions with -8- employees, consultants, contractors and/or directors shall be deemed for non-financing purposes unless the Company's Board of Directors, including at least one of the Preferred Shares Director, determines otherwise) that together in the aggregate exceed the "Employee Reserve" (as defined below) (as adjusted for share combinations or subdivisions or other recapitalizations of the Company's shares), then the applicable Conversion Ratio of the Series C-1 Preferred Shares shall be adjusted by adding 0.00091 to the applicable Conversion Ratio of the Series C-1 Preferred Shares for every 10,000 (as adjusted for share combinations or subdivisions or other recapitalizations of the Company's shares) additional Ordinary Shares issued (including Ordinary Shares deemed to be issued pursuant to subsections 5(d)(i)(E)(i) or 5(d)(i)(E)(ii)) to employees, consultants, contractors and/or directors (if in transactions with primarily non financing purposes, as described above) in excess of the Employee Reserve (as adjusted for share combinations or subdivisions or other recapitalizations of the Company's shares (the "C-1 Adjustment") according to the formula specified below: C-1 Adjustment = (0.00091 * (X/10,000)) Where: X= the number of Ordinary Shares issued (including Ordinary Shares deemed issued pursuant to section 5(d)(i)(E)(i) or 5(d)(i)(E)(ii)) in excess of the Employee Reserve (except for the issuance of Ordinary Shares pursuant to the exercise of C-1 Existing Options) with both such Employee Reserve and the 10,000 number adjusted for share combinations or subdivisions or other recapitalizations of the Company's shares); and Employee Reserve = 150,000 (as adjusted for share combinations or subdivisions or other recapitalizations of the Company's shares) plus that number (as adjusted for share combinations or subdivisions or other recapitalizations of the Company's shares) which are no longer issuable pursuant to C-1 Existing Options because of the termination, without exercise, of such C-1 Existing Options. An example of the application of the abovementioned anti dilution provisions is attached hereto as Exhibit A to this Amendment. -9- Such C-1 Adjustment shall be added to the applicable Series C-1 Preferred Shares Conversion Ratio only upon the conversion of the Series C-1 Preferred Shares into Ordinary Shares and not prior to such date and for all purposes of these Articles the phrase "on an as converted basis" shall not include the C-1 Adjustment. (c) With respect to Series C-2 Preferred Shares: (i) Upon each issuance by the Company of any Additional Shares (as defined below) at a price per share which is less than the Series C-2 Conversion Price then in effect but which is equal to or above five U.S. Dollars and eighteen cents (U.S.$5.18) per share (as adjusted for share combinations or subdivisions or other recapitalizations of the Company's shares) (the "C-2 Additional Share Price") then the Series C-2 Conversion Price will be reduced to an amount equal to the C-2 Additional Share Price. (ii) Upon each issuance by the Company of any Additional Shares (as defined below) at a price per share which is less than five U.S. Dollars and eighteen cents (U.S.$5.18) (as adjusted for share combinations or subdivisions or other recapitalizations of the Company's shares), such Series C-2 Conversion Price will be adjusted in two steps as follows: At the first step: the Series C-2 Conversion Price ---------- will be adjusted to the lesser of (x) the then current Series C-2 Conversion Price or (y) five U.S. Dollars and eighteen cents (U.S.$5.18), (as adjusted for share combinations or subdivisions or other recapitalizations of the Company's shares) (the "Interim Series C-2 Conversion Price"); and At the second step the Series C-2 Conversion Price ----------- will be reduced to an amount equal to a fraction: (i) the numerator of which is the sum of (A) the total number of Ordinary Shares outstanding prior to the issuance of such Additional Shares (on a fully diluted basis after giving effect to all options to purchase Ordinary Shares and assuming the conversion into Ordinary Shares of all convertible securities) multiplied by the Interim Series C-2 Conversion Price calculated in the immediately preceding first step plus (B) the total amount of the consideration received by the Company for such Additional Shares, and (ii) the denominator of which is the sum of the total number of Ordinary Shares outstanding immediately prior to the issuance of -10- such Additional Shares (on a fully diluted basis after giving effect to all options to purchase Ordinary Shares and assuming the conversion into Ordinary Shares of all convertible securities) plus the number of such Additional Shares issued. (iii) In addition to Article 5(d)(i)(A)(c)(i) and Article 5(d)(i)(A)(c)(ii) above, except for the issuance of Ordinary Shares pursuant to stock options outstanding on June 1, 1999 held by the Company's employees, consultants, contractors and directors to purchase Ordinary Shares or options reserved for such purposes as of such date (as adjusted for share combinations or subdivisions or other recapitalizations of the Company's shares) (the "C-2 Existing Options"), in the event that from and after June 1, 1999 and until the IPO the Company shall grant or issue any Ordinary Shares, options to purchase Ordinary Shares or other securities convertible into or exchangeable for Ordinary Shares to its employees, consultants, contractors and/or directors (if in transactions with primarily non-financing purposes, provided, however, that all transactions with employees, consultants, contractors and/or directors shall be deemed for non-financing purposes unless the Company's Board of Directors, including at least one of the Preferred Shares Director, determines otherwise) that together in the aggregate exceed the C-2 Existing Options, then the applicable Conversion Ratio of the Series C-2 Preferred Shares shall be adjusted by adding 0.00067 to the applicable Conversion Ratio of the Series C-2 Preferred Shares for every 10,000 (as adjusted for share combinations or subdivisions or other recapitalizations of the Company's shares) additional Ordinary Shares issued (including Ordinary Shares deemed to be issued pursuant to subsections 5(d)(i)(E)(i) or 5(d)(i)(E)(ii)) to employees, consultants, contractors and/or directors (if in transactions with primarily non financing purposes, as described above) in excess of the Employee Reserve (as adjusted for share combinations or subdivisions or other recapitalizations of the Company's shares (the "C- 2 Adjustment") according to the formula specified below: C-2 Adjustment = (0.00067 * (X/10,000)) Where: -11- X= the number of Ordinary Shares issued (including Ordinary Shares deemed issued pursuant to section 5(d)(i)(E)(i) or 5(d)(i)(E)(ii)) in excess of the C-2 Existing Options (except for the issuance of Ordinary Shares pursuant to the exercise of C-2 Existing Options) with both such C-2 Existing Options and the 10,000 number adjusted for share combinations or subdivisions or other recapitalizations of the Company's shares). An example of the application of the abovementioned anti dilution provisions is attached hereto as Exhibit B to this Amendment. Such C-2 Adjustment shall be added to the applicable Series C-2 Preferred Shares Conversion Ratio only upon the conversion of the Series C-2 Preferred Shares into Ordinary Shares and not prior to such date and for all purposes of these Articles the phrase "on an as converted basis" shall not include the C-2 Adjustment. (B) No adjustments of a Conversion Price shall be made in an amount less than one cent (US$0.01) per share. No adjustment of a Conversion Price shall be made if it has the effect of increasing the Conversion Price beyond the applicable Conversion Price in effect for such series of Preferred Shares immediately prior to such adjustment. (C) The consideration for the issuance of Additional Shares shall (a) to the extent it consists of cash, be deemed to be the amount of cash received therefor after giving effect to any discounts or commissions paid or incurred by the Company for any underwriting or otherwise in connection with the issuance and sale thereof, and (b) to the extent it consists of property other than cash, be computed at the fair market value of such property as determined in good faith by the Company's Board of Directors, provided, however that if a majority in -------- interest of the holders of the Series A Preferred Shares and Series B Non Voting Preferred Shares or a majority in interest of the holders of Series C Preferred Shares dispute the determination by the Board of Directors then the fair market value of such property shall be determined by an independent appraiser selected by a majority in interest of the holders of Series A Preferred Shares and Series B Non Voting Preferred Shares or a majority in interest of the Series C Preferred Shares, as applicable, from a list of five (5) potential appraisers submitted by the Board of Directors, the costs and expenses of which appraisal shall be borne by the Company. -12- (D) For purpose of Subarticle (d)(i) hereof, the consideration for any Additional Shares shall be taken into account at the U.S. Dollar equivalent thereof, on the day such Additional Shares are issued or deemed issued, whichever is earlier. (E) With respect to Series C Preferred Shares only, in the case of the issuance of options to purchase Ordinary Shares, securities by their terms convertible into or exchangeable for Ordinary Shares or options to purchase such convertible or exchangeable securities, the following provisions shall apply for all purposes of this subsection 5(d)(i) and subsection 5(d)(ii): (i) The aggregate maximum number of Ordinary Shares deliverable upon exercise (to the extent then exercisable) of such options to purchase or rights to subscribe for Ordinary Shares shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsection 2(d)(i)(C)), if any, received by the Company upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights for the Ordinary Shares covered thereby. (ii) The aggregate maximum number of Ordinary Shares deliverable upon conversion of, or in exchange (to the extent then convertible or exchangeable) for, any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Company for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Company upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subsection 2(d)(i)(C)). (iii) In the event of any change in the number of Ordinary Shares deliverable or in the consideration payable to the Company upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the anti dilution provisions thereof, a Conversion Price, to the extent in any way affected by or -13- computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Ordinary Shares or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (iv) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, a Conversion Price, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Ordinary Shares (and convertible or exchangeable securities that remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (v) The number of shares of Ordinary Shares deemed issued and the consideration deemed paid therefor pursuant to subsections 5(d)(i)(E)(i) and (ii) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either subsections 5(d)(i)(E)(iii) or (iv). (ii) "Additional Shares" shall mean any Ordinary Shares or any Preferred Shares issued by the Company (including only with respect to Series C Preferred Shares any options or warrants to purchase Ordinary Shares, securities by their terms convertible into or exchangeable for Ordinary Shares or options to purchase such convertible or exchangeable securities) other than: (A) Ordinary Shares or any options or warrants to purchase Ordinary Shares, securities by their terms convertible into or exchangeable for Ordinary Shares or options or warrants to purchase such convertible or exchangeable securities, issued pursuant to a transaction described in Subarticles (d)(iii) or (d)(iv) hereof. (B) Ordinary Shares or any options or warrants to purchase Ordinary Shares, securities by their terms convertible into or exchangeable for Ordinary Shares or options or warrants to purchase such convertible or exchangeable securities, issued to employees, consultants, contractors and/or directors of the Company (if in transactions with primarily non-financing purposes) directly or pursuant to an escrow arrangement as approved by the Board of Directors of the Company. -14- (C) Ordinary Shares issued upon conversion of the Preferred Shares. (D) Ordinary or Preferred Shares issued upon exercise of options/warrants or any other convertible securities existing at the date this Amendment to the Articles first becomes effective. (E) Strategic Investor Shares. In these Articles "Strategic Investor Shares" shall mean: shares of any kind or any options or warrants to purchase Ordinary Shares, securities by their terms convertible into or exchangeable for Ordinary Shares or options or warrants to purchase such convertible or exchangeable securities, issued to an investor ("Strategic Investor") which is capable of materially contributing, directly or indirectly, (other than by investing capital in the Company) to the Company's marketing, distribution or sales and which is approved as such by at least two of the Directors appointed by the holders of Preferred Shares (of which one is the Preferred C Director as defined below). (iii) If the Company subdivides or combines its Ordinary Shares, the Conversion Price shall be proportionately reduced, in case of subdivision of shares, as at the effective date of such subdivision, or if the Company fixes a record date for the purpose of so subdividing, as at such record date, whichever is earlier, or shall be proportionately increased, in the case of combination of shares, as the effective date of such combination, or, if the Company fixes a record date for the purpose of so combining, as at such record date, whichever is earlier. (iv) If the Company at any time pays a dividend, with respect to its Ordinary Shares only, payable in additional shares of Ordinary Shares or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Ordinary Shares, without any comparable payment or distribution to the holders of Preferred Shares (hereinafter referred to as "Ordinary Shares Equivalents"), then the Conversion Price shall be adjusted as at the date the Company fixes as a record date for the purpose of receiving such dividend (or if no such record date is fixed, as at the date of such payment) to that price determined by multiplying the applicable Conversion Price in effect immediately prior to such record date (or if no record date is fixed then immediately prior to such payment) by a fraction (a) the numerator of which shall be the total number of Ordinary Shares outstanding and those issuable with respect to Ordinary Shares Equivalents prior to the payment of such dividend, and (b) the denominator of which shall be the total number of shares of Ordinary Shares outstanding and those issuable with respect to such Ordinary Shares Equivalents immediately after the payment of such dividend (plus, in the event that the Company paid cash for fractional shares, the number of additional shares which would have -15- been outstanding had the Company issued fractional shares in connection with such dividend). (e) In the event the Company declares a distribution payable in securities of other persons, evidences of indebtedness issued by the Company or other persons, assets (excluding cash dividends) or options or rights not referred to in Subarticle (d)(iv), then, in each such case, the holders of the Preferred Shares shall be entitled to receive such distribution, in respect of their holdings on an as-converted basis as of the record date for such distribution. (f) If at any time or from time to time there shall be a recapitalization of the Ordinary Shares (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Article), provision shall be made so that the holders of the Preferred Shares shall thereafter be entitled to receive upon conversion of the Preferred Shares the number of Ordinary Shares or other securities or property of the Company or otherwise, to which a holder of Ordinary Shares deliverable upon conversion of the Preferred Shares would have been entitled immediately prior to such recapitalization. In any such case, appropriate adjustments shall be made in the application of the provisions of this Article 5 with respect to the rights of the holders of the Preferred Shares after the recapitalization to the end that the provisions of this Article 5 (including adjustments of the Conversion Price then in effect and the number of shares issuable upon conversion of the Preferred Shares) shall be applicable after that event as nearly equivalent as may be practicable. (g) The Company will not, by amendment of these Articles or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder in this Article 5 by this Company, but will at all times in good faith assist in the carrying out of all the provisions of this Article 5 and in taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Preferred Shares against impairment. (h) No fractional shares shall be issued upon conversion of the Preferred Shares, and the number of shares of Ordinary Shares to be issued shall be rounded to the nearest whole share with all shares held by the same holder aggregated for the purposes of such rounding. (i) Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Article 5, the Company, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Preferred Shares a certificate setting forth each adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall furnish or cause to be furnished to such holder a like certificate setting forth (A) -16- such adjustment or readjustment, (B) the Conversion Price, as the case may be, at the time in effect, and (C) the number of shares of Ordinary Shares and the amount, if any, of other property which at the time would be received upon the conversion of a Preferred Share. (j) In the event of any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (including a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of any class or any other securities or property, or to receive any other right, the Company shall mail to each holder of Preferred Shares, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (k) The Company shall at all times reserve and keep available out of its authorized but unissued Ordinary Shares, solely for the purpose of effecting the conversion of the Preferred Shares, such number of its Ordinary Shares as shall from time to time be sufficient to effect the conversion of all issued and outstanding Preferred Shares; and if at any time the number of authorized but unissued Ordinary Shares shall not be sufficient to effect the conversion of all then outstanding Preferred Shares, in addition to such other remedies as shall be available to the holders of such Preferred Shares, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued Ordinary Shares capital to such number of shares as shall be sufficient for such purposes. 6. Increase of Share Capital ------------------------- (a) Subject to Article 74, the Company may, from time to time, by a resolution of shareholders holding 75% or more of the voting power present at the meeting in person or by proxy and voting thereon (a "Special Resolution"), whether or not all the shares then authorized have been issued, and whether or not all the shares theretofore issued have been called up for payment, increase its share capital by the creation of new shares. Any such increase shall be in such amount and shall be divided into shares of such nominal amounts, and such shares shall confer such rights and preferences, and shall be subject to such restrictions, as such Special Resolution shall provide. (b) Except to the extent otherwise provided in such Special Resolution, such new shares shall be subject to all the provisions applicable to the shares of the original capital. 7. Special Rights: Modifications of Rights --------------------------------------- (a) Subject to the provisions of the Memorandum of Association of the Company, and without prejudice to any special rights previously conferred -17- upon the holders of existing shares in the Company, and subject to Article 74, the Company may, from time to time, by Special Resolution, provide for shares with such preferred or deferred rights or rights of redemption or other special rights and/or such restrictions, whether in regard to dividends, voting, repayment of share capital or otherwise, as may be stipulated in such Special Resolution. (b) (i) If at any time, the share capital is divided into different classes of shares, the rights attached to any class, unless otherwise provided by these Articles, may be modified or abrogated by the Company, by Special Resolution, subject to the consent in writing of the holders of seventy-five per cent (75%) of the issued shares of such class or the sanction of a Special Resolution passed at a separate General Meeting of the holders of the shares of such class and subject to the provisions of Article 74. (ii) The provisions of these Articles relating to General Meetings shall, mutatis mutandis, apply to any separate General Meeting of the holders of the shares of a particular class. (iii) Unless otherwise provided by these Articles, the enlargement of an existing class of shares, or the issuance of additional shares thereof, shall not be deemed, for purposes of this Article 7(b), to modify or abrogate the rights attached to the previously issued shares of such class or of any other class. 8. Consolidation, Subdivision, Cancellation and Reduction of Share Capital ----------------------------------------------------------------------- (a) The Company may, from time to time, by Special Resolution (subject, however, to the provisions of Articles 7(b) and 74 hereof and to applicable law): (i) consolidate and divide all or any of its issued or unissued share capital into shares of larger nominal value than its existing shares, (ii) subdivide its shares (issued or unissued) or any of them, into shares of smaller nominal value than is fixed by the Memorandum of Association (subject, however, to the provisions of the Companies Ordinance), and the resolution whereby any share is subdivided may determine that, as among the holders of the shares resulting from such subdivision, one or more of the shares may, as compared with the others, have any such preferred or deferred rights or rights of redemption or other special rights, or be subject to any such restrictions, as the Company has power to attach to unissued or new shares. (iii) cancel any shares which, at the date of the adoption of such Special Resolution, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so canceled, or -18- (iv) reduce its share capital in any manner, and with and subject to any incident authorized, and consent required, by law. (b) With respect to any consolidation of issued shares into shares of larger nominal value, and with respect to any other action which may result in fractional shares, the Board of Directors may settle any difficulty which may arise with regard thereto, as it deems fit, including, inter alia, resort to one or more of the following actions: (i) determine, as to the holder of shares so consolidated, which issued shares shall be consolidated into each share of larger nominal value; (ii) allot, in contemplation of or subsequent to such consolidation or other action, such shares or fractional shares sufficient to preclude or remove fractional share holdings; (iii) redeem, in the case of redeemable preference shares, and subject to applicable law, such shares or fractional shares sufficient to preclude or remove fractional share holdings; (iv) cause the transfer of fractional shares by certain shareholders of the Company to other shareholders thereof so as to most expediently preclude or remove any fractional shareholdings, and cause the transferees to pay the transferors the fair value of fractional shares so transferred, and the Board of Directors is hereby authorized to act as agent for the transferors and transferees with power of substitution for purposes of implementing the provisions of this sub-Article 8(b)(iv). SHARES 9. Issuance of Share Certificates; Replacement of Lost Certificates ---------------------------------------------------------------- (a) Share certificates shall be issued under the rubber stamp of the Company and shall bear the signatures of two Directors (or if there be only one Director, the signature of such Director), or of any other person or persons authorized thereto by the Board of Directors. (b) Each member shall be entitled to one numbered certificate for all the shares of any class registered in his name, and if the Board of Directors so approves, to several certificates, each for one or more of such shares. Each certificate shall specify the serial numbers of the shares represented thereby and may also specify the amount paid up thereon. (c) A share certificate registered in the names of two or more persons shall be delivered to the person first named in the Registrar of Members in respect of such co-ownership. -19- (d) If a share certificate is defaced, lost or destroyed, it may be replaced, upon payment of such fee, and upon the furnishing of such evidence of ownership and such indemnity, as the Board of Directors may think fit. 10. Registered Holder ----------------- Except as otherwise provided in these Articles, the Company shall be entitled to treat the registered holder of any share as the absolute owner thereof, and, accordingly, shall not, except as ordered by a court of competent jurisdiction, or as required by statute, be bound to recognize any equitable or other claim to, or interest in such share on the part of any other person. 11. Allotment of Shares; Pre-emptive Rights --------------------------------------- (a) Subject to the provisions of Articles 11(b) and 74 the shares shall be under the control of the Board of Directors, who shall have the power to allot shares or otherwise dispose of them to such persons, on such terms and conditions (including inter alia terms relating to calls as set forth in Article 13(f) hereof), and either at par or at a premium, or, subject to the provisions of the Companies Ordinance, at a discount, and at such times, as the Board of Directors may think fit, and the power to give to any person the option to acquire from the Company any shares, either at par or at a premium, or, subject as aforesaid, at a discount, during such time and for such consideration as the Board of Directors may think fit. (b) Prior to the IPO each shareholder has rights of first refusal to purchase, pro-rata, all (or any part) of New Securities (as defined below) that the Company may, from time to time, propose to sell and issue. The shareholder's pro rata share shall be the ratio of the number of shares of the Company's Ordinary Shares (assuming for purposes of this Article that all Preferred Shares have been converted into Ordinary Shares) then held by the shareholder as of the date of the Rights Notice (as defined in Article 11(b)(ii)), to the sum of the total number of Ordinary Shares as of such date. (i) "New Securities" shall mean any Ordinary Shares or Preferred Shares of any kind of the Company, whether now or hereafter authorized, and rights, options, or warrants to purchase said Ordinary Shares or Preferred Shares, and securities of any type whatsoever that are, or may become, convertible into said Ordinary Shares or Preferred Shares; provided, however, that "New Securities" shall not include (i) securities issuable upon conversion of Preferred Shares; (ii) securities offered to the public in the Initial Public Offering; (iii) securities issued in connection with the acquisition of another corporation, business entity or line of business of another business entity by the Company by merger, consolidation, purchase of all or substantially all of the assets, or other reorganization as a result of which the Company owns not less than fifty percent (50%) of the voting power of such corporation; (iv) the Company's Ordinary Shares or Preferred Shares issued in connection with any stock split, stock dividend, recapitalization, reclassification or similar event by the -20- Company; (v) securities authorized by the Company's Board of Directors including the affirmative vote of at least two of the directors appointed by the holders of Preferred Shares to be issued in connection with the acquisition of assets by the Company or supply arrangements for the Company; (vi) Ordinary Shares to be issued to employees, directors or consultants of the Company in accordance with the Board of Directors resolutions; (vii) securities issued to a Strategic Investor (as such term is defined in Article 5(d)(ii)(E) above) (viii) securities issued upon the exercise of outstanding options granted prior to or at the date these Articles first become effective; or (ix) securities to be sold and issued by the Company which securities have been exempt from the definition of "New Securities" by a resolution unanimously adopted, in the best interest of the Company, by all the directors lawfully entitled to vote on such a resolution. (ii) If the Company proposes to issue New Securities, it shall give the shareholders written notice (the "Rights Notice") of its intention, describing the New Securities, the price, the general terms upon which the Company proposes to issue them, and the number of shares that the shareholder has the right to purchase under this Article 11. Each shareholder shall have twenty one (21) days from delivery of the Rights Notice to agree to purchase (i) all or any part of its pro-rata share of such New Securities and (ii) all or any part of the pro-rata share of any other shareholder (including for this purpose any permitted transferee of the shareholder) entitled to such rights to the extent that such other shareholder does not elect to purchase its full pro-rata share, in each case for the price and upon the general terms specified in the Rights Notice, by giving written notice to the Company setting forth the quantity of New Securities to be purchased. If the shareholders who elect to purchase their full pro-rata shares also elect to purchase in the aggregate more than 100% of the New Securities, such New Securities shall be sold to such shareholders in accordance with their respective pro-rata shares. (iii) If the shareholders fail to exercise in full the right of first refusal within the period specified in 11(b)(ii) above, the Company shall have ninety (90) days after delivery of the Rights Notice to sell the unsold New Securities at a price and upon general terms no more favorable to the purchasers thereof than specified in the Company's notice. If the Company has not sold the New Securities within said ninety (90) day period the Company shall not thereafter issue or sell any New Securities without first offering such securities to the shareholders in the manner provided above. 12. Payment in Installments ----------------------- If by the terms of allotment of any share, the whole or any part of the price thereof shall be payable in installments, every such installment shall, when due, be paid to the Company by the then registered holder(s) of the share of the person(s) entitled thereto. -21- 13. Calls on Shares --------------- (a) The Board of Directors may, from time to time make such calls as it may think fit upon members in respect of any sum unpaid in respect of shares held by such members which is not, by the terms of allotment thereof or otherwise, payable at a fixed time, and each member shall pay the amount of every call so made upon him (and of each installment thereof if the same is payable in installments), to the person(s) and at the time(s) and place(s) designated by the Board of Directors, as any such time(s) may be thereafter extended and/or such person(s) or place(s) changed. Unless otherwise stipulated in the resolution of the Board of Directors (and in the notice hereafter referred to), each payment in response to a call shall be deemed to constitute a pro rata payment on account of all shares in respect of which such call was made. (b) Notice of any call shall be given in writing to the member(s) in question not less than fourteen (14) days prior to the time of payment, specifying the time and place of payment, and designating the person to whom such payment shall be made, provided, however, that before the time for any such payment, the Board of Directors may, by notice in writing to such member(s), revoke such call in whole or in part, extend such time, or alter such person and/or place. In the event of a call payable in installments, only one notice thereof need be given. (c) If, by the terms of allotment of any share or otherwise, any amount is made payable at any fixed time, every such amount shall be payable at such time as if it were a call duly made by the Board of Directors and of which due notice had been given, and all the provisions herein contained with respect to such calls shall apply to each such amount. (d) The joint holders of a share shall be jointly and severally liable to pay all calls in respect thereof and all interest payable thereon. (e) Any amount unpaid in respect of a call shall bear interest from the date on which it is payable until actual payment thereof, at such rate (not exceeding the then prevailing debt rate charged by leading commercial banks in Israel), and at such time(s) as the Board of Directors may prescribe. (f) Upon the allotment of shares, the Board of Directors may provide for differences among the allottees of such shares as to the amount of calls and/or the times of payment thereof. 14. Prepayment ---------- With the approval of the Board of Directors, any member may pay to the Company any amount not yet payable in respect of his shares, and the Board of Directors may approve the payment of interest on any such amount until the same would be payable if it had not been paid in advance, at such rate and time(s) as may be approved by the Board of Directors. The Board of Directors -22- may at any time cause the Company to repay all or any part of the money so advanced, without premium or penalty. Nothing in this Article 14 shall derogate from the right of the Board of Directors to make any call before or after receipt by the Company of any such advance. 15. Forfeiture and Surrender ------------------------ (a) If any member fails to pay any amount payable in respect of a call, or interest thereon as provided for herein, on or before the day fixed for payment of the same, the Company, by resolution of the Board of Directors, may at any time thereafter, so long as the said amount or interest remains unpaid, forfeit all or any of the shares in respect of which said call had been made. Any expense incurred by the Company in attempting to collect any such amount or interest, including, inter alia, attorneys' fees and costs of suit, shall be added to, and shall, for all purposes (including the accrual of interest thereon), constitute a part of the amount payable to the Company in respect of such call. (b) Upon the adoption of a resolution of forfeiture, the Board of Directors shall cause notice thereof to be given to such member, which notice shall state that, in the event of the failure to pay the entire amount so payable within a period stipulated in the notice (which period shall not be less than fourteen (14) days and which may be extended by the Board of Directors), such shares shall be ipso facto forfeited, provided, however, that, prior to the expiration of such period, the Board of Directors may nullify such resolution of forfeiture, but no such nullification shall stop the Board of Directors from adopting a further resolution of forfeiture in respect of the non-payment of the same amount. (c) Whenever shares are forfeited as herein provided, all dividends theretofore declared in respect thereof and not actually paid shall be deemed to have been forfeited at the same time. (d) The Company, by resolution of the Board of Directors, may accept the voluntary surrender of any share. (e) Any share forfeited or surrendered as provided herein shall become the property of the Company, and the same, subject to the provisions of these Articles, may be sold, re-allotted or otherwise disposed of as the Board of Directors thinks fit. (f) Any member whose shares have been forfeited or surrendered shall cease to be a member in respect of the forfeited or surrendered shares, but shall, notwithstanding, be liable to pay, and shall forthwith pay, to the Company, all calls, interest and expenses owing upon or in respect of such shares at the time of forfeiture or surrender, together with interest thereon from the time of forfeiture or surrender until actual payment, at the rate prescribed in Article 13(e) above, and the Board of Directors, in its discretion, may enforce the payment of such moneys, or any part thereof, but shall not be under any obligation to do so. In the event of such forfeiture or surrender, -23- the Company, by resolution of the Board of Directors, may accelerate the date(s) of payment of any or all amounts then owing by the member in question (but not yet due) in respect of all shares owned by such member, solely or jointly with another, and in respect of any other matter or transaction whatsoever. (g) The Board of Directors may at any time, before any share so forfeited or surrendered shall have been sold, re-allotted or otherwise disposed of, nullify the forfeiture or surrender on such conditions as it thinks fit, but no such nullification shall stop the Board of Directors from re- exercising its powers of forfeiture pursuant to this Article 15. 16. Lien ---- (a) Except to the extent the same may be waived or subordinated in writing, the Company shall have a first and paramount lien upon all the shares registered in the name of each member (without regard to any equitable or other claim or interest in such shares on the part of any other person), and upon the proceeds of the sale thereof, for his debts, liabilities and engagements arising from any cause whatsoever, solely or jointly with another, to or with the Company, whether the period for the payment, fulfillment or discharge thereof shall have actually arrived or not. Such lien shall extend to all dividends from time to time declared in respect of such share. Unless otherwise provided, the registration by the Company of a transfer of shares shall be deemed to be a waiver on the part of the Company of the lien (if any) existing on such shares immediately prior to such transfer. (b) The Board of Directors may cause the Company to sell any shares subject to such lien when any such debt, liability or engagement has matured, in such manner as the Board of Directors may think fit, but no such sale shall be made unless such debt, liability or engagement has not been satisfied within fourteen (14) days after written notice of the intention to sell shall have been served on such member, his executors or administrators. (c) The net proceeds of any such sale, after payment of the costs thereof, shall be applied in or toward satisfaction of the debts, liabilities or engagements of such member (whether or not the same have matured), or any specific part of the same (as the Company may determine), and the residue (if any) shall be paid to the member, his executors, administrators or assigns. 17. Sale after Forfeiture or Surrender or in Enforcement of Lien ------------------------------------------------------------ Upon any sale of shares after forfeiture or surrender or for enforcing a lien, the Board of Directors may appoint some person to execute an instrument of transfer of the shares so sold and cause the purchaser's name to be entered in the Register of Members in respect of such shares, and the purchaser shall not be bound to see to the regularity of the proceedings, or to the application of the purchase money, and after his name has been entered in the Register of Members in respect of such shares, the validity of the sale shall not be -24- impeached by any person, and the remedy of any person aggrieved by the sale shall be in damages only and against the Company exclusively. 18. Redeemable Shares ----------------- The Company may, subject to applicable law, issue redeemable shares and redeem the same. 19. Conversion of Shares into Stock ------------------------------- (a) The Board of Directors may, with the sanction of the members previously given by Special Resolution and subject to Article 74, convert any paid-up shares into stock, and may, with like sanction, reconvert any stock into paid-up shares of any denomination. (b) The holders of stock may transfer the same, or any part thereof, in the same manner and subject to the same regulations, as the shares from which the stock arose might have been transferred prior to conversion, or as near thereto as circumstances admit, provided, however, that the Board of Directors may from time to time fix the minimum amount of stock so transferable, and restrict or forbid the transfer of fractions of such minimum, but the minimum shall not exceed the nominal value of each of the shares from which such stock arose. (c) The holders of stock shall, in accordance with the amount of stock held by them, have the same rights and privileges as regards dividends, voting at meetings of the Company and other matters as if they held the shares from which such stock arose, but no such right or privilege, except participation in the dividends and profits of the Company, shall be conferred by any such aliquot part of such stock as would not, if existing in shares, have conferred that right or privilege. (d) Such of the Articles of the Company as are applicable to paid-up shares shall apply to stock, and the words "share" and "shareholder" (or "member") therein shall include "stock" and "stockholder". TRANSFER OF SHARES 20. Effectiveness and Registration ------------------------------ (a) No transfer of shares in the Company, and no assignment of an option to acquire such shares from the Company, shall be effective unless the transfer or assignment has been approved by the Board of Directors, but the Board of Directors shall not withhold its approval of any such transfer or assignment made in accordance with this Article 20. (b) No transfer of shares shall be registered unless a proper instrument of transfer (in form and substance satisfactory to the Board of Directors) has -25- been submitted to the Company, together with the share certificate(s) and such other evidence of title as the Board of Directors may reasonably require. Until the transferee has been registered in the Register of Members in respect of the shares so transferred, the Company may continue to regard the transferor as the owner thereof. The Board of Directors, may, from time to time, prescribe a fee for the registration of a transfer. (c) Without derogating from the provisions of Article 20(a) or (b), the following provisions shall govern transfers of shares in the Company, except to the extent waived in writing (before or after the effective date of these Articles) by any shareholder (as to such shareholder) who would otherwise be entitled thereto. No shareholder shall sell, assign, transfer, pledge, hypothecate, mortgage or dispose of, by gift or otherwise, or in any way encumber all or any of the shares in the capital stock of the Company, of any class or series, now owned or hereafter acquired by him except as set forth below in this Article 20(c): (i) (w) Any holder of Ordinary Shares or Preferred Shares proposing to transfer all or any of his shares (in this Article 20(c)(i), the "Offeror") shall, upon receipt of an offer from a potential purchaser, first request the Company, by written notice (which shall contain all the information necessary to enable the Company so to do including, without limitation, the identity of the prospective purchaser), to offer such shares (in this Article 20(c)(i), the "Offered Shares"), on the terms of the proposed transfer, to all the shareholders of the Company (in this Article 20(c)(i), the "Offerees"). The Company shall comply with such request by sending the Offerees a written notice (in this Article 20(c)(i), the "Offer"), stating therein the identity of the Offeror and of the proposed transferee(s) and the proposed terms of sale of the Offered Shares. Any Offeree may accept such offer in respect of all or any of the Offered Shares by giving the Company notice to that effect within fifteen (15) days after being served with the Offer. (x) If the acceptances, in the aggregate, are in respect of all of, or more than, the Offered Shares, then the accepting Offerees shall acquire the Offered Shares, on the terms aforementioned, in proportion to their respective holdings provided that no Offerees shall be entitled to acquire under the provisions of this Article 20(c)(i)(y) more than the number of Offered Shares initially accepted by such Offeree, and upon the allocation to him of the full number of shares so accepted, he shall be disregarded in any subsequent computations and allocations hereunder. Any shares remaining after the computation of such respective entitlements shall be re-allocated among the accepting Offerees (other than those to be disregarded as aforesaid), in the same manner, until one hundred per cent (100%) of the Offered Shares have been allocated as aforesaid. -26- (y) If the acceptances, in the aggregate, are in respect of less than the number of Offered Shares, then the accepting offerees shall not be entitled to acquire the Offered Shares, and the Offeror, at the expiration of the aforementioned fifteen (15) day period, shall be entitled to transfer all (but not less than all) of the Offered Shares to such proposed transferee(s), provided, however, that in no event shall the Offeror transfer any of the Offered Shares to any transferee other than such accepting Offerees or such proposed transferee(s) or transfer the same on terms more favorable to the buyer(s) than those stated in the Offer, and provided further that any of the Offered Shares not transferred within sixty (60) days after the expiration of such fifteen (15) day period, shall again be subject to the provisions of this Article 20(c)(i). (z) Should the purchase price specified in the Offer be payable in property other than cash or evidences of indebtedness, the Offerees shall have the right to pay the purchase price in the form of cash equal in amount to the value of such property which shall be determined by independent certified appraisers or reputable bankers (at the expense of the Company), the identity of which shall be determined by the Company, and if the consideration payable is shares that are publicly traded, the value of such shares shall be the market value thereof as of the date of the payment. (ii) For the purposes of any Offer under Article 20(c)(i), the respective holdings of any number of accepting Offerees shall mean the respective proportions of the aggregate number of Ordinary Shares (including, for purposes of such determination, Ordinary Shares issuable upon conversion of Preferred Shares) held by such accepting Offerees as determined prior to such Offer. (iii) Prior to the earlier of (i) the closing of the Company's initial underwritten public offering of its Ordinary Shares pursuant to an effective registration statement under the United States Securities Act of 1933, as amended, or the Israeli Securities Law, 1968, or equivalent law of another jurisdiction or (ii) three years from the date of the 1996 Shareholders Agreement (September 30, 1996), each of Samuel HaCohen ("HaCohen") and Vladimir Morgernstern ("Morgernstern") shall not sell, assign, transfer, pledge, hypothecate, mortgage or dispose of, by gift or otherwise, or in any way encumber all or any of the shares in the capital stock of the Company, of any class or series, owned by them as of the date these Articles first became effective or hereafter acquired by each of them (such shares are hereinafter collectively referred to as the "Securities"). Notwithstanding anything else to the contrary in these Articles, (but subject to Article 20(c)(i) hereof) each of HaCohen and Morgernstern -27- may, following the date which is eighteen months after the date of the 1996 Shareholders Agreement (September 30, 1996), freely transfer without any restrictions each year, 10% (not including transfers pursuant to the last paragraph of this Article 20(c)(iii)) of his shares in the Company provided that each of HaCohen and Morgernstern will not transfer more than a total of 30% (not including transfers pursuant to the last paragraph of this Article 20(c)(iii)) of his current shareholding unless otherwise permitted herein. Notwithstanding anything else to the contrary in these Articles, each of HaCohen and Morgernstern may freely transfer without any restrictions or first refusal rights by the parties hereto up to 2% of the Company's issued share capital (on a fully diluted basis). Any provision of this Article to the contrary notwithstanding, each of HaCohen and Morgernstern may transfer shares in the Company to his parent, sibling, spouse, lineal descendant, or antecedent, brother or sister; or to an entity controlled by HaCohen or Morgernstern (provided that if such entity does not remain so controlled, such shares shall be transferred back to HaCohen or Morgernstern or to another such entity), provided, however, that no such transfer shall be effective unless the transferee agrees in writing to remain subject to all of the limitations and obligations which apply to such shares hereunder and not to make any further sale, assignment, transfer, pledge, or disposal of such shares except back to HaCohen or Morgernstern. Notwithstanding any other provision of this Agreement, upon the death of HaCohen or Morgernstern, the provisions of Articles 20(c)(iii)(x) and 20(c)(iii)(y) shall not apply to any sale by their heirs. (iv) Anything in this Article 20(c) to the contrary notwithstanding, (a) any of the shareholders may freely transfer any of its shares in the Company to (i) such shareholder's spouse, lineal descendant or antecedent, brother or sister, or (ii) an entity controlled by, controlling or under common control, with such shareholder (provided that if such entity does not remain so controlled or controlling such shares shall be transferred back to the original shareholder or to another such entity), (b) as to any shareholder which is a partnership, in addition to (a)(ii) above, such shareholder may transfer to such shareholder's partners and to affiliated partnerships managed by the same management company or the same managing general partner as such shareholder, (c) as to any shareholder's partner which is a limited liability company, following transfer of such shareholder's shares of the Company to such a limited liability company, such limited liability company may freely transfer such shares to such limited liability company's members, (d) as to Yozma Venture Capital Ltd. ("Yozma"), STAR Management of Investments (1993) Limited Partnership ("STAR") transfers to any of the partners of STAR, and -28- any entity to which STAR would be permitted to freely transfer shares in the Company under this Article 20(c)(iv), (e) any of Bessemer Venture Investors L.P., Bessemer Venture Partners IV L.P., and Bessec Ventures IV L.P. may freely transfer any of its shares of the Company to any of the other Bessemer Shareholders (as defined in Schedule 2 of the Shareholders Agreement, dated April 5, 2000) (f) as to GE Capital Advent Investment Corp. ("GE Capital"), any affiliate or related entity (including any partnership or other entity in which GE Capital or any affiliate or related entity is a general partner) (g) as to Samuel HaCohen, transfer of up to 18,750 Ordinary Shares to Evan Chaim Goldman, (h) as to Yitzhak Chemo, transfer of up to 9,370 Ordinary Shares to Evan Chaim Goldman, (i) as to Shimon Katz, transfer of up to 9,380 Ordinary Shares to Evan Chaim Goldman (j) as to Vladimir Morgensten, transfer of up to 18,750 Ordinary Shares to Evan Chaim Goldman, (k) as to Sequel Technology Ltd., transfer of up to 18,750 Ordinary Shares to Evan Chaim Goldman. No transfer of any securities pursuant to this Article 20(c)(iv) may be made, unless the transferee thereof agrees in writing to be bound by all agreements binding upon the shareholders immediately prior to such transfer. (d) Any other provision of these Articles to the contrary notwithstanding, in the event that any person or entity makes an offer to purchase all of the issued and outstanding share capital of the Company or to merge the Company with or into another entity, and members holding more than 75% of each class of the issued and outstanding share capital of the Company indicate their acceptance of such offer (it being understood that solely for purposes of a decision on this matter Ordinary Shares received upon conversion of Preferred Shares, shall vote as one class together with the class of Preferred Shares from which they were converted), and such offer is approved by a majority of the Company's Board of Directors, then, at the closing of such offered purchase of all the issued and outstanding share capital of the Company or merger, all of the holders of Ordinary Shares in the Company will transfer such Ordinary Shares or Preferred Shares to such person or entity; provided, however, that the -------- consideration for all of the Company's shares shall in any event be allocated among the members in accordance with Articles 72 and 73. 21. Suspension of Registration -------------------------- The Board of Directors may suspend the registration of transfers during the fourteen (14) days immediately preceding the Annual General Meeting. TRANSMISSION OF SHARES 22. Descendants' Shares ------------------ (a) In case of a share registered in the names of two or more holders, the Company may recognize the survivor(s) as the sole owner(s) thereof -29- unless and until the provisions of Article 22(b) have been effectively invoked. (b) Any person becoming entitled to a share in consequence of the death of any person, upon producing evidence of the grant of probate or letters of administration or declaration of succession shall be registered as a member in respect of such share, or may, subject to the regulations as to transfer herein contained, transfer such share. 23. Receivers and Liquidators ------------------------- (a) The Company may recognize the receiver or liquidator of any corporate member in winding-up or dissolution, or the receiver or trustee in bankruptcy of any member, as being entitled to the shares registered in the name of such member. (b) The receiver or liquidator of a corporate member in winding-up or dissolution, or the receiver or trustee in bankruptcy of any member, upon producing such evidence as the Board of Directors may deem sufficient that he sustains the character in respect of which he proposes to act under this Article or of his title, shall with the consent of the Board of Directors (which the Board of Directors may grant or refuse in its absolute discretion), be registered as a member in respect of such shares, or may, subject to the regulations as to transfer herein contained, transfer such shares. GENERAL MEETINGS 24. Annual General Meeting ---------------------- An Annual General Meeting shall be held once in every calendar year at such time (within a period of not more than fifteen (15) months after the last preceding Annual General Meeting) and at such place either within or without the State of Israel as may be determined by the Board of Directors. 25. Extraordinary General Meetings ------------------------------ All General Meetings other than the Annual General Meetings shall be called "Extraordinary General Meetings." The Board of Directors may, whenever it thinks fit, convene an Extraordinary General Meeting at such time and place, within or without the State of Israel, as may be determined by the Board of Directors, and shall be obliged to do so upon a requisition in writing in accordance with Section 109 of the Companies Ordinance. 26. Notice of General Meetings; Omission to Give Notice --------------------------------------------------- (a) Not less than seven (7) days' prior notice shall be given of every General Meeting (including a General Meeting adopting a Special Resolution). Each such notice shall specify the place and the day and hour of the -30- meeting and the general nature of each item to be acted upon thereat. Notice shall be given to all members who would be entitled to attend and vote at such meeting, if it were held on the date when such notice is issued. Anything herein to the contrary notwithstanding, with the consent of all members entitled to vote thereon, a resolution may be proposed and passed at such meeting although a lesser notice than hereinabove prescribed has been given. (b) The accidental non-receipt of notice sent to such member, shall not invalidate the proceedings at such meeting. PROCEEDINGS AT GENERAL MEETINGS 27. Quorum ------ (a) Two or more members (not in default in payment of any sum referred to in Article 33(a) hereof), present in person or by proxy and holding shares conferring in the aggregate a majority of the voting power of the Company, shall constitute a quorum at General Meetings. No business shall be transacted at a General Meeting, or at any adjournment thereof, unless the requisite quorum is present when the meeting proceeds to business. (b) If within an hour from the time appointed for the meeting a quorum is not present, the meeting, if convened upon requisition under Sections 109 or 110 of the Companies Ordinance, shall be dissolved, but in any other case it shall stand adjourned to the same day in the next week, at the same time and place, or to such day and at such time and place as the Chairman may determine with the consent of the holders of a majority of the voting power represented at the meeting in person or by proxy and voting on the question of adjournment. No business shall be transacted at any adjourned meeting except business which might lawfully have been transacted at the meeting as originally called. At such adjourned meeting, any two (2) members (not in default as aforesaid) present in person or by proxy, shall constitute a quorum. 28. Chairman -------- The Chairman, if any, of the Board of Directors shall preside as Chairman at every General Meeting of the Company. If there is no such Chairman, or if at any meeting he is not present within fifteen (15) minutes after the time fixed for holding the meeting or is unwilling to act as Chairman, the members present shall choose someone of their number to be Chairman. The office of Chairman shall not, by itself, entitle the holder thereof to vote at any General Meeting nor shall it entitle such holder to a second or casting vote (without derogating, however, from the rights of such Chairman to vote as a shareholder or proxy of a shareholder if, in fact, he is also a shareholder or such proxy). -31- 29. Adoption of Resolutions at General Meetings ------------------------------------------- Subject to the provisions of Article 74: (a) (i) An Ordinary Resolution shall be deemed adopted if approved by the holders of a majority of the voting power represented at the meeting in person or by proxy and voting thereon. (ii) A Special or Extraordinary Resolution shall be deemed adopted if approved by the holders of not less than seventy-five percent (75%) of the voting power represented at the meeting in person or by proxy and voting thereon. (b) Every question submitted to a General Meeting shall be decided by a show of hands, but if a written ballot is demanded by any member present in person or by proxy and entitled to vote at the meeting, the same shall be decided by such ballot. A written ballot may be demanded before the proposed resolution is voted upon or immediately after the declaration by the Chairman of the results of the vote by a show of hands. If a vote by written ballot is taken after such declaration, the results of the vote by a show of hands shall be of no effect, and the proposed resolution shall be decided by such written ballot. The demand for a written ballot may be withdrawn at any time before the same is conducted, in which event another member may then demand such written ballot. The demand for a written ballot shall not prevent the continuance of the meeting for the transaction of business other than the question on which the written ballot has been demanded. (c) A declaration by the Chairman of the meeting that a resolution has been carried unanimously, or carried by a particular majority, or lost, and an entry to that effect in the minute book of the Company, shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favor of or against such resolution. 30. Resolutions in Writing ---------------------- A resolution in writing signed by all members of the Company then entitled to attend and vote at General Meetings or to which all such members have given their written consent (by letter, facsimile [telecopier], telegram, telex or otherwise) shall be deemed to have been unanimously adopted by a General Meeting duly convened and held. 31. Power to Adjourn ---------------- (a) The Chairman of a General Meeting at which a quorum is present may, with the consent of the holders of a majority of the voting power represented in person or by proxy and voting on the question of adjournment (and shall if so directed by the meeting), adjourn the meeting from time to time and from place to place, but no business shall be -32- transacted at any adjourned meeting except business which might lawfully have been transacted at the meeting as originally called. (b) It shall not be necessary to give any notice of an adjournment, whether pursuant to Article 27(b) or Article 31(a), unless the meeting is adjourned for thirty (30) days or more in which event notice thereof shall be given in the manner required for the meeting as originally called. 32. Voting Power ------------ Subject to the provisions of Articles 5(a) and 33(a) and subject to any provision hereof conferring special rights as to voting, or restricting the right to vote, every member shall have one vote for each share held by him of record, on every resolution, without regard to whether the vote thereon is conducted by a show of hands, by written ballot or by any other means. 33. Voting Rights ------------- (a) No member shall be entitled to vote at any General Meeting (or be counted as a part of the quorum thereat), unless all calls and other sums then payable by him in respect of his shares in the Company have been paid. (b) A company or other corporate body being a member of the Company may, by resolution of its directors or any other managing body thereof, authorize any person to be its representative at any meeting of the Company. Any person so authorized shall be entitled to exercise on behalf of such member all the power which the latter could have exercised if it were an individual shareholder. Upon the request of the Chairman of the meeting, written evidence of such authorization (in form acceptable to the Chairman) shall be delivered to him. (c) Any member entitled to vote may vote either personally or by proxy (who need not be a member of the Company), or, if the member is a company or other corporate body, by a representative authorized pursuant to Article 33(b). (d) If two or more persons are registered as joint holders of any share, the vote of the senior who tenders a vote, in person or by proxy, shall be accepted to the exclusion of the vote(s) of the other joint holder(s); and for this purpose seniority shall be determined by the orders in which the names stand in the Register of Members. PROXIES 34. Instrument of Appointment ------------------------- (a) The instrument appointing a proxy shall be in writing and shall be substantially in the following form: -33- "I _________________________ of _________________________________ (Name of Shareholder) (Address of Shareholder) being a member of ________________________________ hereby appoint (Name of the Company) ________________________________ of ______________________________ (Name of Proxy) (Address of Proxy) as my proxy to vote for me and on my behalf at the General Meeting of the Company to be held on the ______ day of ___________ , 19__, and at any adjournment(s) thereof. Signed this _____ day of __________ , 19__. ______________________________ (Signature of Appointer)" or in any usual or common form or in such other form as may be approved by the Board of Directors. It shall be duly signed by the appointer or his duly authorized attorney or, if such appointer is a company or other corporate body, under its common seal or stamp or the hand of its duly authorized agent(s) or attorney(s). (b) The instrument appointing a proxy (and the power of attorney or other authority, if any, under which such instrument has been signed) shall either be delivered to the Company (at its Registered Office, or at its principal place of business or at such place as the Board of Directors may specify) not less than forty-eight (48) hours before the time fixed for the meeting at which the person named in the instrument proposes to vote, or presented to the Chairman at such meeting. 35. Effect of Death of Appointer or Revocation of Appointment --------------------------------------------------------- A vote cast pursuant to an instrument appointing a proxy shall be valid notwithstanding the previous death of the appointing member (or of his attorney-in-fact, if any, who signed such instrument), or the revocation of the appointment or the transfer of the share in respect of which the vote is cast, provided no written intimation of such death, revocation or transfer shall have been received by the Company or by the Chairman of the meeting before such vote is cast and provided, further, that the appointing member, if present in person at said meeting, may revoke the appointment by means of a writing, oral notification to the Chairman, or otherwise. BOARD OF DIRECTORS 36. Powers of Board of Directors ---------------------------- (a) In General ---------- -34- The management of the business of the Company shall be vested in the Board of Directors, which may exercise all such powers and do all such acts and things as the Company is authorized to exercise and do, and are not hereby or by law required to be exercised or done by the Company in General Meeting. The authority conferred on the Board of Directors by this Article 36 shall be subject to the provisions of the Companies Ordinance, of these Articles and any regulation or resolution consistent with these Articles adopted from time to time by the Company in General Meeting, provided, however, that no such regulation or resolution shall invalidate any prior act done by or pursuant to a decision of the Board of Directors which would have been valid if such regulation or resolution had not been adopted. (b) Borrowing Power --------------- The Board of Directors may from time to time, in its discretion, cause the Company to borrow or secure the payment of any sum or sums of money for the purposes of the Company, and may secure or provide for the repayment of such sum or sums in such manner, at such times and upon such terms and conditions in all respects as it thinks fit, and, in particular, by the issuance of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages, charges, or other securities on the undertaking or the whole or any part of the property of the Company, both present and future, including its uncalled or called but unpaid capital for the time being. (c) Reserves -------- The Board of Directors may, from time to time, set aside any amount(s) out of the profits of the Company as a reserve or reserves for any purpose(s) which the Board of Directors, in its absolute discretion, shall think fit, and may invest any sum so set aside in any manner and from time to time deal with and vary such investments, and dispose of all or any part thereof, and employ any such reserve or any part thereof in the business of the Company without being bound to keep the same separate from other assets of the Company, and may subdivide or redesignate any reserve or cancel the same or apply the funds therein for another purpose, all as the Board of Directors may from time to time think fit. 37. Exercise of Powers of Directors ------------------------------- (a) A meeting of the Board of Directors at which a quorum is present shall be competent to exercise all the authorities, powers and discretions vested in or exercisable by the Board of Directors. (b) Subject to the provisions of Article 74, a resolution proposed at any meeting of the Board of Directors shall be deemed adopted if approved by a majority of the Directors present when such resolution is put to a vote and voting thereon. -35- (c) A resolution in writing signed by all Directors then in office and lawfully entitled to vote thereon (as conclusively determined by the Chairman of the Audit Committee (Va'adat Bikoret), (if any) and in the absence of such determination - by the Chairman of the Board of Directors) or to which all such Directors have given their written consent (by letter, telegram, telex, facsimile, telecopier or otherwise) shall be deemed to have been unanimously adopted by a meeting of the Board of Directors duly convened and held. 38. Delegation of Powers -------------------- (a) The Board of Directors may, subject to the provisions of the Companies Ordinance, delegate any or all of its powers to committees, each consisting of two or more persons (all of whose members must be Directors), and it may from time to time revoke such delegation or alter the composition of any such committee. Any Committee so formed (in these Articles referred to as a "Committee of the Board of Directors"), shall, in the exercise of the powers so delegated, conform to any regulations imposed on it by the Board of Directors. The meetings and proceedings of any such Committee of the Board of Directors shall, mutatis mutandis, be governed by the provisions herein contained for regulating the meetings of the Board of Directors, so far as not superseded by any regulations adopted by the Board of Directors under this Article. Unless otherwise expressly provided by the Board of Directors in delegating powers to a Committee of the Board of Directors, such Committee shall not be empowered to further delegate such powers. (b) With derogating from the provisions of Article 51, the Board of Directors may, subject to the provisions of the Companies Ordinance, from time to time appoint a Secretary to the Company, as well as officers, agents, employees and independent contractors, as the Board of Directors may think fit, and may terminate the service of any such person. The Board of Directors may, subject to the provisions of the Companies Ordinance, determine the powers and duties, as well as the salaries and emoluments, of all such persons, and may require security in such cases and in such amounts as it thinks fit. (c) The Board of Directors may from time to time, by power of attorney or otherwise, appoint any person, company, firm or body of persons to be the attorney or attorneys of the Company at law or in fact for such purpose(s) and with such powers, authorities and discretions, and for such period and subject to such conditions, as it thinks fit, and any such power of attorney or other appointment may contain such provisions for the protection and convenience of persons dealing with any such attorney as the Board of Directors may think fit, and may also authorize any such attorney to delegate all or any of the powers, authorities and discretions vested in him. 39. Number of Directors ------------------- -36- Until otherwise determined by Ordinary Resolution of the Company and subject to Article 74, the Board of Directors of the Company shall consist of not less than three (3) nor more than eight (8) Directors. 40. Appointment and Removal of Directors ------------------------------------ The Company's Board of Directors (the "Board") shall be composed of eight (8) directors, out of whom: two (2) directors (the "Preferred A and B Shares Directors") shall be designated by written notice to the Company by the holders, from time to time, of a majority of the Series A Preferred Shares (including Series A Preferred Shares received upon conversion of Series B Non Voting Preferred Shares) (including all Ordinary Shares received upon conversion of Series A Preferred Shares and Series B Non Voting Preferred Shares); one (1) Director (the "Preferred C Director") shall be designated by written notice to the Company by the holders, from time to time, of a majority of the Series C-1 Preferred Shares (including all Ordinary Shares received upon Conversion of Series C-1 Preferred Shares) (the "Preferred A and B Directors" and the "Preferred C Director" shall be referred to herein collectively as the "Preferred Shares Directors"); two (2) Directors (the "Management Shares Directors") shall be designated by written notice to the Company by the holders, from time to time, of a majority of the Management Shares ("Management Shares" in this Article shall mean the shares held by Samuel HaCohen, Vladimir Morgernstern, Ian Coldwell, Menachem Ish Shalom, Ami Rosenblat, and Yohanan Engelhardt); one (1) Director (the "Ordinary Shares Director") shall be designated by written notice to the Company by the holders, from time to time, of a majority of the Ordinary Shares (including Management Shares but not including Ordinary Shares received upon conversion of Preferred Shares); and one (1) director (the "Seventh Director") shall be designated by written notice to the Company jointly by the holders, from time to time, of a majority of the Ordinary Shares (including Management Shares but not including Ordinary Shares received upon conversion of Preferred Shares) and of the Preferred Shares (including Ordinary Shares received upon conversion of Preferred Shares) (voting as separate classes). If the majority of the Preferred Shares (including Ordinary Shares received upon conversion of Preferred Shares) (as a class) and the majority of the Ordinary Shares (including Management Shares but not including Ordinary Shares received upon conversion of Preferred Shares) (as a class) cannot agree on such a director within a month from the date that either class has suggested the nomination of an individual to the board of directors then the holders of Preferred Shares (including Ordinary Shares received upon conversion of Preferred Shares) shall offer to the holders of Ordinary Shares (including Management Shares but not including Ordinary Shares received upon conversion of Preferred Shares) a list of names of three individuals from whom the holders of Ordinary Shares (including Management Shares but not including Ordinary Shares received upon conversion of Preferred Shares) shall elect one as the Seventh Director; provided however that the Seventh Director shall be an individual who is not associated with or affiliated with the holders of the Preferred Shares (including Ordinary Shares received upon conversion of Preferred Shares) unless, and for as long as, the holders of the Ordinary Shares (including Management Shares but not including Ordinary -37- Shares received upon conversion of Preferred Shares) do not object to such association or affiliation; and one (1) director (the "Clal Director") shall be designated by written notice to the Company by the Clal Shareholders for as long as the Clal Shareholders have not sold more than (i) 25% of the shares issuable thereto upon conversion of the Convertible Debentures issued thereto on the date these Articles first became effective (the "Convertible Debentures") or (ii) 25% of their holdings in the Company's share capital as of the date hereof. For the purposes of this Section the terms associate and affiliate shall have the same meaning ascribed to such term pursuant to the United States Securities Act of 1933 and Exchange Act of 1934. Any Director(s) may only be removed from office by the holders of the class(es) of shares that designated such Director, and any vacancy, however created, in the Board of Directors may only be filled by the holders of the class(es) of shares that designated the previous incumbent of such vacancy; provided however that the Seventh Director may be removed by either the majority of the Ordinary Shares (including Management Shares but not including Ordinary Shares received upon conversion of Preferred Shares) and/or by the majority of the Preferred Shares (including Ordinary Shares received upon conversion of Preferred Shares) and his replacement shall be designated as detailed above. Any such act shall become effective on the date fixed in such notice, or upon the delivery thereof to the Company, whichever is later. Notwithstanding anything to the contrary herein, the right to appoint a Management Shares Director shall be of no force and effect if the holders of the Management Shares sell more than 50% of their holding of shares in the Company (on a fully diluted basis and taking into account all their options and treating the expiration or termination of options as sales) on the date that these Articles first became effective. The STAR Shareholders and the Jerusalem Pacific Ventures (1994) L.P., ATV, and the Clal Shareholders (as such terms are defined in Schedule 1 and Schedule 4 to that certain Amendment and Restatement to Shareholders Agreement entered into by and among certain shareholders of the Company dated as of April 5, 2000, the "Shareholders Agreement"), shall each, at any time that any such group does not actually designate a director to the Board, be entitled to designate a non-voting observer to the Company's Board. Such observer shall be entitled to attend all Board meetings, shall be entitled to receive all documents and information provided to any director, but will not be entitled to vote at any Board meeting. Any observer may only be removed from office by the holders who designated such observer. Should such group's holding of the Company's shares be reduced so that such holder holds less than four percent (4%) of the issued and outstanding share capital of the Company (assuming for purposes of such determination, that all options and warrants to purchase the Company's shares have been exercised), then such group will cease to possess the right to designate an observer, and any observer so designated will automatically and without further action be removed from office. -38- In addition, in the event that the Bessemer Venture Partners IV L.P designates, according to the provisions of the Shareholders Agreement, a person to the Company's Board who is not affiliated with the Bessemer Shareholders (as defined in Schedule 2 of the Shareholders Agreement) or any of them and such designee is approved by a majority of the Company's Board (excluding an existing director designated by the Bessemer Venture Partners IV L.P) then the Bessemer Shareholders (as such a term is defined in Schedule 2 of the Shareholders Agreement) would be entitled to designate a non-voting observer to the Company's Board; provided, however, that such approval by a majority of the other directors shall in no way be a condition to such designee becoming a director or serving as a director. Such observer shall be entitled to attend all Board meetings, shall be entitled to receive all documents and information provided to any director, but will not be entitled to vote at any Board meeting. Such observer may only be removed from office by the holders who designated such observer. Should the Bessemer Shareholders' holdings of the Company's shares be reduced so that they hold less than four percent (4%) of the issued and outstanding share capital of the Company (assuming for purposes of such determination, that all options and warrants to purchase the Company's shares have been exercised) then such group will cease to possess the right to designate an observer, and any observer so designated will automatically and without further action be removed from office. GE Capital shall be entitled to designate a non-voting observer to the Company's Board. Such observer, who shall be selected by GE Capital and approved by the Company's Board (which approval shall not be unreasonably withheld), shall be entitled to attend all Board meetings, shall be entitled to receive all documents and information provided to any director, but will not be entitled to vote at any Board meeting. Such observer may only be removed from office by GE Capital. Should the holdings of GE Capital (together with its permitted transferees pursuant to Article 20(c)(iv) be reduced so that such holders hold in the aggregate less than two percent (2%) of the issued and outstanding share capital of the Company (assuming for purposes of such determination, that all options and warrants to purchase the Company's shares have been exercised), then such group will cease to possess the right to designate an observer, and any observer so designated will automatically and without further action be removed from office. The documents and other information received by the GE Capital observer pursuant to this paragraph shall be used by such observer and GE Capital and its affiliates and permitted transferees pursuant to Article 20(c)(iv), solely for purposes of monitoring the performance and prospects of, and managing their investment in, the Company. 41. Qualification of Directors -------------------------- No person shall be disqualified as a Director by reason of his not holding shares in the Company or by reason of his having served as a Director in the past. 42. Continuing Directors in the Event of Vacancies ---------------------------------------------- In the event of one or more vacancies in the Board of Directors, the continuing Directors may continue to act in every matter, and, pending the filling of any -39- vacancy pursuant to the provisions of Article 40, may temporarily fill any such vacancy until the holders of shares eligible to designate a director to fill such vacancy have done so. 43. Vacation of Office ------------------ (a) The office of a Director shall be vacated, ipso facto, upon his death, or if he be found lunatic or become of unsound mind, or if he become bankrupt, or, if the Director is a company, upon its winding-up. (b) The office of the Director shall be vacated by his written resignation. Such resignation shall become effective on the date fixed therein, or upon the delivery thereof to the Company, whichever is later. 44. Remuneration of Directors ------------------------- No director shall be paid any remuneration by the Company for his services as Director except as may be approved pursuant to the provisions of the Companies Ordinance. 45. Conflict of Interests --------------------- Subject to the provisions of the Companies Ordinance, the Company may enter into any contract or otherwise transact any business with any Director in which contract or business such Director has a personal interest, directly or indirectly; and may enter into any contract of otherwise transact any business with any third party in which contract or business a Director has a personal interest, directly or indirectly. 46. Alternate Directors ------------------- (a) A Director may, by written notice to the Company, appoint an alternate for himself (in these Articles referred to as "Alternate Director"), remove such Alternate Director and appoint another Alternate Director in place of any Alternate Director appointed by him whose office has been vacated for any reason whatsoever. Unless the appointing Director, by the instrument appointing an Alternate Director or by written notice to the Company, limits such appointment to a specified period of time or restricts it to a specified meeting or action of the Board of Directors, or otherwise restricts its scope, the appointment shall be for an indefinite period, and for all purposes. (b) Any notice given to the Company pursuant to Article 46(a) shall become effective on the date fixed therein, or upon the delivery thereof to the Company, whichever is later. (c) An Alternate Director shall have all the rights and obligations of the Director who appointed him, provided, however, that he may not in turn appoint an alternate for himself (unless the instrument appointing him otherwise expressly provides), and provided further that an Alternate -40- Director shall have no standing at any meeting of the Board of Directors or any committee thereof while the Director who appointed him is present. (d) Any natural person, whether or not he be a member of the Board of Directors, may act as an Alternate Director. One person may act as Alternate Director for several directors, and in such event he shall have a number of votes (and shall be treated as the number of persons for purposes of establishing a quorum) equal to the number of Directors for whom he acts as Alternate Director. If an Alternate Director is also a Director in his own right his rights as an Alternate Director shall be in addition to his rights as a Director. (e) An Alternate Director shall alone be responsible for his own acts and defaults and he shall not be deemed the agent of the Director(s) who appointed him. (f) The office of an Alternate Director shall be vacated under the circumstances, mutatis mutandis, set forth in Article 43, and such office shall ipso facto be vacated if the Director who appointed such Alternate Director ceases to be a Director. PROCEEDINGS OF THE BOARD OF DIRECTORS 47. Meetings -------- (a) The Board of Directors may meet and adjourn its meetings and otherwise regulate such meetings and proceedings as the Directors think fit. Subject to all of the other provisions of these Articles concerning meetings of the Board of Directors, the Board of Directors may meet by telephone conference call so long as each Director participating in such call can hear, and be heard by, each other Director participating in such call. (b) Any Director may at any time, and the Secretary, upon the request of such Director, shall, convene a meeting of the Board of Directors, but not less than three (3) business days' written notice shall be given of any meeting, unless such notice is waived in writing by all of the Directors as to a particular meeting. 48. Quorum ------ Until otherwise unanimously decided by the Board of Directors, a quorum at a meeting of the Board of Directors shall be constituted by the presence (in person, via telephone conference call, or by proxy) of a majority of the Directors then in office who are lawfully entitled to participate in the meeting (as conclusively determined by the Chairman of the Audit Committee (if any) and in the absence of such determination - by the Chairman of the Board of Directors), but shall not be less than three. -41- If within thirty (60) minutes from the time appointed for the meeting a quorum is not present, the meeting shall be dissolved. 49. Chairman of the Board of Directors ---------------------------------- The Board of Directors may from time to time elect one of its members to be the Chairman of the Board of Directors, remove such Chairman from office and appoint another in its place. The Chairman of the Board of Directors shall preside at every meeting of the Board of Directors, but if there is no such Chairman, or if at any meeting he is not present within fifteen (15) minutes of the time fixed for the meeting, or if he is unwilling to take the chair, the Directors present shall choose one of their number to be the chairman of such meeting. The office of the Chairman shall not, by itself, entitle the holder thereof to vote at any General Meeting nor shall it entitle such holder to a second or casting vote. 50. Validity of Acts Despite Defects -------------------------------- Subject to the provisions of the Companies Ordinance, all acts done bona fide at any meeting of the Board of Directors, or of a Committee if the Board of Directors, or by any person(s) acting as Director(s), shall, notwithstanding that it may afterwards be discovered that there was some defect in the appointment of the participants in such meetings or any of them or any person(s) acting as aforesaid, or that they or any of them were disqualified, be as valid as if there were no such defect or disqualification. GENERAL MANAGER 51. The General Manager ------------------- The Board of Directors may from time to time appoint one or more persons, whether or not Directors, as General Manager(s) of the Company and may confer upon such person(s), and from time to time modify or revoke, such title(s) (including Managing Director, Director General or any similar or dissimilar title) and such duties and authorities of the Board of Directors as the Board of Directors may deem fit, subject to such limitations and restrictions as the Board of Directors may from time to time prescribe. Such appointment(s) may be either for a fixed term or without any limitation of time, and the Board of Directors may from time to time (subject to the provisions of the Companies Ordinance and of any contract between any such person and the Company) fix his or their salaries and emoluments, remove or dismiss him or them from office and appoint another or others in his or their place or places. MINUTES 52. Minutes ------- -42- (a) Minutes of each General Meeting and of each meeting of the Board of Directors shall be recorded and duly entered in books provided for that purpose. Such minutes shall, in all events, set forth the names of the persons present at the meeting and all resolutions adopted thereat. (b) Any minutes as aforesaid, if purporting to be signed by the chairman of the meeting or by the chairman of the next succeeding meeting, shall constitute prima facie evidence of the matters recorded therein. DIVIDENDS 53. Declaration of Dividends ------------------------ Subject to Article 74, the Board of Directors may from time to time declare and cause the Company to pay, such interim dividend as may appear to the Board of Directors to be justified by the profits of the Company. The final dividend in respect of any fiscal period shall be proposed by the Board of Directors and shall be payable only after the same has been approved by Ordinary Resolution of the Company, but no such resolution shall provide for the payment of an amount exceeding that proposed by the Board of Directors for the payment of such final dividend, and no such resolution or any failure to approve a final dividend shall affect any interim dividend theretofore declared and paid. The Board of Directors shall determine the time for payment of such dividends, both interim and final, and the record date for determining the shareholders entitled thereto. 