-----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, ORZAx8YjLnj77fH4lWNNN7Yl2wA7P0+sOVJ7jOJu6ostfATQQw8LYESj+AjqUi80 bxtNcXq3j9T9l+u+jtrCOA== 0000950130-01-502768.txt : 20010629 0000950130-01-502768.hdr.sgml : 20010629 ACCESSION NUMBER: 0000950130-01-502768 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010628 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IIS INTELLIGENT INFORMATION SYSTEMS LTD CENTRAL INDEX KEY: 0000742358 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER TERMINALS [3575] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 000-13012 FILM NUMBER: 1669956 BUSINESS ADDRESS: STREET 1: 33 JABOTINSKY ST STREET 2: RAMAF GAN ISREAL BUSINESS PHONE: 9724892077 MAIL ADDRESS: STREET 1: 33 JABOTINSKY STREET STREET 2: RAMAF GAN ISRAEL CITY: RAMAF GAN STATE: L3 ZIP: 00000 20-F 1 d20f.txt FORM 20-F FORM 20-F U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to ________ Commission File No. 0-13012 ------- I.I.S. Intelligent Information Systems Limited ---------------------------------------------- (Exact name of Registrant as specified in its charter and translation of Registrant's name into English) ISRAEL ------ (Jurisdiction of incorporation or organization) 33 Jabotinsky Street, Ramat Gan, Israel --------------------------------------- (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: None Securities registered or to be registered pursuant to Section 12(g) of the Act: Ordinary Shares, NIS 0.003 par value per share ---------------------------------------------- (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: As of December 31, 2000, the Registrant had 8,987,324 Ordinary Shares, NIS 0.003 par value per share, outstanding ("Ordinary Shares"). Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____________ ---------- Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 _______ Item 18 X ------ This Annual Report on Form 20-F contains historical information and forward- looking statements. Statements looking forward in time are included in this Form 20-F pursuant to the "safe harbor" provision of the Private Securities Litigation Reform Act of 1995. They involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to be materially different from any future performance suggested herein. Further, the Company operates in an industry sector where securities values may be volatile and may be influenced by economic and other factors beyond the Company's control. In the context of the forward-looking information provided in this Form 20-F and in other reports, please refer to the discussions of risk factors detailed in, as well as the other information contained in, the Company's filings with the Securities and Exchange Commission during the past 12 months. -2- PART I Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS - ------- ----------------------------------------------------- Not applicable. Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE - ------- --------------------------------------- Not applicable. Item 3. KEY INFORMATION - ------- --------------- A. Selected Financial Data. The following selected consolidated financial data of the Company as of December 31, 2000 and 1999 and for the three years ended December 31, 2000, are derived from the Company's audited consolidated financial statements which are included in this Annual Report and have been prepared in accordance with U.S. GAAP. The selected consolidated financial data as of December 31, 1998, 1997 and 1996 and for the years ended December 31, 1997 and 1996 have been derived from audited consolidated financial statements not included in this Annual Report and have also been prepared in accordance with U.S. GAAP. The Selected Financial Data set forth below should be read in conjunction with and are qualified by reference to Item 5 (Operating and Financial Review and Prospects), and the Consolidated Financial Statements included elsewhere in this Annual Report. -3-
Statement of Operations Data (in thousands, except per share data): - ------------------------------------------------------------------- Year Ended December 31, ----------------------- 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- Sales revenues $ 54,431 $37,981 $ 31,481 $ 5,408 $ 96 Maintenance and other services revenues 8,529 6,417 4,467 547 -- Total revenues 62,960 44,398 35,948 5,955 96 Cost of sales 41,542 26,930 23,327 4,484 27 Inventories write off 4,900 -- 5,442 -- -- Cost of maintenance and other services 8,935 5,316 2,836 429 -- Total cost of revenues 55,377 32,246 31,605 4,913 27 Gross profit 7,583 12,152 4,343 1,042 69 Research and 3,768 2,719 2,410 686 925 development costs, net Selling and marketing expenses 16,199 9,245 7,589 1,417 639 General and administrative expenses 9,071 6,465 5,870 1,777 899 Write-off of trade receivables 1,200 -- 470 -- -- Restructuring & reorganization expenses 3,500 -- 1,071 467 -- Operating loss (26,155) (6,277) (13,067) (3,305) (2,394) Financial income (expenses), net 497 (203) (1,022) 173 277 Other income (expenses), net 437 (36) (267) (1,770) (12) Loss before income taxes and (25,221) (6,516) (14,356) (4,902) (2,129) minority interest Income taxes -- 75 -- -- -- Minority interest in losses of -- -- -- 55 740 subsidiary Net loss $(25,221) $(6,591) $(14,356) $(4,847) $(1,389) Basic and diluted net earnings (loss) $(5.43) $(1.41) $(2.55) $(0.55) $(.016) per share Weighted average number of shares used 4,649 4,649 5,621 8,860 8,901 in computing basic and diluted net earnings (loss) per share (in thousands)
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At December 31, --------------- Balance Sheet Data (in thousands): 1996 1997 1998 1999 2000 - ---------------------------------- ---- ---- ---- ---- ---- Working capital $18,508 $14,175 $ 3,761 $5,590 $2,254 Cash and cash equivalents 11,098 5,958 5,661 7,350 3,077 Total assets 44,131 35,326 17,992 8,496 6,349 Short-term bank credits 829 2,370 3,588 142 10 Long-term debt ---- 2,706 568 122 2,839 Shareholders' equity $22,946 $16,289 $ 4,005 $2,757 $1,882
B. Capitalization and Indebtedness. Not applicable. C. Reasons for the Offer and Use of Proceeds. Not applicable. D. Risk Factors. An investment in the Company involves a high degree of risk. The following risk factors should be considered carefully in evaluating an investment in the Company. Since StoreAge Networking Technologies Ltd. ("StoreAge") is the Company's most valuable asset, a number of the following risks relate to the Company's investment in, and affiliation with, StoreAge. We Depend on StoreAge's Future Success For Continued Growth. We are highly dependent on the success of our StoreAge affiliate for future profits. We cannot assure you that StoreAge will prove commercially successful, or that our investment in StoreAge will be profitable. To date, StoreAge's revenues have been very limited. We have a History of Substantial Recurring Losses. We lost approximately $1.4 million during the year ended December 31, 2000, $4.8 million during the year ended December 31, 1999, $14.4 million during the year ended December 31, 1998, $6.6 million during the year ended December 31, 1997, and $25.2 million during the year ended December 31, 1996. Our ability to achieve profitable operations depends on, among other things, the successful marketing of storage technology products which we have only recently introduced into the market. However, we cannot assure you that we will become and stay profitable. Since We Have a Minority Ownership Interest in StoreAge, Our Interest in StoreAge's Profits and Our Ability to Direct Its Business Affairs Are Limited. Our interest in StoreAge was reduced -5- following StoreAge's recently completed private placement (described below) to a 39% ownership interest (and may be further reduced). Cisco Systems, Inc., CDC Holdings Ltd., Morgan Keegan Entities, Genesis Partners, Koonras Technologies Ltd., The Challenge Fund and Ophir Tech Ltd. (together, the "Private Investors"), hold the remaining 61% ownership interest. Because we hold a diminished percentage interest in StoreAge, our shareholders will also have a smaller indirect interest in StoreAge. In addition, future financing needs of StoreAge are likely to require additional private or public equity financing, thus further diluting our shareholding percentage. The significant ownership interest in StoreAge held by the Private Investors (which may be further increased) and the rights granted to the Private Investors, including preferences in liquidation and receipt of dividends, registration rights and various negative covenants, will also reduce the flexibility that we will have in the operation and any future disposition of StoreAge. Our Future Capital Needs Could Adversely Affect Us if We are Unable to Raise Additional Capital. Given the business levels we presently expect, we believe that our existing cash on hand will be sufficient to meet our working capital requirements, including normal capital expenditures, for at least the next 12 months, and that StoreAge's existing cash on hand, including the net proceeds of its recent private placement, will be sufficient to meet its working capital requirements, including normal capital expenditures, for at least the next 12 months. However, continued losses could reduce StoreAge's and/or our working capital and cash equivalents, which could adversely affect StoreAge's or our future operations unless we secure additional financing. If financing is not available when required or is not available on acceptable terms, we may be unable to develop or enhance our services, take advantage of business opportunities or respond to competitive pressures. We Have Incurred Substantial Indebtedness. We have incurred substantial indebtedness, in the form of the $3,000,000 principal amount of debentures described below. On December 20, 2000, we entered into a securities purchase agreement under which we issued 30 units, each consisting of $100,000 principal amount of our convertible secured debentures (the "Debentures") and three-year non redeemable warrants (the "Warrants"). If a substantial portion of the Debentures are not converted into Ordinary Shares, we will have to repay the principal amount of the unconverted Debentures, plus interest. The degree to which we are leveraged could have important consequences to our shareholders, including the following: (i) our ability to obtain additional financing in the future for acquisitions, general corporate purposes or other purposes, may be impaired; (ii) a substantial portion of our available cash must be dedicated to the payment of the principal of and interest on our existing debt; (iii) the Debentures contain certain restrictive operating covenants; (iv) we might be placed at a competitive disadvantage in comparison to certain less-leveraged competitors; (v) the Debentures are subject to floating rates of interest, causing us to be vulnerable to increases in interest rates; and (vi) our substantial degree of leverage could make us more vulnerable in the event of a continued downturn in general economic conditions. The holders of the Debentures have a floating charge on all of our assets, including our shares in StoreAge, our primary asset, and thus have rights in those assets in the event of a default under the terms of the Debentures, senior to the rights of our shareholders. Competition From Other Companies That Have Greater Resources Than We Do Could Adversely Affect Us. The markets in which StoreAge's technology products will be sold, especially the United States, are highly competitive. Most of our competitors have substantially greater financial, technical and marketing resources than we do. -6- Our Business Prospects May Suffer If StoreAge Is Unable To Keep Up With The Rapid Technological Developments In The Storage Industry. The market for StoreAge's products is characterized by rapidly changing technology and evolving industry standards. The introduction of new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. StoreAge's ability to anticipate such changes and to develop and introduce successfully new and enhanced products on a timely basis will be a very significant factor in its ability to grow and to remain competitive. StoreAge will need to make substantial expenditures (including commitments to pay royalties) for research, development and introduction of new products. If StoreAge is unable, for technological or other reasons, to develop products in response to changes in the industry, its business and our prospects will be materially and adversely affected. We cannot assure you that StoreAge will not encounter technical or other difficulties that could delay the introduction of new products in the future. If StoreAge is unable to introduce new products in response to changes in the industry, StoreAge's business and the market price of our Ordinary Shares will be materially and adversely affected. If There Are Changes in StoreAge's Future Customers' Requirements, Its Business May Suffer. The markets for computer and storage technology equipment are changing rapidly and often unpredictably. Changes in customer requirements and preferences, introduction or modification of new industry standards, or variations in the relative cost-effectiveness of different storage technology solutions could adversely affect its growth and future financial performance. If future customer requirements differ from those projected by StoreAge, its future product sales would be adversely affected. Our Business Depends on a Limited Number of Key Personnel, the Loss of Whom Could Adversely Affect Us. Our continued success depends to a significant extent upon the performance of our senior executives. We do not maintain key-man life insurance policies covering any of our executives. The loss of one or more senior executives' services would likely have a material adverse effect on us. Our Quarterly Results May Fluctuate. Our future quarterly results may vary significantly due to a combination of several factors, including fluctuations in research and development expenses and the absence of sales. Anti-takeover Provisions Could Negatively Impact Our Shareholders. Provisions of Israeli law may delay, prevent or make difficult an acquisition of our Company, which could prevent a change of control and therefore depress the price of our stock. Israeli corporate law regulates mergers and acquisitions of shares through tender offers in certain circumstances, requires special approvals for transactions involving significant shareholders and regulates other matters that may be relevant to these types of transactions. Because Our Board of Directors Is Classified, it Could Hinder a Merger, Proxy Contest or Tender Offer, Whether or Not They Would Be Beneficial to Our Shareholders. The classification of our board of directors could delay or impede the removal of incumbent directors and could therefore complicate a merger, tender offer or proxy contest involving us, even if such events would be beneficial to the interests of our shareholders, or could discourage a third party from attempting to acquire control of the Company. A Substantial Number of Our Shares Can Be Sold in the Future under Rule 144, Which Could Lower the Price of Our Shares. Existing shareholders may sell Ordinary Shares pursuant to Rule 144 -7- ("Rule 144") promulgated under the Securities Act, or otherwise. In addition, warrants ("Settlement Warrants") granted to certain parties as part of a settlement of a class action filed against the Company may be exercised for Ordinary Shares and such Ordinary Shares may then be sold. Additionally, we issued Debentures and Warrants pursuant to a securities purchase agreement which may be converted and exercised, respectively, for Ordinary Shares which may then be sold. Such sales could adversely affect the price of the Ordinary Shares. We cannot predict the effect that future sales of the Ordinary Shares, or the availability of the Ordinary Shares for future sales, will have on the market price of the Ordinary Shares. Prevailing market prices for the Ordinary Shares could drop if substantial amounts of the Ordinary Shares are sold, or if others perceive that such sales could occur. In addition, proposed changes in Israeli taxation of capital gain may result in the sale of a substantial number of the Ordinary Shares in a short period of time in the future. We May Not Pay Dividends. We have not declared or paid dividends on our Ordinary Shares since 1989, and do not intend to declare or pay any dividends to our shareholders in the foreseeable future. Our Share Price May Be Volatile. The market price of our Ordinary Shares may fluctuate following the announcement of financial results or new product introductions by us or our competitors or other matters such as military, political or economic developments in the Middle East and the market for technology stocks generally. The Market Price of our Ordinary Shares May Fall Due to Dilution Resulting From the Issuance of the Shares. If the Debentures are converted or the Warrants or Settlement Warrants are exercised, the existing holders of the Ordinary Shares will suffer substantial dilution. Our Financial Results May Be Adversely Affected By Inflation and Currency Fluctuations. Since we report our financial results in dollars, fluctuations in rates of exchange between the dollar and non-dollar currencies may have a material adverse affect on our results of operations. The majority of our expenses are paid in NIS (primarily salaries) and are influenced by the timing of, and the extent to which, any increase in the rate of inflation in Israel over the rate of inflation in the United States is not offset by the devaluation of the NIS in relation to the dollar. We believe that the rate of inflation in Israel has not had a material adverse effect on our business to date. However, our dollar costs in Israel will increase if inflation in Israel exceeds the devaluation of the NIS against the dollar or if the timing of such devaluation lags behind inflation in Israel. Over time, the NIS has been devalued against the dollar, generally reflecting inflation rate differentials. Likewise, our operations could be adversely affected if we are unable to guard against currency fluctuations in the future. We do not currently engage in any currency hedging transactions intended to reduce the effect of fluctuations in foreign currency exchange rates on our results of operations. We cannot guarantee that we will not enter into such transactions in the future or that such measures will adequately protect us from serious harm due to the impact of inflation in Israel. Since StoreAge Currently Has a Limited Number of Customers, Loss of Any One Customer in the Future as StoreAge Builds Its Customer Base Could Hurt Its Business. A material percentage of StoreAge's revenues are derived from a limited number customers. We do not anticipate that StoreAge generally will enter into long-term contracts with its customers, and customers generally will have certain rights to extend or delay the shipment of their orders or cancel orders without penalty. Loss of one or more principal customers or a material decrease in orders could materially and adversely affect -8- its business, financial position and results of operations. StoreAge's Proprietary Technology Enjoys Only Limited Protection; Third- Party Claims of Infringement Could Harm StoreAge's Business. StoreAge has limited patent protection for its products and has attempted to protect its proprietary software and other intellectual property rights through trade secrets, nondisclosure agreements and other measures. StoreAge has applied for several patents for its technology. We cannot assure you, however, that StoreAge will receive these patents and/or be able to protect its proprietary software and other intellectual property rights adequately or that competitors, all of whom have legitimate access to any non-proprietary technical standards utilized by StoreAge will not be able to develop similar technology independently. For example, a number of StoreAge's competitors are producing or plan to produce products that incorporate Virtualization technology. Third parties may from time to time notify StoreAge that it may be infringing patents owned by or proprietary rights of third parties, although no such claims are currently pending against StoreAge. If necessary, StoreAge may have to seek a license under any such patent, or redesign or modify its products and processes in order to avoid infringement of such patents. There can be no assurance that such a license would be available on acceptable terms, if at all, or that StoreAge could so avoid infringement of such patents, in which case StoreAge's business, financial position and results of operations could be materially and adversely affected. There has been substantial litigation in the technology industry regarding intellectual property rights, and litigation may be necessary to protect StoreAge's proprietary technology. It is also possible that StoreAge will increasingly have to litigate infringement claims with companies in the storage system market, as the number of competitive products and companies grow. Any such claims or litigation may be time-consuming and costly, cause product shipment delays, require StoreAge to redesign or modify its products or require StoreAge to enter into royalty or licensing agreements, any of which could have a material adverse effect on StoreAge's business, operating results or financial condition. Despite StoreAge's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of StoreAge's products or to obtain and use information that StoreAge regards as proprietary. In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States. There can be no assurance that StoreAge's means of protecting its proprietary rights will be adequate or that StoreAge's competitors will not independently develop similar technology or duplicate StoreAge's products or design. StoreAge Depends on a Limited Number of Key Suppliers of Key Components to Manufacture Its Products. StoreAge's reliance on a limited number of suppliers for key components of its products, the absence of long term purchase agreements with those suppliers, the fact that StoreAge is likely to maintain only minimum inventory levels and the fact that there may be a significant market demand for those components involve several risks in addition to inadequate supply. These risks include potential price increases, selective supply allocations, late deliveries and poor component quality. We cannot assure you that StoreAge will not experience shortages of key components in the future or that StoreAge will not be subject to selective supply allocations and increased prices of components. Any shortage of key components and any delay or other difficulty in obtaining such components from other suppliers and integrating them into StoreAge's products could materially and adversely affect StoreAge's business, financial position and results of operations. StoreAge Depends on Subcontractors to Manufacture its Products. StoreAge depends on -9- subcontractors to manufacture its products. StoreAge's future results of operations will be dependent in large part upon its ability to have products manufactured and delivered promptly upon the receipt of orders and to provide prompt and efficient service to its customers. As a result, any disruption of its day-to-day operations, or the day-to-day operations of its subcontractors, could have a material adverse effect upon StoreAge. StoreAge's operations, including, research, marketing, customer service and distribution functions, are based in and managed from a single facility in Israel. It relies on the manufacturing facilities of subcontractors that may be based in and managed from a small number of facilities in Israel. A fire, flood, earthquake or other disaster or condition affecting these facilities could disable these functions. Any such damage to, or other condition interfering with the operation of, these facilities would have a material adverse effect on the business of StoreAge and its financial position and results of operations. StoreAge is Subject to Warranty Claims for Defective Products. Products offered by StoreAge may contain defects in hardware, software or workmanship that remain undetected until after commercial shipment. Any loss or delay in customer or market acceptance attributable to such defects or any material replacement or repair expenses due to any such defects could have a material adverse effect on StoreAge's business, financial position and results of operations. StoreAge's Planned International Expansion Will Expose It to New Risks. StoreAge intends to expand its operations internationally. These efforts will require significant management attention and financial resources. There can be no assurance that these efforts will be successful. Although sales are effected in U.S. dollars, international sales are subject to a number of risks, including longer payment cycles, unexpected changes in regulatory requirements, import and export restrictions and tariffs, the burden of complying with a variety of foreign laws, potentially adverse tax consequences, currency fluctuations, the imposition of currency exchange or price controls, and political and economic instability abroad. If StoreAge increases its international sales, seasonal fluctuations may also affect to a greater extent StoreAge's total revenues due to lower sales that typically occur during the summer months in Europe and other parts of the world. Conducting Business In Israel Entails Special Risks. We are incorporated under the laws of, and our executive offices and research and development facilities, and those of StoreAge, are located in, the State of Israel. Although most of StoreAge's sales are made to customers outside Israel, it is nonetheless directly affected by the political, economic and military conditions affecting Israel. Any of StoreAge's manufacturing operations would be heavily dependent upon components imported from outside of Israel. Any major hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could have a material adverse effect on our business, financial condition and results of operations and that of StoreAge. Since the establishment of the State of Israel in 1948, a state of hostility has existed, varying in degree and intensity, between Israel and the Arab countries. While Israel has entered into peace agreements with both Egypt and Jordan and several other countries have announced their intentions to establish trade and other relations with Israel, Israel has not entered into any peace arrangement with Syria or Lebanon. Moreover, while Israel is in the process of conducting peace negotiations with the Palestinian Authority, since September 2000 there has been a significant deterioration in the relationship between Israel and the Palestinian Authority and as a result of violence between Israelis and Palestinians, the peace process between the parties has stagnated. Efforts to resolve the problem have failed to result in an agreeable solution. Continued hostilities between the Palestinian community and Israel and any failure to settle the conflict may have a material adverse effect on our business and that of StoreAge. Further deterioration of hostilities into a full scale -10- conflict might require more widespread military reserve service by our and StoreAges's employees that may have a material adverse effect on our business and that of StoreAge. In addition, termination or reduction of certain governmental grants, programs and tax benefits could have a material adverse effect on us and StoreAge. On May 4, 2000, a committee chaired by the Director General of the Israeli Ministry of Finance issued a report recommending a sweeping reform in the Israeli system of taxation. The proposed reform would significantly alter the taxation of individuals and would also affect corporate taxation. In particular, the proposed reform would reduce but not eliminate the tax benefits available to approved enterprises. The Israeli cabinet of the previous government approved the recommendation in principle. The new Israeli government has declared that it intends to recommend tax reforms but has not approved the May 4, 2000 report or any alternative reform. Implementation of any reform requires legislation by Israel's Knesset. We are not certain whether the proposed reform will be adopted, when it will be adopted or what form reforms will ultimately take or what effect it will have on us. Item 4. INFORMATION ON THE COMPANY -------------------------- A. History and Development of the Company. Until early 1999, I.I.S. Intelligent Information Systems Limited ("IIS" or the "Company") was engaged in the development, manufacture, marketing and service of data communication and intelligent peripheral products targeted at the International Business Machines ("IBM") midrange, IBM mainframe and open systems computing environments. In late 1998, the Company implemented a restructuring plan (the "Restructuring") which resulted in the disposition of most of the assets of the Company, substantial changes in the Company's structure and a focus exclusively on storage area networking ("SAN"). For information regarding the Company's products prior to completion (in early 1999) of the Restructuring, please refer to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 1997. In January 1999, StoreAge Networking Technologies Ltd., an Israeli company, ("StoreAge") was organized