54. Funds Available for Payment of Dividends ---------------------------------------- No dividend shall be paid otherwise than out of the profits of the Company. 55. Amount Payable by way of Dividends ---------------------------------- Subject to the rights of the holders of shares with special rights as to dividends, any dividend paid by the Company shall be allocated among the members entitled thereto in proportion to the nominal value of their respective holdings of the shares in respect of which such dividend is being paid. 56. Interest -------- No dividend shall carry interest as against the Company. 57. Payment in Specie ----------------- Upon the recommendation of the Board of Directors approved by Ordinary Resolution of the Company, a dividend may be paid, wholly or partly, by the distribution of specific assets of the Company or by distribution of paid up shares, debentures or debenture stock of the Company or of any other companies, or in any one or more of such ways. 58. Capitalization of Profits, Reserves, etc. ----------------------------------------- -43- Upon the recommendation of the Board of Directors approved by Ordinary Resolution of the Company, the Company: (a) may cause any moneys, investments, or other assets forming part of the undivided profits of the Company, standing to the credit of a reserve fund, or to the credit of a reserve fund for the redemption of capital, or in the hands of the Company and available for dividends, or representing premiums received on the issuance of shares and standing to the credit of the share premium account, to be capitalized and distributed among such of the shareholders as would be entitled to receive the same if distributed by way of dividend and in the same proportion, on the footing that they become entitled thereto as capital, or may cause any part of such capitalized fund to be applied on behalf of such shareholders in paying up in full, either at par or at such premium as the resolution may provide, any unissued shares or debentures or debenture stock of the Company which shall be distributed accordingly, in payment, in full or in part, of the uncalled liability on any issued share or debentures or debenture stock; and (b) may cause such distribution or payment to be accepted by such shareholders in full satisfaction of their interest in the said capitalized sum. 59. Implementation of Powers under Articles 57 and 58 ------------------------------------------------- For the purpose of giving full effect to any resolution under Articles 57 or 58, and without derogating from the provisions of Article 8(b) hereof, the Board of Directors may settle any difficulty which may arise in regard to the distribution as it thinks expedient, and, in particular, may issue fractional certificates, and may fix the value for distribution of any specific assets, and may determine that cash payments shall be made to any members upon the footing of the value so fixed, or that fractions of less value than the nominal value of one share may be disregarded in order to adjust the rights of all parties, and may vest any such cash, shares, debentures, debenture stock or specific assets in trustees upon such trusts for the persons entitled to the dividend or capitalized fund as may seem expedient to the Board of Directors. Where requisite, a proper contract shall be filed in accordance with Section 130 of the Companies Ordinance, and the Board of Directors may appoint any person to sign such contract on behalf of the persons entitled to the dividend or capitalized fund. 60. Deductions from Dividends ------------------------- The Board of Directors may deduct from any dividend or other moneys payable to any member in respect of a share any and all sums of money then payable by him to the Company on account of calls or otherwise in respect of shares of the Company and/or on account of any other matter of transaction whatsoever. 61. Retention of Dividends ---------------------- -44- (a) The Board of Directors may retain any dividend or other moneys payable or property distributable in respect of a share on which the Company has a lien, and may apply the same in or toward satisfaction of the debts, liabilities, or engagements in respect of which the lien exists. (b) The Board of Directors may retain any dividend or other moneys payable or property distributable in respect of a share in respect of which any person is, under Articles 22 or 23, entitled to become a member, or which any person is, under said Articles, entitled to transfer, until such person shall become a member in respect of such share or shall transfer the same. 62. Unclaimed Dividends ------------------- All unclaimed dividends or other moneys payable in respect of a share may be invested or otherwise made use of by the Board of Directors for the benefit of the Company until claimed. The payment by the Directors of any unclaimed dividend or such other moneys into a separate account shall not constitute the Company a trustee in respect thereof, and any dividend unclaimed after a period of seven (7) years from the date of declaration of such dividend, and any such other moneys unclaimed after a like period from the date the same were payable, shall be forfeited and shall revert to the Company, provided, however, that the Board of Directors may, at its discretion, cause the Company to pay any such dividend or such other moneys, or any part thereof, to a person who would have been entitled thereto had the same not reverted to the Company. 63. Mechanics of Payment -------------------- Any dividend or other moneys payable in cash in respect of a share may be paid by check or warrant sent through the post to, or left at, the registered address of the person entitled thereto or by transfer to a bank account specified by such person (or, if two or more persons are registered as joint holders of such share or are entitled jointly thereto in consequence of the death or bankruptcy of the holder or otherwise, to any one of such persons or to his bank account), or to such person and at such address as the person entitled thereto may be writing direct. Every such check or warrant shall be made payable to the order of the person to whom it is sent, or to such person as the person entitled thereto as aforesaid may direct, and payment of the check or warrant by the banker upon whom it is drawn shall be a good discharge to the Company. Every such check or warrant shall be sent at the risk of the person entitled to the money represented thereby. 64. Receipt from a Joint Holder --------------------------- If two or more persons are registered as joint holders of any share, or are entitled jointly thereto in consequence of the death or bankruptcy of the holder or otherwise, any one of them may give effectual receipts for any dividend or other moneys payable or property distributable in respect of such share. ACCOUNTS -45- 65. Books of Account ---------------- The Board of Directors shall cause accurate books of account to be kept in accordance with the provisions of the Companies Ordinance and of any other applicable law. Such books of account shall be kept at the Registered Office of the Company, or at such other place or places as the Board of Directors may think fit, and they shall always be open to inspection by all Directors. No member, not being a Director, shall have any right to inspect any account or book or other similar document of the Company, except as conferred by law or authorized by the Board of Directors. 66. Audit ----- At least once in every fiscal year the accounts of the Company shall be audited and the correctness of the profit and loss account and balance sheet certified by one or more duly qualified auditors. 67. Auditors -------- The appointment, authorities, rights and duties of the auditor(s) of the Company, shall be regulated by applicable law, provided, however, that in exercising its authority to fix the remuneration of the auditor(s), the members in General Meeting may, by Ordinary Resolution, act (and in the absence of any action in connection therewith shall be deemed to have so acted), to authorize the Board of Directors to fix such remuneration subject to such criteria or standards, if any, as may be provided in such Ordinary Resolution, and if no such criteria or standards are so provided, such remuneration shall be fixed in an amount commensurate with the volume and nature of the services rendered by such auditor(s). BRANCH REGISTERS 68. Branch Registers ---------------- Subject to and in accordance with the provisions of Sections 72 to 81, inclusive, of the Companies Ordinance and to all orders and regulations issued thereunder, the Company may cause branch registers to be kept in any place outside Israel as the Board of Directors may think fit, and, subject to all applicable requirements of law, the Board of Directors may from time to time adopt such rules and procedures as it may think fit in connection with the keeping of such branch registers. RIGHTS OF SIGNATURE AND STAMP 69. Rights of Signature and Stamp ----------------------------- -46- (a) The Board of Directors shall be entitled to authorize any person or persons (who need not be Directors) to act and sign on behalf of the Company, and the acts and signature of such person(s) on behalf of the Company shall bind the Company insofar as such person(s) acted and signed within the scope of his or their authority. (b) The Company shall have at least one official stamp. (c) The Company may exercise the powers conferred by Section 102 of the Companies Ordinance regarding a seal for use abroad, and such powers shall be vested in the Board of Directors. -47- NOTICES 70. Notices ------- (a) Any written notice or other document may be served by the Company on any member either personally or by sending it by prepaid registered mail (Courier Services such as Fed-ex if sent to a place outside Israel) addressed to such member at his address as described in the Register of Members or such other address as he may have designated in writing for the receipt of notices and other documents. Any written notice or other document may be served by any member upon the Company by tendering the same in person to the Secretary or the General Manager of the Company at the principal office of the Company or by sending it by prepaid registered mail (airmail if posted outside Israel) to the Company at its Registered Address. Any such notice or other document, shall be deemed to have been served on two (2) business days after it has been posted (seven (7) business days if sent to a place not located on the same continent as the place from where it was posted), or when actually received by the addressee if sooner than two days or seven days, as the case may be, after it has been posted, or when actually tendered in person, to such member (or to the Secretary or the General Manager), provided, however, that notice may be sent by cablegram, telex, telecopier (facsimile) or other electronic means and confirmed by registered mail as aforesaid, and such notice shall be deemed to have been given twenty-four (24) hours after such cablegram, telex, telecopy or other electronic communication has been sent or when actually received by such member (or by the Company), whichever is earlier. If a notice is, in fact, received by the addressee, it shall be deemed to have been duly served, when received, notwithstanding that it was defectively addressed or failed, in some respect, to comply with the provisions of this Article 70(a). (b) All notices to be given to the members shall, with respect to any share to which persons are jointly entitled, be given to whichever of such persons is named first in the Register of Members, and any notice so given shall be sufficient notice to the holders of such share. (c) Any member whose address is not described in the Register of Members, and who shall not have designated an address for the receipt of notices, shall not be entitled to receive any notice from the Company. INSURANCE AND INDEMNITY 71. Insurance and Indemnity ----------------------- (a) For purposes of these Articles, the term "Office Holder" shall mean every Director and every officer of the Company, including, without limitation, -48- each of the persons defined as "Nosei Misra" in Chapter D'1 of the Companies Ordinance. (b) Subject to the provisions of the Companies Ordinance, the Company may enter into a contract for the insurance of all or part of the liability of any Office Holder, in respect of one of the following: (i) a breach of his duty of care to the Company or to another person; (ii) a breach of his fiduciary duty to the Company, provided that the Office Holder acted in good faith and had reasonable cause to assume that such act would not prejudice the interests of the Company; (iii) a financial obligation imposed on him in favor of another person in respect of an act performed in his capacity as an Office Holder. (c) Subject to the provisions of the Companies Ordinance, the Company may indemnify an Office Holder in respect of one of the following: (i) a financial obligation imposed on him in favor of another person by a court judgment, including a compromise judgment or an arbitrator's award approved by court, in respect of an act performed in his capacity as an Office Holder; (ii) reasonable litigation expenses, including attorneys' fees, expended by an Office Holder or charged to him by a court, in a proceeding instituted against him by the Company or on its behalf or by another person, or in a criminal charge from which he was acquitted, all in respect of an act performed in his capacity as an Office Holder. (d) The provisions of Articles 71(a), 71(b) and 71(c) above are not intended, and shall not be interpreted, to restrict the Company in any manner in respect of the procurement of insurance and/or in respect of indemnification (i) in connection with any person who is not an Office Holder, including, without limitation, any employee, agent, consultant or contractor of the Company who is not an Office Holder, and/or (ii) in connection with any Office Holder to the extent that such insurance and/or indemnification is not specifically prohibited under law; provided that if the Company has an Audit Committee, the procurement of any such insurance and/or the provision of any such indemnification shall be approved by the Audit Committee (if any) of the Company. -49- WINDING UP 72. Winding Up ---------- If the Company be wound up on liquidation or dissolution, then, subject to applicable law, all the assets of the Company available for distribution among the members shall be distributed to them in the following order and preference: (a) First, each Series C Preferred Share shall entitle its holder to receive a per share distribution in the amount of its Original Purchase Price (as adjusted for share combinations or subdivisions or any other recapitalization of the Company's shares) plus interest from the date of issuance of such shares to the date of such distribution at an annual rate equal to LIBOR plus 1.5% prior to any payments with respect to any other Preferred Shares or Ordinary Shares. In the event the assets of the Company available for distribution shall be insufficient to make such per share distribution, all of such assets shall be distributed among the holders of Series C Preferred Shares in proportion to the full preference such holders would otherwise be entitled to receive; (b) Second, after the payments of all amounts pursuant to Article 72(a) above, each Series A Preferred Share and each Series B Non Voting Preferred Share shall entitle its holder to a per share distribution in the amount of two United States Dollars and thirty three cents (US$2.33) plus interest from the date of issuance of such Preferred Shares to the date of such distribution at an annual rate equal to LIBOR plus 1.5%. In the event the assets of the Company available for distribution shall be insufficient to make such per share distribution, all of such assets shall be distributed among the holders of the Series A Preferred Shares and Series B Non Voting Preferred Shares in proportion to the full preference such holders would otherwise be entitled to receive; (c) Third, after payments of all amounts pursuant to Articles 72(a) and 72(b) above, the Series A Preferred Shares, Series B Non Voting Preferred Shares and Series C Preferred Shares then participate with the holders of the Ordinary Shares on an as converted basis in any proceeds remaining after all liquidation rights of the Preferred Shares are met. (d) Notwithstanding the provisions of Articles 72(b) and 72(c) above, if the total value of all the assets to be distributed per Ordinary Share (assuming for purposes of such calculation the conversion of all Series A Preferred Shares, Series B Non Voting Preferred Shares and Series C Preferred Shares into Ordinary Shares) is equal to, or greater than twice the Original C-2 Purchase Price (adjusted for share combinations or subdivisions or other recapitalizations of the Company's shares), then the Series A Preferred Shares, Series B Non Voting Preferred Shares, Series C Preferred Shares, and the Ordinary Shares shall entitle their holders to a per share distribution in proportion to the respective percentage holdings of all of the Ordinary Shares and the Ordinary Shares into which all Series -50- A Preferred Shares, Series B Non Voting Preferred Shares and Series C Preferred Shares could, at the time of such distribution, be converted and Article 72(b) and 72(c) above shall not have any force or effect. (e) Notwithstanding the provisions of Articles 72(a), 72(b), 72(c) and 72(d) above, if the total value of the assets to be distributed per Ordinary Share (assuming for purposes of such calculation the conversion of all Preferred Shares into Ordinary Shares) is equal to or greater than seven United States Dollars and eighty cents ($7.80) and less than twice the Original Series C-2 Purchase Price (adjusted for share combinations or subdivisions or other recapitalizations of the Company's shares), then following the distribution to the Series C Preferred Shares as detailed in Article 72(a) above, the Series A Preferred Shares, Series B Non Voting Preferred Shares, Series C Preferred Shares and the Ordinary Shares shall entitle their holders to a per share distribution in proportion to the respective percentage holdings of all of the Ordinary Shares and the Ordinary Shares into which all Preferred Shares could, at the time of such distribution, be converted and the provisions of Articles 72(a), 72(b), 72(c) and 72(d) above shall have no force or effect. (f) Notwithstanding the provisions of Articles 72(a), 72(b), 72(c), 72(d) and 72(e) above, if the total value of the assets to be distributed per Ordinary Share (assuming for purposes of such calculation the conversion of all Preferred Shares into Ordinary Shares) is equal to or greater than six United States Dollars and ninety-nine cents ($6.99) and less than seven United States Dollars and eighty cents ($7.80) (adjusted for share combinations or subdivisions or other recapitalizations of the Company's shares), then following the distribution to the Series C Preferred Shares as detailed in Article 72(a) above, the Series A Preferred Shares, Series B Non Voting Preferred Shares, Series C Preferred Shares and the Ordinary Shares shall entitle their holders to a per share distribution in proportion to the respective percentage holdings of all of the Ordinary Shares and the Ordinary Shares into which all Preferred Shares could, at the time of such distribution, be converted and the provisions of Articles 72(a), 72(b), 72(c), 72(d) and 72(f) above shall have no force or effect. 73. Deemed Winding Up ----------------- For purposes of Article 72, in addition to any liquidation, dissolution, or winding up of the Company under applicable law, the Company shall be deemed to be wound up: (a) in the event of a consolidation, merger or reorganization of the Company with or into, or a sale of all or substantially all of the Company's assets, or substantially all of the Company's issued and outstanding share capital, to, any other company, or any other entity or person, other than a wholly-owned subsidiary of the Company, excluding a transaction in which shareholders of the Company prior to the transaction will maintain voting control of the resulting entity after the transaction (provided, however, that shares of the surviving entity held by shareholders of this Company acquired by means other than the exchange or conversion of the shares of this Company -51- shall not be used in determining if the stockholders of this Company own more than fifty percent (50%) of the voting power of the surviving entity (or its parent), but shall be used for determining the total outstanding voting power of the surviving entity); or (b) in the event of any transaction or series of related transactions in which more than fifty percent (50%) of the outstanding share capital of the Company following such transaction or series of related transactions is held by a shareholder or group of shareholders (the "New Control Entity") that held less than fifty percent (50%) of the outstanding share capital of the Company prior to such transaction or series of related transactions provided however that this Article 73 shall not apply to a transaction or series or related transactions in which the New Control Entity purchases Preferred Shares (or Ordinary Shares received upon conversion of Preferred Shares) constituting 35% or more of the Company's issued and outstanding share capital. Upon any deemed winding up of the Company as described in this Article 73, at the closing of the transaction at which the Company is deemed for purposes of this Article 73 to be wound up, the holders of the Preferred Shares shall be paid in cash, securities or a combination thereof, an amount equal to the amount per share which would be payable to the holders of Preferred Shares, respectively, pursuant to Article 72 if all consideration being received by the Company and its members in connection with such transaction were being distributed in a liquidation of the Company, and shall be entitled by a majority vote to cause the immediate winding-up of the Company. MAJOR DECISIONS 74. Major Decisions --------------- (a) Prior to the closing of an initial public offering of the Company's shares, all of the following decisions of the Company will be brought first to the Board of Directors of the Company for its approval and, if such decision may be taken by the Shareholders, require the consent of the holders of at least 662/3% of the Preferred Shares and the consent of the holders of at least 662/3% of the outstanding shares of Ordinary Shares, each voting as a separate class. Any of the following decisions shall not be taken by the Company's Board of Directors without the consent of one of the director's designated by the holders of the Preferred Shares and one of the directors designated by the holders of Management Shares (as defined in Article 40 above). (i) adopt any amendment of the Memorandum or Articles of Association of the Company, or any other action, which would have the effect of amending the rights, preferences or privileges of the Preferred Shares; (ii) authorize or issue any equity securities of any class with rights equal to or superior to those of the Preferred Shares, or other securities convertible into such securities, or enter into any contract or grant any option for the issue of any such securities; -52- (iii) merge with or consolidate into any corporation, firm or entity, or sell, lease or otherwise dispose of all or substantially all of its assets; (iv) increase the number of directors above eight (8); (v) declare or pay any dividend or other distribution of cash, or other assets to the Company's shareholders in their capacity as such; and (vi) appoint or remove from office either of the Company's legal advisers and/or auditors. (B) Prior to the closing of the IPO, no amendment of the Articles of Association amending the rights, preferences or privileges of the Series C Preferred Shares shall be effective unless the holders of seventy five percent (75%) of the then outstanding Series C Preferred Shares shall have first consented in writing to such amendment. For the avoidance of doubt, the creation of any new class of shares with equal or superior rights to the Series C Preferred Shares and/or the issuance of any additional shares with equal or superior rights to the Series C Preferred Shares shall not constitute for itself an amendment of the rights, preferences or privileges of the Series C Preferred Shares, but the authorization of additional Series C Preferred Shares not authorized at the date these Articles of Association first became effective, without limitation, will constitute an amendment of the rights, preferences and privileges of the Series C Preferred Shares. For the purposes of this Article 74 the holders of the Convertible Debentures shall be entitled to vote as if the Convertible Debentures held thereby have been converted into Series C-2 Preferred Shares at a conversion price of $10 per share. -53- Exhibit A This Exhibit A to the Articles of RTS Software Ltd., an Israeli company (the "Company"), is aimed to serve as an illustration of several scenarios under which Series C Preferred Shares would be entitled to antidilution adjustments pursuant to the Company's Articles of Association, as amended, and how such antidilution protection would be calculated. All of the scenarios illustrated by this Exhibit A assume that the initial Series Conversion Price in effect is $3.90 and that the outstanding share capital (on a fully diluted basis including any options to purchase Ordinary Shares, securities by their terms convertible into or exchangeable for Ordinary Shares or options to purchase such convertible or exchangeable securities) of the Company is as follows: 2,517,520 Ordinary Shares 3,951,740 Series A Preferred Shares 650,000 Series B Preferred Shares 2,651,667 Series C Preferred Shares 1,558,440 Warrants to purchase Series A Preferred Shares 216,670 Warrants to purchase Series B Preferred Shares 31,795 Warrants to purchase Series C Preferred Shares 1,862,435 Existing Options to Purchase Ordinary Shares --------- 13,440,267 Fully-diluted shares outstanding. Scenario 1: Assume the Company issues 1,000,000Additional Shares at a purchase - ---------- price of U.S. $3.75 per share. Result: The Series C Conversion Price would be adjusted according to Article 5(d)(i)(A)(b)(i) to be $3.75. Accordingly, 1.04 Ordinary Shares would then be issuable upon the conversion of each Series C Preferred Share, since the Original Issue Price ($3.90) divided by the Conversion Price ($3.75) equals 1.04. -54- Scenario 2: Assume the Company issues 1,000,000 Additional Shares at a purchase - ---------- price of U.S. $3.00 per share. Result: The Series C Conversion Price would be adjusted according to Article 5(d)(i)(A)(b)(ii) in two steps: First: to $3.50; and then Second: (13,440,267 x $3.50) + (1,000,000 x $3.00) = $3.46538 = New Series C ------------------------------------------ -------- 13,440,267 + 1,000,000 Conversion Price Accordingly, 1.12542 Ordinary Shares would then be issuable upon the conversion of each Series C Preferred Share, since the Original Issue Price ($3.90) divided by the Conversion Price ($3.46538) equals 1.12542. Scenario 3: Assuming that following the issuance of 1,000,000 Additional Shares - ---------- at a purchase price of U.S. $3.00 as described in Scenario 2, the Company then grants after February 26, 1998 options (to the extent then exercisable) to purchase 400,000 Ordinary Shares to employees in non-financing transactions. Assuming none of the 1,862,435 Existing Options have been terminated without exercise, such grant of options to purchase 400,000 Ordinary Shares is 250,000 Ordinary Shares in excess of the "Employee Reserve" (400,000 minus 150,000 equals 250,000). Result: The Series C Conversion Ratio would be 1.12542 (as described in Scenario 2 above) and then, as a result of the employee option grants in excess of the Employee Reserve, the Adjustment would be calculated according to Article 5(d)(i)(A)(b)(iii) as follows: Adjustment = 0.00091 x (250,000 / 10,000) = 0.02275 Accordingly, 1.14817 Ordinary Shares would then be issuable upon the conversion of each Series C Preferred Share, which is the result of dividing the Series C Original Issue Price (3.90) by the revised Series C Conversion Price ($3.46441, as calculated above in Scenario 2) and then adding the Adjustment (0.02275, as calculated above) as follows: ($3.90 / $3.46538) + 0.02275 = 1.14817 For the avoidance of doubt, the Adjustment referred to in this Scenario 3 would be added to the applicable Series C Shares Conversion Ratio only upon the conversion of Series C Preferred Shares into Ordinary Shares and not prior to such time. EX-3.3 5 0005.txt AMENDED ARTICLES OF ASSOC. OF REGISTRANT Exhibit 3.3 ----------- THE COMPANIES LAW- 1999 A COMPANY LIMITED BY SHARES ARTICLES OF ASSOCIATION OF VIRYANET LTD. PRELIMINARY 1. In these Articles, unless the context otherwise requires: "these Articles" shall mean these Articles of Association of the Company as shall be amended from time to time; "Auditors" shall mean the auditors of the Company, from time to time; The "Board" shall mean the Company's board of directors; The "Company" shall mean ViryaNet Ltd.; "Director" shall mean a director of the Company, form time to time; "External Directors" shall mean directors appointed and serving in accordance with Sections 239 through 249 of the Law; The "Law" shall mean the Companies Law, 5759-1999, as it may be amended from time to time, and any regulations promulgated thereunder; "Month" shall mean a Gregorian month; The "Office" shall mean the registered Office of the Company as it shall be from time to time; "Office Holder" shall mean every director and every other person defined, under the Law as a "Nosei Misra," including specified executive officers of the Company; The "Ordinance" shall mean the Companies Ordinance [New Version] 1983, as amended, and any regulations promulgated thereunder, and those provisions of the Ordinance which are still in effect from time to time; The "Register" shall mean the Register of Shareholders that is to be kept pursuant to Section 127 of the Law or, if the Company shall keep branch registers, any such branch register, as the case may be; A "Shareholder" shall mean any person or entity that is the owner of at least one share, or any fraction thereof, in the Company, as registered in the Register; "Writing" shall mean handwriting, typewriting, facsimile, print, lithographic printing and any other mode or modes of presenting or reproducing words in visible form; "Year" shall mean a Gregorian year. In these Articles, subject to this Article and unless the context otherwise requires, expressions defined in the Law or any modification thereof in force at the date on which these Articles become binding on the Company, shall have the meaning so defined; and words importing the singular shall include the plural, and vice versa; words importing the masculine gender shall include the feminine; and words importing persons shall include companies, partnerships, associations and all other legal entities. The titles of the Articles or of a chapter containing a number of Articles are not part of the Article. In the event that an Article has been added to these Articles which contradicts an original Article found in these Articles, the Articles added shall take precedence. LIMITED LIABILITY AND COMPANY OBJECTIVES 2. The Company is a public company as such term is defined in Section 1 of the Law. The liability of the Company's shareholders is limited and accordingly each shareholder's responsibility for the Company's obligations shall be limited to the payment of the par value of the shares held by such shareholder, subject to the provisions of these Articles and the Law. 3. The Company's objectives are to carry on any business and do any act which are not prohibited by law. The Company may also make contributions of reasonable sums to worthy purposes even if such contributions are not made on the basis of business considerations. CAPITAL 4. The share capital of the Company shall consist of NIS 3,500,000 consisting of 35,000,000 Ordinary Shares (the "Ordinary Shares"), each having a nominal value of NIS 0.1. The powers, preferences, rights, restrictions, and other matters relating to the Ordinary Shares are as set forth in the following Articles. Warrants and options shall not be considered as shares for purposes of these Articles. The Ordinary Shares all rank pari passu in all respects except as set forth in the warrant itself. 5. Subject to the Law and these Articles and to the terms of any resolution creating new shares, the unissued shares from time to time shall be under the control of the Board which may, subject as aforesaid, allot the same to such persons, against cash, or for such other considerations which is not cash, with such restrictions and conditions, in excess of their nominal value, or at their nominal value, or at a discount to their nominal value, and at such times as the Board shall deem appropriate. Subject as aforesaid, the Board shall have the power to cause the Company to grant to any person the option to acquire from the Company any unissued shares or issue to any person other securities convertible or exercisable to or rights to acquire shares or other securities of the Company, and on such terms as the Board shall deem appropriate. -2- 6. The Board shall have the power, to the extent permitted under the Law and these Articles, to cause the Company to purchase shares of the Company during such period, for such consideration and on such terms as the Board shall deem fit. 7. The Company shall not issue bearer shares or exchange a share certificate for a bearer share certificate. 8. Subject to the Law and these Articles, and without prejudice to any special rights previously conferred upon the holders of any existing shares or class of shares, the Company may, from time to time, create shares with such preferential, deferred, qualified or other special rights, privileges, restrictions or conditions, whether in regard to dividend, voting, repayment of capital of otherwise as may be stipulated in the resolution or other instrument authorizing such new shares. 9. The Company shall have the power to issue redeemable shares and redeem the same all in accordance with, and subject to, the provisions of the Law. SHAREHOLDERS 10. If two or more persons are registered in the Register as joint holders of a share, they shall be jointly and severally liable for any calls or any other liability with respect to such share. However, with respect to voting, power of attorney and furnishing of notices, the one registered first in the Registers shall be deemed to be the sole owner of the share, unless all the registered joint holders notify the Company in writing to treat another one of them as the sole owner of the share, unless registered, subject to the provisions of Article 68 hereof. If two or more persons are registered together as holders of a share, each one of them shall be permitted to give receipts binding all the joint holders for dividends or other monies or property received from the Company in connection with the share and the Company shall be permitted to pay all the dividend or other monies or property due with respect to the share to one or more of the joint holders, as it shall choose. 11. Except upon court order so directing, the Company shall not recognize the holder of a share as a trustee, and shall not be obligated to recognize a right based upon the rules of equity or a right dependent upon a condition or a future right or a partial right in a share, or any other right whatsoever with respect to the share, except for the exclusive right of the registered holder with respect to the share. SHARE CERTIFICATES 12. 12.1. A shareholder shall be entitled to receive from the Company without payment, one or more certificate(s) that shall state the number of shares owned by him, their serial numbers and the amount paid on account of their par value. However, in the event of more than one person holding a share, the Company shall not be obligated to issue more than one certificate to all of the joint holders, and the delivery of such a certificate to one of the joint holders shall be deemed to be a delivery to all of the partners. -3- Where a shareholder has transferred only a part of the shares represented in a certificate, the old certificate shall be cancelled and he shall be entitled, without charge, to a new certificate representing the balance of shares. 12.2. Each certificate shall carry the signature or signatures of those persons appointed by the Board for this purpose and the stamp or seal of the Company. A Registration Company (as such term is defined in the Securities Law 5728-1968) shall be entitled, without payment, to receive, within such time as may be prescribed under the Statutes or, if not prescribed as aforesaid, within such time period as the Board may deem fit, a certificate that specifies the number and class of shares, together with any other details the Company is required, under the Law, for inclusion therein that are registered in its name in the Register. If a share certificate is defaced, lost or destroyed, it may be renewed on payment of such fee, if any, not exceeding one United States dollar or the New Israeli Shekel equivalent thereof on the date of payment and on such terms, if any, as to evidence and indemnity as the Board thinks fit. PLEDGE 13. The Company shall have a lien and first pledge on any share that is registered in the name of any Shareholder (whether registered in the Shareholder's name only or together with another or others), but not fully paid, for any amount still outstanding with respect to that share, whether or not presently payable. Any such pledge shall apply to all dividends and other moneys, if any payable in connection with such share. The Board may at any time release any share, wholly or in part, temporarily or permanently, from the provisions of this Article. Unless otherwise provided, registration by the Company of a share transfer shall be deemed to be a waiver by the Company of its lien and pledge on those shares. 14. The Company may sell, in such manner and at such time as the Board thinks fit, any pledged shares when the debt, liability or other obligation giving rise to the lien has matured, but no sale shall be made unless a written request has been furnished to the Shareholder or person who has acquired a right in the shares, setting out the amount or obligation or commitment due and demanding payment or, fulfillment of the debt, liability or other obligation within seven days of service of the notice, and the person fails to fulfill his obligation pursuant to the notice within such seven days period. 15. The net proceeds of any such sale of pledged shares shall be applied in satisfaction of the debt, liability or other obligation relating to the pledged share, and the remainder (if any) shall be paid to the Shareholder or to the person who had acquired a right in the share sold, pursuant to the above. 16. After execution of a sale of pledged shares as provided for in Articles 13 and 14, the Board shall be permitted to sign or to appoint any person to sign a deed of transfer of the shares sold and to register the buyer's name in the Register as the owner of the shares. Such buyer shall not be obligated to supervise the application of monies nor will his right in the shares be affected by a defect or illegality in the sale proceedings after his name has been registered in the Register with respect to those shares. The sole remedy of any person aggrieved by the sale shall be in damages only and against the Company exclusively. -4- TRANSFER OF SHARES AND THE MANAGEMENT THEREOF 17. The shares of the Company are transferable subject to the restrictions contained in these Articles and the Law. Each transfer shall be made in writing in any usual or common form, or in any form approved by the Board from time to time. Such form shall be delivered to the office, or such other place that the Board may from time to time approve, together with the transferred share certificates, if share certificates have been issued with respect to the shares to be delivered, and any other proof of the transferor's title that the Board may require under the Law. The Board may, in its absolute discretion, refuse to register a transfer of any share which is not fully paid. 18. The share transfer deed shall be executed both by the transferor and transferee, and the transferor shall be deemed to remain a holder of the share until the name of the transferee is entered into the Register in respect thereof. The share transfer deed with respect to a share that has been fully paid may be signed by the transferor only. 19. Every instrument of transfer of a share must be in respect of only one class of share. 20. Subject to Article 23, all instruments of transfer which shall be registered in the Register shall (except in case of fraud) be retained by the Company, but any instrument of transfer which the Board may refuse to register in the Register shall (except in case of fraud) be returned to the party presenting the same. 21. No fee shall be charged: 21.1. for registration of a transfer; or 21.2. on the registration of any probate, letters of administration, certificate of death or marriage, power of attorney, notice or other instrument relating to or affecting the title any shares. 22. The Company shall maintain a Register and, if applicable, a register of Substantial Shareholders (as defined in the Law) as required by the Law. Subject to and in accordance with the provisions of the Law, the Company may cause branch registers to be kept in any other country, and to exercise all the other powers mentioned in the Law relating to such branch registers. The Company shall also be entitled to appoint a transfer agent, whose records shall be deemed a branch register. 23. The Company shall be entitled to destroy: (a) all instruments of transfer of shares and all other documents on the faith of which entries are made in the Register at any time after the expiration of six (6) years from the date of registration of the same; (b) all dividend mandates and notifications of change of name or address at any time after the expiration of two (2) years from the date of recording; and (c) all share certificates which have been cancelled at any time after the expiration of one (1) year from the date of cancellation. If the Company destroys a document in good faith and without notice of any claim (regardless of the parties) to which the document might be relevant, it shall conclusively be presumed in favor of the Company that every instrument of transfer so destroyed was a valid and effective instrument duly and properly registered, every share certificate so destroyed was a valid and effective document duly and properly cancelled and every other document mentioned above so destroyed was a valid and effective document in accordance with the recorded particulars in the books or records of the Company. Nothing in this Article shall be -5- construed as imposing upon the Company any liability in respect of the destruction of any document at an earlier date than that provided above or if the condition as to good faith and absence of notice is not met. References in these Articles to the destruction of any document include references to its disposal in any manner. TRANSMISSION OF SHARES 24. Upon the death of a Shareholder, the remaining partners (in the event that the deceased was a partner in a share) or the administrators or executors or heirs of the deceased (in the event the deceased was the sole holder of the share or was the only one of the joint holders of the share to remain alive) shall be recognized by the Company as the sole holders of any title to the shares of the deceased. However, nothing herein shall release the estate of a deceased holder (whether sole or joint) of a share from any obligation to the Company with respect to any share held by the deceased. 25. Any person becoming entitled to a share as a consequence of the death or bankruptcy or liquidation of a Shareholder shall, upon such evidence being produced as may from time to time be required by the Board, have the right either to be registered as a Shareholder in respect of the share upon the consent of the Board or, to transfer such share to another person, subject to the provisions contained in these Articles with respect to transfers. 26. A person becoming entitled to a share because of the death, bankruptcy or liquidation of a Shareholder shall be entitled to receive, and to give receipts for, dividends or other payments paid with respect to the share but shall not be entitled to exercise any of the rights or privileges of Shareholder unless and until such person becomes a Shareholder in respect of the share. CALLS 27. Subject to the provisions of these Article and to the terms of allotment of any shares, the Board may from time to time make such calls on the Shareholders in respect of all moneys unpaid on their shares (whether on account of the nominal amount of the shares or by way of premium or, if the shares shall have been issued at a discount to their nominal value, on account of all moneys unpaid on such shares) as it may think fit, provided that at least 14 (fourteen) days' notice is given of each call. Each Shareholder shall be liable to pay the amount of every call so made on him to the Board. A call may be wholly or in part revoked or the time fixed for its payment postponed by the Board. A Shareholder upon whom a call is made shall remain liable for calls made upon him notwithstanding the subsequent transfer of the shares in respect of which the call was made. Unless otherwise stipulated by the Board in the notice given in respect of the call, each payment in response to a call shall be deemed to constitute a pro rata payment on account of all the shares in respect of which such call was made. 28. A call shall be deemed to have been made at the time when the resolution of the Board authorizing such call was passed. 29. The joint holders of a share shall be jointly and severally liable for the payment of all calls and installments in respect hereof. -6- 30. If a call or installment payable in respect of a share is not paid before or on the day appointed for payment thereof, the Shareholder from whom the call or installment is due shall pay interest on the amount of the call or installment from the day such call or installment is payable to the time of actual payment at such rate as the Board shall fix, but the Board may waive payment of such interest wholly or in part. The provisions of this Articles shall not deprive the Company of, or derogate from, any other rights or remedies the Company may have against such person pursuant to these Articles or applicable law. 31. No Shareholder shall be entitled to receive any dividend or other payment or distribution or be present or vote at any General Meeting either personally or (save as proxy for another Shareholder) by proxy, or by any other means as may be permitted under the Law, or be reckoned in a quorum, or to exercise any other privilege as a Shareholder until such Shareholder shall have paid all calls then due and payable on every share registered in such Shareholder's name, whether registered alone or jointly with any other person, (as referred to in Article 29), together with interest and expenses. 32. Any sum which by the terms of issue of a share is made payable upon allotment or at any fixed date, whether on account of the nominal value of the share or by way of premium, or, if such share shall have been issued at a discount to its nominal value, on account of the amount payable in respect of such share, shall for all purposes of these Articles be deemed to be a call duly made and payable on the date fixed for payment, and in case of non-payment all the relevant provisions of these Articles as to payment of interest and expenses, forfeiture or otherwise shall apply as if such sum were a call duly made and notified. 33. The Board may, at its discretion, receive from any Shareholder willing to pay in advance all or a part of the amounts then due on account of such Shareholder's shares, in addition to any amounts requested for payment. The Board shall be permitted to pay such Shareholder: (1) interest at such rate as the Board and the Shareholder shall agree upon for the amounts paid in advance as aforesaid, or upon the part thereof which is in excess of the amounts whose payment was at the time requested on account of the Shareholder's shares, and (2) any dividends that may be paid for that part of the shares for which the Shareholder has paid in advance. 34. The Board may at any time cause the Company to repay the amount so advanced upon the least three (3) months' written notice to such Shareholder of its instruction to do so, unless before the expiration of such notice the amount so advanced shall have been called up on the share in respect of which it was advanced. FORFEITURE OF SHARES 35. If a Shareholder fails to pay all or any part of a call or installment of a call on or prior to the day appointed for payment thereof, the Board may, so long as such amount remains unpaid, serve notice on the Shareholder requiring payment of such unpaid amount, together with any interest which may have accrued and any expenses that were incurred as a result of such non-payment. 36. The notice shall specify a date not less than seven (7) days from the date of the notice, on or before which the payment of the call or installment or part thereof is to be made together with interest and any expenses incurred as a result of such non-payment. The notice shall also state the place the payment is to be made and that in the event of non-payment at or -7- before the time appointed, the share in respect of which the call was made will be liable to forfeiture. 37. If the requirements of any such notice as aforesaid are not complied with, any share in respect of which the notice has been given may at any time thereafter, before the payment required by the notice has been made, be forfeited by a resolution of the Board to that effect. Any such forfeiture shall apply to dividends that were declared but not yet distributed with respect to the forfeited shares. 38. Forfeited shares shall be deemed the property of the Company and may be sold or otherwise disposed of, on such terms and in such manner as the Board sees fit. At any time prior to the sale or disposition of forfeited shares, the forfeiture may be canceled on such terms as the Board sees fit. Notwithstanding the foregoing, no such cancellation shall stop the Board from adopting a subsequent resolution of forfeiture in respect of a failure to amounts due in respect of the shares. 39. The Company may, by resolution of the Board, accept a surrender of any share liable to be forfeited hereunder. A surrendered share shall be treated as if it has been forfeited. 40. A person whose shares have been forfeited or surrendered shall cease to be a shareholder in respect of them but shall notwithstanding the forfeiture or surrender remain liable to pay to the Company all calls made and not paid on such shares at the time of forfeiture or surrender, and interest thereon to the date of payment in the same manner in all respects as if the shares had not been forfeited or surrendered, and to satisfy all (if any) claims and demands which the Company might have enforced in respect of the shares at the time of forfeiture or surrender without any reduction or allowance for the value of the shares at the time of forfeiture. In the event of any such forfeiture or surrender, the Company, by resolution of the Board, may accelerate the date(s) of payment of any or all amounts then owing to the Company by the shareholder in question (but not yet due) in respect of shares, whether registered in his name or registered jointly with any other person forfeited or surrendered as aforesaid. 41. The forfeiture or surrender of a share shall involve the extinction at the time forfeiture or surrender of all interest in and all claims and demands against the Company in respect of the share as between the Shareholder whose share is forfeited or surrendered and the Company, except only such of those rights and liabilities as are by these Articles expressly saved, or as are by the Law given or imposed in the case of past Shareholders. 42. A declaration in writing by a director or secretary of the Company that a share in the Company has been duly forfeited on the date stated in the declaration shall be conclusive evidence of the facts therein stated against all persons claiming to be entitled to the share. That declaration, together with the receipt of the Company for the consideration, if any, given for the share on the sale or disposition thereof and specifying the place of payment of the consideration, shall constitute good title to the share. The person to whom the share is sold or disposed of shall be registered as the holder of the share and shall not be bound to see to the application of the purchase money, if any, nor shall his title to the share be affected by any irregularity or invalidity in the proceedings in reference to the forfeiture, sale or disposal of the share. 43. The provisions of these Articles as to forfeiture shall apply in the case of non-payment of any sum which, by the terms of issue of a share, becomes payable at a fixed time, whether -8- on account of the amount of the share, or by way of premium, as if the same had been payable by virtue of a call duly made and notified. ALTERATION OF CAPITAL 44. With regard to its capital the Company may: 44.1. From time to time, by resolution of its Shareholders subject to these Articles and the Law: 44.1.1. Consolidate and divide all or any of its issued or unissued share capital into shares of larger nominal value than its existing shares; 44.1.2. Cancel any shares which at the date of the adoption of such resolution have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled; 44.1.3. Subject to applicable laws, subdivide its shares (issued or outstanding) or any of them, into shares of smaller nominal value than is fixed by the Memorandum of Association (if applicable) or these Articles. The resolution whereby any share is subdivided may determine that, as among the holders of the shares resulting from such subdivision, one or more of the share may, as compared with the others, have special rights, or be subject to any such restrictions, as the Company has power to attach to unissued or new share; 44.1.4. Reduce its share capital and any capital redemption reserve fund in any way that may be considered expedient and, in particular, exercise any or all of the powers conferred under the Law in relation to such reduction of share capital or capital redemption reserve. 44.2. Upon any consolidation or subdivision of shares, settle any difficulty which may arise with regard thereto, as it deems fit, including (but without prejudice to the generality of the foregoing), in the event of a consolidation or any action which may result in fractional shares: 44.2.1. Allotting, in contemplation of, or subsequent to, such consolidation or other action, such shares or fractional shares sufficient to preclude or remove fractional shareholdings; 44.2.2. Subject to Section 295 of the Law, making such arrangements for the sale or transfer of the fractional shares to such person or persons at such times and at such price as the Board thinks fit so as to most expeditiously preclude or remove any fractional shareholdings. The Board shall cause the Company to distribute the net proceeds of any such sale in due proportion among the Shareholders who would have been entitled to the fractional shares so sold or transferred; 44.2.3. To the extent as may be permitted under the law redeem or purchase such fractional shares sufficient to preclude and remove such fractional shareholding and the Board shall cause the Company to distribute the net -9- proceeds payable in connection with such redemption or purchase in due proportion among the shareholders who would have been entitled to such fractional shares; and 44.2.4. Determining, as to the holders of shares so consolidated, which issued shares shall be consolidated into each share of a larger nominal value. INCREASE OF CAPITAL 45. The Company may from time to time, whether or not all the shares then authorized have been issued, and whether or not all the shares theretofore issued have been fully called up for payment, increase its share capital by the creation of new shares. Any such new share capital shall be of such amount and divided into shares of such nominal amounts and (subject to any special rights then attached to any existing class of shares) bear such rights or preferences or be subject to such conditions or restrictions (if any) as the resolution approving such share capital increase shall provide. 46. Except so far as otherwise provided in such resolution or pursuant to these Articles, such new shares shall be subject to all the provisions applicable to the shares of the original capital of the same class and par value. VARIATION OF CLASS RIGHTS 47. If at any time the share capital of the Company is divided into different classes of shares, the right attached to any class (unless otherwise provided by the terms of issue of the shares of that class) may be varied only upon consent of a separate General Meeting of the holders of the shares of that class. The provisions of these Articles relating to General Meetings shall mutatis mutandis apply to every such separate General Meeting. 48. Unless otherwise provided by these Articles, the enlargement of an authorized class of shares, or the issuance of additional shares thereof out of the authorized and unissued share capital, shall not be deemed, for the purposes of Article 47 to vary, modify or abrogate the rights attached to previously issued shares of such class or of any other class of shares. BORROWING POWERS 49. Subject to these Articles and the Law the Board may from time to time, cause the Company to borrow or secure the payment of any sum of money for the purposes of the Company and raise or secure the repayment of any such sum upon such terms and conditions as it sees fit, and, in particular, issue bonds, perpetual or redeemable debentures, or other securities or mortgage, charge, its undertaking property and assets of the property of the Company, both present and future, including its uncalled capital and its called but unpaid capital whether outright or as collateral security for any debt, liability or obligation of the Company or of any third party. GENERAL MEETINGS 50. -10- 50.1. An Annual General Meeting shall be held once in every calendar year at such time (within a period of not more than fifteen (15) months after the last preceding Annual General Meeting) and at such place, either within or without the State of Israel, as may be determined by the Board. 50.2. Subject to the provisions of these Articles, the function of the Annual General Meeting shall be to elect the members of the Board; to receive and discuss the Financial Statements, the ordinary reports and accounts of the Company's Directors and Auditors; to appoint the Company's Auditors and to fix their remunerations and to transact any other business which under these Articles or the Law are to be transacted at a General Meeting. 51. All General Meetings other than Annual General Meeting shall be called Extraordinary General Meetings. The Board, whenever it sees fit, may, and upon a demand in writing as provided for in Section 63(b) of the Law, shall convene an Extraordinary General Meeting. Every such demand shall include the purposes for which the meeting is called, shall be signed by those making the demand (the "Petitioners") and shall be sent to the Office. Any such demand may consist of several documents in like form, each signed by one or more Petitioners. The date of a meeting called by the Board pursuant hereto must be no later than 56 days from the date of submission of the demand. If the Board does not call a meeting within 21 days from the date of submission of the demand, the Petitioners, or any of them representing more than one half of the voting rights held by the Petitioners, may convene the meeting by themselves. However, any such meeting shall not be held after three months have passed since the date of the submission of the demand. 52. Subject to these Articles, applicable law and regulations, prior notice of at least 21 days of any General Meeting, specifying the place, date and hour of the meeting, shall be given as, hereinafter provided, to the Shareholders thereunto entitled pursuant to these Articles and the Law. Non-receipt of any such notice shall not invalidate any resolution passed or the proceedings held at that meeting. With the consent of all the Shareholders entitled to receive notice thereof, a meeting may be convened upon shorter notice or without any notice and in such manner, generally, as shall be approved by such Shareholders. 53. Notice of a General Meeting shall include: 53.1. The agenda for such meeting. The contents of such agenda shall include, among other things as determined by the Board and subject to the Law and these Articles, the following: 53.1.1. if such meeting is being held pursuant to a requisition of Shareholders or Directors in the manner as provided by the Law, particulars of the objectives for which such meeting has been called; 53.1.2. any subject as may be requested for inclusion in the manner referred to in Article 54; 53.1.3. the methods or mechanisms available for submitting written votes; and 53.1.4. any other particulars as may be required under the Law. -11- 53.2. The text of any resolution which is proposed to be put and voted upon at such meeting, unless the Law permits a general description of the text; and 53.3. Any other matter as so required, under the Law, for inclusion in any such notice. 54. 54.1. Notwithstanding any provision of these Articles to the contrary, and to allow the Company to determine the Shareholders entitled to notice of, or to vote at, any Annual or Extraordinary General Meeting or any adjournment thereof, or to express consent to or dissent from any corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of, or to take or be the subject to, any other action, the Board may fix, a record date, which shall not be more than forty (40), or any longer period permitted under the Law, nor less than four (4) days before the date of such meeting or other action. A determination of holders of record entitled to notice of or to vote at a meeting shall apply to any adjournment of the meeting: provided, however, that the Board may fix a new record date for the adjourned meeting. 54.2. Any Shareholder or Shareholders of the Company holding, at least, one percent (1%) of the voting rights in the issued share capital of the Company may, pursuant to the Law, request that the Board include a subject in the agenda of a General Meeting to be held in the future. Any such request must be in writing, give particulars of the subject which is requested to be included in such agenda, be signed by the Shareholder or Shareholders making such request and must be deposited at the Office and addressed to the Board. In addition subject to the Law and the provisions of Article 89, the Board shall be required to include such subject in the agenda of the meeting only if the request has been delivered to the Secretary of the Company not later than (i) with respect to an Annual General Meeting of Shareholders, not less than ninety (90) days and not more than one hundred and twenty (120) days prior to the anniversary date of the immediately preceding annual meeting and (ii) with respect to an Extraordinary General Meeting of Shareholders, not less than ninety (90) days and not more than one hundred and twenty (120) days prior to the proposed date of such meeting, provided, however, that in the event that less than ninety (90) days notice or prior public disclosure of the date of any such meeting is given, such request must have been delivered to the Secretary of the Company not later than the close of business on the 10th day following the day on which notice or prior public disclosure of the meeting was given, provided that the preceding provision shall not derogate from the Company's obligations pursuant to Section 69(b) of the Law. Each such request shall also set forth: (a) the name and address of the Shareholder making the request; (b) a representation that the Shareholder is a holder of record of shares of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting; (c) a description of all arrangements or understandings between the Shareholder and any other person or persons (naming such person or persons) in connection with the subject which is requested to be included in the agenda; and (d) a declaration that all the information that is required under the Law and any other applicable law to be provided to the Company in connection with such subject, if any, has been provided. The Chairman of the General Meeting may -12- refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. The Board will include in the agenda for a General Meeting a subject as requested if the Board deems that subject suitable for discussion at a General Meeting. 55. Subject to the Law, all General Meetings shall be held at such time and place as the Board may determine. The Board may, in its absolute discretion, resolve to enable persons entitled to attend a General Meeting to do so by simultaneous attendance and participation at the principal meeting place and a satellite meeting place or places anywhere in the world and the Shareholders present in person, by proxy or by written ballot at satellite meeting places shall be counted in the quorum for and entitled to vote at the General Meeting in question, and that meeting shall be duly constituted and its proceedings valid, provided that the Chairman of the General Meeting is satisfied that adequate facilities are available throughout the General Meeting to ensure that Shareholders attending at all the meeting place able to: 55.1. participate in the business for which the meeting has been convened; 55.2. hear all persons who speak (whether by the use of microphones, loudspeakers audio-visual communications equipment or otherwise) in the principal meeting place and any satellite meeting place, and 55.3. be heard by all other persons so present in the same way. 56. The Chairman of the General Meeting shall be present at, and the meeting shall be deemed to take place at, the principal meeting place. 57. The officer of the Company who has charge of the Register shall prepare and make, at least ten (10) days before every meeting of the Shareholders, a complete list of the Shareholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each Shareholder and the number of shares registered in the name of each Shareholder. Such list shall be open to the examination of any Shareholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting at a place specified in the notice of the meeting or at the place where the meeting is to be held. The list shall also be present at the meeting during the whole time thereof, and may be inspected by any Shareholder who is present. PROCEEDINGS AT GENERAL MEETINGS 58. No business shall be transacted at any General Meeting unless a quorum is present when the meeting proceeds to business. For all purposes, the quorum shall not be less than two (2) Shareholders present in person, or by proxy, or deemed by the Law, to be present at such meeting, holding, in the aggregate, at least, thirty-three and one- third percent (33 1/3%) of the voting rights in the issued share capital of the Company. 59. If within half an hour from the time appointed for the meeting a quorum is not present (or within such longer time not exceeding one (1) hour as the Chairman of the meeting may decide), the meeting, if convened upon the requisition of the Shareholders, shall be dissolved; in any other case, it shall stand adjourned to the same day in the next week at the same place and time (unless such day shall fall on a public holiday either in Israel or the -13- United States, in which case the meeting will be adjourned to the first day, not being a Friday, Saturday or Sunday, which follows such public holiday), or any other day, hour and/or place as the Directors shall notify the Shareholders in the notice of General Meeting delivered by the Company pursuant to Article 52 in connection with the meeting from which the adjournment occurred. If a quorum is not present at the second meeting within half an hour from the time appointed for the meeting, any two Shareholders present personally or by proxy or any other valid instrument shall Constitute a quorum, and shall be entitled to deliberate and to resolve in respect of the matters for which the meeting was convened. 60. The Chairman (if any) of the Board shall preside as Chairman at every General Meeting of the Company. If there is no Chairman or if at any meeting he is not present within fifteen (15) minutes from the time appointed for the meeting, or if he refuses to preside as Chairman of the meeting, the deputy Chairman (if any) shall, if present and willing to act, preside at the meeting but if neither the Chairman and deputy Chairman are present and willing to preside, the Directors present shall choose a Director to preside, or if there is only one director present he shall preside if willing to act. If there is no Director present and willing to preside, the Shareholders present and entitled to vote shall choose a Shareholder to be Chairman of the meeting. The Chairman of any General Meeting shall not, by virtue of such office, be entitled to vote at any General Meeting nor shall the Chairman of a meeting have a second or casting vote (without derogation, however from the rights of such Chairman to vote as a Shareholder or proxy of a Shareholder if, in fact, he is also a Shareholder or a duly appointed proxy). 61. The Chairman may, with the consent of any meeting at which a quorum is present, and shall if so directed by the meeting, adjourn the meeting from time to time and from place to place, as the meeting shall decide. The Chairman may, at his sole discretion and without the requirement for the consent of the meeting, adjourn or otherwise make alternative appropriate arrangements for any General Meeting at which in his opinion the venue arrangements cannot cater in an orderly fashion so as to enable the shareholders present adequately to hear, speak and vote on the matters before the meeting. Without prejudice to the generality of the foregoing, the Chairman may in such circumstances direct that the meeting be held simultaneously in two or more venues connected for the duration of the meeting by audio or audio-visual links or in two or more consecutive sessions with the votes taken being aggregated or that it be adjourned to a later time on the same day or a later date at the same or any other venue. 62. Notwithstanding anything in these Articles to the contrary, if a meeting shall be adjourned for twenty-one (21) days or more, a notice shall be given of the adjourned meeting as in the case of an original meeting. Except as aforesaid no Shareholder shall be entitled to receive any notice of an adjournment or of the business to be transacted at the adjourned meeting. At an adjourned meeting no matters shall be discussed except for those which could properly have been discussed at the meeting from which the adjournment occurred. 63. Subject to these Articles and the Law, a resolution of the Company in a General Meeting shall be deemed adopted if passed by Shareholders present, in person, by proxy, or by written ballot, or deemed under the Law to be present, holding greater than fifty percent (50%) of the total voting power attached to the shares whose holders were present, in person, by proxy, or by written ballot, or deemed under the Law to be present, at such General Meeting, and voted thereon. Every vote at a General Meeting shall be conducted -14- according to the number of votes to which each Shareholder is entitled on the basis of the number of shares held by him which confer on him a right to vote at a General Meeting. 64. At any General Meeting, a resolution, in respect of any business, put to vote of the meeting shall be decided by a poll. Such poll shall be held in the manner, at the time and place as the Chairman of the General Meeting directs (including the use of ballots or tickets), whether immediately or after an interval or postponement, or in any other way, and, subject to the other provisions of these Articles and the Law, the results of the poll shall be deemed to be a resolution of the General Meeting. The holding of a poll shall not prevent the continued business of the General Meeting. 65. A resolution in writing signed by all Shareholders of the Company then entitled to attend and vote at General Meetings or to which all such Shareholders have given their written consent (by letter, facsimile telecopier, telegram, telex or otherwise), or their oral consent by telephone (provided that a written summary thereof has been approved and signed by the Chairman of the meeting) shall be deemed to have been unanimously adopted by a General Meeting duly commenced and held. 66. A declaration by the Chairman of the meeting that a resolution has been passed, or has been passed unanimously or by a particular majority, lost, or not passed by a particular majority shall be conclusive and entry to that effect in the minute book of the Company signed by the Chairman of the meeting shall be conclusive evidence thereof, without proof of the number or proportion of the votes recorded in favor of or against such resolution. Without derogating from the generality of the foregoing, if: (a) any objection shall be raised to the qualification of any voter; or (b) any votes have been counted which ought not to have been counted or which might have been rejected; or (c) any votes are not counted which ought to have been counted, the objection or error shall not vitiate the decision of the meeting or adjourned meeting on any resolution unless it is raised or pointed out at the meeting or, as the case may be, the adjourned meeting at which the vote objected to is given or tendered or at which the error occurs. Any objection or error shall be referred to the Chairman of the meeting; and shall only vitiate the decision of the meeting on any resolution if the Chairman decides that it may have affected the decision of the meeting. The decision of the Chairman on such matters shall be final and conclusive. VOTES OF SHAREHOLDERS 67. Subject to any rights or restrictions then attached to any class or classes of shares and to these Articles, every Shareholder who is present, in person, by proxy, or by written ballot or is deemed under the Law to be present shall be entitled to one vote for each share of which he is the holder. 68. In the case of joint holders the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders. For the -15- purpose of this Article seniority shall be determined by the order in which the names appear in the Register. The appointment of a proxy to vote on behalf of a share held by joint holders shall be executed by the signature of the senior of the joint holders. 69. A Shareholder in respect of whom an order has been made by any court having jurisdiction in matters concerning a mental disability may vote in person, by proxy or by written ballot, through the person authorized by such court or by law to act on such Shareholder's behalf, provided that such evidence as the Board, or some other person who may be authorized by the Board for such purpose, may require of the authority of the person claiming such authorization shall have been deposited at the Office, or at such other place as is specified in accordance with these Articles for the lodgment of instruments of proxy, not less than forty-eight (48) hours before the time appointed for holding the meeting or adjourned meeting. 70. No Shareholder shall, unless the Board otherwise determines, be entitled in respect of any share held by that Shareholder, to vote at any General Meeting, personally or by proxy or by any other lawful means, or at any separate meeting of the holders of any class of shares, or to exercise any other right conferred by virtue of being a Shareholder in relation to any such meeting if any call or other sum presently payable by the Shareholder in respect of that share remains unpaid. 71. Subject to the Law and the other provisions of these Articles, shares may be voted personally, by proxy, by ballot or by any other manner that the Company is required to recognize and a Shareholder entitled to more than one vote need not use all his votes or cast all the votes he uses in the same way. Any person (whether a Shareholder or not) may be appointed to act as a proxy. 72. A Shareholder that is a corporation shall be entitled by a decision of its board of directors or by a decision of a person or other body, according to a resolution of its board of directors, to appoint a person who it shall deem fit to be its representative at every meeting of the Company. The representative appointed as aforesaid shall be entitled to perform on behalf of the corporation he represents all the powers that the corporation itself might perform as if it were an individual Shareholder. 73. A vote pursuant to an instrument appointing a proxy shall be valid notwithstanding the death of the appointor or the appointor becoming of unsound mind or the cancellation of the proxy or its expiration in accordance with any law, or the transfer of the shares with respect to which the proxy was given, unless a notice in writing of the death, becoming of unsound mind, cancellation or transfer was received at the Office at least twenty-four (24) hours before the commencement of the meeting or adjourned meeting. 74. A Shareholder is entitled to vote by a separate proxy with respect to each share held by him provided that each proxy shall have a separate letter of appointment containing the serial number of the share(s) with respect to which the proxy is entitled to vote. Where valid but differing instruments of proxy or other instrument which the Company is required, under the Law, to recognize in relation to the exercise of the voting rights in respect of a share, are delivered in respect of the same share for use at the same meeting, the instrument which is delivered last (regardless of its date or of the date of its execution) shall be treated as replacing and revoking the others as regards that share. However, if the Board, or some other person as may be authorized by the Board for such purpose, is unable to determine which was the last delivered, none of them shall be treated as valid in respect of that share. -16- Delivery of an instrument appointing a proxy or any other instrument, as aforesaid, shall not preclude a Shareholder from attending and voting in person at the meeting. 75. The Board may cause the Company to send, by mail or otherwise, instruments of proxy to Shareholders for use at any General Meeting. 76. A letter of appointment of a proxy, power of attorney or other instrument pursuant to which a person is acting shall be in writing, and the signature of the appointor shall be confirmed by an advocate or notary or bank or in any other manner acceptable to the directors. Unless such confirmed instrument or a copy thereof is deposited in the Office, or at such other place in Israel or abroad as the directors may direct from time to time, at least twenty-four (24) hours before the time appointed for the meeting or adjourned meeting wherein the person referred to in the instrument is appointed to vote, that person shall not be entitled to vote that share. An instrument appointing a proxy and which is not limited in time shall expire 12 months after the date of its execution. If the appointment shall be for a limited period, whether in excess of 12 months or not, the instrument shall be valid for the period stated therein. 77. An instrument appointing a proxy (i) shall: (a) be in writing under the hand of the appointor or of his attorney duly authorized in writing, or if such appointor is a corporation, either under its seal or under the hand of some officer or attorney duly authorized in that behalf; (b) be deemed to include the power to vote on any amendment of a resolution put to the meeting for which it is given as the proxy thinks fit; and (c) unless the contrary is stated therein, be valid as well for any adjournment of the meeting as for the meeting to which it relates; (ii) (whether for a specific meeting or otherwise) may be in the following form or in any other similar form which is appropriate under the circumstances. Letter of Appointment of Proxy "I, ___________________, of ________________________, holding shares in _________________ and entitled to _________ votes hereby appoint __________________ of ________________________________ or in his place ___________________________ of ____________________ to vote in my name and in my place at the general meeting (regular, extraordinary, adjourned - as the case may be) of the Company to be held on the _____________ day of _________________ __ and at any adjournment thereof. In witness whereof, I have hereby affixed my signature the _________ day of _____________, __. _____________ Appointor's Signature I hereby confirm that the foregoing instrument was signed before me by the Appointor -17- _________________________ (name, profession and address) DIRECTORS 78. The Board shall be composed of not more than nine (9) members and not less than three (3) members. 79. Subject to the Law, no person shall be disqualified to serve as a director by reason of his not holding shares in the Company or by reason of his having served as a director in the past. 80. Subject to the Law, the remuneration of a director shall be such sum (if any) as shall from time to time be approved by the Company in General Meeting. The directors and their alternates shall be entitled to be repaid all reasonable travelling, hotel and other expenses incurred by them arising from their travelling to and from Board meetings or meetings of any committee of the Board. If by any arrangement, approved by the Board, any director shall perform or render any special duties or services outside his ordinary duties as a director, the Board may cause the Company to pay him special remuneration, in addition to his ordinary remuneration, and such special remuneration may be by way of salary, commission, participation in profits, or otherwise as may be arranged, all subject to the provisions of the Law with regard to all such matters, including Shareholder and audit committee approvals required under the Law for various arrangements relating to director remuneration. 81. The office of a director shall be vacated, ipso facto: (a) if he becomes bankrupt or suspends payment or colludes or compounds with his creditors; (b) if he be declared legally incompetent; (c) if by notice in writing given to the Company he resigns his office; (d) if he is removed from office by a resolution of the General Meeting of the Company approved by Shareholders holding more than 50% of the outstanding share capital of the Company; (e) if, under the Law, his term otherwise automatically terminates; or (f) upon his death. 82. Subject to the provisions of the Law, no director shall be disqualified by virtue of his office from holding any office or place of profit in the Company or in any company in which the Company shall be a shareholder or otherwise interested, or from contracting with the Company as vendor, purchaser or otherwise, nor shall any such contract, or any contract or arrangement entered into by or on behalf of the Company in which any director shall be in any way interested be avoided, nor, other than as required by the Law, shall any director be liable to account to the Company for any profit arising from any such office or place of profit or realized by any such contract or arrangement by reason only of such director's -18- holding that office or of the fiduciary relations thereby established, but the nature of his interest, as well as any material fact or document, must be disclosed by him at the meeting of the Board at which the contract or arrangement is first considered, if his interest then exists, or, in any other case, at no later than the first meeting of the Board after the acquisition of his interest. 83. The entering into of a transaction by the Company with an Office Holder or a third party in which an Office Holder has a personal interest (as more fully described in Section 270(1) of the Law), which is not an Extraordinary Transaction (as defined in the Law) shall, if such Office Holder is a director or the General Manager, be approved in such manner as may be prescribed by the Board, from time to time, or otherwise by the Board itself. If such Office Holder is not a director, then such transaction shall be approved in such manner as may be prescribed by the General Manager from time to time and in the absence of any such determination, by the General Manager. POWERS AND DUTIES OF DIRECTORS 84. 84.1. The business of the Company shall be managed by the Board, which may exercise all such powers of the Company and perform on behalf of the Company all such acts as may be exercised and performed by the Company as are not by the Law or by these Articles required to be exercised or done by the Company through a General Meeting or, if the Company is under an obligation under the Law to appoint a General Manager, the General Manager, subject to the provisions of the Law and of these Articles and to such regulations (not being inconsistent with such aforesaid provisions) as may be prescribed by the Company in General Meeting. Notwithstanding the foregoing, no regulation made by the Company in a General Meeting shall invalidate any prior act of the Board which would have been valid if such regulation had not been made. The general powers given by this Article shall not be limited or restricted by any special authority or power given to the Board by any other Article. 84.2. The Board may from time to time, at its discretion, cause the Company to borrow or secure the payment of any sum or sums of money for the purposes of the Company, and may secure or provide for the repayment of such sum or sums in such manner, at such times and upon such terms and conditions as it deems fit, and, in particular, by the issuance of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages, charges, or other securities on the undertaking or the whole or any part of the property of the Company, both present and future, including its uncalled or called but unpaid capital for the time being. 84.3. The Board may, from time to time, set aside any amount(s) out of the profits of the Company as a reserve or reserves for any purpose(s) which the Board, in its absolute discretion, shall deem fit, including without limitation, capitalization and distribution of bonus shares, and may invest any sum so set aside in any manner and from time to time deal with and vary such investments and dispose of all or any part thereof, and employ any such reserve or any part thereof in the business of the Company without being bound to keep the same separate from other assets of the Company, and may subdivide or redesignate any reserve or cancel the same or -19- apply the funds therein for another purpose, all as the Board may from time to time think fit. 85. Subject to the provisions of these Articles and the Law, the Board may at any time and from time to time, by power of attorney or otherwise, appoint any person to be the attorney or attorneys of the Company for such purposes and with such powers, authorities and responsibilities (not exceeding those vested in or exercisable by the Board under these Articles) and for such period and subject to such conditions as it may think fit, and any such power of attorney may contain such provisions for the protection and convenience of persons dealing with any such attorney as the Board may think fit, and may also authorize any such attorney to sub-delegate all or any of the powers, authorities and responsibilities vested in him. 86. The Board may act at any time notwithstanding any vacancy in its body provided that in the event that the number of directors shall at any time be less than the minimum number prescribed by or in accordance with these Articles it shall be lawful for them to act as a Board for the purpose of filling any vacancies in their body or for summoning a General Meeting of the Company, but not for any other purpose. 