as a wholly-owned subsidiary of IIS and commenced development and marketing of products based on its SAN Virtualization technology. In January 1999, the Company divested itself of its 62.3% equity interest in NetWiz Ltd., an Israeli development-stage company ("NetWiz"). In the transaction, it transferred its entire interest in NetWiz to a non-affiliated third party and such non-affiliated third party assumed all liabilities associated with such interest. The divestiture required the Company to expend $945,000. Net gain realized as a result of the sale of NetWiz amounted to $616,000. In February 1999, the Company disposed of its networking products and network integration services division, which was comprised of Adanet Communications, Ltd. ("Adanet"), an Israeli company which the Company acquired in June 1994, and I.I.S. Computer Maintenance and Services (1983) Limited ("I.I.S. Maintenance"), an Israeli company. The Company realized net proceeds of $1.506 million and net gain of $175,000 as a result of the sale of Adanet and I.I.S. Maintenance. In March 1999, the Company sold most of the assets and the buyer assumed most of the liabilities of its Decision Data Division ("Decision Data"), which comprised all of the Company's United States, United Kingdom and German operations. The Company realized net proceeds of $2.487 million and net gain of $205,000 as a result of the sale of Decision Data. -11- During November 2000, the Company acquired the assets of Eastek Embedded Systems (Meitav) Ltd. ("Eastek"), a private Israeli software company, to enhance its R&D capabilities in order to develop synergetic software solutions for the SAN market. In December 2000, the Company completed a private placement of $3 million in the issuance of convertible subordinated notes and warrants to qualified investors. The net proceeds from the offering were used to fund the Company's investment in StoreAge's second round of financing. On January 25, 2001, StoreAge completed its second round of financing, raising a total of $25 million from strategic and institutional investors in a private placement. The Company was an investor in the financing, investing a total of $4.2 million. Following the consummation of the financing, the Company held 39% of the outstanding shares of StoreAge. IIS was incorporated in Israel in 1980. The executive offices of the Company are located at 33 Jabotinsky Street, Ramat Gan, Israel, its telephone number is (+972) 3-751-0007 and its facsimile number is (+972) 3-575-0595. The Company's agent in the United States is Brown Raysman Millstein Felder & Steiner LLP located at 900 Third Avenue New York, NY 10022. B. Business Overview. With the ever growing need for storage in computing systems, resulting among other things from the wide applications of Internet and Intranet technologies, coupled with the deployment of data warehouses and other decision support systems, the storage industry is changing its structure. Storage is developing into a separate industry, with information technology departments seeking to purchase storage systems independently from purchasing and upgrading computing environments. An additional aspect of the phenomenal growth of the installed storage is the increasing dependency of users on their storage systems and, hence, the requirement for high availability as well as protection from malfunctions and disasters. With data growing at an exponential rate, it was inevitable that a logical method of data storage, retrieval and management be developed, thus the formation of storage area networks ("SANs"). A SAN configuration is typically based on a "fabric" of fibre channel cables, switches and hubs that provide the connectivity necessary to establish data patterns between a heterogeneous set of servers and storage devices on a many-to-many basis. This storage network helps companies gain a competitive edge by assisting them in the management of storage and the retrieval of the explosive growth of stored digital data. SAN provides users with the ability to quickly share information assets, regardless of their location, in any desired format. SAN technology enables the user to connect multiple hosts to multiple storage systems using a hub or a switch, making all storage systems accessible to all or specified servers. The complexity, rapid growth and increased importance of data to mission- critical applications has led to the development of storage management software. This software allows IT managers to effectively manage and maintain the integrity of the data stored. The growing size and complexity of -12- storage installations, combined with the rapid growth in the demand for storage, has made the administration of storage resources more challenging as administrators seek to solve the problem of assuring the availability of data across multiple platforms and geographies. Consequently, the storage management process now has much broader implications for many organizations. Enterprises now want integrated storage management solutions that provide centralized management of storage resources and support high data availability, scalability, and performance in heterogeneous environments. In order to enable total focus on the new fast growing, large SAN and fibre channel market, in January 1999, IIS formed StoreAge, a separate entity whose sole purpose is to concentrate on storage networking development activities. StoreAge's goal is to be a leader in the storage networking industry. Its personnel has extensive experience in the design and implementation of leading edge technologies. Its mission includes the development and deployment of products and services in areas such as (i) a Redundant Array of Independent Disks ("RAID") storage system for Open Systems (including NT, Linux and UNIX), (ii) storage networking middleware (distributed RAID, volume management), (iii) storage management software, and (iv) storage related applications, such as snapshot, remote mirroring and others. The innovative approach to enterprise storage systems proposed by StoreAge has attracted interest from original equipment manufacturers ("OEMs"), including those whose range of options do not include similar solutions. Therefore, StoreAge is employing an OEM market strategy, as opposed to a direct market strategy targeted at end-users. StoreAge seeks to make strategic alliances with major corporations that have developed customer bases, such as computing platforms manufacturers, networking platforms manufacturers and possibly storage systems manufacturers. Such strategic alliances and business cooperation may benefit StoreAge by providing it with promising distribution avenues, while introducing these partners to StoreAge's advanced technology and products. Products and Systems In June 2001, the Company launched the iSCSI SWAT line, an advanced suite of applications for enhanced development, testing and verification of storage solutions and peripherals based on the Internet Small Computer Systems Interface ("iSCSI") specification for the SAN. iSCSI is a new protocol that is expected to eventually replace the "Fibre Channel" protocol currently being used for SAN. The advantage of the iSCSI is that it works with standard Ethernet (Fast and Gigabit Ethernet), the existing enterprise infrastructure built over many years for a Local Area Network ("LAN"). iSCSI enables the creation of cost-effective and high-performance storage solutions for the SAN by extending the capabilities of regular Ethernet to include the transfer of storage data without sacrificing ease of access. The iSCSI SWAT emulates an iSCSI environment and provides a rich multiple document, graphical user interface ("GUI") that incorporates all professional features and functionality within a single test environment interface. StoreAge's family of products include the Storage Virtualization Manager ("SVM(TM)"). StoreAge has developed the SVM(TM) as a SAN storage management solution. The SVM(TM) is a storage area network appliance that works with StoreAge's proprietary software through the creation and allocation of virtual volumes ("virtualization") to provide overall virtual volume management in a heterogeneous SAN environment. The SVM(TM) features physical device monitoring, volume definitions -13- and virtual storage allocations for all servers and storage connected to the Fibre Channel loop or fabric. It provides a common GUI through which storage is virtualized and selectively presented to users in a flexible way. Unlike other competing management solutions, the SVM(TM) does not impose any performance degradation on the I/O traffic on a SAN. The SVM(TM) serves as a platform for storage applications, such as remote mirroring and snapshot, and is a key enabler for functions such as serverless, LAN-free backup, shared file systems and multi-node clusters among other services that require a uniform overall view of and multiple access to all storage resources of the enterprise ("Storage Applications"). The SVM(TM) enables the flexibility of a centrally managed highly scalable SAN without incurring degradation of performance or high cost of hardware. The SVM(TM) appliance can be a small and inexpensive unit since it does not have to conduct the actual data transfer. In the SVM(TM) based solution all storage is handled uniformly, independent of the type of storage subsystem or operating systems. Virtual volumes can be created, expanded, deleted, moved from server to server and assigned to multiple servers. An important aspect of the SVM(TM) is that Storage Applications, in addition to human administrators (via the management GUI), can request volume allocations from the SVM(TM) appliance, giving a SAN new capabilities for improved data management. Applications such as Snapshot and others can create, expand and delete their own volumes, communicating directly with the SVM(TM). The SVM(TM) delivers the following key functions critical for SAN management: . SAN manageability: A central point for managing entire SAN resources via a Web-enabled intuitive GUI effected through any standard browser and the ability to administer multiple RAID subsystems as if it was one large system (RAID pooling). . SAN Scalability: Unlimited SAN growth from a number of servers, storage capacity, I/O performance or bandwidth viewpoint. . SAN Security: Selective presentation of volumes to users with a fabric zoning control, which protects data from access via unauthorized path. . High Availability: Complete redundancy is supported. Modifications to the system are done on the fly without system re-boot. SAN bottlenecks are avoided due to multiple paths with load balancing and automatic failover. . Interoperability and Sharing: Volume masking enables sharing of storage among servers with different OS and FS. Volumes can be seen by more than one host, creating an ideal platform for shared file systems and clusters. Volumes can be moved from host to host (without copying). . Performance Enhancement: Striping across RAID subsystems for increased performance. Performance statistics help to facilitate removal of SAN bottlenecks. SVM(TM) provides a central management point for storage virtualization while the data is directly transferred between the host computer and storage devices. This architecture meets all key requirements from a good virtualization scheme and in particular the total independence of the virtual storage from both the servers and the storage subsystems, thus creating true heterogeneous SANs. -14- SVM(TM) provides significant scalability, performance, reliability and price advantages over alternative architectures. Sales and Marketing StoreAge's objective is to become the leading provider of SAN Storage Management software solutions offering high availability and increased protection of data over distributed networks. In order to achieve this objective, StoreAge is pursuing the following strategies: . Accelerate sales through strategic partnerships with OEM suppliers . Develop a reseller distribution channel . Accelerate the build-up of its U.S. operation StoreAge targets its products to industry leaders in the following areas: . Server Suppliers. These companies design, make and sell the computers that are shared on a network. Traditionally they are also the largest suppliers of storage used by these servers. Some of the largest companies in this area include Compaq Computer Corp., Dell Computer Corp., Hewlett-Packard Company, IBM Corp. and Sun Microsystems, Inc. . Storage System Suppliers. Storage systems suppliers make products such as disk and tape drives and cartridge libraries. Some of the biggest enterprises in this space include Data General, a Division of EMC Corp. and Storage Technology Corp. . Systems Integrators. Systems integrators custom-design data storage systems for organizations. These companies include Electronic Data Systems Corporation (EDS) and Datalink Corp. . Suppliers of Computer-Based Products with High Storage Content. . Storage Service Providers. These companies provide outsourced data storage services to organizations. The main companies include StorageNetworks, Inc. and Storability, Inc. StoreAge has traditionally marketed its products through one-on-one presentations to potential OEM partners, as well as through appearances at industry conferences/trade shows. In addition, StoreAge also promotes its products through frequent press releases covering its developments and technological breakthroughs and through StoreAge's Web site located at www.store-age.com. - ----------------- StoreAge's major markets are in the US. In particular, most of the potential OEM partners are U.S. based companies with only a small number in Europe and the Far East. StoreAge opened its first U.S. office in Scottsdale, Arizona, in May 2000. StoreAge has started hiring key personnel in the U.S. office and plans on expanding its U.S. presence in the near future. Until recently, the members of senior management shared sales and marketing responsibilities. Product Research and Development The Company is currently engaged in the Internet Small Computer Systems Interface ("iSCSI") space and is looking into new applications for its iSCSI and storage expertise. The Company has a continuing program of product research and development that is exclusively directed at developing new data storage products for open systems environments. The Company's research and development staff -15- works closely with its marketing and field personnel in an effort to determine emerging user needs and continually reviews and evaluates technological changes affecting the Company's markets. In past years, a significant portion of the Company's and StoreAge's research and development expenses have been financed by grants from the office of the Chief Scientist of the Israeli Ministry of Industry and Trade (the "Chief Scientist"), which typically provides grants up to 50% of the expenditures connected with a project which it approves, in return for royalties at the rate of 3% to 5% of sales of products developed with funds provided, up to a dollar- linked amount equal to the grant received bearing interest of LIBOR in respect of the particular project. The terms of these grants prohibit the manufacture of products developed outside of Israel and the transfer of the technology developed through projects funded by these grants to any person or entity without the prior consent of the Research Committee of the Chief Scientist. There can be no assurance that such consent, if requested, will be granted. Such restrictions do not apply to exports of the Company's or StoreAge's products developed with the assistance of the Chief Scientist. As of December 31, 2000, both the Company and StoreAge ceased to apply for grants from the Chief Scientist due to the restrictions described above and certain other restrictions on the sale of technology under the terms of the grants. The elimination of such grants requires additional expenditures by the Company and StoreAge and, accordingly, will result in increased net research and development expenses in the future. The following table shows the net consolidated research and development expenditures of the Company and participation in such expenditures by the Chief Scientist since 1998:
Year Ended December 31, ----------------------- 1998 1999 2000 (in thousands) Company-funded research and $2,410 $ 686 $ 925 Development expenditures Chief Scientist participation $ 261 $ 223 $ 403 ------ ----- ------ Total outlay for research and Development $2,671 $ 909 $1,328 ====== ===== ======
In 1998, 1999 and 2000, the Company incurred royalty expenses of approximately $20,000, $63,000 and $15,000 respectively, for payment to the Chief Scientist. These amounts were included in cost of sales expenses for such periods. The Company's net research and development expenses constituted 6.7% and 11.5% of total revenues for the years ended December 31, 1998 and 1999, respectively. The Company's net research and development expenses exceeded total revenues by $829,000 for the year ended December 31, 2000. As of December 31, 2000, the Company and StoreAge had a research and development staff of 5 and 25 employees, respectively. All such employees are engineers and technicians engaged in applied research, development of new products and enhancement of existing products. Despite the Company's commitment to product research and development, there can be no assurance that any of the Company's development efforts will result in commercially successful -16- products, that such products will be released in a timely manner or that the Company will be able to respond effectively to technological changes or new product announcements by others. Customer Service and Support In conjunction with implementing an OEM strategy, StoreAge has chosen not to invest a significant part of its resources in building direct customer service and support, but instead has chosen to invest in making strategic alliances with major corporations that have developed customer service and support. StoreAge expects to indirectly provide the same level of support as many of its competitors through these alliances. Therefore, service revenues are not expected to comprise a significant portion of StoreAge's revenues. StoreAge's office in Arizona is providing the first line of support to its OEM customers and system integrators. Manufacturing StoreAge expects that some of its customers will prefer to license its designs and have the modules produced by their own sources, and, in such cases, it is not expected that StoreAge will be directly involved in the production or assembly of hardware modules, unless its OEM customers require it. To the extent necessary, StoreAge expects to implement its production through authorized sub-contractors. By relying on other companies to supply certain key components of its products that are available only from limited sources in the quantities and quality demanded by StoreAge, the company runs the risk that there may be a shortage in certain products it obtains from these outside vendors. For example, some of StoreAge's hardware modules are built based on components which may not be available in great quantities in the market, and may have only a single source, such as Intel and Q-Logic. While these sources are major, and generally reliable companies, the fact that there is a single source for some of the components may result in potential supply problems. Competition StoreAge believes it is the first company that has completed the development of an Asymmetric (off-the-data-path) SAN volume (virtualization) management appliance. On June 9, 2000, Compaq announced its VersaStor architecture which is based on similar concepts, however this was a technology announcement only and no products have been formally launched. StoreAge's primary competition currently is from companies that offer Symmetric storage virtualization (in-the-data-path). Included in this category are DataCore Software Corporation, FalconStor, StorageApps Inc. and Vicom Systems, Inc. Veritas Software has also announced its intention to release such a software product. StoreAge believes that its off-the-data-path Virtualization technology is far superior to the alternative architecture. StoreAge believes that its system architecture provides it with competitive advantages over its competitors because of main user benefits such as incremental growth capability, scalability, availability and performance and main OEM benefits including cost effective solutions and time to market advantage. However, even with these competitive advantages, there can be no assurance that StoreAge will be able to compete successfully or that competition will not have a material adverse effect on its results of operations. -17- In addition, there are a number of companies whose product offerings fall within the bounds of the storage management software market. These companies include major players in the data storage industry, such as Commvault Systems, Inc., Computer Associates International, Inc., Data General, a Division of EMC Corp., Hewlett-Packard Company, IBM Corp., Legato Systems, Inc., Network Specialists, Inc. and Veritas Software. Nevertheless, these companies' storage management applications relate primarily to data backup and replication, disaster recovery and load balancing rather than SAN virtualization and management and, therefore, do not compete directly with StoreAge's solutions, for the most part. Some of StoreAge's potential customers may become its competitors in the storage management software market. These companies may dedicate or acquire greater resources in the future geared toward providing storage management solutions that compete directly with StoreAge's products. Such actions could preclude any future relationship between StoreAge and these customers. StoreAge also expects that competition will increase as a result of growth in the SAN industry and the resulting increase in demand for SAN management solutions. Current and potential competitors may also establish cooperative relationships among themselves or with third parties, including StoreAge's potential OEM partners, in order to increase the ability of their products to address the needs of prospective customers and end-users. Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share. See Note 12 to the Company's Consolidated Financial Statements for information regarding the geographic distribution of the Company's revenues since 1998. Substantially all revenues were generated by assets and operations which have subsequently been disposed of in the Restructuring. Proprietary Technology and Intellectual Property To date, the Company has not entered into any agreements with third-parties whereby it has sold substantially all of its existing rights to technology. However, the Company does contemplate licensing as a means of exploiting its technology as part of its business. The Company and StoreAge rely on a combination of trade secret, patent and trademark law, together with non-disclosure agreements and technical measures, to establish and protect proprietary rights in their products. StoreAge has filed several patents for its technology and plans to apply for patent protection on more of its inventions in the future. Currently, StoreAge has very limited patent protection and has registered only certain of its trademarks. It may be possible for unauthorized third parties (including competitors) to copy aspects of StoreAge's products, whether or not in violation of StoreAge's rights. However, the Company believes that, because of the rapid pace of technological change in the networking and data communications and computer industries, legal protection for its products is less significant to its prospects than the knowledge, ability and expertise of its management and technical personnel to rapidly develop and produce new products and product enhancements. The Company and StoreAge do not believe that their products, trademarks or other proprietary rights infringe upon the proprietary rights of any third parties. However, there can be no assurance that one or more third parties will not make a contrary assertion. The cost of responding to any such assertion may be material, whether or not the assertion is validated. -18- C. Organizational Structure. In January 1999, StoreAge, an Israeli company, was organized as our wholly- owned subsidiary and commenced development and marketing of products based on Storage Area Network ("SAN") Virtualization technology. We currently hold 39% of the outstanding shares of StoreAge. D. Property, Plants and Equipment. Our executive offices are currently located at 33 Jabotinsky Street, Ramat Gan, Israel, where we lease premises of 200 square meters and conduct all of our business activities. The annual rent for this space is approximately $43,000, with total annual occupancy costs, including local taxes, utilities, maintenance and other costs of approximately $24,000. StoreAge conducts all of its activities, including their corporate administration, research and development and testing laboratory activity from a 3,150 square foot rented facility located in the Gutwirth Science-Based Industries Center, Technion City, Haifa, Israel. The annual rent for this space is approximately $42,000, with total annual occupancy costs, including local taxes, utilities, maintenance and other costs of approximately $12,000. StoreAge also leases space of 4420 square feet for its sales and marketing office located in Scottsdale, Arizona. The annual rent for this space is approximately $55,044. StoreAge plans to enter into a new lease for space of 7,650 square feet located in the Nesher area in Haifa, Israel, in which StoreAge will conduct their corporate administration, research and development and testing laboratory activity. Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS - ------- -------------------------------------------- Forward Looking Statements Some of the information in this section contains forward looking statements that involve substantial risks and uncertainties. You can identify these statements by forward looking words such as "expect", "anticipate", "believe", "seek", "estimate" and similar words. Statements that we make in this section that are not statements of historical fact also may be forward looking statements. Forward looking statements are not guarantees of our future performance, and involve risks, uncertainties and assumptions that may cause our actual results to differ materially from the expectations we describe in our forward looking statements. There may be events in the future that we are not accurately able to predict, or over which we have no control. You should not place undue reliance on forward looking statements. We do not promise to notify you if we learn that our assumptions or projections are wrong for any reason. We disclaim any obligation to update our forward looking statements. See "Risk Factors" for more information. A. Operating Results. General IIS is an Israeli company which, following the Restructuring, operates in one business segment - the research, development and, ultimately, production, marketing, sale and/or licensing of products based on SAN space. -19- The functional currency of the Company and its subsidiaries is the U.S dollar, as the U.S. dollar is the primary currency of the economic environment in which the Company and its subsidiaries have operated and expect to continue to operate in the foreseeable future. The majority of the Company's operations is currently conducted in Israel and most of the Israeli expenses are currently paid in new Israeli shekels ("NIS"); however, most of the expenses are denominated and determined in U.S. dollars. Financing and investing activities including loans, equity transactions and cash investments, are made in U.S. dollars. Most of the Company's revenues (58.3% in 2000 and 72.9% in 1999) are from sales and services outside of Israel in United States dollars and other non-Israeli currencies. Where practicable, arrangements are made to ensure that the dollar value of most export sales made in non-dollar currencies is maintained. A majority of the Company's purchases of materials and components are also made in non-Israeli currencies (mainly the dollar). In addition, most marketing costs are incurred outside of Israel. Thus, the functional currency of the Company is the dollar. Transactions and balances originally denominated in dollars are presented at their original amounts. Transactions and balances in other currencies are re-measured into dollars in accordance with the principles set forth in Statement No. 52 of the Financial Accounting Standards Board of the United States ("FASB") "Foreign Currency Translation". The implementation of the Restructuring has resulted in the disposition of most assets of the Company, substantial changes in the Company's structure and a focus on the SAN space, which the Company believes can be structured to become profitable in the next several years. This new business, run by the Company and StoreAge, an affiliate of the Company, focuses on the storage market. The Company believes that new market trends have resulted in the creation of a significant market niche which can be exploited by the Company using its storage technology and which could generate significant sales within two to three years. Results of Operations The following tables set forth for the periods indicated selected income statement items as a percentage of the total revenues of the Company.
Year Ended December 31 -------------------------------------------------- 1998 1999 2000 -------------------------------------------------- Sales revenues 87.6% 90.8% 100.0% Maintenance and other services revenues 12.4 9.2 0 ------------ ------------ ------------ Total revenues 100.0% 100.0% 100.0% ------------ ------------ ------------ Cost of sales 64.9 75.3 28.1 Inventories Write Off 15.1 -- -- Cost of maintenance and other services 7.9 7.2 0 ------------ ------------ ------------ Total cost of revenues 87.9 82.5 28.1 ------------ ------------ ------------ Gross profit 12.1 17.5 71.9 Research and development costs, net 6.7 11.5 *
-20- Selling, marketing, general and administrative 37.4 53.6 * expenses ------------ ------------ ------------ Non recurring charges 4.3 7.9 * (trade receivables write off and restructuring and reorganization) Operating loss (36.3) (55.5) * ------------ ------------ ------------ Financial and other (3.6) (26.8) * income (expenses), net Loss before minority interest in losses of subsidiary (39.9) (82.3) * Minority interest in losses of subsidiary -- 0.9 * ------------ ------------ ------------ Net loss (39.9%) (81.4%) *
____________________ * Greater than revenues Years Ended December 31, 2000, 1999 and 1998 In 2000, total revenues decreased 98.4% compared with 1999, and in 1999, total revenues decreased 83.4% compared with 1998, reflecting the effects of the Restructuring Revenues from sales and services to unaffiliated customers outside of Israel represented approximately 58.3% of revenues in 2000 and 72.9% of revenues in 1999, compared with 65.6% of revenues in 1998. See Note 12 to the Company's Consolidated Financial Statements for additional information regarding the geographic distribution of the Company's revenues since 1998. Substantially all 1998 and 1999 revenues were generated by assets and operations which were subsequently disposed of in the Restructuring. Gross profit as a percentage of total revenues was approximately 71.9% in 2000 compared with 17.5% in 1999 and 12.1% in 1998. The increase in 2000 was primarily due to sales of more profitable StoreAge products and other software products. The increase in 1999 was due to the Restructuring. Marketing efforts to penetrate the emerging storage area networking market may produce a new source of revenue, offsetting, at least in part, the loss of revenue, but there is no assurance that such revenue growth will occur. Total outlays for research and development decreased to approximately $1.33 million in 2000 and $909,000 in 1999 compared with approximately $2.67 million in 1998. The net cost to the Company of such outlays was $925,000 ($829,000 greater than revenues) in 2000 compared with approximately $686,000 (11.5% of revenues) in 1999, and approximately $2.41 million (6.7% of revenues) in 1998. IIS anticipates a continued investment by it and StoreAge in research and development in storage subsystems to address future market demands for storage technology products. Selling and marketing expenses decreased to approximately $639,000 in 2000 ($543,000 greater than revenues) from $1.4 million in 1999 (23.8% of revenues) and approximately $7.6 million in 1998 (21.1% of revenues). General and administrative expenses decreased to approximately $899,000 in -21- 2000 ($803,000 greater than revenues) from $1.8 million in 1999 (29.8% of revenues) and approximately $5.9 million in 1998 (16.3% of revenues). The decrease in expenses reflects the effects of the Company's current structure and the completion of the Restructuring. In 2000, the Company recorded an operating loss of approximately $2.39 million compared with an operating loss of approximately $3.31 million in 1999 and an operating loss of approximately $13.07 million in 1998. The lower 2000 operating loss reflects the Company's current structure. The 1999 operating loss reflected the effects of the Restructuring, in which the Company completed its disposition of its revenue-generating operations. There were no taxes on income in 2000, 1999 or 1998. See "Effective Corporate Tax Rate". As a result of the foregoing factors, the Company recorded a net loss of approximately $1.39 million in 2000, a net loss of approximately $4.85 million in 1999, and a net loss of approximately $14.36 million in 1998. There can be no assurance that the Company will return to profitability in 2001 or thereafter. Impact of Inflation and Exchange Rates The dollar cost of the Company's operations in Israel is related to the extent to which the rate of inflation in Israel is offset by the devaluation of Israeli currency in relation to the dollar without significant timing delays. The Company's dollar costs in Israel will increase if devaluation fails to keep pace with the rate of inflation. Conversely, those costs will decrease if the rate at which Israeli currency devalues against the dollar exceeds the rate of inflation in Israel on a relatively even basis. Periodically, dependent upon inflation and other considerations, both fiscal and monetary, the Bank of Israel resets the target (middle of the range) exchange rate of the NIS in relation to a weighted basket of foreign currencies of Israel's major trading partners and allows the actual exchange rate to float within a range determined by the Bank of Israel. During 1998, 1999 and 2000, the NIS was devalued (appreciated) approximately 20.4%, (3.2%) and (5.5%) respectively, against the currency basket, and approximately 17.6%, (0.2%) and (2.7%) respectively, against the dollar. Our operations could be adversely affected if we are unable to guard against currency fluctuations in the future. We do not currently engage in any currency hedging transactions intended to reduce the effect of fluctuations in foreign currency exchange rates on our results of operations. We cannot guarantee that we will not enter into such transactions in the future or that such measures will adequately protect us from serious harm due to the impact of inflation in Israel. The relationship between the Company's assets and liabilities in Israeli currency and whether they are linked to a foreign currency or price index also affects the Company's financial results. In the past IIS has managed its exposure in Israeli currency so that unlinked liabilities generally exceeded unlinked monetary assets in Israeli currency. The Company cannot predict whether it will be able to continue to manage its assets and liabilities in this manner in the future. -22- Effective Corporate Tax Rate The income tax obligations of IIS in Israel are based upon earnings determined for Israeli statutory purposes and not as determined from the amounts reported in dollars. Therefore, the provision for income taxes included in the financial statements does not directly relate to income shown on those statements. If certain conditions are met, IIS will be deemed an "Industrial Company." In the past, certain of its Israeli operations have been granted "Approved Enterprise" status under the Law for the Encouragement of Capital Investments, 1959, as amended (an "Approved Enterprise"). Consequently, part of its Israeli activities were subject to taxation at reduced rates and were permitted special deductions in computing taxable income. Income arising from an Approved Enterprise may be subject to a reduced company tax at the rate of 25% (rather than the regular company tax rate of 36% in 2000), or may be exempt from company tax for a period of time, depending on the election made by the enterprise. Since the Company's Israeli operations are operating under more than one Approved Enterprise designation and since part of its taxable income is not entitled to tax benefits and is taxed at regular rates, its past effective tax rate was the result of a weighted combination of the various applicable rates or tax exemptions. We cannot assure you that we will maintain our status as an Industrial Company for year 2001 or beyond. If we do not maintain our status as an Industrial Company, the applicable Israeli income tax with respect to capital gain realized by an individual shareholder with respect to the Ordinary Shares will be as follows: 35% for individuals who are Israeli residents, 36% for Israeli companies and 50% for non-residents of Israel. See also Item 10.E. "Taxation." Net loss carry forwards of the Company totaled approximately $73 million as of December 31, 2000 and are unlimited in time. See Note 11 to the Company's Consolidated Financial Statements. Quarterly Results The Company's operating results in the near future may vary significantly from quarter to quarter, in part because of the substantial changes in the Company's structure and a focus on SAN channel technology. The Company's operating results for any particular quarter are not necessarily indicative of any future results. The nature of the Company's industry and business has changed, and the accelerated and unpredictable pace of new product introduction and market trends, which is expected to continue, limits management's ability to accurately forecast short-term results of operations. Furthermore, there can be no assurance that the Company will return to profitability in 2001 or thereafter. Governmental Economic, Fiscal, Monetary or Political Factors Our principal offices and our principal facilities, and those of StoreAge, are located in Israel, and each of us is directly affected by the political, economic and military conditions to which that country is subject. Any of StoreAge's manufacturing operations would be heavily dependent upon components imported from outside of Israel. A substantial majority of StoreAge's future sales, if any, will be made outside of Israel. Accordingly, our operations and those of StoreAge could be materially adversely affected if major hostilities involving Israel should occur or if trade between Israel and its -23- present trading partners were interrupted or curtailed. In addition, termination or reduction of certain governmental grants, programs and tax benefits could have a material adverse effect on us and StoreAge. On May 4, 2000, a committee chaired by the Director General of the Israeli Ministry of Finance issued a report recommending a sweeping reform in the Israeli system of taxation. The proposed reform would significantly alter the taxation of individuals and would also affect corporate taxation. In particular, the proposed reform would reduce but not eliminate the tax benefits available to Approved Enterprises. The Israeli cabinet of the previous government approved the recommendation in principle. The new Israeli government has declared that it intends to recommend tax reforms but has not approved the May 4, 2000 report or any alternative reform. Implementation of any reform requires legislation by Israel's Knesset. We are not certain whether the proposed reform will be adopted, when it will be adopted or what form reforms will ultimately take or what effect it will have on us. B. Liquidity and Capital Resources. In late 1999, StoreAge completed a private placement of 707,558 convertible preferred shares to outside investors for a total net consideration of approximately $3.12 million. Accordingly, the Company's equity interest in StoreAge was reduced to 58.56%. The excess received by StoreAge from the issuance of convertible preferred shares to outside investors, over the amount invested by the Company, amounting to approximately $2.24 million, was recorded as a quasi-equity item, preferred shares of subsidiary. During November 2000, the Company acquired the assets of Eastek Embedded Systems (Meitav) Ltd. ("Eastek"), a private Israeli software company, to enhance its R&D capabilities in order to develop synergetic software solutions for the SAN market. The acquisition was completed through the issuance of shares to Eastek and its founder, Danny Shavit. If certain conditions are met a total of 180,000 shares will be delivered to Eastek and Mr. Shavit. In December 2000, the Company completed a private placement of $3 million through the issuance of convertible subordinated notes and warrants to qualified investors. The net proceeds from the offering were used to fund part of the Company's investment in StoreAge's second round of financing. On January 25, 2001, StoreAge completed its second round of financing, raising a total of $25 million from strategic and institutional investors in a private placement. The Company was an investor in the financing, investing a total of $4.2 million. Following the consummation of the financing, the Company held 39% of the outstanding shares of StoreAge. The Company had cash and cash equivalents of approximately $5.66 million at December 31, 1998, $7.35 million at December 31, 1999 and $3.08 million at December 31, 2000. The ratio of current assets to current liabilities was 1.30:1.00 at December 31, 1998, 3.59:1.00 at December 31, 1999 and 2.42:1.00 at December 31, 2000. The increase in the current ratio in 1999 reflected the disposition of various assets for cash in the Restructuring. The decrease in the current ratio in 2000 was primarily due to operating losses and de- consolidation of StoreAge. For a discussion of the primary currency in which the operations of the Company are conducted see Item 5.A., "Operating Results," above. -24- In 2000, the Company recorded a net negative cash flow from operations of approximately $(2.04) million and in 1999, the Company recorded a net negative cash flow from operations of approximately $(2.19) million, compared with a net negative cash flow from operations of approximately $(2.88) million in 1998. Net cash flow from operations in 1998, 1999 and 2000 was adversely affected by the operating losses during those years. The Company anticipates that its existing cash on hand, will be sufficient, at the business levels presently projected, to meet its working capital requirements, including normal capital expenditures, for at least the next 12 months. However, continued losses from operations or inability to secure additional financing for StoreAge, if required, may reduce the Company's working capital and cash equivalents to a level which could adversely affect the Company's future operations. StoreAge has certain limitations in respect of its Approved Enterprise status. StoreAge has been granted Approved Enterprise status and has elected the "alternative track of benefits." Income derived from an Approved Enterprise is tax exempt for the first two years of a 7-year period of benefits. Income derived during the remaining five years of benefits is taxed at a reduced tax rate. The period of benefits commences with the first year in which StoreAge has taxable income. The period of benefits relating to StoreAge's Approved Enterprise status will expire no later than the year 2013. In the event of distribution of cash dividends from income which is tax exempt due to the above, StoreAge would have to pay tax at the rate of 25% on an amount equal to the amount of dividends distributed. The Company does not control StoreAge and consequently has no ability to receive loans or advances from StoreAge. In the event that StoreAge declares dividends, the holders of the preferred shares will receive the greater of (i) their investment plus 8% per annum, compounded annually or (ii) their pro rata portions of the dividends available for distribution to all the shareholders. C. Research and Development, Patents and Licenses, etc. See the information in "Item 4. Information on the Company - B. Business Overview - Product Research and Development". D. Trend Information. StoreAge is a start-up company that has only recently begun to sell its products and the Company is in the earliest stages of establishing its own research & development unit, specializing in storage technology. As a result of this limited history, there are no trends yet known to the Company that are likely to have a material effect on the Company's revenues, income from continuing operations, profitability, liquidity or capital resources. For additional information please see the "Risk Factors" listed in Item 3 above. -25- Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES - ------- ------------------------------------------ A. Directors and Senior Management. The Company's executive officers and directors as of June 1, 2001 were as follows:
Name Age Position with the Company - ---- --- ------------------------- Robi Hartman 40 Chairman of the Board, Director, Chief Executive Officer and Acting Chief Financial Officer Moshe Kahn* 43 External Director David Rubner 61 Director Aharon Jacobowitz* 52 Director Yael Ilan 52 Director Gideon Marks 46 Director Jonathan Nativ* 54 External Director Danny Shavit 46 Chief Technology Officer
* Member of the Audit Committee and Compensation Committee Robi Hartman has been a director of the Company since September 1998, Vice Chairman of the Board from October 1998 to March 2000, Acting Chief Financial Officer since December 1998, and Chairman of the Board and Chief Executive Officer of the Company since March 2000. Before joining the Company, from 1987 to 1996, Mr. Hartman was the manager of Teledata Communications Ltd., a leading supplier of advanced access solutions, beginning as a manager and progressing to the Chief Financial Officer and finally as Chief Executive Officer and President. From 1996 to 1997, Mr. Hartman was the President of VCON Telecommunications, a pioneer in PC based teleconferencing. Since 1997 he owns and manages West End Technology Investments Ltd. Currently, he is also a director of NSI Communications in Canada. Mr. Hartman received his B.A. in Economics and Political Science from Bar Ilan University and his Masters degree in Business Administration (MBA) from Bentley College. Moshe Kahn has been a director of the Company since November 2000. Mr. Kahn was elected as an external director in accordance with the Israeli Companies Law. He is an attorney admitted to practice in Israel and the State of New York. He is a partner of the law firm of M. Porath and Co. in Tel Aviv, where he is engaged in corporate law and commercial mediation and acts as council for local and international firms. Mr. Kahn serves as a Major in the Legal Department of the Armed Forces of the State of Israel reserves. Mr. Kahn has an L.L.B. in Law from Bar Ilan University. Mr. Kahn is a member of our audit committee. David Rubner has been a director of the Company since March 2000. Mr. Rubner is Chairman and Chief Executive Officer of Rubner Technology Ventures Ltd. Mr. Rubner was employed from 1970 until recently by ECI Telecom Ltd. ("ECI"). From 1991 to October 1999 and February 2000, -26- respectively, he was ECI's President and Chief Executive Officer. In November 1999 he was appointed Vice-Chairman of the Board of Directors of ECI. Mr. Rubner is also Chairman of the Board of Directors of ECTel Ltd., a publicly traded subsidiary of ECI, and serves on the boards of Check Point Software Technologies Ltd., Efcon Ltd., Jigami Corp. and Koor Ltd. Mr. Rubner holds a bachelor of science degree with honors in electronic engineering from Queen Mary College, University of London, and a master of science degree in electrical engineering from Carnegie Mellon University, Pittsburgh. Mr. Rubner is a member of the Presidium of the Israel Manufacturers' Association, and was recipient of the Industry Prize of Israel for 1995. Aharon Jacobowitz has been a director of the Company since May 1995. Since 1989, Mr. Jacobowitz has been a management consultant to large organizations on data processing issues. His clients include the Accountant General, Ministry of Finance, State of Israel, General Manager of the Social Security Institute in Israel and Teva Pharmaceutical Industries Ltd., the largest pharmaceutical manufacturer of Israel. Prior to 1989, Mr. Jacobowitz was employed for 14 years in various capacities in the marketing division of IBM Israel Ltd. His main specialties were networking and midrange systems. Mr. Jacobowitz is a member of our audit committee. Dr. Yael Ilan has been a director of the Company since November 1997. She is the Chief Executive Officer of Optichrom Ltd., an optical components private company, the President of Yedatel Ltd., an economic consulting company, and a director of several public and private corporations, most of them in the technology sector. Until 1998, she was a director of Bezeq - Israel's Telecommunication Company in which she was also a member of the audit committee and the committee for strategic planning and investments. Correspondingly, she is the head of the Broadband Communication Programs administration, a subdivision of MAGNET - the Israeli Government hi-tech cooperation initiative. Dr. Ilan holds a Ph.D. in industrial engineering, Ph.D. in physical chemistry and a Masters degree in business administration. Gideon Marks has been a director of the Company since July 2000. He is the managing director, Israel of Garage.com. From 1988 until 1998 Mr. Marks served as Chief Financial Officer of the RAD Group, one of the largest data communication groups in Israel. Prior to joining Garage.com, Mr. Marks was the representative of NationsBanc Montgomery Securities in Israel. Mr. Marks has a B.A. and an M.B.A from Tel Aviv University. Jonathan Nativ has been a director of the Company since November 2000. Mr. Nativ was elected as an external director in accordance with the Israeli Companies Law. He has served since 1997 as the Chief Executive Officer of Compwise Ltd., a company that develops, markets and sells special-purpose software for tariff modeling and analysis and auditing solutions to telecommunications companies, particularly those involved in wireless telecommunications. From 1978 until 1983, he served as project manager at Tadiran Ltd. (Telecommunications Division), one of Israel's leading electronics firms. From 1983 to 1995, Mr. Nativ served as the Director of Research and Development, Executive Vice President of Marketing, and Executive Vice President of Strategy and Business Development at Teledata Communications Ltd., a leading supplier of advanced access network solutions to telecommunication network operators worldwide. From 1995 to 1997 he served as a consultant to Teledata Communications Ltd. He serves as director of TDSoft Ltd. and other Israeli technology-based companies. Mr. Nativ earned a bachelor's degree. in Electronic Engineering from the Technion, Israel Institute of Technology and an Executive MBA from Tel-Aviv University. Mr. Nativ is a member of our audit committee. -27- Danny Shavit has been the Chief Technology Officer of the Company since November 2000. He was the Co-Founder and Managing Director of Eastek, a company that developed CDROM and hard-disk drive test software from October 1995 until November 2000. From January 1992 until August 1995 he was the R&D Manager of Meitav Ltd., a company that developed real-time temperature control systems. From October 1987 until December 1991 he was the Co-Founder and R&D Manager of Maintek LTD., a start-up in the field of hard-disk controllers doing a joint venture with Standard Microsystems Corporation in the United States. Mr. Shavit is an expert in real-time microprocessor based, mass-storage controllers and test systems. He earned a Bachelor of Science degree in Computer Engineering and a Masters of Science degree in Digital Signal Processing from the Technion in Israel. There is no family relationship between any of the persons named above. Furthermore, there are no arrangements or understandings with any of the major shareholders, customers, suppliers or others, pursuant to which any person referred to above was selected as a director or member of senior management. B. Compensation. During the fiscal year ended December 31, 2000, the aggregate remuneration paid to all officers and directors of the Company as a group (then eight persons) was approximately $230,000. In connection with the Eastek acquisition, 100,000 Ordinary Shares of the Company were issued to Danny Shavit. Subject to certain conditions, the Ordinary Shares issued to Mr. Shavit will be delivered to him in installments of 30,000, 35,000 and 35,000 Ordinary Shares on the first, second and third anniversaries of the Eastek acquisition, respectively. See Note 2 to the Consolidated Financial Statements of the Company for information regarding certain severance pay and pension plans generally available to employees of the Company, and in which certain officers and directors participate. An aggregate of 656,550 options were granted to the Company's directors during the fiscal year ended December 31, 2000. All of such options are exercisable for Ordinary Shares of the Company and have an exercise price of $3.625. With the exception of the options held by Robi Hartman, the options become exercisable in four equal annual installments from November 30, 2000 and expire on November 30, 2006. Mr. Hartman holds a total of 356,550 options, of which 56,550 are currently fully exercisable and expire on November 30, 2006. The other 300,000 options held by Mr. Hartman become exercisable in four equal annual installments from March 22, 2000 and expire on November 30, 2006. For information on the Company's stock option plan, see "Stock Option Plans" below and Note 10 to the Company's Consolidated Financial Statements. C. Board Practices. In August 1993 the Company's articles of association were amended to provide, among other matters, for a classified board of directors. These provisions were retained with minor amendments, in the new articles of associations of the Company approved on November 19, 2000 (the "Articles of Association"). Mr. Marks and Dr. Ilan have served as directors of the Company since July 2000 and November 1997, respectively, and currently serve until the 2001 annual meeting and until their successors have been elected and qualified. Mr. Hartman has been a director of the Company since September 1998 and currently serves until the 2002 annual meeting and until his successor has been -28- elected and qualified. However, since Mr. Hartman is Chief Executive Officer of the Company, in accordance with the provisions of the Articles of Association, he shall serve as a director as long as he remains Chief Executive Officer. Messrs. Jacobowitz and Rubner have been directors of the Company since May 1995 and March 2000, respectively, and currently serve until the 2003 annual meeting and until their successors have been elected and qualified. Messrs. Nativ and Kahn have each served as directors of the Company since November 2000 when they were elected as external directors (as defined below) pursuant to the Israeli Companies Law. Under Israeli Companies Law, the initial term of an external director is three years and may be extended for an additional three years. Officers serve at the discretion of the board of directors, subject to the terms of any agreement between them and the Company. Mr. Shavit has served as the Company's Chief Technology Officer since November 2000 and will continue to serve in this position subject to the terms of his employment agreement. There are no service contracts between the Company and any of its directors providing for benefits upon termination of employment. External and Independent Directors Under the new Israeli Companies Law, Israeli companies whose shares have been offered to the public in or outside of Israel are required to appoint two people to serve as external directors on the board of directors of a company. The Companies Law provides that a person may not be appointed as an external director if the person or the person's relative, partner, employer or any entity controlled by that person has at the date of appointment, or has had at any time during the two years preceding that date, any affiliation with the company, any entity controlling the company or any entity controlled by the company or by this controlling entity. The term "affiliation" includes: . an employment relationship; . business or professional relationship maintained on a regular basis; . control; or . service as an officer. No person can serve as an external director if the person's position or other business creates, or may create, conflict of interests with the person's responsibilities as an external director or if such position or other business may impair such director's ability to serve as an external director. No person who is a director in one company can serve as an external director in another company, if at that time a director of the other company serves as an external director in the first company. The Companies Law further provides that when, at the time of appointment of an external director, all members of the board of directors of the company are of one gender, then the external director appointed shall be of the other gender. External directors are appointed by a majority vote at a shareholders' meeting, provided that either: (1) the majority of shares voted at the meeting, including at least one third of the shares of non-controlling shareholders voted at the meeting, vote in favor of appointment of the director or (2) the -29- total number of shares of non-controlling shareholders voted against the election of the director does not exceed one percent of the aggregate voting rights in the company. The initial term of an external director will be three years and may be extended for an additional three-year period. Each committee of a company's board of directors will be required to include at least one external director and all external directors must be members of the company's audit committee. In addition, we are obligated under the requirements for quotation on the Nasdaq SmallCap Market to have at least two independent directors on our board of directors, who also may serve as external directors under the Companies Law, and to establish an audit committee, at least a majority of whose members are independent of management. The audit committee should adopt a formal written audit committee charter to be reviewed annually. An external director is entitled to consideration and to the refund of expenses, only as provided in regulations adopted under the Companies Law and is otherwise prohibited from receiving any other consideration, directly or indirectly, in connection with service provided as an external director. Nevertheless, the grant of an exemption from liability for breach of fiduciary duty or duty of care, an undertaking to indemnify, indemnification or insurance under the provisions of the Companies Law shall not be deemed as consideration. Under the Companies Law, an external director cannot be dismissed from the office unless: . the board of directors determines that the external director no longer meets the requirements for holding such office, as set forth in the Companies Law or that the director is in breach of his or her fiduciary duties to the company and the shareholders of the company vote (by the same majority required for the appointment) to remove the external director after the external director has been given the opportunity to present his or her position; . an Israeli court determines, upon a request of a director or a shareholder, that the director no longer meets the requirements for holding such office as set forth in the Companies Law or that the director is in breach of his or her fiduciary duties to the company; or . the court determines, upon a request of the company or a director, shareholder or creditor of the company, that the external director is unable to fulfill his or her duty or has been convicted of certain crimes as specified in the Companies Law. Audit Committee and Internal Auditor The Israeli Companies Law requires public companies to appoint an audit committee. The responsibilities of the audit committee include identifying irregularities in the management of the company's business and approving related party transactions as required by law. An audit committee must consist of at least three directors, including all of the external directors. The chairman of the board of directors, any director employed by or otherwise providing services to the company, and a controlling shareholder or any relative of a controlling shareholder, may not be a member of the audit committee. An audit committee may not approve an action or a transaction with a controlling shareholder, or with an office holder, unless at the time of approval two external directors are serving as members of the audit committee and at least one of the external directors was present at the meeting in which an approval was granted. Our audit committee consists of Messrs. Kahn, Nativ and Jacobowitz. -30- Under the Israeli Companies Law, the board of directors must appoint an internal auditor, nominated by the audit committee. The role of the internal auditor is to examine, among other matters, whether the company's actions comply with the law and orderly business procedure. Under the Israeli Companies Law, the internal auditor may be an employee of the company but not an office holder, or an affiliate, or a relative of an office holder or affiliate, and he or she may not be the company's independent accountant or its representative. We intend to appoint an internal auditor in the near future. Compensation Committee The Israeli Companies Law does not require public companies to appoint a compensation committee. The Company, however, has selected a compensation committee which makes recommendations to the board with respect to all director and officer compensation issues including the grant of stock options. Our compensation committee consists of Messrs. Kahn, Nativ and Jacobowitz. D. Employees. As of December 31, 2000 the Company and StoreAge employed 9 and 30 persons, respectively: 30 in engineering, 2 in sales, 3 in operations and logistics, and 4 in general management and marketing. The Company and StoreAge are planning to increase the current staff by 18 persons in the next six months, in the areas of engineering and sales, with a focus on research and development and testing, as well as in marketing. The Company has never experienced a work stoppage, and the Company considers its relations with its employees to be good. The Company pays competitive salaries and provides competitive benefits to its employees. Certain provisions of the collective bargaining agreements between the Histadrut (the General Federation of Labor in Israel) and the Coordinating Bureau of Economic Organizations (including the Industrialists' Association) (the "CBEO") are applicable to the Company's Israeli employees by order of the Israeli Ministry of Labor. These provisions principally concern the length of the workday, minimum daily wages for professional workers, contributions to a pension fund, insurance for work-related accidents, procedures for dismissing employees, determination of severance pay and other conditions of employment. The Company generally provides its Israeli employees with benefits and conditions beyond the required minimums. An important contractual provision applicable to all employers in Israel is the linkage of wages to increases in the CPI, although the extent of the linkage has been limited in recent years. The specific formula of such linkage varies according to agreements reached between the Government of Israel, the Histadrut and the CBEO. In addition, Israeli law generally requires severance pay (generally one month's salary for each year of employment) upon the retirement or death of an employee or termination of employment without due cause. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute which is similar to the United States Social Security -31- Administration. Such payments amount to approximately 9% of wages (up to a maximum amount), with the employee contributing approximately 4.5% and the employer contributing the remainder. E. Share Ownership. The following chart sets forth director and senior management share ownership in the Company as of May 31, 2001. Each shareholder listed below enjoys the same voting rights with respect to each share.