87. The Board may delegate all or any of its powers, authorities and responsibilities (except for those powers, authorities and responsibilities which, under the Law (including, but not limited to, those listed in Section 112 of the Law), the Board is unable to delegate) to any committee consisting of such members of the Board as the Board may, from time to time, think fit, subject to applicable requirements of the Law (the "Committee of the Board"). The Board may, subject to the Law, widen, curtail or revoke such delegation of powers, authorities and responsibilities. To the fullest extent permitted by law, the Board, after determining a number of shares reserved for the issuance of shares, options or warrants to the Company's employees, directors, and consultants, may delegate the power to issue such options and shares to a committee of the Board. Any committee of the Board so formed shall in the exercise of the power, authorities and responsibilities so delegated conform to any regulations that may be lawfully imposed on it by the Board. The meetings and proceedings of a Committee of the Board shall be governed by the provisions herein contained for regulating the meetings and proceedings of the Board, so far as the same are applicable thereto and are not lawfully suspended or superseded by any regulations imposed by the Board. The Board shall appoint an audit committee consisting of at least three (3) members, the members of which and the authorities, powers and responsibilities of which shall be governed by the Law and any other applicable law or rule. ELECTION OR REMOVAL OF DIRECTORS 88. The members of the Board shall be elected and appointed at the Company's Annual General Meetings. At each Annual General Meeting of the Shareholders, successors to the Directors shall be elected for a one-year term (until the next Annual General Meeting) by a resolution of the General Meeting. 89. (a) Nominations for the election of Directors may be made by the Board or a committee appointed by the Board or by any Shareholder holding at least 1% of the outstanding voting power in the Company. However, any Shareholder entitled to vote in the election of directors generally may nominate one or more persons for election as -20- directors at a meeting only if written notice of such Shareholder's intent to make such nomination or nominations has been given to the Secretary of the Company not later than (i) with respect to an election to be held at an Annual General Meeting of Shareholders, not less than ninety (90) days and not more than one hundred and twenty (120) days prior to the anniversary date of the immediately preceding annual meeting and (ii) with respect to an election to be held at an extraordinary meeting of Shareholders, not less than ninety (90) days and not more than one hundred and twenty (120) days prior to the proposed date of such meeting, provided, however, that in the event that less than ninety (90) days notice or prior public disclosure of the date of any such meeting is given, such request must have been delivered to the Secretary of the Company not later than the close of business on the 10th day following the day on which notice or prior public disclosure of the meeting was given, provided that the preceding provision shall not derogate from the Company's obligations pursuant to Section 69(b) of the Law. Each such notice shall set forth: (a) the name and address of the Shareholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the Shareholder is a holder of record of shares of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the Shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the Shareholder; and (d) the consent of each nominee to serve as a director of the Company if so elected and a declaration signed by each of the nominees declaring that there is no limitation under the Law or any other applicable law for the appointment of such a nominee and that all the information that is required under the Law to provided to the Company in connection with such an appointment has been provided. The Chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. (b) To the extent required under the Law, the Company shall appoint or arrange the election of two (2) persons as External Directors. The appointment or election and removal of such directors shall be made in accordance with the Law, notwithstanding the provisions of these Articles. The provisions of Article 88 shall not apply to a Director who is an External Director. (c) Notwithstanding the provisions of paragraphs (a) and (b) of this Article, no person shall be nominated or appointed to the office of a Director if such person is disqualified, under the Law, from being appointed as a director. 90. Subject to the provisions of Articles 88, the Board may at any time appoint any other person as a director, whether to fill a vacancy or as an addition to the then current number of directors, provided that the total number of directors shall not at any time exceed any maximum number (if any) fixed by or in accordance with these Articles. Any director so appointed shall hold office until the Annual General Meeting of Shareholders at which the term for the other directors of his class expires, unless otherwise stated in the appointing resolution. -21- ALTERNATE DIRECTORS 91. (a) A director may, by written notice to the Company given in the manner set forth in Article 89(a), appoint any individual who is qualified to serve as a director, to act as alternate director (an "Alternate Director") at meetings of the Board or any committee of the Board of which the appointor is a member in his place during his absence (and, at his discretion, to revoke such nomination) provided that such individual is not a director or is a person acting as an Alternate Director for any other director or any other person disqualified by law. (b) Any Director appointing an Altetrnate Director may remove such Alternate Director and appoint another Alternate Director in place of any Alternate Director appointed by him whose office has been vacated for any reason whatsoever. The appointment of an Alternate Director shall be subject to the consent of the Board. Unless the appointing Director, by the instrument appointing an Alternate Director or by written notice to the Company, limits such appointment to a specified period of time or restricts it to a specified meeting or action of the Borad, or otherwise restricts its scope, the appointment shall be for all purposes, and for a period of time concurrent with the term of the appointing Director. (c) Any appointment or removal of an Alternate Director shall be effected by an instrument in writing delivered at the Office and signed by the appointor or by such other method as may be approved by the Board. (d) An Alternate Director shall be entitled to receive notice of meetings of the Board and of any committee of the Board of which the appointor is a member, to attend and to vote at any such meeting at which his appointor is not personally present and generally to perform all the functions of his appointor (except as regards power to appoint an alternate, unless the instrument of his appointment states otherwise) as a director in his absence. Save as otherwise provided in these Articles, an Alternate Director shall be deemed for all purposes to be a director and shall be responsible for his or her own acts and defaults. (e) An Alternate Director shall not be entitled to receive from the Company in respect of his appointment as Alternate Director any remuneration. (f) An Alternate Director shall ipso facto cease to be an Alternate Director if his appointor ceases for any reason to be a Director or on the happening of any event which, if he were a director, would cause him to vacate the office of Director. PROCEEDINGS OF DIRECTORS 92. Meetings of the Board will be convened in accordance with the needs of the Company and, in any event, shall be convened at least once every three (3) months. Save as aforesaid, the Board may meet, adjourn and otherwise regulate its meetings as it thinks fit. Board meetings may be convened at any time by the Chairman of the Board. The Chairman of the Board shall convene a Board meeting upon the request of any two directors as soon as practicable after receiving such request and shall otherwise convene a Board meeting as provided by the Law. If the Chairman of the Board does not, within fourteen (14) days after -22- the date of receiving a request from two directors as aforesaid, convene a Board meeting, then the directors requesting the convening of such Board meeting may convene the Board meeting. If the Chairman of the Board does not, within fourteen (14) days after being obliged to convene a Board meeting as provided under the Law, convene a Board meeting, the person who, as provided in the Law in such circumstances, is entitled to convene the Board meeting, may convene such meeting. Notice of a Board meeting shall contain the information required by the Law and shall be delivered to the directors not less than seven (7) days before such meeting. 93. Notice of a meeting of the Board may be given orally or in writing, and if given in writing, may be sent by hand, post, facsimile or electronic mail to a director at the address, facsimile number or electronic mail address given by such director to the Company for such purpose. Any such notice shall be deemed duly received, if sent by post, three (3) days following the day when any such notice was duly posted and if delivered by hand or transmitted by facsimile transmission or electronic mail, such notice shall be deemed duly received by the director on the date of delivery or, as the case may be, transmission of the same. Notwithstanding anything contained to the contrary herein, failure to deliver notice to a director of any such meeting in the manner required hereby may be waived by such director and a meeting shall be deemed to have been duly convened notwithstanding such defective notice if such failure or defect is waived prior to action being taken at such meeting, by all directors entitled to participate at such meeting to whom notice was not duly given as aforesaid. 94. Any director may participate in a meeting of the Board by means of telephone or similar communication equipment whereby all the directors participating in the meeting can hear each other and the directors participating in this manner shall be deemed to be present in person at such meeting and shall be entitled to vote or be counted in a quorum accordingly. Such a meeting shall be deemed to take place where the largest group of those participating is assembled or, if there is no such group, where the Chairman of the meeting is then located. 95. Until otherwise decided by the Board, a quorum at a meeting of the Board shall be constituted by the presence in person, by alternate or by telephone or similar communication equipment of a majority of the directors then in office who are lawfully entitled to participate and vote at the meeting. If within one-half an hour (or within such longer time not exceeding one (1) hour as the Chairman of the meeting may decide) from the time appointed for the holding of the Board meeting a quorum is not present, the Board meeting shall stand adjourned to the same day in the next week at the same time and place (unless such day shall fall on a public holiday either in Israel or the United States, in which case the meeting will be adjourned to the first day, not being a Friday, Saturday or Sunday, which follows such public holiday). If at such adjourned Board meeting a quorum is not present within half an hour from the time appointed for holding the meeting, the directors present, in person, by alternate or by telephone or similar communication equipment (as referred to in Article 94) who are lawfully entitled to participate and vote at such meeting shall be a quorum. No business shall be transacted at a meeting of the Board unless the requisite quorum is present (in person, by alternate or by telephone as aforesaid) when the meeting proceeds to business. For the purpose of these Articles an Alternate Director shall be counted in a quorum if the director who appointed him is not present. -23- 96. A resolution proposed at a meeting of the Board at which there is a quorum shall be deemed adopted if supported by a majority of the number of directors present at the meeting and lawfully entitled to vote on such resolution. 97. The Chairman of the Board shall not have a second or casting vote at any Board meeting. 98. A resolution in writing signed by all the directors then in office lawfully entitled to vote thereon, shall be as effective for all purposes as a resolution passed at a meeting of the Board duly convened, held and constituted and may consist of several documents in like form each signed by one or more of the directors. For the purpose of this Article, the signature of an Alternate Director, the appointer of which is entitled to vote on such resolution, shall suffice in lieu of the signature of the director appointing him. 99. The Board may from time to time elect by resolution or otherwise appoint a director to be Chairman or deputy Chairman and determine the period for which each of them is to hold office. 100. The Chairman of the Board, or in his absence the deputy Chairman, shall preside at meetings of the Board, but if no such Chairman or deputy Chairman shall be elected or appointed, or if at any meeting the Chairman or deputy Chairman shall not be present within fifteen (15) minutes after the time appointed for holding such meeting, or if the Chairman, or, if applicable, deputy Chairman, is unwilling or unable to chair such meeting, the directors present shall choose one of their number to be Chairman of such meeting. 101. Subject to the provisions of the Law, all bona fide actions of any meeting of the Board, or of a committee of the Board, or of any person acting as a director or Alternate Director or a member of such committee shall, notwithstanding that it be afterwards discovered that there was some defect in the appointment of any such director or such committee or person acting as aforesaid, or that they or any of them were disqualified, or had vacated office or were not entitled to vote, be as valid as if every such person had been duly appointed or had duly continued in office and was qualified and had continued to be a director or, as the case may be, an Alternate Director and had been entitled to vote. GENERAL MANAGER 102. Subject to these Articles and the Law, the Board may from time to time appoint one or more persons, whether or not directors, as the General Manager, Chief Executive Officer, and/or President of the Company. Subject to the Law, the powers, authorities and responsibilities any such General Manager, Chief Executive Officer and/or President shall have shall be those that the Board may, at its discretion, lawfully confer on the same. The Board may, from time to time, as the Board may deem fit, modify or revoke, such title(s), duties and authorities the Board conferred as aforesaid. Subject to these Articles and the Law, any such appointment(s) and any such powers, authorities and responsibilities, conferred as aforesaid may be either for a fixed term or without any limitation of time, and may be made upon such conditions and subject to such limitations and restrictions as the Board may, from time to time, determine and the Board may from time to time (subject to the provisions of the Law and of any contract between any such person and the Company) fix his or their salaries and remove or dismiss him or them from office and appoint another or others in his or their place. -24- MINUTES 103. The Company shall cause minutes to be made of all General Meetings of the Company and also of all appointments of directors and Office Holders and of the proceedings of all meetings by the Board and any committees thereof, and of the persons present at any such meetings, and all business transacted at such meetings, (which shall include any written resolution of the directors pursuant to Article 98 above). Any such minute of any meeting, if purporting to be signed by the Chairman of such meeting, or by the Chairman of the Board, shall be prima facie evidence of the facts therein stated. Minutes of a meeting shall be kept at the Office for the period, and in the manner, prescribed in the Law. STAMP AND SIGNATURES 104. (a) The Company may have one or more official stamps. (b) The Company may keep an official stamp for documents made for foreign jurisdictional purposes, and may authorize, from time to time, a person appointed for this purpose to make use of such stamp. (c) A document shall be deemed signed by the Company upon the fulfillment of all of the following: (1) The Company's stamp was stamped on the document by a person authorized therefor by the Board, or the document bears the name of the Company in print; (2) It bears the signature of one or more persons authorized, generally or in the specific instance, to sign such document by the Board. (d) An authorization of one or more persons by the Board to sign a document on behalf of the Company shall be deemed to include the authority to stamp the Company's stamp thereon, unless otherwise provided by the Board. (e) An authorization by the Board as provided in Article 104(d) may be for a specific document or for a certain sort of document or for all the Company's documents or for a definite period of time or for an unlimited period of time, provided that any such authority may be terminated by the Board, at any time. (f) The provisions of this Article shall apply both to the Company's documents executed in Israel and the Company's documents executed abroad. SECRETARY 105. The Board shall appoint a Secretary of the Company on any terms it thinks proper. The Board may from time to time by resolution appoint a temporary substitute for the Secretary. -25- LOCAL MANAGEMENT 106. The directors may organize from time to time arrangements for the management of the Company's business in any particular place, whether in Israel or abroad, as they shall see fit, and the provisions of the next section shall not derogate from the general powers granted to the Board pursuant to this Article. 107. The Board may from time to time convene any local management or agency to conduct the business of the Company in any particular place, whether in Israel or abroad, and may appoint any person to be a member of such local management, or to be a director or agent, and may decide his manner of compensation. The Board may from time to time grant a person so appointed any power, authority, or discretion that the Board has at that time, and may authorize any person acting at that time as a member of a local management to continue in his position notwithstanding that some position has been vacated there, and any such appointment or authorization may be made upon such conditions as the Board deems fit. The Board may from time to time relieve any person so appointed or revoke or change any such authorization. DIVIDENDS AND RESERVES 108. Subject to these Articles, the Company may declare and pay any dividend permitted under the Law. 109. The Board may, before declaring any dividend, set aside, out of the profits of the Company, such sums as it thinks proper as a reserve or reserves, which shall, at the discretion of the Board, be applicable for any purpose to which the profits of the Company may be properly applied and pending such application may be employed in the business of the Company as the Board may, from time to time, deem fit. The Board may, alternatively, carry forward any profits which it may deem prudent not to distribute as a dividend. 110. The Company may, by a resolution of the Board, declare a dividend in accordance with the respective rights of the Shareholders. 111. The Board may, from time to time, cause the Company to pay to the Shareholders such interim dividends as appear to the Board to be justified by the profits of the Company. The validity of any interim dividend shall not be affected by the subsequent failure of the Board to declare a dividend. 112. No dividend shall bear interest or linkage against the Company. 113. All dividends unclaimed for one year, after having been declared, may be invested or otherwise made use of by the Company as the Board shall see fit, until the same is claimed. The Company shall not be deemed a trustee in respect of any such unclaimed dividends. Any dividend or other sum remaining unclaimed for a period of seven (7) years after having been declared shall be forfeited and shall revert to the Company. 114. Subject to any special or restricted rights conferred upon the holders of shares as to dividends, all dividends shall be declared by the Board and paid in proportion to the amount paid up on account of the nominal value of the shares in respect of which the dividend is being paid. As regards shares not fully paid throughout the period in respect of which the dividend is paid, dividends in respect thereto shall be apportioned and paid pro rata -26- according to amounts deemed under this Article to be paid up on account of the nominal value of such shares during any portion or portions of the period in respect of which the dividend is paid. For this purpose, the amount deemed to be paid on account on the nominal value of such partly paid shares shall be such proportion of the nominal value as the amount paid to the Company with respect to the share bears to its full issuance price. Subject to the terms of article 33 above, no amount paid on a share, in advance of a call, shall be treated as paid up on a share. 115. Subject to the terms of any share issuance regarding the date or the occurrence of an event from which such shares are to be eligible for dividends, the persons registered in the Register as Shareholders on the record date for the declaration of a dividend shall be entitled to receive the dividend. A transfer of shares shall not transfer the right to a dividend which has been declared after the transfer but before the registration of the transfer. 116. The Board may deduct from any dividend payable to any Shareholder all sums of money (if any) presently payable by such Shareholder to the Company on account of calls or otherwise in relation to the shares of the Company. The Board may retain any dividend or other moneys payable on or in respect of a share on which the Company has a lien, and may apply the same in or toward the satisfaction of the debts, liabilities or engagement in respect of which the lien exists. 117. Subject to the provisions of the Law, any resolution of the Board declaring a dividend may, direct payment of such dividend wholly or partly by the distribution of specific assets of the Company, or by distribution of paid up shares, debentures, or debenture stock of the Company or any other companies or in any one or more of such ways, and the Board shall give effect to such resolution, and where any difficulty arises in regard to such distribution, the Board may settle the same as it thinks expedient, and in particular may fix the value for distribution of such specific assets or any part thereof and may determine that cash payments shall be made to any Shareholders on the basis of the value so fixed in order to adjust the rights of all parties, and may vest any such specific assets in trustees as may seem expedient to the Board. 118. The Board may cause the Company to pay the dividends, interest or other moneys payable on shares in respect of which any person is by transmission entitled to be registered as holder to such person upon production of such certificate and evidence as would be required if such person desired to be registered as a Shareholder in respect of such shares. 119. Any dividend, interest or other moneys payable in cash on or in respect of a share may be paid by check or money order sent through the post to the registered address of the holder or person entitled thereto and in the case of two or more persons being registered as joint holders of such share, to the registered address of that one of the joint holders who is first named on the Register, or to such person and to such address or by such other means offered by the Company as the holder or joint holders or person entitled thereto, as applicable, may agree in writing with the Company. Every such check or money order shall be made payable to the order of the person to whom it is sent or to such person as the Shareholder, person entitled or joint holders direct. Any one of two or more persons registered as joint holders of a share may give effectual receipts for any dividends or other moneys payable in respect of the shares held by them as joint holders. The Company shall not be responsible nor shall have any liability for any check or money order lost in transmission or in respect of sums lost or delayed in the course of payment by a method offered by the Company as aforesaid. -27- CAPITALIZATION OF RESERVE FUNDS 120. The Board may from time to time resolve that any sum, investment or property not required as a source for payment of fixed preferential dividends and (a) standing credited at that time to any fund or to any reserve liability account of the Company, including also premiums received from issuance of shares, debentures, or debenture stock of the Company; or (b) being net profits not distributed and remaining in the Company, shall be capitalized, and that such investment sum or property be released for distribution and be distributed as capital among the Shareholders according to the proportion to which they would be entitled if such amount were distributed as dividends on shares, in the manner so directed by such resolution. The Board shall use such investment sum or property, according to such a resolution, for full payment of such shares of the Company's capital not issued to the Shareholders and to issue such shares and to distribute them as fully paid up shares among those Shareholders according to the pro rata rate for payment of the value of the shares and their rights in the amount capitalized, or as full payment of shares to be issued upon the exercise of warrants on a net issuance basis. The Board may also use such investment sum or property or any part thereof for the aforesaid Shareholders for full payment of those shares not issued, in proportion to such shares of the Company's capital issued and held by such Shareholders, or use such investment sum or property in any other manner permitted by such a resolution. If any difficulty shall arise with respect to such a distribution the Board may organize the distribution as it deems desirable. They shall particularly be permitted to determine the value of the property or investment for the purpose of distribution of all fully paid up shares, to pay money to any such Shareholder according to the value determined in this manner in order to coordinate and adjust the Shareholders' rights. The Board shall also be permitted to decide that parts with a value of less than one New Israel Shekel shall not be taken into account in order to adjust the rights of all parties, to give all such shares, cash or property to trustees to hold in escrow for such persons entitled to part of the allocation and the distribution in accordance with and against such securities as the Board deems desirable. ACCOUNTS AND AUDIT 121. The Board shall cause accounting records to be kept in accordance with applicable law. The books of account shall be kept at the Office, or at such other place or places as the Board shall deem fit (either within the State of Israel or elsewhere in the world) and shall be open for inspection by directors. No Shareholder (not being a director) shall have any right to inspect any account or book or document of the Company, except as conferred by applicable law or as authorized by the Board or a resolution of the Company's General Meeting. 122. At least once every fiscal year, the accounts of the Company shall be examined and audited and the correctness of the profit and loss account and balance sheet certified by one or more duly qualified auditors. 123. The appointment, authorities, rights and duties of the Auditors shall be regulated by applicable law, provided, however, that in exercising its authority to fix the remuneration of the Auditors, the Company's General Meeting may, act (and in the absence of any action in connection therewith, shall be deemed to have so acted) to authorize the Board to fix such remuneration, subject to such criteria or standards, if any, as may be provided in such -28- resolution, and if no such criteria or standards are so provided, such remuneration shall be fixed in an amount commensurate with the volume and nature of the services rendered by such Auditors. NOTICES 124. Subject to the Law, notice to a Shareholder may be served, as general notice to all Shareholders, by publication in one of the daily Hebrew newspapers appearing in Israel and in one daily English language newspaper appearing in the City of New York, and otherwise in such manner as may be required under the Law, but in place of the publication of general notice as aforesaid, notice may be served on each Shareholder individually or by hand or by post to the registered address of each Shareholder. The date of such publication in the newspaper shall be deemed to be the date of service on all Shareholders. A notice served on a Shareholder not sent by post but left at the Shareholder's registered address shall be deemed duly served on the day it was left there. A notice served on a Shareholder through the post shall be deemed duly served on the third day following the day when the envelope containing it was posted. Proof that an envelope containing a notice was properly addressed, stamped and posted shall be conclusive evidence that notice was given. 125. A notice may be given by the Company to the joint holders of a share by giving notice to the joint holder named in the Register in respect of the shares. 126. Subject to the Law, where a given number of days' notice extending over any period is required to be given, the day of service shall be counted in such number of days or other period. 127. Any Shareholder whose address is not contained in the Register and who shall not have designated in writing an address for receipt of notices shall not be entitled to receive any notice from the Company. 128. Apart from the publication of any advertisement in the press, as mentioned in Article 124, a person entitled to a share in consequence of the death or bankruptcy of a Shareholder upon supplying to the Company such evidence as the Board may reasonably require as evidence of his title to the share, and upon supplying also an address in Israel or the United States for the service of notices, shall be entitled to have served upon or delivered to him at such address any notice or document to which the Shareholder but for his death or bankruptcy would be entitled, and such service or delivery shall for all purposes be deemed to be sufficient service for delivery of such notice or document on all persons interested (whether jointly with or as claiming through or under him) in the share. Save as aforesaid any notice or document delivered or sent by post to or left at the address of any Shareholder shall, notwithstanding that such Shareholder be then dead or bankrupt, and whether or not the Company shall have notice of his death or bankruptcy, be deemed to have been duly served or delivered in respect of any share registered in the name of such Shareholder as sole or first-named joint holder. 129. Any notice or other document (including, but not limited to, a share certificate) may be served or delivered by the Company to the Shareholders listed in the Register as it stands at any time, as may be determined by the Board from time to time, provided that the date so determined by the Board shall not be more than fifteen (15) days prior to the date of posting (where the notice or other document is posted) or otherwise not more than fifteen (15) days -29- before the date of service. No change in the Register after the time determined by the Board shall invalidate any such service or delivery. Every person who becomes entitled to a share shall be bound by any notice in respect of that share which, before his name is entered in the Register, has been duly given, or deemed to be duly given to the person from whom he received or became entitled to receive the share. INSURANCE AND INDEMNITY OF OFFICERS 130. Subject to the provisions of the Law with regard to such matters: 130.1. the Company may enter into a contract for the insurance of all or part of the liability of an Office Holder with respect to an obligation imposed on such Office Holder due to an act performed by him in his capacity as an Office Holder of the Company arising from any of the following: 130.1.1. a breach of his duty of care to the Company or to another person; 130.1.2. a breach of his duty of loyalty to the Company, provided that the Office Holder acted in good faith and had reasonable cause to assume that such act would not prejudice the interests of the Company; 130.1.3. a financial liability imposed on such Office Holder in favor of another person; 130.2. (a) the Company may undertake, in advance, to indemnify, or may indemnify, an Office Holder in respect of, a liability or expense (as referred to in subparagraph 130.2(b) below) that may be imposed on such Office Holder (due to an act performed by him in his capacity as an Office Holder): (1) that arises from those types of events which the Board deems to be forseeable, and limited to those amounts determind by the Board to be reasonable under the circumstances; or (2) that arises from an event that took place prior to the Company's giving such indemnity; (b) the liability and expense referred to in sub-paragraph 130.2(a) above are as follows: (1) a financial liability imposed on an Office Holder in favor of another person by a court judgment, including a compromise judgment given as a result of a settlement or an arbitrator's award which has been confirmed by a court; -30- (2) reasonable litigation expences, including attorneys' fees, expended by an Office Holder or which were imposed on an Office Holder by a court in proceedings instituted against him by the Company or in its name or by any other person or in a criminal charge from which he was acquitted or in a criminal charge in which he was convicted for a criminal offense that does not require proof of criminal thought (as such term is defined by the Penal Law, 5737-1977); 130.3. the Company may release exculpate and exempt, in advance, all or part of an Office Holder's liability to the Company for damage which arises from the breach of his duty of care to the Company (as such term is understood by Sections 252 and 253 of the Law). (iv) The provisions of Articles 130.1, 130.2 and 130.3 above are not intended, and shall not be interpreted, to restrict the Company in any manner in respect of the procurement of insurance and/or in respect of indemnification (i) in connection with any person who is not an Office Holder, including, without limitation, any employee, agent, consultant or contractor of the Company who is not an Office Holder, and/or (ii) in connection with any Office Holder to the extent that such insurance and/or indemnification is not specifically prohibited under law; provided that the procurement of any such insurance and/or the provision of any such indemnification shall be approved by the Board or in such manner as may be required by the Law. -31- EX-5.1 6 0006.txt OPINION OF MEITAR, LIQUORNIK, GEVA & CO. Exhibit 5.1 [Meitar, Liquornik, Geva & Co., Law Offices Letterhead] July __, 2000 ViryaNet Ltd. 5 Kiryat Hamada Street Science Based Industries Campus P.O. Box 23052, Har Hotzvim Jerusalem 9 1230 Israel Dear Sirs or Madams, RE: VIRYANET LTD. REGISTRATION STATEMENT ON FORM F-1 We have acted as special Israeli counsel for ViryaNet Ltd., an Israeli corporation (the "Company"), in connection with the preparation and filing of a registration statement on Form F-1 (File No. 333-_______) (the "Registration Statement") pursuant to the United States Securities Act of 1933, as amended (the "Act"), to be filed with the United States Securities and Exchange Commission (the "SEC") in connection with: (i) A proposed underwritten initial public offering of up to ___________ Ordinary Shares, par value NIS 0.1 per share of the company (the "Underwritten Shares"); and (ii) Up to an additional ________________ Ordinary Shares par value NIS 0.1 per share of the Company (the "Option Shares"), subject to an option contemplated to be granted to the underwriters, Chase Securities Inc., Salomon Smith Barney Inc. and Dain Rauscher Incorporated (the "Underwriters"). The sales of the Underwritten Shares and the Option Shares (together hereinafter referred to as the "Shares") by the Company to the Underwriters are expected to be subject to certain terms and conditions set forth in an Underwriting Agreement contemplated to be entered into by the Company and the Underwriters. You have asked us to render our opinion as to the matters hereinafter set forth. We have examined originals and copies, certified or otherwise identified to our satisfaction, of all such agreements, certificates and other statements of corporate officers and other representatives of the Company and other documents as we have deemed necessary as a basis for this opinion. In our examination we have assumed the genuiness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity with the originals of all documents submitted to us as copies. We have, when relevant facts material to our opinion were not independently established by us, relied to the extent we deemed such reliance proper upon written or oral statements of officers and other representatives of the Company. In giving the opinion expressed herein, no opinion is expressed as to the laws of any jurisdiction other than the State of Israel. Based upon and subject to the foregoing, we are of the opinion that insofar as Israeli law is concerned: 1. The Company is a corporation duly organized and validly existing under the laws of Israel. 2. The Shares to be issued and sold by the Company have been duly authorized and, when issued and sold against payment therefor as describe in the Registration Statement, will be legally issued, fully paid and nonassessable. We hereby consent to the filing of this opinion with the Securities and Exchange Commission as Exhibit 5.1 to the Registration Statement and to the inclusion in the Registration Statement upon our authority of statements concerning Israeli law included, and the reference to US under the caption "Service and Enforcement of Legal Process" therein. Very truly yours, Dan Geva, Adv Meitar, Liquornik, Geva & Co. EX-10.1 7 0007.txt 1996 STOCK PLAN Exhibit 10.1 ------------ R.T.S. RELATIONAL TECHNOLOGY SYSTEMS LTD. 1996 STOCK OPTION AND INCENTIVE PLAN ============= 1. NAME This plan, as amended from time to time, shall be known as the R.T.S. Relational Technology Systems Ltd. 1996 Stock Option And Incentive Plan. 2. PURPOSE OF 1996 PLAN The purpose of the R.T.S. Relational Technology Systems Ltd. 1996 Stock Option and Incentive Plan (the "1996 Plan") is to afford an incentive to officers, directors, employees and consultants of R.T.S. Relational Technology Systems Ltd. (the "Company"), or any subsidiary of the Company which now exists or hereafter is organized or acquired by the Company, to acquire a proprietary interest in the Company, to continue as employees, directors and consultants, to increase their efforts on behalf of the Company and to promote the success of the Company's business. It is further intended that among other options granted some of the options granted by the Committee pursuant to the 1996 Plan shall constitute "incentive stock options" ("Incentive Stock Options" or "ISO") within the meaning of Section 422 of the U.S. Internal Revenue Code of 1986, as amended (the "Code"), some of the options granted by the Committee pursuant to the 1996 Plan shall constitute "nonqualified stock options" ("Nonqualified Stock Options") and some of the options granted by the Committee shall be102 Stock Options ("102 Stock Options") pursuant to the provisions of Section 102 of the Israeli Income Tax Ordinance (New Version) 1961 and any regulations, rules, orders or procedures promulgated thereunder (together: the "Options") . The Committee may also grant restricted shares ("Restricted Stock") under the 1996 Plan (Restricted Stock together with the Options shall be referred to as: "Options/Shares"). 3. ADMINISTRATION OF 1996 PLAN The Board of Directors (the "Board") or a Stock Option Committee (the "Committee") appointed and maintained by the Board shall have the power to administer the 1996 Plan. The Committee shall consist of at least three members who shall serve at the pleasure of the Board, and any member of such Committee shall be eligible to receive Options/Shares under the 1996 Plan while serving on the Committee, unless otherwise specified herein. The Board or the Committee shall have full power and authority: (i) to designate participants; (ii) to designate Options/Shares or any portion thereof as Incentive -2- Stock Options, as Nonqualified Stock Options, as Restricted Stock, as 102 Stock Options, or otherwise; (iii) to determine the terms and provisions of respective Option/Shares agreements (which need not be identical) including, but not limited to, the number of Options/Shares in the Company to be granted, provisions concerning the time or times when and the extent to which the Options may be exercised and the nature and duration of restrictions as to transferability or restrictions constituting substantial risk of forfeiture; (iv) to accelerate the right of an optionee to exercise, in whole or in part, any previously granted Option ; (v) to interpret the provisions and supervise the administration of the 1996 Plan; and (vi) to determine any other matter which is necessary or desirable for, or incidental to administration of the 1996 Plan. The Board or the Committee shall have the authority to grant in its discretion to the holder of an outstanding Option, in exchange for the surrender and cancellation of such Option, a new Option having a purchase price lower than provided in the Option so surrendered and canceled and containing such other terms and conditions as the Board or the Committee may prescribe in accordance with the provisions of the 1996 Plan. All decisions and selections made by the Board or the Committee pursuant to the provisions of the 1996 Plan shall be made by a majority of its members except that no member of the Board or Committee shall vote on, or be counted for quorum purposes, with respect to any proposed action of the Board or Committee relating to any Option to be granted to that member. Any decision reduced to writing and signed by a majority of the members who are authorized to make such decision shall be fully effective as if it had been made by a majority at a meeting duly held. Each member of the Board or the Committee shall be indemnified and held harmless by the Company against any cost or expense (including counsel fees) reasonably incurred by him, or liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act in connection with the 1996 Plan unless arising out of such member's own fraud or bad faith, to the extent permitted by applicable law. Such indemnification shall be in addition to any rights of indemnification the member may have as directors or otherwise under the articles of association of the Company, any agreement, any vote of stockholders or disinterested directors, or otherwise. 4. DESIGNATION OF PARTICIPANTS The persons eligible for participation in the 1996 Plan as recipients of Options/Shares shall include any employees or former employees of the Company or of any subsidiary of the Company. Except for Incentive Stock Options Directors of the Company or of any subsidiary of the Company who are not employees of the Company or its subsidiaries, and additionally consultants or contractors of the Company or its subsidiaries, shall also be eligible for participation in the 1996 Plan as recipients of Options. A person who has been granted an Option/Share hereunder may be granted additional Options/Shares, if the Board or the Committee shall so determine. -3- 5. TRUSTEE The 102 Stock Options which shall be granted to employees of the Company (or if required by law) shall be issued to a trustee nominated by the Board or the Committee (in accordance with the provisions of Section 102) (the "Trustee") and held for the benefit of the optionees for a period of not less than two years (24 months) from the date of grant. The Trustee may also hold in trust any shares issued upon exercise of such 102 Stock Options pursuant to the provisions of Section 102. The Trustee shall not use the voting rights vested in any such shares held by the Trustee and shall not exercise said right in any way whatsoever, except in cases when, at his discretion and after consulting with the Committee, the Trustee believes that the said rights should be exercised for the protection of the optionees as a minority among the Company shareholders. 6. SHARES RESERVED FOR 1996 PLAN Subject to adjustment as provided in Paragraph 8 hereof, a total of 140,000 Ordinary Shares, NIS1 par value per share, of the Company ("Shares") shall be subject to the 1996 Plan. The Shares subject to the 1996 Plan hereby are, reserved for sale for such purpose. Any of such Shares which may remain unsold and which are not subject to outstanding options at the termination of the 1996 Plan shall cease to be reserved for the purpose of the 1996 Plan, but until termination of the 1996 Plan the Company shall at all times reserve a sufficient number of shares to meet the requirements of the 1996 Plan. Should any Option for any reason expire or be canceled prior to its exercise or relinquishment in full, the shares therefore subject to such Option may again be subjected to an Option under the 1996 Plan. 7. OPTION/SHARES PRICE (a) Except for Incentive Stock Options the purchase price of each Share subject to an Option or of each Restricted Stock or any portion thereof shall be determined by the Committee in its sole and absolute discretion in accordance with applicable law, subject to guidelines as shall be suggested by the Board from time to time (but not less than the par value). (b) The Option price shall be payable upon the exercise of the Option in cash, by check, or other form satisfactory to the Board or the Committee. (c) The proceeds received by the Company from the sale of Options/Shares subject to an Option/Share granted under the 1996 Plan will be added to the general funds of the Company and used for its corporate purposes. -4- 8. ADJUSTMENTS Upon the occurrence of any of the following described events, a grantee's rights to purchase Options/Shares under the 1996 Plan shall be adjusted as hereinafter provided: (a) If the Company is separated, reorganized, merged, consolidated or amalgamated with or into another corporation while unexercised /unvested Options/Shares remain outstanding under the 1996 Plan, there shall be substituted for the shares subject to the unexercised /unvested portions of such outstanding Options/Shares an appropriate number of shares of each class of shares or other securities of the separated, reorganized, merged, consolidated or amalgamated corporation which were distributed to the shareholders of the Company in respect of such shares, and appropriate adjustments shall be made in the purchase price per share to reflect such action. (b) If the Company is liquidated or dissolved while unexercised/unvested Options/Shares remain outstanding under the 1996 Plan, then all such outstanding Options/Shares may be exercised/vested in full by the optionees/grantees as of the effective date of any such liquidation or dissolution of the Company without regard to the installment exercise provisions of Paragraph 9(b), by the optionees/grantees giving notice in writing to the Company of their intention to so exercise. (c) If the outstanding shares of the Company shall at anytime be changed or exchanged by declaration of a stock dividend, stock split, combination or exchange of shares, recapitalization, extraordinary dividend payable in stock of a corporation other than the Company, or any other like event by or of the Company, and as often as the same shall occur, then the number, class and kind of Shares subject to this 1996 Plan or subject to any Options theretofore granted, and the option prices, shall be appropriately and equitably adjusted so as to maintain the proportionate number of Shares without changing the aggregate option price; provided, however, that no adjustment shall be made by reason of the distribution of subscription rights on outstanding stock. Upon the happening of any of the foregoing, the class and aggregate number of shares issuable pursuant to the 1996 Plan (as set forth in paragraph 6 hereof), in respect of which Options/Shares have not yet been exercised/vested, shall be appropriately adjusted. (d) Anything herein to the contrary notwithstanding, if prior to the completion of the initial public offering of shares of the Company, all or substantially all of the shares of the Company are to be sold, or upon a -merger or reorganization or the like, the shares of the Company, or any class thereof, are to be exchanged for securities of another company, then in such event, each optionee shall be obliged to sell or exchange, as the case may be, the shares he purchased under the 1996 Plan in accordance with the instructions then issued by the Board. -5- 9. TERM AND EXERCISE OF OPTIONS/SHARES (a) Options shall be exercised by the optionee by giving written notice to the Company, which exercise shall be effective upon receipt of such notice by the Secretary of the Company at its principal office. The notice shall specify the number of Shares with respect to which the Option is being exercised. (b) Each Option granted under this 1996 Plan shall be exercisable on the date and for the number of shares as shall be provided in the option agreement evidencing the Option and setting forth the terms thereof. However, (i) no Option shall be exercisable after the expiration of seven (7) years from the date of grant, and (ii) no Incentive Stock Options may be granted to a person who at the time of the grant owns more than 10% of the voting stock of value of the Company. (c) Options/Shares granted under the 1996 Plan shall not be transferable by optionees/grantees other than by will or the laws of descent and distribution, and during an optionee's lifetime shall be exercisable only by that optionee. (d) Options granted to employees or directors may not be exercised after the termination of employment and/or service as a director unless (i) prior to the date of such termination, the Board or the Committee shall authorize, in the relevant option agreement or otherwise, an extension of the term of all or part of the option beyond the date of such termination for a period not to exceed the period during which the Option by its terms would otherwise have been exercisable, (ii) termination is without Cause (as determined by the Committee) or employee resigns, in which event any Options still in force and unexpired may be exercised within a period of 30 days from the date of such termination, but only with respect to the number of shares purchasable at the time of such termination, (iii) termination is the result of death or disability, in which event any Options still in force and unexpired may be exercised within a period of six (6) months from the date of termination, but only with respect to the number of shares purchasable at the time of such termination, or (iv) termination of employment is the result of retirement under any deferred compensation agreement or retirement plan of the Company or of any subsidiary of the Company or after age 60, while Options granted hereunder are still in force and unexpired, in which case the Board or Committee shall have the discretion to permit any unmatured installments of the Options to be accelerated as for the later of the date of retirement or a date one year following the date of grant, and the Options shall thereupon be exercisable in full without regard to the installment exercise provisions of Paragraph 9(b). -6- (e) The holders of Options/Shares shall not be or have any of the rights or privileges of shareholders of the Company in respect of any shares unless and until, following exercise/vesting date but subject always to the provisions of Section 5 above, certificates representing such shares shall have been issued by the Company and delivered to such holders. (f) Any form of option agreement authorized by the 1996 Plan may contain such other provisions as the Board or the Committee may, from time to time, deem advisable. Without limiting the foregoing, the Board or the Committee may, with the consent of the optionee/grantee, from time to time cancel all or any portion of any Option then subject to exercise, and the Company's obligation in respect of such Option may be discharged by (i) payment to the optionee of an amount in cash equal to the excess, if any, of the Fair Market Value of the shares at the date of such cancellation subject to the portion of the Option so canceled over the aggregate purchase price of such shares, (ii) the issuance or transfer to the optionee of Shares of the Company with a Fair Market Value at the date of such transfer equal to any such excess, or (iii) a combination of cash and shares with a combined value equal to any such excess, all as determined by the Board or the Committee in its sole discretion. (g) Shares of Restricted Stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, for such period as the Committee shall determine from the date on which the award is granted (the "Restricted Period"). The Committee may also impose such other restrictions and conditions on the shares as it deems appropriate including the satisfaction of performance criteria. Certificates for shares of stock issued pursuant to Restricted Stock awards shall bear an appropriate legend referring to such restrictions, and any attempt to dispose of any such shares of stock in contravention of such restrictions shall be null and void and without effect. During the Restricted Period, such certificates shall be held in escrow by an escrow agent appointed by the Committee. In determining the Restricted Period of an award, the Committee may provide that the foregoing restrictions shall lapse with respect to specified percentages of the awarded shares on successive anniversaries of the date of such award. Subject to such exceptions as may be determined by the Committee, if the Grantee's continuous employment with, or performance of, service for, the Company or any Parent or Subsidiary shall cease for any reason prior to the expiration of the Restricted Period of an award, any shares remaining subject to restrictions shall thereupon be forfeited by the grantee and transferred to a Subsidiary at no cost to the Company or such Parent or Subsidiary or shall be converted into a deferred stock. -7- 10. INCENTIVE STOCK OPTIONS (a) In case of ISO granted to employees, the aggregate Fair Market Value of Shares (determined as of the date of the grant of the ISO's) with respect to which ISO's are exercisable for the first time by any optionee during any calendar year shall not exceed the limitation provided under Section 422(d) of the Code. (b) The options issued as ISOs must be granted within 7 years of the date that the Plan is adopted or the date that the Plan is approved by the stockholders, whichever is earlier. (c) Any option issued as an ISO must by its terms be exerciseable only within 10 years of the date that it is granted. (d) The option price for any ISO must not be less than the fair market value of the stock at the time that the option is granted. This requirement shall be deemed satisfied if there has been a good faith attempt to value the stock accurately for this purpose. (e) The ISO by its terms must be non-transferable other than at death and must be exercisable during the employee's lifetime only by the employee. 11. PURCHASE OF INVESTMENT Unless Shares covered by the 1996 Plan have been listed for trade on any stock exchange (of any jurisdiction), or the Company has determined that such registration is unnecessary, each person exercising an Option under the 1996 Plan may be required by the Company to give a representation in writing that he is acquiring such shares for his own account, for investment and not with a view to, or for sale in connection with, the distribution of any part thereof. 12. TERM DATE OF 1996 PLAN The 1996 Plan shall be effective as of January 1, 1996 and shall terminate on December 31, 2005.All Options not exercised as of December 31, 2005 shall expire. 13. AMENDMENTS OR TERMINATION The Board may, at any time and from time to time, amend, alter, or discontinue the 1996 Plan, except that no amendment or alteration shall be made which would impair the rights of the holder of any Options/Shares theretofore granted without his consent. -8- 14. GOVERNMENT REGULATIONS The 1996 Plan, and the granting and exercise of Options/Shares hereunder, and the obligation of the Company to sell and deliver shares under such Options/Shares, shall be subject to all applicable laws, rules, and regulations, whether of the State of Israel or of the United States or any other State having jurisdiction over the Company and the optionee including the registration of the shares under the United States Securities Act of 1933, and to such approvals by any governmental agencies or national securities exchanges as may be required. 15. CONTINUANCE OF EMPLOYMENT Neither the 1996 Plan nor the option agreement with the optionee shall impose any obligation on the Company or a subsidiary thereof, to continue any optionee/grantee in its employ, and nothing in the 1996 Plan or in any Option/Share granted pursuant thereto shall confer upon any optionee any right to continue in the employ of the Company or a subsidiary thereof or restrict the right of the Company or a subsidiary thereof to terminate such employment at any time. 16. GOVERNING LAW This 1996 Plan shall be governed by and construed and enforced in accordance with the laws of the State of Israel applicable to contracts made and to be performed therein, without giving effect to the principles of conflict of laws. 17. TAX CONSEQUENCES Any tax consequences arising from the grant or exercise of any Options/Shares, from the payment for shares covered thereby or from any other event or act (of the Company or the optionee) hereunder (including without limitation any tax consequences if for any reason, or by any authority, legal or other, according to any law or regulation, local or foreign, the options or shares of any type or kind granted under this 1996 Plan or any portion thereof, would not constitute or not qualify for any type or kind of tax consequences), shall be borne solely by the optionee. Furthermore, the optionee shall agree to indemnify the Company and the Trustee and hold them harmless against and from any and all liability for any such tax or interest or penalty thereon, including without limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax from any payment made to the optionee/grantee. 18. NON-EXCLUSIVITY OF THE 1996 PLAN The adoption of the 1996 Plan by the Board shall not be construed as amending, modifying or rescinding any previously approved incentive arrangement or as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under the 1996 Plan, and such arrangements may be either applicable generally or only in specific cases. -9- 19. MULTIPLE AGREEMENTS The terms of each Option/Share may differ from other Options/Shares granted under the 1996 Plan at the same time, or at any other time. The Committee may also grant more than one Option/Share to a given optionee/grantee during the term of the 1996 Plan, either in addition to, or in substitution for, one or more Options/Shares previously granted to that optionee/grantee. EX-10.2 8 0008.txt 1997 STOCK PLAN Exhibit 10.2 ------------ RTS LTD. 1997 STOCK OPTION AND INCENTIVE PLAN 1. NAME This plan, as amended from time to time, shall be known as the RTS Ltd. 1997 Stock Option And Incentive Plan. 2. PURPOSE OF 1997 PLAN The purpose of the RTS Ltd. 1997 Stock Option and Incentive Plan (the "1997 Plan") is to afford an incentive to officers, directors, employees and consultants of RTS Ltd. (the "Company"), or any subsidiary of the Company which now exists or hereafter is organized or acquired by the Company, to acquire a proprietary interest in the Company, to continue as employees, directors and consultants, to increase their efforts on behalf of the Company and to promote the success of the Company's business. It is further intended that among other options granted some of the options granted by the Committee pursuant to the 1997 Plan shall constitute "incentive stock options" ("Incentive Stock Options" or "ISO") within the meaning of Section 422 of the U.S. Internal Revenue Code of 1986, as amended (the "Code"), some of the options granted by the Committee pursuant to the 1997 Plan shall constitute "nonqualified stock options" ("Nonqualified Stock Option's") and some of the options granted by the Committee shall be 102 Stock Options ("102 Stock Options") pursuant to the provisions of Section 102 of the Israeli Income Tax Ordinance (New Version) 1961 and any regulations, rules, orders or procedures promulgated thereunder (together: the "Options"). The Committee may also grant restricted shares ("Restricted Stock") under the 1997 Plan (Restricted Stock together with the Options shall be referred to as: "Options/Shares"). 3. ADMINISTRATION OF 1997 PLAN The Board of Directors (the "Board") or a Stock Option Committee (the "Committee") appointed and maintained by the Board shall have the power to administer the 1997 Plan. The Committee shall consist of at least three members who shall serve at the pleasure of the Board, and any member of such Committee shall be eligible to receive Options/Shares under the 1997 Plan while serving on the Committee, unless otherwise specified herein. The Board or the Committee shall have full power and authority: (i) to designate participants; (ii) to designate Options/Shares or any portion thereof as incentive Stock Options, as Nonqualified Stock Options, as Restricted Stock, as 102 Stock Options, or otherwise; (iii) to determine the terms and provisions of respective Option/Shares agreements (which need not be identical) including, but not limited to, the number of Options/Shares in the Company to be granted, provisions concerning the time or times when and the extent to which the Options may be exercised and the nature and duration of restrictions as to transferability or restrictions constituting substantial risk of forfeiture; (iv) to accelerate the right of an optionee to exercise, in whole or in part, any previously granted Option; (v) to interpret the provisions and supervise the administration of the 1997 Plan; and (vi) to determine any other matter which is necessary or desirable for, or incidental to administration of the 1997 Plan. The Board or the Committee shall have the authority to grant in its discretion to the holder of an outstanding Option, in exchange for the surrender and cancellation of such Option, a new Option having a purchase price lower than provided in the Option so surrendered and canceled and containing such other terms and conditions as the Board or the Committee may prescribe in accordance with the provisions of the 1997 Plan. All decisions and selections made by the Board or the Committee pursuant to the provisions of the 1997 Plan shall be made by a majority of its members except that no member of the Board or Committee shall vote on, or be counted for quorum purposes, with respect to any proposed action of the Board or Committee relating to any Option to be granted to that member. Any decision reduced to writing and signed by a majority of the members who are authorized to make such decision shall be fully effective as if it had been made by a majority at a meeting duly held. Each member of the Board or the Committee shall be indemnified and held harmless by the Company against any cost or expense (including counsel fees) reasonably incurred by him, or liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act in connection with the 1997 Plan unless arising out of such member's own fraud or bad faith, to the extent permitted by applicable law. Such indemnification shall be in addition to any rights of indemnification the member may have as directors or otherwise under the articles of association of the Company, any agreement, any vote of stockholders or disinterested directors, or otherwise. 4. DESIGNATION OF PARTICIPANTS The persons eligible for participation in the 1997 Plan as recipients of Options/Shares shall include any employees or former employees of the Company or of any subsidiary of the Company. Except for Incentive Stock Options Directors of the Company or of any subsidiary of the Company who are not employees of the Company or its subsidiaries, and additionally consultants or contractors of the Company or its subsidiaries, shall also be eligible for participation in the 1997 Plan as recipients of Options. A person who has been granted an Option/Share hereunder may be granted additional Options/Shares, if the Board or the Committee shall so determine. 5. TRUSTEE The 102 Stock Options which shall be granted to employees of the Company (or if required by law) shall be issued to a trustee nominated by the Board or the Committee (in accordance with the provisions of Section 102) (the "Trustee") and held for the benefit of the optionees for a period of not less than two years (24 months) from the date of grant. The Trustee may also hold in trust any shares issued upon exercise of such 102 Stock Options pursuant to the provisions of Section 102. The Trustee shall not use the voting rights vested in any such shares held by the Trustee and shall not exercise said right in any way whatsoever, except in cases when, at his discretion and after consulting with the Committee, the Trustee believes that the said rights should be exercised for the protection of the optionees as a minority among the Company shareholders. 6. SHARES RESERVED FOR 1997 PLAN Subject to adjustment as provided in Paragraph 8 hereof, a total of 500,000 Ordinary Shares, NIS 0.1 par value per share, of the Company ("Shares") shall be subject to the 1997 Plan. The Shares subject to the 1997 Plan hereby are, reserved for sale for such purpose. Any of such Shares which may remain unsold and which are not subject to outstanding options at the termination of the 1997 Plan shall cease to be reserved for the purpose of the 1997 Plan, but until termination of the 1997 Plan the Company shall at all times reserve a sufficient number of shares to meet the requirements of the 1997 Plan. Should any Option for any reason expire or be canceled prior to its exercise or relinquishment in full, the shares therefore subject to such Option may again be subjected to an Option under the 1997 Plan. 7. OPTION/SHARES PRICE (a) Except for Incentive Stock Options the purchase price of each Share subject to an Option or of each Restricted Stock or any portion thereof shall be determined by the Committee in its sole and absolute discretion in accordance with applicable law, subject to guidelines as shall be suggested by the Board from time to time (but not less than the par value). (b) The Option price shall be payable upon the exercise of the Option in cash, by check, or other form satisfactory to the Board or the Committee. (c) The proceeds received by the Company from the sale of Options/Shares subject to an Option/Share granted under the 1997 Plan will be added to the general funds of the Company and used for its corporate purposes. 8. ADJUSTMENTS Upon the occurrence of any of the following described events, a grantee's rights to purchase Options/Shares under the 1997 Plan shall be adjusted as hereinafter provided: (a) If the Company is separated, reorganized, merged, consolidated or amalgamated with or into another corporation while unexercised/unvested Options/Shares remain outstanding under the 1997 Plan, there shall be substituted for the shares subject to the unexercised/unvested portions of such outstanding Options/Shares an appropriate number of shares of each class of shares or other securities of the separated, reorganized, merged, consolidated or amalgamated corporation which were distributed to the shareholders of the Company in respect of such shares, and appropriate adjustments shall be made in the purchase price per share to reflect such action. (b) If the Company is liquidated or dissolved while unexercised/unvested Options/Shares remain outstanding under the 1997 Plan, then all such outstanding Options/Shares may be exercised/vested in full by the optionees/grantees as of the effective date of any such liquidation or dissolution of the Company without regard to the installment exercise provisions of Paragraph 9(b), by the optionees/grantees giving notice in writing to the Company of their intention to so exercise. (c) If the outstanding shares of the Company shall at anytime be changed or exchanged by declaration of a stock dividend, stock split, combination or exchange of shares, recapitalization, extraordinary dividend payable in stock of a corporation other than the Company, or any other like event by or of the Company, and as often as the same shall occur, then the number, class and kind of Shares subject to this 1997 Plan or subject to any Options theretofore granted, and the option prices, shall be appropriately and equitably adjusted so as to maintain the proportionate number of Shares without changing the aggregate option price; provided, however, that no adjustment shall be made by reason of the distribution of subscription rights on outstanding stock. Upon the happening of any of the foregoing, the class and aggregate number of shares issuable pursuant to the 1997 Plan (as set forth in paragraph 6 hereof), in respect of which Options/Shares have not yet been exercised/vested, shall be appropriately adjusted. (d) Anything herein to the contrary notwithstanding, if prior to the completion of the initial public offering of shares of the Company, all or substantially all of the shares of the Company are to be sold, or upon a -merger or reorganization or the like, the shares of the Company, or any class thereof, are to be exchanged for securities of another company, then in such event, each optionee shall be obliged to sell or exchange, as the case may be, the shares he purchased under the 1997 Plan in accordance with the instructions then issued by the Board. 9. TERM AND EXERCISE OF OPTIONS/SHARES (a) Options shall be exercised by the optionee by giving written notice to the Company, which exercise shall be effective upon receipt of such notice by the Secretary of the Company at its principal office. The notice shall specify the number of Shares with respect to which the Option is being exercised. (b) Each Option granted under this 1997 Plan shall be exercisable on the date and for the number of shares as shall be provided in the option agreement evidencing the Option and setting forth the terms thereof. However, (i) no Option shall be exercisable after the expiration of seven (7) years from the date of grant and (ii) no Incentive Stock Options may be granted to a person who at the time of the grant owns more than 10% of the voting stock of value of the Company. (c) Options/Shares granted under the 1997 Plan shall not be transferable by optionees/grantees other than by will or the laws of descent and distribution, and during an optionee's lifetime shall be exercisable only by that optionee. (d) Options granted to employees or directors may not be exercised after the termination of employment and/or service as a director unless (i) prior to the date of such termination, the Board or the Committee shall authorize, in the relevant option agreement or otherwise, an extension of the term of all or part of the option beyond the date of such termination for a period not to exceed the period during which the Option by its terms would otherwise have been exercisable, (ii) termination is without Cause (as determined by the Committee) or employee resigns, in which event any Options still in force and unexpired may be exercised within a period of 30 days from the date of such termination, but only with respect to the number of shares purchasable at the time of such termination, (iii) termination is the result of death or disability, in which event any Options still in force and unexpired may be exercised within a period of six (6) months from the date of termination, but only with respect to the number of shares purchasable at the time of such termination, or (iv) termination of employment is the result of retirement under any deferred compensation agreement or retirement plan of the Company or of any subsidiary of the Company or after age 60, while Options granted hereunder are still in force and unexpired, in which case the Board or Committee shall have the discretion to permit any unnatured installments of the Options to be accelerated as for the later of the date of retirement or a date one year following the date of grant, and the Options shall thereupon be exercisable in fall without regard to the installment exercise provisions of Paragraph 9(b). (e) The holders of Options/Shares shall not be or have any of the rights or privileges of shareholders of the Company in respect of any shares unless and until, following exercise/vesting date but subject always to the provisions of Section 5 above, certificates representing such shares shall have been issued by the Company and delivered to such holders. (f) Any form of option agreement authorized by the 1997 Plan may contain such other provisions as the Board or the Committee may, from time to time, deem advisable. Without limiting the foregoing, the Board or the Committee may, with the consent of the optionee/grantee, from time to time cancel all or any portion of any Option then subject to exercise, and the Company's obligation in respect of such Option may be discharged by (i) payment to the optionee of an amount in cash equal to the excess, if any, of the Fair Market Value of the shares at the date of such cancellation subject to the portion of the Option so canceled over the aggregate purchase price of such shares, (ii) the issuance or transfer to the optionee of Shares of the Company with a Fair Market Value at the date of such transfer equal to any such excess, or (iii) a combination of cash and shares with a combined value equal to any such excess, all as determined by the Board or the Committee in its sole discretion. (g) Shares of Restricted Stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, for such period as the Committee shall determine from the date on which the award is granted (the "Restricted Period"). The Committee may also impose such other restrictions and conditions on the shares as it deems appropriate including the satisfaction of performance criteria. Certificates for shares of stock issued pursuant to Restricted Stock awards shall bear an appropriate legend referring to such restrictions, and any attempt to dispose of any such shares of stock in contravention of such restrictions shall be null and void and without effect. During the Restricted Period, such certificates shall be held in escrow by an escrow agent appointed by the Committee. In determining the Restricted Period of an award, the Committee may provide that the foregoing restrictions shall lapse with respect to specified percentages of the awarded shares on successive anniversaries of the date of such award. Subject to such exceptions as may be determined by the Committee, if the Grantee's continuous employment with, or performance of, service for, the Company or any Parent or Subsidiary shall cease for any reason prior to the expiration of the Restricted Period of an award, any shares remaining subject to restrictions shall thereupon be forfeited by the grantee and transferred to a Subsidiary at no cost to the Company or such Parent or Subsidiary or shall be converted into a deferred stock. 10. INCENTIVE STOCK OPTIONS (a) In case of ISO granted to employees, the aggregate Fair Market Value of Shares (determined as of the date of the grant of the ISO's) with respect to which ISO's are exercisable for the first time by any optionee during any calendar year shall not exceed the limitation provided under Section 422(d) of the Code. (b) The options issued as ISO's must be granted within 7 years of the date that the Plan is adopted or the date that the Plan is approved by the stockholders, whichever is earlier. (c) Any option issued as an ISO must by its terms be exercisable only within 10 years of the date that it is granted. (d) The option price for any ISO must not be less than the fair market value of the stock at the time that the option is granted. This requirement shall be deemed satisfied if there has been a good faith attempt to value the stock accurately for this purpose. (e) The ISO by its terms must be non-transferable other than at death and must be exercisable during the employee's lifetime only by the employee. 11. PURCHASE OF INVESTMENT Unless Shares covered by the 1997 Plan have been listed for trade on any stock exchange (of any jurisdiction), or the Company has determined that such registration is unnecessary, each person exercising an Option under the 1997 Plan may be required by the Company to give a representation in writing that he is acquiring such shares for his own account for investment and not with a view to, or for sale in connection with, the distribution of any part thereof. 12. TERM DATE OF 1997 PLAN The 1997 Plan shall be effective as of January 1, 1997 and shall terminate on December 31, 2006. All Options not exercised as of December 31, 2006 shall expire. 13. AMENDMENTS OR TERMINATION The Board may, at any time and from time to time, amend, alter, or discontinue the 1997 Plan, except that no amendment or alteration shall be made which would impair the rights of the holder of any Options/Shares theretofore granted without his consent. 14. GOVERNMENT REGULATIONS The 1997 Plan, and the granting and exercise of Options/Shares hereunder, and the obligation of the Company to sell and deliver shares under such Options/Shares, shall be subject to all applicable laws, rules, and regulations, whether of the State of Israel or of the United States or any other State having jurisdiction over the Company and the optionee including the registration of the shares under the United States Securities Act of 1933, and to such approvals by any governmental agencies or national securities exchanges as may be required. 15. CONTINUANCE OF EMPLOYMENT Neither the 1997 Plan nor the option agreement with the optionee shall impose any obligation on the Company or a subsidiary thereof, to continue any optionee/grantee in its employ, and nothing in the 1997 Plan or in any Option/Share granted pursuant thereto shall confer upon any optionee any right to continue in the employ of the Company or a subsidiary thereof or restrict the right of the Company or a subsidiary thereof to terminate such employment at any time. 16. GOVERNING LAW This 1997 Plan shall be governed by and construed and enforced in accordance with the laws of the State of Israel applicable to contracts made and to be performed therein, without giving effect to the principles of conflict of laws. 17. TAX CONSEQUENCES Any tax consequences arising from the grant or exercise of any Options/Shares, from the payment for shares covered thereby or from any other event or act (of the Company or the optionee) hereunder (including without limitation any tax consequences if for any reason, or by any authority, legal or other, according to any law or regulation, local or foreign, the options or shares of any type or kind granted under this 1997 Plan or any portion thereof, would not constitute or not qualify for any type or kind of tax consequences), shall be borne solely by the optionee. Furthermore, the optionee shall agree to indemnify the Company and the Trustee and hold them harmless against and from any and all liability for any such tax or interest or penalty thereon, including without limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax from any payment made to the optionee/grantee. 18. NON-EXCLUSIVITY OF THE 1997 PLAN The adoption of the 1997 Plan by the Board shall not be construed as amending, modifying or rescinding any previously approved incentive arrangement or as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under the 1997 Plan, and such arrangements may be either applicable generally or only in specific cases. 19. MULTIPLE AGREEMENTS The terms of each Option/Share may differ from other Options/Shares granted under the 1997 Plan at the same time, or at any other time. The Committee may also grant more than one Option/Share to a given optionee/grantee during the term of the 1997 Plan, either in addition to, or in substitution for, one or more Options/Shares previously granted to that optionee/grantee. EX-10.3 9 0009.txt 1998 STOCK PLAN Exhibit 10.3 ------------ RTS SOFTWARE LTD. 1998 STOCK OPTION AND INCENTIVE PLAN ~~~~~~~~~~~~~~~ 1. NAME This plan, as amended from time to time, shall be known as the RTS Software Ltd. 1998 Stock Option And Incentive Plan. 2. PURPOSE OF 1998 PLAN The purpose of the RTS Software Ltd. 1998 Stock Option and Incentive Plan (the "1998 Plan") is to afford an incentive to officers, directors, employees and consultants of RTS Software Ltd. (the "Company"), or any subsidiary of the Company which now exists or hereafter is organized or acquired by the Company, to acquire a proprietary interest in the Company, to continue as employees, directors and consultants, to increase their efforts on behalf of the Company and to promote the success of the Company's business. It is further intended that among other options granted some of the options granted by the Committee pursuant to the 1998 Plan shall constitute "incentive stock options" ("Incentive Stock Options" or "ISO") within the meaning of Section 422 of the U.S. Internal Revenue Code of 1986, as amended (the "Code"), some of the options granted by the Committee pursuant to the 1998 Plan shall constitute "nonqualified stock options" ("Nonqualified Stock Options") and some of the options granted by the Committee shall be 102 Stock Options ("102 Stock Options") pursuant to the provisions of Section 102 of the Israeli Income Tax Ordinance (New Version) 1961 and any regulations, rules, orders or procedures promulgated thereunder (together: the "Options") . The Committee may also grant restricted shares ("Restricted Stock") under the 1998 Plan (Restricted Stock together with the Options shall be referred to as: "Options/Shares"). 3. ADMINISTRATION OF 1998 PLAN The Board of Directors (the "Board") or a Stock Option Committee (the "Committee") appointed and maintained by the Board shall have the power to administer the 1998 Plan. The Committee shall consist of at least three members who shall serve at the pleasure of the Board, and any member of such Committee shall be eligible to receive Options/Shares under the 1998 Plan while serving on the Committee, unless otherwise specified herein. The Board or the Committee shall have full power and authority: (i) to designate participants; (ii) to designate Options/Shares or any portion thereof as -2- Incentive Stock Options, as Nonqualified Stock Options, as Restricted Stock, as 102 Stock Options, or otherwise; (iii) to determine the terms and provisions of respective Option/Shares agreements (which need not be identical) including, but not limited to, the number of Options/Shares in the Company to be granted, provisions concerning the time or times when and the extent to which the Options may be exercised and the nature and duration of restrictions as to transferability or restrictions constituting substantial risk of forfeiture; (iv) to accelerate the right of an optionee to exercise, in whole or in part, any previously granted Option ; (v) to interpret the provisions and supervise the administration of the 1998 Plan; and (vi) to determine any other matter which is necessary or desirable for, or incidental to administration of the 1998 Plan. The Board or the Committee shall have the authority to grant in its discretion to the holder of an outstanding Option, in exchange for the surrender and cancellation of such Option, a new Option having a purchase price lower than provided in the Option so surrendered and canceled and containing such other terms and conditions as the Board or the Committee may prescribe in accordance with the provisions of the 1998 Plan. All decisions and selections made by the Board or the Committee pursuant to the provisions of the 1998 Plan shall be made by a majority of its members except that no member of the Board or Committee shall vote on, or be counted for quorum purposes, with respect to any proposed action of the Board or Committee relating to any Option to be granted to that member. Any decision reduced to writing and signed by a majority of the members who are authorized to make such decision shall be fully effective as if it had been made by a majority at a meeting duly held. Each member of the Board or the Committee shall be indemnified and held harmless by the Company against any cost or expense (including counsel fees) reasonably incurred by him, or liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act in connection with the 1998 Plan unless arising out of such member's own fraud or bad faith, to the extent permitted by applicable law. Such indemnification shall be in addition to any rights of indemnification the member may have as directors or otherwise under the articles of association of the Company, any agreement, any vote of stockholders or disinterested directors, or otherwise. 4. DESIGNATION OF PARTICIPANTS The persons eligible for participation in the 1998 Plan as recipients of Options/Shares shall include any employees or former employees of the Company or of any subsidiary of the Company. Except for Incentive Stock Options Directors of the Company or of any subsidiary of the Company who are not employees of the Company or its subsidiaries, and additionally consultants or contractors of the Company or its subsidiaries, shall also be eligible for participation in the 1998 Plan as recipients of Options. -3- A person who has been granted an Option/Share hereunder may be granted additional Options/Shares, if the Board or the Committee shall so determine. 5. TRUSTEE The 102 Stock Options which shall be granted to employees of the Company (or if required by law) shall be issued to a trustee nominated by the Board or the Committee (in accordance with the provisions of Section 102) (the "Trustee") and held for the benefit of the optionees for a period of not less than two years (24 months) from the date of grant. The Trustee may also hold in trust any shares issued upon exercise of such 102 Stock Options pursuant to the provisions of Section 102. The Trustee shall not use the voting rights vested in any such shares held by the Trustee and shall not exercise said right in any way whatsoever, except in cases when, at his discretion and after consulting with the Committee, the Trustee believes that the said rights should be exercised for the protection of the optionees as a minority among the Company shareholders. 