Number of Shares Percentage of Shares Title of Beneficially Beneficially Owned Name Class Owned(1) (%)(2) Options(3) - ---- ----- -------- ------------------ ----------------- Gideon Marks Ordinary Shares - * 50,000 David Rubner Ordinary Shares - * 50,000 Robi Hartman Ordinary Shares 496,814 5.47% 356,550 Yael Ilan Ordinary Shares - * 50,000 Aharon Jacobowitz Ordinary Shares - * 50,000 Jonathan Nativ Ordinary - Shares * 50,000 Moshe Kahn Ordinary - Shares * 50,000 Danny Shavit Ordinary Shares 180,000(4) 1.98% -
___________________ * Owns less than one percent of the Ordinary Shares outstanding. (1) Beneficial ownership by a person assumes the exercise of all options and warrants held by such person that are currently exercisable or are exercisable within 60 days of such date. (2) Percentage ownership is based on 9,087,324 shares outstanding as of May 31, 2001. (3) All of the options are exercisable for Ordinary Shares of the Company and have an exercise price of $3.625. With the exception of the options held by Robi Hartman, the options become exercisable in four equal annual installments from November 30, 2000 and expire on November 30, 2006. Mr. Hartman holds a total of 356,550 options, of which 56,550 options are currently -32- fully exercisable and expire on November 30, 2006. The other 300,000 options held by Mr. Hartman become exercisable in four equal annual installments from March 22, 2000 and expire on November 30, 2006. (4) In connection with the Eastek acquisition, 100,000 and 80,000 shares were issued to Mr. Shavit and Eastek, respectively. Subject to certain conditions, the Ordinary Shares issued to Mr. Shavit will be delivered to him in installments of 30,000, 35,000 and 35,000 Ordinary Shares on the first, second and third anniversaries of the Eastek acquisition, respectively. Additionally, Mr. Shavit is the beneficial owner of the shares issued to Eastek. The Company issued 60,000 of such shares to Eastek as partial consideration for the acquisition and the Company may deliver an additional 20,000 Ordinary Shares to Eastek on the first anniversary of the acquisition if certain conditions are met. Stock Option Plans In August 1993, a new employee share incentive plan (the "Plan") was approved by the board of directors and later adopted by the Company's shareholders. The Plan permits the grant of options to purchase Ordinary Shares to officers, directors and key employees of, and consultants to, the Company or any subsidiary of the Company. The Plan presently permits the grant of options to purchase up to an aggregate of 1,239,883 Ordinary Shares. The Plan is administered by the board of directors or by a committee appointed by the board of directors, which designates the optionees, exercise prices and amounts and dates of grant. The exercise price of options granted under the Plan is the fair market value (in NIS linked to the dollar in the case of Israeli employees and in dollars in the case of non-Israeli employees) of the underlying shares on the date of grant, or a lesser percentage of fair market value as is determined by the committee or the board of directors, but in no event less than 85% of the market price of the shares on the date of grant. Options are non-assignable except by the laws of descent and generally vest and are exercisable in three equal annual installments. The options expire 6-10 years subsequent to the date of grant. As of December 31, 2000, options to purchase up to 1,148,150 Ordinary Shares were outstanding, exercisable at prices ranging from $3.63 to $67.2 per share, with expiration dates ranging from February 2002 to November 2006, of which options to purchase up to 656,550 Ordinary Shares were held by all officers and directors of the Company and StoreAge as a group. For additional information regarding the Company's stock option plan, see Note 10 to the Company's Consolidated Financial Statements. Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS - ------- ------------------------------------------------- A. Major Shareholders. As of December 31, 1999, Resonance Ltd. beneficially owned 28.3% of the Company's outstanding Ordinary Shares. Subsequently, Resonance Ltd. advised the Company that it was no longer a 10% shareholder of the Company. The Company believes that Resonance Ltd. sold the balance of its shares in the public market and as a result is no longer a beneficial owner of 5% or more of the Company's outstanding Ordinary Shares. During the period of March 5, 2001 to April 27, 2001, Mr. Hartman purchased an aggregate of 106,500 of the Company's Ordinary Shares. As reported on its Schedule 13G recently filed with the Securities & Exchange Commission, Europlan Trust Company Ltd. is the -33- beneficial owner of an aggregate of 887,145 Ordinary Shares of the Company or 9.76% of the Company's outstanding Ordinary Shares. The following table sets forth, as of May 31, 2001, the number of Ordinary Shares of the Company owned by all persons known to the Company to beneficially own 5% or more of the Company's Ordinary Shares. The Company's major shareholders do not have different voting rights.
Number of Percentage of Ordinary Shares Beneficially Ordinary Shares Name and Address Owned(1) Beneficially Owned(2) - ---------------- -------- --------------------- Europlan Trust Company Ltd.(3)...... 887,145 9.76% Robi Hartman(4)..................... 496,814 5.47% All directors and officers as a group.......................... 646,814 7.12%
____________________ (1) Beneficial ownership assumes the exercise of all options and warrants held by such person or persons that are currently exercisable or are exercisable within 60 days of such date. (2) Percentage ownership is based on 9,087,324 shares outstanding as of May 31, 2001. (3) As reported on Schedule 13G filed with the Securities & Exchange Commission, dated June 6, 2001. (4) Mr. Hartman is Chief Executive Officer and Chairman of the Company. Beneficial ownership is as reported on Amendment No. 1 to Schedule 13G dated May 1, 2001. As of April 30, 2001, approximately 89.2% of the outstanding Ordinary Shares of the Company were held of record by approximately 65 holders registered on the books of the Company's United States transfer agent with addresses in the United States. The Company believes that there are more than 500 beneficial owners of its Ordinary Shares in the United States and that a substantial majority of its Ordinary Shares are beneficially owned by non-United States persons. To the extent known to the Company, the Company is not directly or indirectly owned or controlled by another corporation, by any foreign government or by any other natural or legal person. There are currently no arrangements known to the Company that may result in a change in control of the Company. B. Related Party Transactions. In connection with the StoreAge's private placement, in January 2001, StoreAge entered into a shareholders' rights agreement (the "Rights Agreement") with a wholly-owned subsidiary of the Company and with certain other investors. Under the Rights Agreement, in addition to other provisions, each party has the right of first refusal to purchase any shares of StoreAge offered for sale by the Company and the other investors. -34- In February 2001, a portion of the Company's office space located in Ramat Gan, Israel was leased from a company that is owned by Robi Hartman, the Company's Chief Executive Officer and Chairman. The space was leased at 70% of the then generally prevailing market rate for lease space in the area, as approved by the Company's audit committee based upon an independent appraisal report. Several of the Company's employees perform research and development work for StoreAge and StoreAge is charged on a percentage of cost basis for such work. Additionally, the Company's research and development team is currently engaged in developing Internet Small Computer Systems Interface ("iSCSI") applications for StoreAge for a fixed price per product developed. C. Interests of Experts and Counsel. Not applicable. Item 8. FINANCIAL INFORMATION - ------- --------------------- A. Consolidated Statements and Other Financial Information. See pages F-1 - F-28 following Item 19. Legal Proceedings On December 14, 1999, we, as defendants, and a class constituted of certain of our current and former shareholders, as plaintiffs, were the subject of a Stipulation of Settlement filed in the United States District Court for the Eastern District of New York (the "Stipulation"). The Stipulation served to settle a class action lawsuit brought against us on behalf of the class of plaintiffs (the "Class") through a complaint filed on September 15, 1993. The plaintiffs in the lawsuit claimed violations of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, by us, by some of our officers, and by two underwriters of our securities in connection with the public offering of some of our Ordinary Shares in an August 1993 public offering. In accordance with the Stipulation, we issued warrants to the members of the Class willing to participate in the settlement. The warrants entitle their holders to purchase that number of Ordinary Shares equal to 10% of the number of Ordinary Shares outstanding as of the date that the Stipulation was submitted to court, or 886,039 Ordinary Shares, at an exercise price of $0.30 per share. A suit was filed in Israel in 1995 against the Company and certain of its officers and directors alleging inadequate disclosure in prior years of the Company's financial position, results of operations and prospects, and damages in the amount of $250,000. The Company has answered the complaint, denying all allegations of wrongdoing. The Company believes that the allegations are without merit and, if a settlement is not consummated, intends to continue to defend the action vigorously. While the Company does not believe that the outcome of the action, if not settled, will have a material adverse effect on either its business operations or its financial position, there can be no assurance as to the outcome of the suit. -35- The Company is not a party to any other litigation that would, individually or in the aggregate, have a material adverse effect on the Company or its business, and is not aware that any such litigation is threatened. Dividends The Company has not declared or paid dividends on their Ordinary Shares since 1989, and does not intend to declare or pay any dividends to their shareholders in the foreseeable future. B. Significant Changes. There have been no significant changes since December 31, 2000, the date of the annual financial statements in this annual report. Item 9. THE OFFER AND THE LISTING - ------- -------------------------- The Ordinary Shares of the Company have been traded in the over-the-counter market in the United States since the Company's initial public offering on November 8, 1984. The Ordinary Shares originally traded under the symbol IISLF and now trade under the symbol IISL. From January 22, 1985 to March 17, 1999, the Ordinary Shares traded on the Nasdaq National Market ("Nasdaq"). Since March 18, 1999 the Ordinary Shares have traded on the Nasdaq SmallCap Market (the "SmallCap Market"). The following table sets forth, for the periods indicated, the annual high and low sale prices of the Ordinary Shares as reported by Nasdaq for the five most recent full financial years, the quarterly high and low sale prices for the two most recent full financial years and first quarter 2001 and the monthly high and low sale prices for the most recent six months. High Low ---- --- Year ended December 31, 1996 $12.39 $4.14 Year ended December 31, 1997 $ 7.88 $3.00 Year ended December 31, 1998 $ 3.94 $0.28 Year ended December 31, 1999 $ 7.94 $0.34 Year ended December 31, 2000 $10.03 $1.38 1999 - ---- First Quarter $ 0.81 $0.34 Second Quarter 1.31 0.50 Third Quarter 1.13 0.84 Fourth Quarter 7.94 0.81 2000 - ---- First Quarter $10.03 $3.88 Second Quarter 7.69 3.00 -36- High Low ---- --- Third Quarter $7.00 $3.50 Fourth Quarter 4.94 1.38 First Quarter 2001 4.44 1.44 Most Recent Six Months - ---------------------- December 2000 $3.63 $1.38 January 2001 3.81 1.44 February 2001 4.44 1.94 March 2001 2.58 1.76 April 2001 2.10 1.52 May 2001 2.52 2.17 The foregoing prices reflect inter-dealer quotations without retail mark- ups, mark-downs or commissions and may not represent actual transactions. Item 10. ADDITIONAL INFORMATION - -------- ---------------------- A. Share Capital. Not applicable. B. Memorandum and Articles of Association. Objects and Purposes in the Company's Articles of Association The Company's objects and purposes are specified in its Memorandum of Association filed as Exhibit 3.2 to Registration Statement No. 33-62862 dated August 10, 1993 (the "Memorandum"). Provisions Regarding Directors Pursuant to article 54(b) of our Articles of Association, a transaction entered into by the Company in which a director of the Company has a personal interest, directly or indirectly, will be valid in respect of the Company and the given director only if approved by the Company's board of directors and, if such transactions are "irregular transactions" as defined in the Israeli Companies Law, only if approved in accordance with the requirements of the Israeli Companies Law. An "irregular transaction" pursuant to the Israeli Companies Law is defined as a transaction which is not in the ordinary course of business, a transaction which is not under ordinary market conditions or any transaction which might substantially affect the profitability of the Company, its assets and liabilities. The Israeli Companies Law provides that a director who has personal interest in a given transaction of the Company, brought to the approval of the board of directors, shall not be present and vote at that meeting. Article 55 of the Company's Articles of Association, provides that a director who has a personal interest in a matter which is brought for discussion before the board of directors may participate in said discussion, provided that he shall neither vote in nor attend discussions concerning -37- the approval of the activities or the arrangements. If said director did vote or attend as aforesaid, the approval given to the aforesaid activity or arrangements shall be invalid. Pursuant to article 72 of the Company's Articles of Association, at any meeting of the board of directors at which a quorum is present, the board will have the authority to exercise all or part of the authorities, power of attorney and discretion invested at such time in the directors or regularly exercised by them. With respect to legal quorum at our board meetings, the Israeli Companies Law provides that, unless determined otherwise by the Company, a legal quorum at the board meetings shall consist of the majority of the board members. We have not decided otherwise and therefore, the legal quorum at our board meeting will consist of the majority of the board members. Any transaction concerning compensation to a director requires the approval by the board of directors, the audit committee and the shareholders of the Company. The board of directors may from time to time, in its discretion, cause the Company to borrow or secure the payment of any sum or sums of money for the purpose of the Company. Additionally, the Company may secure or provide for the repayment of such sum or sums in such manner, at such times and upon such terms and conditions in all respects as it sees fit and in particular, by the issuance of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages, charges or other securities on the undertaking, or the whole or any part of the property of the Company, both present and future, including units uncalled or called but unpaid capital for the time being. There is no mandatory retirement age for the directors under our Articles of Association or the Companies Law. There is no requirement concerning the number of shares one individual must hold in order to qualify him or her as a director under our Articles of Association or the Israeli Companies law. Dividends Subject to any preferential, deferred, qualified or other rights, privileges or conditions attached to any special class of shares with regard to dividends, the profits of the Company available for dividend and resolved to be distributed shall be applied in payment of dividends upon the shares of the Company in proportion to the amount paid up or credited as paid up per the nominal value thereon respectively. Unless not otherwise specified in the conditions of issuance of the shares, all dividends with respect to shares which were not fully paid up within a certain period, for which dividends were paid, shall be paid proportionally to the amounts paid or credited as paid on the nominal value of the shares during any portion of the above-mentioned period. The board of directors may declare a dividend to be paid to the shareholders according to their rights and interests in the profits, and may fix the record date for eligibility and the time for payment. The directors may from time to time pay to the shareholders on account of the next forthcoming dividend such interim dividends as, in their judgment, the position of the Company justifies. A transfer of shares shall not pass the right to any dividend declared thereon after such transfer and before the registration of the transfer. -38- There is no time limit after which dividend entitlement lapses according to our Articles of Association or the Companies Law. The board of directors may determine that, a dividend may be paid, wholly or partly, by the distribution of specific assets of the Company or by distribution of paid-up shares, debentures or debenture stock or any other securities of the Company or of any other companies or in any one or more of such ways in the manner and to the extent permitted by the Companies Law. Terms of Directors Pursuant to article 50 of our Articles of Association, except for external directors (as defined in the Companies Law) and the Chief Executive Officer of the Company which will automatically be a director of the Company and his term of office as a director shall be vacated, ipso facto, when he ceases to serve as Chief Executive Officer of the Company, all directors shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible, one class to hold office initially for a term expiring at the 2001 annual meeting of the Company, another class to hold office initially for a term expiring at the 2002 annual meeting of the Company, and another class to hold office initially for a term expiring at the 2003 annual meeting of the Company, with the members of each class to hold office until their successors have been duly elected and qualified. At each annual meeting following the 2001 annual meeting, the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of the Company held in the third year following the year of their election and until their successors have been duly elected and qualified. Except for article 50 of the Company's Articles of Association (described above) which may be amended only by the affirmative vote of 75% of our shareholders present (in person or by proxy) and voting on such resolution at a general meeting, all other articles of our Articles of Association may be amended by a majority vote of shareholders present and voting at a meeting of shareholders of the Company. Votes of Shareholders Our shareholders have one vote for each share held on all matters submitted to a vote of shareholders. Except as otherwise provided in our Articles of Association, any resolution at a general meeting shall be deemed adopted if approved by the holders of a majority of the voting rights in the Company represented at the meeting in person or by proxy and voting thereon. In the case of an equality of votes, either on a show of hands or a poll, the chairman of the meeting shall not be entitled to a further or casting vote. At all general meetings, a resolution put to a vote at the meeting shall be decided on a show of hands unless, before or upon the declaration of the result of the show of hands, a poll in writing be demanded by the chairman (being a person entitled to vote), or by at least two shareholders present, in person or by proxy, holding at least 5% of the issued share capital of the Company and, unless a poll be so demanded, a declaration by the chairman of the meeting that a resolution has been carried, or has been carried unanimously or by a particular vote, or lost, or not carried by a particular vote, shall be conclusive, and an entry to that effect in the minute book of the Company shall be conclusive evidence thereof, without proof of the number or proportion of the votes recorded in favor of or against such -39- resolution. If a poll be demanded in manner aforesaid, it shall be taken forthwith, and the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. The demand of a poll shall not prevent the continuance of a meeting for the transaction of any business other than the question on which a poll has been demanded. Any shareholder which is not a natural person may, by resolution of its directors or other governing body, authorize such person as it thinks fit to act as its representative at a general meeting, and the person so authorized to the satisfaction of the Company shall be entitled to exercise the same powers on behalf of such company, which he represents as the company could exercise if it were an individual shareholder. Subject to any rights or restrictions for the time being attached to any class or classes of shares, every shareholder shall have one vote for each share of which he is the holder, whether on a show of hands or on a poll. Our Articles of Association do not permit cumulative voting and it is not mandated by Israeli law. Votes may be given either personally or by proxy. A proxy need not be a shareholder of the Company. If any shareholder be a lunatic, idiot, or non compos mentis, he may vote by his committee, receiver, curator bonis or other legal curator, and such last-mentioned persons may give their votes either personally or by proxy. If two or more persons are jointly entitled to a share then, in voting upon any question, the vote of the senior person who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other registered holders of the share and, for this purpose seniority shall be determined by the order in which the names stand in the shareholder register. The instrument appointing a proxy shall be in writing in the usual common form, or such form as may be approved by the board of directors, and shall be signed by the appointor or by his attorney duly authorized in writing or, if the appointor is a corporation, the corporation shall vote by its representative, appointed by an instrument duly signed by the corporation. The instrument appointing a proxy shall be deemed to include authorization to demand a poll or to vote on a poll on behalf of the appointor. A vote given in accordance with the terms of an instrument of proxy shall be valid notwithstanding the previous death or insanity of the principal, or revocation of the proxy, or transfer of the share in respect of which the vote is given, unless an intimation in writing of the death, revocation or transfer shall have been received at the office before the commencement of the meeting or adjourned meetings at which the proxy is used. The instrument appointing a proxy shall be deposited at the registered office of the Company or at such other place or places, whether in Israel or elsewhere, as the board of directors may from time to time, either generally or in a particular case or class of cases prescribe, at least forty-eight (48) hours before the time appointed for holding the meeting or adjourned meeting at which the person named in such instrument proposes to vote. Otherwise, the person so named shall not be entitled to vote in -40- respect thereof, but no instrument appointing a proxy shall be valid after the expiration of twelve months from the date of its execution. Subject to the provisions of the Companies Law, a resolution in writing (approved by letter, telex, facsimile or otherwise) by all the shareholders, in person or by proxy, for the time being entitled to vote at a general meeting of the Company, shall be as valid and as effectual as a resolution adopted by a general meeting duly convened, held and constituted for the purpose of passing such resolution. A shareholder will be entitled to vote at the meetings of the Company by several proxies appointed by him, provided that each proxy shall be appointed with respect to different shares held by the appointing shareholder. Every proxy so appointed on behalf of the same shareholder shall be entitled to vote as he sees fit. Further Rights and Preferences of the Ordinary Shares In the event of sale or the undertaking of the Company, the board or the liquidator on a winding up, as the case may be, subject to the authorization by a majority vote at a meeting of shareholders, may distribute to our shareholders all assets remaining after payment of the Company's liabilities. Our Articles of Association allow, subject to the Israeli Companies Law, the issue of redeemable shares and to redeem the same according to terms and conditions determined by the Company. Our Articles of Association do not include provisions related to sinking funds. According to our Articles of Association no person shall be entitled to vote at any general meeting (or be counted as a part of the quorum thereof) unless all calls then payable by him in respect of his shares in the Company shall have been paid. The Israeli Companies Law provides that a company is entitled to determine within its articles a provision allowing the board to place call on shares, in event the consideration for such shares, in full or in part, have not been paid on time and in accordance with the agreeable terms set out in the given agreement or the articles of association of the company. According to our Articles of Association, there are no discriminating provisions against any existing or prospective holders of shares of the Company as a result of a shareholder holding a substantial number of shares. Modification of Class Rights If, at any time, the share capital is divided into different classes of shares, the rights attached to any class (unless otherwise provided by the terms of issuance of the shares of that class) may be varied with the consent in writing of the holders of all the issued shares of that class, or with the sanction of a majority vote at a meeting of the shareholders passed at a separate meeting of the holders of the shares of the class. The provisions of our Articles of Association relating to general meetings shall apply, mutatis mutandis, to every such separate general meeting. Any holder of shares of the class present in person or by proxy may demand a secret poll. -41- Unless otherwise provided by the conditions of issuance, the enlargement of an existing class of shares, or the issuance of additional shares thereof, shall not be deemed to modify or abrogate the rights attached to the previously issued shares of such class or of any other class. These conditions provide for the minimum shareholder approvals permitted by the Israeli Companies Law. General Meetings General meetings shall be held at least once in every calendar year at such time, not being more than fifteen months after the holding of the last preceding general meeting, and at such time and place as may be determined by the board of directors. The board of directors may, whenever it deems necessary, and shall upon such requisition in writing as is provided by Section 63(b) of the Companies Law, convene a general meeting. Any such request must state the purposes for which the meeting is to be called, be signed by the requesting shareholders, and must be deposited at the registered office of the Company. Such request may consist of several documents in like form, each signed by one or more requesting shareholder. Unless a longer period for notice is prescribed by the Companies Law, at least ten (10) days and not more than sixty (60) days notice of any general meeting shall be given, specifying the place, the day and the hour of meeting and, in the case of special business, the nature of such business, shall be given in the manner hereinafter mentioned, to such shareholders as are under the provisions of the Company's Articles of Association, entitled to receive notices from the Company. Notices shall be given by mail or by personal delivery to every registered shareholder of the Company, to his address as described in the shareholders register of the Company or such other address as designated by him in writing for this purpose. Provided that the accidental omission to give such notice to, or the non-receipt of such notice by, any such shareholder shall not invalidate any resolution passed or proceeding held at any such meeting and, with the consent of all the shareholders for the time being entitled to receive notice of meetings, a meeting may be convened upon a shorter notice or without notice, and generally in such manner as such shareholders may approve. Such consent may be given at the meeting or retrospectively after the meeting. If the shareholder did not provide the Company any address for the delivery of notices, the shareholder shall be deemed to have waived his right to receive notices. Only shareholders of record as reflected on the Company's share register at the close of business on the date fixed by the board of directors as the record date determining the then shareholders who will be entitled to vote, shall be entitled to notice of, and to vote, in person or by proxy, at a general meeting and any postponement or adjournment thereof. Quorum at General Meetings No business shall be transacted at any general meeting unless a quorum is present when the meeting proceeds to business. The quorum at any Meeting shall be two shareholders present in person or by proxy, holding or representing at least twenty five percent (25%) of the total voting rights in the Company. A company being a shareholder shall be deemed to be personally present for the purpose of the Company's Articles of Association if represented by its representative duly authorized in accordance -42- with article 42 of the Company's Articles of Association. If, within half an hour from the time appointed for the holding of a general meeting, a quorum is not present, the meeting shall stand adjourned to the same day in the next week at the same time and place, or any time and hour as the board of directors shall designate and state in a notice to the shareholders entitled to vote at the original meeting, and if, at such adjourned meeting, a quorum is not present within half an hour from the time appointed for holding the meeting any two shareholders present in person or by proxy shall constitute a quorum. Notwithstanding the aforesaid, if a general meeting was convened at the demand of shareholders as permitted by Section 63(b) of the Companies Law, then a quorum at such adjourned meeting shall be present only if one or more shareholders are present who held in the aggregate at least 5% of the issued share capital of the Company and at least 1% of the voting rights in the Company or one or more shareholders who hold in the aggregate at least 5% of the voting rights in the Company. Restrictions on Shareholders Rights to Own Securities The Memorandum and Articles of Association of the Company do not restrict in any way the ownership of Ordinary Shares by residents or nonresidents, except with respect to subjects of countries which are in a state of war with Israel, and neither the Memorandum and Articles of Association nor Israeli law restricts the voting rights of residents or nonresidents. Potential Issues that Could Delay a Merger The classification of our board of directors could delay or impede the removal of incumbent directors and could therefore complicate a merger, tender offer or proxy contest involving us, even if such events would be beneficial to the interests of our shareholders, or could discourage a third party from attempting to acquire control of the Company. A merger of the Company requires the approval of the board of directors and the general meeting of shareholders, in accordance with the provisions of the Israeli Companies Law. Requirement of Disclosure of Shareholder Ownership There are no provisions of our Memorandum or Articles of Association governing the ownership threshold above which shareholder ownership must be disclosed. Approval of Special Transactions under Israeli Law Under the Companies Law, the approval of the board of directors is required only for arrangements with respect to compensation of a company's chief executive officer. Arrangements regarding the compensation of directors requires approval by the board of directors, audit committee and the shareholders. The Companies Law requires that an officer or a controlling shareholder in a public company, including an Israeli company that is publicly traded outside of Israel, promptly disclose to the audit committee, board of directors and, in certain circumstances, the shareholders, any personal interest that -43- he may have and all related material information known to him, in connection with any existing or proposed transaction by the company (an officer and a controlling shareholder are under no such duty of disclosure when the personal interest stems only from the personal interest of a relative in a transaction that is not exceptional). In addition, if the transaction is an exceptional transaction, as defined in the Companies Law, the officer must also disclose any personal interest held by the officer's spouse, siblings, parents, grandparents, descendants, spouse's descendants and the spouse of any of the foregoing, or by a corporation in which the officer is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one director or the general manager. The disclosure must be made without delay and not later than the board of directors meeting as which the transaction is first discussed. For these purposes, the definition of a controlling shareholder under the Companies Law includes a shareholder that holds 25% or more of the voting rights in a company, unless another shareholder holds more than 50% of the voting rights (if two or more shareholders are interested parties in the same transaction their shareholdings shall be deemed cumulative). Once the officer or controlling shareholder complies with these disclosure requirements, the company may approve the transaction in accordance with the provisions of the Companies Law and its articles of association. Generally, the approval of the majority of the disinterested members of the audit committee and the board of directors is required. If audit committee approval is required for a transaction with an interested party, an officer or a controlling shareholder, such approval may not be given unless, at the time the approval was granted two members of the audit committee were external directors and at least one of them was present at the meeting at which the audit committee decided to grant the approval. Shareholder approval may also be required if the transaction is an exceptional transaction. An exceptional transaction is a transaction other than in the ordinary course of business, otherwise than on market terms or that is likely to have a material impact on the company's profitability, assets or liabilities. In such event, the principal terms of such transaction must be disclosed in a notice to the shareholders which will include all substantive documents relating to the transaction. If the transaction is with an officer or with a third party in which the officer or the controlling shareholder has a personal interest, the approval must confirm that the transaction is not adverse to the company's interest. Shareholders must also approve all compensation paid to directors in whatever capacity, company's undertaking to indemnify a director or indemnification under a permit to indemnify and any transaction in which a majority of the board members have a personal interest. An officer with a personal interest in any matter may not be present at any audit committee or board of directors meeting where such matter is being approved, and may not vote thereon, unless the majority of the members of the audit committee or of the board of directors have a personal interest in such approval. Shareholders' approval for an exceptional transaction must include at least one third of the shareholders who have no personal interest in the transaction and are present at the meeting. However, the transaction can be approved by shareholders without this one-third approval if the total shareholdings of those who vote against the transaction do not represent more than one percent of the voting rights in the company, unless the Minister of Justice shall determine a different percentage. Anti-Takeover Provisions; Mergers and Acquisitions under Israeli Law Pursuant to the Companies Law, if following any acquisition of shares of a public company or of a class of shares of a public company the acquiror will hold 90% or more of the company's shares or 90% of any class of the company's shares, respectively, then the acquiror must make a tender offer for all of the remaining shares or the particular class of shares of the company. In the event that 5% or more of the shareholders have not responded favorably to a tender offer, the offeror may not purchase -44- more than 90% of that class of shares. This rule does not apply if the acquisition is made by way of a merger. Furthermore, the Companies Law provides that as long as a shareholder in a public company holds more than 90% of the company's shares or of a class of shares, such shareholder shall be precluded from purchasing any additional shares of that type. The Companies Law further provides that if following the tender offer such acquiring shareholder holds more than 95% of the outstanding shares of any class, the holders of all the remaining shares will be obligated to transfer such shares to the acquiror at the tender offer price. This entails the possibility of additional delay and the imposition of further approval requirements at the court's discretion. The Companies Law requires that each company that is party to a merger approve the transaction by a vote of the board of directors and by a vote of the majority of its outstanding shares, generally excluding shares voted by the other party to the merger or any person holding at least 25% of the other party to the merger, at a shareholders' meeting called on at least 21 days prior notice. In addition, the Companies Law does not generally require court approval of a merger. Pursuant to the Companies Law, the articles of association of companies such as ours, which have been incorporated prior to February 1, 2000, are deemed to include a provision whereby the approval of a merger requires approval of the transaction by the majority of the shareholders present and voting on the proposed transaction who hold at least 75% of the shares present and voting at such meeting. Upon the request of a creditor to either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be completed unless at least 70 days have passed from the time that a proposal for approval of the merger has been filed with the Israeli Registrar of Companies and certain notification and information have been provided to debtors. Notwithstanding the approval requirements set forth in the Companies Law, companies, such as ours, which have been incorporated prior to the Companies Law coming into effect, must specifically amend their articles of association to provide for the shareholder voting requirements contained in the Companies Law. The Companies Law also provides that an open market acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a holder of 25% of the voting rights in the company. This rule does not apply if there already is another holder of 25% of the voting rights in the company. Similarly, the Companies Law provides that an open market acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become the holder of 45% of the voting rights in the company. This rule does not apply if another party already holds more than 50% of the voting rights in the company. Regulations promulgated under the Companies Law provide that these tender offer requirements do not apply to companies whose shares are listed for trading on a stock exchange outside of Israel only if, according to the laws in the country in which its shares are traded there is either a limitation on the acquisition of a specified percentage of control in the Company or the acquisition of a specified percentage of control requires the purchaser to also make a tender offer to the public. The Companies Law extends the disclosure requirements applicable to an officer of the Company to a shareholder that holds 25% or more of the voting rights in a public company, including an Israeli company that is publicly traded outside of Israel such as on NASDAQ. Certain transactions -45- between a public company and a 25% shareholder, or transactions in which a 25% shareholder of the company has a personal interest but which are between a public company and another entity, require the approval of the board of directors and of the shareholders. Moreover, an extraordinary transaction with a 25% shareholder or the terms of compensation of a 25% shareholder must be approved by the audit committee, the board of directors and shareholders. The shareholder approval for an extraordinary transaction must include at least one third of the shareholders who have no personal interest in the transaction and are present at the meeting; the transaction can be approved by shareholders without this one third approval, if the total share holdings of those who vote against the transaction do not represent more than 1% of the voting rights in the company. The Israeli Companies Ordinance requires that certain transactions, actions and arrangements be approved as provided for in the Company's Articles of Association, by the Company's board of directors, by the audit committee and/or by the Company's shareholders. The vote required by the audit committee and the board for approval of such matters, in each case, is a majority of the disinterested directors participating in a duly convened meeting. Changes in Capital The Company's Memorandum and Articles of Association do not impose any conditions governing changes in capital that are more stringent than required by the Israeli Companies Law. C. Material Contracts. On November 30, 2000, we entered into a purchase and assignment agreement (the "Purchase and Assignment Agreement") with Eastek Embedded Systems (Metiav) Ltd. ("Eastek"), an Israeli based software company, and Eastek's founder, Mr. Danny Shavit ("Mr. Shavit"), to acquire all the assets of Eastek. Under the terms of the Purchase and Assignment Agreement, we issued 60,000 of the Company's Ordinary Shares to Eastek as partial consideration for the acquisition and may deliver an additional 20,000 Ordinary Shares to Eastek on the first anniversary of the acquisition if certain conditions are met. In connection with our acquisition of Eastek, we hired Mr. Shavit to serve as Chief Technology Officer of the Company. On November 30, 2000, we entered into an employment agreement with Mr. Shavit under the terms of which we issued 100,000 of the Company's Ordinary Shares to Mr. Shavit. Subject to certain conditions, the Ordinary Shares will be delivered to Mr. Shavit in installments of 30,000, 35,000 and 35,000 Ordinary Shares on the first, second and third anniversaries of the acquisition respectively. On December 20, 2000, we entered into a securities purchase agreement (the "Purchase Agreement") with CDC Holdings Ltd., Armour Investments Ltd., Industrial Systems & Equipment Co., Meir Noga and Nachum Ezra (the "Purchasers"). In accordance with the Purchase Agreement, we issued units, each consisting of $100,000 principal amount of our convertible secured debentures (the "Debentures") and three-year non-redeemable warrants (the "Warrants") to acquire 10,000 Ordinary Shares, par value NIS .003 per share (the "Ordinary Shares") to the Purchasers. We issued a total of 30 Units, representing Debentures in an aggregate principal amount of $3,000,000 and Warrants to acquire an aggregate of 300,000 Ordinary Shares. We will not receive any proceeds from the sale of the Ordinary Shares issuable upon the conversion of the Debentures by the converting -46- shareholders. We will receive from the exercising shareholders the exercise price of the Warrants upon exercise of which the Ordinary Shares are issuable, but will not receive any proceeds from the sale of the Ordinary Shares by the exercising shareholders. In connection with the StoreAge's private placement, in January 2001, StoreAge entered into a shareholders' rights agreement (the "Rights Agreement") with a wholly-owned subsidiary of the Company, Nelson Nahum, Ophirtech Ltd., Koonras Technologies Ltd., Genesis Partners II L.D.C., Genesis Partners II (Israel) L.P., Cisco Systems, Inc., Morgan Keegan & Company, Inc., Morgan Keegan Opportunity Fund, L.P., Morgan Keegan Employee Investment Fund, L.P. and certain other investors (each an "Investor" collectively, the "Investors"). Under the Rights Agreement, in addition to other provisions, each Investor has the right of first refusal to purchase any shares of StoreAge offered for sale by the Company and the other Investors. In January 2001, the Company entered into a lease with West End Technology Investments Ltd. for office space located at 33 Jabotinsky Street, Ramat Gan, Israel. The lease is for an undefined term that began on February 1, 2001. Both parties have the right to terminate the lease at any time, by written notice of 75 days in advance. The annual rent for this space is approximately $34,680, with total annual occupancy costs, including local taxes, utilities, maintenance and other costs of approximately $21,360. The rent is for fully furnished office space. The remaining empty office space is rented from a third party at a higher price. D. Exchange Controls Nonresidents of Israel who purchase Ordinary Shares of the Company outside of Israel will be able to receive dividends (if any be declared), and any amounts payable upon the dissolution, liquidation or winding up of the affairs of the Company, which will be fully repatriable in certain non-Israeli currencies (including United States dollars), at the rate of exchange prevailing at the time of conversion, pursuant to a general permit issued by the Controller of Foreign Currency at the Bank of Israel (the "Controller") under the Currency Control Law, 1978, provided that Israeli income tax has been paid on such amounts by the Company. Investments, including acquisitions, and certain other transactions outside Israel by the Company require specific approval from the Controller. The Company has received such approvals in the past, but no assurance can be given that they will be received in the future. The Memorandum and Articles of Association of the Company do not restrict in any way the ownership of Ordinary Shares by nonresidents, except with respect to subjects of countries which are in a state of war with Israel, and neither the Memorandum and Articles of Association nor Israeli law restricts the voting rights of nonresidents. The Israeli Currency Control Law, 1978 imposes certain limitations concerning foreign currency transactions and transactions between Israeli and non-Israeli residents, which limitations may be regulated or waived by the Controller of Foreign Exchange at the Bank of Israel, through "general" and "special" permits. In May 1998, a new "general permit" was issued pursuant to which substantially all transactions in foreign currency are permitted. Any dividends or other distributions paid in respect of Ordinary Shares and any amounts payable upon the dissolution, liquidation or winding up of the affairs of a company, as well as the proceeds of any sale in Israel of the company's securities to an Israeli resident are freely repatriable into non-Israeli currencies at the -47- rate of exchange prevailing at the time of conversion, provided that any Israeli income tax owing has been paid on (or withheld from) such payments. Because exchange rates between the NIS and the U.S. dollar fluctuate continuously, U.S. shareholders will be subject to any such currency fluctuation during the period from when such dividend is declared through the date payment is made in U.S. dollars. E. Taxation. Capital Gains and Income Taxes Applicable to Non-Israeli Shareholders Under existing regulations, any gain realized by a shareholder with respect to the Company's Ordinary Shares will be exempt from Israeli capital gains tax as long as the Ordinary Shares are listed on an approved foreign securities market (which term includes the NASDAQ SmallCap Market in the United States) and provided that the Company qualifies as an "Industrial Company" within the definition of the Law for the Encouragement of Industry (Taxes), 1969. There can be no assurance, however, that the provisions of the law, with respect to this exemption, will not change. If we qualify and maintain our status as an Industrial Company (of which there can be no assurance), the applicable income tax will be as follows: 35% for individuals who are Israeli residents, 36% for Israeli companies and 50% for non-residents of Israel (subject to an applicable trouble-taxation treaty). Individuals who are non-residents of Israel are subject to income tax on income derived from sources in Israel, or received in Israel. Such sources of income include passive income such as dividends, royalties and interest, as well as non-passive income form services rendered in Israel. On the distribution of dividends other than bonus shares (stock dividends), income tax is withheld at source at the rate of 25% (or the lower rate payable with respect to "Approved Enterprises"), unless a double taxation treaty which provides for a lower tax rate in Israel or dividends is in effect between Israel and the shareholder's country. The Convention between the State of Israel and the Government of the United States relating to relief from double taxation (the "Treaty") provides for a maximum tax of 25% on dividends paid to a resident of the United States. Generally, under the Treaty, the maximum withholding tax on dividends paid to a holder of Ordinary Shares of the Company who is a resident of the United States (as defined in the Treaty) will be 25%. Dividends of an Israeli company derived from the income of an Approved Enterprise will be subject to a 15% dividend withholding tax. The Treaty exempts from Israeli taxation any capital gain realized on the sale, exchange or other disposition of Ordinary Shares by a United States shareholder who owned, either directly or indirectly, less than 10% of the voting stock of the Company at all times during the 12-month period preceding such sale, exchange or other disposition. A nonresident of Israel who has had income derived or accrued in Israel from which tax was withheld at source and which constitutes income from certain sources, including dividends, is currently exempt from the duty to file an Israeli tax return with respect to such income, provided such income was not derived from a business carried on in Israel by such nonresident. -48- Proposed Tax Reform On May 4, 2000, a committee chaired by the Director General of the Israeli Ministry of Finance, issued a report recommending a significant reform in the Israeli system of taxation. The proposed reform would significantly alter the taxation of individuals, and would also affect corporate taxation. In particular, the proposed reform would reduce, but not eliminate, the tax benefits available to approved enterprises. The Israeli cabinet of the previous government approved the recommendation in principle. The new Israeli Government has declared that it intends to recommend tax reforms but has not approved the May 4, 2000 report or any alternative reform. Implementation of the reform requires legislation by Israel's Knesset. We cannot be certain whether the proposed reform will be adopted, when it will be adopted or what form any reform will ultimately take. United States Federal Income Tax Consequences The following is a summary of certain material U.S. Federal income tax consequences that apply to U.S. Holders (as defined below) who hold Ordinary Shares as capital assets. This summary is based on the United States Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations promulgated thereunder, judicial and administrative interpretations thereof, and the U.S.