6. SHARES RESERVED FOR 1998 PLAN Subject to adjustment as provided in Paragraph 8 hereof, a total of 350,000 Ordinary Shares, NIS 0.1 par value per share, of the Company ("Shares") shall be subject to the 1998 Plan. The Shares subject to the 1998 Plan hereby are, reserved for sale for such purpose. Any of such Shares which may remain unsold and which are not subject to outstanding options at the termination of the 1998 Plan shall cease to be reserved for the purpose of the 1998 Plan, but until termination of the 1998 Plan the Company shall at all times reserve a sufficient number of shares to meet the requirements of the 1998 Plan. Should any Option for any reason expire or be canceled prior to its exercise or relinquishment in full, the shares therefore subject to such Option may again be subjected to an Option under the 1998 Plan. 7. OPTION/SHARES PRICE (a) Except for Incentive Stock Options the purchase price of each Share subject to an Option or of each Restricted Stock or any portion thereof shall be determined by the Committee in its sole and absolute discretion in accordance with applicable law, subject to guidelines as shall be suggested by the Board from time to time (but not less than the par value). (b) The Option price shall be payable upon the exercise of the Option in cash, by check, or other form satisfactory to the Board or the Committee. (c) The proceeds received by the Company from the sale of Options/Shares subject to an Option/Share granted under the 1998 Plan will be added to the general funds of the Company and used for its corporate purposes. -4- 8. ADJUSTMENTS Upon the occurrence of any of the following described events, a grantee's rto purchase Options/Shares under the 1998 Plan shall be adjusted as hereinafter provided: (a) If the Company is separated, reorganized, merged, consolidated or amalgamated with or into another corporation while unexercised /unvested Options/Shares remain outstanding under the 1998 Plan, there shall be substituted for the shares subject to the unexercised /unvested portions of such outstanding Options/Shares an appropriate number of shares of each class of shares or other securities of the separated, reorganized, merged, consolidated or amalgamated corporation which were distributed to the shareholders of the Company in respect of such shares, and appropriate adjustments shall be made in the purchase price per share to reflect such action. (b) If the Company is liquidated or dissolved while unexercised/unvested Options/Shares remain outstanding under the 1998 Plan, then all such outstanding Options/Shares may be exercised/vested in full by the optionees/grantees as of the effective date of any such liquidation or dissolution of the Company without regard to the installment exercise provisions of Paragraph 9(b), by the optionees/grantees giving notice in writing to the Company of their intention to so exercise. (c) If the outstanding shares of the Company shall at anytime be changed or exchanged by declaration of a stock dividend, stock split, combination or exchange of shares, recapitalization, extraordinary dividend payable in stock of a corporation other than the Company, or any other like event by or of the Company, and as often as the same shall occur, then the number, class and kind of Shares subject to this 1998 Plan or subject to any Options theretofore granted, and the option prices, shall be appropriately and equitably adjusted so as to maintain the proportionate number of Shares without changing the aggregate option price; provided, however, that no adjustment shall be made by reason of the distribution of subscription rights on outstanding stock. Upon the happening of any of the foregoing, the class and aggregate number of shares issuable pursuant to the 1998 Plan (as set forth in paragraph 6 hereof), in respect of which Options/Shares have not yet been exercised/vested, shall be appropriately adjusted. (d) Anything herein to the contrary notwithstanding, if prior to the completion of the initial public offering of shares of the Company, all or substantially all of the shares of the Company are to be sold, or upon a -merger or reorganization or the like, the shares of the -5- Company, or any class thereof, are to be exchanged for securities of another company, then in such event, each optionee shall be obliged to sell or exchange, as the case may be, the shares he purchased under the 1998 Plan in accordance with the instructions then issued by the Board. 9. TERM AND EXERCISE OF OPTIONS/SHARES (a) Options shall be exercised by the optionee by giving written notice to the Company, which exercise shall be effective upon receipt of such notice by the Secretary of the Company at its principal office. The notice shall specify the number of Shares with respect to which the Option is being exercised. (b) Each Option granted under this 1998 Plan shall be exercisable on the date and for the number of shares as shall be provided in the option agreement evidencing the Option and setting forth the terms thereof. However, (i) no Option shall be exercisable after the expiration of seven (7) years from the date of grant, and (ii) no Incentive Stock Options may be granted to a person who at the time of the grant owns more than 10% of the voting stock of value of the Company. (c) Options/Shares granted under the 1998 Plan shall not be transferable by optionees/grantees other than by will or the laws of descent and distribution, and during an optionee's lifetime shall be exercisable only by that optionee. (d) Options granted to employees or directors may not be exercised after the termination of employment and/or service as a director unless (i) prior to the date of such termination, the Board or the Committee shall authorize, in the relevant option agreement or otherwise, an extension of the term of all or part of the option beyond the date of such termination for a period not to exceed the period during which the Option by its terms would otherwise have been exercisable, (ii) termination is without Cause (as determined by the Committee) or employee resigns, in which event any Options still in force and unexpired may be exercised within a period of 30 days from the date of such termination, but only with respect to the number of shares purchasable at the time of such termination, (iii) termination is the result of death or disability, in which event any Options still in force and unexpired may be exercised within a period of six (6) months from the date of termination, but only with respect to the number of shares purchasable at the time of such termination, or (iv) termination of employment is the result of retirement under any deferred compensation agreement or retirement plan of the Company or of any subsidiary of the Company or after age 60, while Options granted hereunder are still in force and unexpired, in which case the Board or Committee shall have the discretion to permit any unmatured installments of the Options to be accelerated as for the later of the -6- date of retirement or a date one year following the date of grant, and the Options shall thereupon be exercisable in full without regard to the installment exercise provisions of Paragraph 9(b). (e) The holders of Options/Shares shall not be or have any of the rights or privileges of shareholders of the Company in respect of any shares unless and until, following exercise/vesting date but subject always to the provisions of Section 5 above, certificates representing such shares shall have been issued by the Company and delivered to such holders. (f) Any form of option agreement authorized by the 1998 Plan may contain such other provisions as the Board or the Committee may, from time to time, deem advisable. Without limiting the foregoing, the Board or the Committee may, with the consent of the optionee/grantee, from time to time cancel all or any portion of any Option then subject to exercise, and the Company's obligation in respect of such Option may be discharged by (i) payment to the optionee of an amount in cash equal to the excess, if any, of the Fair Market Value of the shares at the date of such cancellation subject to the portion of the Option so canceled over the aggregate purchase price of such shares, (ii) the issuance or transfer to the optionee of Shares of the Company with a Fair Market Value at the date of such transfer equal to any such excess, or (iii) a combination of cash and shares with a combined value equal to any such excess, all as determined by the Board or the Committee in its sole discretion. (g) Shares of Restricted Stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, for such period as the Committee shall determine from the date on which the award is granted (the "Restricted Period"). The Committee may also impose such other restrictions and conditions on the shares as it deems appropriate including the satisfaction of performance criteria. Certificates for shares of stock issued pursuant to Restricted Stock awards shall bear an appropriate legend referring to such restrictions, and any attempt to dispose of any such shares of stock in contravention of such restrictions shall be null and void and without effect. During the Restricted Period, such certificates shall be held in escrow by an escrow agent appointed by the Committee. In determining the Restricted Period of an award, the Committee may provide that the foregoing restrictions shall lapse with respect to specified percentages of the awarded shares on successive anniversaries of the date of such award. Subject to such exceptions as may be determined by the Committee, if the Grantee's continuous employment with, or performance of, service for, the Company or any Parent or Subsidiary shacease for any reason prior to the expiration of the Restricted Period of an -7- award, any shares remaining subject to restrictions shall thereupon be forfeited by the grantee and transferred to a Subsidiary at no cost to the Company or such Parent or Subsidiary or shall be converted into a deferred stock. 10. INCENTIVE STOCK OPTIONS (a) In case of ISO granted to employees, the aggregate Fair Market Value of Shares (determined as of the date of the grant of the ISO's) with respect to which ISO's are exercisable for the first time by any optionee during any calendar year shall not exceed the limitation provided under Section 422(d) of the Code. (b) The options issued as ISOs must be granted within 7 years of the date that the Plan is adopted or the date that the Plan is approved by the stockholders, whichever is earlier. (c) Any option issued as an ISO must by its terms be exerciseable only within 10 years of the date that it is granted. (d) The option price for any ISO must not be less than the fair market value of the stock at the time that the option is granted. This requirement shall be deemed satisfied if there has been a good faith attempt to value the stock accurately for this purpose. (e) The ISO by its terms must be non-transferable other than at death and must be exercisable during the employee's lifetime only by the employee. 11. PURCHASE OF INVESTMENT Unless Shares covered by the 1998 Plan have been listed for trade on any stock exchange (of any jurisdiction), or the Company has determined that such registration is unnecessary, each person exercising an Option under the 1998 Plan may be required by the Company to give a representation in writing that he is acquiring such shares for his own account, for investment and not with a view to, or for sale in connection with, the distribution of any part thereof. 12. TERM DATE OF 1998 PLAN The 1998 Plan shall be effective as of January 1, 1998 and shall terminate on December 31, 2007. All Options not exercised as of December 31, 2007 shall expire. 13. AMENDMENTS OR TERMINATION The Board may, at any time and from time to time, amend, alter, or discontinue the 1998 Plan, except that no amendment or alteration shall be made which would impair the rights of the holder of any Options/Shares theretofore granted without his consent. -8- 14. GOVERNMENT REGULATIONS The 1998 Plan, and the granting and exercise of Options/Shares hereunder, and the obligation of the Company to sell and deliver shares under such Options/Shares, shall be subject to all applicable laws, rules, and regulations, whether of the State of Israel or of the United States or any other State having jurisdiction over the Company and the optionee including the registration of the shares under the United States Securities Act of 1933, and to such approvals by any governmental agencies or national securities exchanges as may be required. 15. CONTINUANCE OF EMPLOYMENT Neither the 1998 Plan nor the option agreement with the optionee shall impose any obligation on the Company or a subsidiary thereof, to continue any optionee/grantee in its employ, and nothing in the 1998 Plan or in any Option/Share granted pursuant thereto shall confer upon any optionee any right to continue in the employ of the Company or a subsidiary thereof or restrict the right of the Company or a subsidiary thereof to terminate such employment at any time. 16. GOVERNING LAW This 1998 Plan shall be governed by and construed and enforced in accordance with the laws of the State of Israel applicable to contracts made and to be performed therein, without giving effect to the principles of conflict of laws. 17. TAX CONSEQUENCES Any tax consequences arising from the grant or exercise of any Options/Shares, from the payment for shares covered thereby or from any other event or act (of the Company or the optionee) hereunder (including without limitation any tax consequences if for any reason, or by any authority, legal or other, according to any law or regulation, local or foreign, the options or shares of any type or kind granted under this 1998 Plan or any portion thereof, would not constitute or not qualify for any type or kind of tax consequences), shall be borne solely by the optionee. Furthermore, the optionee shall agree to indemnify the Company and the Trustee and hold them harmless against and from any and all liability for any such tax or interest or penalty thereon, including without limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax from any payment made to the optionee/grantee. -9- 18. NON-EXCLUSIVITY OF THE 1998 PLAN The adoption of the 1998 Plan by the Board shall not be construed as amending, modifying or rescinding any previously approved incentive arrangement or as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under the 1998 Plan, and such arrangements may be either applicable generally or only in specific cases. 19. MULTIPLE AGREEMENTS The terms of each Option/Share may differ from other Options/Shares granted under the 1998 Plan at the same time, or at any other time. The Committee may also grant more than one Option/Share to a given optionee/grantee during the term of the 1998 Plan, either in addition to, or in substitution for, one or more Options/Shares previously granted to that optionee/grantee. EX-10.4 10 0010.txt 1999 STOCK PLAN Exhibit 10.4 ------------ RTS SOFTWARE LTD. 1999 STOCK OPTION AND INCENTIVE PLAN ============= 1. NAME This plan, as amended from time to time, shall be known as the RTS Software Ltd. 1999 Stock Option And Incentive Plan. 2. PURPOSE OF 1999 PLAN The purpose of the RTS Software Ltd. 1999 Stock Option and Incentive Plan (the "1999 Plan") is to afford an incentive to officers, directors, employees and consultants of RTS Software Ltd. (the "Company"), or any subsidiary of the Company which now exists or hereafter is organized or acquired by the Company, to acquire a proprietary interest in the Company, to continue as employees, directors and consultants, to increase their efforts on behalf of the Company and to promote the success of the Company's business. It is further intended that among other options granted some of the options granted by the Committee pursuant to the 1999 Plan shall constitute "incentive stock options" ("Incentive Stock Options" or "ISO") within the meaning of Section 422 of the U.S. Internal Revenue Code of 1986, as amended (the "Code"), some of the options granted by the Committee pursuant to the 1999 Plan shall constitute "nonqualified stock options" ("Nonqualified Stock Options") and some of the options granted by the Committee shall be 102 Stock Options ("102 Stock Options") pursuant to the provisions of Section 102 of the Israeli Income Tax Ordinance (New Version) 1961 and any regulations, rules, orders or procedures promulgated thereunder (together: the "Options") . The Committee may also grant restricted shares ("Restricted Stock") under the 1999 Plan (Restricted Stock together with the Options shall be referred to as: "Options/Shares"). 3. ADMINISTRATION OF 1999 PLAN The Board of Directors (the "Board") or a Stock Option Committee (the "Committee") appointed and maintained by the Board shall have the power to administer the 1999 Plan. The Committee shall consist of at least three members who shall serve at the pleasure of the Board, and any member of such Committee shall be eligible to receive Options/Shares under the 1999 Plan while serving on the Committee, unless otherwise specified herein. The Board or the Committee shall have full power and authority: (i) to designate participants; (ii) to designate Options/Shares or any portion thereof as Incentive Stock Options, as Nonqualified Stock Options, as Restricted Stock, as 102 -2- Stock Options, or otherwise; (iii) to determine the terms and provisions of respective Option/Shares agreements (which need not be identical) including, but not limited to, the number of Options/Shares in the Company to be granted, provisions concerning the time or times when and the extent to which the Options may be exercised and the nature and duration of restrictions as to transferability or restrictions constituting substantial risk of forfeiture; (iv) to accelerate the right of an optionee to exercise, in whole or in part, any previously granted Option ; (v) to interpret the provisions and supervise the administration of the 1999 Plan; and (vi) to determine any other matter which is necessary or desirable for, or incidental to administration of the 1999 Plan. The Board or the Committee shall have the authority to grant in its discretion to the holder of an outstanding Option, in exchange for the surrender and cancellation of such Option, a new Option having a purchase price lower than provided in the Option so surrendered and canceled and containing such other terms and conditions as the Board or the Committee may prescribe in accordance with the provisions of the 1999 Plan. All decisions and selections made by the Board or the Committee pursuant to the provisions of the 1999 Plan shall be made by a majority of its members except that no member of the Board or Committee shall vote on, or be counted for quorum purposes, with respect to any proposed action of the Board or Committee relating to any Option to be granted to that member. Any decision reduced to writing and signed by a majority of the members who are authorized to make such decision shall be fully effective as if it had been made by a majority at a meeting duly held. Each member of the Board or the Committee shall be indemnified and held harmless by the Company against any cost or expense (including counsel fees) reasonably incurred by him, or liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act in connection with the 1999 Plan unless arising out of such member's own fraud or bad faith, to the extent permitted by applicable law. Such indemnification shall be in addition to any rights of indemnification the member may have as directors or otherwise under the articles of association of the Company, any agreement, any vote of stockholders or disinterested directors, or otherwise. 4. DESIGNATION OF PARTICIPANTS The persons eligible for participation in the 1999 Plan as recipients of Options/Shares shall include any employees or former employees of the Company or of any subsidiary of the Company. Except for Incentive Stock Options Directors of the Company or of any subsidiary of the Company who are not employees of the Company or its subsidiaries, and additionally consultants or contractors of the Company or its subsidiaries, shall also be eligible for participation in the 1999 Plan as recipients of Options. A person who has been granted an Option/Share hereunder may be granted additional Options/Shares, if the Board or the Committee shall so determine. -3- 5. TRUSTEE The 102 Stock Options which shall be granted to employees of the Company (or if required by law) shall be issued to a trustee nominated by the Board or the Committee (in accordance with the provisions of Section 102) (the "Trustee") and held for the benefit of the optionees for a period of not less than two years (24 months) from the date of grant. The Trustee may also hold in trust any shares issued upon exercise of such 102 Stock Options pursuant to the provisions of Section 102. The Trustee shall not use the voting rights vested in any such shares held by the Trustee and shall not exercise said right in any way whatsoever, except in cases when, at his discretion and after consulting with the Committee, the Trustee believes that the said rights should be exercised for the protection of the optionees as a minority among the Company shareholders. 6. SHARES RESERVED FOR 1999 PLAN Subject to adjustment as provided in Paragraph 8 hereof, a total of 500,000 Ordinary Shares, NIS 0.1 par value per share, of the Company ("Shares") shall be subject to the 1999 Plan. The Shares subject to the 1999 Plan hereby are, reserved for sale for such purpose. Any of such Shares which may remain unsold and which are not subject to outstanding options at the termination of the 1999 Plan shall cease to be reserved for the purpose of the 1999 Plan, but until termination of the 1999 Plan the Company shall at all times reserve a sufficient number of shares to meet the requirements of the 1999 Plan. Should any Option for any reason expire or be canceled prior to its exercise or relinquishment in full, the shares therefore subject to such Option may again be subjected to an Option under the 1999 Plan. 7. OPTION/SHARES PRICE (a) Except for Incentive Stock Options the purchase price of each Share subject to an Option or of each Restricted Stock or any portion thereof shall be determined by the Committee in its sole and absolute discretion in accordance with applicable law, subject to guidelines as shall be suggested by the Board from time to time (but not less than the par value). (b) The Option price shall be payable upon the exercise of the Option in cash, by check, or other form satisfactory to the Board or the Committee. (c) The proceeds received by the Company from the sale of Options/Shares subject to an Option/Share granted under the 1999 Plan will be added to the general funds of the Company and used for its corporate purposes. -4- 8. ADJUSTMENTS Upon the occurrence of any of the following described events, a grantee's right to purchase Options/Shares under the 1999 Plan shall be adjusted as hereinafter provided: (a) If the Company is separated, reorganized, merged, consolidated or amalgamated with or into another corporation while unexercised /unvested Options/Shares remain outstanding under the 1999 Plan, there shall be substituted for the shares subject to the unexercised /unvested portions of such outstanding Options/Shares an appropriate number of shares of each class of shares or other securities of the separated, reorganized, merged, consolidated or amalgamated corporation which were distributed to the shareholders of the Company in respect of such shares, and appropriate adjustments shall be made in the purchase price per share to reflect such action. (b) If the Company is liquidated or dissolved while unexercised/unvested Options/Shares remain outstanding under the 1999 Plan, then all such outstanding Options/Shares may be exercised/vested in full by the optionees/grantees as of the effective date of any such liquidation or dissolution of the Company without regard to the installment exercise provisions of Paragraph 9(b), by the optionees/grantees giving notice in writing to the Company of their intention to so exercise. (c) If the outstanding shares of the Company shall at anytime be changed or exchanged by declaration of a stock dividend, stock split, combination or exchange of shares, recapitalization, extraordinary dividend payable in stock of a corporation other than the Company, or any other like event by or of the Company, and as often as the same shall occur, then the number, class and kind of Shares subject to this 1999 Plan or subject to any Options theretofore granted, and the option prices, shall be appropriately and equitably adjusted so as to maintain the proportionate number of Shares without changing the aggregate option price; provided, however, that no adjustment shall be made by reason of the distribution of subscription rights on outstanding stock. Upon the happening of any of the foregoing, the class and aggregate number of shares issuable pursuant to the 1999 Plan (as set forth in paragraph 6 hereof), in respect of which Options/Shares have not yet been exercised/vested, shall be appropriately adjusted. (d) Anything herein to the contrary notwithstanding, if prior to the completion of the initial public offering of shares of the Company, all or substantially all of the shares of the Company are to be sold, or upon a -merger or reorganization or the like, the shares of the Company, or any class thereof, are to be exchanged for securities of another company, -5- then in such event, each optionee shall be obliged to sell or exchange, as the case may be, the shares he purchased under the 1999 Plan in accordance with the instructions then issued by the Board. 9. TERM AND EXERCISE OF OPTIONS/SHARES (a) Options shall be exercised by the optionee by giving written notice to the Company, which exercise shall be effective upon receipt of such notice by the Secretary of the Company at its principal office. The notice shall specify the number of Shares with respect to which the Option is being exercised. (b) Each Option granted under this 1999 Plan shall be exercisable on the date and for the number of shares as shall be provided in the option agreement evidencing the Option and setting forth the terms thereof. However, (i) no Option shall be exercisable after the expiration of seven (7) years from the date of grant, and (ii) no Incentive Stock Options may be granted to a person who at the time of the grant owns more than 10% of the voting stock of value of the Company. (c) Options/Shares granted under the 1999 Plan shall not be transferable by optionees/grantees other than by will or the laws of descent and distribution, and during an optionee's lifetime shall be exercisable only by that optionee. (d) Options granted to employees or directors may not be exercised after the termination of employment and/or service as a director unless (i) prior to the date of such termination, the Board or the Committee shall authorize, in the relevant option agreement or otherwise, an extension of the term of all or part of the option beyond the date of such termination for a period not to exceed the period during which the Option by its terms would otherwise have been exercisable, (ii) termination is without Cause (as determined by the Committee) or employee resigns, in which event any Options still in force and unexpired may be exercised within a period of 30 days from the date of such termination, but only with respect to the number of shares purchasable at the time of such termination, (iii) termination is the result of death or disability, in which event any Options still in force and unexpired may be exercised within a period of six (6) months from the date of termination, but only with respect to the number of shares purchasable at the time of such termination, or (iv) termination of employment is the result of retirement under any deferred compensation agreement or retirement plan of the Company or of any subsidiary of the Company or after age 60, while Options granted hereunder are still in force and unexpired, in which case the Board or Committee shall have the discretion to permit any unmatured installments of the Options to be accelerated as for the later of the date of retirement or a date one year following the date of grant, and the Options shall thereupon be exercisable in full without regard to the installment exercise provisions of Paragraph 9(b). -6- (e) The holders of Options/Shares shall not be or have any of the rights or privileges of shareholders of the Company in respect of any shares unless and until, following exercise/vesting date but subject always to the provisions of Section 5 above, certificates representing such shares shall have been issued by the Company and delivered to such holders. (f) Any form of option agreement authorized by the 1999 Plan may contain such other provisions as the Board or the Committee may, from time to time, deem advisable. Without limiting the foregoing, the Board or the Committee may, with the consent of the optionee/grantee, from time to time cancel all or any portion of any Option then subject to exercise, and the Company's obligation in respect of such Option may be discharged by (i) payment to the optionee of an amount in cash equal to the excess, if any, of the Fair Market Value of the shares at the date of such cancellation subject to the portion of the Option so canceled over the aggregate purchase price of such shares, (ii) the issuance or transfer to the optionee of Shares of the Company with a Fair Market Value at the date of such transfer equal to any such excess, or (iii) a combination of cash and shares with a combined value equal to any such excess, all as determined by the Board or the Committee in its sole discretion. (g) Shares of Restricted Stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, for such period as the Committee shall determine from the date on which the award is granted (the "Restricted Period"). The Committee may also impose such other restrictions and conditions on the shares as it deems appropriate including the satisfaction of performance criteria. Certificates for shares of stock issued pursuant to Restricted Stock awards shall bear an appropriate legend referring to such restrictions, and any attempt to dispose of any such shares of stock in contravention of such restrictions shall be null and void and without effect. During the Restricted Period, such certificates shall be held in escrow by an escrow agent appointed by the Committee. In determining the Restricted Period of an award, the Committee may provide that the foregoing restrictions shall lapse with respect to specified percentages of the awarded shares on successive anniversaries of the date of such award. Subject to such exceptions as may be determined by the Committee, if the Grantee's continuous employment with, or performance of, service for, the Company or any Parent or Subsidiary shall cease for any reason prior to the expiration of the Restricted Period of an award, any shares remaining subject to restrictions shall thereupon be forfeited by the grantee and transferred to a Subsidiary at no cost to the Company or such Parent or Subsidiary or shall be converted into a deferred stock. -7- 10. INCENTIVE STOCK OPTIONS (a) In case of ISO granted to employees, the aggregate Fair Market Value of Shares (determined as of the date of the grant of the ISO's) with respect to which ISO's are exercisable for the first time by any optionee during any calendar year shall not exceed the limitation provided under Section 422(d) of the Code. (b) The options issued as ISOs must be granted within 7 years of the date that the Plan is adopted or the date that the Plan is approved by the stockholders, whichever is earlier. (c) Any option issued as an ISO must by its terms be exerciseable only within 10 years of the date that it is granted. (d) The option price for any ISO must not be less than the fair market value of the stock at the time that the option is granted. This requirement shall be deemed satisfied if there has been a good faith attempt to value the stock accurately for this purpose. (e) The ISO by its terms must be non-transferable other than at death and must be exercisable during the employee's lifetime only by the employee. 11. PURCHASE OF INVESTMENT Unless Shares covered by the 1999 Plan have been listed for trade on any stock exchange (of any jurisdiction), or the Company has determined that such registration is unnecessary, each person exercising an Option under the 1999 Plan may be required by the Company to give a representation in writing that he is acquiring such shares for his own account, for investment and not with a view to, or for sale in connection with, the distribution of any part thereof. 12. TERM DATE OF 1999 PLAN The 1999 Plan shall be effective as of January 1, 1999 and shall terminate on December 31, 2008. All Options not exercised as of December 31, 2008 shall expire. 13. AMENDMENTS OR TERMINATION The Board may, at any time and from time to time, amend, alter, or discontinue the 1999 Plan, except that no amendment or alteration shall be made which would impair the rights of the holder of any Options/Shares theretofore granted without his consent. -8- 14. GOVERNMENT REGULATIONS The 1999 Plan, and the granting and exercise of Options/Shares hereunder, and the obligation of the Company to sell and deliver shares under such Options/Shares, shall be subject to all applicable laws, rules, and regulations, whether of the State of Israel or of the United States or any other State having jurisdiction over the Company and the optionee including the registration of the shares under the United States Securities Act of 1933, and to such approvals by any governmental agencies or national securities exchanges as may be required. 15. CONTINUANCE OF EMPLOYMENT Neither the 1999 Plan nor the option agreement with the optionee shall impose any obligation on the Company or a subsidiary thereof, to continue any optionee/grantee in its employ, and nothing in the 1999 Plan or in any Option/Share granted pursuant thereto shall confer upon any optionee any right to continue in the employ of the Company or a subsidiary thereof or restrict the right of the Company or a subsidiary thereof to terminate such employment at any time. 16. GOVERNING LAW This 1999 Plan shall be governed by and construed and enforced in accordance with the laws of the State of Israel applicable to contracts made and to be performed therein, without giving effect to the principles of conflict of laws. 17. TAX CONSEQUENCES Any tax consequences arising from the grant or exercise of any Options/Shares, from the payment for shares covered thereby or from any other event or act (of the Company or the optionee) hereunder (including without limitation any tax consequences if for any reason, or by any authority, legal or other, according to any law or regulation, local or foreign, the options or shares of any type or kind granted under this 1999 Plan or any portion thereof, would not constitute or not qualify for any type or kind of tax consequences), shall be borne solely by the optionee. Furthermore, the optionee shall agree to indemnify the Company and the Trustee and hold them harmless against and from any and all liability for any such tax or interest or penalty thereon, including without limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax from any payment made to the optionee/grantee. 18. NON-EXCLUSIVITY OF THE 1999 PLAN The adoption of the 1999 Plan by the Board shall not be construed as amending, modifying or rescinding any previously approved incentive arrangement or as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the -9- granting of stock options otherwise than under the 1999 Plan, and such arrangements may be either applicable generally or only in specific cases. 19. MULTIPLE AGREEMENTS The terms of each Option/Share may differ from other Options/Shares granted under the 1999 Plan at the same time, or at any other time. The Committee may also grant more than one Option/Share to a given optionee/grantee during the term of the 1999 Plan, either in addition to, or in substitution for, one or more Options/Shares previously granted to that optionee/grantee. EX-10.5 11 0011.txt 2000 AMENDED INVESTORS' RIGHTS AGREEMENT Exhibit 10.5 ------------ THE 2000 AMENDMENT AND RESTATEMENT TO INVESTORS RIGHTS AGREEMENT ========================== THIS 2000 AMENDMENT AND RESTATEMENT (hereinafter the "Agreement") to the Amendment and Restatement to the Investors Rights Agreement dated June 1 1999 is made as of the 5th day of April, 2000, by and among RTS Software Ltd., an Israeli company (the "Company"), the Investors identified in Schedule 1 attached hereto (the "1996 Investors"), the Investors identified in Schedule 2 attached hereto (the "1998 Investors"), the Investors identified in Schedule 3 attached hereto (the "1999 Investors"), (the 1996 Investors, the 1998 Investors and the 1999 Investors are referred to collectively as the "Existing Investors") the investors identified in Schedule 4 attached hereto (the "New Investors") (the Existing Investors and the New Investors are referred to collectively as the "Investors") and the Founders identified in Schedule 5 attached hereto (the "Founders"). W I T N E S S E T H: WHEREAS the 1996 Investors and the Company have entered into an Investors Rights Agreement dated September 30, 1996 (the "1996 Investors Rights Agreement"); and WHEREAS the 1996 Investors and the 1998 Investors (other than GE Capital Equity Holdings, Inc. (formerly GE Capital Advent Investment Corp.) ("GE Capital") have entered into an Amendment and Restatement to the 1996 Investors Rights Agreement dated February 27, 1998 (the "1998 Investors Rights Agreement"). WHEREAS the 1996 Investors and the 1998 Investors have entered into an Amendment and Restatement to the 1998 Investors Rights Agreement dated April 22, 1998 (the "Second 1998 Investors Rights Agreement"); WHEREAS the Existing Investors have entered into an Amendment and Restatement to the Second 1998 Investors Rights Agreement dated June 1, 1999 (the "1999 Investors Rights Agreement"); WHEREAS the Investors and the Company wish to amend and restate the 1999 Investors Rights Agreement so that, as of the date first mentioned above, all the provisions of the 1999 Investors Rights Agreement would have no further force or effect and would be replaced by all the provisions of this Agreement as detailed below; and -2- WHEREAS the Investors are the holders of issued and outstanding Series A Preferred Shares par value NIS 0.1 each of the Company (the "Series A Preferred Shares"), Series B Preferred Shares par value NIS 0.1 each of the Company (the "Series B Preferred Shares"), Series C-1 Preferred Shares par value NIS 0.1 each of the Company (the "Series C-1 Preferred Shares"), the Series C-2 Preferred Shares par value NIS 0.1 each (the "Series C-2 Preferred Shares"), the Company's Convertible Debentures issued under the Loan and Investment Agreement of even date herewith (the "Convertible Debentures") and a portion of the Ordinary Shares par value NIS 0.1 each (collectively with any Ordinary Shares par value NIS 0.1 per share issued upon conversion of the Convertible Debentures, the "Ordinary Shares"). The Series C-1 Preferred Shares and the Series C-2 Preferred Shares shall be referred to herein collectively as the "Series C Preferred Shares" and the Series A Preferred Shares, Series B Preferred Shares and Series C Preferred Shares and any shares (other than Ordinary Shares) issued upon conversion of the Convertible Debentures shall be referred to herein collectively as the "Preferred Shares"); and WHEREAS the Investors and the Company desire to set forth certain matters regarding the ownership of the shares of the Company. NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the parties (or that portion of the parties to the 1999 Investors Rights Agreement required in order to amend the 1999 Investors Rights Agreement) hereby agree that the provisions of the 1999 Investors Rights Agreement would, as of the date first mentioned above, have no further force or effect and would be replaced in its entirety with the provisions detailed below as follows: 1. Affirmative Covenants --------------------- 1.1. Delivery of Financial Statements -------------------------------- The Company shall deliver (i) the New Investors, Eucalyptus and Access until the consummation of the Company's IPO (as defined in Section 1.7 below) and (ii) shall otherwise deliver to each Investor, for so long as such Investor is the record holder of Ordinary Shares, or other securities convertible into Ordinary Shares ("Ordinary Share Equivalents"), in either case constituting at least four percent (4%) of the Ordinary Shares (assuming, for purposes of such calculation, the conversion into Ordinary Shares of all Ordinary Share Equivalents): 1.1.1. As soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of the Company, a consolidated balance sheet of the Company as of the end of such year, and statements of income and statements of cash flow of the Company for such year (the "Audited Annual Financial Statements"), setting forth in each case in comparative form the figures for the previous fiscal year, all -3- in reasonable detail, prepared in accordance with United States generally accepted accounting principles ("GAAP"), audited by a firm of Independent Certified Public Accountants in the State of Israel who are members of the Israeli Institute of Certified Public Accountants, and accompanied by an opinion of such firm which opinion shall state that such balance sheet and statements of income and cash flow have been prepared in conformity with GAAP, and present fairly in all material aspects the financial position of the Company as of their date, and that the audit by such accountants in connection with such financial statements has been conducted in accordance with generally accepted auditing standards. 1.1.2. As soon as practicable, but in any event within forty five (45) days after the end of each quarter of each fiscal year of the Company, an unaudited consolidated balance sheet of the Company as at the end of each such period and unaudited consolidated statements of (i) income and (ii) cash flow of the Company for such period (the "Unaudited Quarterly Financial Statements") and, in the case of the first, second and third quarterly periods, for the period from the beginning of the current fiscal year to the end of such quarterly period, setting forth in each case in comparative form the figures for the corresponding period of the previous fiscal year, all in reasonable detail and except as otherwise stated therein, fairly presenting the financial position of the Company as of their date subject to (x) there being no footnotes contained therein and (y) changes resulting from year-end audit adjustments. Notwithstanding the foregoing, if reasonably requested by the Clal Group (as defined in Schedule 4 hereto), the Company shall provide the Clal Investors with the Company's Audited Annual Financial Statements within thirty (30) days after the end of each fiscal year of the Company. Without derogating from the provisions of Section 1.6 below, the Clal Group may attach information regarding the Company which is derived from the Company's Audited Annual Financial Statements and Unaudited Quarterly Financial Statements to Clal Group's reports to the extent required in writing by the Israeli Securities Authority provided that the Clal Group has promptly notified in writing the Company of such disclosure requirement at least 20 days prior to making such disclosure; and provided further that the Company has had a reasonable opportunity to contest such disclosure. 1.2. Accounting ---------- The Company will maintain and cause each of its Subsidiaries to maintain a system of accounting established and administered in -4- accordance with GAAP (in the case of each Subsidiary (as defined below) in the jurisdiction in which it is incorporated) consistently applied, and will set aside on its books and cause each of its operating Subsidiaries to set aside on its books all such proper reserves as shall be required by GAAP (in the case of each Subsidiary in the jurisdiction in which it is incorporated). For purposes of this Section 1.2, "Subsidiary" means any corporation or entity at least a majority of whose voting securities are at the time owned by the Company, or by one or more Subsidiaries, or by the Company and one or more Subsidiaries. 1.3. Insurance --------- The Company will maintain fire and casualty insurance policies substantially as in effect on the date of this Agreement. In addition to the foregoing, the Company shall maintain from financially sound and reputable insurers (and shall pay all premiums and maintain in full force and effect), term life insurance (with the Company named as beneficiary) on the lives of each of Samuel HaCohen and Vladimir Morgenstern, each in the amount of two million United States dollars ($2,000,000). 1.4. Proprietary Information and Non-Competition Agreements ------------------------------------------------------ From and after September 30, 1996, the Company and its subsidiaries have not and will not employ, or otherwise contract with any person who will have access to confidential information with respect to the Company and its operations unless such person has executed and delivered a Proprietary Information and Non-Competition Agreement to the satisfaction (as to substance and form) of the Company's Board of Directors. 1.5. Annual Plan; Monthly Report ---------------------------- The management of the Company shall establish annually an operating plan and budget for the Company (the "Annual Plan") in consultation with the Board. The Annual Plan for the following year shall be submitted to the Board of Directors for its approval at least fourteen (14) days prior to the first day of the year covered by such Annual Plan. The management of the Company shall submit to the Company's Board of Directors as soon as practicable, but in any event within thirty (30) days after the end of each month, an unaudited consolidated balance sheet of the Company as at the end of such month, and an unaudited estimated consolidated statement of income and statements of cash flow for such month. 1.6. Confidentiality --------------- The Investors agree that any information with respect to the Company -5- or any of its subsidiaries obtained pursuant (a) to this Agreement, the Investment and Loan Agreement dated as of April 5, 2000 (the "Investment and Loan Agreement") and Amendment and Restatement to the Shareholders Agreement dated April 5, 2000 (the "2000 Shareholders Agreement"); (b) the 1999 Investors Rights Agreement, the Second 1998 Investors Rights Agreement and the Share Purchase Agreement (the "1999 Share Purchase Agreement") dated as of June 1, 1999 entered into by and among the purchasers detailed in Schedule 1.1 to that Agreement and the Company; (c) the Second Amendment and Restatement to the Shareholders Agreement (the "1999 Shareholders Agreement") entered into by the parties detailed in Schedules 1, 2 and 3 to that Agreement dated June 1, 1999 and (d) in addition with respect to the 1996 Investors and the 1998 Investors, the information obtained pursuant to the Share Purchase Agreement dated as of April 22, 1998 entered into by and among GE Capital and the Company and the Amendment and Restatement to the Amendment and Restatement to the Shareholders Agreement (the "Second 1998 Shareholders Agreement") entered into by the parties detailed in Schedules 1, 2 and 3 to that Agreement dated as of April 22, 1998, and (e) in addition, with respect to the 1996 Investors and the 1998 Investors, other than GE Capital, the information obtained pursuant to the Share Purchase Agreement dated as of February 26, 1998 entered into by and among the purchasers detailed in Schedule 1.1 to that Agreement and the Company, the information obtained pursuant to the 1998 Investors Rights Agreement and the information obtained pursuant to the Amendment and Restatement to the Shareholders Agreement dated as of February 27, 1998 (the "1998 Shareholders Agreement"), and (f) with respect to the 1996 Investors, the information obtained pursuant to the Share Purchase Agreement dated as of September 30, 1996 entered into by and among the purchasers detailed in Schedule 1.1 to that Agreement and the Company, the information obtained pursuant to the 1996 Investors Rights Agreement and the information obtained pursuant to the Shareholders Agreement entered into by the parties detailed in Schedule 1 to that agreement dated as of 30, September, 1996 (the "1996 Shareholders Agreement") except for information which became publicly known not due to any action or inaction of any of the Investors, will not be disclosed without the prior written consent of the Company; provided that, in connection with periodic reports to -------- their shareholders or partners, the Investors may, without first obtaining such written consent, make general statements, not containing technical information, regarding the nature and progress of the Company's business; and provided further, that the Investors -------- may provide summary information regarding the Company's financial information in their reports to the respective shareholders or partners, but may not annex to such reports the full financial information to be provided hereunder by the Company; and provided -------- further, however, that in the event that an Investor is required to annex financial information obtained to such reports, such Investor shall exert its reasonable efforts to avoid annexing such financial information, in a manner consistent with -6- applicable law and practice, but to the extent that its efforts are unsuccessful, such Investor shall be entitled to annex such financial information to such reports. Notwithstanding the foregoing, GE Capital may disclose such information to its affiliates and permitted transferees pursuant to Section 2.3 of the Shareholders Agreement, solely for purposes of monitoring the performance and prospects of, and managing its investment in, the Company. 1.7. Termination of Financial Information Rights ------------------------------------------- The Company's obligation to deliver the financial statements and other information under Section 1.1 shall terminate and shall be of no further force or effect upon the closing of the Company's initial firmly underwritten public offering of its Ordinary Shares pursuant to an effective registration statement under the United States Securities Act of 1933, as amended (the "Securities Act"), or equivalent law of another jurisdiction, at a price per share of not less than six United States Dollars and ninety nine cents ($6.99) (adjusted for share combination or subdivision or other recapitalization of the Company's shares) with net proceeds to the Company of not less than seven million five hundred thousand United States Dollars ($7,500,000) (the "IPO"). Thereafter, the Company shall deliver to the Investors, and its assignees or transferees, such financial information as the Company from time to time provides to other holders of its shares. 1.8. The STAR Shareholders (as such term is defined in the Shareholders Agreement), ATV (as defined in Schedule 1), the JPV Investors (as such term is defined in Schedule 1), and the Clal Group shall each, at any time that such group not actually designate a director to the Board of Directors, be entitled to designate a non-voting observer to the Company's Board of Directors. Such observer shall be entitled to attend all Board of Directors meetings, shall be entitled to receive all documents and information provided to any director, but will not be entitled to vote at any Board of Directors meeting. Any observer may only be removed from office by the holders who designated such observer. Should such group's holding of the Company's shares be reduced so that such holder holds less than four percent (4%) of the issued and outstanding share capital of the Company (assuming for purposes of such determination, that all options and warrants to purchase the Company's shares have been exercised), then such group will cease to possess the right to designate an observer, and any observer so designated will automatically and without further action be removed from office. 1.9. In addition, in the event that Bessemer Venture Partners IV L.P. designates a person to the Company's Board of Directors which is not affiliated with the Bessemer Investors (as such a term is defined in Schedule 2 hereto) or any of them and such designee is approved by a majority of the Company's Board of Directors (excluding an existing -7- director designated by Bessemer Venture Partners IV L.P, if any) then the Bessemer Investors would be entitled to designate a non-voting observer to the Company's Board of Directors; provided, however, that such approval by a majority of the other directors shall in no way be a condition to such designee becoming a director or serving as a director. Such observer shall be entitled to attend all Board of Directors meetings, shall be entitled to receive all documents and information provided to any director, but will not be entitled to vote at any Board of Directors meeting. Such observer may only be removed from office by the holders who designated such observer. Should the Bessemer Investors' holding of the Company's shares be reduced to less than four percent (4%) of the issued and outstanding share capital of the Company (assuming for purposes of such determination, that all options and warrants to purchase the Company's shares have been exercised) then such group will cease to possess the right to designate an observer, and any observer so designated will automatically and without further action be removed from office. 1.10. GE Capital shall be entitled to designate a non-voting observer to the Company's Board. Such observer, who shall be selected by GE Capital and approved by the Company's Board (which approval shall not be unreasonably withheld), shall be entitled to attend all Board meetings, shall be entitled to receive all documents and information provided to any director, but will not be entitled to vote at any Board meeting. Such observer may only be removed from office by GE Capital. Should the holdings of GE Capital (together with its permitted transferees pursuant to Section 2.3 of the Shareholders Agreement) in the aggregate be reduced to less than two percent (2%) of the issued and outstanding share capital of the Company (assuming for purposes of such determination, that all options and warrants to purchase the Company's shares have been exercised), then such group will cease to possess the right to designate an observer, and any observer so designated will automatically and without further action be removed from office. The documents and other information received by the GE Capital observer pursuant to this paragraph shall be used by such observer and by GE Capital and its affiliates and permitted transferees pursuant to Section 2.3 of the Shareholders Agreement, solely for purposes of monitoring the performance and prospects of and managing their investment in the Company. 2. Pre-emptive Right ----------------- Until the IPO, the Company hereby grants to each Investor rights of first refusal to purchase such Investor's pro-rata share (or any portion thereof) of New Securities (as defined below) that the Company may, from time to time, propose to sell and issue. The Investor's pro rata share shall be the ratio of the number of shares of the Company's Ordinary Shares (assuming for purposes of this Section that all Preferred Shares have been converted into Ordinary Shares) then held by the Investor as of the date of the Rights Notice (as defined -8- in Section 2(b)), to the sum of the total number of Ordinary Shares outstanding as of such date. This right of first refusal shall be subject to the following provisions: (a) "New Securities" shall mean any Ordinary Shares or Preferred Shares of any kind of the Company, whether now or hereafter authorized, and rights, options, or warrants to purchase said Ordinary Shares or Preferred Shares, and securities of any type whatsoever that are, or may become, convertible into said Ordinary Shares or Preferred Shares; provided, however, that "New -------- ------- Securities" shall not include (i) securities issuable upon conversion of Preferred Shares; (ii) securities offered to the public in the IPO; (iii) securities issued in connection with the acquisition of another corporation, business entity or line of business of another business entity by the Company by merger, consolidation, purchase of all or substantially all of the assets, or other reorganization as a result of which the Company owns not less than fifty percent (50%) of the voting power of such corporation; (iv) the Company's Ordinary Shares or Preferred Shares issued in connection with any stock split, stock dividend, recapitalization, reclassification or similar event by the Company; (v) securities authorized by the Company's Board of Directors (including the affirmative vote of at least two (2) of the Directors appointed by the holders of Preferred Shares) to be issued in connection with the acquisition of assets by the Company or supply arrangements for the Company; (vi) Ordinary Shares or options, or any other securities convertible into Ordinary Shares to be issued to employees, directors, contractors, or consultants of the Company in accordance with the Board of Directors' resolutions; (vii) securities issued to a Strategic Investor (as defined below); (viii) securities issued upon the exercise of outstanding options and warrants or any other convertible securities granted at or prior to the date of the Closing of the Investment and Loan Agreement; or (ix) securities to be sold and issued by the Company which securities have been exempt from the definition of "New Securities" by a resolution unanimously adopted, in the best interest of the Company, by all the directors lawfully entitled to vote on such a resolution. "Strategic Investor" in this Agreement shall mean an investor which is capable of materially contributing, directly or indirectly, (other than by investing capital in the Company) to the Company's marketing, distribution or sales and which is approved as such by at least two of the Directors appointed by the holders of Preferred Shares of which one is the Preferred C-1 Director (as defined in the Company's Articles of Association). (b) If the Company proposes to issue New Securities, it shall give the Investors written notice (the "Rights Notice") of its intention, describing the New Securities, the price, the general terms upon which the Company proposes to issue them, and the number of shares that the Investor has the right to purchase under this Section 2. Each Investor shall have twenty-one (21) days from delivery of the Rights Notice to agree to purchase (i) all or any part of its pro-rata share of such New Securities and (ii) all or any part of the pro-rata share of any other shareholder (including for this purpose any permitted transferee of -9- such holder) entitled to such rights to the extent that such other shareholder does not elect to purchase its full pro-rata share, in each case for the price and upon the general terms specified in the Rights Notice, by giving written notice to the Company setting forth the quantity of New Securities to be purchased. If the Investors who elect to purchase their full pro-rata shares also elect to purchase in the aggregate more than 100% of the New Securities, such New Securities shall be sold to such Investors in accordance with their respective pro-rata shares. (c) If the Investors fail to exercise in full the right of first refusal within the period or periods specified in Section 2(b), the Company shall have ninety (90) days after delivery of the Rights Notice to sell the unsold New Securities at a price and upon general terms no more favorable to the purchasers thereof than specified in the Company's notice. If the Company has not sold the New Securities within said ninety (90) day period the Company shall not thereafter issue or sell any New Securities without first offering such securities to the Investors in the manner provided above. (d) The pre-emptive right mentioned herein shall not be in addition to the pre- emptive right described in Article 11(b) of the Articles of Association adopted as of the date of this Agreement, but shall be subject to the provisions of such Article 11(b). 3. Registration ------------ The following provisions govern the registration of the Company's securities: 3.1. Definitions ----------- As used in this Agreement, the following terms have the following meanings: "Form S-3" means Form S-3 or Form F-3 under the Securities Act, as in -------- effect on the date hereof or any registration form under the Securities Act subsequently adopted by the Securities and Exchange Commission ("SEC") which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. "Founders" means: Samuel HaCohen, Vladimir Morgenstern Yitzhak Chemo, -------- Shimon Katz and Sequel Technology Ltd. "Founders' Shares" means all Ordinary Shares owned by the Founders. ---------------- "Holder" means any holder of outstanding Registrable Shares or shares ------ convertible into Registrable Shares who acquired such Registrable Shares or shares convertible into Registrable Shares in a transaction or series of transactions not involving any registered public offering. "Initiating Holders" means Holders holding more than fifty percent ------------------ -10- (50%) of the Registrable Shares, assuming for purposes of such determination the conversion of all shares convertible into Registrable Shares. "Register," "registered" and "registration" refer to a registration --------- ---------- ------------ effected by filing a registration statement in compliance with the Securities Act and the declaration or ordering by the Commission of effectiveness of such registration statement, or the equivalent actions under the laws of another jurisdiction. "Registrable Shares" means all Ordinary Shares issuable upon ------------------ conversion of the Preferred Shares and Convertible Debentures, all Ordinary Shares issued by the Company in respect of such shares and all Ordinary Shares that the Investors may hereafter purchase pursuant to their warrants, preemptive rights or rights of first refusal, or Ordinary Shares issued on conversion or exercise of other securities so purchased; provided, however, that any Ordinary Shares -------- that could be sold by the holder thereof (in accordance with applicable law) within six (6) months without the registration of such shares, shall not be deemed to be Registrable Shares. "SEC" means the U.S. Securities and Exchange Commission. --- 3.2. Incidental Registration ----------------------- If the Company at any time proposes to register any of its securities, other than in a demand registration under Section 3.3 of this Agreement, it shall give notice to the Holders and Founders of such intention. Upon the written request of any Holder or Founder given within twenty (20) days after receipt of any such notice, the Company shall include in such registration all of the Registrable Shares or Founders' Shares, as the case may be, indicated in such request, so as to permit the disposition of the shares so registered. Notwithstanding any other provision of this Section 3.2, if the managing underwriter advises the Company in writing that marketing factors require a limitation of the number of shares to be underwritten, then there shall be excluded from such registration and underwriting to the extent necessary to satisfy such limitation, first shares held by shareholders other than the Holders and Founders (pro rata to the total number of Registrable Shares held by each of the Holders of such group), then shares held by the Founders (pro rata to the total number of Registrable Shares held by each of the Holders of such group), then to the extent necessary, shares held by the Holders (pro rata to the respective total number of Registrable Shares held by each of the Holders). 3.3. Demand Registration ------------------- At any time during the period beginning one (1) year following the closing of the IPO, (a) the Initiating Holders may request in writing that all or part of the Registrable Shares shall be registered for trading on -11- any securities exchange on which the Company's shares are otherwise traded, and (b) after the Company has completed at least one (1) registration at the request of the Holders, the Founders holding a majority of the Founders' Shares may request in writing that all or part of the Founders Shares shall be registered for trading on any securities exchange on which the Company's shares are otherwise traded. Any request under this Section must request the registration of shares in a minimum amount of five million United States dollars ($5,000,000) (or, if on Form S-3, one million United States dollars ($1,000,000)). Within twenty (20) days after receipt of any such request, the Company shall give written notice of such request to the other Holders (and following the first such registration, the Founders) and shall include in such registration all Registrable Shares (and following the first such registration, the Founders Shares) held by all such Holders (or following the first such registration, the Founders) who wish to participate in such demand registration and provide the Company with written requests for inclusion therein within fifteen (15) days after the receipt of the Company's notice. Thereupon, the Company shall effect the registration of all Registrable Shares (and, in the case of a request submitted by the Founders, Founders Shares) as to which it has received requests for registration for trading on the securities exchange specified in the request for registration; provided, however, that the Company -------- shall not be required to effect any registration under this Section 3.3 within a period of twelve (12) months following the effective date of a previous registration. Notwithstanding any other provision of this Section 3, if the managing underwriter advises the Holders (and following the first such registration, the Founders) in writing that marketing factors require a limitation of the number of shares to be underwritten, then there shall be excluded from such registration and underwriting to the extent necessary to satisfy such limitation, first shares held by shareholders other than the Holders and Founders (pro rata to the total number of Registrable Shares held by each of the Holders of such group), then shares which the Company may wish to register for its own account, then shares held by the Founders (pro rata to the total number of Registrable Shares held by each of the Holders of such group) and thereafter, to the extent necessary, shares held by the Holders (pro rata to the respective total number of Registrable Shares held by each of the Holders), provided, however, -------- that in any event all Registrable Shares must be included in such registration prior to any other shares of the Company. The Company shall not register securities for sale for its own account in any registration requested pursuant to this Section 3.3 unless permitted to do so by the written consent of Holders (or, in the case of a registration requested by Founders, Founders) who hold at least 66% of the Registrable Shares (or, in the case of a registration requested by Founders, Founders Shares) as to which registration has been requested. The Company shall not be required to effect more than four (4) registrations at the request of the Initiating Holders under this Section 3.3 and two (2) registrations at the request of the Founders -12- under this Section 3.3. 3.3A Notwithstanding the provisions of Section 3.2 and 3.3 hereof, if the Company consummates a subsequent investment in the Company's share capital yielding to the Company gross proceeds of at least US$10 million of which at least US$5 million are invested by third parties who are not shareholders of the Company prior to such investment ("Private Placement") then, the holders of the Convertible Debentures shall be entitle to the same registration rights granted to the investors in such Private Placement. 3.4. Designation of Underwriter -------------------------- (a) In the case of any registration effected pursuant to Section 3.3, (i) the majority of the Holders participating shall have the right to designate the managing underwriter(s) in any underwritten offering provided that such managing underwriter(s) shall be either one of the Lead Underwriter or Co-Manager in the Company's IPO or an underwriter which is among the twenty (20) leading underwriting firms as measured by revenues and (ii) the Company and all Holders and Founders participating in such underwritten registration shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. (b) In the case of any registration initiated by the Company, the Company shall have the right to designate the managing underwriter in any underwritten offering and any Holders or Founders participating in such underwritten registration shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. 3.5. Expenses -------- All expenses incurred in connection with any registration under Section 3.2 and Section 3.3 (including the preparation of the registration statement) shall be borne by the Company; provided, -------- however, that each of the Holders or Founders participating in such ------- registration shall pay its pro rata portion of the fees, discounts or commissions payable to any underwriter and any fees of counsel to such Holders or Founders. 3.6. Indemnification --------------- In the event any Ordinary Shares are included in a registration statement in accordance herewith: (a) To the extent permitted by law, the Company will indemnify and hold harmless each one of the Holders and/or Founders, the partners, officers, directors and shareholders of each one of the Holders and/or Founders, legal counsel and accountants for each -13- one of the Holders and/or Founders, any underwriter (as defined in the Securities Act) for such Holder and/or Founder and each person, if any, who controls Holder and/or Founder or underwriter within the meaning of the Securities Act or the 1934 Act against any losses, expenses, claims, damages, or liabilities to which they become subject under the Securities Act, the 1934 Act or other United States federal or state laws or the securities laws of the State of Israel or any other jurisdiction in which the Registrable Shares are sold, insofar as such losses, expenses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "violation"): (i) any untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading in light of the circumstances under which they were made, or (iii) any violation or alleged violation by the Company of the Securities Act, the 1934 Act, any Federal or state securities law or any rule or regulation promulgated under the Securities Act, the 1934 Act or any federal or state securities law, or any of the securities laws of the State of Israel or any other jurisdiction in which the Registrable Shares are sold or any rule or regulation thereunder; and the Company will reimburse each such Holder, Founder, officer or director, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 3.6(a), shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable to the Holders and/or Founders, underwriter or controlling person in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished to the Company expressly for use in connection with such registration by the Holders and/or Founders, underwriter or controlling person provided further, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Holder and/or Founder or underwriter, or any person controlling such Holder and/or Founder or underwriter, from whom the person asserting any such losses, claims, damages or liabilities purchased shares in the offering, if a copy of the prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements -14- thereto) was not sent or given by or on behalf of such Holder and/or Founder or underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the shares to such person, and if the prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability. (b) To the extent permitted by law, each selling Holder and/or Founder will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter (within the meaning of the Securities Act) for the Company, any person who controls such underwriter, and any Holder and/or Founder selling securities in such registration statement or any directors or officers or any persons controlling such parties, against any losses, claims, expenses, damages, or liabilities to which any of the forgoing persons become subject under the Securities Act, the 1934 Act or other United States federal or state securities law, or any of the securities laws of the State of Israel or any other jurisdiction in which the Registrable Shares are sold, insofar as such losses, expenses, claims, damages, liabilities (or actions in respect thereto) arise out of or are based upon any Violation (including alleged Violation), in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Holder and/or Founder expressly for use in connection with such registration; and each such Holder and/or Founder will reimburse any persons intended to be indemnified pursuant to this section 3.6(b) for any legal or other expenses reasonably incurred by such person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 3.6(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holders and/or Founders, which consent shall not be unreasonably withheld: provided that in no event shall any indemnity under this Section 3.6(b) exceed the gross proceeds from the offering received by such Holder and/or Founder. (c) Promptly after receipt by an indemnified party under this Section 3.6(c) of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 3.6, notify the indemnifying party in writing of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party -15- similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to notify an indemnifying party in writing within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnifying party under this Section 3.6, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 3.6. (d) if the indemnification provided for in this Section 3.6 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage or expense, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions relating to indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. (f) The obligations of the Company, the Holders and the Founders under this Section 3.6 shall survive the completion of any -16- offering of Registrable Shares and/or Founders Shares in a registration statement under this Section 3. 3.7. Obligations of the Company -------------------------- Whenever required under this Section 3 to effect the registration of any Registrable Shares, the Company shall, as expeditiously as possible: 3.7.1. prepare and file with the SEC a registration statement with respect to such Registrable Shares and use its best efforts to cause such registration statement to become effective, and, upon the request of the holders of a majority of the Registrable Shares registered thereunder, keep such registration statement effective for a period of up to nine (9) months or, if sooner, until the distribution contemplated in the Registration Statement has been completed. 3.7.2. prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Shares covered by such registration statement. 3.7.3. furnish to the Holders or the Founders, as the case may be, such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Shares owned by them. 3.7.4. use all reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders or the Founders, as the case may be, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. 3.7.5. in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder or Founder, as the case may be, participating in such underwriting shall also enter into and perform its obligations under such an agreement. 3.7.6. notify each holder of Registrable Shares or Founders' Shares covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under -17- the Securities Act or the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. 3.7.7. cause all Registrable Shares or Founders' Shares registered pursuant thereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed. 3.7.8. provide a transfer agent and registrar for all Registrable Shares or Founders' Shares registered pursuant hereunder and a CUSIP number for all such Registrable Shares or Founders Shares, in each case not later than the effective date of such registration. 3.7.9. furnish, at the request of any Holder or Founder requesting registration of Registrable Shares or Founders' Shares, as the case may be, pursuant to this Section 3, on the date that such Registrable Shares are delivered to the underwriters for sale in connection with a registration pursuant to this Section 3, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and (ii) a letter dated such date, from the independent certified public accountant of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any. 3.8. Reports Under Securities Exchange Act of 1934. --------------------------------------------- With a view to making available to the Holders and Founders the benefits of Rule 144 promulgated under the Securities Act and any other rule or regulation of the SEC that may at any time permit a Holder or Founder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times after the effective date of the IPO; -18- (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the 1934 Act; and (c) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request a written statement by the Company that it has complied with the foregoing subsections 3.8(a) and 3.8 (b). 3.9. Assignment of Registration Rights --------------------------------- Any of the Holders or Founders may assign its rights to cause the Company to register Shares pursuant to this Section 3 to a transferee or transferees of all or any part of its Registrable Shares or Founders' Shares. The transferor shall, within twenty (20) days after such transfer, furnish the Company with written notice of the name and address of such transferee and the securities with respect to which such registration rights are being assigned, and the transferee's written agreement to be bound by this Section 3. 3.10. Rights that may be Granted to Subsequent Investors -------------------------------------------------- The Company may grant to investors in the Company only such rights of registration as shall be approved by a majority of the Board of Directors (which majority includes the affirmative vote of two of the Directors designated by the holders of Preferred Shares). 3.11. Lock-Up ------- In any registration of the Company's shares all Holders and Founders agree that any sales of Registrable Shares or Founders Shares may be subject to a "lock-up" period restricting such sales beginning thirty (30) days prior to, and (i) for up to one hundred and eighty (180) days following in the case of the Company's IPO or (ii) ninety (90) days in the case of any offering initiated during the period of two (2) years following the IPO, and all Holders will agree to abide by such customary "lock-up" period within the foregoing time limits as is required by the underwriter in such registration. 4. Negative Covenants ------------------ Until an IPO, the Investors agree that except as otherwise required by law, all the following decisions of the Company will be brought first to the Board of Directors of the Company for its approval and that in the event they participate in a vote on one of the matters described in this Section, they shall vote their Shares in the Company, and shall use their best efforts to cause the directors of the Company designated by each of them, in order that the Company shall not, without (if such decision may be taken by the Investors) the affirmative vote of the holders of record of at least sixty six and two thirds percent (662/3%) of the -19- outstanding Preferred A Shares, Preferred B Shares and Preferred C Shares (all such Preferred Shares voting as one class) and the affirmative vote of the holders of record of at least sixty six and two thirds percent (662/3%) of the outstanding shares of Ordinary Shares, (voting as a separate class), and without (when the decision is brought to the Board of Directors) the consent of one of the Preferred Shares Directors (as defined in Section 6 of the Shareholders Agreement) and one of the Management Shares Directors (as defined in Section 6 of the Shareholders Agreement): (i) adopt any amendment of the Memorandum or Articles of Association of the Company or any other action which would have the effect of amending the specific rights, preferences or privileges of the Preferred Shares; (ii) authorize or issue any equity securities of any class with rights equal to or superior to those of the shares of Preferred Shares or other securities convertible into such securities, nor enter into any contract or grant any option for the issue of any such securities; (iii) merge with or consolidate into any corporation, firm or entity, or sell or otherwise dispose of all or substantially all of its assets; (iv) increase the number of Directors above eight (8); (v) declare or pay any dividend or other distribution of cash, shares, or other assets to the Company's shareholders in their capacity as such; and (f) appoint or remove from office either of the Company's legal adviser and/or auditors. For the purposes of this Section 4 the holders of the Convertible Debentures shall be entitled to vote as if the Convertible Debentures held thereby have been converted into Series C-2 Preferred Shares at a conversion price of $10 per share. 5. Expenses -------- The Company shall reimburse its members of the Board of Directors for overseas expenses incurred by directors in connection with overseas travel in order to participate in the Board of Directors meetings. 6. Miscellaneous ------------- 6.1. Further Assurances ------------------ Each of the parties hereto shall perform such further acts and execute such further documents as may reasonably be necessary to carry out and give full effect to the provisions of this Agreement and the intentions of the parties as reflected thereby. 6.2. Governing Law; Jurisdiction --------------------------- -20- This Agreement shall be governed by and construed according to the laws of the State of Israel, without regard to the conflict of laws provisions thereof. Any dispute arising under or in relation to this Agreement shall be resolved exclusively in the competent court for Tel Aviv-Jaffa district, and each of the parties hereby submits irrevocably to the exclusive jurisdiction of such court for any such dispute. 6.3. Successors and Assigns; Assignment ---------------------------------- Except as otherwise expressly limited herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto. None of the rights, privileges, or obligations set forth in, arising under, or created by this Agreement may be assigned or transferred without the prior consent in writing of each party to this Agreement, with the exception of (a) assignments and transfers between the Investors, (b) assignments and transfers from an Investor to any other entity which controls, is controlled by or is under common control with, such Investor, (c) as to any Investor which is a partnership, in addition, assignments and transfers to its partners and to affiliated partnerships managed by the same management company or managing general partner or by an entity which controls, is controlled by, or is under common control with, such management company or managing general partner; (d) as to any shareholder's partner which is a limited liability company, following assignments and transfers by such shareholder to its partners which are limited liability companies, such limited liability companies may make assignments and transfers to such limited liability companies' respective members, or (e) as to GE Capital, any permitted transferee pursuant to Section 2.3 of the Shareholders Agreement; provided, however, that any transfers/assignment according to (c) and (d) above shall be permissible only provided that all said partners and company members of such partners nominate a single individual or a single entity as their representative to serve as such until the Company's IPO, with respect to all their affairs with the Company, which representative shall be their proxy and agent until the IPO to act in their name in all matters related to their rights as shareholders in the Company and provided further that any assignment of any rights or obligations by any of the parties to this Agreement to any assignee shall be permissible only if the party assigning rights or obligations has transferred all of the shares of the Company held by it/him to such assignee. Notwithstanding anything contained in this Agreement to the contrary, in the event GE Capital transfers more than 256,410 Ordinary Shares (or Series C-1 Preferred Shares or warrants convertible or exercisable for such number of Ordinary Shares) to any person or entity (other than to a permitted transferee pursuant to Section 2.3 of the Shareholders Agreement), such transferee may, at the request of GE Capital, upon execution of appropriate documentation, become a party to this -21- Agreement, with all the rights and obligations of a holder of the class (or classes) of securities then held by it (but without any of the rights specifically provided herein only to GE Capital), and such transferee and its subsequent transferees shall have the same right to transfer its rights hereunder to any transferee of all of its securities issued by the Company. 6.4. Entire Agreement; Amendment and Waiver -------------------------------------- This Agreement and the Schedules hereto constitute the full and entire understanding and agreement between the parties or any of them and supersedes any prior agreement between the parties or any of them with regard to the subject matters hereof and thereof. Any term of this Agreement may be amended and the observance of any term hereof may be waived (either prospectively or retroactively and either generally or in a particular instance) only following written notice to all of the Investors and with the written consent of (a) Investors holding at least ninety percent (90%) in interest of the Ordinary Shares (not including Ordinary Shares received upon conversion of Preferred Shares), (b) Investors holding at least ninety percent (90%) in interest of the Preferred A Shares and Preferred B Shares (including all Ordinary Shares received upon conversion of Preferred A Shares and Preferred B Shares), (voting together as a single class), and (c) Investors holding at least ninety percent (90%) in interest of the Preferred C Shares (including all Ordinary Shares received upon conversion of Preferred C Shares). 6.5. Notices ------- All notices and other communications required or permitted hereunder to be given to a party to this Agreement shall be in writing and shall be telecopied or mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand or by messenger if sent to an address within Israel, or by Courier Service (such as Federal Express) if sent to an address outside of Israel, addressed to such party's address as set forth below or at such other address as the party shall have furnished to each other party in writing in accordance with this provision: if to the 1996 Investors: to the addresses set forth in Schedule 1 if to the 1998 Investors: to the addresses set forth in Schedule 2. if to the 1999 Investors: to the addresses set forth in Schedule 3. if to the New Investors: to the address set forth in Schedule 4. if to the Founders: to the addresses set forth in Schedule 5. if to the Company: RTS Software Ltd. Science Based Industries Campus P.O. Box 23504, Jerusalem 91230, Israel -22- Facsimile: 972-2-5815-507 or such other address with respect to a party as such party shall notify by ten (10) days advance written notice to each other party in writing as above provided. Any notice sent in accordance with this Section 6.5 shall be effective (i) if mailed five (5) business days after mailing, (ii) if sent by messenger, upon receipt, and (iii) if sent via telecopier, upon transmission and electronic confirmation of receipt or (if transmitted and received on a non- business day on the first business day following transmission and electronic confirmation of receipt). 6.6. Delays or Omissions ------------------- No delay or omission to exercise any right, power, or remedy accruing to any party upon any breach or default under this Agreement, shall be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent, or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any of the parties, shall be cumulative and not alternative. 6.7. Severability ------------ If any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable under applicable law, then such provision shall be excluded from this Agreement and the remainder of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms; provided, however, that in such event this Agreement shall be -------- interpreted so as to give effect, to the greatest extent consistent with and permitted by applicable law, to the meaning and intention of the excluded provision as determined by such court of competent jurisdiction. 6.8. Counterparts ------------ This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and enforceable against the parties actually executing such counterpart, and all of which together shall constitute one and the same instrument. 