- Israel Tax Treaty, all as in effect on the date hereof and all of which are subject to change either prospectively or retroactively. This summary does not address all tax considerations that may be relevant with respect to an investment in Ordinary Shares. This summary does not account for the specific circumstances of any particular investor, such as: . broker-dealers, . financial institutions, . certain insurance companies, . investors liable for alternative minimum tax, . tax-exempt organizations, . non-resident aliens of the U.S. or taxpayers whose functional currency is not the U.S. dollar, . persons who hold the Ordinary Shares through partnerships or other pass- through entities, . investors that actually or constructively own 10 percent or more of our voting shares, and . investors holding Ordinary Shares as part of a straddle or a hedging or conversion transaction. -49- This summary does not address the effect of any U.S. Federal taxation other than U.S. Federal income taxation. In addition, this summary does not include any discussion of state, local or foreign taxation. Shareholders are urged to consult their tax advisors regarding the foreign and United States Federal, state and local tax considerations of an investment in Ordinary Shares. For purposes of this summary, a "U.S. Holder" is a shareholder which is: . an individual who is a citizen or, for U.S. Federal income tax purposes, a resident of the United States; . a partnership, corporation or other entity created or organized in or under the laws of the United States or any political subdivision thereof; . an estate whose income is subject to U.S. Federal income tax regardless of its source; or . a trust if: (a) a court within the United States is able to exercise primary supervision over administration of the trust, and (b) one or more United States persons have the authority to control all substantial decisions of the trust. Taxation of Dividends The gross amount of any distributions received with respect to Ordinary Shares, including the amount of any Israeli taxes withheld therefrom, will constitute dividends under U.S. Federal income tax purposes, to the extent of our current and accumulated earnings and profits as determined for U.S. Federal income tax principles. Shareholders will be required to include this amount of dividends in gross income as ordinary income. Distributions in excess of our earnings and profits will be treated as a non-taxable return of capital to the extent of a shareholder's tax basis in the Ordinary Shares and any amount in excess of such shareholder's tax basis, will be treated as gain from the sale of Ordinary Shares. See "Disposition of Ordinary Shares" below for the discussion on the taxation of capital gains. Dividends will not qualify for the dividends- received deduction generally available to corporations under Section 243 of the Code. Dividends that we pay in NIS, including the amount of any Israeli taxes withheld therefrom, will be included in a shareholder's income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day such dividends are received. A U.S. Holder who receives payment in NIS and converts NIS into U.S. dollars at an exchange rate other than the rate in effect on such day may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss. U.S. Holders should consult their own tax advisors concerning the U.S. tax consequences of acquiring, holding and disposing of NIS. -50- Any Israeli withholding tax imposed on such dividends will be a foreign income tax eligible for credit against a U.S. Holder's U.S. federal income tax liability, subject to certain limitations set out in the Code (or, alternatively, for deduction against income in determining such tax liability). The limitations set out in the Code include computational rules under which foreign tax credits allowable with respect to specific classes of income cannot exceed the U.S. federal income taxes otherwise payable with respect to each such class of income. Dividends generally will be treated as foreign-source passive income or financial services income for United States foreign tax credit purposes. Foreign income taxes exceeding the credit limitation for the year of payment or accrual may be carried back for two taxable years and forward for five taxable years in order to reduce U.S. federal income taxes, subject to the credit limitation applicable in each of such years. Other restrictions on the foreign tax credit include a prohibition on the use of the credit to reduce liability for the U.S. individual and corporation alternative minimum taxes by more than 90%. A U.S. Holder will be denied a foreign tax credit with respect to Israeli income tax withheld from dividends received on the Ordinary Shares to the extent such U.S. Holder has not held the Ordinary Shares for at least 16 days of the 30-day period beginning on the date which is 15 days before the ex- dividend date or to the extent such U.S. Holder is under an obligation to make related payments with respect to substantially similar or related property. Any days during which a U.S. Holder has substantially diminished its risk of loss on the Ordinary Shares are not counted toward meeting the 16-day holding period required by the statute. The rules relating to the determination of the foreign tax credit are complex, and shareholders should consult with their personal tax advisors to determine whether and to what extent they would be entitled to this credit. Dispositions of Ordinary Shares If a shareholder sells or otherwise disposes of Ordinary Shares, such shareholder will recognize a gain or loss for U.S. Federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other disposition and the adjusted tax basis of such Ordinary Shares. Subject to the discussion below under the heading "Passive Foreign Investment Companies," such gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if a shareholder has held the Ordinary Shares for more than one year at the time of the sale or other disposition. In general, any gain that a shareholder recognizes on the sale or other disposition of Ordinary Shares will be U.S.-source for purposes of the foreign tax credit limitation; losses, will generally be allocated against U.S. source income. Deduction of capital losses is subject to certain limitations under the Code. In the case of a cash basis U.S. Holder who receives NIS in connection with the sale or disposition of Ordinary Shares, the amount realized will be based on the U.S. dollar value of the NIS received with respect to the Ordinary Shares as determined on the settlement date of such exchange. A U.S. Holder who receives payment in NIS and converts NIS into United States dollars at a conversion rate other than the rate in effect on the settlement date may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss. An accrual basis U.S. Holder may elect the same treatment required of cash basis taxpayers with respect to a sale or disposition of Ordinary Shares, provided that the election is applied consistently from year to year. Such election may not be changed without the consent of the Internal Revenue Service (the "IRS"). In the event that an accrual basis U.S. Holder does not elect to be treated as a cash basis taxpayer (pursuant to the Treasury regulations applicable to foreign currency transactions), such U.S. Holder may have a foreign currency gain or loss for U.S. federal income tax purposes because of differences between the U.S. dollar value of the currency received prevailing on -51- the trade date and the settlement date. Any such currency gain or loss would be treated as ordinary income or loss and would be in addition to gain or loss, if any, recognized by such U.S. Holder on the sale or disposition of such Ordinary Shares. Passive Foreign Investment Companies For U.S. Federal income tax purposes, we will be considered a passive foreign investment company ("PFIC") for any taxable year in which either (1) 75% or more of our gross income is passive income, or (ii) at least 50% of the average value of all of our assets for the taxable year produce or are held for the production of passive income. For this purpose, passive income includes dividends, interest, royalties, rents, annuities and the excess of gains over losses from the disposition of assets which produce passive income. If we were determined to be a PFIC for U.S. Federal income tax purposes, highly complex rules would apply to U.S. Holders owning Ordinary Shares. Accordingly, shareholders are urged to consult their tax advisors regarding the application of such rules. Based on our current and projected income, assets and activities, we believe that we are not currently a PFIC nor do we expect to become a PFIC in the foreseeable future. However, because the determination of whether we are a PFIC is based upon the composition of our income and assets from time to time, there can be no assurances that we will not become a PFIC for any future taxable year. If we are treated as a PFIC for any taxable year, then, unless a shareholder elects either to treat such shareholder's investment in Ordinary Shares as an investment in a "qualified electing fund" (a "QEF election") or to "mark-to-market" such shareholder's Ordinary Shares, as described below: . the shareholder would be required to allocate income recognized upon receiving certain dividends or gain recognized upon the disposition of Ordinary Shares ratably over the holding period for such Ordinary Shares; . the amount allocated to each year during which we are considered a PFIC other than the year of the dividend payment or disposition would be subject to tax at the highest individual or corporate tax rate, as the case may be, and an interest charge would be imposed with respect to the resulting tax liability allocated to each such year; . gain recognized upon the disposition of Ordinary Shares would be taxable as ordinary income; and . the shareholder would be required to make an annual return on IRS Form 8621 regarding distributions received with respect to Ordinary Shares and any gain realized on such shareholder's Ordinary Shares. If a shareholder makes either a timely QEF election or a timely mark-to- market election in respect of such shareholder's Ordinary Shares, the shareholder would not be subject to the rules described above. If a shareholder makes a timely QEF election, the shareholder would be required to include in such shareholder's income for each taxable year such shareholder's pro rata share of our ordinary earnings as ordinary income and such shareholder's pro rata share of our net capital gain as long-term capital gain, whether or not such amounts are actually distributed to the shareholder. A shareholder would not be eligible to make a QEF election unless we comply with certain applicable information reporting requirements. -52- Alternatively, if a shareholder elects to "mark-to-market" such shareholder's Ordinary Shares, the shareholder will generally include in income any excess of the fair market value of the Ordinary Shares at the close of each tax year over such shareholder's adjusted basis in the Ordinary Shares. If the fair market value of the Ordinary Shares had depreciated below the shareholder's adjusted basis at the close of the tax year, the shareholder may generally deduct the excess of the adjusted basis of the Ordinary Shares over its fair market value at that time. However, such deductions generally would be limited to the net mark-to-market gains, if any, that the shareholder included in income with respect to such Ordinary Shares in prior years. Income recognized and deductions allowed under the mark-to-market provisions, as well as any gain or loss on the disposition of Ordinary Shares with respect to which the mark-to- market election is made, is treated as ordinary income or loss. Backup Withholding and Information Reporting Payments in respect of Ordinary Shares may be subject to information reporting to the U.S. Internal Revenue Service and to a 31 percent U.S. backup withholding tax. Backup withholding will not apply, however, if a shareholder (i) is a corporation or comes within certain exempt categories, and demonstrates the fact when so required, or (ii) furnishes a correct taxpayer identification number and makes any other required certification. Any amount withheld under these rules may be credited against shareholder federal income tax liability. Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited against a U.S. Holder's U.S. tax liability, and a U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS. Any U.S. Holder who holds 10% or more in vote or value of our Ordinary Shares will be subject to certain additional United States information reporting requirements. U.S. Gift and Estate Tax An individual U.S. Holder of Ordinary Shares will be subject to U.S. gift and estate taxes with respect to Ordinary Shares in the same manner and to the same extent as with respect to other types of personal property. F. Dividends and Paying Agents. Not applicable. G. Statements by Experts. Not applicable. H. Documents on Display. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, accordingly, it files reports and other information with the Securities and Exchange Commission (the "SEC"). Individuals can inspect and copy those reports and other information at the public reference facilities maintained by the SEC at Judiciary Plaza, 450 Fifth -53- Street, N.W., Washington, D.C. 20549 and at the following Regional Offices of the SEC: Northwestern Atrium Center, 500 West Madison Street, Suite 1400, 14th Floor, Chicago, Illinois 60661; and Seven World Trade Center, 13th Floor, New York, New York 10048. You can obtain copies of such material at prescribed rates from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. Individuals can also obtain reports and other information from the Internet site maintained by the SEC at http://www.sec.gov. In addition, documents referred to in this 20-F filing are available, at no cost, upon request from Robi Hartman, Chief Executive Officer, I.I.S. Intelligent Information Systems Limited, 33 Jabotinsky Street, Ramat Gan, Israel (Tel. 972-3-751-0007). I. Subsidiary Information. Not applicable. Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------- ------------------------------------------------------------ In the normal course of business, the financial position of the Company is routinely subjected to a variety of risks, including market risk associated with interest rate movements and currency rate movements on non-U.S. dollar denominated assets and liabilities. The Company regularly assesses these risks and has established policies and business practices to protect against the adverse effects of these and other potential exposures. As a result, the Company does not anticipate material losses in these areas. For purposes of specific risk analysis, the Company uses sensitivity analysis to determine the impacts that market risk exposures may have on the fair values of the Company's financial instruments. The financial instruments included in the sensitivity analysis consist of all of the Company's cash and cash equivalents. To perform sensitivity analysis, the Company assesses the risk of loss in fair values from the impact of hypothetical changes in interest rates and foreign currency exchange rates on market sensitive instruments. The market values for interest risk are computed based on the present value of future cash flows as impacted by the changes in rates attributable to the market risk being measured. The discount rates used for the present value computations were selected based on market interest rates in effect at December 31, 2000. The market values for foreign exchange risk are computed based on spot rates in effect at December 31, 2000. The market values that result from these computations are compared to the market values of these financial instruments at June 30, 2000. The differences in this comparison are the hypothetical gains or losses associated with each type of risk. The results of the sensitivity analysis are as follows: Interest Rate Risk: A 10% decrease or a 10% increase in the levels of interest rates with all other variables held constant would not materially affect the earnings, cash flow and fair value of the Company's financial instruments at December 31, 2000. -54- Foreign Currency Exchange Rate Risk: A 10% movement in levels of foreign currency exchange rates against the U.S. dollar with all other variables held constant would not materially affect the earnings, cash flow and fair value of the Company's financial instruments at December 31, 2000. Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES - -------- ------------------------------------------------------ Not applicable. -55- PART II Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES - -------- ---------------------------------------------- Not applicable. Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF - -------- ------------------------------------------------------------------- PROCEEDS -------- Not applicable. Item 15. [Reserved] - -------- Item 16. [Reserved] - -------- PART III Item 17. FINANCIAL STATEMENTS - -------- -------------------- Not applicable. Item 18. FINANCIAL STATEMENTS - -------- -------------------- Attached. See Item 19(a). Item 19. FINANCIAL STATEMENTS AND EXHIBITS - -------- ---------------------------------
(a) Index to Financial Statements: Page ---- Report of Independent Auditors on Consolidated Financial Statements of the Company and its subsidiaries...... F-2 Consolidated Balance Sheets at December 31, 2000 and 1999........ F-3 - F-4 Consolidated Statements of Operations for the Three Years ended December 31, 2000............................................. F-5 Consolidated Statements of Changes in Shareholders' Equity for the Three Years ended December 31, 2000................... F-6 Consolidated Statements of Cash Flows for the Three Years ended December 31, 2000............................................. F-7 - F-8 Notes to the Consolidated Financial Statements................... F-9 - F-28
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. -56- (b) Exhibits 1.1 Memorandum of Association of the Company* 1.2 Articles of Association of the Company, Amended and Restated as of November 19, 2000. 2.1 Form of Debenture issued pursuant to the securities purchase agreement dated January 31, 2001. 2.2 Form of Warrant issued pursuant to the securities purchase agreement dated January 31, 2001. 4.1 Purchase and Assignment agreement between the Company and Eastek Embedded Systems (Meitav) Ltd., dated November 30, 2000. 4.2 Employment Agreement of Danny Shavit, dated November 30, 2000. 4.3 Summary English Translation from the original Hebrew of a Lease Agreement entered into between the Company and West End Technology Investments Ltd., for office space located at 33 Jabotinsky Street, Ramat Gan, Israel, dated January 30, 2001. 4.4 Securities Purchase Agreement dated January 31, 2001, between the Company and CDC Holdings Ltd., Armour Investments Ltd., Industrial Systems & Equipment Co., Meir Noga and Nachum Ezra. 4.5 Shareholders' Rights Agreement dated as of January 18, 2001 between StoreAge and certain investors. 8.1 List of significant subsidiaries of the Company. 10.1 Consent of Kost Forer and Gabbay, a Member of Ernst & Young International. * Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement No. 33-62862 dated August 10, 1993. -57- SIGNATURES The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf. I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED (Registrant) By: /s/ Robi Hartman ------------------------------------------ Robi Hartman, Chief Executive Officer Date: June 28, 2001 -58- Index to Exhibits: Exhibit No. - ----------- 1.1 Memorandum of Association of the Company.* 1.2 Articles of Association of the Company, Amended and Restated as of November 19, 2000. 2.1 Form of Debenture issued pursuant to the securities purchase agreement dated January 31, 2001. 2.2 Form of Warrant issued pursuant to the securities purchase agreement dated January 31, 2001. 4.1 Purchase and Assignment agreement between the Company and Eastek Embedded Systems (Meitav) Ltd., dated November 30, 2000. 4.2 Employment Agreement of Danny Shavit dated November 30, 2000. 4.3 Summary English Translation from the original Hebrew of a Lease Agreement entered into between the Company and West End Technology Investments Ltd., for office space located at 33 Jabotinsky Street, Ramat Gan, Israel, dated January 30, 2001. 4.4 Securities Purchase Agreement dated January 31, 2001 between the Company and CDC Holdings Ltd., Armour Investments Ltd., Industrial Systems & Equipment Co., Meir Noga and Nachum Ezra. 4.5 Shareholders' Rights Agreement dated as of January 18, 2001 between StoreAge and certain investors. 8.1 List of significant subsidiaries of the Company. 10.1 Consent of Kost Forer and Gabbay, a Member of Ernst & Young International. * Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement No. 33-62862 dated August 10, 1993. -59- I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000 IN U.S. DOLLARS INDEX
Page -------------- Report of Independent Auditors F-2 Consolidated Balance Sheets F-3 - F-4 Consolidated Statements of Operations F-5 Statements of Changes in Shareholders' Equity F-6 Consolidated Statements of Cash Flows F-7 - F-8 Notes to Consolidated Financial Statements F-9 - F-28
- - - - - - - - - - - - [ERNST & YOUNG LOGO] KOST FORER & GABBAY Phone: 972-3-6232525 3 Aminadav St. Fax: 972-3-5622555 Tel-Aviv 67067, Israel REPORT OF INDEPENDENT AUDITORS TO THE SHAREHOLDERS OF I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED We have audited the accompanying consolidated balance sheets of I.I.S. Intelligent Information Systems Limited ("the Company") and its subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Decision Data (U.K.) Ltd., which statements reflect total revenues constituting 12% of the related consolidated totals revenues for the year ended December 31, 1998. Those statements were audited by other auditors whose reports has been furnished to us and our opinion, insofar as it relates to the data included for Decision Data (U.K.) Ltd., is based solely on the reports of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above, present fairly, in all material respects, the consolidated financial position of I.I.S. Intelligent Information Systems Limited and its subsidiaries as of December 31, 2000 and 1999, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Tel-Aviv, Israel KOST FORER & GABBAY March 11, 2001 A Member of Ernst & Young International F-2 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS U.S. Dollars in thousands - -------------------------------------------------------------------------------
DECEMBER 31, --------------------------------------- 2000 1999 ----------------- ----------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $3,077 $7,350 Restricted deposit 600 - Trade receivables 43 - Affiliate 79 - Other accounts receivable and prepaid expenses (Note 3) 45 395 ------ ------ Total current assets 3,844 7,745 ------ ------ SEVERANCE PAY FUND 32 320 ------ ------ INVESTMENT IN AN AFFILIATE (Note 4) 2,127 - ------ ------ PROPERTY AND EQUIPMENT, NET (Note 5) 63 431 ------ ------ WORK FORCE, NET (Note 6) 283 - ------ ------ $6,349 $8,496 ====== ======
The accompanying notes are an integral part of the consolidated financial statements. F-3 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS U.S. Dollars in thousands (except share data) - -------------------------------------------------------------------------------
DECEMBER 31, --------------------------------------- 2000 1999 ----------------- ----------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term bank credit (Note 8a) $ - $ 68 Current maturities of long-term bank loans (Note 8b) 10 74 Trade payables 177 245 Other accounts payable and accrued expenses (Note 7) 1,403 1,768 -------- -------- Total current liabilities 1,590 2,155 -------- -------- LONG-TERM LIABILITIES: Long-term bank loans, net of current maturities (Note 8b) 11 122 Convertible debentures (Note 8c) 2,828 - Accrued severance pay 38 384 -------- -------- Total long-term liabilities 2,877 506 -------- -------- MINORITY INTEREST IN A SUBSIDIARY - 842 -------- -------- PREFERRED SHARES OF SUBSIDIARY - 2,236 -------- -------- COMMITMENTS AND CONTINGENCIES (Note 9) SHAREHOLDERS' EQUITY: Share capital (Note 10)- Ordinary shares of NIS 0.003 par value Authorized: 16,666,667 shares as of December 31, 2000 and 1999; Issued and outstanding: 8,987,324 and 8,860,394 shares as of December 31, 2000 and 1999, respectively; 54 54 Additional paid-in capital 37,435 36,683 Receivables on account of shares (16) - Deferred stock compensation (222) - Accumulated deficit (35,369) (33,980) -------- -------- 1,882 2,757 -------- -------- $ 6,349 $ 8, 496 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-4 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS U.S. Dollars in thousands (except per share data) - -------------------------------------------------------------------------------
Year ended December 31, ------------------------------------------------------------- 2000 1999 1998 ----------------- ----------------- ----------------- Revenues: (Note 12) Sales $ 96 $ 5,408 $ 31,481 Maintenance and other services - 547 4,467 ------- ------- -------- 96 5,955 35,948 ------- ------- -------- Cost of revenues: Sales 27 4,484 23,327 Inventories written off (Note 1) - - 5,442 Maintenance and other services - 429 2,836 ------- ------- -------- 27 4,913 31,605 ------- ------- -------- Gross profit 69 1,042 4,343 ------- ------- -------- Operating expenses: Research and development, net (Note 13a) 925 686 2,410 Selling and marketing 639 1,417 7,589 General and administrative 899 1,777 5,870 Trade receivables written off (Note 1) - - 470 Restructuring and reorganization (Note 1) - 467 1,071 ------- ------- -------- Total operating expenses 2,463 4,347 17,410 ------- ------- -------- Operating loss (2,394) (3,305) (13,067) Financial income (expenses), net (Note 13b) 277 173 (1,022) Other expenses, net (Note 13c) (12) (1,770) (267) ------- ------- -------- Loss before minority interest in losses of subsidiary (2,129) (4,902) (14,356) Minority interest in losses of subsidiary 740 55 - ------- ------- -------- Net loss $(1,389) $(4,847) $(14,356) ======= ======= ======== Basic and diluted net loss per share $(0.16) $(0.55) $(2.55) ======= ======= ======== Number of shares used in computing basic and diluted net loss per share (in thousands) 8,901 8,860 5,621 ======= ======= ========
The accompanying notes are an integral part of the consolidated financial statements. F-5 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY U.S. Dollars in thousands - -------------------------------------------------------------------------------
ACCUMULATED ADDITIONAL RECEIVABLES DEFERRED OTHER SHARE PAID-IN ON ACCOUNT OF STOCK COMPREHENSIVE CAPITAL CAPITAL SHARES COMPENSATION LOSS -------------------------------------------------------------------------------------- Balance as of January 1, 1998 $51 $31,457 $ - $ - $(442) Comprehensive loss: Foreign currency translation adjustments - - - - (348) Net loss - - - - - Total comprehensive loss Conversion of convertible debentures and amortization of beneficial conversion feature 3 2,417 - - - ---- ------- ---- ----- ---- Balance as of December 31, 1998 54 33,874 - - (790) Comprehensive loss: Foreign currency translation adjustments - - - - 73 Net loss - - - - - Total comprehensive loss Amortization of compensation in respect to warrants issued upon settlement of lawsuit - 2,809 - - - Foreign currency translation adjustment due to realization of investment in subsidiaries - - - - 717 ---- ------- ---- ----- ---- Balance as of December 31, 1999 54 36,683 - - - Comprehensive loss: Net loss - - - - - Total comprehensive loss Issuance of shares upon acquisition of Eastek - *) 160 - - - Issuance of warrants related to convertible debentures - 147 - - - Exercise of options - *) 208 (16) - - Deferred stock compensation related to shares in escrow issued on the acquisition of Eastek - 237 - (237) - Amortization of deferred stock compensation - - - 15 - ---- ------- ---- ----- ---- Balance as of December 31, 2000 $54 $37,435 $(16) $(222) $ - ==== ======= ==== ===== ====
TOTAL TOTAL ACCUMULATED COMPREHENSIVE SHAREHOLDERS' DEFICIT LOSS EQUITY --------------------------------------------------------------- Balance as of January 1, 1998 $(14,777) $ 16,289 Comprehensive loss: Foreign currency translation adjustments - $ (348) (348) Net loss (14,356) (14,356) (14,356) -------- Total comprehensive loss $(14,704) ======== Conversion of convertible debentures and amortization of beneficial conversion feature - 2,420 -------- -------- Balance as of December 31, 1998 (29,133) 4,005 Comprehensive loss: Foreign currency translation adjustments - $ 73 73 Net loss (4,847) (4,847) (4,847) -------- Total comprehensive loss $ (4,774) ======== Amortization of compensation in respect to warrants issued upon settlement of lawsuit - 2,809 Foreign currency translation adjustment due to realization of investment in subsidiaries - 717 -------- -------- Balance as of December 31, 1999 (33,980) 2,757 Comprehensive loss: Net loss (1,389) $ (1,389) (1,389) -------- Total comprehensive loss $ (1,389) ======== Issuance of shares upon acquisition of Eastek - 160 Issuance of warrants related to convertible debentures - 147 Exercise of options - 192 Deferred stock compensation related to shares in escrow issued on the acquisition of Eastek - - Amortization of deferred stock compensation - 15 -------- -------- Balance as of December 31, 2000 $(35,369) $ 1,882 ======== ========
*) Represents an amount lower than $1. The accompanying notes are an integral part of the consolidated financial statements. F-6 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES CONSOLIDATED STATMENTS OF CASH FLOWS U.S. Dollars in thousands - -------------------------------------------------------------------------------