6.9. Administration of Certain Investors ----------------------------------- For purposes of administrative simplicity, any right of the STAR Investors (as defined in Schedule 1), hereunder shall be exercised by SVM STAR Venture Capital Management Ltd. ("SVM"), and each of the STAR Investors hereby appoints SVM as its agent and proxy for such purposes. For purposes of determining the availability of any right -23- or the applicability of any limitation under this Agreement, all Ordinary Shares or Preferred Shares, as the case may be, held by any of the STAR Investors (as defined in Schedule 1) and any transferee of any STAR Investor permitted under Section 8.3 of that certain Share Purchase Agreement dated as of February 26, 1998 entered into by and among the purchasers detailed in Schedule 1.1 to that agreement and the Company, shall be aggregated and the STAR Investors and any such transferees be viewed as a single Investor. For purposes of determining the availability of any right or the applicability of any limitation under this Agreement, all Ordinary Shares or Preferred Shares, as the case may be, held by Clal Venture Capital Ltd., Clalit Capital Fund, Clal Industries and Investments and by Clal Electronics Industries Ltd. and any assignee thereof shall be aggregated and the Clal Investors (as defined in Schedule 1) and any such transferee be viewed as a single Investor. For purposes of determining the availability of any right or applicability of any limitation under this Agreement, all Ordinary Shares or Preferred Shares, as the case may be, held by Jerusalem Pacific Ventures (1994) Ltd. and Unicycle Trading Company and any assignee thereof shall be aggregated and the JPV Investors (as defined in Schedule 1) and any such transferees be viewed as a single Investor and for the purposes of administrative simplicity any rights of the JPV Investors (as defined in Schedule 1) hereunder shall be exercised by Jerusalem Pacific Ventures (1994) L.P. and Unicycle Trading Company hereby appoints Jerusalem Pacific Ventures (1994) L.P. as its agent and proxy for such purposes. For purposes of determining the availability of any right or the applicability of any limitation under this Agreement, all Ordinary Shares or Preferred Shares, as the case may be, held by Bessemer Venture Investors L.P., Bessemer Venture Partners IV L.P. or Bessec Ventures IV L.P., and any assignee of Bessemer Venture Investors L.P., Bessemer Venture Partners IV L.P. or Bessec Ventures IV L.P., shall be aggregated and the Bessemer Investors (as defined in Schedule 2) and any such transferees be viewed as a single Investor and for the purposes of administrative simplicity any rights of the Bessemer Investors (as defined in Schedule 2) hereunder shall be exercised by Bessemer Venture Partners IV L.P. and each of the Bessemer Investors hereby appoints Bessemer Venture Partners IV L.P. as its agent and proxy for such purposes. For purposes of determining the availability of any right or applicability of any limitation under this Agreement, all Ordinary Shares or Preferred Shares, as the case may be, held by GE Capital or any permitted transferee thereof pursuant to Section 2.3 of the Shareholders Agreement, shall be aggregated and viewed as a single investor and for the purposes of administrative simplicity any rights of such Investors hereunder shall be exercised by GE Capital. For the purpose of determining the availability of any right or the applicability of any limitation under this Agreement, all Ordinary Shares and Preferred Shares held by any of Eucalyptus Ventures L.P., Eucalyptus Ventures (Cayman) L.P., Eucalyptus Ventures Affiliate Fund L.P., Eucalyptus Ventures (Israel) L.P. and Access Technology -24- Partners L.P. and their permitted assignees shall be aggregated and the Eucalyptus Investors (as defined in Schedule 3) and any such permitted assignees shall be viewed as a single Investor and for the purposes of administrative simplicity, any rights of the Eucalyptus Investors (as defined in Schedule 3) hereunder shall be exercised by Eucalyptus Venture Management LLC and each of the Eucalyptus Investors hereby appoints Eucalyptus Venture Management LLC as its agent and proxy for such purposes. 6.10. Titles, Subtitles, Preamble and Schedules ----------------------------------------- The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. The preamble and Schedules are an integral and inseparable part of this Agreement. 6.11. Prior Agreement --------------- This Agreement supersedes the 1999 Amendment and Restatement to Investors Rights Agreement, Second 1998 Amendment and Restatement to Investors Rights Agreement, the Amendment and Restatement to the Investors Rights Agreement dated as of February 27, 1998 and the Investors Rights Agreement dated as of September 30, 1996, among the Company and certain of the Investors (and their predecessors in interest). [THIS SPACE INTENTIONALLY LEFT BLANK] -25- IN WITNESS WHEREOF the parties have signed this Agreement as of the date first hereinabove set forth. RTS Software Ltd. By: _______________________________ ____________________________________ Clal Industries and Investments Ltd. By: _______________________________ ____________________________________ Clal Electronics Industries Ltd. By: _______________________________ ____________________________________ The Challenge Fund - Etgar II L.P. By: _______________________________ ____________________________________ Koonras Technologies Ltd. By: _______________________________ ____________________________________ Dubfam Investments Ltd. By: _______________________________ ____________________ ___________________ Eucalyptus Ventures L.P. Eucalyptus Ventures (Cayman) L.P. by its General Partner Eucalyptus by its General Partner Eucalyptus Venture Management L.L.C. Venture Management L.L.C. ____________________ ___________________ Eucalyptus Ventures (Israel) L.P. Eucalyptus Ventures Affiliate Fund L.P. by its General Partner Eucalyptus its General Partner Eucalyptus Venture Management L.L.C. Venture Management L.L.C. Bessemer Venture Partners IV L.P. GE Capital Equity Holdings, Inc. -26- By_______________________________ By Deer IV & Co. LLC Bessemer Venture Investors L.P. By: _______________________________ by Deer IV & Co. LLC by_______________________________ ___________________________________ _________________________________ Bessec Ventures IV L.P. Link Technologies Venture Capital 1 LLC. by_______________________________ by Deer IV & Co. LLC by_________________________________ _________________________________ ___________________________________ SVE STAR Ventures Enterprises SVE STAR Ventures Enterprises No No III, A German Civil Law IIIa, a German Civil Law Partnership Partnership (with Limitation of (with Limitation of liability) liability) By: SVM STAR Ventures By: SVM STAR Ventures Management GMBH No.3 Management GMBH No.3 by:______________________________ by: _______________________________ _________________ SVM STAR Ventures ___________________________________ Managementgesellschaft mbH SVE STAR Ventures Enterprises No No.3 & Co Beteiligungs KG V,A German Civil Law partnership (with Limitation of liability) By: SVM STAR Ventures Management GMBH No.3 By: SVM STAR Venture Management GMBH No.3 by:______________________________ by:________________________________ _____________________ SVM Star Venture Management GmbH No.3 by:________________________________ _________________________________ ___________________________________ Jerusalem Pacific Ventures (1994) Clal Venture Capital L.P.. -27- L.P. by:___________________________ by:______________________________ ______________________________ Unicycle Trading Company L.P. by:___________________________ ______________________________ _________________________________ Clalit Capital Fund L.P. Advanced Technology Ventures IV L.P. by:___________________________ by:______________________________ ______________________________ STAR Management of Investments (1993) Limited Partnership by:___________________________ ______________________________ _________________________________ One Liberty Fund III L.P. Gilde IT Fund B.V. By:___________________________ By:______________________________ ______________________________ _________________________________ Leumi & Co. Investment Bankers Inter Cosma Ltd. Ltd. by:___________________________ by:______________________________ ______________________________ _________________________________ Courses Technology Investments Steps Technology Investments Ltd. Ltd. by:___________________________ by:______________________________ ____________________ _____________________ Samuel HaCohen Sequel Technology Ltd. ____________________ by:______________________________ -28- Shimon Katz ____________________ _____________________ Yizhak Chemo Vladimir Morgernstern ________________________________ __________________________________ Hambrecht & Quist California Hambrecht & Quist Employee Venture by its Fund, L.P. II by its General Partner Hambrecht & Quist Venture Management, L.L.C. ________________________________ __________________________________ Access Technology Partners, L.P. Access Technology Partners Brokers by its General Partner Access Fund, L.P. Technology Management, L.L.C. by its General Partner Hambrecht & and by its Managing Member Quist Venture Management L.L.C. Hambrecht & Quist Venture Management, L.L.C. ________________________________ __________________________________ Hambrecht & Quist RTS Software Migdal Eshcol Financim Ltd. Investors, LLC By:_____________________________ By:_______________________________ -29- SCHEDULE 1 THE 1996 INVESTORS SVE STAR Ventures Enterprises No III , A German Civil Law Partnership (with Limitation of liability); Possartsrasse 9 D-81679 Munich, Germany SVE STAR Ventures Enterprises No IIIa, a German Civil Law Partnership (with Limitation of liability) Possartsrasse 9 D-81679 Munich, Germany SVM Star Venture Management GmbH No.3 Possartsrasse 9 D-81679 Munich, Germany SVM STAR Ventures Managementgesellschaft mbH No.3 & Co. Beteiligungs KG Possartsrasse 9 D-81679 Munich, Germany SVE STAR Ventures Enterprises No. V, A German Civil Law partnership (with Limitation of liability) Possartsrasse 9 D-81679 Munich, Germany STAR Management of Investments (1993) Limited Partnership 11 Galgalei Haplada St., Herzelia Pituach (the "STAR Investors") Clal Venture Capital L.P. Clal Building, Kiriat Atidim, Tel Aviv, Israel ("Clal Venture Capital") Clalit Capital Fund L.P. Clal Building, Kiriat Atidim, Tel Aviv, Israel ("Clalit") -30- Jerusalem Pacific Ventures (1994) L.P. 505 Sansome St. (15th floor) San francisco, CA 94111 Unicycle Trading Company L.P. 611 No. Oakhurst Drive Beverly Hills, CA 90210 (hereinafter the "JPV Investors") Advanced Technology Ventures IV L.P. 485 Ramona St. (Suite 200) Palo Alto, CA 94301 ("ATV") One Liberty Fund III L.P. Newtonlaan 91, PO Box 85067, the Netherlands Gilde IT Fund B.V. Newtonlaan 91, PO Box 85067, the Netherlands Leumi & Co. Investment Bankers Ltd. 25 Kalisher St. Tel Aviv InterCosma Ltd. Atarot PO Box 1365, Jerusalem Courses Technology Investments Ltd. 9 Achad Haam St., Tel Aviv Steps Technology Investments Ltd. 9 Achad Haam St., Tel Aviv -31- SCHEDULE 2 THE 1998 INVESTORS GE Capital Equity Holdings, Inc. 120 Long Ridge Road Stamford CT 06927 USA (hereinafter "GE Capital") Bessemer Venture Investors L.P. c/o Bessemer Venture Partners 1025 Old County Road, Suite 205 Westbury, NY 11590 USA Bessemer Venture Partners IV L.P. 1025 Old County Road, Suite 205 Westbury, NY 11590 USA Bessec Ventures IV L.P. c/o Bessemer Venture Partners 1025 Old County Road, Suite 205 Westbury, NY 11590 USA (hereinafter: the "Bessemer Investors") Link Technologies Venture Capital I LLC. 200 West Ninth Street Plaza, Wilmington Delaware 19801, USA SVE STAR Ventures Enterprises No III, A German Civil Law Partnership (with Limitation of liability); Possartsrasse 9 D-81679 Munich, Germany SVE STAR Ventures Enterprises No IIIa, a German Civil Law Partnership (with Limitation of liability) Possartsrasse 9 D-81679 Munich, Germany SVM Star Venture Management GmbH No.3 Possartsrasse 9 -32- D-81679 Munich, Germany SVM STAR Ventures Managementgesellschaft mbH No.3 & Co. Beteiligungs KG Possartsrasse 9 D-81679 Munich, Germany SVE STAR Ventures Enterprises No. V,A German Civil Law partnership (with Limitation of liability) Possartsrasse 9 D-81679 Munich, Germany STAR Management of Investments (1993) Limited Partnership 11 Galgalei Haplada St., Herzelia Pituach (the "STAR Investors") Clal Venture Capital L.P. Clal Building Kiriat Atidim, Tel Aviv, Israel Clalit Capital Fund L.P. Clal Building Kiriat Atidim, Tel Aviv, Israel Jerusalem Pacific Ventures (1994) L.P. 505 Sansome St. (15th floor) San francisco, CA 94111 Advanced Technology Ventures IV L.P. 485 Ramona St. (Suite 200) Palo Alto, CA 94301 Gilde IT Fund B.V. Newtonlaan 91, PO Box 85067, the Netherlands Courses Technology Investments Ltd. 9 Achad Haam St., Tel Aviv Steps Technology Investments Ltd. 9 Achad Haam St., Tel Aviv -33- SCHEDULE 3 THE 1999 INVESTORS Eucalyptus Ventures L.P. c/o Eucalyptus Venture Management L.L.C. 46 Rothschild Blvd. Tel Aviv 66883 Israel Eucalyptus Ventures (Cayman) L.P. c/o Eucalyptus Venture Management L.L.C. 46 Rothschild Blvd. Tel Aviv 66883 Israel Eucalyptus Ventures (Israel) L.P. c/o Eucalyptus Venture Management L.L.C. 46 Rothschild Blvd. Tel Aviv 66883 Israel Eucalyptus Ventures Affiliate Fund L.P. c/o Eucalyptus Venture Management L.L.C. 46 Rothschild Blvd. Tel Aviv 66883 Israel Hambrecht & Quist California One Bush Street San Francisco, CA 94104 United States Hambrecht & Quist Employee Venture Fund L.P. II One Bush Street San Francisco, CA 94104 United States Access Technology Partners, L.P. One Bush Street San Francisco, CA 94104 United States Access Technology Partners Brokers Fund L.P. One Bush Street San Francisco, CA 94104 United States -34- Hambrecht & Quist RTS Software Investors, LLC One Bush Street San Francisco, CA 94104 United States Samuel HaCohen 15 Ben Zeev St., Jerusalem Leumi & Co. Investment Bankers Ltd. 25 Kalisher St. Tel Aviv Advanced Technology Ventures IV L.P. 485 Ramona St. (Suite 200) Palo Alto, CA 94301 Link Technologies Venture Capital I LLC. 200 West Ninth Street Plaza, Wilmington Delaware 19801, USA Bessemer Venture Partners IV L.P. 1025 Old County Road, Suite 205 Westbury, NY 11590 USA Bessec Ventures IV L.P. c/o Bessemer Venture Partners 1025 Old County Road, Suite 205 Westbury, NY 11590 USA GE Capital Equity Holdings, Inc. 120 Long Ridge Road Stamford CT 06927 USA -35- SCHEDULE 4 THE NEW INVESTORS Clal Electronics Industries Ltd. Clal Building, Kiriat Atidim, Tel Aviv, Israel Clal Industries and Investments Ltd. Clal Building, Kiriat Atidim, Tel Aviv, Israel Clalit Capital Fund L.P. Clal Building, Kiriat Atidim, Tel Aviv, Israel (collectively with Clal Venture Capital, the "Clal Group" or the "Clal Investors") The Challenge Fund-Etgar II L.P. 1 Ha'shikma Street Savyon, Israel 56530 Koonras Technologies Ltd. 21 Ha'arba'a Street, Tel Aviv, Israel Dubfam Investments Ltd. 284 Musgrave Road, Berea, Durban, South Africa InterCosma Ltd Atarot PO Box 1365, Jerusalem Migdal Eshcol Financim Ltd. 26 Saadia Gaon Street Tel Aviv, Israel Jerusalem Pacific Ventures (1994) L.P. 505 Sansome St. (15th floor) San francisco, CA 94111 Unicycle Trading Company L.P. 611 No. Oakhurst Drive -36- Beverly Hills, CA 90210 Advanced Technology Ventures IV L.P. 485 Ramona St. (Suite 200) Palo Alto, CA 94301 Link Technologies Venture Capital I LLC 200 West Ninth Street Plaza, Wilmington Delaware 19801, USA Bessemer Venture Partners IV L.P. 1025 Old County Road, Suite 205 Westbury, NY 11590 USA Bessemer Venture Investors L.P. c/o Bessemer Venture Partners 1025 Old County Road, Suite 205 Westbury, NY 11590 USA Bessec Ventures IV L.P. c/o Bessemer Venture Partners 1025 Old County Road, Suite 205 Westbury, NY 11590 USA GE Capital Equity Holdings, Inc. 120 Long Ridge Road Stamford CT 06927 USA Eucalyptus Ventures L.P. c/o Eucalyptus Venture Management L.L.C. 46 Rothschild Blvd. Tel Aviv 66883 Israel Eucalyptus Ventures(Cayman) L.P. c/o Eucalyptus Venture Management L.L.C. 46 Rothschild Blvd Tel Aviv 66883 Israel Eucalyptus Ventures (Israel) L.P. c/o Eucalyptus Venture Management L.L.C. 46 Rothschild Blvd. Tel Aviv 66883 Israel -37- Eucalyptus Ventures Affiliate Fund L.P. c/o Eucalyptus Venture Management L.L.C. 46 Rothschild Blvd. Tel Aviv 66883 Israel Hambrecht & Quist California One Bush Street San Francisco, CA 94104 United States Hambrecht & Quist Employee Venture Fund L.P. II One Bush Street San Francisco, CA 94104 United States Access Technology Partners, L.P. One Bush Street San Francisco, CA 94104 United States Access Technology Partners Brokers Fund L.P. One Bush Street San Francisco, CA 94104 United States Hambrecht & Quist RTS Software Investors, LLC One Bush Street San Francisco, CA 94104 United States -38- SCHEDULE 5 THE FOUNDERS Samuel HaCohen 15 Ben Zeev St., Jerusalem Vladimir Morgenstern 26 Lohamei Hagetaot St., Jerusalem Yitzhak Chemo 24 David Meretz St., Jerusalem Shimon Katz 54 Shmaryahu Levin St., Jerusalem Sequel Technology Ltd. c/o Hayman Friedlander 4 Hapalmah St., Kiriat Ono EX-10.6 12 0012.txt FORM OF WARRANT SERIES A SHARES Exhibit 10.6 ------------ WARRANT to Purchase up to an Aggregate of _______ Convertible Preferred Shares (Subject to Adjustment) of R.T.S. Relational Technology Systems Ltd. at U.S. $___ per share VOID AFTER 10:00 a.m. (prevailing Tel Aviv time) on October 30, 2006 THIS IS TO CERTIFY that the holder specified below ("Holder") is entitled to purchase, subject to the provisions of this Warrant, from R.T.S. Relational Technology Systems Ltd. (the "Company"), at any time on or after the date hereof (the "Effective Date") and until October 30, 2006, an aggregate of up to ______ (subject to adjustment) fully and nonassessable Convertible Preferred Shares, nominal value New Israeli Shekel ("NIS") 1.00 per share (the "Convertible Preferred Shares"), of the Company at a price of US$___ per share or the NIS equivalent thereof (the "Exercise Price"). In the event that all of the outstanding Convertible Preferred Shares are converted into Ordinary Shares, this Warrant shall be exercisable solely for such Ordinary Shares and any references throughout this Warrant to shares of Convertible Preferred Shares shall be deemed to refer to the Ordinary Shares into which the Convertible Preferred Shares may be converted. The amount and kind of securities purchasable pursuant to the rights granted hereunder and the Exercise Price for such securities are subject to adjustment pursuant to the further provisions of this Warrant. 1 EXERCISE OF WARRANT Subject to the provisions hereof, this Warrant may be exercised in whole or in part, at any time or from time to time on or after the Effective Date and until October 30, 2006. This Warrant shall be exercised by presentation and surrender hereof to the Company at the principal office of the Company; accompanied by 1. a written notice of exercise and 2. payment to the Company, for the account of the Company, of the Exercise Price for the number of Ordinary Shares specified in such notice. The Exercise Price for the number of Ordinary Shares specified in the notice shall be payable in immediately available good funds, at the option of the Holder, in U.S. dollars or the NIS equivalent thereof, based on the Representative Rate of Exchange published by the Bank of Israel known as of the time of payment. -2- Upon such presentation and surrender, the Company shall issue promptly to the Holder the Convertible Preferred Shares to which the Holder is entitled hereunder. In the event the Exercise Price has been paid in U.S. dollars, the certificate representing the Convertible Preferred Shares issued upon such exercise shall bear a stamp from an Israeli commercial bank confirming that the Convertible Preferred Shares were purchased with foreign currency. In the event that the Warrant is exercised pursuant to the net exercise provisions below, the Company shall apply to the Bank of Israel, if necessary, in order to obtain such stamp. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder to purchase the balance of the Convertible Preferred Shares purchasable hereunder. Upon receipt by the Company of this Warrant, in proper form for exercise, the Holder shall be deemed to be the holder of record of the Convertible Preferred Shares issuable upon such exercise, notwithstanding that the share transfer books of the Company shall then be closed or that certificates representing such Convertible Preferred Shares shall not then be actually delivered to the Holder. The Company shall pay any and all expenses, any stamp duty and any other charges that may be payable in connection with the issuance of the Convertible Preferred Shares and the preparation and delivery of share certificates pursuant to this Paragraph 1 in the name of the Holder. No fractions of Convertible Preferred Shares shall be issued in connection with the exercise of this Warrant, and the number of Convertible Preferred Shares issued shall be rounded down to the nearest whole number. Notwithstanding the foregoing, in the event of (i) the initial public offering of the Company (the "IPO"), (ii) on or after the merger of the Company with or into another company or entity, in which the Company is not the surviving entity (a "Merger") or (iii) on or after the sale of all or substantially all of the assets of the Company (a "Sale") then, in lieu of exercising this Warrant as provided above, in whole or in part, the Holder may elect to receive simultaneously with the Closing of the IPO, or simultaneously with the closing of the Merger or Sale, by the surrender and cancellation of this Warrant or any such portion thereof to the Company, Convertible Preferred Shares equal to the value of the Warrant (or the portion thereof being canceled) by written notice of such election to the Company, at the principal office of the Company, in which event the Company shall issue to the Holder, for no additional consideration, that number of Convertible Preferred Shares computed using the following formula: Y(A - B) X = ------------ A X equals the number of Convertible Preferred Shares to be issued to the Holder; -3- Y equals the number of Convertible Preferred Shares which would otherwise have been purchasable under this Warrant (or the portion thereof being canceled); B equals the Exercise Price in effect at the time of exercise pursuant to this formula (as may have been or be adjusted pursuant to the terms of this Warrant); and A shall equal the "Fair Value" of one share of the Company's Convertible Preferred Shares. Fair Value shall mean in the event that this Warrant is exercised in accordance with the above formula (i) if in connection with an IPO, then the Fair Value shall equal the price (as sold to the public) of that number of the Company's Ordinary Shares into which one share of the Company's Preferred Shares is Convertible, or (ii) if in connection with a Merger or Sale, the value of such share(s) as determined for the purposes of the Merger or Sale, or (iii) if other than in connection with an IPO or a Merger or Sale and if a public market exists for the securities then subject to this Warrant and such securities are listed on a U.S. nationally recognized stock exchange or on the Nasdaq stock market, then the Fair Value shall equal the last sale or trading price of such securities as reported on such exchange or market, as applicable; provided, however, if no public market exists for the securities then the Fair Value shall be determined in good faith by the Board of Directors of the Company, but if such determination is challenged in good faith by the Holder, then as determined by an independent appraiser mutually satisfactory to the Company and the Holder, which determination shall be binding upon the parties. 2. RESERVATION OF SHARES: PRESERVATION OF RIGHTS The Company hereby agrees that at all times it will maintain and reserve such number of authorized but unissued Ordinary Shares so that this Warrant may be exercised without additional authorization of Convertible Preferred Shares after giving effect to all other options, warrants, convertible securities and other rights to acquire Convertible Preferred Shares of the Company. In addition, the Company will maintain and reserve such number of authorized but unissued Ordinary Shares as will be sufficient to permit the conversion in full of all issued or issuable Convertible Preferred Shares. All shares of Convertible Preferred Shares (and Ordinary Shares issuable upon conversion thereof) issuable pursuant to the terms hereof, when issued upon exercise of this Warrant in accordance with the terms hereof shall be duly and validly issued and fully paid and nonassessable, not subject to preemptive rights and shall be free and clear of all liens, encumbrances, equities and claims. The Company further agrees that it will not, by charter amendment or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by the Company. -4- 3. EXCHANGE OR LOSS OF WARRANT This Warrant is exchangeable, upon presentation and surrender hereof at the principal office of the Company, only in connection with a partial exercise hereof. The Company shall be under no obligation to issue replacement warrants for the aggregate number of shares covered hereby except as described herein. The term "Warrant" as used herein includes any Warrant or Warrants for which this Warrant may be exchanged. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like terms, tenor and date. 4. ADJUSTMENT The number of Convertible Preferred Shares (and the number of Ordinary Shares issuable upon conversion thereof) purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time or upon exercise as provided in this paragraph 4. 4.1 If, during the term of this Warrant, the Company shall distribute a stock dividend or shares of capital stock pursuant to a reclassification of its Convertible Preferred Shares to the holders of Convertible Preferred Shares (i.e., bonus shares), the number of Convertible Preferred Shares purchasable upon exercise of this Warrant shall be increased by multiplying such number of shares to be purchased under this Warrant by a fraction of which the denominator shall be the number of Convertible Preferred Shares outstanding at the close of business on the day immediately preceding the date of such distribution and the numerator shall be the sum of such number of shares and the total number of bonus shares, such increase to become effective immediately after the opening of business on the date following such distribution, and upon the happening of such an event the Exercise Price shall be adjusted appropriately. 4.2 If, during the term of this Warrant, the outstanding Convertible Preferred Shares shall be subdivided into a greater number of Convertible Preferred Shares, the number of Convertible Preferred Shares purchasable upon exercise of this Warrant at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately increased, and, conversely, if the outstanding Convertible Preferred Shares shall each be combined into a smaller number of Convertible Preferred Shares, the number of Convertible Preferred Shares purchasable upon exercise of this Warrant at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately decreased, and in each such case the Exercise Price shall be adjusted appropriately. -5- 4.3 Reorganization, Reclassification, Merger, Consolidation or Disposition ---------------------------------------------------------------------- of Assets --------- (a) In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation or sell, transfer or otherwise dispose of all or substantially all of its property, assets or business to another corporation and pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, (i) shares of capital stock of the successor or acquiring corporation or of the Company (if it is the surviving corporation) or (ii) any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of capital stock of the successor or acquiring corporation ("Other Property") are to be received by or distributed to the holders of Convertible Preferred Shares of the Company who are holders immediately prior to such transaction, then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the number of shares of capital stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a holder of the number of shares of Convertible Preferred Shares for which this Warrant is exercisable immediately prior to such event. (b) In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined by resolution of the Board of Directors of the Company) in order to provide for adjustments of shares of the Convertible Preferred Shares for which this Warrant is exercisable, which modifications shall be as nearly equivalent as practicable to the adjustments provided for in this Section 4. (c) The provisions of this subsection 4.3 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets. 4.4 Other Dilutive Events --------------------- In case any event shall occur as to which the preceding subsections 4.1 through 4.3 are not strictly applicable but as to which the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles hereof -6- then, in each such case, the Board of Directors of the Company shall, in good faith, determine what adjustments are necessary to preserve the purchase rights of the Holder represented by this Warrant. The Company will notify the Holder of any such adjustments. 5. NOTICE OF CERTAIN EVENTS The holder of this Warrant shall be entitled to the same rights to receive notices of corporate actions as any holder of Convertible Preferred Shares as provided in the Company's Articles of Association or otherwise. Notwithstanding, in case at any time: 5.1 There shall be any merger of the Company with, or any statutory exchange of the Company's securities with the securities of, or sale of all or substantially all of its assets to, another corporation; or 5.2 There shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give written notice, by first class mail, postage prepaid, addressed to the Holder at the address of the Holder as shown on the books of the Company, of the date on which such merger, exchange, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Convertible Preferred Shares of record shall be entitled to exchange their Convertible Preferred Shares for securities or other property deliverable upon such merger, exchange, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least twenty (20) days prior to the action in question. 6. NOTICE OF ADJUSTMENTS Whenever the number of Convertible Preferred Shares for which this Warrant is exercisable is adjusted as provided in paragraph 4 hereof or whenever the rate at which the Convertible Preferred Shares are convertible into Ordinary Shares is adjusted pursuant to the Company's Articles of Association, the Company shall promptly compute such adjustment and mail to the Holder at the last address provided to the Company in writing a certificate, signed by the principal financial office of the Company, setting forth the number of Convertible Preferred Shares (and the number of Ordinary Shares into which the Convertible Preferred Shares may be converted) for which this Warrant is exercisable and the exercise price as a result of such adjustment, a brief statement of the facts requiring such adjustment and the detailed computation thereof and when such adjustment has or will become effective. -7- 7. RIGHTS OF THE HOLDER 7.1 Without limiting the foregoing or any remedies available to the Holder, the Holder will be entitled to specific performance of the obligations hereunder, and injunctive relief against actual or threatened violations of the obligations of any person subject to this Warrant. 7.2 This Warrant shall not entitle the Holder to any voting rights or other rights as a shareholder of the Company whatsoever, except the rights expressed herein and no dividend or interest shall be payable or accrue in respect of this Warrant. 8. REGISTRATION RIGHTS The Holder shall have the registration and other rights and be subject to the obligations, set forth in the Investors Rights Agreement, dated the date hereof, as it may be amended from time to time as provided therein, with respect to the Ordinary Shares issued or issuable upon conversion of the Convertible Preferred Shares issuable or issued upon the exercise of this Warrant. 9. NOTICE GENERALLY Any notice, demand, request, consent, approval, declaration, delivery or communication hereunder to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if in writing and shall be deemed to have been validly served, given or delivered (a) when sent after receipt of confirmation or answer back if sent by telex or telecopy or other similar facsimile transmission, (b) two (2) business days after deposit with a reputable international two (2) day courier with all charges prepaid or (c) when delivered if hand-delivered by messenger, all of which shall be properly addressed to the party to be notified and sent to the address or number indicated, to the Holder, or the holder of Convertible Preferred Shares (or the Ordinary Shares issuable upon conversion thereof) at its last known address appearing on the books of the Company maintained for such purpose, and to the Company at: R.T.S. Relational Technology Systems, Ltd. Science Based Industries Campus P.O. Box 23052 Jerusalem 91230, Israel or at such other address as may be submitted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. -8- 10. TERMINATION This Warrant and the rights conferred hereby shall terminate at the earlier of (a) the aforementioned time on October 30, 2006; or (b) the offering to the public of the shares of the Company. 11. LIMITATION ON TRANSFER This Warrant shall be transferable in whole or in part only to a subsidiary of the Holder. 12. GOVERNING LAW This Warrant shall be governed by, and construed in accordance with, the laws of the State of Israel, without giving effect to the rules respecting conflict of law, and the parties hereto irrevocably submit to the exclusive jurisdiction of the Courts of Israel in respect of any dispute or matter arising out of or connected with this Warrant. DATED: October 30, 1996 R.T.S. RELATIONAL TECHNOLOGY SYSTEMS LTD. By: ______________ Name: ______________ Title: ______________ Agreed to and accepted: _________________________________________ Name of Holder By: _____________________________ Name: _____________________________ Title: _____________________________ Address: _____________________________ _____________________________ EX-10.7 13 0013.txt FORM OF WARRANT SERIES B SHARES -1- Exhibit 10.7 ------------ WARRANT to Purchase up to an Aggregate of ______ Non Voting Convertible Preferred B Shares (Subject to Adjustment) of R.T.S. Relational Technology Systems Ltd. at U.S. $30 per share VOID AFTER 10:00 a.m. (prevailing Tel Aviv time) on October 30, 2006 THIS IS TO CERTIFY that the holder specified below ("Holder") is entitled to purchase, subject to the provisions of this Warrant, from R.T.S. Relational Technology Systems Ltd. (the "Company"), at any time on or after the date hereof (the "Effective Date") and until October 30, 2006, an aggregate of up to ______ (subject to adjustment) fully and nonassessable Non Voting Convertible Preferred B Shares, nominal value New Israeli Shekel ("NIS") 1.00 per share (the "Convertible Preferred B Shares"), of the Company at a price of US$30 per share or the NIS equivalent thereof (the "Exercise Price"). In the event that all of the outstanding Convertible Preferred B Shares are converted into Ordinary Shares, this Warrant shall be exercisable solely for such Ordinary Shares and any references throughout this Warrant to shares of Convertible Preferred B Shares shall be deemed to refer to the Ordinary Shares into which the Convertible Preferred B Shares may be converted. The amount and kind of securities purchasable pursuant to the rights granted hereunder and the Exercise Price for such securities are subject to adjustment pursuant to the further provisions of this Warrant. 1. EXERCISE OF WARRANT Subject to the provisions hereof, this Warrant may be exercised in whole or in part, at any time or from time to time on or after the Effective Date and until October 30, 2006. This Warrant shall be exercised by presentation and surrender hereof to the Company at the principal office of the Company; accompanied by 1. a written notice of exercise and 2. payment to the Company, for the account of the Company, of the Exercise Price for the number of Ordinary Shares specified in such notice. The Exercise Price for the number of Ordinary Shares specified in the notice shall be payable in immediately available good funds, at the option of the Holder, in U.S. dollars or the NIS equivalent thereof, based on the Representative Rate of Exchange published by the Bank of Israel known as of the time of payment. -2- Upon such presentation and surrender, the Company shall issue promptly to the Holder the Convertible Preferred B Shares to which the Holder is entitled hereunder. In the event the Exercise Price has been paid in U.S. dollars, the certificate representing the Convertible Preferred B Shares issued upon such exercise shall bear a stamp from an Israeli commercial bank confirming that the Convertible Preferred B Shares were purchased with foreign currency. In the event that the Warrant is exercised pursuant to the net exercise provisions below, the Company shall apply to the Bank of Israel, if necessary, in order to obtain such stamp. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder to purchase the balance of the Convertible Preferred B Shares purchasable hereunder. Upon receipt by the Company of this Warrant, in proper form for exercise, the Holder shall be deemed to be the holder of record of the Convertible Preferred B Shares issuable upon such exercise, notwithstanding that the share transfer books of the Company shall then be closed or that certificates representing such Convertible Preferred B Shares shall not then be actually delivered to the Holder. The Company shall pay any and all expenses, any stamp duty and any other charges that may be payable in connection with the issuance of the Convertible Preferred B Shares and the preparation and delivery of share certificates pursuant to this Paragraph 1 in the name of the Holder. No fractions of Convertible Preferred B Shares shall be issued in connection with the exercise of this Warrant, and the number of Convertible Preferred B Shares issued shall be rounded down to the nearest whole number. Notwithstanding the foregoing, in the event of (i) the initial public offering of the Company (the "IPO"), (ii) on or after the merger of the Company with or into another company or entity, in which the Company is not the surviving entity (a "Merger") or (iii) on or after the sale of all or substantially all of the assets of the Company (a "Sale") then, in lieu of exercising this Warrant as provided above, in whole or in part, the Holder may elect to receive simultaneously with the Closing of the IPO, or simultaneously with the closing of the Merger or Sale, by the surrender and cancellation of this Warrant or any such portion thereof to the Company, Convertible Preferred B Shares equal to the value of the Warrant (or the portion thereof being canceled) by written notice of such election to the Company, at the principal office of the Company, in which event the Company shall issue to the Holder, for no additional consideration, that number of Convertible Preferred B Shares computed using the following formula: Y(A - B) X = ----------------- A X equals the number of Convertible Preferred B Shares to be issued to the Holder; -3- Y equals the number of Convertible Preferred B Shares which would otherwise have been purchasable under this Warrant (or the portion thereof being canceled); B equals the Exercise Price in effect at the time of exercise pursuant to this formula (as may have been or be adjusted pursuant to the terms of this Warrant); and A shall equal the "Fair Value" of one share of the Company's Convertible Preferred B Shares. Fair Value shall mean in the event that this Warrant is exercised in accordance with the above formula (i) if in connection with an IPO, then the Fair Value shall equal the price (as sold to the public) of that number of the Company's Ordinary Shares into which one share of the Company's Preferred B Shares is Convertible, or (ii) if in connection with a Merger or Sale, the value of such share(s) as determined for the purposes of the Merger or Sale, or (iii) if other than in connection with an IPO or a Merger or Sale and if a public market exists for the securities then subject to this Warrant and such securities are listed on a U.S. nationally recognized stock exchange or on the Nasdaq stock market, then the Fair Value shall equal the last sale or trading price of such securities as reported on such exchange or market, as applicable; provided, however, if no public market exists for the securities then the Fair Value shall be determined in good faith by the Board of Directors of the Company, but if such determination is challenged in good faith by the Holder, then as determined by an independent appraiser mutually satisfactory to the Company and the Holder, which determination shall be binding upon the parties. 2. RESERVATION OF SHARES: PRESERVATION OF RIGHTS The Company hereby agrees that at all times it will maintain and reserve such number of authorized but unissued Ordinary Shares so that this Warrant may be exercised without additional authorization of Convertible Preferred B Shares after giving effect to all other options, warrants, convertible securities and other rights to acquire Convertible Preferred B Shares of the Company. In addition, the Company will maintain and reserve such number of authorized but unissued Ordinary Shares as will be sufficient to permit the conversion in full of all issued or issuable Convertible Preferred B Shares. All shares of Convertible Preferred B Shares (and Ordinary Shares issuable upon conversion thereof) issuable pursuant to the terms hereof, when issued upon exercise of this Warrant in accordance with the terms hereof shall be duly and validly issued and fully paid and nonassessable, not subject to preemptive rights and shall be free and clear of all liens, encumbrances, equities and claims. The Company further agrees that it will not, by charter amendment or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by the Company. -4- 3. EXCHANGE OR LOSS OF WARRANT This Warrant is exchangeable, upon presentation and surrender hereof at the principal office of the Company, only in connection with a partial exercise hereof. The Company shall be under no obligation to issue replacement warrants for the aggregate number of shares covered hereby except as described herein. The term "Warrant" as used herein includes any Warrant or Warrants for which this Warrant may be exchanged. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like terms, tenor and date. 4. ADJUSTMENT The number of Convertible Preferred B Shares (and the number of Ordinary Shares issuable upon conversion thereof) purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time or upon exercise as provided in this paragraph 4. 4.1. If, during the term of this Warrant, the Company shall distribute a stock dividend or shares of capital stock pursuant to a reclassification of its Convertible Preferred B Shares to the holders of Convertible Preferred B Shares (i.e., bonus shares), the number of Convertible Preferred B Shares purchasable upon exercise of this Warrant shall be increased by multiplying such number of shares to be purchased under this Warrant by a fraction of which the denominator shall be the number of Convertible Preferred B Shares outstanding at the close of business on the day immediately preceding the date of such distribution and the numerator shall be the sum of such number of shares and the total number of bonus shares, such increase to become effective immediately after the opening of business on the date following such distribution, and upon the happening of such an event the Exercise Price shall be adjusted appropriately. 4.2. If, during the term of this Warrant, the outstanding Convertible Preferred B Shares shall be subdivided into a greater number of Convertible Preferred B Shares, the number of Convertible Preferred B Shares purchasable upon exercise of this Warrant at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately increased, and, conversely, if the outstanding Convertible Preferred B Shares shall each be combined into a smaller number of Convertible Preferred B Shares, the number of Convertible Preferred B Shares purchasable upon exercise of this Warrant at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately decreased, and in each such case the Exercise Price shall be adjusted appropriately. -5- 4.3. Reorganization, Reclassification, Merger, Consolidation or Disposition ---------------------------------------------------------------------- of Assets --------- (a) In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation or sell, transfer or otherwise dispose of all or substantially all of its property, assets or business to another corporation and pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, (i) shares of capital stock of the successor or acquiring corporation or of the Company (if it is the surviving corporation) or (ii) any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of capital stock of the successor or acquiring corporation ("Other Property") are to be received by or distributed to the holders of Convertible Preferred B Shares of the Company who are holders immediately prior to such transaction, then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the number of shares of capital stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a holder of the number of shares of Convertible Preferred B Shares for which this Warrant is exercisable immediately prior to such event. (b) In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined by resolution of the Board of Directors of the Company) in order to provide for adjustments of shares of the Convertible Preferred B Shares for which this Warrant is exercisable, which modifications shall be as nearly equivalent as practicable to the adjustments provided for in this Section 4. (c) The provisions of this subsection 4.3 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets. 4.4. Other Dilutive Events --------------------- In case any event shall occur as to which the preceding subsections 4.1 through 4.3 are not strictly applicable but as to which the failure to make any adjustment would not fairly protect the purchase rights represented by -6- this Warrant in accordance with the essential intent and principles hereof then, in each such case, the Board of Directors of the Company shall, in good faith, determine what adjustments are necessary to preserve the purchase rights of the Holder represented by this Warrant. The Company will notify the Holder of any such adjustments. 5. NOTICE OF CERTAIN EVENTS The holder of this Warrant shall be entitled to the same rights to receive notices of corporate actions as any holder of Convertible Preferred B Shares as provided in the Company's Articles of Association or otherwise. Notwithstanding, in case at any time: 5.1. There shall be any merger of the Company with, or any statutory exchange of the Company's securities with the securities of, or sale of all or substantially all of its assets to, another corporation; or 5.2. There shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give written notice, by first class mail, postage prepaid, addressed to the Holder at the address of the Holder as shown on the books of the Company, of the date on which such merger, exchange, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Convertible Preferred B Shares of record shall be entitled to exchange their Convertible Preferred B Shares for securities or other property deliverable upon such merger, exchange, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least twenty (20) days prior to the action in question. 6. NOTICE OF ADJUSTMENTS Whenever the number of Convertible Preferred B Shares for which this Warrant is exercisable is adjusted as provided in paragraph 4 hereof or whenever the rate at which the Convertible Preferred B Shares are convertible into Ordinary Shares is adjusted pursuant to the Company's Articles of Association, the Company shall promptly compute such adjustment and mail to the Holder at the last address provided to the Company in writing a certificate, signed by the principal financial office of the Company, setting forth the number of Convertible Preferred B Shares (and the number of Ordinary Shares into which the Convertible Preferred B Shares may be converted) for which this Warrant is exercisable and the exercise price as a result of such adjustment, a brief statement of the facts requiring such adjustment and the detailed computation thereof and when such adjustment has or will become effective. -7- 7. RIGHTS OF THE HOLDER 7.1 Without limiting the foregoing or any remedies available to the Holder, the Holder will be entitled to specific performance of the obligations hereunder, and injunctive relief against actual or threatened violations of the obligations of any person subject to this Warrant. 7.2 This Warrant shall not entitle the Holder to any voting rights or other rights as a shareholder of the Company whatsoever, except the rights expressed herein and no dividend or interest shall be payable or accrue in respect of this Warrant. 8. REGISTRATION RIGHTS The Holder shall have the registration and other rights and be subject to the obligations, set forth in the Investors Rights Agreement, dated the date hereof, as it may be amended from time to time as provided therein, with respect to the Ordinary Shares issued or issuable upon conversion of the Convertible Preferred B Shares issuable or issued upon the exercise of this Warrant. 9. NOTICE GENERALLY Any notice, demand, request, consent, approval, declaration, delivery or communication hereunder to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if in writing and shall be deemed to have been validly served, given or delivered (a) when sent after receipt of confirmation or answer back if sent by telex or telecopy or other similar facsimile transmission, (b) two (2) business days after deposit with a reputable international two (2) day courier with all charges prepaid or (c) when delivered if hand-delivered by messenger, all of which shall be properly addressed to the party to be notified and sent to the address or number indicated, to the Holder, or the holder of Convertible Preferred B Shares (or the Ordinary Shares issuable upon conversion thereof) at its last known address appearing on the books of the Company maintained for such purpose, and to the Company at: R.T.S. Relational Technology Systems, Ltd. Science Based Industries Campus P.O. Box 23052 Jerusalem 91230, Israel or at such other address as may be submitted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. -8- 10. TERMINATION This Warrant and the rights conferred hereby shall terminate at the earlier of (a) the aforementioned time on October 30, 2006; or (b) the offering to the public of the shares of the Company. 11. LIMITATION ON TRANSFER This Warrant shall be transferable in whole or in part only to a subsidiary of the Holder. 12. GOVERNING LAW This Warrant shall be governed by, and construed in accordance with, the laws of the State of Israel, without giving effect to the rules respecting conflict of law, and the parties hereto irrevocably submit to the exclusive jurisdiction of the Courts of Israel in respect of any dispute or matter arising out of or connected with this Warrant. DATED: October 30, 1996 R.T.S. RELATIONAL TECHNOLOGY SYSTEMS LTD. By: --------------- Name: --------------- Title: --------------- Agreed to and accepted: _____________________________ Name of Holder By: --------------- Name: --------------- Title: --------------- Address: --------------- EX-10.8 14 0014.txt FORM OF WARRANT SERIES C-1 SHARES Exhibit 10.8 ------------ WARRANT to Purchase up to an Aggregate of _____ Convertible Preferred C-1 Shares (Subject to Adjustment) of RTS Software Ltd. at NIS 0.1 per share THIS IS TO CERTIFY that _________________ (the "Holder") is entitled to purchase, subject to the provisions of this Warrant, from RTS Software Ltd. (the "Company"), at any time on or after the date hereof (the "Effective Date"), an aggregate of up to ______ (subject to adjustment) fully and nonassessable Convertible Preferred Shares, nominal value New Israeli Shekel ("NIS") 0.1 per share (the "Convertible Preferred Shares"), of the Company at a price of NIS 0.1 per share (the "Exercise Price"). In the event that all of the outstanding Convertible Preferred Shares are converted into Ordinary Shares, this Warrant shall be exercisable solely for such Ordinary Shares and any references throughout this Warrant to shares of Convertible Preferred Shares shall be deemed to refer to the Ordinary Shares into which the Convertible Preferred Shares may be converted. The amount and kind of securities purchasable pursuant to the rights granted hereunder and the Exercise Price for such securities are subject to adjustment pursuant to the further provisions of this Warrant. 1. EXERCISE OF WARRANT Subject to the provisions hereof, this Warrant may be exercised in whole or in part, at any time or from time to time on or after the Effective Date. This Warrant shall be exercised by presentation and surrender hereof to the Company at the principal office of the Company; accompanied by 1. a written notice of exercise and 2. payment to the Company, for the account of the Company, of the Exercise Price for the number of shares specified in such notice. The Exercise Price for the number of shares specified in the notice shall be payable in immediately available good funds, at the option of the Holder, in NIS. Upon such presentation and surrender, the Company shall issue promptly to the Holder the Convertible Preferred Shares to which the Holder is entitled hereunder. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder to purchase the balance of the Convertible Preferred Shares purchasable hereunder. Upon receipt by the Company of this -2- Warrant, in proper form for exercise, the Holder shall be deemed to be the holder of record of the Convertible Preferred Shares issuable upon such exercise, notwithstanding that the share transfer books of the Company shall then be closed or that certificates representing such Convertible Preferred Shares shall not then be actually delivered to the Holder. The Company shall pay any and all expenses, any stamp duty and any other charges that may be payable in connection with the issuance of the Convertible Preferred Shares and the preparation and delivery of share certificates pursuant to this Paragraph 1 in the name of the Holder. No fractions of Convertible Preferred Shares shall be issued in connection with the exercise of this Warrant, and the number of Convertible Preferred Shares issued shall be rounded down to the nearest whole number. Notwithstanding the foregoing, in the event of (i) the initial public offering of the Company (the "IPO"), (ii) on or after the merger of the Company with or into another company or entity, in which the Company is not the surviving entity (a "Merger") or (iii) on or after the sale of all or substantially all of the assets of the Company (a "Sale") then, in lieu of exercising this Warrant as provided above, in whole or in part, the Holder may elect to receive simultaneously with the Closing of the IPO, or simultaneously with the closing of the Merger or Sale, by the surrender and cancellation of this Warrant or any such portion thereof to the Company, Convertible Preferred Shares equal to the value of the Warrant (or the portion thereof being canceled) by written notice of such election to the Company, at the principal office of the Company, in which event the Company shall issue to the Holder, for no additional consideration, that number of Convertible Preferred Shares computed using the following formula: Y(A - B) X = ----------------- A X equals the number of Convertible Preferred Shares to be issued to the Holder; Y equals the number of Convertible Preferred Shares which would otherwise have been purchasable under this Warrant (or the portion thereof being canceled); B equals the Exercise Price in effect at the time of exercise pursuant to this formula (as may have been or be adjusted pursuant to the terms of this Warrant); and A shall equal the "Fair Value" of one share of the Company's Convertible Preferred Shares. Fair Value shall mean in the event that this Warrant is exercised in accordance with the above formula (i) if in connection with an IPO, then the Fair Value shall equal the price (as sold to the public) of that number of the Company's Ordinary Shares into which one share of the Company's Preferred Shares is Convertible, or (ii) if in connection with a Merger or Sale, the value of such share(s) as determined for the -3- purposes of the Merger or Sale, or (iii) if other than in connection with an IPO or a Merger or Sale and if a public market exists for the securities then subject to this Warrant and such securities are listed on a U.S. nationally recognized stock exchange or on the Nasdaq stock market, then the Fair Value shall equal the last sale or trading price of such securities as reported on such exchange or market, as applicable; provided, however, if no public market exists for the securities then the Fair Value shall be determined in good faith by the Board of Directors of the Company, but if such determination is challenged in good faith by the Holder, then as determined by an independent appraiser mutually satisfactory to the Company and the Holder, which determination shall be binding upon the parties. 2. RESERVATION OF SHARES: PRESERVATION OF RIGHTS The Company hereby agrees that at all times it will maintain and reserve such number of authorized but unissued Ordinary Shares so that this Warrant may be exercised without additional authorization of Convertible Preferred Shares after giving effect to all other options, warrants, convertible securities and other rights to acquire Convertible Preferred Shares of the Company. In addition, the Company will maintain and reserve such number of authorized but unissued Ordinary Shares as will be sufficient to permit the conversion in full of all issued or issuable Convertible Preferred Shares. All shares of Convertible Preferred Shares (and Ordinary Shares issuable upon conversion thereof) issuable pursuant to the terms hereof, when issued upon exercise of this Warrant in accordance with the terms hereof shall be duly and validly issued and fully paid and nonassessable, not subject to preemptive rights and shall be free and clear of all liens, encumbrances, equities and claims. The Company further agrees that it will not, by charter amendment or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by the Company. 3. EXCHANGE OR LOSS OF WARRANT This Warrant is exchangeable, upon presentation and surrender hereof at the principal office of the Company, only in connection with a partial exercise hereof. The Company shall be under no obligation to issue replacement warrants for the aggregate number of shares covered hereby except as described herein. The term "Warrant" as used herein includes any Warrant or Warrants for which this Warrant may be exchanged. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like terms, tenor and date. 4. ADJUSTMENT -4- The number of Convertible Preferred Shares (and the number of Ordinary Shares issuable upon conversion thereof) purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time or upon exercise as provided in this paragraph 4. 4.2. If, during the term of this Warrant, the Company shall distribute a stock dividend or shares of capital stock pursuant to a reclassification of its Convertible Preferred Shares to the holders of Convertible Preferred Shares (i.e., bonus shares), the number of Convertible Preferred Shares purchasable upon exercise of this Warrant shall be increased by multiplying such number of shares to be purchased under this Warrant by a fraction of which the denominator shall be the number of Convertible Preferred Shares outstanding at the close of business on the day immediately preceding the date of such distribution and the numerator shall be the sum of such number of shares and the total number of bonus shares, such increase to become effective immediately after the opening of business on the date following such distribution, and upon the happening of such an event the Exercise Price shall be adjusted appropriately. 4.2. If, during the term of this Warrant, the outstanding Convertible Preferred Shares shall be subdivided into a greater number of Convertible Preferred Shares, the number of Convertible Preferred Shares purchasable upon exercise of this Warrant at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately increased, and, conversely, if the outstanding Convertible Preferred Shares shall each be combined into a smaller number of Convertible Preferred Shares, the number of Convertible Preferred Shares purchasable upon exercise of this Warrant at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately decreased, and in each such case the Exercise Price shall be adjusted appropriately. 4.3. Reorganization, Reclassification, Merger, Consolidation or ----------------------------------------------------------- Disposition of Assets --------------------- (a) In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation or sell, transfer or otherwise dispose of all or substantially all of its property, assets or business to another corporation and pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, (i) shares of capital stock of the successor or acquiring corporation or of the Company (if it is the surviving corporation) or (ii) any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of capital stock of the successor or acquiring corporation ("Other Property") are to be received by or distributed to the holders of Convertible Preferred Shares of the Company who are holders immediately prior to such transaction, -5- then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the number of shares of capital stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a holder of the number of shares of Convertible Preferred Shares for which this Warrant is exercisable immediately prior to such event. (b) In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined by resolution of the Board of Directors of the Company) in order to provide for adjustments of shares of the Convertible Preferred Shares for which this Warrant is exercisable, which modifications shall be as nearly equivalent as practicable to the adjustments provided for in this Section 4. (c) The provisions of this subsection 4.3 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets. 4.4. Other Dilutive Events --------------------- In case any event shall occur as to which the preceding subsections 4.1 through 4.3 are not strictly applicable but as to which the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles hereof then, in each such case, the Board of Directors of the Company shall, in good faith, determine what adjustments are necessary to preserve the purchase rights of the Holder represented by this Warrant. The Company will notify the Holder of any such adjustments. 5. NOTICE OF CERTAIN EVENTS The holder of this Warrant shall be entitled to the same rights to receive notices of corporate actions as any holder of Convertible Preferred Shares as provided in the Company's Articles of Association or otherwise. Notwithstanding, in case at any time: 5.1. There shall be any merger of the Company with, or any statutory exchange of the Company's securities with the securities of, or sale of all or substantially all of its assets to, another corporation; or 5.2. There shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; -6- then, in any one or more of such cases, the Company shall give written notice, by first class mail, postage prepaid, addressed to the Holder at the address of the Holder as shown on the books of the Company, of the date on which such merger, exchange, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Convertible Preferred Shares of record shall be entitled to exchange their Convertible Preferred Shares for securities or other property deliverable upon such merger, exchange, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least twenty (20) days prior to the action in question. 6. NOTICE OF ADJUSTMENTS Whenever the number of Convertible Preferred Shares for which this Warrant is exercisable is adjusted as provided in paragraph 4 hereof or whenever the rate at which the Convertible Preferred Shares are convertible into Ordinary Shares is adjusted pursuant to the Company's Articles of Association, the Company shall promptly compute such adjustment and mail to the Holder at the last address provided to the Company in writing a certificate, signed by the principal financial office of the Company, setting forth the number of Convertible Preferred Shares (and the number of Ordinary Shares into which the Convertible Preferred Shares may be converted) for which this Warrant is exercisable and the exercise price as a result of such adjustment, a brief statement of the facts requiring such adjustment and the detailed computation thereof and when such adjustment has or will become effective. -7- 7. RIGHTS OF THE HOLDER 7.1. Without limiting the foregoing or any remedies available to the Holder, the Holder will be entitled to specific performance of the obligations hereunder, and injunctive relief against actual or threatened violations of the obligations of any person subject to this Warrant. 7.2. This Warrant shall not entitle the Holder to any voting rights or other rights as a shareholder of the Company whatsoever, except the rights expressed herein and no dividend or interest shall be payable or accrue in respect of this Warrant. 8. REGISTRATION RIGHTS The Holder shall have the registration and other rights and be subject to the obligations, set forth in the Investors Rights Agreement, dated the date hereof, as it may be amended from time to time as provided therein, with respect to the Ordinary Shares issued or issuable upon conversion of the Convertible Preferred Shares issuable or issued upon the exercise of this Warrant. 9. NOTICE GENERALLY Any notice, demand, request, consent, approval, declaration, delivery or communication hereunder to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if in writing and shall be deemed to have been validly served, given or delivered (a) when sent after receipt of confirmation or answer back if sent by telex or telecopy or other similar facsimile transmission, (b) two (2) business days after deposit with a reputable international two (2) day courier with all charges prepaid or (c) when delivered if hand-delivered by messenger, all of which shall be properly addressed to the party to be notified and sent to the address or number indicated, to the Holder, or the holder of Convertible Preferred Shares (or the Ordinary Shares issuable upon conversion thereof) at its last known address appearing on the books of the Company maintained for such purpose, and to the Company at: RTS Software, Ltd. Science Based Industries Campus P.O. Box 23052 Jerusalem 91230, Israel or at such other address as may be submitted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. -8- 10. LIMITATION ON TRANSFER This Warrant shall be transferable in whole or in part only to a subsidiary of the Holder. 11. GOVERNING LAW This Warrant shall be governed by, and construed in accordance with, the laws of the State of Israel, without giving effect to the rules respecting conflict of law, and the parties hereto irrevocably submit to the exclusive jurisdiction of the Courts of Israel in respect of any dispute or matter arising out of or connected with this Warrant. DATED: February 27, 1998 RTS SOFTWARE LTD. By: __________________ Name: __________________ Title: __________________ EX-10.9 15 0015.txt FORM OF WARRANT SERIES C-2 SHARES Exhibit 10.9 ------------ WARRANT to Purchase up to an Aggregate of ______ Series C-2 Convertible Preferred Shares (Subject to Adjustment) of R.T.S. Software Ltd. at U.S. $5.75 per share ---- VOID AFTER 10:00 a.m. (prevailing Tel Aviv time) on the Termination Date (as defined below) THIS IS TO CERTIFY that the holder specified below ("Holder") is entitled to purchase, subject to the provisions of this Warrant, from R.T.S. Software Ltd. (the "Company"), at any time on or after June 1, 1999 (the "Effective Date") and until the Termination Date (as defined below), an aggregate of up to _____ (subject to adjustment) fully paid and nonassessable Series C-2 Convertible Preferred Shares, nominal value New Israeli Shekel ("NIS") 0.1 per share (the "Convertible Preferred Shares"), of the Company at a price of US$5.75 per share or the NIS equivalent thereof (the "Exercise Price"). In the event that all of the outstanding Convertible Preferred Shares are converted into Ordinary Shares, this Warrant shall be exercisable solely for such Ordinary Shares and any references throughout this Warrant to shares of Convertible Preferred Shares shall be deemed to refer to the Ordinary Shares into which the Convertible Preferred Shares may be converted. The amount and kind of securities purchasable pursuant to the rights granted hereunder and the Exercise Price for such securities are subject to adjustment pursuant to the further provisions of this Warrant. 1. EXERCISE OF WARRANT Subject to the provisions hereof, this Warrant may be exercised by the Holder in whole or in part at any time or from time to time following the Effective Date and until the earlier of (i) June 1, 2004, (ii) a consolidation, merger or reorganization involving the Company or a sale of all or substantially all of the assets of the Company, or (iii) sale or transfer of the majority of the issued and outstanding share capital of the Company other than through an initial public offering ("IPO") of the Company's securities (the "Termination Date") (the period commencing on the Effective Date and ending on the Termination Date shall be referred to herein as the "Warrant Exercise Period"). This Warrant shall be exercised by presentation and surrender hereof to the Company at the principal office of the Company; accompanied by 1. a written notice of exercise; and 2. payment to the Company, for the account of the Company, of the Exercise Price for the number of Convertible Preferred Shares specified in such notice. -2- The Exercise Price for the number of Convertible Preferred Shares specified in the notice shall be payable in immediately available funds, at the option of the Holder, in U.S. dollars or the NIS equivalent thereof, based on the Representative Rate of Exchange published by the Bank of Israel known as of the time of payment. Upon such presentation and surrender, the Company shall issue promptly to the Holder the Convertible Preferred Shares to which the Holder is entitled hereunder. If this Warrant is exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder to purchase the balance of the Convertible Preferred Shares purchasable hereunder. Upon receipt by the Company of this Warrant, in proper form for exercise, the Holder shall be deemed to be the holder of record of the Convertible Preferred Shares issuable upon such exercise, notwithstanding that the share transfer books of the Company shall then be closed or that certificates representing such Convertible Preferred Shares shall not then be actually delivered to the Holder. The Company shall pay any and all expenses, any stamp duty and any other charges that may be payable in connection with the issuance of the Convertible Preferred Shares and the preparation and delivery of share certificates pursuant to this Paragraph 1 in the name of the Holder. No fractions of Convertible Preferred Shares shall be issued in connection with the exercise of this Warrant, and the number of Convertible Preferred Shares issued shall be rounded down to the nearest whole number. Notwithstanding the foregoing, in lieu of exercising this Warrant as provided above, in whole or in part, the Holder may elect to receive, by the surrender and cancellation of this Warrant or any such portion thereof to the Company, Convertible Preferred Shares equal to the value of the Warrant (or the portion thereof being canceled) by written notice of such election to the Company, at the principal office of the Company, in which event the Company shall issue to the Holder, for no additional consideration, that number of Convertible Preferred Shares computed using the following formula: Y(A - B) X = ------------ A X equals the number of Convertible Preferred Shares to be issued to the Holder; Y equals the number of Convertible Preferred Shares which would otherwise have been purchasable under this Warrant (or the portion thereof being canceled); B equals the Exercise Price in effect at the time of exercise pursuant to this formula (as may have been or be adjusted pursuant to the terms of this Warrant); and -3- A shall equal the "Fair Value" of one share of the Company's Convertible Preferred Shares. Fair Value shall mean in the event that this Warrant is exercised in accordance with the above formula (i) if in connection with an IPO, then the Fair Value shall equal the price (as sold to the public) of that number of the Company's Ordinary Shares into which one share of the Company's Preferred Shares is Convertible, or (ii) if in connection with a Merger or Sale, the value of such share(s) as determined for the purposes of the Merger or Sale, or (iii) if other than in connection with an IPO or a Merger or Sale and if a public market exists for the securities then subject to this Warrant and such securities are listed on a U.S. nationally recognized stock exchange or on the Nasdaq stock market, then the Fair Value shall equal the last sale or trading price of such securities as reported on such exchange or market, as applicable; provided, however, if no public market exists for the securities then the Fair Value shall be determined in good faith by the Board of Directors of the Company, but if such determination is challenged in good faith by the Holder, then as determined by an independent appraiser mutually satisfactory to the Company and the Holder, which determination shall be binding upon the parties. 2. RESERVATION OF SHARES: PRESERVATION OF RIGHTS The Company hereby agrees that at all times it will maintain and reserve such number of authorized but unissued Convertible Preferred Shares so that this Warrant may be exercised without additional authorization of Convertible Preferred Shares after giving effect to all other options, warrants, convertible securities and other rights to acquire Convertible Preferred Shares of the Company. In addition, the Company will maintain and reserve such number of authorized but unissued Ordinary Shares as will be sufficient to permit the conversion in full of all issued or issuable Convertible Preferred Shares. All shares of Convertible Preferred Shares (and Ordinary Shares issuable upon conversion thereof) issuable pursuant to the terms hereof, when issued upon exercise of this Warrant in accordance with the terms hereof shall be duly and validly issued, fully paid and nonassessable, not subject to preemptive rights and shall be free and clear of all liens, encumbrances, equities and claims. The Company further agrees that it will not, by charter amendment or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by the Company. 3. EXCHANGE OR LOSS OF WARRANT This Warrant is exchangeable, upon presentation and surrender hereof at the principal office of the Company, only in connection with a partial exercise hereof. The Company shall be under no obligation to issue replacement warrants for the aggregate number of shares covered hereby except as described herein. The term "Warrant" as used herein includes any Warrant or Warrants for which this Warrant may be exchanged. Upon receipt by the -4- Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like terms, tenor and date. 4. ADJUSTMENT The number of Convertible Preferred Shares (and the number of Ordinary Shares issuable upon conversion thereof) purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time or upon exercise as provided in this paragraph 4. 4.1. If, during the term of this Warrant, the Company shall distribute a stock dividend or shares of capital stock pursuant to a reclassification of its Convertible Preferred Shares to the holders of Convertible Preferred Shares (i.e., bonus shares), the number of Convertible Preferred Shares purchasable upon exercise of this Warrant shall be increased by multiplying such number of shares to be purchased under this Warrant by a fraction of which the denominator shall be the number of Convertible Preferred Shares outstanding at the close of business on the day immediately preceding the date of such distribution and the numerator shall be the sum of such number of shares and the total number of bonus shares, such increase to become effective immediately after the opening of business on the date following such distribution, and upon the happening of such an event the Exercise Price shall be adjusted appropriately. 4.2. If, during the term of this Warrant, the outstanding Convertible Preferred Shares shall be subdivided into a greater number of Convertible Preferred Shares, the number of Convertible Preferred Shares purchasable upon exercise of this Warrant at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately increased, and, conversely, if the outstanding Convertible Preferred Shares shall each be combined into a smaller number of Convertible Preferred Shares, the number of Convertible Preferred Shares purchasable upon exercise of this Warrant at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately decreased, and in each such case the Exercise Price shall be adjusted appropriately. 4.3. Reorganization, Reclassification, Merger, Consolidation or ---------------------------------------------------------- Disposition of Assets --------------------- (a) In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation or sell, transfer or otherwise dispose of all or substantially all of its property, assets or business to another -5- corporation and pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, (i) shares of capital stock of the successor or acquiring corporation or of the Company (if it is the surviving corporation) or (ii) any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of capital stock of the successor or acquiring corporation ("Other Property") are to be received by or distributed to the holders of Convertible Preferred Shares of the Company who are holders immediately prior to such transaction, then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the number of shares of capital stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a holder of the number of shares of Convertible Preferred Shares for which this Warrant is exercisable immediately prior to such event. (b) In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined by resolution of the Board of Directors of the Company) in order to provide for adjustments of shares of the Convertible Preferred Shares for which this Warrant is exercisable, which modifications shall be as nearly equivalent as practicable to the adjustments provided for in this Section 4. (c) The provisions of this subsection 4.3 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets. 4.4. Other Dilutive Events --------------------- In case any event shall occur as to which the preceding subsections 4.1 through 4.3 are not strictly applicable but as to which the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles hereof then, in each such case, the Board of Directors of the Company shall, in good faith, determine what adjustments are necessary to preserve the purchase rights of the Holder represented by this Warrant. The Company will notify the Holder of any such adjustments. -6- 5. NOTICE OF CERTAIN EVENTS The Holder of this Warrant shall not be entitled to the same rights to receive notices of corporate actions as any holder of Convertible Preferred Shares. Notwithstanding the foregoing, in case at any time: 5.1. There shall be any merger of the Company with, or any statutory exchange of the Company's securities with the securities of, or sale of all or substantially all of its assets to, another corporation; or 5.2. There shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give written notice, by first class mail, postage prepaid, addressed to the Holder at the address of the Holder as shown on the books of the Company, of the date on which such merger, exchange, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Convertible Preferred Shares of record shall be entitled to exchange their Convertible Preferred Shares for securities or other property deliverable upon such merger, exchange, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least twenty (20) days prior to the action in question. 6. NOTICE OF ADJUSTMENTS Whenever the number of Convertible Preferred Shares for which this Warrant is exercisable is adjusted as provided in paragraph 4 hereof or whenever the rate at which the Convertible Preferred Shares are convertible into Ordinary Shares is adjusted pursuant to the Company's Articles of Association, the Company shall promptly compute such adjustment and mail to the Holder at the last address provided to the Company in writing a certificate, signed by the principal financial office of the Company, setting forth the number of Convertible Preferred Shares (and the number of Ordinary Shares into which the Convertible Preferred Shares may be converted) for which this Warrant is exercisable and the exercise price as a result of such adjustment, a brief statement of the facts requiring such adjustment and the detailed computation thereof and when such adjustment has or will become effective. 7. RIGHTS OF THE HOLDER 7.1. Without limiting the foregoing or any remedies available to the Holder, the Holder will be entitled to specific performance of the obligations hereunder, and injunctive relief against actual or threatened violations of the obligations of any person subject to this Warrant. 7.2. This Warrant shall not entitle the Holder to any voting rights or other rights as a shareholder of the Company whatsoever, except the rights -7- expressed herein and no dividend or interest shall be payable or accrue in respect of this Warrant. 8. TAX ALLOCATION The Company and the Holder hereby acknowledge and agree that the Warrant is part of an investment unit within the meaning of Section 1273(c)(2) of the Internal Revenue Code of 1986, as amended, which includes the Convertible Preferred Shares. Notwithstanding anything to the contrary contained herein, the Company and the Holder hereby further acknowledge and agree that for purposes of United States federal, state and local income tax and United States generally accepted accounting principles (if applicable), the "issue price" of the Warrant and the Convertible Preferred Shares to be issued thereunder shall be the amount agreed by the Company and the Holder within 60 days following the date when the Warrant first becomes exercisable. The Company and the Holder agree to use the foregoing issue prices for all the foregoing purposes with respect to this transaction. 9. NOTICE GENERALLY Any notice, demand, request, consent, approval, declaration, delivery or communication hereunder to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if in writing and shall be deemed to have been validly served, given or delivered (a) when sent after receipt of confirmation or answer back if sent by telex or telecopy or other similar facsimile transmission, (b) two (2) business days after deposit with a reputable international two (2) day courier with all charges prepaid or (c) when delivered if hand-delivered by messenger, all of which shall be properly addressed to the party to be notified and sent to the address or number indicated, to the Holder, or the holder of Convertible Preferred Shares (or the Ordinary Shares issuable upon conversion thereof) at its last known address appearing on the books of the Company maintained for such purpose, and to the Company at: R.T.S. Software Ltd. Science Based Industries Campus P.O. Box 23052 Jerusalem 91230, Israel or at such other address as may be submitted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. 10. EFFECTIVENESS AND TERMINATION This Warrant and the rights conferred hereby shall become effective at the Effective Date and shall terminate at the Termination Date. 11. LIMITATION ON TRANSFER This Warrant shall not be transferable in whole or in part to any third party other than to a permitted transferee pursuant to Section 2.3 of that certain -8- Shareholders Agreement, dated June 1, 1999, by and among the Holder and certain other shareholders of the Company. 12. GOVERNING LAW This Warrant shall be governed by, and construed in accordance with, the laws of the State of Israel, without giving effect to the rules respecting conflict of law, and the parties hereto irrevocably submit to the exclusive jurisdiction of the Courts of Israel in respect of any dispute or matter arising out of or connected with this Warrant. DATED: June 1, 1999 R.T.S. SOFTWARE LTD. By: ________________ Name: ________________ Title: ________________ Agreed to and accepted: By: Name: _______________ Title: _______________ Address: _______________ EX-10.10 16 0016.txt HAPOALIM NECHASIM 217,391 SHARES WARRANT Exhibit 10.10 ------------- THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR QUALIFIED UNDER ANY STATE OR FOREIGN SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT COVERING THIS WARRANT AND/OR SUCH SECURITIES, OR THE HOLDER RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THE WARRANT AND/OR SUCH SECURITIES SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT AND THE QUALIFICATION REQUIREMENTS UNDER APPLICABLE STATE OR FOREIGN LAW. WARRANT TO PURCHASE ORDINARY SHARES ----------------------------------- R.T.S. Software Ltd., an Israeli Company (the "Company") hereby grants to Hapoalim Nechasim (Menayot) Ltd. (the "Holder"), the right to purchase from the Company the number of Ordinary Shares of the Company, nominal value NIS 0.10 each (the "Ordinary Shares") specified below, subject to the terms and conditions set forth below, effective as of March 15, 1999 (the "Effective Date"). 1 Number of Ordinary Shares Available for Purchase ------------------------------------------------ This Warrant may be exercised to purchase that number of the Company's Ordinary Shares having an aggregate exercise price in an amount equivalent to one million United States dollars (US$1,000,000), at an exercise price per each Ordinary Share which shall be calculated as set forth in Section 2 below, subject to adjustments under Section 8 of this Warrant (the "Warrant Shares"). 1 Exercise Price -------------- The exercise price for each Warrant Share purchasable hereunder shall be calculated as set forth below, subject to adjustments under Section 8 of this Warrant (the "Warrant Price"): (i) in the event that, at any time during the period commencing on the Effective Date and ending at 23:59 on December 31, 1999, the Company shall: (a) issue its securities in a Qualified Financing (as such term is defined below in this Section 2); or (b) issue its securities in an Initial Public Offering (as such term is defined below in this Section 2); (c) enter into a sale of all or substantially all of the Company's property and assets; or (d) enter into a merger or consolidation of the Company with or into another corporation or in the event of any acquisition of all or substantially all the outstanding share capital of the Company, for a consideration either in cash or exchange of securities (including, without limitation, any transaction following which more than fifty -2- percent (50%) of the Company's shares are held by persons who, prior to the said transaction, held less than fifty percent (50%) of the Company's shares) or any other business combination (such transactions described in (a), (b), (c) and (d) above are collectively referred to as "Liquidity Events"), the exercise price for each Warrant Share purchasable hereunder shall be equal to eighty percent (80%) of the price per share paid by purchasers of the Company's securities in the Liquidity Event (assuming such price was calculated on a fully-diluted and as-converted basis, taking into account all convertible securities, convertible loans, warrants, options and all other rights, whatsoever, to receive shares - the "Event Price"); (ii) in the event that a Liquidity Event shall not be consummated prior to 23:59 on December 31, 1999, then at any time during the period commencing on 00:00 on January 1, 2000 and ending at 23:59 on March 31, 2000, the exercise price for each Warrant Share purchasable hereunder shall be equal to the lower of: (i) the Event Price of a Liquidity Event closing any time during the period commencing on 00:00 on January 1, 2000 and ending at 23:59 on March 31, 2000; or (ii) a price reflecting a pre money Company valuation of US$100,000,000, which shall be equal to a fraction, the numerator of which is US$100,000,000, and the denominator of which is the total number of issued and outstanding shares of the Company at the time of exercise (on a fully diluted and as-converted basis, taking into account all convertible securities, convertible loans, warrants, options and all other rights, whatsoever, to receive shares). As an illustration of the foregoing, if the number of issued and outstanding shares of the Company, on a fully diluted and as converted basis, as of the date of exercise, is 14,959,224 shares, and the Warrant Price applicable to the exercise of this Warrant on the date hereof would be US$100,000,000/14,959,224 = US$6.685. (iii) Subject to the provisions of Section 3 hereof, in the event that a Liquidity Event shall not be consummated prior to 23:59 on March 31, 2000, then at any time during the period commencing on 00:00 on April 1, 2000 and ending at 23:59 on June 30, 2000, the exercise price for each Warrant Share purchasable hereunder shall be equal to the lower of: (i) the Event Price of a Liquidity Event closing any time during the period commencing on 00:00 on January 1, 2000 and ending at 23:59 on June 30, 2000; or (ii) a price reflecting a pre money Company valuation of US$80,000,000, which shall be equal to a fraction, the numerator of which is US$80,000,000, and the denominator of which is the total number of issued and outstanding shares of the Company at the time of exercise (on a fully diluted and as-converted basis, taking into account all convertible securities, convertible loans, warrants, options and all other rights, whatsoever, to receive shares). As an illustration of the foregoing, if the number of issued and outstanding shares of the Company, on a fully diluted and as converted basis, as of the date of exercise, is 14,959,224 shares, and the Warrant Price applicable to the exercise of this Warrant on the date hereof would be US$80,000,000/14,959,224 = US$5.348. -3- (d) Subject to the provisions of Section 3 hereof, in the event that a Liquidity Event shall not be consummated prior to 23:59 on June 30, 2000, the exercise price for each Warrant Share purchasable hereunder following such date shall be equal to a price reflecting a pre money Company valuation of US$60,000,000, which shall be equal to a fraction, the numerator of which is US$60,000,000, and the denominator of which is the total number of issued and outstanding shares of the Company at the time of exercise (on a fully diluted and as-converted basis, taking into account all convertible securities, convertible loans, warrants, options and all other rights, whatsoever, to receive shares). As an illustration of the foregoing, if the number of issued and outstanding shares of the Company, on a fully diluted and as converted basis, as of the date of exercise, is 14,959,224 shares, and the Warrant Price applicable to the exercise of this Warrant on the date hereof would be US$60,000,000/14,959,224= US$4.011. (e) For the avoidance of doubt it is hereby clarified that in no event shall the Warrant Price or the Event Price reflect a pre money Company valuation of less than US$60,000,000. For the purpose of this Warrant, the term "Qualified Financing" shall mean the closing of the first financing after the date hereof in which the Company issues Equity Securities (as defined below) and in which persons and/or entities other than, or in addition to, the Company's existing shareholders immediately prior to the Qualified Financing, contribute aggregate gross proceeds to the Company in such financing in excess of two million United States Dollars (US$2,000,000). Equity Securities shall mean securities of the share capital of the Company other than options, warrants or convertible debentures or loans. For purposes of this Warrant "Initial Public Offering" shall mean the first underwritten public offering pursuant to an effective registration statement under the Securities Act , or any other securities law of any other jurisdiction, covering the offering and sale of shares of Ordinary Shares for the account of the Company (other than a registration statement effected solely to implement an employee benefit plan, a transaction in which Rule 145 of the Securities and Exchange Commission is applicable or any other form or type of registration in which the Ordinary Shares cannot be included pursuant to the Securities and Exchange Commission rules of practices). All references to dates and time are made according to the time in the State of Israel. 3. Term ---- This Warrant may be exercised, in whole, or in part (subject to Section 4 below), during the period beginning on the Effective Date and ending on the date which is the earlier of: (i) three (3) years following the Effective Date; (ii) immediately following the closing of an Initial Public Offering; and (iii) immediately following the closing of an event described in Section 2(i)(c) and (d) hereof. Notwithstanding the foregoing, if, at the conclusion of the initial 12-month period of the credit line of up to US$4,000,000 given to Company by the Holder, the Holder does not extend such -4- credit line for an additional 12-month period, then this Warrant shall immediately terminate upon the termination of the initial 12-month period of such credit line. 4. Exercise of Warrant ------------------- This Warrant may be exercised in whole or in part on one occasion during its term. The Warrant may be exercised by the surrender of the Warrant to the Company at its principal office together with the Notice of Exercise annexed hereto duly completed and executed on behalf of the Holder. a. Exercise for Cash ----------------- To exercise for cash, the Notice of Exercise must be accompanied by payment in full of the amount of the aggregate purchase price of the Warrant Shares being purchased upon such exercise in immediately available funds, in U.S. Dollars or NIS equivalent thereof, based on the representative rate of exchange published by the Bank of Israel and known at the time of payment. b. Net Exercise ------------- In lieu of the payment method set forth in Section 4(a) above, upon the closing of a Liquidity Event described in Sections 2(i)(b), 2(i)(c) or 2(i)(d), the Holder may elect to exchange the Warrant for a number of Warrant Shares equal to the increase in value of the Warrant Shares otherwise purchasable hereunder on the date of exchange. If the Holder elects to exchange this Warrant as provided in this Section 4(b), the Holder shall tender to the Company the Warrant along with the Notice of Exercise, and the Company shall issue to the Holder the number of Warrant Shares computed using the following formula: X = Y (A-B) ------- A Where X = the number of Warrant Shares to be issued to the Holder. Y = the number of shares of Warrant Shares purchasable under the Warrant (as adjusted to the date of such calculation, but excluding those shares already issued under this Warrant). A = the Fair Market Value (as defined below) of one share of the Company's Ordinary Shares. B = Exercise Price (as adjusted to the date of such calculation). "Fair Market Value" of an Ordinary Share shall mean: (i) Except as set forth in subsection 4.b.(ii) (below), if the Company's Ordinary Shares are not publicly traded, then as determined by the Company's Board of Directors in good faith. -5- (ii) If the exercise date is the date of closing of a public offering of the Company's Ordinary Shares pursuant to an effective registration statement under the Securities Act, then the public offering price (before deduction of discounts, commissions or expenses) in such offering. In the event of a net exercise, the entire Warrant must be surrendered, and no new Warrant shall be issued. c. Issuance of Shares on Exercise ------------------------------ The Company agrees that the Warrant Shares so purchased shall be issued as soon as practicable thereafter, and that the Holder shall be deemed the record owner of such Warrant Shares as of and from the close of business on the date on which this Warrant shall be surrendered, together with payment in full as required above. In the event of a partial exercise, the Company shall concurrently issue to the Holder a replacement Warrant on the same terms and conditions as this Warrant, but representing the number of Warrant Shares remaining after such partial exercise. d. Conditional Exercise -------------------- In any connection with a Liquidity Event, such exercise may be made conditional upon the completion of such Liquidity Event. 5. Fractional Interest ------------------- No fractional shares will be issued in connection with any exercise hereunder, and the number of Warrant Shares issued shall be rounded to the nearest whole number. 6. Warrant Confers No Rights of Shareholder ---------------------------------------- Except as otherwise set forth in this Warrant, the Holder shall not have any rights as a shareholder of the Company with regard to the Warrant Shares prior to actual exercise resulting in the purchase of any Warrant Shares. 7. Investment Representation ------------------------- Neither this Warrant nor the Warrant Shares issuable upon the exercise of this Warrant have been registered under the Securities Act, or any other securities laws. The Holder acknowledges by acceptance of the Warrant that (a) it has acquired this Warrant for investment and not with a view to distribution; (b) it has either a pre-existing personal or business relationship with the Company, or its executive officers, or by reason of its business or financial experience, it has the capacity to protect its own interests in connection with the transaction; and (c) it is an accredited investor as that term is defined in Regulation D promulgated under the Securities Act. The Holder agrees that any Warrant Shares issuable upon exercise of this Warrant will be acquired for investment and not with a view to distribution and such Warrant Shares will not be registered under the Securities Act and applicable state securities laws and that such Warrant Shares may have to be held indefinitely unless they are -6- subsequently registered or qualified under the Securities Act and applicable state securities laws, or based on an opinion of counsel reasonably satisfactory to the Company, an exemption from such registration and qualification is available. The Holder, by acceptance hereof, consents to the placement of legend(s) on all securities hereunder as to the applicable restrictions on transferability in order to ensure compliance with the Securities Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Securities Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. 8. Adjustment of Warrant Price and Number of Shares ------------------------------------------------ The number and kind of securities purchasable initially upon the exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: a. Adjustment for Shares Splits and Combinations If the Company at any --------------------------------------------- time or from time to time during the term of this Warrant effects a subdivision of the outstanding Ordinary Shares, the number of Ordinary Shares issuable upon exercise of this Warrant immediately before the subdivision shall be proportionately increased, and conversely, if the Company at any time or from time to time combines the outstanding Ordinary Shares, the number of Ordinary Shares issuable upon exercise of this Warrant immediately before the combination shall be proportionately decreased. Any adjustment under this Section 8(a) shall become effective at the close of business on the date the subdivision or combination becomes effective. b. Adjustment for Certain Dividends and Distributions In the event the -------------------------------------------------- Company at any time or from time to time, during the term of this Warrant makes, or fixes a record date for the determination of holders of Ordinary Shares entitled to receive a dividend or other distribution payable in additional shares of Ordinary Shares, then and in each such event the number of Ordinary Shares issuable upon exercise of this Warrant shall be increased as of the time of such issuance or, in the event such a record date is fixed, as of the close of business on such record date, by multiplying the number of Ordinary Shares issuable upon exercise of this Warrant by a fraction: (i) the numerator of which shall be the total number of Ordinary Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of Ordinary Shares issuable in payment of such dividend or distribution, and (ii) the denominator of which is the total number of shares of Ordinary Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date; provided, --------- however, that if such record date is fixed and such dividend is not ------- fully paid or if such distribution is not fully made on the date fixed thereof, the number of Ordinary Shares issuable upon exercise of this Warrant shall be recomputed accordingly as of the close of business on such record date and thereafter the number of shares of Ordinary Shares issuable upon exercise of this Warrant shall be adjusted pursuant to this Section 8(b) as of the time of actual payment of such dividends or distributions. -7- c. Adjustments for Other Dividends and Distributions. In the event the ------------------------------------------------- Company at any time or from time to time during the term of this Warrant makes, or fixes a record date for the determination of holders of Ordinary Shares entitled to receive a dividend or other distribution payable in securities of the Company other than Ordinary Shares, then in each such event provision shall be made so that the Holder shall receive upon exercise of this Warrant, in addition to the number of Ordinary Shares receivable thereupon, the amount of securities of the Company that the Holder would have received had this Warrant been exercised for Ordinary Shares immediately prior to such event (or the record date for such event) and had the Holder thereafter, during the period from the date of such event to and including the date of exercise, retained such securities receivable by it as aforesaid during such period, subject to all other adjustments called for during such period under this Section and the Company's Articles of Association with respect to the rights of the Holder. d. Adjustment for Reclassification, Exchange and Substitution If the ---------------------------------------------------------- Ordinary Shares issuable upon the exercise of this Warrant are changed into the same or a different number of shares of any class or classes of shares, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or shares dividend or a reorganization, merger, consolidation or sale of assets, provided for elsewhere in this Section), then and in any such event the Holder shall have the right thereafter to exercise this Warrant into the kind and amount of shares and other securities receivable upon such recapitalization, reclassification or other change, by holders of the number of shares of Ordinary Shares for which this Warrant might have been exercised immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided herein and under the Company's Articles of Association. e. Reorganization, Mergers, Consolidations or Sales of Assets If at any ---------------------------------------------------------- time or from time to time during the term of this Warrant there is a capital reorganization of the Ordinary Shares (other than a recapitalization, subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Subsection) or a merger or consolidation of the Company with or into another corporation, or the sale of all or substantially all of the Company's shares or properties and assets to any other person, then, as a part of such reorganization, merger, consolidation or sale, provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this Warrant, the number of shares or other securities or property of the Company, or of the successor corporation resulting from such merger or consolidation or sale, to which a holder of Ordinary Shares deliverable upon conversion would have been entitled on such capital reorganization, merger, consolidation or sale. In any such case (except to the extent any cash or property is received in such transaction), appropriate adjustment shall be made in the application of the provisions of this Subsection and the Company's Articles of Association with respect to the rights of the Holder after the reorganization, merger, consolidation or sale to the end that the provisions of this Subsection and the Company's Articles of Association (including adjustment of the number of -8- shares of Ordinary Shares issuable upon exercise of this Warrant) shall be applicable after that event and be as nearly equivalent to the provisions hereof as may be practicable. f. Other Transactions. In the event that the Company shall issue shares ------------------- to its shareholders as a result of a split-off, spin-off or the like, then the Company shall give the Holder a 30 days written notice prior to the completion of such issuance or other action. g. General Protection. The Company will not, by amendment of its Articles ------------------ of Association or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder, or impair the economic interest of the Holder, but will at all times in good faith assist in the carrying out of all the provisions hereof and in taking of all such actions and making all such adjustments as may be necessary or appropriate in order to protect the rights and the economic interests of the Holder against impairment. h. Notice of Capital Changes. If at any time during the term of this ------------------------- Warrant there shall be any capital reorganization or reclassification of the capital shares of the Company, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to another company or there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company, or other transaction described in this Section 8, then, in any one or more of said cases, the Company shall give the Holder written notice, by registered or certified mail, postage prepaid, of the date on which such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of record of Ordinary Shares shall participate in such subscription rights, or shall be entitled to exchange their Ordinary Shares for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least fourteen (14) days prior to the action in question and not less than fourteen (14) days prior to the record date in respect thereto. i. Adjustment of Warrant Price. Upon each adjustment in the number of --------------------------- Ordinary Shares purchasable hereunder, the Warrant Price shall be proportionately increased or decreased, as the case may be, in a manner that is the inverse of the manner in which the number of Ordinary Shares purchasable hereunder shall be adjusted. j. Notice of Adjustments. Whenever the Warrant Price or the number of --------------------- Ordinary Shares purchasable hereunder shall be adjusted pursuant to Section 8 hereof, the Company shall prepare a certificate signed by the chief financial officer of the Company setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price and the number of Ordinary -9- Shares purchasable hereunder after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (by first class mail, postage prepaid) to the Holder. 9. Transfer of This Warrant or Securities Issuable on Exercise Hereof ------------------------------------------------------------------ a. With respect to any offer, sale or other disposition of this Warrant or securities into which such Warrant may be exercised, the Holder will give written notice to the Company prior thereto, describing briefly the manner thereof, together with, if requested by the Company, a written opinion of such Holder's counsel, to the effect that such offer, sale or other distribution may be effected without registration or qualification (under any federal or state law then in effect). Such opinion letter and all such transferees must warrant and represent that each such transferee is an "accredited" investor as that term is defined under Regulation D of the Securities Act. Promptly, as practicable, upon receiving such written notice and opinion and warranties and representations, if so requested, the Company, as promptly as practicable, shall deliver to the Holder one or more replacement Warrant certificates on the same terms and conditions as this Warrant for delivery to the transferees. Each Warrant thus transferred and each certificate representing the securities thus transferred shall bear legend(s) as to the applicable restrictions on transferability in order to ensure compliance with the Securities Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Securities Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. Any provision of this Warrant to the contrary notwithstanding, the Holder may not offer, sell or otherwise dispose of this Warrant to any third party, other than (i) to a wholly owned subsidiary of Bank Hapoalim B.M., or (ii) to any other transferee approved by the Company in writing in its sole discretion. In addition to the above, any transfer of this Warrant or the Warrant Shares shall be subject to the provisions of the Company's Articles of Association. b. In the event that the Company or its shareholders receive an offer to transfer all or substantially all of the shares in the Company, or to effect a merger or acquisition, or sale of all or substantially all of the assets of the Company, then the Company shall promptly inform the Holder in writing of such offer. 10. Registration Rights ------------------- The Company covenants and agrees as follows: The Holder shall have registration rights in accordance with and subject to an Amendment and Restatement Investors Rights Agreement dated April 22, 1998 (the "Amended Investors Rights Agreement") between the Company and certain of its shareholders, pursuant to which the Company granted such shareholders registration rights as provided therein, and therefore (i) the Holder of this Warrant shall be deemed to be a Holder (as defined in the Amended Investors Rights Agreement) and (ii) (x) the Warrant Shares, and (y) any Ordinary Shares of the Company issued as a dividend or other distribution with respect to, or in exchange for or in replacement of, such -10- Warrant Shares shall be deemed to be included in the definition of Registrable Shares (as defined in the Amended Investors Rights Agreement). Rights and Obligations Survive Exercise and Expiration of Warrant. The ------------------------------------------------------------------ rights and obligations of the Company and the Holder set forth in this Section 10 and in the Registration Rights shall survive the exercise, conversion and expiration of this Warrant only if this Warrant is exercised and only with respect to the Warrant Shares issued in respect of this Warrant. 11. Representations and Warranties. ------------------------------ The Company represents and warrants to the Holder as follows: a. This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms. b. The Warrant Shares are duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and not subject to any preemptive rights. c. The execution and delivery of this Warrant are not, and the issuance of the Warrant Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company's Articles of Association, do not and will not contravene any law, governmental rule or regulation, judgment or order applicable to the Company, and, except for consents that have already been obtained by the Company, do not and will not conflict with or contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration with or the taking of any action in respect of or by, any Federal, state or local government authority or agency or other person. The Holder hereby represents and warrants to the Company as follows: one. Holder has been provided with a copy of the Amended Investors Rights Agreement, has carefully read its terms and by executing this Warrant hereby agrees to be bound by the provisions of the Amended Investors Rights Agreement applicable to a "Holder" (as defined therein). two. Holder has been provided with a copy of the Articles of Association of the Company (the "Articles") and has carefully read the provisions thereof (including without limitation the provisions of the "Drag Along Right" as set forth in Article _____). -11- 12. Expenses -------- The Company will pay the Israeli Stamp Duty on the issuance of the Warrant Shares, and will notify the Israeli Companies Registrar of such issuance within the time period required by law. The Stamp Duty on this Warrant, if any, will be paid in full by the Company. 13. Loss, Theft, Destruction or Mutilation of Warrant ------------------------------------------------- Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant or Shares certificate, and in case of loss, theft or destruction, of indemnity, or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant or Shares certificate, if mutilated, the Company will make and deliver a new Warrant or Shares certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or Shares certificate. 14. Notices ------- Any notice or other communication hereunder shall be in writing and shall be deemed to have been given upon delivery, if personally delivered or three business days after deposit if deposited in the mail for mailing by certified mail, postage prepaid, and addressed as follows: If to Holder: Bank Hapoalim B.M. Electronics Group - Industrial Sector 41-45 Rothschild Blvd. Tel Aviv, Israel attn.: Ruthi Simha fax: 03-567-5699 If to Company: R.T.S. Software Ltd. 5 Kiriat Hamada Street Har Hotzvim, Jerusalem, Israel attn.: Samuel HaCohen or Yohanan Engelhardt fax: 02-5815507 With a copy to: R.T.S. Software Inc. attn.: Samuel HaCohen or Yohanan Engelhardt fax: 1-781-890-2953 Each of the above addressees may change its address for purposes of this paragraph by giving to the other addressees notice of such new address in conformance with this paragraph. -12- 15. Applicable Law; Jurisdiction ---------------------------- This Warrant shall be governed by and construed in accordance with the laws of the State of Israel as applicable to contracts between two residents of the State of Israel entered into and to be performed entirely within the State of Israel. Any dispute arising under or in relation to this Warrant shall be resolved exclusively in the competent court for Tel Aviv-Jaffa district, and each of the parties hereby submits irrevocably to the exclusive jurisdiction of such court. 16. Entire Agreement ---------------- This Warrant constitutes the entire agreement between the parties hereto with regard to the subject matters hereof, and supercedes any prior communications, agreements and/or understandings between the parties hereto with regard to the subject matters hereof. Dated: March 15, 1999 R.T.S. SOFTWARE LTD. By: Samuel HaCohen Yohanan Engelhardt ---------------------------- --------------------------- Title: President and CEO CFO ---------------------------- --------------------------- /s/ Samuel HaCohen /s/ Yahanan Engelhardt ---------------------------- --------------------------- Agreed to and accepted: Hapoalim Nechasim (Menayot) Ltd. By: Y. Elinar /s/ I.M. Behar ---------------------------------- Name: /s/ Y. Elinar I. M. Behar ---------------------------------- Title: Members of the Board of Management ---------------------------------- Address: 41-45 Rothschild Blvd. Tel Aviv, Israel -13- NOTICE OF EXERCISE To: 1. The undersigned hereby elects to purchase _________ shares of Ordinary Shares of ____________, pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price for such shares in full. 2. In exercising this Warrant, the undersigned hereby confirms and acknowledges that the shares of Ordinary Shares are being acquired solely for the account of the undersigned and not as a nominee for any other party, or for investment, and that the undersigned will not offer, sell or otherwise dispose of any such shares of Ordinary Shares except under circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws. 3. Please issue a certificate representing said shares of Ordinary Shares in the name of the undersigned. 4. Please issue a new Warrant for the unexercised portion of the attached Warrant in the name of the undersigned. 5 [Optional] This exercise is made contingent upon the closing of the Initial Public Offering on [____________]. In the event that such closing does not take place on or before such date, this exercise shall be withdrawn. ___________________ ____________________________ (Date) (Print Name) ____________________________ (Signature) EX-10.11 17 0017.txt HAPOALIAN NECHASIM 69,565 SHARES WARRANT Exhibit 10.11 ------------- THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR QUALIFIED UNDER ANY STATE OR FOREIGN SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT COVERING THIS WARRANT AND/OR SUCH SECURITIES, OR THE HOLDER RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THE WARRANT AND/OR SUCH SECURITIES SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT AND THE QUALIFICATION REQUIREMENTS UNDER APPLICABLE STATE OR FOREIGN LAW. WARRANT TO PURCHASE ORDINARY SHARES ----------------------------------- R.T.S. Software Ltd., an Israeli Company (the "Company"), hereby grants to Hapoalim Nechasim (Menayot) Ltd. (the "Holder"), the right to purchase from the Company the number of Ordinary Shares of the Company, nominal value NIS 0.10 each (the "Ordinary Shares") specified below, subject to the terms and conditions set forth below, effective as of January __, 2000 (the "Effective Date"). 1. Number of Ordinary Shares Available for Purchase and the Warrant Price - --------------------------------------------------------------------------- (i) This Warrant may be exercised to purchase that number of the Company's Ordinary Shares having an aggregate exercise price in an amount equivalent to Four Hundred Thousand U.S. Dollars ($400,000), at an exercise price per each Ordinary Share which shall be calculated as set forth in Section 2 below, subject to adjustments under Section 8 of this Warrant (the "Warrant Shares"). (ii) The exercise price for each Warrant Share purchasable hereunder shall be Five Dollars and Seventy Five U.S. Cents ($5.75) (the "Warrant Price"); provided, however, that if (and only if) the Company shall complete a -------- ------- Liquidity Event (as such term is defined below) after the Effective Date and the price per share paid by purchasers of the Company's securities (or deemed price per share paid for the Company's assets) in the first such Liquidity Event (assuming such price was calculated on a fully-diluted and as-converted basis, taking into account all convertible securities, convertible loans, warrants, options and all other rights, whatsoever, to receive shares) is less than the Warrant Price above, then the Warrant Price shall be adjusted and reduced to the price (or deemed price) paid in such Liquidity Event. For purposes of this Warrant, the term "Liquidity Event" shall mean the first transaction following the Effective Date in which the Company shall (a) issue its securities in a Qualified Financing (as such term is defined below); (b) issue its securities in an Initial Public Offering (as such term is defined -2- below); (c) enter into a sale of all or substantially all of the Company's property and assets or all or substantially all of the Company's issued shares; or (d) enter into a merger or consolidation of the Company with or into another corporation. For the purpose of this Warrant, the term "Qualified Financing" shall mean the closing of a financing transaction in the Company in which the Company issues Additional Shares, as defined in the Company's Articles of Association with respect to the Company's Series C Preferred Shares. In the event that the Qualified Financing is an issuance of any options or warrants to purchase Ordinary Shares, securities by their terms convertible into or exchangeable for Ordinary Shares or options to purchase such convertible or exchangeable securities ("Convertibles"), then the Warrant Price shall be the sum of (i) the price at which such Convertibles were purchased from the Company (to the extent such price is identifiable as a separate payment to the Company) and (ii) the price per Ordinary Share (on an as-converted basis) at which such Convertibles convert into equity securities. In the event that more than one type of security or other instrument is issued in the Qualified Financing, the Warrant Price shall be the lowest price per Ordinary Share (on an as-converted basis) in the Qualified Financing. For purposes of this Warrant "Initial Public Offering" shall mean the first underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, or any other comparable securities laws, covering the offering and sale of shares of Ordinary Shares for the account of the Company (other than a registration statement effected solely to implement an employee benefit plan, a transaction in which Rule 145 of the Securities and Exchange Commission is applicable or any other form or type of registration in which the Ordinary Shares cannot be included pursuant to the Securities and Exchange Commission rules of practices). 2. Term - --------- This Warrant may be exercised, in whole, or in part (subject to Section 3 below), during the period beginning on the Effective Date and ending on the date which is the earlier of: (i) January ___, 2003; or (ii) immediately prior to the closing of a Liquidity Event (other than a Qualified Financing). Notwithstanding the foregoing, if, at the conclusion of the initial 12-month period of the credit line of up to US$6,000,000 given to Company by the Holder on the Effective Date (which reflects an increase of $2,000,000 over the existing credit line extended to the Company on or about March 15, 1999 - such increase referred to as the "Credit Line Increase"), the Holder does not extend such Credit Line Increase for an additional 12-month period, then this Warrant shall immediately terminate upon the termination of the initial 12-month period of such credit line. 3. Exercise of Warrant - ------------------------ This Warrant may be exercised in whole or in part on one occasion during its term. The Warrant may be exercised by the surrender of the Warrant to the Company at its -3- principal office together with the Notice of Exercise annexed hereto as Exhibit A (the "Notice of Exercise") duly completed and executed on behalf of the Holder. a. Exercise for Cash ----------------- To exercise for cash, the Notice of Exercise must be accompanied by payment in full of the amount of the aggregate purchase price of the Warrant Shares being purchased upon such exercise in immediately available funds, in U.S. Dollars or NIS equivalent thereof, based on the representative rate of exchange published by the Bank of Israel and known at the time of payment. b. Net Exercise ------------- In lieu of the payment method set forth in Section 3(a) above, subject to and upon the closing of a Liquidity Event (other than a Qualified Financing) described in Section 1 above, the Holder may elect to exchange the Warrant for a number of Warrant Shares equal to the increase in value of the Warrant Shares otherwise purchasable hereunder on the date of exchange. If the Holder elects to exchange this Warrant as provided in this Section 3(b), the Holder shall tender to the Company the Warrant along with the Notice of Exercise, and the Company shall issue to the Holder the number of Warrant Shares computed using the following formula: X = Y (A-B) ------- A Where X = the number of Warrant Shares to be issued to the Holder. Y = the number of shares of Warrant Shares purchasable under the Warrant (as adjusted to the date of such calculation, but excluding those shares already issued under this Warrant). A = the Fair Market Value (as defined below) of one share of the Company's Ordinary Shares. B = Exercise Price (as adjusted to the date of such calculation). "Fair Market Value" of an Ordinary Share shall mean: (i) Except as set forth in subsection 3.b.(ii) (below), if the Company's Ordinary Shares are not publicly traded, then as determined by the Company's Board of Directors in good faith. (ii) If the exercise date is the date of closing of a public offering of the Company's Ordinary Shares pursuant to an effective registration statement under the Securities Act, then the public offering price (before deduction of discounts, commissions or expenses) in such offering. In the event of a net exercise, the entire Warrant must be surrendered, and no new Warrant shall be issued. -4- c. Issuance of Shares on Exercise ------------------------------ The Company agrees that the Warrant Shares so purchased shall be issued as soon as practicable thereafter, and that the Holder shall be deemed the record owner of such Warrant Shares as of and from the close of business on the date on which this Warrant shall be surrendered, together with payment in full as required above. d. Conditional Exercise -------------------- In any connection with a Liquidity Event, such exercise may be made conditional and automatically effective upon the completion of such Liquidity Event. 4. Fractional Interest - ------------------------ No fractional shares will be issued in connection with any exercise hereunder, and the number of Warrant Shares issued shall be rounded to the nearest whole number. 5. Warrant Confers No Rights of Shareholder - --------------------------------------------- Except as otherwise set forth in this Warrant, the Holder shall not have any rights as a shareholder of the Company with regard to the Warrant Shares prior to actual exercise resulting in the purchase of any Warrant Shares. 6. Investment Representation - ------------------------------ Neither this Warrant nor the Warrant Shares issuable upon the exercise of this Warrant have been registered under the Securities Act, or any other securities laws. The Holder acknowledges by acceptance of the Warrant that (a) it has acquired this Warrant for investment purposes only and not with a view to the distribution thereof; (b) it has either a pre-existing personal or business relationship with the Company, or its executive officers, or by reason of its business or financial experience, it has the capacity to protect its own interests in connection with the transaction; and (c) it is an accredited investor as that term is defined in Regulation D promulgated under the Securities Act. The Holder agrees that any Warrant Shares issuable upon exercise of this Warrant will be acquired for investment and not with a view to distribution and such Warrant Shares will not be registered under the Securities Act and applicable state securities laws and that such Warrant Shares may have to be held indefinitely unless they are subsequently registered or qualified under the Securities Act and applicable state securities laws, or based on an opinion of counsel reasonably satisfactory to the Company, an exemption from such registration and qualification is available. The Holder, by acceptance hereof, consents to the placement of legend(s) on all securities hereunder as to the applicable restrictions on transferability in order to ensure compliance with the Securities Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Securities Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. 7. Adjustment of Warrant Price and Number of Shares - ----------------------------------------------------- -5- The number and kind of securities purchasable initially upon the exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: a. Adjustment for Shares Splits and Combinations. If the Company at any ---------------------------------------------- time or from time to time during the term of this Warrant effects a subdivision of the outstanding Ordinary Shares, the number of Ordinary Shares issuable upon exercise of this Warrant immediately before the subdivision shall be proportionately increased, and conversely, if the Company at any time or from time to time combines the outstanding Ordinary Shares, the number of Ordinary Shares issuable upon exercise of this Warrant immediately before the combination shall be proportionately decreased. Any adjustment under this Section 7(a) shall become effective at the close of business on the date the subdivision or combination becomes effective. b. Adjustment for Certain Dividends and Distributions. In the event the --------------------------------------------------- Company at any time or from time to time, during the term of this Warrant makes, or fixes a record date for the determination of holders of Ordinary Shares entitled to receive a dividend or other distribution payable in additional shares of Ordinary Shares, then and in each such event the number of Ordinary Shares issuable upon exercise of this Warrant shall be increased as of the time of such issuance or, in the event such a record date is fixed, as of the close of business on such record date, by multiplying the number of Ordinary Shares issuable upon exercise of this Warrant by a fraction: (i) the numerator of which shall be the total number of Ordinary Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of Ordinary Shares issuable in payment of such dividend or distribution, and (ii) the denominator of which is the total number of shares of Ordinary Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date; provided, --------- however, that if such record date is fixed and such dividend is not ------- fully paid or if such distribution is not fully made on the date fixed thereof, the number of Ordinary Shares issuable upon exercise of this Warrant shall be recomputed accordingly as of the close of business on such record date and thereafter the number of shares of Ordinary Shares issuable upon exercise of this Warrant shall be adjusted pursuant to this Section 7(b) as of the time of actual payment of such dividends or distributions. c. Adjustments for Other Dividends and Distributions. In the event the ------------------------------------------------- Company at any time or from time to time during the term of this Warrant makes, or fixes a record date for the determination of holders of Ordinary Shares entitled to receive a dividend or other distribution payable in securities of the Company other than Ordinary Shares, then in each such event provision shall be made so that the Holder shall receive upon exercise of this Warrant, in addition to the number of Ordinary Shares receivable thereupon, the amount of securities of the Company that the Holder would have received had this Warrant been exercised for Ordinary Shares immediately prior to such event (or the record date for such event) and had the Holder thereafter, during the period from the date of such event to and including the date of exercise, -6- retained such securities receivable by it as aforesaid during such period, subject to all other adjustments called for during such period under this Section and the Company's Articles of Association with respect to the rights of the Holder. d. Adjustment for Reclassification, Exchange and Substitution. If the ----------------------------------------------------------- Ordinary Shares issuable upon the exercise of this Warrant are changed into the same or a different number of shares of any class or classes of shares, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or shares dividend or a reorganization, provided for elsewhere in this Section), then and in any such event the Holder shall have the right thereafter to exercise this Warrant into the kind and amount of shares and other securities receivable upon such recapitalization, reclassification or other change, by holders of the number of shares of Ordinary Shares for which this Warrant might have been exercised immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided herein and under the Company's Articles of Association. e. Reorganization. If at any time or from time to time during the term --------------- of this Warrant there is a capital reorganization of the Ordinary Shares (other than a recapitalization, subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Subsection), then, as a part of such reorganization, provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this Warrant, the number of shares or other securities or property of the Company, to which a holder of Ordinary Shares deliverable upon conversion would have been entitled on such capital reorganization. In any such case (except to the extent any cash or property is received in such transaction), appropriate adjustment shall be made in the application of the provisions of this Subsection and the Company's Articles of Association with respect to the rights of the Holder after the reorganization to the end that the provisions of this Subsection and the Company's Articles of Association (including adjustment of the number of shares of Ordinary Shares issuable upon exercise of this Warrant) shall be applicable after that event and be as nearly equivalent to the provisions hereof as may be practicable. f. Other Transactions. In the event that the Company shall issue shares ------------------- to its shareholders as a result of a split-off, spin-off or the like, then the Company shall give the Holder a 30 days written notice prior to the completion of such issuance or other action. g. General Protection. The Company will not, by amendment of its Articles ------------------ of Association or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder, or impair the economic interest of the Holder, but will at all times in good faith assist in the carrying out of all the provisions hereof and in taking of all such actions and making all such adjustments as may be necessary or appropriate in order to protect the -7- rights and the economic interests of the Holder against impairment. h. Notice of Capital Changes. If at any time during the term of this ------------------------- Warrant there shall be any capital reorganization or reclassification of the capital shares of the Company, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to another company or there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company, or other transaction described in this Section 7, then, in any one or more of said cases, the Company shall give the Holder written notice, by registered or certified mail, postage prepaid, of the date on which such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of record of Ordinary Shares shall participate in such subscription rights, or shall be entitled to exchange their Ordinary Shares for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least fourteen (14) days prior to the action in question and not less than fourteen (14) days prior to the record date in respect thereto. i. Adjustment of Warrant Price. Upon each adjustment in the number of --------------------------- Ordinary Shares purchasable hereunder, the Warrant Price shall be proportionately increased or decreased, as the case may be, in a manner that is the inverse of the manner in which the number of Ordinary Shares purchasable hereunder shall be adjusted. j. Notice of Adjustments. Whenever the Warrant Price or the number of --------------------- Ordinary Shares purchasable hereunder shall be adjusted pursuant to Section 7 hereof, the Company shall prepare a certificate signed by the chief financial officer of the Company setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price and the number of Ordinary Shares purchasable hereunder after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (by first class mail, postage prepaid) to the Holder. 8. Transfer of This Warrant or Securities Issuable on Exercise Hereof - ----------------------------------------------------------------------- a. With respect to any offer, sale or other disposition of this Warrant or securities into which such Warrant may be exercised, the Holder will give written notice to the Company prior thereto, describing briefly the manner thereof, together with, if requested by the Company, a written opinion of such Holder's counsel, to the effect that such offer, sale or other distribution may be effected without registration or qualification (under any federal or state law then in effect). Such opinion letter and all such transferees must warrant and represent that each such transferee is an "accredited" investor as that term is defined under Regulation D of the Securities Act. Promptly, as practicable, upon receiving such written notice and opinion and warranties and representations, if so requested, the Company, as promptly as practicable, shall deliver to the Holder -8- one or more replacement Warrant certificates on the same terms and conditions as this Warrant for delivery to the transferees. Each Warrant thus transferred and each certificate representing the securities thus transferred shall bear legend(s) as to the applicable restrictions on transferability in order to ensure compliance with the Securities Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Securities Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. Any provision of this Warrant to the contrary notwithstanding, the Holder may not offer, sell or otherwise dispose of this Warrant to any third party, other than (i) to a wholly owned subsidiary of Bank Hapoalim B.M., or (ii) to any other transferee approved by the Company in writing in its sole discretion. In addition to the above, any transfer of this Warrant or the Warrant Shares shall be subject to the provisions of the Company's Articles of Association. b. In the event that the Company or its shareholders receive an offer to transfer all or substantially all of the shares in the Company, or to effect a merger or acquisition, or sale of all or substantially all of the assets of the Company, then the Company shall promptly inform the Holder in writing of such offer. 9. Registration Rights - ------------------------ The Company covenants and agrees as follows: a. The Holder shall have registration rights in accordance with and subject to an Amended and Restated Investors Rights Agreement dated June 1, 1999 (the "Amended Investors Rights Agreement") between the Company and certain of its shareholders, pursuant to which the Company granted such shareholders registration rights as provided therein, and therefore (i) the Holder of this Warrant shall be deemed to be a Holder (as defined in the Amended Investors Rights Agreement) and (ii) (x) the Warrant Shares, and (y) any Ordinary Shares of the Company issued as a dividend or other distribution with respect to, or in exchange for or in replacement of, such Warrant Shares shall be deemed to be included in the definition of Registrable Shares (as defined in the Amended Investors Rights Agreement). b. The rights and obligations of the Company and the Holder set forth in this Section 9 and in the Registration Rights shall survive the exercise, conversion and expiration of this Warrant only if this Warrant is exercised and only with respect to the Warrant Shares issued in respect of this Warrant. 10. Representations and Warranties. - ------------------------------------ a. The Company represents and warrants to the Holder as follows: i. This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms. -9- ii. The Warrant Shares are duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and not subject to any preemptive rights. iii. The execution and delivery of this Warrant are not, and the issuance of the Warrant Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company's Articles of Association, do not and will not contravene any law, governmental rule or regulation, judgment or order applicable to the Company, and, except for consents that have already been obtained by the Company, do not and will not conflict with or contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration with or the taking of any action in respect of or by, any Federal, state or local government authority or agency or other person. b. The Holder hereby represents and warrants to the Company as follows: i. The Holder has been provided with a copy of the Amended Investors Rights Agreement, has carefully read its terms and by executing this Warrant hereby agrees to be bound by the provisions of the Amended Investors Rights Agreement applicable to a "Holder" (as defined therein). ii. The Holder has been provided with a copy of the Articles of Association of the Company (the "Articles") and has carefully read the provisions thereof (including without limitation the provisions of the "Drag Along Right" as set forth in Article 20(d)). 11. Expenses - ------------- The Company will pay the Israeli Stamp Duty on the issuance of the Warrant Shares, and will notify the Israeli Companies Registrar of such issuance within the time period required by law. The Stamp Duty on this Warrant, if any, will be paid in full by the Company. 12. Loss, Theft, Destruction or Mutilation of Warrant - ------------------------------------------------------ Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant or Shares certificate, and in case of loss, theft or destruction, of indemnity, or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant or Shares certificate, if mutilated, the Company will make and deliver a new Warrant or Shares certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or Shares certificate. 13. Notices - ------------ -10- Any notice or other communication hereunder shall be in writing and shall be deemed to have been given upon delivery, if personally delivered or three business days after deposit if deposited in the mail for mailing by certified mail, postage prepaid, and addressed as follows: If to Holder: Hapoalim Nechasim (Menayot) Ltd. c/o Bank Hapoalim B.M. Electronics Group - Industrial Sector 41-45 Rothschild Blvd. Tel Aviv, Israel attn.: Ruthi Simha fax: 03-567-5699 If to Company: R.T.S. Software Ltd. 5 Kiriat Hamada Street Har Hotzvim, Jerusalem, Israel attn.: Samuel HaCohen or Yohanan Engelhardt fax: 02-5815507 With a copy to: R.T.S. Software Inc. attn.: Samuel HaCohen or Yohanan Engelhardt fax: +1-781-890-2953 Each of the above addressees may change its address for purposes of this paragraph by giving to the other addressees notice of such new address in conformance with this paragraph. 14. Applicable Law; Jurisdiction - --------------------------------- This Warrant shall be governed by and construed in accordance with the laws of the State of Israel as applicable to contracts between two residents of the State of Israel entered into and to be performed entirely within the State of Israel. Any dispute arising under or in relation to this Warrant shall be resolved exclusively in the competent court for Tel Aviv-Jaffa district, and each of the parties hereby submits irrevocably to the exclusive jurisdiction of such court. 15. Entire Agreement - --------------------- This Warrant constitutes the entire agreement between the parties hereto with regard to the subject matters hereof, and supersedes any prior communications, agreements and/or understandings between the parties hereto with regard to the subject matters hereof. Dated: January ___, 2000 R.T.S. SOFTWARE LTD. By: /s/ Yoran Bibring ---------------------------- Title: Chief Financial Officer ------------------------- -11- Agreed to and accepted: - ---------------------- Hapoalim Nechasim (Menayot) Ltd. By: _________________________ Name: _________________________ Title: ________________________ Address: 41-45 Rothschild Blvd. Tel Aviv, Israel -12- NOTICE OF EXERCISE To: 1. The undersigned hereby elects to purchase _________ shares of Ordinary Shares of ____________, pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price for such shares in full. 2. In exercising this Warrant, the undersigned hereby confirms and acknowledges that the shares of Ordinary Shares are being acquired solely for the account of the undersigned and not as a nominee for any other party, or for investment, and that the undersigned will not offer, sell or otherwise dispose of any such shares of Ordinary Shares except under circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws. 3. Please issue a certificate representing said shares of Ordinary Shares in the name of the undersigned. 4. Please issue a new Warrant for the unexercised portion of the attached Warrant in the name of the undersigned. 5. [Optional] This exercise is made contingent upon the closing of the Initial Public Offering on [____________]. In the event that such closing does not take place on or before such date, this exercise shall be withdrawn. ____________________ ___________________________ (Date) (Print Name) ___________________________ (Signature) EX-10.12 18 0018.txt ORDINARY SHARES PURCHASE WARRANT Exhibit 10.12 ------------- WARRANT to Purchase up to an Aggregate of _______ Ordinary Shares (Subject to Adjustment) of R.T.S. Software Ltd. at U.S. $__ per share VOID AFTER 10:00 a.m. (prevailing Tel Aviv time) on _______________ THIS IS TO CERTIFY that the holder specified below ("Holder") is entitled to purchase, subject to the provisions of this Warrant, from R.T.S. Software Ltd. (the "Company"), at any time on or after the date hereof (the "Effective Date") and until ________________, an aggregate of up to ________ (subject to adjustment) fully and nonassessable Ordinary Shares, nominal value New Israeli Shekel ("NIS") 0.10 per share (the "Ordinary Shares"), of the Company at a price of US$___ per Ordinary Share or the NIS equivalent thereof (the "Exercise Price"). The amount and kind of securities purchasable pursuant to the rights granted hereunder and the Exercise Price for such securities are subject to adjustment pursuant to the further provisions of this Warrant. 1. EXERCISE OF WARRANT Subject to the provisions hereof, this Warrant may be exercised in whole or in part, at any time or from time to time on or after the Effective Date and until ______________. This Warrant shall be exercised by presentation and surrender hereof to the Company at the principal office of the Company; accompanied by 1. a written notice of exercise; and 2. payment to the Company, for the account of the Company, of the Exercise Price for the number of Ordinary Shares specified in such notice. The Exercise Price for the number of Ordinary Shares specified in the notice shall be payable in immediately available funds, at the option of the Holder, in U.S. dollars or the NIS equivalent thereof, based on the Representative Rate of Exchange published by the Bank of Israel known as of the time of payment. Upon such presentation and surrender, the Company shall issue promptly to the Holder the Ordinary Shares to which the Holder is entitled hereunder. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder to purchase the balance of the Ordinary Shares purchasable hereunder. Upon receipt by the Company of this Warrant, in proper form for exercise and the Exercise Price for the Ordinary Shares being purchased at such time, the Holder shall be deemed to be the holder of record of -2- the Ordinary Shares issuable upon such exercise, notwithstanding that the share transfer books of the Company shall then be closed or that certificates representing such Ordinary Shares shall not then be actually delivered to the Holder. The Company shall pay any and all expenses, any stamp duty and any other charges that may be payable in connection with the issuance of the Ordinary Shares and the preparation and delivery of share certificates pursuant to this Paragraph 1 in the name of the Holder. No fractions of Ordinary Shares shall be issued in connection with the exercise of this Warrant, and the number of Ordinary Shares issued shall be rounded down to the nearest whole number. Notwithstanding the foregoing, in the event of (i) the initial public offering of the Company (the "IPO"), (ii) on or after the merger of the Company with or into another company or entity, in which the Company is not the surviving entity (a "Merger") or (iii) on or after the sale of all or substantially all of the assets of the Company (a "Sale") then, in lieu of exercising this Warrant as provided above, in whole or in part, the Holder may elect to receive simultaneously with the Closing of the IPO, or simultaneously with the closing of the Merger or Sale, by the surrender and cancellation of this Warrant or any such portion thereof to the Company, Ordinary Shares equal to the value of the Warrant (or the portion thereof being canceled) by written notice of such election to the Company, at the principal office of the Company, in which event the Company shall issue to the Holder, for no additional consideration, that number of Ordinary Shares computed using the following formula: Y(A - B) X = ----------------- A X equals the number of Ordinary Shares to be issued to the Holder; Y equals the number of Ordinary Shares which would otherwise have been purchasable under this Warrant (or the portion thereof being canceled); B equals the Exercise Price per Ordinary Share in effect at the time of exercise pursuant to this Warrant (as may be adjusted pursuant to the terms of this Warrant); and A shall equal the "Fair Value" of one share of the Company's Ordinary Shares. Fair Value shall mean in the event that this Warrant is exercised in accordance with the above formula (i) if in connection with an IPO, then the Fair Value shall equal the price of an Ordinary Share as sold to the public, or (ii) if in connection with a Merger or Sale, the value of such share(s) as determined for the purposes of the Merger or Sale, or (iii) if other than in connection with an IPO or a Merger or Sale and if a public market exists for the securities then subject to this Warrant and such securities are listed on a U.S. nationally recognized stock exchange or on the Nasdaq stock market, then the Fair Value shall equal the last sale or trading price of such securities as reported on such exchange or market, as applicable; provided, however, if no public market exists for the securities -3- then the Fair Value shall be determined in good faith by the Board of Directors of the Company, but if such determination is challenged in good faith by the Holder, then as determined by an independent appraiser mutually satisfactory to the Company and the Holder, which determination shall be binding upon the parties. 2. RESERVATION OF SHARES: PRESERVATION OF RIGHTS The Company hereby agrees that at all times it will maintain and reserve such number of authorized but unissued Ordinary Shares so that this Warrant may be exercised without additional authorization of Ordinary Shares after giving effect to all other options, warrants, convertible securities and other rights to acquire Ordinary Shares of the Company. All shares of Ordinary Shares issuable pursuant to the terms hereof, when issued upon exercise of this Warrant in accordance with the terms hereof shall be duly and validly issued and fully paid and nonassessable, not subject to preemptive rights and shall be free and clear of all liens, encumbrances, equities and claims. The Company further agrees that it will not, by charter amendment or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by the Company. 3. EXCHANGE OR LOSS OF WARRANT This Warrant is exchangeable, upon presentation and surrender hereof at the principal office of the Company, only in connection with a partial exercise hereof. The Company shall be under no obligation to issue replacement warrants for the aggregate number of shares covered hereby except as described herein. The term "Warrant" as used herein includes any Warrant or Warrants for which this Warrant may be exchanged. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like terms, tenor and date. 4. ADJUSTMENT The number of Ordinary Shares purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time or upon exercise as provided in this paragraph 4. 4.1. If, during the term of this Warrant, the Company shall distribute a stock dividend or shares of capital stock pursuant to a reclassification of its Ordinary Shares to the holders of Ordinary Shares (i.e., bonus shares), the number of Ordinary Shares purchasable upon exercise of this Warrant shall be increased by multiplying such number of shares to be purchased under this Warrant by a fraction of which the denominator shall be the number of Ordinary Shares outstanding at the close of business on the day -4- immediately preceding the date of such distribution and the numerator shall be the sum of such number of shares and the total number of bonus shares, such increase to become effective immediately after the opening of business on the date following such distribution, and upon the happening of such an event the Exercise Price shall be adjusted appropriately. 4.2. If, during the term of this Warrant, the outstanding Ordinary Shares shall be subdivided into a greater number of Ordinary Shares, the number of Ordinary Shares purchasable upon exercise of this Warrant at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately increased, and, conversely, if the outstanding Ordinary Shares shall each be combined into a smaller number of Ordinary Shares, the number of Ordinary Shares purchasable upon exercise of this Warrant at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately decreased, and in each such case the Exercise Price shall be adjusted appropriately. 4.3. Reorganization, Reclassification, Merger, Consolidation or Disposition ---------------------------------------------------------------------- of Assets --------- (a) In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation or sell, transfer or otherwise dispose of all or substantially all of its property, assets or business to another corporation and pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, (i) shares of capital stock of the successor or acquiring corporation or of the Company (if it is the surviving corporation) or (ii) any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of capital stock of the successor or acquiring corporation ("Other Property") are to be received by or distributed to the holders of Ordinary Shares of the Company who are holders immediately prior to such transaction, then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the number of shares of capital stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a holder of the number of shares of Ordinary Shares for which this Warrant is exercisable immediately prior to such event. (b) In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the -5- Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined by resolution of the Board of Directors of the Company) in order to provide for adjustments of shares of the Ordinary Shares for which this Warrant is exercisable, which modifications shall be as nearly equivalent as practicable to the adjustments provided for in this Section 4. (c) The provisions of this subsection 4.3 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets. 4.4. Other Dilutive Events --------------------- In case any event shall occur as to which the preceding subsections 4.1 through 4.3 are not strictly applicable but as to which the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles hereof then, in each such case, the Board of Directors of the Company shall, in good faith, determine what adjustments are necessary to preserve the purchase rights of the Holder represented by this Warrant. The Company will notify the Holder of any such adjustments. 5. NOTICE OF CERTAIN EVENTS The Holder of this Warrant shall not be entitled to any rights of a shareholder. Notwithstanding, in case at any time: 5.1. There shall be any merger of the Company with, or any statutory exchange of the Company's securities with the securities of, or sale of all or substantially all of its assets to, another corporation; or 5.2. There shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give written notice, by first class mail, postage prepaid, addressed to the Holder at the address of the Holder as shown on the books of the Company, of the date on which such merger, exchange, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Ordinary Shares of record shall be entitled to exchange their Ordinary Shares for securities or other property deliverable upon such merger, exchange, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least twenty (20) days prior to the action in question. 6. NOTICE OF ADJUSTMENTS Whenever the number of Ordinary Shares for which this Warrant is exercisable is adjusted as provided in paragraph 4 hereof the Company shall promptly -6- compute such adjustment and mail to the Holder at the last address provided to the Company in writing a certificate, signed by the principal financial officer of the Company, setting forth the number of Ordinary Shares for which this Warrant is exercisable and the exercise price as a result of such adjustment, a brief statement of the facts requiring such adjustment and the detailed computation thereof and when such adjustment has or will become effective. 7. RIGHTS OF THE HOLDER 7.1. Without limiting the foregoing or any remedies available to the Holder, the Holder will be entitled to specific performance of the obligations hereunder, and injunctive relief against actual or threatened violations of the obligations of any person subject to this Warrant. 7.2. This Warrant shall not entitle the Holder to any voting rights or other rights as a shareholder of the Company whatsoever, except the rights expressed herein and no dividend or interest shall be payable or accrue in respect of this Warrant. 8. REGISTRATION RIGHTS Following the completion of the Company's initial public offering of its Ordinary Shares, the Company shall notify the Holder at any time it plans to register its ordinary shares for sales to the public (other than registration in connection with an IPO or pursuant to Forms F-4, F-8 and their equivalents). The Holder shall have 20 days from the Company's mailing of such notice to indicate whether it desires that the Ordinary Shares issuable upon exercise of this Warrant (the "Warrant Shares") be included in such offering. If the Holder hereof so requests that the Warrant Shares be so registered in such offering, the Company shall use its best efforts to include such Warrant Shares in such offering; provided, however, that if the managing underwriter of such offering determines in its sole discretion that the number of Ordinary Shares to be sold by persons other than the Company should be limited (or excluded completely), then the number of Warrant Shares to be included in such offering shall be reduced (pro rata with persons other than the Company who hold registration rights and desire to be included in the offering, all in proportion to relative ownership of shares of the Company). It shall be a condition to the exercise of its rights hereunder that the Holder hereof enters into an underwriting agreement as requested by the managing underwriter of such offering, and abide by the terms and conditions set forth therein. The registration rights provided by this section shall not be assignable, and shall terminate on the fourth anniversary of the date of this Warrant. -7- 8. NOTICE GENERALLY Any notice, demand, request, consent, approval, declaration, delivery or communication hereunder to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if in writing and shall be deemed to have been validly served, given or delivered (a) when sent after receipt of confirmation or answer back if sent by telex or telecopy or other similar facsimile transmission, (b) two (2) business days after deposit with a reputable international two (2) day courier with all charges prepaid or (c) when delivered if hand-delivered by messenger, all of which shall be properly addressed to the party to be notified and sent to the address or number indicated, to the Holder, or the holder of Ordinary Shares at its last known address appearing on the books of the Company maintained for such purpose, and to the Company at: RTS Software, Ltd. Science Based Industries Campus P.O. Box 23052 Jerusalem 91230, Israel or at such other address as may be submitted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. 9. TERMINATION This Warrant and the rights conferred hereby shall terminate on March 31, 2002. 10. LIMITATION ON TRANSFER This Warrant shall be transferable in whole or in part only to a subsidiary of the Holder, provided that if the Holder ceases to hold the majority of any of the means of control of such subsidiary, this Warrant shall be transferred back to the Holder. 11. GOVERNING LAW This Warrant shall be governed by, and construed in accordance with, the laws of the State of Israel, without giving effect to the rules respecting conflict of law, and the parties hereto irrevocably submit to the sole and exclusive jurisdiction of the Courts of Israel in respect of any dispute or matter arising out of or connected with this Warrant. DATED: ___________________ RTS Software Ltd. By: _____________________ Name: _____________________ Title: _____________________ -8- Agreed to and accepted: _____________________________ Name of Holder By: _____________________ Name: _____________________ Title: _____________________ Address: _____________________ _____________________ EX-10.13 19 0019.txt CERTAIN SHAREHOLDERS WARRANT Exhibit 10.13 ------------- WARRANT to Purchase up to an Aggregate of __________ Ordinary Shares (Subject to Adjustment) of R.T.S. Software Ltd. at the Exercise Price (as defined below) VOID AFTER 10:00 a.m. (prevailing Tel Aviv time) on the Termination Date (as defined below) THIS IS TO CERTIFY that __________ ("Holder") is entitled to purchase, subject to the provisions of this Warrant, from R.T.S. Software Ltd. (the "Company"), at any time on or after April 11, 2000 (the "Effective Time") and until the Termination Date (as defined below), an aggregate of up to _________ (subject to adjustment) fully paid and nonasseasable Ordinary Shares, nominal value New Israeli Shekel ("NIS") 0.1 per share (the "Ordinary Shares"), of the Company, at a price per share in US dollars or the NIS equivalent thereof, calculated using the formula set forth in Exhibit A attached hereto (the "Exercise Price"). 1 EXERCISE OF WARRANT Subject to the provisions hereof, this Warrant may be exercised by the Holder in whole or in part at any time or from time to time following the Effective Time and until the earliest of (i) April 11, 2005, (ii) a consolidation, merger or reorganization involving the Company or a sale of all or substantially all of the assets of the Company, or (iii) sale or transfer of the majority of the issued and outstanding share capital of the Company, other than through an initial public offering ("IPO") of the Company's securities (the "Termination Date"). (The period commencing on the Effective Time and ending on the Termination Date shall be referred to herein as the "Warrant Exercise Period"). This Warrant shall be exercised by presentation and surrender hereof to the Company at the principal office of the Company; accompanied by 1. a written notice of exercise; and 2. payment to the Company, for the account of the Company, of the Exercise Price for the number of Ordinary Shares specified in such notice. The Exercise Price for the number of Ordinary Shares specified in the notice shall be payable in immediately available funds, at the option of the Holder, in U.S. dollars or the NIS equivalent thereof, based on the Representative Rate of Exchange published by the Bank of Israel known as of the time of payment. Upon such presentation and surrender, the Company shall issue promptly to the Holder, the Ordinary Shares to which the Holder is entitled hereunder. If this Warrant is exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder to purchase the balance of the Ordinary Shares purchasable hereunder. Upon receipt by the Company of this Warrant, in proper form for exercise, the Holder shall be deemed to be the holder of record of the Ordinary Shares issuable upon such exercise, notwithstanding that the share transfer books of the Company shall then be closed or that certificates representing such Ordinary Shares shall not then be actually delivered to the Holder. The Company shall pay any and all expenses, any stamp duty and any other charges that may be payable in connection with the issuance of the Ordinary Shares and the preparation and delivery of share certificates pursuant to this Paragraph 1 in the name of the Holder. No fractions of Ordinary Shares shall be issued in connection with the exercise of this Warrant, and the number of Ordinary Shares issued shall be rounded down to the nearest whole number. Notwithstanding the foregoing, in lieu of exercising this Warrant as provided above, in whole or in part, the Holder may elect to receive, by the surrender and cancellation of this Warrant or any such portion thereof to the Company, Ordinary Shares equal to the value of the Warrant (or the portion thereof being canceled) by written notice of such election to the Company, at the principal office of the Company, in which event the Company shall issue to the Holder, for no additional consideration, that number of Ordinary Shares computed using the following formula: Y(A - B) X = -------------- A X equals the number of Ordinary Shares to be issued to the Holder; Y equals the number of Ordinary Shares which would otherwise have been purchasable under this Warrant (or the portion thereof being canceled); B equals the Exercise Price in effect at the time of exercise pursuant to this formula (as may have been or be adjusted pursuant to the terms of this Warrant); and A shall equal the "Fair Value" of one share of the Company's Ordinary Shares. Fair Value shall mean in the event that this Warrant is exercised in accordance with the above formula (i) if in connection with an IPO, then the Fair Value shall equal the price (as sold to the public) of one Ordinary Share, or (ii) if in connection with a Merger or Sale, the value of such share(s) as determined for the purposes of the Merger or Sale, or (iii) if other than in connection with an IPO or a Merger or Sale and if a public market exists for the securities then subject to this Warrant and such securities are listed on a U.S. nationally recognized stock exchange or on the Nasdaq National Market, then the Fair Value shall equal the last sale or trading price of such securities as reported on such exchange or market, as applicable; provided, however, that if no public market exists for the securities, then the Fair Value shall be determined in good faith by the Board of Directors of the Company, but if such determination is challenged in good faith by the Holder, then as shall be determined by an independent appraiser mutually satisfactory to the Company and the Holder, which determination shall be binding upon the parties. 2. RESERVATION OF SHARES: PRESERVATION OF RIGHTS The Company hereby agrees that at all times it will maintain and reserve such number of authorized but unissued Ordinary Shares so that this Warrant may be exercised without additional authorization of Ordinary Shares after giving effect to all other options, warrants, convertible securities and other rights to acquire Ordinary Shares of the Company. All Ordinary Shares issuable pursuant to the terms hereof, when issued upon exercise of this Warrant in accordance with the terms hereof shall be duly and validly issued, fully paid and nonassessable, not subject to preemptive rights and shall be free and clear of all liens, encumbrances, equities and claims. The Company further agrees that it will not, by charter amendment or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by the Company. 3. EXCHANGE OR LOSS OF WARRANT This Warrant is exchangeable, upon presentation and surrender hereof at the principal office of the Company, only in connection with a partial exercise hereof. The Company shall be under no obligation to issue replacement warrants for the aggregate number of shares covered hereby except as described herein. The term "Warrant" as used herein includes any Warrant or Warrants for which this Warrant may be exchanged. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like terms, tenor and date. 4. ADJUSTMENT The number of Ordinary Shares purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time or upon exercise as provided in this paragraph 4. 4.1 If, during the term of this Warrant, the Company shall distribute a stock dividend or shares of capital stock pursuant to a reclassification of its Ordinary Shares to the holders of Ordinary Shares (i.e., bonus shares), the number of Ordinary Shares purchasable upon exercise of this Warrant shall be increased by multiplying such number of shares to be purchased under this Warrant by a fraction of which the denominator shall be the number of Ordinary Shares outstanding at the close of business on the day immediately preceding the date of such distribution and the numerator shall be the sum of such number of shares and the total number of bonus shares, such increase to become effective immediately after the opening of business on the date following such distribution, and upon the happening of such an event the Exercise Price shall be adjusted appropriately. 4.2 If, during the term of this Warrant, the outstanding Ordinary Shares shall be subdivided into a greater number of Ordinary Shares, the number of Ordinary Shares purchasable upon exercise of this Warrant at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately increased, and, conversely, if the outstanding Ordinary Shares shall each be combined into a smaller number of Ordinary Shares, the number of Ordinary Shares purchasable upon exercise of this Warrant at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately decreased, and in each such case the Exercise Price shall be adjusted appropriately. 4.3 Reorganization, Reclassification, Merger, Consolidation or Disposition ---------------------------------------------------------------------- of Assets --------- (a) In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation or sell, transfer or otherwise dispose of all or substantially all of its property, assets or business to another corporation and pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, (i) shares of capital stock of the successor or acquiring corporation or of the Company (if it is the surviving corporation) or (ii) any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of capital stock of the successor or acquiring corporation ("Other Property") are to be received by or distributed to the holders of Ordinary Shares of the Company who are holders immediately prior to such transaction, then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the number of shares of capital stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a holder of the number of shares of Ordinary Shares for which this Warrant is exercisable immediately prior to such event. (b) In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined by resolution of the Board of Directors of the Company) in order to provide for adjustments of the Ordinary Shares for which this Warrant is exercisable, which modifications shall be as nearly equivalent as practicable to the adjustments provided for in this Section 4. (c) The provisions of this subsection 4.3 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets. 4.4 Other Dilutive Events --------------------- In case any event shall occur as to which the preceding subsections 4.1 through 4.3 are not strictly applicable but as to which the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles hereof then, in each such case, the Board of Directors of the Company shall, in good faith, determine what adjustments are necessary to preserve the purchase rights of the Holder represented by this Warrant. The Company will notify the Holder of any such adjustments. 5. NOTICE OF CERTAIN EVENTS The Holder of this Warrant shall not be entitled to any rights to receive notices of corporate actions as any holder of Ordinary Shares. Notwithstanding the foregoing, in case at any time: 5.1 There shall be any merger of the Company with, or any statutory exchange of the Company's securities with the securities of, or sale of all or substantially all of its assets to, another corporation; or 5.2 There shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give written notice, by first class mail, postage prepaid, addressed to the Holder at the address of the Holder as shown on the books of the Company, of the date on which such merger, exchange, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Ordinary Shares of record shall be entitled to exchange their Ordinary Shares for securities or other property deliverable upon such merger, exchange, sale, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given at least twenty (20) days prior to the action in question. 6. NOTICE OF ADJUSTMENTS Whenever the number of Ordinary Shares for which this Warrant is exercisable is adjusted as provided in paragraph 4 hereof, the Company shall promptly compute such adjustment and mail to the Holder at the last address provided to the Company in writing a certificate, signed by the principal financial officer of the Company, setting forth the number of Ordinary Shares for which this Warrant is exercisable and the exercise price as a result of such adjustment, a brief statement of the facts requiring such adjustment and the detailed computation thereof and when such adjustment has or will become effective. 7. RIGHTS OF THE HOLDER 7.1 Without limiting the foregoing or any remedies available to the Holder, the Holder will be entitled to specific performance of the obligations hereunder, and injunctive relief against actual or threatened violations of the obligations of any person subject to this Warrant. 7.2 This Warrant shall not entitle the Holder to any voting rights or other rights as a shareholder of the Company whatsoever, except for the rights expressed herein and no dividend or interest shall be payable or accrue in respect of this Warrant. 8. NOTICE GENERALLY Any notice, demand, request, consent, approval, declaration, delivery or communication hereunder to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if in writing and shall be deemed to have been validly served, given or delivered (a) when sent after receipt of confirmation or answer back if sent by telex or telecopy or other similar facsimile transmission, (b) two (2) business days after deposit with a reputable international two (2) day courier with all charges prepaid or (c) when delivered if hand-delivered by messenger, all of which shall be properly addressed to the party to be notified and sent to the address or number indicated, to the Holder, or the holder of the Ordinary Shares at its last known address appearing on the books of the Company maintained for such purpose, and to the Company at: R.T.S. Software Ltd. Science Based Industries Campus P.O. Box 23052 Jerusalem 91230, Israel or at such other address as may be submitted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. 9. EFFECTIVENESS AND TERMINATION This Warrant and the rights conferred hereby shall become effective at the Effective Time and shall terminate on the Termination Date. 10. LIMITATION ON TRANSFER This Warrant shall not be transferable in whole or in part to any third party other than to a permitted transferee pursuant to Section 2.3 of that certain Amended and Restated Shareholders Agreement, dated April 5, 2000, by and among the Holder and certain other shareholders of the Company. 11. GOVERNING LAW This Warrant shall be governed by, and construed in accordance with, the laws of the State of Israel, without giving effect to the rules respecting conflict of law, and the parties hereto irrevocably submit to the exclusive jurisdiction of the Courts of Israel in respect of any dispute or matter arising out of or in connection with this Warrant. DATED: April 11, 2000 R.T.S. Software Ltd. By: ________________ Name: ________________ Title:________________ Exhibit A --------- EXERCISE PRICE -------------- 1 Certain Definitions -------------------- In this Warrant the following terms shall have the meaning ascribed thereto herein: "Discount" - shall mean: In the event of a Liquidation Event: (i) 30% of the Liquidation Event Price in the event that the Liquidation Event is consummated within four (4) months of the Effective Date, (ii) 40% of the Liquidation Event Price in the event that the Liquidation Event is consummated after four (4) month of the Effective Date but on or before nine (9) months of the Effective Date and (iii) 50% of the Liquidation Event Price in the event that the Liquidation Event is consummated after nine (9) months of the Effective Date; In the event of a Qualified Private Placement: (a) 25% of the Qualified Private Placement Price in the event that the Qualified Private Placement is consummated within nine (9) months of the Effective Date, or (b) 40% of the Qualified Private Placement Price in the event that the Qualified Private Placement is consummated after nine (9) months of the Effective Date; In the event of an IPO: (i) 30% of the IPO Price in the event that the IPO is consummated within four (4) months of the Effective Date, (ii) 40% of the IPO Price in the event that the IPO is consummated after four (4) month of the Effective Date but on or prior to nine (9) months of the Effective Date and (iii) 50% of the IPO Price in the event that the IPO is consummated after nine (9) months of the Effective Date; "Effective Date" shall mean March 20, 2000; "IPO" shall mean an initial public offering of the Company's securities yielding to the Company gross proceeds of at least US$20 million; "IPO Price" shall mean the actual price per share at which the Company's shares are offered to the public in the IPO; "Liquidation Event" shall mean a liquidation, dissolution, merger of the Company with another entity, acquisition of all of the Company's equity shares by another entity or acquisition of all or substantially all of the Company's assets by another entity; "Liquidation Event Price" the actual price per share determined in the Liquidation Event for a Series C-2 Preferred Share, par value NIS 0.1; Non Qualified Private Placement" shall mean a Private Placement, which doesn't qualify as a Qualified Private Placement; "Non Qualified Private Placement Price" shall mean the actual price paid per share in the Non Qualified Private Placement; "Private Placement" shall mean a subsequent investment in the Company's Share Capital; "Qualified Private Placement" shall mean a Private Placement yielding to the Company gross proceeds of at least US$10 million of which at least US$5 million are invested by third parties who are not shareholders of the Company prior to the date hereof; "Qualified Private Placement Price" shall mean the actual price paid per share in the Qualified Private Placement. 1 The Exercise Price per Ordinary Share shall equal: 95% of the balance between (i) (a) the IPO Price, if an IPO is consummated prior to a Liquidation Event or a Qualified Private Placement, or (b) the Liquidation Event Price, if a Liquidation Event is consummated prior to an IPO or a Qualified Private Placement, or (c) the Qualified Private Placement Price, if a Qualified Private Placement is consummated prior to an IPO or a Liquidation Event and (ii) the Discount. 