Year ended December 31, -------------------------------------------------------------------- 2000 1999 1998 ------------------ ------------------ ------------------ Cash flows from operating activities: - ------------------------------------------------------ Net loss $(1,389) $(4,847) $(14,356) Adjustments to reconcile net loss to net cash used in operating activities: Inventories write off - - 5,442 Loss from sale of shares in an investee - - 49 Gain on sale of investment in subsidiaries - (996) - Depreciation, amortization and write off of property, equipment and other assets 151 613 2,626 Amortization of deferred stock compensation 15 - - Loss (gain) on sale of property and equipment 37 (43) (363) Minority interest in losses of subsidiary (740) (55) - Amortization of beneficial conversion feature - - 667 Amortization of compensation in respect to warrants issued upon settlement of lawsuit - 2,809 - Decrease (increase) in trade receivables (96) 1,396 3,905 Decrease (increase) in other accounts receivable and prepaid expenses 11 (220) 578 Decrease (increase) in inventories (102) 785 2,424 Increase (decrease) in trade payables 199 (411) (2,573) Decrease in other accounts payable and accrued expenses (63) (659) (1,114) Decrease in provision for warranties - (47) (164) Decrease in accrued severance pay, net (58) (517) (5) ------ ------ ------ Net cash used in operating activities (2,035) (2,192) (2,884) ------ ------ ------ Cash flows from investing activities: - ------------------------------------------------------ Proceeds from sale of property and equipment 3 93 2,291 Purchase of property and equipment (446) (131) (796) Investment in restricted deposit (600) - - Proceeds from sale of investment in subsidiaries, net of cash in the subsidiaries at the time they ceased being consolidated - 825 - De-consolidation of a previously consolidated subsidiary (4,228) - - ------ ------ ------ Net cash provided by (used in) investing activities (5,271) 787 1,495 ------ ------ ------
The accompanying notes are an integral part of the consolidated financial statements. F-7 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES CONSOLIDATED STATMENTS OF CASH FLOWS U.S. Dollars in thousands - -------------------------------------------------------------------------------
Year ended December 31, -------------------------------------------------------------------- 2000 1999 1998 ------------------ ------------------ ------------------ Cash flows from financing activities: - ------------------------------------------------------ Proceeds from issuance of Preferred shares of subsidiary to third party, net - 3,122 - Exercise of options 192 - - Proceeds from issuance of warrants 147 - - Proceeds from long-term bank loans 29 61 305 Repayment of long-term bank loans (95) (129) (339) Short-term bank credit, net (68) - 1,173 Proceeds from issuance of convertible debentures, net 2,828 - - ------- ------ ------ Net cash provided by financing activities 3,033 3,054 1,139 ------- ------ ------ Effect of exchange rate changes on cash and cash equivalents - 40 (47) ------- ------ ------ Increase (decrease) in cash and cash equivalents (4,273) 1,689 (297) Cash and cash equivalents at the beginning of the year 7,350 5,661 5,958 ------- ------ ------ Cash and cash equivalents at the end of the year $ 3,077 $7,350 $5,661 ======= ====== ====== Non-cash activities: Conversion of convertible debentures $ - $ - $1,753 ======= ====== ====== Issuance of shares upon acquisition of Eastek: Estimated fair value of assets acquired and liabilities assumed at the date of acquisition: Working capital deficiency (excluding cash and cash equivalents) (30) Property and equipment 15 Work force 291 Long-term liabilities (116) ------- $ 160 ======= Supplemental disclosure of cash flows activities: Cash paid during the year for: Income taxes $ - $ - $ 42 ======= ====== ====== Interest $ 20 $ 39 $ 450 ======= ====== ======
The accompanying notes are an integral part of the consolidated financial statements. F-8 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. Dollars in thousands (except share and per share data) - ------------------------------------------------------------------------------- NOTE 1:- GENERAL 1. Until early 1999, I.I.S. Intelligent Information Systems Limited ("IIS" or the "Company") was engaged in the development, manufacture, marketing and servicing of data communications and intelligent peripheral products targeted at the International Business Machines ("IBM") midrange, IBM mainframe and open systems computing environments. The Company owned 49% of StoreAge Networking Technologies ("StoreAge"), an Israeli Company, which is engaged in the development and marketing of products based on its SAN Virtualization technology. The Company is currently engaged in the Internet Small Computer Systems Interface ("iSCSI") space and is looking into new applications for its iSCSI and storage expertise. In late 1998, the Company implemented a restructuring plan (the "Restructuring Plan"), which resulted in the disposal of most of the assets of the Company, substantial changes in the Company's structure and a focus exclusively on storage area networking ("SAN"). In January 1999, the Company divested itself of its 62.3% equity interest in NetWiz Ltd., an Israeli development-stage company ("NetWiz"). In the transaction, it transferred its entire interest in NetWiz to a non-affiliated third party and such non-affiliated third party assumed all liabilities associated with such interest. The divestiture required from the Company in expenditure of $945. Net gain realized as a result of the sale of NetWiz amounted to $616. In February 1999, the Company disposed of its networking products and network integration services division, which is comprised of Adanet Communications, Ltd. ("Adanet"), an Israeli company, which the Company acquired in June 1994, and I.I.S Computer Maintenance and Services (1983) Limited ("I.I.S Maintenance"), an Israeli company. The Company realized net proceeds of $ 1,506 and a net gain of $175 as a result of the sale of Adanet and I.I.S maintenance. In March 1999, the Company sold most of the assets and liabilities of its Decision Data Division ("Decision Data") which comprises all of the Company's U.S., United Kingdom and Germany operations. The Company realized net proceeds of $2,487 and a net gain of $ 205 as a result of the sale of Decision Data. During the first quarter of 1999 and the last quarter of 1998 (as discussed above), the Company incurred costs of $ 467 and $ 6,983, respectively, in implementing its worldwide restructuring plan. The following is a breakdown of the restructuring costs incurred:
YEAR ENDED DECEMBER 31, --------------------------------------- 1999 1998 ----------------- ----------------- Inventories write off $ - $5,442 Included in cost of revenues ----------------- ----------------- Trade receivables write off - 470 Included in operating expenses ----------------- ----------------- Termination costs - 268 Impairment of goodwill - 574 Other costs, net 467 229 ----------------- ----------------- 467 1,071 Included in operating expenses ----------------- ----------------- $ 467 $6,983 ================ ================
F-9 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. Dollars in thousands (except share and per share data) - ------------------------------------------------------------------------------- 2. In January 1999, StoreAge Network Technologies Ltd., an Israeli company, ("StoreAge") was organized as a wholly-owned subsidiary of IIS and commenced the development and marketing of products based on its SAN Virtualization technology, accordingly, on January 1, 1999, IIS transferred to StoreAge all of its know-how, operations, assets and liabilities in the area of Fiber Channel in return for the entire share capital of StoreAge. In late 1999, 707,558 Preferred A shares of StoreAge were issued to outside investors for a total net consideration of $3,122. Accordingly, the Company's equity interest in StoreAge was reduced to 58.56%. The excess of the value of the investment in StoreAge derived from the issuance of Preferred shares by StoreAge to outside investors, over the amount invested, in the amount of $2,236 was recorded as a quasi-equity item, Preferred shares of a subsidiary. In December 2000 4,259,268 Preferred B shares of StoreAge were issued for a total consideration of $14,000. The Company has invested $4,220, of which $543 was made by the conversion of loan to StoreAge, in exchange of 1,283,866 Preferred B shares. Accordingly, the Company's equity interest in StoreAge was reduced to 49%. Thus StoreAge's operations were de-consolidated since December 2000, and the Company's investment in StoreAge was accounted for in accordance with the equity method. As part of this financing round, StoreAge issued, in January 2001, an additional 3,346,567 Preferred B shares for a total consideration of $11,000, and the Company's equity interest in StoreAge was reduced to 38.9%. 3. During November 2000, the Company acquired all the activities, assets and rights, and assumed certain obligations of Eastek Embedded Systems (Meitav) Ltd. ("Eastek") a private Israeli software company, to enhance its R&D capabilities in order to develop synergetic software solutions for the SAN market. In consideration of this acquisition the Company issued 80,000 Ordinary shares of the Company, of which 20,000 shares will be deposited with a trustee and shall be delivered twelve months after the closing - provided that no claims are made against Eastek. The value of shares issued in this transaction was $2 per share in the aggregate amount of $160. The Company also granted a key employee of Eastek 100,000 shares in escrow which will be released annually in three installments of 30,000 shares, 35,000 shares and 35,000 shares. (See Note 10). The transaction was accounted for by the purchase method of accounting, and Eastek's operations are consolidated as of the date of acquisition. The excess cost over the fair value of net assets acquired was allocated to the assembled work force in the amount of $291 which is to be amortized on a straight-line basis over a three- year period. The allocation of the purchase price of the Eastek acquisition is based on the fair value of assets acquired and liabilities assumed. The following is a summary of the assets acquired: Working capital deficiency $ (30) Property and equipment 15 Work force (amortized over three years) 291 Long-term liabilities (116) ----- $ 160 =====
F-10 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. Dollars in thousands (except share and per share data) - ------------------------------------------------------------------------------- The following represents the unaudited pro-forma results of operations for the years ended December 31, 2000 and 1999 assuming that the Eastek acquisition had been consummated as of January 1, 2000 and January 1, 1999, respectively:
YEAR ENDED DECEMBER 31, ------------------------------------------ 2000 1999 ------------------ ------------------ Sales $ 283 $ 6,283 ======= ======= Net loss $(1,465) $(4,897) ======= ======= Basic and diluted net loss per share $ (0.16) $ (0.55) ======= =======
4. In December 2000, the Company completed a private placement of $3 million in the issuance of convertible subordinated debentures and warrants to qualified investors. The net proceeds from the offering were used to fund the Company's investment in StoreAge's second round of financing (see Note 8c). NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"). A. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. B. FINANCIAL STATEMENTS IN U.S. DOLLARS: The functional currency of the Company and its subsidiaries is the U.S dollar, as the U.S. dollar is the primary currency of the economic environment in which the Company and its subsidiaries have operated and expect to continue to operate in the foreseeable future. The majority of the Company's operations is currently conducted in Israel and most of the Israeli expenses are currently paid in new Israeli shekels ("NIS"); however, most of the expenses are denominated and determined in U.S. dollars. Financing and investing activities including loans, equity transactions and cash investments, are made in U.S. dollars. Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S. dollars in accordance with Statement No. 52 of the Financial Accounting Standard Board ("FASB") "Foreign Currency Translation". All transactions gains and losses of the remeasurement of monetary balance sheet items are reflected in the statement of operations as financial income or expenses as appropriate. F-11 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. Dollars in thousands (except share and per share data) - ------------------------------------------------------------------------------- The financial statements of foreign subsidiaries whose functional currency is their local currency, have been translated into U.S. dollars. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Statement of operations amounts have been translated using the average exchange rate for the period. The resulting translation adjustments are reported as a component of shareholders' equity - accumulated other comprehensive income (loss). Such subsidiaries were realized during 1999. C. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements of the Company include the accounts of the Company and its subsidiaries. Intercompany balances and transactions have been eliminated upon consolidation. D. CASH EQUIVALENTS: The Company considers all highly liquid investments that are readily convertible to cash with original maturities of three months or less to be cash equivalents. E. RESTRICTED DEPOSIT: The restricted deposit, which is primarily invested in certificates of deposit, which mature within one year, as security for the settlement of a lawsuit (see Note 9). F. INVESTMENT IN AN AFFILIATE: The investment in StoreAge over which the Company can exercise significant influence over operating and financing policy (generally, entities in which the Company holds 20% to 50% of ownership or voting rights), is presented using the equity method of accounting and in accordance with EITF 99-10 "Percentage Used to Determine the Amount of Equity Method Losses" which requires that an investor should recognize equity method losses based on the ownership level of the particular investee security held by the investor, or the change in the investor's claim on the investee's book value. G. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets, at the following annual rates:
% ------------------------------ Leasehold improvements Over the term of the lease Machinery and equipment 10 - 33 Office furniture and equipment 6 - 10 Motor vehicles 15
F-12 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. Dollars in thousands (except share and per share data) - ------------------------------------------------------------------------------- The Company and its subsidiaries periodically assess the recoverability of the carrying amount of property and equipment and provide for any possible impairment loss based upon the difference between the carrying amount and fair value of such assets, in accordance with the provisions of FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed Of". As of December 31, 2000, no impairment losses have been identified. H. WORK FORCE: The work force is amortized using the straight-line method over the estimated useful life (three years). The carrying value of the work force is periodically reviewed by management, based on the expected future undiscountinued operating cash flows over the remaining amortization period of the work force. If this review indicates that the work force will not be recoverable, the carrying value of the work force is reduced to the estimated fair value. As of December 31, 2000, no impairment losses have been identified. I. RESEARCH AND DEVELOPMENT COSTS: Statement of Financial Accounting Standards ("SFAS") 86 "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed", requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company's product development process, technological feasibility is established upon completion of a working model. The Company does not incur material costs between the completion of the working model and the point at which the products ready for general release. Therefore, research and development costs are charged to the statement of operations as incurred. J. ROYALTY-BEARING GRANTS: Royalty-bearing grants from the Office of the Chief Scientist ("OCS") for funding approved research and development projects are recognized at the time the Company and its subsidiary are entitled to such grants, on the basis of the related costs incurred. Such grants are recorded as a reduction of research and development costs. Research and development grants amounted to $403, $223 and $261 in 2000, 1999 and 1998, respectively. K. REVENUE RECOGNITION: To date, the Company has derived its revenues from licensing fees for its products, training, installation, maintenance and hardware. The Company sells its products primarily through its direct sales force. In December 1999, the SEC issued Staff Accounting Bulletin No 101 ("SAB 101"), as amended in June 2000, which summarize the staff's views in applying generally accepted accounting principles to revenues recognition in financial statements. The Company adopted SAB 101 during the fourth quarter of 2000. The adoption did not have a significant effect on the consolidated results of operations or financial position. F-13 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. Dollars in thousands (except share and per share data) - ------------------------------------------------------------------------------- The Company has adopted Statement of Position (SOP) 97-2, "Software Revenue Recognition," as amended. SOP 97-2, generally requires revenues earned from software arrangements involving multiple elements to be allocated to each element based on the relative fair value of the elements. The Company has also adopted SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions," for all transactions entered into after January 1, 2000. SOP 98-9 requires that revenue be recognized under the "residual method" when vendor specific objective evidence (VSOE) of fair value exists for all undelivered elements and no VSOE exists for the delivered elements. Revenues from license fees are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no further significant obligations exist, the fee is fixed or determinable, and collectibility is probable. The Company generally does not grant a right of return to its customers. If the fee is not fixed or determinable, revenues are recognized as payments become due from the customer provided that all other revenue recognition criteria have been met. Maintenance, training and installation services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. When services are considered essential, revenues under the arrangement are recognized using contract accounting. When services are not considered essential, the revenues allocable to the services are recognized as the services are performed. To date, the Company had determined that the services are not considered essential to the functionality of other elements of the arrangement. Revenues from hardware sales are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable, and collectibility is probable. When contracts contain multiple elements wherein VSOE of fair value exists for all undelivered elements, the Company accounts for the delivered elements in accordance with the "Residual Method" prescribed by SOP 98-9. Training maintenance and installation revenue included in these arrangements is deferred and recognized on a straight-line basis over the term of the training maintenance and installation agreement. The VSOE of fair value of the undelivered elements is determined based on the price charged for the undelivered element when sold separately. L. WARRANTY COSTS: The Company provides a warranty at no extra charge to the customer. A provision is recorded for probable costs in connection with warranties based on the Company's past experience and engineering estimates. As to date warranty costs were immaterial. M. CONCENTRATIONS OF CREDIT RISKS: Financial instruments that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of cash and cash equivalents, restricted deposit, trade receivables and affiliate account receivable. The Company's cash and cash equivalents and restricted deposit are deposited in major banks in Israel and in the U.S. Such deposits in the U.S. may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Company's investments are financially sound and, accordingly, minimal risk exists with respect to these investments. F-14 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. Dollars in thousands (except share and per share data) - ------------------------------------------------------------------------------- The trade receivables of the Company and its subsidiary are mainly derived from sales to customers located primarily in the U.S., Europe and Israel. The Company performs ongoing credit evaluations of its customers and to date has not experienced any material losses. An allowance for doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection. As of December 31, 2000, no allowance for doubtful accounts was provided. Management believes that the affiliate is financially sound and, accordingly, minimal risk exists with respect to these receivables. The Company and its subsidiaries have no significant off-balance- sheet concentrations of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. N. BASIC AND DILUTED NET LOSS PER SHARE: Basic net earnings (loss) per share is computed based on the weighted average number of Ordinary shares outstanding during each year. Diluted net earnings per share is computed based on the weighted average number of Ordinary shares outstanding during each year, plus dilutive potential Ordinary shares considered outstanding during the year, in accordance with FASB Statement No. 128, "Earnings Per Share". All outstanding convertible debentures, stock options and warrants have been excluded from the calculation of the diluted net loss per Ordinary share because all such securities are antidilutive for all periods presented. The total weighted average number of Ordinary shares related to convertible debentures, options and warrants excluded from the calculation of diluted net loss per share were 1,570,193, 687,808 and 697,252 for the years ended December 31, 2000, 1999 and 1998, respectively. O. SEVERANCE PAY: The Company's liability for severance pay is calculated pursuant to the Israeli Severance Pay Law based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date. Employees are entitled to one month's salary for each year of employment, or a portion thereof. The Company's liability is fully provided by monthly deposits into severance pay funds, insurance policies and by an accrual. The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligations pursuant to Israeli severance pay law or labor agreements. The value of the deposited funds are based on the cash surrendered value of these policies and include immaterial profits. Severance pay expenses for the years ended December 31, 2000, 1999 and 1998 amount to approximately, $10, $292 and $ 973, respectively. F-15 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. Dollars in thousands (except share and per share data) - ------------------------------------------------------------------------------- P. ACCOUNTING FOR STOCK BASED COMPENSATION: The Company has elected to follow Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation" ("FIN 44") in accounting for its employee stock option plans. Under APB 25, when the exercise price of the Company's share options is less than the market price of the underlying shares on the date of grant, compensation expense is recognized. The pro forma disclosures required by SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), are provided in Note 10. The Company applies SFAS 123 and EITF 96-18 "Accounting for Equity Instruments That Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" with respect to options issued to non-employees. SFAS 123 requires use of an option valuation model to measure the fair value of the options at the grant date. Q. INCOME TAXES: The Company and its subsidiary account for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". This Statement prescribes the use of the liability method, whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. R. FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions were used by the Company and its subsidiaries in estimating their fair value disclosure for financial instruments: The carrying values of cash and cash equivalents, restricted deposit, trade receivables, affiliate account receivable, short-term bank credit and trade payables approximate their fair value due to the short-term maturities of these instruments. Convertible loan and long-term bank loans - the carrying amounts reported in the balance sheet approximate their fair value. Fair values were estimated using discounted cash flow analyses, based on the Company's incremental borrowing rates for similar types of borrowing arrangements. S. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended, which is required to be adopted in years beginning after June 15, 2000. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company. F-16 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. Dollars in thousands (except share and per share data) - ------------------------------------------------------------------------------- NOTE 3:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
DECEMBER 31, ------------------------------------------- 2000 1999 ------------------- ------------------ Prepaid expenses $ 30 $ 31 Government authorities 12 246 Other 3 118 ----- ----- $ 45 $ 395 ===== =====
NOTE 4:- INVESTMENT IN AN AFFILIATE Investment in StoreAge: - -----------------------
Investment in Ordinary shares of StoreAge in January, 1999 (39% of voting rights) $ - $ - Investment in Preferred shares of StoreAge in December, 2000 (10% of voting rights) 4,220 - Equity interest in post establishment losses (2,093) - ------- ------ Total investment (49% of voting rights) $ 2,127 $ - ======= ======
The following summarizes the aggregate information of StoreAge:
DECEMBER 31, 2000 ------------------- Current assets $14,358 Non current assets $ 646 Current liabilities $ (921) Non current liabilities $ (40)
YEAR ENDED DECEMBER 31, 2000 ------------------- Revenues $ 66 Gross profit $ 51 Loss from continuing operations $(1,786) Net loss $(1,786)
F-17 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. Dollars in thousands (except share and per share data) - ------------------------------------------------------------------------------- NOTE 5:- PROPERTY AND EQUIPMENT, NET
DECEMBER 31, ------------------------------------------- 2000 1999 ------------------- ------------------ Cost: Leasehold improvements $ - $ 2 Machinery and equipment 29 205 Office furniture and equipment 70 108 Motor vehicles 47 265 ----- ----- 146 580 ----- ----- Accumulated depreciation: Leasehold improvements - - Machinery and equipment 2 43 Office furniture and equipment 60 54 Motor vehicles 21 52 ----- ----- 83 149 ----- ----- Depreciated cost $ 63 $ 431 ===== =====
Depreciation expenses for the years ended December 2000, 1999 and 1998 amounted to approximately $143, $146 and $1,559, respectively. As for charges, see Note 9c. NOTE 6:- WORK FORCE As a result of the purchase of Eastek (see Note 1), the Company recorded a work force in the amount of $291.