1 Notwithstanding Section 2 of this Exhibit A, in the event that the Company consummates a Non Qualified Private Placement prior to an IPO or a Liquidation Event or a Qualified Private Placement, then the Holder of this Warrant shall have the right to elect that the Exercise Price of this Warrant shall equal 95% of the Non Qualified Private Placement Price. Such election shall be communicated in writing to the Company within 15 business days from the closing of the Non Qualified Private Placement and shall be final and binding upon the Holder. EX-10.14 20 0020.txt JERUSALEM LEASE Exhibit 10.14 ------------- AGREEMENT OF LEASE ------------------ Made and entered into on the 30th day of October, 1997 BETWEEN NECHESEI HAR HOTZVIM LTD. (51-168405-2) of 27 Hamered Street, Tel Aviv (hereinafter "the Lessor") of the one part ---------------- AND R.T.S. BUSINESS SYSTEMS LTD. (51-128135-4) of 5 Kiryat Mada Street, Har Hotzvim, Jerusalem (hereinafter: "the Lessee") of the other part ------------------ CHAPTER ONE - ----------- Definitions In this Agreement the following terms will have the meanings set opposite them: "The Parcel" Parcel 110 Block 30241 in the Har Hotzvim Industrial Zone, Jerusalem. "The Building" A building which has already been constructed on the Parcel (formerly Luz Building), which is located at 5 Kiryat Mada Street, Har Hotzvim, Jerusalem. "The Leased An area of approximately 1,700 sq.m. gross, according Premises" to drawings attached to the Agreement as an integral part hereof. The Leased Premises are split into two levels. On level 718: an area of approximately 500 sq.m. gross, the boundaries of which are marked with a blue line on the drawing attached to this Agreement as an integral part hereof and marked as "Appendix A-1", and on level 724: an area of approximately 1,200 sq.m. gross, the boundaries of which are marked with a blue line on the drawing attached to this Agreement as an integral part hereof and marked "Appendix A-2". "The Management A management company which provides maintenance Company" services to the Building, whether established by the Lessor itself or together with others, or which has been appointed or may in the future be appointed with the Lessor's consent. "The Index" The Consumer Price Index (including fruit and vegetables) published by the Central Bureau of Statistics and Economic Research, including such index if published by any other governmental body, or any other official index which may come in its stead, whether or not it is structured on the same data on which the existing index is structured. "The Basic Index" The index for the month of March 1997 as published on April 15, 1997 - i.e. 146.8 points. "The Determining The last index which is known on the date specified in Index" this Agreement for the effecting of any of the payments of rent, or on the date of actual payment thereof, whichever is the later. "Period of Lease" The period of lease mentioned in Clause 3.2 of this Agreement. "The Bank" or "Bank" Bank Hapoalim B.M. "Agreed interest" Interest at rate of 150% (1.5 times) the rate of interest (including commissions and expenses) demanded by the Bank (Branch 609) in respect of unauthorized withdrawals on revolving credit business accounts, where the calculation of such interest will be done in the manner and according to the method by which the aforesaid Bank (Branch 609) calculates interest during the period in which "the agreed interest" (including compound interest) is payable pursuant to this Contract. Written confirmation from the aforesaid Bank (Branch 609) with regard to the aforesaid rate of interest at that branch will constitute conclusive proof of the fact. In the case of a default in payment of up to seven days, the rate of "the agreed interest" will be the same as the rate of interest demanded by the aforesaid Bank in respect of an unauthorized withdrawal on such account. Preamble - -------- WHEREAS The Lessor owns the long leasehold right (from the Israel Lands Administration) in and to the Parcel, the Building and the Leased Premises and is entitled to let the Leased Premises in accordance with any law; and WHEREAS The Lessee wishes to take the Leased Premises on hire from the Lessor for the period and on the conditions set forth below in this Agreement; and WHEREAS The Lessor has agreed to let the Leased Premises to the Lessee in accordance with the terms and conditions of this Agreement; Now therefore it is agreed, stipulated and declared by the parties as follows: 1. 1.1 The preamble to this Agreement constitutes an integral part hereof. 1.2 The appendices to this Agreement constitute an integral part hereof. 2 1.3 Clarifications -------------- For the sake of good order the parties clarify that at the date of signing of this Agreement, there is a lease in force between them, pursuant to a lease contract dated November 18, 1992 and an addendum to the lease contract dated June 10, 1996 (hereinafter: "the Lease Contract") in relation to the leased areas described below, and for the period described below, as follows: 1.3.1 An area of approximately 500 sq.m. gross on level 724 in the Building. 1.3.2 An area of approximately 500 sq.m. gross on level 718 in the Building. 1.3.3 A temporary lease pursuant to "temporary addendum to the Lease Contract" of an area of about 165 sq.m. gross in the Luz Building on level 718. This temporary lease is until October 31, 1997 (with the Lessee having a right to extend the period of this temporary lease until December 31, 1997, as stipulated in the "temporary addendum to the Lease Contract"). 1.3.4 The period of lease of the leased areas described in Clauses 1.3.1 and 1.3.2 above ends on December 31, 1997. 1.3.5 All responsibility pursuant to "the Lease Contract" in relation to the aforesaid leased areas and in relation to any matter during the period up to the end of the period of lease continues to apply to the Lessee. 1.4 In the framework of the area of the Leased Premises as marked in "Appendix A-2" there is an area of approximately 700 sq.m. gross that has been included, the boundaries of which are marked in blue dotted lines on the drawing ""Appendix A-2"; this area will henceforth be referred to as "the New Area". 1.5 All the areas of the Leased Premises, save and except "the New Area", were (and still are at the date of signing of this Agreement) leased to the Lessee as stated in Clauses 1.3.1 and 1.3.2 above. 1.6 The Lessor hereby declares and undertakes that: 1.6.1 It holds the long leasehold right in the Parcel, in the Building and in the Leased Premises, and that the Leased Premises and/or the Lessor's rights in respect thereof are free and clear of any debt and/or attachment and/or pledge and/or claim and/or any other third party right, save for a charge in favor of Bank Hapoalim, and excluding a right of lease in favor of B.R.M. Technologies Ltd. in relation to the New Area, as elucidated in Clause 2.3 below. 3 1.6.2 There are no demolition orders of whatsoever nature in force against the Leased Premises. 1.6.3 The town planning scheme which applies to the Leased Premises makes it possible to conduct the purpose of the lease in the Leased Premises. 1.6.4 There is no legal and/or contractual and/or other impediment to letting the Leased Premises to the Lessee in accordance with the terms and conditions of this Agreement, and included in this the Lessee (sic! - the Lessor) declares that it has not let the Leased Premises under a lease which conflicts with the lease pursuant to this Agreement. 1.6.5 "The New Area" will be delivered to the Lessee where same is completely free and vacant of any occupier and tenant. 1.6.6 The Lessor confirms that the letting of other leased areas in the Building, from the date of signing of this Agreement, will not be for a lease purpose which involves the causing of unreasonable noise. All subject to the matters set forth in this Agreement. 1.7 The headings to clauses in this Agreement are for purposes of place-finding and for convenience only, and do not form part of the Agreement and shall not be used for purposes of interpretation. CHAPTER 2 - --------- The lease, period and purpose thereof - ------------------------------------- Waiver of allegations, delivery of occupation of the Leased Premises and adaptation works therein 2. 2.1 The Lessee hereby declares that it has seen and examined the Leased Premises, has measured the area thereof, examined the possibilities of use thereof, the zoning situation in respect thereof and the permitted uses pursuant to the town planning scheme, and has found that the Leased Premises are suitable for its purposes and its objectives and that the Leased Premises are in good and proper order. The Lessee will take the Leased Premises on hire in the condition in which same stand and it hereby expressly waives in advance any allegation with regard to non-conformity in relation to the Building, the Leased Premises, the possibility of using the Leased Premises and its entering into this Agreement. 2.2 Commencing from January 1, 1998 the Leased Premises, excluding "the New Area" will be deemed to have been delivered to the Lessee. 4 It is agreed that all the responsibility for the state of the Leased Premises (excluding "the New Area") and the standard and quality thereof, is imposed on the Lessee; and for the sake of good order it is hereby clarified that the condition of the Leased Premises (excluding "the New Area") and the standard and quality thereof are the outcome of the use, occupation and lease of the Leased Premises as carried out by the Lessee up to December 31, 1997 by virtue of "the Lease Contract". The Lessor does not have and will not have any responsibility (and no knowledge will be imputed to the Lessor) in relation to the condition of the Leased Premises as at January 1, 1998. With regard to the condition of "the New Area", the following provisions will apply. 2.3 The Lessor shall deliver occupation of "the New Area" to the Lessee on January 1, 1998. The "New Area", on the date of signing of this Agreement, is let to B.R.M. Technologies Ltd. (hereinafter "the Present Tenant"), which is due according to its undertaking to the Lessor and to the Lessee, to vacate the New Area by not later than December 31, 1997. "The Present Tenant" has given notice that it is possible to anticipate the vacation of "the New Area" prior to December 31, 1997 (but not before December 1, 1997). It is agreed that should the "Present Tenant" vacate the "New Area" prior to December 31, 1997, then and in such event the Lessor shall deliver occupation of the "New Area" to the Lessee on the day following completion of actual vacation effected by the "Present Tenant" (but not before December 1, 1997), and the Lessee hereby undertakes to accept occupation of "the New Area" from the Lessor on the day following the vacation thereof by the "Present Tenant" (but not before December 1, 1997). The date specified in this clause 2.3 for the delivery of occupation of "the New Area" will be the date of commencement of the lease in respect of "the New Area" (that is to say, January 1, 1998 or prior thereto in accordance with the above provisions). 2.4 With regard to Clause 2.3 it is hereby agreed that the Lessor shall make every reasonable effort in order that "the Present Tenant" shall vacate the "New Area" by not later than December 31, 1997. However no responsibility will be imposed on the Lessor due to any postponement which may apply as a result of a default on the part of "the Present Tenant". The parties confirm that they have signed separately on an agreement with "the Present Tenant" regarding the date of vacation of "the New Area" and with regard to compensation due to a delay in vacating (hereinafter "the Damages Agreement"); the text of the Damages Agreement is attached to this Agreement as an integral part hereof and is marked "Appendix B". 5 It is agreed that if "the Present Tenant" does not vacate "the New Area" by February 1, 1998, the Lessee will be entitled by written notice to be delivered to the Lessor to give notice that it cancels this Agreement, on the basis that the cancellation will come into force on June 30, 1998; and if the Lessee has delivered such notice of cancellation, this Agreement as it stands shall apply in respect of the Leased Premises, exclusive of "the New Area", in relation to the period until June 30, 1998, and "the New Area" will not be delivered to the Lessee. Should the Lessee not deliver notice of cancellation pursuant to this sub- clause on or before February 28, 1998, the Lease Agreement will continue in accordance with the provisions of this Lease Agreement. Where the Lessee has delivered notice of cancellation pursuant to this sub-clause properly and on due date, the period of lease will end on June 30, 1998, and it will be deemed to be a period stipulated from the outset, and neither party will have any claims against the other. For the avoidance of doubt it is clarified that in every case rent which the Lessee is obliged to pay will be calculated according to the date of delivery of occupation of the Leased Premises as specified in Clause 6.1.3 below. 2.5 The Lessor shall deliver occupation of "the New Area" to the Lessee, and the Lessee shall accept occupation of "the New Area", in circumstances where "the New Area" is in the condition as it stands on the date of delivery of occupation thereof, which is after use by "the Present Tenant". For the avoidance of doubt it is hereby clarified and agreed that "the New Area" will include all the fixtures and systems existing therein (if any) on the date of delivery of occupation thereof to the Lessee, including, and without derogating from the generality of the foregoing, partition walls, communications wiring, ceilings, electrical wiring, air-conditioning systems, carpets and so forth. Without derogating from the provisions of Clause 2.7 below, it is hereby expressly agreed that the Lessee alone shall be responsible for adapting "the New Area" to the Lessee's needs, including the execution of all works required therein, all of which shall be at the Lessee's expense. The same shall apply with regard to any repair and replacement of any system and any part in the "New Area". It is hereby expressly agreed that no liability is imposed or will be imposed on the Lessor with regard to the condition of "the New Area", and the condition of any system therein or any other part thereof. No obligation shall be imposed on the Lessor to bear any cost required for purposes of preparing "the New Area", the repairs required therein and for any other purpose. It is hereby clarified that the Lessor does not have any knowledge with regard to the state of "the New Area" and concerning the proper working order thereof and of any system and part therein, and no such knowledge shall be imputed to the Lessor. The Lessee undertakes to inspect the "New 6 Area" by itself and through tradesmen on its behalf. The Lessee declares that it has undertaken to take "the New Area" on hire and to accept occupation thereof (within the framework of the Leased Premises and generally) after having found same to be suitable for its purposes and after it has agreed to the matters set forth in relation to "the New Area" in this Clause 2.5 and in this Agreement. 2.6 The Lessee undertakes to execute improvements in most of the areas of the Leased Premises which are on level 724 (both in "the New Area" and also in the remaining portions of the Leased Premises which are on this level), which shall include at least the installation of a new decorative ceiling and repainting, all solely at the Lessee's expense and on its responsibility. 2.7 Nothing contained in clauses 2.3 and 2.5 above shall derogate from the Lessor's responsibility for the proper working order of the central units of the air-conditioning which are located on the roof of the Building, and for the proper working order of the air-conditioning system (central heating and cooling) up to the Leased Premises, as well as for the proper working order of the water system up to the Leased Premises, and the proper working order of the sewerage system outside the Leased Premises, and the proper working order of the electricity supply system up to the Leased Premises; all on the date of commencement of the lease. The maintenance of all the above from the date of commencement of the lease shall be in accordance with the provisions of Clause 12.3 below. The lease and the period thereof 3. 3.1 The Lessor hereby lets to the Lessee and the Lessee takes on hire from the Lessor the Leased Premises for the period, on the consideration and on the terms and conditions set forth in this Agreement. 3.2 The period of lease is for 5 years commencing on January 1, 1998 and terminating on December 31, 2002. 3.3 Notwithstanding the foregoing, and in accordance with the matters set forth in Clause 2.3 above, it is possible that the lease of "the New Area" will be brought forward, so that the lease period in respect thereof may also commence prior to January 1, 1998 (but not before December 1, 1997). Should the lease of "the New Area" be brought forward as aforesaid, then all the provisions of this Agreement shall apply with respect to the lease of "the New Area" commencing from the date of actual commencement of the lease of the "New Area". 4. 4.1 Subject to the contents of Clause 4.2 below, it is agreed that the parties will not be entitled to terminate the lease except in accordance with the provisions of this Agreement and/or the provisions of the law. A party which breaches its obligation as set forth above shall not be released from the fulfillment of its obligations pursuant to this Agreement, in whole or in part. 7 4.2 Shortening of the period of lease ---------------------------------- The Lessee is hereby given the right to shorten the period of lease in respect of the entire Leased Premises, as follows: 4.2.1 The Lessee may notify the Lessor in writing by not later than June 30, 1999 regarding a shortening of the period of lease so that it will terminate on December 31, 1999. 4.2.2 The Lessee may notify the Lessor in writing by not later than December 31, 2000 regarding a shortening of the period of lease so that it will terminate on June 30, 2001. 4.2.3 Each of the Lessee's notice pursuant to Clauses 4.2.1 and 4.2.2 above will be referred to henceforth as "notice of shortening". 4.2.4 No notice of shortening shall be valid unless given in writing and delivered to the Lessor on or before the date specified in Clauses 4.2.1 and 4.2.2 (as the case may be). 4.2.5 Where the Lessee has delivered a notice of shortening, the period of lease pursuant to this Agreement will end on the date specified in Clauses 4.2.1 and 4.2.2 (as the case may be); all on condition that notice of shortening has been properly delivered on due date. Where such notice of shortening has been delivered, the lease will be deemed to have been fixed from the outset for a period of lease terminating on December 31, 1999 (if the notice of shortening is delivered pursuant to Clause 4.2.1) or on June 30, 2001 (if the notice of shortening was delivered pursuant to Clause 4.2.2) (hereinafter "the Shortened Period of Lease"). 4.2.6 Should no notice of shortening be delivered up to either of the dates specified in Clauses 4.2.1 and 4.2.2 above, the period of lease will automatically continue. 4.2.7 Where the period of lease has ended, as stated in Clause 4.2.5 above, the Lessor shall return to the Lessee the promissory notes in the Lessor's possession (in accordance with the provisions of Clause 6.6 below) and which relate to the period subsequent to the end of the Shortened Period of Lease ). 5. The purpose of the lease is to conduct a software and hardware house in the Leased Premises and offices which serve for such purpose, and the Lessee hereby undertakes by way of a material undertaking not to use the Leased Premises during the entire period of lease for any other purpose. 8 CHAPTER THREE - ------------- Rent and manner of payment thereof 6. 6.1 The Lessee hereby undertakes by way of material undertaking to pay the Lessor monthly rental throughout the entire period of lease, as follows: 6.1.1 Rental in respect of the lease of the Leased Premises for each Gregorian month therein during the period of lease commencing from January 1, 1998, is hereby fixed at NIS 63,580 (in words: sixty-three thousand five hundred and eighty new shekels) (hereinafter "the Basic Rental"), plus linkage differentials to the index as described below, and together with V.A.T. 6.1.2 If the lease of the "New Area" is brought forward in the manner prescribed in this Agreement, then the daily rental (for each day of lease in the month of December 1997) in respect of "the New Area" is hereby fixed at NIS 845 (in words: eight hundred and forty-five new shekels), plus linkage differentials to the index as described below, and plus V.A.T. 6.1.3 If the "Present Tenant" should be late in delivering "the New Area" (beyond December 31, 1997), then the Basic Rental will be reduced in respect of each day of default by the amount specified in Clause 6.1.2 (hereinafter "the Extent of the Reduction"); all up to the date of commencement of the lease in respect of "the New Area". The Basic Rental and the rental pursuant to Clause 6.1.2 above and "the Extent of the Reduction" aforesaid shall be paid together with linkage differentials to the index on a basis that each payment of Basic Rental shall be increased by the same percentage as the percentage rise in the "Determining Index" as against "the Basic Index". 6.2 The Lessee takes note of the fact that the Building, the Parcel, the Lease Agreement and every payment pursuant thereto, have been pledged by the Lessor in favor of Bank Hapoalim. 6.3 The Lessee undertakes to pay the Lessor the monthly rentals, together with linkage differentials to the index and plus V.A.T., in respect of each Gregorian month in advance, on the first day of each Gregorian month, commencing from January 1, 1998. The Lessee undertakes to make payment to the Lessor on January 1, 1998 of the daily rentals pursuant to Clause 6.1.2 above, in the event that the lease of the "New Area" is brought forward as aforesaid. 6.4 The status of the linkage differentials shall be the same as the principal amount of the rentals for all intents and purposes. 9 6.5 For the convenience of collection of the monthly rentals and as security for the due payment thereof, the Lessee undertakes to deliver to the Lessor 60 index-linked promissory notes (hereinafter "the Promissory Notes" or "the Promissory Note"). The text of the Promissory Notes shall be according to the text of the note a copy of which is attached to this Agreement as an integral part hereof and is marked "Appendix C". The amount of each Promissory Note shall be NIS 63,580 plus V.A.T. at the rate thereof according to law on the due date of payment, and the basic index in each Promissory Note shall be 146.8 points. There shall be a Promissory Note in respect of each payment of monthly rentals, and accordingly the date of each note shall be the first day of each Gregorian month during the Period of Lease, commencing from January 1, 1998 (the first note) and ending on December 1, 2002 (the last note). The place of payment of each Promissory Note shall be at Bank Leumi le-Israel B.M., Mahane Yehuda branch (913) account 10000/61, and the Lessee confirms that it has given an instruction to the aforesaid Bank to meet each of the Promissory Notes. Amounts paid will be transferred to the Lessor's aforesaid bank account. The Promissory Notes are not endorseable, but may be deposited for purposes of effecting a demand for payment at the Lessor's aforesaid bank. The Lessor undertakes not to transfer the Promissory Notes to any third party (except the Bank) whether for consideration or otherwise. This undertaking by the Lessor shall be deemed to be a material undertaking. The fact of the delivery of the aforesaid Promissory Notes, the deposit thereof and the demand for payment thereof do not constitute payment or settlement. Only the actual payment and settlement of the monthly rentals shall be deemed to be payment. 6.6 Where the Lessee has paid a Promissory Note in relation to a month in which it is necessary to make a reduction in the rentals, in accordance with the provisions of Clause 6.1.3 above, the Lessor shall refund to the Lessee "the Extent of the Reduction" within two days from the date of payment of the Promissory Note, plus linkage differentials to the index. 6.7 In the case of a default by the Lessee in the payment of rentals, the Lessee undertakes to pay the Lessor penalty interest on the amount in arrears and for the period of the default at the rate of "the Agreed Interest". This right available to the Lessor shall not derogate from any other right the Lessor may have according to law and pursuant to this Agreement. 6.8 Parking garages --------------- For the avoidance of doubt it is hereby clarified that the parking of a private vehicle, commencing from the date of first operation of the internal parking garage in an adjacent building (on the Parcel) shall be effected according to financial arrangements and a separate agreement to be made between the Lessee and the operator of the parking garage (whether the operator is the Lessor itself or any other entity). 10 The Lessor undertakes that the operator of the internal parking garage in the adjacent building will allow the Lessee to park two specific motor cars in the aforesaid internal parking garage (at unmarked places) without an extra payment, provided that the Lessee signs a separate parking agreement with the operator of the parking garage which is acceptable to the operator of the parking garage. In addition to the parking of the aforesaid two cars, the Lessor undertakes that if the Lessee so requests, the operator of the aforesaid parking garage will agree to enter into a parking agreement with the Lessee (which is acceptable to the operator of the parking garage) for the parking of 24 specific motor cars. The amount of the payment and the payment arrangements will be as prescribed from time to time by the operator of the parking garage. Until the start of operation of the internal parking garage in the adjacent building and so long as building operations on the Parcel allow for this (as shall be determined by the Lessor), the Lessor will permit the Lessee to park free of charge and at unmarked places in the presently existing open parking ground, 12 specific motor cars on the part of the Lessee. V.A.T. 7. Value Added Tax at the rate prevailing for the time being shall be added to each payment for which the Lessee is liable pursuant to this Agreement. For the avoidance of doubt it is clarified that no double V.A.T. shall be paid in respect of any payment. CHAPTER FOUR - ------------ Additional payments for which the Lessee is liable 8. 8.1 In addition to the payment of the rentals, the Lessee hereby undertakes that during the entire Period of Lease it will effect the following payments: 8.1.1 All the municipal and governmental taxes, the rates, fees, levies and any other compulsory payments imposed on the Leased Premises and on the use thereof, which are imposed and which may in the future be imposed on occupiers of properties or on a person who operates or conducts a business in the Leased Premises. 8.1.2 All the fees and the payments which relate to the consumption of water and electricity in the Leased Premises. The payments referred to above shall be paid directly to the authorities and entities concerned. 8.1.3 Payments which are demanded by the Management Company in accordance with the management agreement. 11 The Lessor undertakes to cause a situation that the Lessee's payments to the Management Company for the management of the Building and the providing of maintenance services therein, will not be higher than NIS 21,675 (an amount linked to the index, Basic Index: 146.8 points) on average per month in any year of lease (plus V.A.T.). This provision also applies in the event of the letting of portions of the Leased Premises to subsidiaries and/or affiliates and/or associated companies (hereinafter "Affiliated Companies") and for so long that the Lessee has not let parts of the Leased Premises to sub- tenants who are not Affiliated Companies under a sub-lease, the aggregate area of which exceeds 250 sq.m., even though it is permitted to do so as stated in Clause 19.4 below. The Lessee's payments in accordance with this sub-clause in respect of each month in the first three-quarters in each year of lease shall be a sum of NIS 21,675 (linked as aforesaid and plus V.A.T.), and at the end of the last quarter an accounting will be done, and if there was an overpayment the surplus amount will be deducted by the Management Company from the payment in respect of the first quarter in the following year of lease, and in the last year of lease, the surplus amount, if any, will be refunded by the Management Company, at the end of the Period of Lease. 8.1.4 If any of the amounts the Lessee is obliged to pay in accordance with Clauses 8.1.1 and 8.1.2 above should be based on an account which relates to the whole Building or to one of the wings in the Building, the Lessee will make payment to the Lessor according to a meter which relates to the Leased Premises, and if there is no meter, then an appropriate portion of the amount of the account according to the ratio the Leased Premises bear to the Building. 8.1.5 Each of the payments mentioned above in this clause shall be paid by the Lessee on the legal date on which same is required to be paid to the authorities or to the entities concerned. 8.1.6 The Lessee undertakes to exhibit to the Lessor, from time to time, when called upon to do so by the Lessor, all the receipts and/or certificates evidencing that the payments imposed on the Lessee pursuant to this Contract have in fact been paid by it. 8.2 Should one of the parties (hereinafter "the First Party") effect any payment which, according to the provisions of this Agreement, is imposed on the other party, the other party will be obliged to refund to the First Party any amount which has been paid by the First Party as aforesaid, where such amount is linked to the index from the date of payment thereof by the First Party and up to the time of actual repayment thereof, and bearing interest at the rate of "the Agreed Interest". 12 CHAPTER FIVE - ------------ The Lessee's obligations - ------------------------ 9. 9.1 The Lessee hereby undertakes that, at its expense, it will obtain all the licenses and permits required and which may in the future be required by the competent authorities for the conduct of the Lessee's business in the Leased Premises, and in addition, to comply, at its expense, with any condition which may be demanded by such authorities for the grant of the licenses and the permits and/or the renewal thereof. The failure to obtain licenses and permits as aforesaid, or any portion thereof, by the Lessee and/or the non-renewal thereof, shall not constitute grounds for a breach of this Agreement by the Lessee. The Lessee declares that the Lessor is not responsible to it for obtaining any such license and/or permit. 9.2 The Lessee hereby undertakes that throughout the entire period of the lease it will comply with all the laws, regulations, and including the bylaws, which apply and/or which may in the future apply, during the period of lease, to the Leased Premises, to the use thereof and to the business and the activities carried out therein. Should the Lessee breach an obligation imposed on it in connection with the lease of the Leased Premises and the use thereof, as described above in this clause, the Lessee shall compensate the Lessor for any damage and/or expense incurred by the Lessor (if any) due to the breach and/or in consequence thereof. 9.3 The Lessee hereby undertakes not to use the Leased Premises, or any part thereof, in a manner which will cause noises, odors, tremors, pollution and/or smoke and/or constitute a nuisance to neighbors, in an unreasonable manner and having regard to the region in which the Leased Premises are located. The Lessee shall bear the payment of any fines which may be imposed, by the municipal authorities and/or by State institutions, if imposed, in respect of a violation of the provisions of this clause. Where fines are imposed as aforesaid in respect of the Lessor, the Lessee shall indemnify the Lessor for the full amount of such fines. 9.4 Shortly after the commencement of the period of lease, the Lessee shall give written notice to the local authority in the jurisdiction of which the Leased Premises are located, and to the Management Company regarding the fact that Lessee has taken occupation of the Leased Premises, and with respect to the duration of the period of lease and/or the remaining details which may be demanded by them, and concurrent therewith shall send a copy of his aforesaid notices to the Lessor. 13 Signboards 10. The Lessee shall be entitled to hang a signboard/s solely at the place designated for the purpose in the Building, and after the signboard/s, the type and the form thereof, have been approved by the Lessor. Restriction on use 11. The Lessee undertakes not to keep any materials, tools, equipment and any other chattels outside the Leased Premises, and the Lessee will not be entitled to use the Parcel and/or any part of the Building, apart from the Leased Premises, for any purpose whatsoever except for obtaining access to the Leased Premises. Management of the Building 12. 12.1 The Lessee undertakes to comply fully with all the provisions contained in the house regulations of the Building, if there are house regulations, and/or any reasonable provision, directive and rules that may be prescribed from time to time by the Management Company. 12.2 In addition, and without prejudice to the Lessee's remaining obligations, the Lessee undertakes that at the time of signing of this Agreement it will sign an agreement with the Management Company for obtaining services, in the text attached to this Agreement, and will pay the Management Company, throughout the entire period of lease, the maintenance expenses, management charges and the remaining amounts which may be due to the Management Company pursuant to the Management Agreement. Failure to pay the Management Company shall be tantamount in all respects to a failure to pay rentals pursuant to this Agreement. The contents of this Clause 12.2 are subject to the provisions of Clause 8.1.3 above. 12.3 For the sake of good order, the Lessor confirms that occupation [maintenance] of the Building (excluding leased areas) and the systems in the Building, which are not systems of the Leased Premises, is imposed on the Management Company, including the supply of air- conditioning (cooling and heating) up to the Leased Premises, a system for conveying water up to the Leased Premises, a sewerage system outside the Leased Premises and a system for the supply of electricity up to the Leased Premises. 13. 13.1 The Lessee hereby undertakes to use the Leased Premises carefully, to preserve the cleanliness of the Leased Premises and the Building and to refrain from causing any damage and/or spoilage in the Leased Premises. 13.2 The Lessee shall be obliged within a reasonable time, in the circumstances of the matter and at its expense and to the satisfaction of the Lessor, to repair any damage and/or fault which may be caused to the Leased Premises by it and/or its employees and/or persons acting on its behalf and/or its customers and/or as a consequence of its use of the Leased Premises, save and except for faults which are caused due to wear and tear resulting from reasonable use. 14 13.3 The Lessor will be obliged, within a reasonable time in the circumstances of the matter, to repair any damage and/or fault which the Lessor and/or its employees caused to the Building and/or to the Leased Premises. 13.4 Should the Lessee fail to perform a repair for which it is liable by virtue of the contents of sub-clause 13.2 above, the Lessor or anyone on its behalf shall be entitled, but not obliged, to carry out such repairs itself, and the Lessee shall be obliged to repay the Lessor, immediately upon the Lessor's demand, any amount which may be incurred for performing the repair, linked to the index and plus interest at the rate of "the agreed interest", calculated from the date of disbursement of the money and up to the time of actual repayment. Coupled with the demand for the expenses from the Lessee, the Lessor shall present to the Lessee receipts and accounts evidencing the cost of performing the repair. 13.5 Should the Lessor fail to perform a repair for which it is liable pursuant to Clause 13.3 above, and the fault or damage prevents reasonable use of the Leased Premises, then the Lessee shall be entitled to repair the fault or the damage, after having given the Lessor and the Management Company prior warning notice of two weeks, and the Lessor shall be obliged, if the damage and the fault has not been repaired, to refund to the Lessee any amount it incurred for performing the repair, linked to the index. 14. 14.1 The Lessee hereby undertakes, as a material undertaking, that after the commencement of the lease it will not perform or carry out any alterations in the Leased Premises and/or additions to the ceilings, floors and walls of the Leased Premises, and will not carry out building works of whatsoever nature, without obtaining the Lessor's prior written consent thereto, and will comply with all the terms and conditions thereof. The Lessor is deemed to have agreed that it is appropriate to perform the works imposed on the Lessee pursuant to Clause 2.6 above, including ceilings and internal partitions (and similar other internal alterations). The Lessor further agrees to the installation of computer and communications cables and the threading and insertion of electricity and telephone wires; provided that the Lessor complies with all provisions of the law which relate to the matter. 14.2 Without prejudice to the contents of sub-clause 14.1 above, any alteration and/or addition to the Leased Premises which may be made in accordance with the above provisions of this clause shall remain in the Leased Premises and shall constitute an integral part thereof, and the Lessor shall not be called upon to pay the Lessee any consideration in respect thereof, but the Lessor may demand from the Lessee that the Leased Premises be restored to their former condition, and in such event the Lessee shall, at its expense, restore the Leased Premises to their former condition, to the Lessor's satisfaction, by not later than the end of the period of lease. 15 15. The Lessee shall be responsible for all the damage which may be caused to the Leased Premises and/or to the Building (excluding damage the original cause of which lies in wear and tear resulting from reasonable use of the Leased Premises) and/or damage to any third party who may be in the Leased Premises and/or in the Building and which result from acts and/or omissions on the part of the Lessee, including acts and/or omissions of its employees, persons acting on its behalf, its customers and/or as a consequence of conducting the Lessee's business in the Leased Premises and/or in the Building. CHAPTER SIX - ----------- Insurance - --------- 16. 16.1 16.1.1 The Lessee undertakes that, at its expense, it will insure its activities in the Leased Premises by way of employers liability insurance as well as third party liability insurance, with the sum assured being a realistic one, and to add the name of the Lessor as an additional insured in the aforesaid policy/ies, without there being a right of subrogation against the Lessor, and where any third party insurance is subject to a "cross-liability" clause pursuant to which the insurance will be deemed to have been effected separately for each of the individual parties making up the insured. 16.1.2 The Lessee undertakes, as a material undertaking, to insure the contents of the Leased Premises, on the basis that the sum assured will be realistic, and to add the name of the Lessor as an additional insured under the policy without any rights of subrogation against the Lessor. 16.1.3 The Lessee shall, at the Lessor's request, exhibit to the Lessor any policy taken out by the Lessee as aforesaid, and shall update the sums assured and/or cause a change in the terms and conditions of the policy if such terms and conditions are inconsistent with the provisions of this Agreement. 16.2 For the avoidance of doubt it is clarified that no responsibility of whatsoever nature shall rest on the Lessor vis-a-vis the Lessee in respect of any damage which may be caused to the Lessee and/or its property and/or its business, due to any reason. All such damage shall be covered by the insurances which the Lessee is obliged to effect as aforesaid. 16.3 Should the Lessor be held liable for payment of additional insurance fees in excess of the customary norm as a result of the Lessee's operations in the Leased Premises, then and in that event the Lessee shall pay the Lessor the aforesaid extra amount upon the Lessor's demand; together with its demand the Lessor shall present the Lessee with a certificate from the insurance company evidencing the payment of the additional insurance fees. 16 CHAPTER SEVEN - ------------- 17. 17.2 The Lessee undertakes to permit the Lessor and/or its employees and/or agents and/or persons acting on its behalf to enter the Leased Premises at normal working hours, after prior arrangement with the Lessee, in order to examine the Leased Premises and/or for purposes of carrying out repairs therein and/or in order to exhibit the Leased Premises to potential buyers and/or tenants, provided that by so doing the Lessee's reasonable use of the Leased Premises shall not be adversely affected and no unreasonable inconvenience will be caused to the Lessee. Carrying out of works in the Building and in the Parcel 17.2 The Lessor shall be entitled to perform any construction and development works it deems fit in the Building and/or on the Parcel, and the Lessee will not be entitled to object to the carrying out thereof, provided that as a result thereof the Lessee's right to reasonable use of the Leased Premises shall not be prejudiced. 17.3 The Lessor has commenced and intends to continue the construction of the Ramot Meir project, which covers part of "the Parcel" and land adjacent thereto, including within the area of "the Building". As a result thereof there are and will be parking restrictions in the Building and on the Parcel. 17.4 The Lessee has taken note of the fact that the Lessor has commenced execution and the Lessor intends to continue execution on the Parcel (and on portions outside the "Building", in "the Building" and adjacent to and abutting on "the Building") of construction works of a large scale, which include excavations, foundation work, shoring, construction of buildings, changes to facades, connecting of buildings, development and finishing works. These works will continue for several years. The Lessee will not be entitled to object to, prevent or interfere with, these building works, and it confirms that it has entered into this Agreement being aware of these matters. As a consequence of the works, various difficulties will be caused, including disturbance, noise, tremors, shocks and dust. CHAPTER EIGHT - ------------- Transfers - --------- Transfer of the Leased Premises 18. The Lessor shall be entitled to sell, encumber and transfer its rights, or any part thereof, in the Parcel and/or the Building and/or the Leased Premises, to whomever it pleases, without being obliged to obtain the Lessee's consent thereto, provided that any such transferee shall undertake to assume all the Lessor's obligations pursuant to this Agreement. 17 19. 19.1 The Lessee undertakes not to transfer any right it has pursuant to this Agreement to any person and/or body corporate, whether registered or unregistered, and not to make over or transfer or sublet the Leased Premises or portion thereof, and not to allow any person or registered or unregistered body corporate to make use of the Leased Premises, or portion thereof, and not to make any such person or body corporate a party to occupation of the Leased Premises, or portion thereof. This undertaking is a material undertaking. 19.2 For purposes of this Clause 19.2, the following terms shall have the meanings set opposite them: Control - within the meaning of the Securities Law, 5728-1968; Affiliated company - within the meaning of the Securities Law, 5728- 1968. 19.3 For purposes of the contents of sub-clause 19.1 above, the Lessor gives its consent to the grant of a right of use which does not constitute occupation, of portions of the Leased Premises to subsidiaries and/or associated companies and/or affiliated companies of the Lessee and/or to companies owned by the controlling shareholders in the Lessee. 19.4 Notwithstanding the contents of Clause 19.1 above, without derogating from the provisions of Clause 19.3 above, the Lessor hereby gives its consent to the subletting by the Lessee of portions of the Leased Premises, provided that the sub-lease shall not apply to an area greater than 49% of the areas of the Leased Premises. The sub-lease shall not derogate from any of the Lessee's obligations pursuant to this Agreement. CHAPTER NINE - ------------ Vacation of the Leased Premises - ------------------------------- Return of the Leased Premises to the Lessor 20. The Lessee hereby undertakes that at the end of the period of lease, or at the time at which this lease comes to an end prior thereto due to the circumstances specified herein, it will vacate the Leased Premises of any person and object and will deliver the Leased Premises to the Lessor where same are in good order and condition and fit for use, in the same state it received the Leased Premises, save for wear and tear resulting from reasonable use, and subject to the provisions of Clause 14.2 above. In addition to any other provision in this Agreement, it is agreed that at the end of the period of lease (or on termination of the lease for any other reason), the Lessee shall return the Leased Premises to the Lessor where same are in good order and condition (fair wear and tear excepted), including all the additions and investments the 18 Lessee has made in the Leased Premises. The Lessor is exempted and will be exempted from any payment, indemnity or refund of money to the Lessee in respect of any addition and investment and cost the Lessee may have had in connection with the lease and with the Leased Premises. All such amounts will be deemed to be extra rentals in addition to any other payment for which the Lessee may be liable in accordance with this Agreement. Nothing in the foregoing shall prevent the Lessee from removing from the Leased Premises any item it may have added to the Leased Premises which is not affixed and the removal of which does not adversely affect the Leased Premises and the systems thereof. At the time of vacation the Lessee shall deliver to the Lessor copies of receipts from the local authority in which the Leased Premises is located, from the Electric Corporation and from Bezeq, with regard to the liquidation and discharge of all the payments which have been imposed on the Lessee by virtue of the provisions of Clause 8 above. Repairs after vacation 21. It is stipulated and agreed between the parties that if at the time of vacation of the Leased Premises and the return thereof to the Lessor, the Leased Premises are not in the condition as stated in Clause 20 above, excluding wear and tear resulting from reasonable use, then without releasing the Lessee from its obligations to put the Leased Premises into such condition, the Lessor shall be entitled, but not obliged, to perform all the reasonable works which may be demanded, in its discretion, in order to put the Leased Premises into the condition in which the Lessee was supposed to return the Leased Premises to it, and the Lessee shall be obliged to repay to the Lessor, immediately upon the Lessor's first demand, all the expenses incurred for this purpose at their dollar value or, on the Lessor's request, together with "the agreed interest", calculated from the date of the disbursement and up to the time of actual payment, and also to compensate the Lessor for any damage, apart from damage caused by the Lessor and/or anyone on its behalf, resulting from the state of the Leased Premises and/or from the necessity for putting it into good order and condition, fair wear and tear excepted. Failure to vacate the Leased Premises - -------------------------------------- 22. 22.1 Should the Lessee fail to vacate the Leased Premises at the time specified in Clause 20 above, then without prejudice to the Lessor's right to exercise its right to receive back the Leased Premises in any legal manner it may deem fit, the Lessee shall be obliged to pay the Lessor agreed pre-estimated liquidated damages in an amount of NIS 4,000 (four thousand shekels) in respect of each day of default, where this amount is linked to the Basic Index from the date of signing of this Agreement and up to the time of actual payment. It is hereby expressly declared by the parties that the amount of the agreed damages denominated above has been fixed after a careful and prudent 19 assessment, and the Lessee shall be estopped from contending that this amount was fixed without any reasonable reference to the damage which could be foreseen at the time of closing of this Agreement as a probable result of the non-vacation of the Leased Premises on due date. 22.2 It is hereby expressly stipulated and agreed by the parties that nothing contained in sub-clause 22.1 above shall release the Lessee from its obligations under Clause 20 above and/or confer on the Lessee a right to continue to occupy and hold the Leased Premises and/or constitute a waiver by the Lessor of any of the Lessor's rights and/or of prejudicing the Lessor's rights to obtain any other remedy and relief. 23. 23.1 Should the Lessee commit a material breach of this Agreement, the Lessor shall be entitled to cancel this Agreement, without this derogating from any other or additional relief, provided that the Lessee has failed to rectify the breach within 14 business days from the date it was called upon to do so. With regard to breaches which do not constitute material breaches, the Lessor shall be entitled to cancel this Agreement after having given prior warning notice of 21 business days to cure the breach, and if such breach has not been duly rectified within the aforesaid time. 23.2 Nothing in the generality of the foregoing shall in any way prejudice any right the Lessor may have to sue for and to receive specific performance of the provisions of this Agreement and/or to sue for and receive from the Lessee compensation for any damages of whatsoever nature which may be incurred by the Lessor as a result of a breach of this Agreement by the Lessee. 23.3 A default in payment of rentals by the Lessee for a period of up to 14 days (but not more than three times per year) will not be deemed to be a material breach; however this shall not release the Lessee from the payment of penalty interest as stipulated in this Agreement. 23.4 Should the "Present Tenant" fail to vacate "the New Area" on time, as stipulated in "the agreement for vacation" (Appendix B), then the provisions of the agreement for vacation shall apply with regard to the compensation. Should the "Present Tenant" have vacated "the New Area", but the Lessor has failed to deliver occupation thereof to the Lessee at the time specified in this Agreement, the Lessor shall be obliged to pay the Lessee agreed pre-estimated liquidated damages in an amount of NIS 1,600 in respect of each day of default (commencing from the seventh day of default), where this amount is linked to the index. Non-applicability of Tenants Protection Laws - --------------------------------------------- 24. The Lessee hereby expressly declares: 24.1 That it has not paid and is not due to pay to the Lessor, or to any other, person any amount for the Lessor's consent to let the Leased Premises to it, 20 either as key money or as a contribution towards the investments in building construction or in any other way, save and except for the rentals pursuant to this Agreement. The Lessee declares that it has not paid and will not pay any amount in connection with this Agreement, the lease and the Leased Premises, which is deemed to be or could be deemed to be "key money". The Lessee declares and undertakes that any cost and any payment and any liability the Lessee may bear and which the Lessee does bear pursuant to this Lease Agreement and in connection with the lease and in connection with the Leased Premises, are not and will not be key money. Each of such payments shall be deemed in all respects to be rental, with this being in addition to all the rentals denominated in this Agreement and in addition to any payment, cost and liability specified in this Agreement. 24.2 That it is aware that the construction of the Building and the Leased Premises was completed after August 20, 1968 and that the Leased Premises were first let after that date. 24.3 That it is aware that there is no tenant and was no tenant entitled to occupy the Leased Premises and that same are not let for key money. The Lessee declares that the Leased Premises (excluding "the New Area") were let to it and delivered to it after August 20, 1968, within the framework of "the Lease Contract", at a time the Leased Premises were vacant of any occupier and tenant. The Lessee declares that "the additional area" will be delivered to it where same are free and vacant of any occupier and tenant. 24.4 That the lease which is the subject of this Agreement is not a protected lease and the Tenants Protection Law (Consolidated Version), 5732-1972, and any regulations made or which may be made pursuant thereto, and any other law which relates to the protection of the tenant or to a restriction on rentals or on conditions of lease, shall not apply to this lease. 24.5 At the time of vacating the Leased Premises the Lessee will not be entitled to any payment from the Lessor and/or from a substitute tenant either as key money or as payment for improvements or installations in the Leased Premises, nor in any other manner. 25. By virtue of the fact that the Lessee is a body corporate, the Lessor shall be entitled to cancel this Agreement forthwith also in any event in which liquidation proceedings are commenced against the Lessee, and including in a case in which a provisional liquidator or a receiver or receiver and manager is appointed for it, or any other enforced appointment, provisional or permanent, and such proceedings are not set aside within 90 days from the date of the commencement thereof. 26. Should a party be late in the payment of any amount it owes to the other party, then any amount which may be paid by the first party shall be applied first to the 21 interest, thereafter to linkage differentials and finally to the principal, and in the event that the collection of any such amount should involve any expenses, then any amount which may be paid as aforesaid shall first be applied towards payment of the expenses and thereafter according to the above sequence. 27. A default, procrastination or waiver on the part of any of the parties to this Agreement in the exercise of any such party's rights to the provisions of this Agreement, which is not made expressly and in writing, shall not be deemed to be a waiver, estoppel, acquiescence or admission by such party, and it may exercise its rights pursuant to this Agreement at any time it pleases without being estopped from doing so. 28. It is agreed that the Lessee shall not be allowed to set off any amount to which it is entitled from the Lessor against any amount which it owes to the Management Company, and the Lessee shall not be allowed to set off any amount to which it is entitled from the Management Company against amounts it owes the Lessor. 29. 29.1 The terms and conditions of this Lease Agreement fully reflect what has been stipulated between the parties and cancel all contractual arrangements, promises, representations and undertakings which were made, if any, between the parties prior to the signing of this Agreement, in relation to the period subsequent to the commencement of the lease pursuant to this Agreement. 29.2 Any alteration to this Agreement and any addition hereto will only be valid if drawn up expressly and in writing and signed by the parties. CHAPTER ELEVEN 30. Collateral security -------------------- As security for the due fulfillment of each of the Lessee's obligations under this Agreement and pursuant to the Management Agreement, and in relation to the period commencing from the date of commencement of the lease (January 1, 1998; or from the date of delivery of occupation of "the New Area" if this is before January 1, 1998), the Lessee undertakes to deliver to the Lessor by not later than December 31, 1997, a financial bank guarantee in the text attached to this Agreement as an integral part hereof and marked "Appendix D". The bank guarantee shall be in a sum of NIS 250,000 and shall be linked to the index ("Basic Index" as stipulated above) and shall be in force until three months after the end of the Period of Lease (December 31, 2002). The Lessee undertakes that the Lessor will have in its possession a bank guarantee as aforesaid until the end of the Period of Lease. After the end of the Period of Lease, or after the end of "the shortened period of lease" (if this applies), and after the Lessee has fulfilled all its obligations to the Lessor, the Lessor shall return the bank guarantee to the Lessee. 22 Without derogating from the fact of the guarantee being autonomous and unconditional, the Lessor shall deliver to the Lessee prior notice of seven days regarding its intention to foreclose on the bank guarantee. The Lessor will not deliver such notice in a case that its demand is seven days or less prior to the date of expiry of the validity of the guarantee. 31. Any notice which may be sent by one party to the other according to the addresses mentioned at the head of this Contract shall be deemed to have been delivered to its destination at the end of 72 hours from the time it is sent by registered post, or at the end of 48 hours from the time it is left at the aforesaid address by a messenger. 32. The Lessee undertakes to pay every payment it is obliged to pay to the Lessor (according to this Agreement and generally) by way of payment to the Lessor's account at Bank Hapoalim, Kikar Rabin branch Tel Aviv (609) account no. 696653; all this shall include rentals, linkage differentials, V.A.T. and any other payment. The Lessor shall be entitled, at any time, to specify another bank account to which the Lessee shall be obliged to transfer the aforesaid payments. In witness whereof the parties have hereunto signed: ( - ) ( - ) Nechesei Har Hotzvim Ltd. R.T.S. Business Systems Ltd. - --------------------------- ------------------------------- The Lessor The Lessee 23 ADDENDUM TO LEASE AGREEMENT (hereinafter "this Addendum") Made and entered into December 3, 1997 Between: NECHESEI HAR HOTZVIM LTD. ("the Lessor") And: R.T.S. BUSINESS SYSTEMS LTD. ("the Lessee") With regard to the lease agreement dated October 30, 1997 (hereinafter "the Lease Agreement") which was signed between the parties in relation to leased premises (in an area of approximately 1,700 sq.m.) in what was formerly Luz Building in Jerusalem, the parties agree as follows: 1. The second paragraph of Clause 2.4 of the Lease Agreement (starting with the words "The parties confirm that..." and ending with the words "... and marked "Appendix B"") shall lapse, and shall be deemed not to have been included in the Lease Agreement from the outset. 2. Appendix B to the Lease Agreement lapses, and shall be deemed not to have been included in the Lease Agreement from the outset. 3. The Lessor hereby notifies the Lessee that it is about to enter into an agreement with "the Present Tenant" (within the meaning of this term under Clause 2.3 of the Lease Agreement) with regard to vacation of "the New Area" (within the meaning thereof under Clause 1.4 of the Lease Agreement). In witness whereof the parties have hereunto signed this day, December 3, 1997, at Jerusalem ( - ) ( - ) Nechesei Har Hotzvim Ltd. R.T.S. Business Systems Ltd. - --------------------------- ------------------------------- The Lessor The Lessee ADDENDUM NO. 2 TO LEASE AGREEMENT Made and entered into at Tel Aviv on November 17, 1998 Between: NECHESEI HAR HOTZVIM LTD. ("the Lessor") And: R.T.S. SOFTWARE LTD. (Company No. 51-128135-4) (formerly R.T.S. Business Systems Ltd.) ("the Lessee") In all matters pertaining to the Lease Agreement signed between the parties on October 30, 1997 (hereinafter "the Lease Agreement") in relation to the Leased Premises in the "Building" (within the meaning thereof under the Lease Agreement: namely, a building already constructed on Parcel 110 Block 30241 in the Har Hotzvim Industrial Zone, at 5 Kiryat Mada Street, Jerusalem); The parties agree on amendments to the Lease Agreement as set forth in this document and the provisions contained in this document. The parties agree that the Lease Agreement and each of the provisions thereof shall continue to apply as same stand, save and except for the amendments made herein as set forth below and in accordance with the following provisions: 1. The description of "the Leased Premises" and the definition thereof in Chapter 01 of the Lease Agreement shall change commencing from the end of December 31, 1998 in a manner whereby the area on level 718 (an area of approximately 500 sq.m. which was marked on the drawing "Appendix A-1" to the Lease Agreement) shall on that date be removed from the Leased Premises (hereinafter "the Eliminated Area"). 2. The description of the Leased Premises and the definition thereof in Chapter One of the Lease Agreement shall change, commencing from January 1, 1999 in a manner whereby an area of approximately 340 sq.m. gross on level 722 in the "Building", the boundaries of which are marked with a blue line on the drawing attached to this document as an integral part hereof and marked "Appendix A-3" shall be added to the Leased Premises on that date (hereinafter "the Additional Area"). 3. Accordingly (and subject to the third paragraph of Clause 5 below), the term "Leased Premises" in the Lease Agreement shall, commencing from January 1, 1999, be as follows: "The Leased Premises" - an area of approximately 1,540 sq.m. gross, according to the drawings attached to the Lease Agreement and to Addendum No. 2 to the Lease Agreement. The Leased Premises are split on two levels. On level 724 of the Building: an area of approximately 1,200 sq.m. gross, the borders of which are marked with a blue line on the drawing attached the Lease Agreement as an integral part thereof (marked "Appendix A-2"), and on level 722 in the Building: an area of approximately 340 sq.m., the borders of which are marked with a blue line on the drawing attached to Addendum No. 2 to the Lease Agreement and marked as "Appendix A-3". 1 4. The Lessee undertakes to vacate the "Eliminated Area" by not later than December 31, 1998 and to deliver occupation thereof to the Lessor on or before December 31, 1998, and all the provisions of the Lease Agreement with regard to vacation as aforesaid and/or delivery of occupation thereof to the Lessor and/or with regard to any breach and/or any default shall apply. The Lessee has taken note of the fact that the Lessor intends to let "the Eliminated Area" to others commencing from January 1, 1999. The period of lease in respect of "the Eliminated Area" terminates on December 31, 1998. 5. With regard to "the Additional Area", the Lessee confirms that it is aware that same is currently let to Applied Company (hereinafter "the Present Tenant") which is due to vacate it pursuant to a lease contract, on or before December 31, 1998. With regard to vacation of "the Additional Area" by the Present Tenant on or before December 31, 1998, it is hereby agreed that the Lessor shall make every reasonable effort in order that "the Present Tenant" will vacate "the Additional Area" up to the aforesaid date, but no responsibility will be imposed on the Lessor as a result of a postponement in such vacation which is under the responsibility of "the Present Tenant". If in fact there should be a delay in the vacation of "the Additional Area" by the Present Tenant, then it is agreed that the dates "December 31, 1998" and "January 1, 1999", with regard to the end of the lease in respect of "the Eliminated Area" and the commencement of the lease in respect of "the Additional Area" (in each of Clauses 1, 2, 3 and 4 of this document) shall be deferred according to the date of vacation of "the Additional Area" by "the Present Tenant". 6. It is agreed that the provisions of Clauses 2.5 and 2.7 of the Lease Agreement shall also apply in respect of "the Additional Area", so that wherever in those clauses the words "the New Area" is written, same shall be read as though "the Additional Area" was also written. In addition, the Lessee confirms that it is aware that "the Present Tenant" intends to dismantle and remove from "the Additional Area" parts, installations and internal partitions, and as a result thereof there will be a necessity for the Lessee to perform supplementary work and various repairs, all at its expense and on its responsibility. 7. Commencing from the date of termination of the lease of the "Eliminated Area" and the commencement of the lease in respect of "the Additional Area" (where these two have been completed), the amounts specified in Clause 6.1.1 of the Lease Agreement will change and in lieu thereof there shall be substituted the amount of: NIS 59,558 (in words: fifty-nine thousand five hundred and fifty-eight new shekels) together with linkage differentials to the index and plus V.A.T. The index: the Basic Index (146.8 points) and the determined index will be as specified in the Lease Agreement. 2 Until the determining date for the commencement of payment of the new amount as agreed above, the Lessee shall continue to pay the rentals in the amount thereof as denominated at present in Clause 6.1.1 of the Lease Agreement. 8. The Lessee declares that it does not now have the intention of shortening the Period of Lease in accordance with Clause 4.2.1 of the Lease Agreement. 9. The first updated payment pursuant to Clause 7 of this document shall be paid to the Lessor in cash and against payment thereof the Lessor shall return to the Lessee the promissory note which relates to that month. It is agreed that during the first two weeks of that month, the Lessor shall return to the Lessee all the promissory notes held by it at that time, against delivery by the Lessee of new promissory notes (to which all the provisions of the Lease Agreement shall apply, including Clauses 6.5 and 6.6 of the Lease Agreement) the amount of each of which is the same as the new amount specified in Clause 7 of this Agreement (Basic Index: 146.8 points). Should new promissory notes not be delivered to the Lessor, the Lessor shall continue to present the existing notes for payment; and any surplus amount which may remain with the Lessor in consequence of the payment of the existing notes will be refunded by the Lessor to the Lessee immediately upon delivery to the Lessor of all the remaining new notes. 10. It is agreed that this document constitutes an integral part of the Lease Agreement, and apart from the changes which have been made in the Lease Agreement as set forth in this document, all the remaining provisions of the Lease Agreement shall continue to apply. In witness whereof the parties have hereunto signed - --------------------------------------------------- this day, ________________, at Tel Aviv ( - ) ( - ) Nechesei Har Hotzvim Ltd. R.T.S. Software Ltd. - --------------------------- ------------------------------- The Lessor The Lessee CERTIFICATE I the undersigned, ________________, Adv./C.P.A., confirm that the aforesaid "Lessee" signed the foregoing document and that its above signature binds it. ______________________ , Adv. 3 ADDENDUM NO. 3 TO LEASE AGREEMENT Signed on April 11, 1999 Between: NECHESEI HAR HOTZVIM LTD. ("the Lessor") And: R.T.S. SOFTWARE LTD. (Company No. 51-128135-4) ("the Lessee") 1. Commencing from March 1, 1999 the Lessee will take on hire an area of approximately 35 sq.m. gross on level 725 in the Luz Building (hereinafter "the Storeroom") the boundaries of which are marked with a blue line on the drawing attached to this Addendum. The purpose of the lease is for same to serve as a storeroom. 2. The period of lease of the area shall be from March 1, 1999 until December 31, 2000. 3. The Lessee may give the Lessor written notice by not later than October 31, 1999 that it does not wish to continue to hire the Storeroom beyond December 31, 1999. Should the Lessee gives such notice, the lease of the Storeroom will terminate on December 31, 1999. 4. The provisions of the Lease Agreement and of Addendum No. 2 to the Lease Agreement which have already been signed by the parties shall apply to the lease in respect of the Storeroom, subject to an addition of rentals and of management charges as follows: 4.1 The Lessee shall pay monthly management charges in a sum of $50 (in new shekels according to the representative rate) in respect of the Storeroom for each month. The Lessee undertakes to make payment by not later than April 15, 1999 of the monthly management charges for the period March 1, 1999 until December 31, 1999. The monthly management charges for the year 2000 (if the lease of the Storeroom continues) shall be paid on or before January 15, 2000. 4.2 The monthly rentals for the Storeroom are $250 (in new shekels according to the representative rate) in respect of each month. The Lessee undertakes to make payment not later than April 15, 1999 of the monthly rentals for the period March 1, 1999 until December 31, 1999. The monthly rentals for the year 2000 (if the lease of the Storeroom continues) shall be paid on or before January 15,2000. 4.3 Together with each amount the Lessee is obliged to pay, the Lessee shall add and shall pay V.A.T. 5. The Lessee confirms that the commencement of the lease of the Storeroom has occurred and that the Storeroom is in the condition in which it was left by the previous tenant. The Lessee shall, at its expense and on its responsibility, perform everything required in order to adapt the Leased Premises to its objectives. In witness wherof the parties have hereunto signed: (-) R.T.S. Software Ltd. _______________________ __________________________ The Lessor The Lessee 1 EX-10.15 21 0021.txt MASSACHUSETTS LEASE Exhibit 10.15 ------------- Two Willow Street Southborough, Massachusetts LEASE dated January 28, 2000 ARTICLE I --------- REFERENCE DATA 1.1 Subjects referred to: -------------------- Each reference in this Lease to any of the following subjects shall be construed to incorporate the data stated for that subject in this Section 1.1: Building: The building located on the Lot, as defined below, commonly known as Two Willow Street, Southborough, Massachusetts Landlord: Firmin Joint Venture LLC a Massachusetts Limited Liability Company Original Address of Landlord: c/o Richard B. Strehlke Natick Office Park 209 West Central Street Natick, Massachusetts 01760 Landlord's Construction Representatives: Richard B. Strehlke and Douglas S. Brodie Tenant: RTS Software, Inc., a Delaware corporation Original Address of Tenant: Reservoir Place 1601 Trapelo Road Waltham, MA 02451 Tenant's Construction Representative: Michelle Daley Tenant's Space: Area located on the entire right side and left front portion of the first floor of the Building as shown on Exhibit A Rentable Floor Area of Tenant's Space: approximately 13,807 square feet. Total Rentable Floor Area of the Building: Approximately 40,000 square feet Term: Five (5) Lease Years Scheduled Term Commencement Date: May 1, 2000 Term Commencement Date: The Scheduled Term Commencement Date, or such other date determined in accordance with Section 3.2. Annual Fixed Rent Rate: $331,368 payable in equal monthly installments on the first day of each month in the amount of $27,614. Lease Year: Lease Year shall mean the twelve (12) month period immediately following the Term Commencement Date. If the Term Commencement Date shall occur on a day other than the first day of a calendar month, then the first Lease Year of the Term shall include the partial month immediately following the Term Commencement Date. CPI shall mean "Consumer Price Index for All Urban Consumers (CPI-U), Boston, Massachusetts All Items- (1982-1984=100) as published by the United States Bureau of Labor Statistics" Base Year for Operating Cost Escalation: See Section 4.2 Permitted Uses: General office use Public Liability Insurance Bodily Injury: $1,000,000 each person; $3,000,000 each accident Property Damage: $500,000 each accident Boiler Insurance: $100,000 Security Deposit: $ 27,614 1.2 Exhibits -------- The exhibits listed below in this section are incorporated in the Lease by reference and are to be construed as part of this Lease: Exhibit A - Plan Showing Tenant's Space Exhibit B - Tenant's Preliminary Plans Exhibit C - Landlord's Services Exhibit D - List of Drawings and Specifications for Basic Building.- Intentionally Omitted Exhibit E - Rules and Regulations. Exhibit F - Description of Lot. ARTICLE II ---------- PREMISES AND TERM 2.1 Premises -------- Landlord hereby leases to Tenant, subject to and with the benefit of the provisions of this Lease, Tenant's Space in the Building. Tenant's space shall exclude exterior faces of exterior walls, the common stairways, stairwells, elevators and elevator wells, and pipes, ducts, conduits, wires and appurtenant fixtures serving exclusively or in common other parts of the Building. If Tenant's Space includes less than the entire rentable area of any floor then Tenant's Space shall include a proportionate share of the central core area of such floor based on the Rentable Floor Area of Tenant's Space as compared to the Rentable Floor Area of other space on such floor. Tenant's Space is hereinafter sometimes referred to as "the Premises" and is shown or described on Exhibit A. 2.2 Common Facilities ----------------- Tenant shall have, as appurtenant to the Premises, rights to use in common with others entitled thereto, subject to reasonable rules of general applicability to tenants of the Building from time to time made by Landlord of which Tenant is given notice: (a) the common facilities, common walkways, driveways, lobbies, hallways, ramps, stairways, elevators, the parking area and all other interior and exterior common areas which are part of the Building or the Lot or which are appurtenant thereto; (b) the common pipes, ducts, conduits, wires and appurtenant equipment serving the Premises; and (c) if the Premises include less than the entire rentable area of any floor, the common toilets and other common facilities in the central core area of such floor (collectively, the "Common Areas").. 2.3 Landlord's Reservations ----------------------- Landlord reserves the right from time to time without unreasonable interference with Tenant's use: (a) to install, repair, replace, use, maintain and relocate for service to the Premises and to other parts of the Building, pipes, ducts, conduits, wires and appurtenant fixtures wherever located in the Building, and (b) to alter or relocate any other common facility, provided that the substitutions are substantially equivalent or better. Installations, replacements and relocations referred to in this Section 2.3 shall be located to the extent possible in the central core area, above ceiling surfaces, below floor surfaces or within the perimeter walls of the premises. 2.4 Term ---- To have and to hold for a period commencing on the Term Commencement Date determined in accordance with Section 3.2, and continuing for the Term unless sooner terminated as provided in Section 3.2, 7.1 or Article IX. Each party on the request of the other shall execute and deliver to the other an agreement setting forth the Term Commencement Date, the expiration of the Term of the Lease, and the dates on which Tenant's notice(s) of extension shall be given. ARTICLE III ----------- 3.1 Initial Construction -------------------- It is acknowledged that Landlord's architects have prepared preliminary line drawings and a brief specification showing the location of partitions, doors, lighting, switches and electrical outlets ("Tenant's Preliminary Plans") which are attached hereto as Exhibit B Tenant's Preliminary Plans shall become the basis for the development of Tenant's Final Plans. Within fifteen (15) business days after execution of the Lease, Landlord, at Landlord's expense shall prepare and deliver to Tenant two complete sets of construction drawings and specifications based upon Tenant's Preliminary Plans ("Tenant's Final Plans"). Tenant shall be responsible for any further engineering, design or construction costs ("TIW Excess Costs") incurred by Landlord as a result of any redesign or modification made to Tenant's Final Plans as requested by Tenant. With the delivery of any revised Tenant's Final Plans, Landlord shall deliver to Tenant an estimate of the TIW Excess Costs. Landlord, at Landlord's expense exclusive of TIW Excess Costs , shall cause its contractor to perform in the Premises and complete ready for Tenant's occupancy all work shown on Tenant's Final Plans ("Landlord's Work"). De minimis changes to Tenant's Final Plans due to site conditions may be made without Tenant's consent. Otherwise, all changes to Tenant's Final Plans shall be subject to Tenant's approval, which approval shall not be unreasonably withheld or delayed. The TIW Excess Costs shown on revised Tenant's Final Plans shall be borne by Tenant and paid to Landlord upon completion of Landlord's Work. All of Tenant's installation of furnishings shall be coordinated with any work being performed by Landlord and in such manner as to maintain harmonious labor relations and not damage the Building or Lot or interfere with Building operations. Space planning services and architectural and engineering services required for preparation of Tenant's Final Plans and construction drawings and specifications and any changes therein shall be performed by Landlord's architects and engineers and the costs thereof paid by Landlord All of Landlord's Work shall be part of the Building. Any revisions to Tenant's Final Plans not otherwise shown on Tenant's Final Plans shall be made at the expense of Tenant. Notwithstanding the foregoing to the contrary, Landlord shall contribute up to a maximum of Two Thousand Five Hundred ( $2500) Dollars to be applied toward an upgrade to the Building Standard floorcovering/carpet. 3.2 Preparation of Premises for Occupancy ------------------------------------- Landlord agrees to use reasonable efforts to have the Term Commencement Date occur on or before the Scheduled Term Commencement Date. The Term Commencement Date shall be the date on which all of the following conditions (the "Delivery Conditions") shall have been satisfied: (i) the Premises have been completed in accordance with Tenant's Final Plans and a Certificate of Occupancy has been issued for the Premises (ii) all Building entrances and lobby areas have been completed with all lighting, painting and carpeting installed, (iii) all common facilities for access and service to the Premises including, without limitation, all elevators, loading facilities and parking areas having been paved and striped and have been fully completed in accordance with Tenant's Final Plans and all applicable laws, (iv) the Building and Premises, including the Building exits, bathrooms and fire alarms are delivered in compliance with federal, state and local laws, codes, rules and regulations including the Americans with Disabilities Act then in effect at the time of the Term Commencement Date ("Laws") as such relate to the structure of the Building except for minor items of work and mechanical adjustment of equipment or items ("punchlist items") which because of season or weather or nature of the item cannot practically be done at the time and are not necessary to make the Premises reasonably tenantable for the Permitted Uses, or are not completed due to delays caused by requests made by Tenant for further changes to Tenant's Final Plans. If Tenant elects to occupy the Premises (for purposes other than preparing the Premises for occupancy) prior to the satisfaction of all of the Delivery Conditions, then the date of occupancy shall be the Term Commencement Date. Landlord shall complete as soon as conditions practically permit all items and work excepted above and Tenant shall not use the Premises in such manner as to increase the cost of completion. Any so-called punchlist items shall be completed by Landlord within forty-five (45) days following the Term Commencement Date. Landlord shall permit Tenant access for installing equipment and furnishings in the Premises prior to the Term Commencement Date when and if it can be done without material interference with remaining work. 3.3 Tenant Changes and Additions ---------------------------- Tenant may not make structural or nonstructural changes and additions to the Premises without the prior written consent and approval of the Landlord. Tenant shall submit plans and specifications showing the requested changes or additions, which plans and specifications shall be first approved by Landlord. Landlord will not approve any such changes or additions if they will require unusual expense to readapt the Premises to normal office use on lease termination or will increase the cost of insurance or taxes on the Building or of Landlord's services called for by Section 5.1, unless Tenant is willing to bear such cost increase. All such changes and additions shall become part of the Building except for Tenant's trade fixtures, business equipment and business furnishings. All of Tenant's changes and additions and installation of furnishings shall be coordinated with any work being performed by Landlord and in such a manner as to maintain harmonious labor relations and not to damage the Building or Lot or interfere with Building operation and, except for installation of furnishings, shall be performed by a reputable licensed general contractor., If Landlord's contractor is not used then the identity of the contractor performing the approved work shall be subject to the reasonable consent of Landlord, which shall not be delayed more than ten (10) business days. Before Tenant's work is started and whether or not Landlord's consent is required, Tenant shall secure all licenses and permits necessary therefor; deliver to Landlord a statement of the names of all its contractors and subcontractors and the estimated cost of all labor and material to be furnished by them and cause each contractor to carry workmen's compensation insurance in statutory amounts covering all of their employees and comprehensive public liability insurance with such limits reasonably satisfactory to Landlord (all such insurance to be written insuring Landlord and Tenant as well as the contractors), and to deliver to Landlord certificates of all such insurance. Tenant agrees to pay promptly when due the entire cost of any work done on the Premises by Tenant, its agent, employees, or independent contractors, and not to cause or permit any liens for labor or materials performed or furnished in connection therewith to attach to the Premises and to discharge any such liens which may so attach. 3.4 General Provisions Applicable to Construction --------------------------------------------- All construction work required or permitted by this Lease, whether by Landlord or by Tenant, shall be done in a good and workmanlike manner and in compliance with all applicable laws and all lawful ordinances, regulations and orders of governmental authority and insurers of the Building. Either party may inspect the work of the other at reasonable times, and shall promptly give notice of observed defects. Landlord's obligations under Section 3.1 shall be deemed to have been performed when Tenant commences to occupy the Premises for the Permitted Uses except for (i)latent defects, (ii) incomplete items, and (iii) items not conforming with the requirements of Section 3.1 which Tenant has given notice to Landlord within 30 days after the Term Commencement Date. With respect to the heating, ventilation and air conditioning system, the 30- day period shall begin with the commencement of the respective heating or air conditioning season. Landlord's obligations for completion of Landlord's Work shall be deemed to have been completed when the Delivery Conditions have occurred except for (A) Landlord's obligation to correct latent defects which shall continue until the later of one (1) year from the Term Commencement Date or the time of expiration of Landlord's right to enforce warranty rights against the General Contractor with respect to any particular defect and (B) Landlord's obligation to complete so called punchlist items as soon as practical. 3.5 Construction Representatives ---------------------------- In connection with the original design and construction, each party authorizes the other to rely upon approval and other actions on the party's behalf by any Construction Representative of the party named in Article I above or any person hereafter designated in substitution or addition by notice to the party relying. ARTICLE IV ---------- RENT 4.1 The Fixed Rent -------------- Tenant agrees to pay, without any offset or deduction whatever except as made in accordance with the provisions of this Lease, commencing on the Term Commencement Date, fixed rent to Landlord, at the Annual Fixed Rent Rate, in equal installments of 1/12th of the Annual Fixed Rent Rate in advance on the first day of each calendar month included in the Term; and for any portion of a calendar month at the beginning or end of the Term, proportionately at that rate payable in advance for such portion. 4.2 Operating Expenses Including Real Estate Taxes ---------------------------------------------- Commencing on January 1, 2001, Tenant shall pay to Landlord as additional rent, Tenant's Proportionate Share of the excess (the "Operating Expenses Excess"), if any, of Landlord's Operating Expenses as defined below in this Section 4.2 over Landlord's Operating Expenses for the Base Year. The Base Year for the purposes of this Section 4.2 shall be calendar year 2000. If the Building is not at least 90% occupied during the entire Base Year or if Landlord is not supplying services to at least 90% of the Total Rentable Floor Area of the Building at any time during the Base Year, Operating Expenses for the Base Year shall be determined as if the Building had been 90% occupied and Landlord had been supplying services to at least 90% of the Total Rentable Floor Area of the Building. Not later than 90 days after the end of each calendar year during the Term and not later than 90 days after Lease termination, Landlord shall render to Tenant an unaudited statement in reasonable detail and according to generally accepted accounting principles showing the actual Operating Expenses incurred in the operation of the Building during the preceding year. For purposes of this Lease, Operating Expenses shall include such competitively priced fringe benefits as are customarily paid to third parties providing similar services in the vicinity of the Building, workmen's compensation insurance premiums and payroll taxes paid by Landlord to, for or with respect to all persons engaged on-site in the operation, maintenance, or cleaning of the Building or Lot provided that Operating Expenses shall only include the share of personnel expenses allocable to the time such individuals are actually performing their duties at the Building; steam, water, sewer, electric, gas and telephone charges supplied to common areas; costs of building and cleaning supplies and equipment, cost of maintenance, cleaning and repairs (other than repairs not properly chargeable against income or for which Landlord has received reimbursement from contractors under guaranties); cost of snow removal and care of landscaping; payments under service contracts with independent contractors; commercially reasonable management fees; and all other reasonable and necessary expenses paid in connection with the operation, cleaning, and maintenance of the Building and Lot and properly chargeable against income. The manager of the Building shall not be required to carry errors and omissions insurance. In no event shall Tenant's share of Operating Expenses include: the cost of initial construction of, or of any additions or expansions to, the Building or the common area, or any other item which under generally accepted accounting principles is properly classified as a capital expenditure; the cost of correcting defects in the original construction of the Building, reserves for future expenditures not yet incurred; costs attributable to repairing items that are covered by warranties; any charges for depreciation of the Building or otherwise; services billed directly to tenants., charges for which Landlord receives or is entitled to receive reimbursement from insurance proceeds or from another third party; any judgment, settlement or arbitration award resulting from any tort liability; principal, interest and other charges payable in connection with any debt; negotiations or disputes with tenants or prospective tenants; payments to subsidiaries or affiliates of Landlord for services rendered to the Building to the extent such amounts exceed competitive costs therefor if not provided by such related parties; efforts to lease portions of the Building or to secure new tenants for the Building including advertising expenses, leasing fees or commissions, attorneys' fees and other professional fees; environmental remediation and compliance excluding testing or other activities required routinely or as required by law for a nonhazardous event, any breach or violation of law, lease or other obligation by Landlord or Landlord's employees, agents or contractors, including fines, penalties and attorneys' fees: and improvements, alterations and repairs and replacements necessary to bring the Building into compliance with laws existing as of the Term Commencement Date, including the Americans with Disabilities Act of 1990 ( 42USC 12101, et seq., as amended from time to time) as it relates to the structure of the Building (it being understood that all issues of compliance which relate to Tenant's specific use of the Premises are the sole responsibility and expense of Tenant) Landlord agrees to maintain all Common Areas in good order, condition and repair and in a safe, clean and sanitary condition in accordance with good and accepted first-class office building practices. In addition, commencing on the first day after the Tax Base Year, Tenant shall pay to Landlord Tenant's Proportionate Share of any increases in Real Estate Taxes incurred over and above those Real Estate Taxes assessed in the Tax Base Year ("Tax Excess"). For purposes of this Lease, Tax Base Year shall be those taxes assessed in the later of tax fiscal year 2000 (e.g. July 1, 1999 - - June 30, 2000) or the first tax fiscal year in which the Building is fully assessed as a completed improvement. Real Estate Taxes shall include real estate taxes and other taxes, levies, and assessments imposed upon the Building and the Lot and upon any personal property of Landlord used in the operation thereof, or Landlord's interest in the Building, fees and assessments for transit, housing, police, fire, or other governmental services which benefit the Building, service or user payments in lieu of taxes, and any and all other taxes, levies, betterments, assessments and charges arising from the ownership, leasing, operation, or use of the Building which are or shall be imposed by National, State, or Municipal or other authorities. In the event any special assessments are assessed and payable, Tenant's Proportionate Share of same shall be calculated as if such assessments were being paid by Landlord over the longest period of time permitted by applicable law. In no event shall Tenant be responsible to pay any rent, taxes, gross receipt taxes, franchise taxes, capital stock taxes, inheritance, estate, succession, transfer, gift or other tax, which is measured in any manner by the income or profit of Landlord or any portion of any special assessment first assessed prior to the Term Commencement Date. For purposes of this Lease, Tenant's Proportionate Share shall be the fraction, expressed as a percent, the numerator of which shall be the Rentable Floor Area of Tenant's Space and the denominator of which shall be the Total Rentable Floor Area of the Building. Initially Tenant's Proportionate Share is 34.6 percent. 4.3 Lot --- "Lot" means all, and also any parts of, the land described in Exhibit F plus any addition thereto resulting from the change of any abutting street line. Landlord represents and warrants that the Lot is a separate taxable parcel and that the Building is the only building located on the Lot. 4.4 Accounting ---------- Landlord shall have the right from time to time to change the periods of accounting under Section 4.2 to any twelve (12) months period other than a calendar year, and upon any such change, all items referred to in said Section 4.2 shall be appropriately apportioned. In all statements rendered under Section 4.2 amounts for periods partially within and partially without the accounting periods shall be appropriately apportioned; and any items which are not determinable at the time of a statement shall be included therein on the basis of Landlord's cost for such items in the prior period and with respect thereto Landlord shall render promptly after determination a supplemental statement and appropriate adjustment shall be made according thereto. In the event of any deficiency, Tenant shall pay same within thirty (30) days after receipt of Landlord's invoice. In the event of any overpayment by Tenant, Tenant shall have the right to credit such overpayment against installments of rent next becoming due or a refund if at the end of the Term. All statements shall be prepared on an accrual basis of accounting. 4.5 Payment of Additional Rent -------------------------- Except as otherwise specifically provided herein any sum, amount, item or charge designated or considered as additional rent in this Lease shall be paid by Tenant to Landlord on the first day of the month following the date on which Landlord notifies Tenant of the amount payable, or on the fifteenth day after the giving of such notice, whichever shall be later. Any such notice shall specify in reasonable detail the basis of such additional rent. On the first day of each month following that month in which notice of additional rent is given, Tenant shall pay to Landlord one-twelfth (1/12) of the amount of additional rent which shall be payable by the Tenant for the then current year based on actual cost experience for the prior period. ARTICLE V --------- LANDLORD'S COVENANTS; RE INTERRUPTIONS AND DELAYS, SERVICES, REPAIRS, QUIET ENJOYMENT 5.1 Landlord's Covenants -------------------- Landlord covenants: 5.1.1 to furnish, through Landlord's employees or independent contractors, the services listed in Exhibit C. 5.1.2 to furnish, through Landlord's employees or independent contractors, reasonable additional building operation services upon reasonable advance request of Tenant at equitable rates from time to time established by Landlord to be paid by Tenant. 5.1.3 except as otherwise provided in Article VII, to keep, maintain and repair and replace, as required, the roof, exterior walls and glass, floor slabs and all structural components of the Building, and all HVAC, electrical and other mechanical systems, plumbing and utility lines that do not serve the Premises exclusively, whether located within or outside of the Premises, and Common Areas and facilities of the Building as may be necessary to keep them in first class condition. 5.1.4 that Landlord has the right to make this Lease and that Tenant on paying the rent and performing its obligations in this Lease shall peacefully and quietly have, hold and enjoy the Premises throughout the term, subject to all terms and provisions hereof without any interruption or disturbance from Landlord or those claiming by, through or under Landlord. 5.1.5 to carry throughout the term of this Lease a policy of insurance on the Building, its furniture, fixtures and other equipment insuring against all risks of physical loss or damage under an All Risk coverage endorsement in an amount at least equal to the full replacement value of the property insured with an agreed amount endorsement sufficient to satisfy co- insurance requirements. 5.1.6 to provide electricity, heating, ventilation, air conditioning, security, building access and elevator services and other building services during normal Building hours which shall be from 6:30 a.m. to 8:00 p.m. Monday through Friday, necessary for the use and enjoyment of the Premises by Tenant There shall be 24 hour per day, 7 day per week card access to the Building and key access to the Premises. Janitorial services will not be provided on Saturdays. Services requested by Tenant in excess of those provided during normal Building hours shall be paid for by Tenant. 5.2 Interruptions ------------- Landlord shall not be liable to Tenant for any compensation or reduction of rent by reason of inconvenience or annoyance or for loss of business arising from power losses and shortages, the necessity of Landlord's entering the Premises for any of the purposes in this Lease authorized or for repairing the premises or any portion of the Building or Lot however the necessity may occur (collectively "Interruption") provided that Landlord uses reasonable efforts not to interfere unreasonably with Tenant's occupancy of the Premises. In case Landlord is prevented or delayed from making any repairs, alterations or improvements, or furnishing any services or performing any other covenant or duty to be performed on Landlord's part, by reason of any cause reasonable beyond Landlord's control including without limitation the causes set forth in Section 13.15 hereof as being reasonable beyond Landlord's control, Landlord shall not be liable to Tenant therefor, nor, except as expressly otherwise provided in Section 7.1, shall Tenant be entitled to any abatement or reduction of rent by reason thereof, nor shall the same given rise to a claim in Tenant's favor that such failure constitutes actual or constructive, total or partial, eviction from the Premises. Landlord reserves the right to stop any service or utility system, when necessary by reason of accident or emergency, or until necessary repairs have been completed, provided, however, that in each instance of stoppage, Landlord shall exercise reasonable diligence to eliminate the cause thereof. Except in case of emergency repairs, Landlord will give Tenant reasonable advance notice of any contemplated stoppage and will use reasonable efforts to avoid unnecessary inconvenience to Tenant by reason thereof. ARTICLE VI ---------- TENANT'S COVENANTS 6.1 Tenant's Covenants ------------------ Tenant covenants during the Term and such further time as Tenant occupies any part of the Premises: 6.1.1 to pay when due all fixed rent and additional rent, all taxes which may be imposed on Tenant's personal property on the Premises (including without limitation, Tenant's fixtures and equipment) regardless to whomever assessed and all charges or public utilities for telephone and service inspections therefor, all charges by public utilities for installation of metering devices at the Premises and all charges of Landlord for services rendered pursuant to Section 6.1.5. It shall be Tenant's responsibility to pay for its own electrical usage in the Premises for lighting and plugs initially estimated at $.80 per year per square foot. In no event shall Tenant pay more to Landlord for utility service than Tenant would pay to the utility company providing such service if Tenant were directly and separately metered by the utility company. 6.1.2 except as otherwise provided in Article VII and Section 5 hereof, to keep the Premises in as good order, repair and condition as exists on the Commencement Date, reasonable wear and damage by fire and casualty only excepted, and at the expiration or termination of this Lease peaceably to yield up the Premises and all changes and additions therein (except if Landlord and Tenant agree otherwise at the time Landlord consented to such changes and additions) in such order, repair and condition, first removing all goods, effects, and fixtures of Tenant, and repairing all damage caused by such removal and restoring the Premises leaving them clean and neat; 6.1.3 not to injure or deface the Premises, Building or Lot, nor to permit in the Premises any auction sale, or nuisance, or the emission from the Premises of any objectionable noise or odor, nor to use or devote the Premises or any part thereof for any purpose other than the Permitted Uses, nor any use thereof which is improper, offensive, disruptive, contrary to law or ordinance, or liable to invalidate or increase the premiums for any insurance on the Building or its contents or liable to render necessary any alteration or addition to the Building; 6.1.4 not to obstruct in any manner any portion of the Building not hereby leased or any portion thereof or of the Lot used by Tenant in common with others; nor permit the painting or placing of any signs or the placing of any curtains blinds, shades, awnings, aerials or flagpoles, or the like, visible from outside the Premises; and to comply with the Rules and Regulations set forth in Exhibit E and all other reasonable Rules and Regulations hereafter made by the Landlord, of which Tenant has been given notice, for the use of the Building and Lot and their facilities and approaches,; provided Landlord uses good faith to uniformly enforce such Rules and Regulations: Landlord shall not be liable to Tenant for the failure of other tenants of the Building to conform to such Rules and Regulations; 6.1.5 to keep the Premises equipped with all safety appliances required by law or ordinance or any other regulation of any public authority because of any use made by Tenant other than normal office use, and to procure all licenses and permits so required because of such other use and, if requested by Landlord, to do any work so required because of such use, it being understood that the foregoing provisions shall not be construed to broaden in any way Tenant's Permitted Uses; 6.1.6 to defend, save harmless, and indemnify Landlord from any liability or injury, loss, accident or damage to any person or property, and from any claims, actions, proceedings and expenses and costs in connection therewith (including without limitation reasonable counsel fees), (i) arising from any negligent act or omission, or other misconduct of Tenant or its agents, employees, contractors, invites or those claiming by through or under Tenant or from any use made or thing done or occurring on the Premises, the Building or the Lot by Tenant or its agents, employees, contractors, invites or those claiming by through or under Tenant to the extent not due to the negligence of Landlord or (ii) resulting from the failure of Tenant to perform and discharge its covenants and obligations under this Lease; 6.1.7 to maintain public liability insurance in the Premises in the amounts which shall, at the beginning of the Term, be at least equal to the limits set forth in Section 1.1, and, from time to time during the Term shall be for such higher limits, if any, as are customarily carried in the area in which the Premises are located on property similar to the Premises and used for similar purposes and to furnish Landlord with the certificates thereof; said insurance certificates shall name Landlord as an additional insured party and shall not be canceled unless ten (10) days prior written notice of said cancellation has been given to Landlord; 6.1.8 to keep all Tenant's employees working in the Premises covered by workmen's compensation insurance in statutory amounts and to furnish Landlord with certificates thereof; 6.1.9 to permit Landlord and Landlord's agents to examine the Premises at reasonable times and, if Landlord shall so elect, to make any repairs or replacements Landlord may deem necessary to avert an emergency, to remove, at Tenant's expense, any changes, additions, signs, curtains, blinds, shades, awnings, aerials, flagpoles, or the like, (except Permitted Alterations) not consented to in writing, and to show the Premises to prospective tenants during the six (6) months preceding expiration of the Term and to prospective purchasers and mortgagees at all reasonable times upon reasonable appointment with Tenant. Landlord's entry to the Premises shall be upon reasonable prior notice (except in cases of emergency) and any entry or work done in the Premises shall be performed in a manner which minimizes interference with Tenant's use and occupancy of the Premises; 6.1.10 not to place a load upon the Premises in excess of that permitted exceeding the permitted pounds of live load per square foot of floor area; and not to move any safe, vault or other heavy equipment in, about or out of the Premises except in such manner and at such times as Landlord shall in each instance authorize; Tenant's business machines and mechanical equipment which cause vibration or noise that may be transmitted to the Building structure or to any other leased space in the Building shall be placed and maintained by Tenant in settings of cork, rubber, spring, or other type of vibration eliminators sufficient to eliminate such vibration or noise; 6.1.11 all the furnishings, fixtures, equipment, effects and property of every kind, nature and description of Tenant and of all persons claiming by, through or under Tenant which, during the continuance of this Lease or any occupancy of the Premises by Tenant or anyone claiming under Tenant, may be on the Premises or elsewhere in the Building, shall be at the sole risk and hazard of Tenant, and if the whole or any part thereof shall be destroyed or damaged by fire, water or otherwise, or by leakage or bursting of water pipes, steam pipes, or other pipes, by theft or from any other cause, no part of said loss or damage is to be charged to or to be borne by Landlord. 6.1.12 not to suffer or permit any liens to stand against the Premises by reason of work, labor services or materials done for or at the request of Tenant. Tenant shall cause any such liens to be discharged within thirty days after Tenant receives notice thereof. 6.1.13 not to store or use on the Premises or permit the storage or use on the Premises, any chemicals that are considered hazardous by the United States Environmental Protection Agency, except in compliance with applicable law, unless the Tenant has the proper license and permits. Tenant further agrees that all chemicals stored on the Premises will be stored within the Premises and that no chemicals will be stored outside the Building. In the event any chemicals used by Tenant shall spill or leak outside the Premises they shall be removed immediately in an approved manner. In the event of an environmental contamination as a result of Tenant's operations on the Premises, Tenant will indemnify and hold harmless the Landlord for any and all liability, including all costs, attorneys' fees and penalties incurred in the preparation of environmental studies, the preparation of remediation plan and implementation of cleanup. Tenant represents that it will not store or use any chemicals which are not permitted to be stored or used in the Commonwealth of Massachusetts. ARTICLE VII ----------- CASUALTY AND TAKING ------------------- 7.1 Casualty and Taking ------------------- In case during the Term all or any substantial part of the Premises, the Building or the Lot are damaged materially by fire or other casualty or by action of public or other authority in consequence thereof, or are taken by eminent domain or Landlord receives compensable damage by reason of anything lawfully done on pursuance of public or other lawful authority, this Lease shall terminate at Landlord's election, provided Landlord terminates all other leases in the Building, which may be made notwithstanding Landlord's entire interest may be divested, by notice given to Tenant within 60 days after the occurrence of the event giving rise to the election to terminate which notice shall specify the effective date of termination, or if Landlord does not elect to so terminate, which notice shall contain Landlord's nonbinding estimate of the time needed to put the Premises or such remainder in as good or better condition than existed immediately prior to such fire, other casualty or taking. In case of a taking of part of the Premises, if the remainder is insufficient for use for Tenant's purposes, and Landlord receives written notice thereof signed by Tenant, or in the case of casualty or taking if the time needed to do the construction work necessary to put the Premises or such remainder in as good or better condition than existed immediately prior to such fire, other casualty or is reasonably estimated by the Landlord to exceed six months, or if Landlord's restoration work is not actually completed within six (6) months from the date of casualty or taking Tenant may terminate this Lease by notice given to Landlord within 30 days after receipt of Landlord's notice, which notice by Tenant shall specify the effective date of termination. The effective date of termination specified either by Landlord or Tenant shall be not less than 15 nor more than 30 days after the date of notice of such termination. If in any case the Premises are rendered unfit for use and occupation and the Lease is not so terminated, Landlord shall use due diligence (following the expiration of all periods in which either party may terminate this Lease pursuant to the foregoing provisions of this Section 7.1) to restore the Premises, or in case of taking what may remain thereof (excluding any items installed or paid for by Tenant which Tenant may be required to remove pursuant to Section 3.1 or 3.3), to the condition of the Premises immediately prior to the casualty or taking and a just proportion of the fixed rent and additional rent according to the nature and extent of the injury shall be abated from the date of casualty or taking until the Premises or such remainder shall have been restored by Landlord and in case of a taking which permanently reduces the area of the Premises, a just proportion of the fixed rent and additional rent shall be abated for the remainder of the Term. 7.2 Reservation of Award -------------------- Landlord reserves to itself any and all rights to receive awards made for damages to the Premises and Building and Lot and the leasehold hereby created, or any one or more of them, accruing by reason of exercise of eminent domain or by reason of anything lawfully done in pursuance of public or other lawful authority. Tenant hereby releases and assigns to Landlord all Tenant's rights to such awards, and covenants to deliver such further assignments and assurances thereof as Landlord may from time to time request hereby. It is agreed and understood, however, that Landlord does not reserve to itself, and Tenant does not assign to Landlord, any damages payable for (i) movable trade fixtures installed by Tenant or anybody claiming under Tenant at its own expense or fixtures or items the removal of which is required or permitted by any agreement given pursuant to Section 3.1. or 3.3, or (ii) relocation expenses recoverable by Tenant from such authority in a separate action. 7.3 Temporary Taking ---------------- If the temporary use of the whole or any part of the Premises shall be taken at any time during the Term for any public or quasi-public purpose by any lawful power or authority, by the exercise of the right of condemnation or eminent domain, or by agreement between Tenant and those authorized to exercise such right, the term of this Lease shall not be reduced or affected in any way and Tenant shall continue to pay in full the fixed rent, additional rent and other sum or sums of money and charges herein reserved and provided to be paid by Tenant and, subject to the other provisions of this Section 7.3 and except as hereinafter provided, Tenant shall be entitled to receive any award or payment for such use and Landlord and Tenant shall join in a single action for the recovery of such award or payment. If such taking is for a period extending beyond the Term and if any award or payment made for such use is made in a lump sum, such award or payment shall be apportioned between Landlord and Tenant as of the date of expiration of the Term. If such taking results in changes or alterations in the Premises which would necessitate an expenditure, after repossession, to restore it to its former condition and such award or payment includes an amount (whether or not specified) to compensate for such expenditures and is made prior to the expiration of the Term of this Lease, then the amount of such award or payment specified as compensation for the expenses of such restoration or, if no such amount is specified, such portion of such award or payment as is sufficient, in the reasonable opinion of Landlord, to cover such expenses, shall be paid to Landlord in trust. If possession of the Premises shall revert to Tenant prior to the expiration date of the Term, Tenant shall restore the Premises as aforesaid and in all other respects indemnify and save harmless Landlord from the effects of such taking so that the Premises in every respect shall upon completion of such restoration be the same as though no such taking had occurred, and upon completion of such restoration the portion, if any, of the award or payment deposited with Landlord pursuant to this Section 7.3 shall be paid over to Tenant, but if Tenant shall not restore the Premises and indemnify Landlord, said sum so deposited shall be applied by Landlord toward Landlord's damages occasioned by Tenant's such default, and if possession of the Premises shall revert to Landlord after the expiration of the term of this Lease, Landlord shall pay over said sum so deposited itself absolutely and without apportionment. If the lump sum or payment in question is made on or after the expiration of the Term then the amount of such award or payment specified, such portion of such award or payment as is sufficient to cover such expenses, shall be paid to and retained by Landlord absolutely and Tenant shall thereupon be excused from any obligation to restore the Premises upon the termination of such temporary taking, except that any obligation that may have accrued for Tenant to restore the Premises prior to the commencement of said temporary taking shall continue to be the obligation of Tenant. ARTICLE VIII ------------ RIGHTS OF MORTGAGEE 8.1 Superiority of Lease -------------------- This Lease and all rights of Tenant hereunder are and will remain subject and subordinate to any mortgage given by Landlord to any mortgagee including any future mortgages, deeds of trust and other instruments in nature of a mortgage, now or hereafter given and by extensions, modifications and renewals thereof. Tenant shall, promptly upon demand, at any time, execute, acknowledge and deliver to Landlord any and all commercially reasonable instruments necessary to indicate that this Lease and all Tenant's rights hereunder are subordinate to the lien of any such mortgage, deeds of trust and other instruments in nature of a mortgage, now or hereafter given and by extensions, modifications and renewals thereof. If Tenant fails to so execute, acknowledge, and deliver any such subordination instrument, the Landlord may sign the same as Tenant's attorney in fact and Tenant hereby nominates, constitutes and appoints Landlord as Tenant's proper legal attorney in fact for such purposes. If notified by any entity that it holds a mortgage, Tenant shall give the holder the same notices of default as it is required to give Landlord under this Lease. Either party on written request of the other, shall within fifteen (15) days of demand thereof, furnish a written statement or estoppel certificate to the other, of any factual matter pertaining to this Lease, to the best of such parties knowledge.. Landlord agrees to use reasonable efforts to obtain a Non Disturbance Agreement from the holder of any mortgage or deed of trust or lessor under any ground lease superior in title to Tenant. 8.2 Implementation -------------- Tenant agrees promptly on request of Landlord to execute and deliver from time to time any commercially reasonable agreement which may reasonably be deemed necessary to implement the provisions of this Article VIII. ARTICLE IX ---------- DEFAULTS 9.1 Events of Default ----------------- If at any time during the term of this Lease any one or more of the following events ("Default of Tenant") shall happen: A. Tenant shall fail to pay the Fixed Rent or any Additional Rent or other charge when due and such failure shall continue for ten (10) days after written notice to Tenant from Landlord, B. If Tenant shall neglect or fail to perform or observe any other covenant herein contained and Tenant shall fail to remedy the same within thirty (30) days after notice to Tenant specifying such neglect or failure, or if such failure is of such a nature that Tenant cannot reasonably remedy the same within such thirty (30) days period, Tenant shall fail to commence promptly to remedy the same and to prosecute such remedy to completion with diligence; C. Intentionally Omitted. D. If a petition is filed by Tenant or any guarantor of Tenant for adjudication as a bankrupt, or for reorganization or an arrangement under any provision of the Bankruptcy Act as then in force and effect, or E. If an involuntary petition under any of the provisions of said Bankruptcy Act is filed against Tenant or any guarantor of Tenant and such involuntary petition is not dismissed within sixty (60) thereafter, then, and in any of such Default of Tenant , Landlord and the agent and servants of Landlord lawfully may, in addition to and not in derogation of any remedies for any preceding breach of covenant, immediately or at any time thereafter and without demand or notice and with or without process of law (forcibly, if necessary) enter into and upon the Premises or any part thereof in the name of the whole or mail a notice of termination addressed to Tenant at the Premises, and repossess same as of Landlord's former estate and expel Tenant and those claiming through or under Tenant and remove its and the effects (forcibly, if necessary) without being deemed guilty any manner of trespass and without prejudice to any remedies which might otherwise be used for arrears of rent or prior breach of covenant and upon such entry or mailing as aforesaid this Lease shall terminate. 9.2 Tenant's Obligations After Termination -------------------------------------- In the event that this Lease is terminated under any of the provisions contained in Section 9.1 or shall be otherwise terminated for breach of any obligation of Tenant, Tenant covenants as an additional and cumulative obligation after any such ending to pay punctually to Landlord all the sums and perform all the obligations which Tenant covenants in this Lease to pay and to perform in the same manner and to the same extent and at the same time as if this Lease had not been terminated. In calculating the amounts to be paid by Tenant under the next foregoing covenant Tenant shall be credited with any amount paid to Landlord as compensation provided in this Section 9.2 and also with the net proceeds of any rent obtained by Landlord by reletting the Premises, after deducting all Landlord's reasonable expenses in connection with such reletting, including, without limitation, all repossession costs, brokerage commissions, fees for legal services and expense of preparing the Premises for such reletting, it being agreed by Tenant that Landlord may (i) relet the Premises or any part or parts thereof, for a term or terms which may at Landlord's option be equal to or less than or to exceed the period which would otherwise have constituted the balance of the Term and may grant such concessions and free rent as Landlord in its reasonable judgment considers advisable or necessary to relet the same and (ii) make such alterations, repairs or decorations in the Premises as Landlord in its reasonable judgment considers advisable or necessary to relet the same, and no action of Landlord in accordance with the foregoing or failure to relet or to collect rent under reletting shall operate or be construed to release or reduce Tenant's liability as aforesaid. In the event Landlord terminated this Lease or otherwise reenters the Premises following a Default of Tenant, Landlord shall use reasonable efforts in good faith to relet the Premises for the account of Tenant at the then current market rate and upon such other terms and conditions as are reasonable under the circumstances, and Landlord shall otherwise use its reasonable efforts in good faith to mitigate Tenant's damages. In lieu of any other damages or indemnity and in lieu of full recovery by Landlord of all sums payable under all the foregoing provisions of this Section 9.2, Landlord may by written notice to Tenant, at any time after this Lease is terminated under any of the provisions contained in Section 9.1 or is otherwise terminated for breach of any obligation of Tenant and before such full recovery, elect to recover, and Tenant shall thereupon pay, as liquidated damages, an amount equal to the aggregate of the fixed rent and additional rent accrued and unpaid at the time of termination and less the amount of any recovery by Landlord under the foregoing provisions of this Section 9.2 up to the time of payment of such liquidated damages. Nothing contained in this Lease shall, however, limit or prejudice the right of Landlord to prove for and obtain in proceedings for bankruptcy or insolvency by reason of the termination of this Lease, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, the damages are to be proved, whether or not the amount be greater, equal to, or less than the amount of the loss or damages referred to above. 9.3 Landlord's Default ------------------ Landlord shall not be deemed to be in default hereunder unless its default shall continue for thirty (30) days, or such additional time as is reasonably required to correct its default, provided that Landlord shall, begin such correction within 30 day period and thereafter prosecute the curing of such default to completion with due diligence after written notice thereof has been given by Tenant to Landlord specifying the nature of the alleged default. ARTICLE X --------- RIGHT TO ASSIGN AND SUBLET 10.1 Tenant shall not assign or sublet this Lease without prior consent of Landlord which consent may be withheld at Landlord's sole discretion; no assignment or subletting and no consent of Landlord thereto shall affect the continuing primary liability of Tenant; no consent to any of the foregoing in a specific instance shall operate as a waiver in any subsequent instance; and no assignment shall be binding upon Landlord or any of Landlord's mortgagees, unless Tenant shall deliver to Landlord an instrument in recordable form which contains a covenant of assumption by the assignee running to Landlord and all persons claiming by, through or under Landlord, but the failure or refusal of the assignee to execute such instrument of assumption shall not release or discharge assignee from its liability as Tenant hereunder nor shall execution of such instrument of assumption affect the continuing primary liability of Tenant. 10.2 In the event Tenant desires to assign this Lease in any instance where Landlord's consent is required to such assignment, Tenant shall so notify Landlord. In lieu of consenting to such assignment, Landlord shall have the option to terminate this Lease, provided notice of Landlord's election to terminate the Lease shall be given not later than fifteen (15) days following receipt of Tenant's assignment notice. Upon termination, this Lease shall cease and expire without further liability of the parties. If Landlord fails to respond to Tenant's request for consent to an assignment or sublease within said fifteen (15) day period, Landlord shall be deemed to have consented to such assignment or sublease. 10.3 Notwithstanding the prohibition set forth herein, Landlord shall not unreasonably withhold or delay its consent to an assignment or subletting requested by Tenant, provided that: (i) in Landlord's reasonable judgment the business of the proposed Tenant will not adversely affect the reputation or image of the Building; (ii) the rent to be derived is payable monthly at a fixed rate and not based on the net or gross income or profits derived from such assignee or subtenant; (iii) the proposed assignee or subtenant is a reputable party of financial worth and stability sufficient in the Landlord's sole and reasonable judgement to perform its obligations pursuant to such assignment or sublease and would not impose a greater load upon the Premises and Building Services than is imposed by Tenant; (iv) rental payments pursuant to the assignment or sublease agreement are not less than that being offered by Landlord for similar space in Building under Leases then being or recently negotiated; (vi the proposed assignee or subtenant (nor any person which, directly or indirectly controls, is controlled by, or is under common control with, the proposed assignee and or subtenant) is not then an occupant of any part of the Building and within the prior six (6) months has not had negotiations with the Landlord to lease space in the Building, (vi) Tenant is not then in default beyond applicable notice and cure periods of its obligations under the Lease and (vii) Landlord has been furnished with information sufficient to make a determination as to each of the foregoing requirements. If Landlord, shall withhold such consent, it shall set forth in writing the reasons therefor. 10.4 For the purposes of this Article 10, the following transfers shall not be deemed an assignment or sublease and shall be permitted as of right without the prior consent of Landlord,: any assignment of this Lease, sublease of all or any portion of the Premises or other transfer of Tenant's interests hereunder to any person or entity (a) controlling, controlled by, or under common control with Tenant (b) acquiring all or substantially all of the assets of Tenant or (c) with or into which Tenant merges or consolidates provided that the assignee or subtenant has a financial net work at least equal to that of Tenant as of the Term Commencement Date. ARTICLE XI ---------- OPTION TO EXTEND 11.1 On the conditions which Landlord may waive, at its election, by written notice to Tenant at any time, that Tenant is not in default of its covenants and obligations under the Lease beyond notice and applicable cure periods and Tenant or its permitted assignee un Section 10.4 above, is occupying all of the Premises both as of the time of option exercise and as of the commencement date of the extension term, and the financial condition of Tenant is as good as of the Term Commencement Date, Tenant shall have the option to extend the term of this Lease for one additional five (5) year term ("Extension Term") , such term commencing as of the day after the expiration of the initial term of the Lease. Tenant may exercise such option to extend by giving Landlord written notice on or before the date twelve (12) months prior to the expiration date of the original term of the Lease. Upon the timely giving of such notice, the terms of this Lease shall be automatically extended upon all terms and conditions of this Lease except that the Annual Fixed Rent, Operating Costs in the Base Year and Tax Base during said Extension Term shall be as hereinafter set forth. If Tenant fails to timely give notice, as required, Tenant shall have nor further right to extend the term of this Lease, time being of the essence to this Article 11. 11.2 The Annual Fixed Rent for any Lease Year during the Extension Term shall be the Fair Market Rental Value, as defined herein, as of the commencement of the Extension Term . The Base Year for Operating Cost Expense Excess and Tax Excess shall be adjusted accordingly. Notwithstanding the foregoing to the contrary, in no event, shall the Annual Fixed Rent, charged during the first year of the Extension Term be less than the Annual Fixed Rent and other monies paid by Tenant during the last year of the original Lease Term. 11.3 Notwithstanding the fact that Tenant's exercise of the extension option shall be self executing, once the Annual Fixed Rent has been determined, the parties shall execute a written agreement confirming the same. 11.4 Notwithstanding the provisions of Article 11 to the contrary, Tenant shall have he right to cancel such extension option upon the following circumstances; Tenant gives Landlord a written request ("Tenant's Request) twelve (12) months prior to the expiration of the then current term of the Lease requesting that Landlord advise Tenant in writing of Landlord's reasonable designation of the Fair Market Rental Value ("Landlord's Response") which is due within thirty (30) days of the receipt of Tenant's Request. Tenant gives Landlord written notice ("Tenant's Cancellation Notice") within thirty (30) days after Tenant receives Landlord's Response, advising Landlord that Landlord's designation of Fair Market Rental Value is unacceptable and therefore canceling Tenant's exercise of the option to extend the term of the Lease. Tenant shall have no right to cancel its extension option if Tenant does not timely give Tenant's Request and Tenant's Cancellation Notice, time being of the essence. 11.5 Fair Market Rental Value shall be computed as of the date in question at the then current annual rental charge (i.e. the sum of the base rent plus escalation and other charges), for new leases then currently being negotiated or executed in comparable space located in the MetroWest area. In determining Fair Market Rental Value the following factors among others, shall be taken into account and given effect: size, location of premises, lease term, current operating expense and base tax years, condition of the building and services provided by Landlord. If Tenant disagrees with Landlord's designation of a Fair Market Rental Value, Tenant shall have the right, by written notice given within thirty (30) days after Tenant has been notified of Landlord's designation to submit such Fair Market Rental Value to arbitration. Fair Market Rental Value shall be submitted to arbitration as follows: Fair Market Rental Value shall be determined by impartial arbitrators, one to be chosen by Landlord, and one to be chosen by Tenant, and a third to be selected, if necessary, as provided below. The unanimous written decision of the two first chosen , without selection and participation of a third arbitrator, or otherwise, the written decisions of a majority of three arbitrators chosen and selected as aforesaid, shall be conclusive and binding upon Landlord and Tenant. Landlord and Tenant shall each notify the other of its chosen arbitrator within ten (10) days following the request for arbitration. Unless the two chosen arbitrators are able to reach a unanimous decision within thirty (30) days following their appointment, they shall mutually appoint an impartial arbitrator and render their decisions within thirty (30) days following the appointment of such third arbitrator. Landlord and Tenant shall bear the expense of the third arbitrator equally and shall each pay the expenses of the arbitrator initially appointed by them. Any arbitrator appointed shall be a qualified real estate appraiser having at least five (5) years experience in valuing commercial office property similar to the Building. If the dispute between the parties has not been resolved before the commencement of Tenant's obligation to pay Fixed Annual Rent based upon such Fair Market Rental Value, then Tenant shall pay Annual Fixed Rent and other charges under the Lease in respect of the Premises based upon the then current rent under this Lease. Upon a final resolution, Tenant shall pay any underpayment of rent and other charges to Landlord or Landlord shall refund any overpayment of rent and other charges to Tenant. ARTICLE XII EXPANSION OPTION 12.1 Subject to the then existing renewal or expansion option of other tenants located in the Building, including without limitation, Massachusetts Dental Society, and provided that Tenant is not in default of the Lease beyond notice and applicable cure periods and that Tenant or its permitted assignee in Section 10.4 above is occupying all of the Premises and that the financial conditions of Tenant is as good as of the Term Commencement Date , throughout the Term, Landlord shall, prior to offering the same to any other party , first offer to lease to Tenant any space located on the first floor of the Building which is contiguous to the Premises (the "RFO Space") in an AS IS condition. Landlord's notice (Landlord's Notice) shall be in writing and shall set forth Landlord's designation of the Fair Market Rental Value, as defined in Article 11 above applicable to such RFO Space , the specified commencement date in respect of such RFO Space and the precise location and dimension of the RFO Space. Tenant shall have the right, exercisable upon written notice ("Tenant's Exercise Notice") given to Landlord within twenty (20) days after receipt of Landlord's Notice to lease the RFO Space. Upon the timely giving of such notice, Landlord shall lease to Tenant and Tenant shall lease from Landlord the RFO Space upon all of the terms and conditions as set forth in this Lease except: The Rent Commencement Date in respect of the RFO Space shall be the later of (a) the Specified Commencement Date in respect of the RFO Space as set forth in Landlord's Notice or (b) the date that Landlord delivers such RFO Space to Tenant, free of all tenants, occupants and their property.. The termination date of the RFO Space shall be the termination date of the Lease. Landlord shall not provide to Tenant any allowances (e.g moving allowance, construction allowance, of the like) or other tenant inducements. The Annual Fixed Rental rate shall be the Fair Market Rental Rate, as defined in Article 11. If Tenant elects to lease the RFO Space, Landlord and Tenant shall execute an amendment to the Lease, effective as of the RFO Space Rent Commencement Date which amendment shall reflect the addition of the RFO Premises, the Annual Fixed Rent payable in respect of such RFO Premises, Operating Costs and Tax Base for the RFO Premises. Time is of the essence to the exercise of all rights set forth herein. Tenant's rights under this Article shall terminate if (a) this Lease or Tenant's right to possession of the Premises are terminated or (b) Tenant assigns any of its interest in this Lease or sublets any portion of the Premises, other than permitted assignees under Section 10.4. If Tenant does not elect to lease the RFO Space, Landlord shall be free to lease the RFO Space to any other party provided, however, the terms and conditions of any such lease shall be no more favorable than those set forth in Landlord's Notice. If Landlord fails to consummate such a lease with such prospective tenant, Tenant shall continue to have the right of first offer with respect thereto during the Term. ARTICLE XIII ------------ MISCELLANEOUS 13.1 Titles ------ The titles of the Articles are for convenience only and are not to be considered in construing this Lease. 13.2 Notice of Lease --------------- Upon request of either party both parties shall execute and deliver a notice of this Lease in form appropriate for recording or registration, and provide any documents or instruments of authority required to record or register such notice. 13.3 Consent ------- Except where otherwise provided herein, whenever any approval, consent, authorization or the like by Landlord or Tenant is expressly required by this Lease, the approval, consent, authorization or the like shall not be delayed or withheld unreasonably. 13.4 Notice ------ Whenever any notices, approval, consent, request or election is given or made pursuant to this Lease it shall be in writing. Communications and payments shall be addressed if to Landlord at Landlord's Original Address or at such other address as may have been specified by prior notice to Tenant, and if to Tenant, at Tenant's Original Address or at such other address as may have been specified by prior notice to Landlord, with a copy to Testa, Hurwitz &Thibeault,LLP , 125 High Street, High Street Tower, Boston , Massachusetts 02110 Attn: Real Estate Department. Any communication or notice so addressed shall be deemed duly served if delivered by hand with a written acknowledgement of receipt, mailed by registered or certified mail, return receipt requested, or sent by any recognized express mail delivery service. Notices shall be effective on delivery or tender of delivery. 13.5 Bind and Inure -------------- The obligations of this Lease shall run with the land, and this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the original Landlord named herein and each successive owner of the Premises shall be liable only for the obligations and liabilities accruing and occurring during the period of its ownership. Whenever the Premises are owned by a trustee or trustees, the obligations or Landlord shall be binding upon Landlord's trust estate, but not upon any trustee or beneficiary of the trust individually. 13.6 No Surrender ------------ The delivery of keys to any employee of Landlord or to Landlord's agent or any employee thereof shall not operate as a termination of this Lease or a surrender of the Premises. 13.7 No-Waiver, Etc. --------------- The failure of Landlord or of Tenant to seek redress for violation of, or to insist upon the strict performance of, any covenant or condition of this Lease shall not be deemed a waiver of such violation nor prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. The receipt by Landlord of fixed rent or additional rent with knowledge of breach of any covenant of this Lease shall not be deemed to have waived such breach. No waiver by Landlord, or by Tenant, shall be valid unless such waiver be in writing signed by the Party to be charged. No consent or waiver, express or implied, by Landlord or Tenant to or of any breach of any agreement or duty shall be construed as a waiver or consent to or of any other breach of the same or any other agreement or duty. -32- 13.8 No Accord and Satisfaction -------------------------- No acceptance by Landlord of a lesser sum than the fixed rent and additional rent then due shall be deemed to be other than on account of the earliest installment of such rent due, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such installment or pursue any other remedy in this Lease provided. 13.9 Cumulative Remedies ------------------- The specific remedies to which either party may resort under the terms of this Lease are cumulative and are not intended to be exclusive of any other remedies or means of redress to which it may be lawfully entitled in case of any breach or threatened breach by the other party of any provisions of this Lease. In addition to the other remedies provided in this Lease, each party shall be entitled to the restraint by injunction of the violation or attempted or threatened violation of any of the covenants, conditions or provisions of this Lease or to a decree compelling specific performance of any such covenants, conditions or provisions. 13.10 Partial Invalidity ------------------ If any term of this Lease, or the application thereof to any person or circumstances, shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such term to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each term of this Lease shall be valid and enforceable to the fullest extent permitted by law. 13.11 Landlord's Right to Cure Tenant's Default ----------------------------------------- If Tenant shall at any time default in the performance of any obligation under this Lease, Landlord shall have the right, but shall not be obligated, to enter upon the Premises and to perform such -33- obligation notwithstanding the fact that no specific provisions for such substituted performance by Landlord is made in this Lease with respect to such default. Except in case of emergency, these rights shall be exercised only after 30 days prior written notice from Landlord of his intention to do so and Tenant's failure to cure such default or commence to cure and diligently pursue its completion within said 30 day period. In performing such obligation, Landlord may make any payment of money or perform any other act. All reasonable sums so paid by Landlord (together with interest at the rate of prime plus 1% per annum) and all necessary incidental costs and expenses in connection with the performance of any such act by Landlord, shall be deemed to be additional rent under this Lease and shall be payable to Landlord within 30 days of demand. Landlord may exercise the foregoing rights without waiving any other of its rights or releasing Tenant from any of its obligations under this Lease. 13.12 Estoppel Certificates --------------------- Both parties agree from time to time, upon not less than fifteen (15) days' prior written request by the other party, to execute, acknowledge and deliver to the other party a statement in writing certifying that this Lease is unmodified and in full force and effect and that Tenant has no defenses, offsets or counterclaims against its obligations to pay the fixed rent and additional rent and to perform its other covenants under this Lease and that there are no uncured defaults of Landlord or Tenant under this Lease (or, if there have been any modifications that the same is in full force and effect as modified and stating the modifications and, if there are any defenses, offsets, counterclaims or defaults, setting them forth in reasonable detail), and the dates to which the fixed rent, additional rent and other charges have been paid. Any such statement delivered pursuant to this Section 11.12 may be relied upon by any prospective purchaser or mortgagees of the Premises or any prospective assignee of any mortgage of the Premises. 13.13 Waiver of Subrogation --------------------- Any insurance carried by either party with respect to the Premises, the Building and property therein or occurrences thereon shall, if it can be so written without additional premium, or with an additional premium which the other party agrees to pay, include a clause or endorsement denying to the -34- insurer rights of subrogation against the other party to the extent rights have been waived by the insured prior to occurrence of injury of loss. Each party, notwithstanding any provisions of this Lease to the contrary, hereby waives any rights of recovery against the other for injury or loss due to hazards covered by insurance required to be carried by such party under this Lease containing such clause of endorsement to the extent of the indemnification received thereunder. 13.14 Brokerage --------- Each party represents and warrants that it has dealt with no broker other than CB Richard Ellis, Whittier Partners and Hunneman Commercial Company (the "Brokers") in connection with this transaction and each agrees to defend, indemnify and save the other harmless from and against any and all claims for a commission arising out of this Lease by any broker other than those named herein. Landlord shall be responsible for all fees and commissions due to the Brokers in connection with or arising out of this Lease. 13.15 Inability to Perform -------------------- Except as otherwise expressly provided herein, Landlord's failure to perform the obligations, covenants and agreements herein contained shall be temporarily excused during such period of its inability to so perform by reason of unforeseeable weather conditions, strikes, or labor troubles, conditions of supply and demand, of any other similar or dissimilar cause whatsoever (including , but not limited to governmental preemption in connection with a national emergency or by reason of any rule, order or regulation of any governmental agency or any department or subdivisions thereof); provided, however, that in each such instance of Landlord's inability to perform, Landlord shall exercise due diligence to eliminate the cause of such inability to perform, to secure alternate sources of supply and the like. In no event shall financial inability excuse a party's performance. -35- 13.16 Limitation of Landlord's Liability ---------------------------------- The term "Landlord" as used in the Lease, so far as covenants or obligations to be performed by Landlord are concerned shall be limited to mean and include only the owner or owners of the Building, at the time in question, and in the event of any transfer or transfers of title to said property, Landlord (and in the case of any subsequent transfers or conveyances, the then grantor) shall be concurrently freed and relieved from and after the date of such transfer or conveyance without any further instrument or agreement, of all liability as respects the performance of any of Landlord's covenants or obligations. It is agreed that Landlord's covenants and obligations contained in this Lease shall only be binding on Landlord, its successors and assigns only during and in respect of their respective successive periods of ownership of said leasehold interest or fee, as the case may be. Tenant, its successors and assigns, shall not assert nor seek to enforce any claim for breach of this Lease against any of Landlord's assets other than all available insurance proceeds, Landlord's interest in the Building and in the rents, issue and profits thereof, and Tenant agrees to look solely to such proceeds and interest for the satisfaction of any liability or claim against Landlord under this Lease, it being specifically agreed that in no event whatsoever shall Landlord, (which term shall include, without limitation, any general or limited partner, trustee, beneficiaries, officers, directors, or stockholders of Landlord) ever be personally liable for such liability. 13.17 Construction ------------ This Lease shall be construed in accordance with the laws of the Commonwealth of Massachusetts. 13.18 Security Deposit. ---------------- Concurrent with the execution and delivery of this Lease, Tenant shall deposit the Security Deposit specified in Section 1.1 hereof and Landlord shall hold the same throughout the Term of this Lease as security for the performance by Tenant of all obligations on the part of Tenant hereunder. Subject to the terms of this Lease, Landlord shall have the right from time to time without prejudice to -36- any other remedy Landlord may have on account thereof, to apply such deposit, or any part thereof to Landlord's damage arising from or to cure any default beyond applicable notice and cure periods of Tenant. If Landlord shall so apply any or all of such deposit, Tenant shall promptly deposit with Landlord the amount so applied to be held as security hereunder and any failure on the part of Tenant to so restore the Security Deposit within five (5) days of Landlord's demand shall constitute a default of Tenant under the Lease. Within thirty (30) days after the expiration or earlier termination of the Lease and surrender of possession of the Premises by Tenant, provided that Tenant is not then in default, Landlord shall return the deposit, or so much as shall not have been applied in accordance with the terms of this Section 13.18 or as otherwise required to cure any existing default of Tenant. While Landlord holds such deposit Landlord shall have no obligation to pay interest on the same and shall have the right to commingle the same with Landlord's other funds. If Landlord conveys Landlord's interest under this Lease, the deposit, or any part thereof not previously applied, may be turned over by Landlord to Landlord's grantee, and, if so turned over, Tenant agrees to look solely to such grantee for proper application and return of the deposit. The holder of a mortgage shall not be responsible to Tenant for the return or application of any such deposit, whether or not it succeeds to the position of Landlord hereunder, unless such deposit shall have been received in hand by such holder. 13.19 Entire Agreement ---------------- This Lease sets forth the entire agreement between the parties hereto and cannot be modified or amended except in writing duly executed by both parties. 13.20 Landlord's Representations and Warranties. ----------------------------------------- Landlord represents and warrants that as of the date of this Lease (i) Landlord is solely vested with fee simple title to the Building, and has full right and authority to lease the Premises to the Tenant, (ii) Those persons executing this Lease on Landlord's behalf are duly authorized to execute and deliver this Lease on its behalf, and (iii) the Lease is binding upon Landlord in accordance with its terms. Simultaneously with the execution of this Lease, Landlord shall deliver evidence of such authority to Tenant in form reasonably satisfactory to Tenant. -37- 13.21 Tenant's Representations and Warranties. --------------------------------------- Tenant represents and warrants that as of the date of this Lease (i) Those persons executing this Lease on Tenant's behalf are duly authorized to execute and deliver this Lease on its behalf, and (iii) the Lease is binding upon Tenant in accordance with its terms. Simultaneously with the execution of this Lease, Tenant shall deliver evidence of such authority to Landlord in form reasonably satisfactory to Landlord. EXECUTED as a sealed instrument in two or more counterparts on the day and year first above written. FIRMIN JOINT VENTURE LIMITED RTS SOFTWARE, INC. LIABILITY COMPANY By By: ------------------------------ --------------------------------------- Richard Strehlke, Manager (name) (title) Hereunto Duly Authorized Hereunto Duly Authorized Date Date: ---------------------------- ------------------------------------- -38- M.D.S. BUILDING --------------- EXHIBIT A --------- PLANS SHOWING TENANT'S SPACE ---------------------------- M. D. S. BUILDING ----------------- EXHIBIT B --------- TENANT'S PRELIMINARY PLANS --------------------------- M. D. S. BUILDING ----------------- EXHIBIT C --------- LANDLORD'S SERVICES ------------------- A. A heating system which will keep the entire Premises, other than storage areas and closets, at a temperature between 70 and 72 degrees Fahrenheit, and storage areas and closets at a temperature of not less than 68 degrees Fahrenheit during normal business hours (6:30 a.m. to 8:00 p.m. Monday through Friday.) B. An air-conditioning system for the Building. All areas shall be air- conditioned except janitor's closets and mechanical rooms during normal business hours (6:30 a.m. to 8:00 p.m. Monday through Friday.) C. (1) Overhead fluorescent light fixtures. (2) Replacement of fluorescent tubes and starters as needed. D. Hot and cold water for lavatory and drinking purposes. E. Toilet supplies, including soap, paper or cloth towels, and toilet tissue for lavatories. F. Janitor services in accordance with the following schedule. Entrance Doors: Entrance glass will be cleaned nightly. -------------- Entrance Floor: Entrance floor will be polished nightly. -------------- Broadloom: All carpeted areas will be vacuumed every night. Broadloom will --------- be shampooed upon request, at an additional cost to the Tenant. Wastepaper Containers: Wastepaper containers will be emptied every night; --------------------- plastic liner bags will be provided for wastepaper containers; liners will be changed once a week. G. Water Fountains: All water fountains will be sanitized and polished --------------- nightly. Washrooms: Washrooms will be cleaned and serviced nightly. This will --------- include refilling all paper towel, toilet tissue and soap dispensers; emptying and cleaning all trash containers; cleaning and polishing all stainless steel fixtures; cleaning toilets; washing and sanitizing all wash basins and shelves; cleaning and polishing all mirrors; removing disfigurations such as ink marks, drawings, etc. from all stall partitions and walls; and damp mopping floors nightly. Scuff Marks: All scuff marks will be removed nightly from all scuff ----------- on doors. Tile Floors: All floors will be swept every night with a treated dust ----------- preventable mop. All corridors and office floors will be polished every night. Floors will be stripped wherever necessary. Time of Operation: Services to be performed five nights per week (Monday ----------------- through Friday) after 6:00 p.m. H. Proper care of grounds surrounding the Building, including care of lawns and shrubs and including keeping such grounds neat, clean and free of litter. I. Maintain and keep the sidewalks and parking areas in front of and around the Building; and will promptly remove all snow and ice therefrom to prevent accumulation on walkways and parking area. -42- M. D. S. BUILDING ----------------- EXHIBIT D --------- LIST OF DRAWINGS AND SPECIFICATIONS FOR BASIC BUILDING ------------------------------------------------------ INTENTIONALLY OMITTED --------------------- RULES AND REGULATIONS --------------------- FOR THE ------- M. D. S. BUILDING ----------------- EXHIBIT E --------- 1. Heating, lighting, and plumbing. The Landlord should be notified at once of any trouble with heating, lighting or plumbing fixtures. Tenant will make reasonable efforts not to leave the doors of the Premises unlocked at night. 2. The sidewalks, entries, halls and stairways shall not be obstructed by Tenant or used for any other purpose than for ingress and egress to and from the Premises, and no articles or rubbish shall be left therein. 3. No toilet fixture shall be used for any purpose other than that for which it is intended, and no sweepings, rubbish, rags, ashes or other substances shall be thrown therein; any damage resulting from so doing shall be borne by the Tenant causing it. 4. The weight and position of all safes shall be subject to the approval of the Landlord. 5. Lettering on doors, tablets and building directory shall be subject to the approval of and provided by the Landlord. Any changes or additions to door signs, tablets or directories shall be made by the Landlord at the Tenant's expense. No signs within the suite will be visible from the outside of the building or from the common areas. No lettering shall be allowed on outside windows. 6. No wires for telephone service, electric lights, messenger service or for any other purpose shall be put in the Premises without the consent of the Landlord, not unreasonably withheld or delayed. 7. No glass in doors or elsewhere through which light is admitted into any part of the Building shall be covered, nor such light obstructed. 8. No animals or birds shall be kept in or about the Building. 9. Moving of freight or furniture into or from the Building must be coordinated with Landlord, but special arrangement must be made with the Landlord for the moving of all safes. 10. Nothing shall be thrown or taken from the windows or doors or in the corridors, nor shall anything be left outside the Building on the window sills of the premises. 11. No person shall loiter in the halls, corridors or lavatories. 12. No Tenant shall use any method of heating other than that provided for in the Tenant's lease, without special agreement with the Landlord. 13. No person shall smoke in the common areas, halls, corridors, lavatories, stairwells, or entryways of the building. -45- M. D. S. BUILDING ----------------- EXHIBIT F --------- DESCRIPTION OF LOT ------------------ A certain parcel of land with the buildings thereon situated on the southeasterly side of Willow Street and the southerly side of Firmin Avenue in Southborough, Worcester County, Massachusetts, designated as "Lot Area = 255,387 square feet or 5.863+/- acres" on a plan entitled: "Plan of Land in Southboruogh, Mass. Owned by Charlotte E. Brewer, Leased by: Richard B. Strehlke, October 3, 1984 by MacCarthy & Sullivan Engineering, Inc." which plan is recorded in Plan Book 555, Plan 36 of the Worcester District Registry of Deeds. Said parcel is more particularly bounded and described according to said plan as follows: NORTHEASTELY by Firmin Avenue, 4.18 feet; NORTHERLY by Firmin Avenue, 665.94 feet; EASTERLY by a stone wall six (6) courses measuring respectively 5.18 feet, 9.02 feet, 46.08 feet, 103.99 feet, 20.80 feet and 49.79 feet; SOUTHERLY by land of Consolidated Rail Corporation, 288.79 feet; NORTHEASTERLY by land of said Consolidated Rail Corporation, 17.39 feet: SOUTHERLY by land of said Consolidated Rail Corporation in two courses measuring respectively 367.78 feet and 401.26 feet; WESTERLY by Willow Street in a curved line, 76.32 feet; and NORTHWESTERLY by Willow Street, 450.11 feet. EX-10.16 22 0022.txt INDEMNIFICATION AGREEMENT Exhibit 10.16 ------------- FORM OF DIRECTOR AND OFFICER INDEMNITY AGREEMENT This Indemnification Agreement (the "Agreement"), dated as of __________, between ViryaNet Ltd., an Israeli company (the "Company"), and [insert name of Officer Holder], the [insert position of the Officer Holder] of the Company (the "Indemnitee"). WHEREAS, Indemnitee is a director or officer of the Company; WHEREAS, both the Company and Indemnitee recognize the increased risk of litigation and other claims being asserted against directors and officers of public companies; WHEREAS, the Articles of Association of the Company authorize the Company to indemnify and advance expenses to its directors and officers to the fullest extent permitted by law and to undertake to take such actions WHEREAS, the shareholders of the Company, the Board of Directors of the Company and the Audit Committee thereof, have approved the terms of this Agreement and have authorized the Company to enter into an agreement containing such term with the Indemnitee, as required under applicable provisions of Israeli law; and WHEREAS, in recognition of Indemnitee's need for substantial protection against personal liability in order to assure Indemnitee's continued service to the Company in an effective manner and Indemnitee's reliance on the aforesaid Articles of Association and, in part, to provide Indemnitee with specific contractual assurance that the protection promised by the Articles of Association will be available to Indemnitee (regardless of, among other things, any amendment to or revocation or any change in the composition of the Company's Board of Directors or acquisition of the Company), the Company wishes to provide in this Agreement for the indemnification of and the advancing of expenses to Indemnitee to the full extent (whether partial or complete) permitted by law and as set forth in this Agreement. NOW, THEREFORE, in consideration of the foregoing premises and of Indemnitee continuing to serve the Company directly or, at its request, with another enterprise, and intending to be legally bound hereby, the parties hereto agree as follows: 1. CERTAIN DEFINITIONS 1.1. Change in Control: shall be deemed to have occurred if: (i) any ----------------- "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of shares of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 20% or more of the total voting power represented by the Company's then outstanding voting securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's shareholders was approved by a vote of at least two- thirds (2/3) of the directors then still in office who either were directors at the beginning of the period of whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 80% of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. 1.2. Expenses: include attorneys' fees and all other costs, expenses and -------- obligations paid or incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in any claim relating to any Indemnifiable Event. 1.3. Indemnifiable Event: is, subject to Section 2.1, any event or ------------------- occurrence related to the fact that Indemnitee is or was an Office Holder (as defined in Section 2.1) or an employee, agent or fiduciary of the Company, or is or was serving at the request of the Company as a director, officer, employee, trustee, agent or fiduciary of another corporation, partnership, joint venture, trust or other entity. 2. INDEMNIFICATION AND ADVANCEMENT OF EXPENSES 2.1. The Company hereby undertakes to indemnify Indemnitee to the fullest extent permitted by applicable law, for any liability and expense that may be imposed on Indemnitee due to an act performed or failure to act by him in his capacity as an Office Holder, as such term is defined in the Companies Law - 5759-1999, of the Company or any subsidiary of the Company or any entity in which Indemnitee serves as an Office Holder at the request of the Company either prior to or after the date hereof (the following shall be hereinafter referred to as "Indemnifiable Events"): 2.1.1. A financial liability imposed on Indemnitee in favor of another person by a court judgment, including a compromise judgment given as a result of a settlement or an arbitrator's award which has been confirmed by a court; and 2.1.2. reasonable litigation Expenses, including attorneys' fees, expended by an Indemnitee or which were imposed on an Indemnitee by a court in proceedings instituted against him by the Company or in its name or by any other person or in a criminal charge from which he was acquitted or in a criminal proceeding in which he was convicted for a criminal offense that does not require proof of criminal intent. 2.2. The indemnification undertaking made by the Company shall be only with respect such events described in Exhibit A hereto. The maximum amount --------- payable by the Company under this Agreement for each event described in Exhibit A shall be as set forth in Exhibit A. --------- --------- 2.3. If so requested by Indemnitee, the Company shall advance an amount (or amounts) estimated by it to cover Indemnitee's reasonable litigation Expenses, including attorneys' fees, with respect to which Indemnitee is entitled to be indemnified under Paragraph 2.1 above. 2.4. The Company's obligation to indemnify Indemnitee and advance expenses in accordance with this Agreement shall be for such period as Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding or any inquiry or investigation, whether civil, criminal or investigative, arising out of the Indemnitee's service in the foregoing positions, whether or not Indemnitee is still serving in such positions. 2.5. The Company undertakes that as long as it may be obligated to provide indemnification and advance Expenses under this Agreement, the Company will purchase and maintain in effect directors and officers liability insurance to cover the liability of Indemnitee to the fullest extent permitted by law. 3. GENERAL LIMITATIONS ON INDEMNIFICATION 3.1. If, when and to the extent that the Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid (unless Indemnitee has commenced legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, in which event Indemnitee shall not be required to so reimburse the Company until a final judicial determination is made with respect thereto as to which all rights of appeal therefrom have been exhausted or lapsed) and shall not be obligated to indemnify or advance any additional amounts to Indemnitee (unless there has been a determination by a court or competent jurisdiction that the Indemnitee would be permitted to be so indemnified under this Agreement). 3.2. Change in Control of Company. The Company undertakes that in the ---------------------------- event of a Change in Control of the Company, the Company's obligations under this Agreement shall continue to be in effect following such Change in Control, and the Company shall take all necessary action to ensure that the party acquiring control of the Company shall independently undertake to continue in effect such Agreement, to maintain the provisions of the Articles of Association allowing indemnification and to indemnify Indemnitee in the event that the Company shall not have sufficient funds or otherwise shall not be able to fulfill its obligations hereunder. 4. NO MODIFICATION. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. Any waiver shall be in writing. 5. SUBROGATION. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. 6. REIMBURSEMENT. The Company shall not be liable under this Agreement to make any payment in connection with any claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy or otherwise) of the amounts otherwise indemnifiable hereunder. Any amounts paid to Indemnitee under such insurance policy or otherwise after the Company has indemnified the Indemnitee for such liability or Expense shall be repaid to the Company promptly upon receipt by Indemnitee. 7. EFFECTIVENESS. This Agreement shall be of full force and effect immediately upon its execution. 8. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by Indemnitee of notice of the commencement of any action, suit or proceeding, Indemnitee will, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement hereof; but the omission so to notify the Company will not relieve it from any liability which it may have the Indemnitee otherwise than under this Agreement. With respect to any such action, suit or proceeding as to which Indemnitee notifies the Company of the commencement thereof and without limitation of Section 2.1: 8.1. The Company will be entitled to participate therein at its own expense; and 8.2. Except as otherwise provided below, to the extent that it may wish, the Company jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel reasonably satisfactory to Indemnitee. After notice from the Company to Indemnitee of its election to assume the defense thereof, the Company will not be liable to Indemnitee under this Agreement for any legal or other expenses subsequently incurred by Indemnitee in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. Indemnitee shall have the right to employ its counsel in such action, suit or proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense thereof shall be at the expense of Indemnitee unless: (i) the employment of counsel by Indemnitee has been authorized by the Company; (ii) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of the defense of such action; or (iii) the Company shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel shall be at the expense of the Company. The Company shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the Company or as to which the Indemnitee shall have made the conclusion provided for in (ii) above. 8.3. The Company shall not be liable to indemnify the Indemnitee under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Company shall not settle any action or claim in any manner which would impose any penalty or limitation on the Indemnitee without the Indemnitee's written consent. Neither the Company nor the Indemnitee will unreasonably withhold their consent to any proposed settlement. 9. NON-EXCLUSIVITY. The rights of the Indemnitee hereunder shall not be deemed exclusive of any other rights he may have under the Company's Articles of Association or applicable law or otherwise, and to the extent that during the Indemnification Period the rights of the then existing directors and officers are more favorable to such directors or officers than the rights currently provided thereunder or under this Agreement to Indemnitee, Indemnitee shall be entitled to the full benefits of such more favorable rights. 10. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company, spouses, heirs and personal and legal representatives. This Agreement shall continue in effect during the Indemnification Period, regardless of whether Indemnitee continues to serve as an officer or director of the Company or of any other enterprise at the Company's request. 11. SEVERABILITY. The provisions of this Agreement shall be severable in the event that any provision hereof (including any provision within a single section, paragraph or sentence) is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. 12. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Israel. 13. ENTIRE AGREEMENT AND TERMINATION. This Agreement represents the entire agreement between the parties; and there are no other agreements, contracts or understandings between the parties with respect to the subject matter of this Agreement. No termination or cancellation of this Agreement shall be effective unless in writing and signed by both parties hereto. ViryaNet Ltd. ________________________ By:_______________________ Name of Office Holder EX-21.1 23 0023.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 ------------ Name of Subsidiary Jurisdiction ------------------ ------------ ViryaNet, Inc. Delaware ViryaNet Europe Limited United Kingdom ViryaNet Japan Japan EX-23.1 24 0024.txt CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts," and to the use or our report dated February 21, 2000 (except for Note 15, as to which the date is April 11, 2000) in the Registration Statement (Form F-1) and related Prospectus of Viryanet Ltd. for the registration of its Ordinary Shares. Tel-Aviv, Israel August 3, 2000 /s/ Kost, Forer and Gabbay KOST, FORER & GABBAY A member of Ernst & Young international EX-23.3 25 0025.txt CONSENT OF ITC DELTACOM Exhibit 23.3 ------------ July 24, 2000 Mr. Doug Shumaca Sr. Vice President & Chief Financial Officer ITC Delta Com, Inc. 1791 O. G. Skinner Drive P. O. Box 510 West Point, GA 31833 Dear Mr. Shumaca: As we discussed in our telephone conversation, ViryaNet (the "Company") is in the process of preparing a Registration Statement on Form F-1 (the "Registration Statement") which will be filed with the U.S. Securities and Exchange Commission (the "SEC") and which relates to the initial public offering of shares of the Company's common stock. This letter is to notify you that as part of the disclosure in the Registration Statement, we have identified ITC Delta Com, Inc. as a client of the Company. This potential public offering of our shares is not yet public information. THEREFORE, WE REQUEST THAT THIS MATTER BE KEPT IN THE STRICTEST CONFIDENCE. We hereby request your permission to (i) disclose the relationship between the Company and ITC Delta Com, Inc., (ii) use the ITC Delta Com, Inc.'s name and logo, and (iii) include the project description in the form set forth on Exhibit A hereto, in any preliminary or final Registration Statement or prospectus relating to the initial public offering of the Company's common stock. Please acknowledge your consent by countersigning below. By countersigning below, you also consent to the filing of this letter with, or other provision of this letter to, the SEC, as may be required by the rules promulgated by the SEC. July 24, 2000 Page Two Thank you for your attention to this matter. If you have any questions, please feel free to call me at (508) 490-8600. Sincerely, /s/ Samuel HaCohen Samuel HaCohen Chairman and Chief Executive Officer Acknowledged: ITC Delta Com, Inc. /s/ Doug Shumaca - ------------------- By: Title: EXHIBIT A ITC Deltacom ITC Deltacom, a full-service telecommunications provide serving business customers throughout the southeastern United States, is implementing Service Hub to create operational efficiencies and increase customers satisfaction. ITC Deltacom has implemented the contract administration, workforce management and service supply chain modules of Service Suite, along with parts of Service Hub required for internet access. By using Service Hub technology, ITC Deltacom is integrating several of its existing applications, including system provisioning, customer relationship management and accounting. In addition, Service Hub can make data from our Service Suite modules accessible over the internet and allow ITC's 250 field engineers to access call information through an internet connection from their laptops. ITC Deltacom is also engaged in a pilot program to manage field engineers via handheld devices connected to our Mobile FE product over the internet. EX-23.4 26 0026.txt CONSENT OF SYMBOL TECHNOLOGIES Exhibit 23.4 ------------ July 19, 2000 Mr. Tomo Razmilovic President & CEO Symbol Technologies Inc. One Symbol Plaza Holtsville, NY 11742 Dear Tomo: As we discussed in our telephone conversation, ViryaNet (the "Company") is in the process of preparing a Registration Statement on Form F-1 (the "Registration Statement") which will be filed with the U.S. Securities and Exchange Commission (the "SEC") and which relates to the initial public offering of shares of the Company's common stock. This letter is to notify you that as part of the disclosure in the Registration Statement, we have identified Symbol Technologies, Inc. as a client of the Company. This potential public offering of our shares is not yet public information. THEREFORE, WE REQUEST THAT THIS MATTER BE KEPT IN THE STRICTEST CONFIDENCE. We hereby request your permission to (i) disclose the relationship between the Company and Symbol Technologies Inc, (ii) use the Symbol Technologies, Inc. name and logo, and include the project description and the use of the Symbol Technology, Inc.'s name the form set forth on Exhibit A hereto, in any preliminary or final Registration Statement or prospectus relating to the initial public offering of the Company's common stock. Please acknowledge your consent by countersigning below. By countersigning below, you also consent to the filing of this letter with, or other provision of this letter to, the SEC, as may be required by the rules promulgated by the SEC. July 15, 2000 Page Two Thank you for your attention to this matter. If you have any questions, please feel free to call me at (508) 490-8600 Sincerely, /s/ Samuel HaCohen Samuel HaCohen Chairman and Chief Executive Officer Acknowledged: Symbol Technologies, Inc.. /s/ Tomo Razmilovic - ------------------- By: Title: EXHIBIT A PROSPECTUS SUMMARY Symbol Technologies Symbol Technologies is a provider of wireless and internet-based mobile data management systems and services installed at more than 45,000 customer locations worldwide. Symbol provides its customer base with broad-based package for support called SymbolCare. Symbol chose Service Hub to upgrade its existing systems, particularly in the areas of parts logistics and repair, and serve as the technology platform for delivering this service over the internet. Symbol's application will use mService Gateway to enable its approximately 75 field representatives to log information about parts, expenses and calls made on customers. SymbolCare over the internet, called MySymbolCare, is in the process of being tested at six customer and partner locations. Symbol plans to implement this application for its base of 5,500 customers and partners. Using Service Hub, Symbol will be able to integrate information from third-party call centers and financial applications, as well as from the supply chain and repair center modules of our Service Suite that Symbol previously purchased from us. Service Hub interfaces to Symbol's existing application, will allow these applications to be phased out in a gradual fashion, rather than forcing an abrupt and costly conversion. Using Service Hub, Symbol expects to reduce the number of call center requests, improve management of spare parts and increased field workforce efficiency. EX-23.5 27 0027.txt CONSENT OF TERAOKA SEIKO Exhibit 23.5 ------------ July 19, 2000 Mr. K. Teraoka ________________ Teraoka Seiko, Co. Ltd. 5-13-12 Kugahama Ohta-Ku, Tokyo, Japan Dear Kazuharu: As we discussed in our telephone conversation, ViryaNet (the "Company") is in the process of preparing a Registration Statement on Form F-1 (the "Registration Statement") which will be filed with the U.S. Securities and Exchange Commission (the "SEC") and which relates to the initial public offering of shares of the Company's common stock. This letter is to notify you that as part of the disclosure in the Registration Statement, we have identified Teraoka Seiko, Co. Ltd.,. as a client of the Company. This potential public offering of our shares is not yet public information. THEREFORE, WE REQUEST THAT THIS MATTER BE KEPT IN THE STRICTEST CONFIDENCE. We hereby request your permission to (i) disclose the relationship between the Company and Teraoka Seiko, Co. Ltd., (ii) use the Teraoka Seiko, Co. Ltd.. name and logo, and (iii) include the project description in the form set forth on Exhibit A hereto, in any preliminary or final Registration Statement or prospectus relating to the initial public offering of the Company's common stock. Please acknowledge your consent by countersigning below. By countersigning below, you also consent to the filing of this letter with, or other provision of this letter to, the SEC, as may be required by the rules promulgated by the SEC. July 15, 2000 Page Two Thank you for your attention to this matter. If you have any questions, please feel free to call me at (508) 490-8600 Sincerely, Samuel HaCohen Chairman and Chief Executive Officer Acknowledged: Teraoka Seiko, Co. Ltd. /s/ Kazuhana Teraoka - ----------------------- By: Kazuhana Teraoka Title: President EXHIBIT A Teraoka Seiko Teraoka Seiko, a Japanese manufacturer of tracking and point-of-sale devices and weighing scales focused on the supermarket industry, has over 200 field engineers in 40 centers in Japan and services 80,000 pieces of equipment. Teraoka also works with a global network of third-party distributors that sell and service Teraoka's products outside Japan. Teraoka Seiko decided to replace its existing system with Service Suite to support their service business and increase service revenues, engineer productivity and customer satisfaction. Teraoka Seiko implemented two of Service Suite's modules, Workforce Management and Service Contract. In the future, Teraoka Seiko plans to implement Supply Chain and Repair Depot. These implementations included interfaces with Teraoka Seiko's accounting and database systems. Teraoka Seiko is in the process of implementing our Service Hub to manage its community of field engineers as well as the field engineers of its global network of third-party distributors and vendors. This field engineering solution will provide field engineers with a call reporting utility to enable field engineers to issue accurate invoices on site by using wireless devices. Teraoka Seiko also plans to offer to third-party vendors an internet-based parts ordering system to facilitate faster and less costly parts shipments. -----END PRIVACY-ENHANCED MESSAGE-----