DECEMBER 31, ------------------------------------------- 2000 1999 ------------------ ------------------- Work force $ 291 $ - Less - accumulated amortization 8 - ------------------ ------------------- $ 283 $ - ================== ===================
Amortization expense amounted to $ 8 for the year ended December 31, 2000. F-18 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. Dollars in thousands (except share and per share data) - ------------------------------------------------------------------------------- NOTE 7:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 31, ------------------------------------------ 2000 1999 ------------------ ------------------ Employees and payroll accruals $ 44 $ 165 Government authorities 8 - Provision for litigation 931 1,104 Accrued expenses 420 499 ------ ------ $1,403 $1,768 ====== ======
NOTE 8:- FINANCING ARRANGEMENTS A. SHORT-TERM BANK CREDIT: As of December 31, 1999, the Company and its subsidiaries have an authorized line of credit in the amount of $80, of which $68 is utilized. Most of the credit is denominated in unlinked NIS. Weighted average interest rate as of December 31, 1999 was 13.5%. As of December 31, 2000 the Company has no authorized line of credit. B. LONG-TERM BANK LOANS:
December 31, ------------------------------------------------------------------------------- 2000 1999 ------------------------------------- ------------------------------------- INTEREST RATE INTEREST RATE % AMOUNT % AMOUNT ----------------- -------------- ----------------- --------------- U.S. dollar 7.3 $21 8 $196 Less - current maturities 10 74 --- ---- $11 $122 === ====
Aggregate maturities of long-term loans for the years subsequent to December 31, 2000 are as follows: 2001 (current maturities) $10 2002 10 2003 1 --- $21 ===
F-19 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. Dollars in thousands (except share and per share data) - ------------------------------------------------------------------------------- C. CONVERTIBLE DEBENTURES: 1. In 1997, the Company issued convertible debentures and warrants to purchase 200,000 Ordinary shares in consideration of $2,000. All of the debentures were converted during 1998 into 4,211,047 Ordinary shares. The warrants are exercisable into Ordinary shares at any time until December 2002 in consideration of $4.47 per share. 2. In December 2000, the Company issued convertible debentures and warrants to purchase 300,000 Ordinary shares in consideration of $3,000. The debentures bear interest at the rate of LIBOR + 1.5% and shall be repaid commencing at the beginning of the third year following the issuance of the debentures and ending at the end of the fifth year. The Debentures are convertible, all or in part, at any time in which these are outstanding, to the Company's Ordinary shares, at a price per share of $3. The warrants granted are exercisable into the Company's Ordinary shares at any time until December 2003 at a price per share of $4.5. The fair value for the warrants was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions for 2000: risk-free interest rates of 6%, dividend yields of 0%, volatility factors of the expected market price of the Company's Ordinary shares of 1.092, and a weighted-average expected life of the warrants of approximately 1.5 years. The fair value of the warrants at the date of grant was $0.49 per warrant, in the aggregate to $147. The fair value of the warrants, plus debt issuance costs in the amount of $25, were accounted for as a discount on the debentures, and shall be amortized over the term of the debentures using the interest method. The Company accounted for these convertible debentures in accordance with EITF 98-5 "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" and EITF 00-27 "Application of EITF Issue No. 98-5 to Certain Convertible Instruments". F-20 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. Dollars in thousands (except share and per share data) - ------------------------------------------------------------------------------- There has been no beneficial conversion feature in respect to these convertible debentures. Aggregate maturities of convertible debentures for the years subsequent to December 31, 2000 are as follows: 2003 $1,000 2004 1,000 2005 1,000 ------ 3,000 Debt issuance costs (172) ------ $2,828 ======
NOTE 9:- COMMITMENTS AND CONTINGENT LIABILITIES A. LEASE COMMITMENTS: The Company and its subsidiaries lease their facilities under an operating lease agreement. The aggregate future minimum payment under noncancelable operating leasing ending on December 31, 2001 is $67. Rent expenses for the years ended December 31, 2000, 1999 and 1998 were approximately $60, $122 and $602, respectively. B. LITIGATION: 1. The Company, certain of its officers and directors and the underwriters of the Company's August 1993 public offering are defendants in a purported class action and two related cases which were filed in the United States District Court for the Eastern District of New York in September 1993, August 1994 and February 1995. The plaintiffs' complaints allege that the Company violated Section 12(2) of the Securities Act of 1933, as well as Section 10(b) and Section 20 of the Securities Exchange Act of 1934 by failing to disclose early enough that revenues in both the Company's European and United States markets were declining and that the Company was struggling to maintain its growth margins at past levels. The plaintiffs also contend that the Company falsely stated that it had successfully integrated a newly acquired business, the Decision Data Division, into the Company's operations. On December 14, 1999, the Company entered into stipulations of settlement with the plaintiffs, which was approved by the court in 2000. The Class Action Settlement provides for the dismissal with prejudice of the Class Action and the release of all class actions against all defendants, in exchange for (i) a cash payment of $600 by the Company into an insured interest-bearing escrow fund, and (ii) delivery to the plaintiff class by the Company of newly issued freely tradable warrants with rights to purchase, in the aggregate, 886,039 Ordinary shares of the Company, at an exercise price of $0.30 per share. The warrants were issued in December 1999. The fair value for these warrants was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions: risk- F-21 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. Dollars in thousands (except share and per share data) - ------------------------------------------------------------------------------- free interest rates of 6%, dividend yields of 0%, volatility factors of the expected market price of the Company's Ordinary shares of 1.369 and a weighted-average expected life of an option of one year. Compensation of $2,809 derived from the warrant was charged to other expenses. 2. A suit was filed in Israel in 1995 against the Company and certain of its officers and directors alleging inadequate disclosure in prior years of the Company's financial position, results of operations and prospects, and damages in the amount of $250. The Company, based on the opinion of its legal advisors, does not believe that the outcome of these actions will have a material adverse effect on either its business operations or its financial position. The Company's legal advisors are unable to estimate the outcome of this suit. 3. A claim was filed against NetWiz Ltd. (a former subsidiary of the Company) in respect of a breach of a lease agreement. As part of agreement for the sale of NetWiz the Company agreed to assume the liabilities in respect of the above claim. The Company's legal counsel estimates that the Company's exposure does not exceed $50. The Company recorded a full provision in respect of this claim. The Company also recorded a guarantee in the amount of $50 in respect of this claim 4. A claim was filed by a supplier against the Company for a non- payment of a debt. The Company rejects the claim and argues that the price of the goods exceeded the agreed upon price. The Company's legal counsel estimates that the Company's exposure does not exceed $20. The Company recorded a full provision in respect of this claim. C. CHARGES: The Company had recorded a charge on all of its assets in favor of banks and lenders. NOTE 10:- SHARE CAPITAL A. REVERSE SPLIT During 1998, the Company effected a 3:1 reverse share split on its Ordinary shares from NIS 0.001 par value to NIS 0.003 par value. All Ordinary shares and per share amounts have been adjusted to give retroactive effect to this reverse share split for all periods presented. B. WARRANTS: As for warrants issued upon issuance of debt and upon settlement of lawsuit see Notes 8c and 9b, respectively. F-22 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. Dollars in thousands (except share and per share data) - ------------------------------------------------------------------------------- C. STOCK OPTION PLAN: Under the Company's 1993 Stock Option Plan ("the Plan"), options may be granted to employees, officers, directors and consultants of the Company or of any subsidiary. The exercise price of options granted under the Plan may not be less than 85% of the fair market value of the Company's Ordinary shares on the date of the grant. The options granted shall vest annually over a period of three to four years, from the first vesting date and expire 6-10 years subsequent to the date of grant. Any options, which are forfeited or canceled before expiration, become available for future grants. The total amount of options available for future grants as of December 31, 2000, amounted to 44,779. As part of the acquisition of Eastek, the Company granted a key employee of Eastek 100,000 shares in escrow which will be released annually in three installments of 30,000 shares, 35,000 shares and 35,000 shares. The Company accounted for this transaction in accordance with EITF 95-8 "Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination". Accordingly the Company recorded deferred stock compensation in the amount of $237. Deferred compensation is amortized to the statement of operations over the vesting period. Amortization expenses in 2000, 1999 and 1998 amounted to $15, $0 and $0, respectively. A summary of the Company's stock option activity, and related information: 2000 1999 1998 ------------------------------- ------------------------------- ------------------------------ WEIGHTED WEIGHTED WEIGHTED NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE OF OPTIONS EXERCISE PRICE OF OPTIONS EXERCISE PRICE OF OPTIONS EXERCISE PRICE ------------ ---------------- ------------- ---------------- ------------ ---------------- Outstanding at the beginning of the year 499,138 $19.08 664,635 $17.39 787,658 $16.41 Granted 716,050 $ 3.63 - - - - Exercised (46,954) $ 4.43 - - - - Forfeited (20,084) $15.91 (165,497) $12.12 (123,023) $11.12 --------- -------- -------- Outstanding at end of year 1,148,150 $10.09 499,138 $19.08 664,635 $17.39 ========= ======== ======== Exercisable at the end of the year 488,650 $18.83 487,808 $19.44 528,518 $23.61 ========= ======== ========
F-23 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. Dollars in thousands (except share and per share data) - ------------------------------------------------------------------------------- The options outstanding as of December 31, 2000, have been separated into ranges of exercise price, as follows:
OPTIONS WEIGHTED OPTIONS OUTSTANDING AS OF AVERAGE WEIGHTED EXERCISABLE AS OF WEIGHTED DECEMBER 31, REMAINING AVERAGE DECEMBER 31, AVERAGE EXERCISE PRICE 2000 CONTRACTUAL LIFE EXERCISE PRICE 2000 EXERCISE PRICE - ---------------- ------------------ ------------------- ---------------- ------------------- ----------------- (YEARS) $3.63 716,050 5.87 $ 3.63 56,550 $ 3.63 $3.93 - $5.79 123,933 5.69 $ 5.48 123,933 $ 5.48 $6.06 - $8.82 142,967 4.12 $ 7.88 142,967 $ 7.88 $12.75 - $18.48 73,000 1.17 $17.07 73,000 $17.07 $24 - $28.89 5,000 3.34 $25.50 5,000 $25.50 $58.65 - $67.14 87,200 2.66 $66.67 87,200 $66.67 --------- ------- 1,148,150 5.08 $10.09 488,650 $18.83 ========= =======
Under SFAS-123, pro forma information regarding net income and net earnings per share is required and has been determined as if the Company had accounted for its employee stock option under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions (no options were granted during 1998 and 1999), for 2000: risk-free interest rates of 6%, dividend yields of 0%, volatility factors of the expected market price of the Company's Ordinary shares of 0.98 and a weighted-average expected life of an option of four years. Weighted average fair values and weighted average exercise prices of options whose exercise price is less, equal or exceeds market price of the shares at date of grant are as follows:
YEAR ENDED DECEMBER 31, 2000 -------------------------------------------------------- WEIGHTED AVERAGE FAIR WEIGHTED AVERAGE VALUE OF OPTIONS EXERCISE PRICE OF GRANTS AT AN EXERCISE OPTIONS GRANTS AT AN PRICE EXERCISE PRICE -------------------------- -------------------------- Equal to market price at date of grant $2.94 $3.63 ===== ===== Exceeds market price at date of grant $1.15 $3.63 ===== =====
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its options. For purposes of pro forma disclosure, the estimated fair value of the options is amortized as an expense over the options' vesting period. F-24 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. Dollars in thousands (except share and per share data) - ------------------------------------------------------------------------------- Pro forma information under SFAS-123:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 2000 1999 1998 ----------------- ----------------- ----------------- Net loss as reported $(1,389) $(4,847) $(14,356) ======= ======= ======== Pro forma net loss $(1,674) $(4,905) $(14,543) ======= ======= ======== Pro forma basic and diluted net loss per share $ (0.19) $ (0.55) $ (2.59) ======= ======= ========
The total compensation expense included in the pro forma information for 2000, 1999 and 1998 is $285, $58 and $187, respectively. As a result of the decrease in the Company's equity interest in StoreAge to 49% (see Note 1), and the de-consolidation of StoreAge, the status of StoreAge's employees was changed in accordance with FIN-44 "Accounting for Certain Transactions Involving Stock Compensation" from employees to non-employees. Thus 46,000 options granted to StoreAge's employees were remeasured at December 31, 2000, under the fair value method, and was accounted for as a variable plan in accordance with SFAS 123 and EITF 96-18 "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services". The fair value for these options was estimated at the balance sheet date using the Black-Scholes option valuation model with the following weighted-average assumptions: risk-free interest rates of 6%, dividend yields of 0%, volatility factors of the expected market price of the Company's Ordinary shares of 0.96 and a weighted- average expected life of an option of four years. The weighted average fair values at the balance sheet date of these options is $1 per option and the aggregate compensation as of December 31, 2000 is $46. Compensation expenses, derived from the change in StoreAge's employees status, would be recognized over the remaining vesting period of 2.4 years. D. DIVIDENDS: Dividends, when declared, will be paid in NIS. Dividends paid to shareholders outside Israel will be converted into dollars, on the basis of the exchange rate prevailing at the date of payment. The Company does not intend to pay cash dividends in the foreseeable future. F-25 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. Dollars in thousands (except share and per share data) - ------------------------------------------------------------------------------- NOTE 11:- INCOME TAXES A. TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969: If the Company meets certain conditions it will be defined as an "industrial company", as defined by this law and, as such, is entitled to certain tax benefits, mainly accelerated depreciation of machinery and equipment, as prescribed by regulations published under the Inflationary Adjustments Law, the right to claim public issuance expenses and amortization of patents and other intangible property rights as a deduction for tax purposes. B. MEASUREMENT OF TAXABLE INCOME UNDER THE INCOME TAX (INFLATIONARY ADJUSTMENTS) LAW, 1985: Results of the Company and its subsidiary for tax purposes are measured in terms of earnings in NIS after certain adjustments for increases in the Israeli Consumer Price Index ("CPI"). As explained in Note 2b, the financial statements are prepared in U.S. dollars. The difference between the annual change in the Israeli CPI and in the NIS/U.S. dollar exchange rate results in a difference between taxable income and the income before taxes reported in the financial statements. In accordance with paragraph 9(f) of SFAS No. 109, the Company has not provided deferred income taxes on the difference between the reporting currency and the tax bases of assets and liabilities. C. LOSS BEFORE MINORITY INTEREST IN LOSSES OF SUBSIDIARY:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 2000 1999 1998 ----------------- ----------------- ----------------- Domestic $2,129 $4,014 $11,202 Foreign - 888 3,154 ------ ------ ------- $2,129 $4,902 $14,356 ====== ====== =======
D. DEFERRED INCOME TAXES: Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. F-26 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. Dollars in thousands (except share and per share data) - ------------------------------------------------------------------------------- Significant components of the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31, ------------------------------------------ 2000 1999 ----------------- ------------------ Tax loss carryforward $ 26,506 $ 27,010 Reserves and allowances 7 63 -------- -------- Net deferred assets before valuation allowance 26,513 27,073 Valuation allowance (26,513) (27,073) -------- -------- Net deferred tax asset $ - $ - ======== ========
As of December 31, 2000, the Company has decreased its valuation allowances of approximately $560 to approximately $26,513 in respect of deferred tax assets resulting from tax loss carryforwards and other temporary differences. Management currently believes that since the Company has a history of losses it is more likely than not that the deferred tax regarding the loss carryforwards and other temporary differences will not be realized in the foreseeable future. E. TAX LOSS CARRYFORWARD: As of December 31, 2000, the Company has carryforward tax loss in the amount of approximately $73,600, which may be carried forward and offset against taxable income in the future for an indefinite period. NOTE 12:- SEGMENTS AND GEOGRAPHIC INFORMATION The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", in 1997. The Company operates in one reportable segment (see Note 1 for a brief description of the Company's business). The total revenues are attributed to geographic information based on the location of the end customer. The following presents total revenues for the years ended December 31, 2000, 1999 and 1998 and long-lived assets as of December 31, 2000, 1999 and 1998:
Year ended December 31, ---------------------------------------------------------- 2000 1999 1998 ---------- ------------ ------------ Sales to unaffiliated customers: United States $ 41 $3,867 $19,228 Israel 40 1,611 12,363 Europe 15 477 4,357 ----- ------ ------- $ 96 $5,955 $35,948 ===== ====== =======
F-27 I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. Dollars in thousands (except share and per share data) - -------------------------------------------------------------------------------
DECEMBER 31, ------------------------------------------------------------- 2000 1999 1998 ------------ ------------- ------------ Long-lived assets: United States $ - $ - $ 158 Israel 346 431 1,610 Europe - - 24 ----- ------ ------- $ 346 $ 431 $ 1,792 ===== ====== =======
NOTE 13:- SELECTED STATEMENTS OF OPERATIONS DATA
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 2000 1999 1998 ------------- ----------- ------------ A. RESEARCH AND DEVELOPMENT EXPENSES, NET: Total costs $1,328 $ 909 $ 2,671 Less - royalty-bearing grants (403) (223) (261) ------ ------- -------- $ 925 $ 686 $ 2,410 ====== ======= ======== B. FINANCIAL INCOME (EXPENSES): Interest income $ 389 $ 289 $ 186 ------ ------- -------- Financial expenses: Interest expenses (67) (76) (446) Foreign currency translation differences (45) (40) (95) Amortization of beneficial conversion feature - - (667) ------ ------- -------- (112) (116) (1,208) ------ ------- -------- $ 277 $ 173 $(1,022) ====== ======= ======== C. OTHER EXPENSES, NET: Amortization of compensation in respect to warrants issued upon settlement of lawsuit $ - $2,809 $ - Gain on sale of investment in subsidiaries - (996) - Loss from sale of shares in an investee - - 49 Other 12 (43) 218 ------ ------- -------- $ 12 $1,770 $ 267 ====== ======= ========
F-28 EX-1.2 2 dex12.txt ARTICLES OF ASSOCIATION Exhibit 1.2 ARTICLES OF ASSOCIATION OF IIS INTELLIGENT INFORMATION SYSTEMS LIMITED Amended and Restated as of November 19, 2000 ARTICLES OF ASSOCIATION OF IIS INTELLIGENT INFORMATION SYSTEMS LIMITED ________________________________________________________________________ INTERPRETATION - -------------- 1. In these Articles, the words in the first column of the following table shall bear the meanings set opposite them respectively in the second column thereof, if not inconsistent with the subject or context: Words Meanings ----- -------- The Company The above-named Company. Companies Law The Companies Law, 1999 (the "Companies Law") and all orders and regulations issued thereunder as amended from time to time, including any law or statute replacing it. The Statutes The Companies Law, the Securities Law of 1968 and every other ordinance or law for the time being in force concerning companies and affecting the Company. These Articles These Articles of Association, as shall be amended from time to time. Officer A Director, President, General Manager, Chief Executive Officer, Vice President, Chief Financial Officer, any other manager directly subordinate to the President, and any person who fills one of the said positions in the Company, even if he carries a different title. Audit Committee As defined in the Companies Law. The Office The registered office of the Company. The Seal Any of (i) the rubber stamp of the Company, (ii) the facsimile signature of the Company, or (iii) the electronic signature of the Company as approved by the Board of Directors. "Shareholder" (a) A holder of one or more of the shares of the Company; (b) a person registered as such in the Register of Shareholders; Shareholders Register The shareholders register required to be kept according to the Companies Law and any other shareholders register permitted to be kept by the Company according to the Companies Law. Month A Gregorian month. NIS New Israeli Shekel Writing Printing, lithography, photography and any other mode or modes of representing or reproducing words in a visible form. Words importing the masculine gender shall include the feminine gender, and words importing person shall include corporations. Subject as aforesaid, any words or expressions defined in the Statutes shall, except where the subject or context forbids, bear the same meanings in these Articles. PUBLIC COMPANY - -------------- 3. The Company is a limited public company, and the following apply: (a) no limitations will apply to the transfer of its shares; (b) the number of shareholders will be unlimited; (c) the Company may issue shares, debentures or any other securities to the public. (d) the liability of its shareholders is limited by shares. SHARE CAPITAL - ------------- 4. (a) The share capital of the Company is NIS fifty thousand (50,000), divided into 16,666,666 Ordinary Shares of NIS 0.003 nominal value each ("Ordinary Shares"). (b) Each Ordinary Share entitles its holder to receive notice of, and to participate in, all General Meetings of the Company, and to one (1) vote in such meetings for every share, and the other rights specified in these Articles. AMENDMENT OF ARTICLES - --------------------- 5. These Articles may be amended by a majority vote at a meeting of shareholders of the Company, with the exception of Article 50 which may be amended only by the affirmative vote of 75% of the shareholders present (in person or by proxy) and voting on such resolution at a General Meeting. If the Company's shares are divided into classes of shares, then a change that infringes on the rights of a class of shares shall be made only with the approval of a General Meeting of that class; the provisions of these Articles shall apply, mutatis mutandis, to the adoption of decisions by a class meeting. Notwithstanding the provisions of this Article , a change of these Articles that obligates a shareholder to acquire additional shares or to increase the extent of his liability shall not obligate the shareholder without his consent. SHARES - ------- 6. Subject to these Articles or to the terms of any resolution creating new shares, the unissued shares in the registered share capital of the Company from time to time shall be under the control of the Board of Directors, which shall have the power to allot shares or otherwise dispose of them to such persons, on such terms and conditions, and either at par or at a premium or, subject to the provisions of the Statutes, 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 nominal value or at a premium or, subject as aforesaid, at a discount, during such time and for such consideration as the Board of Directors may determine. 7. If two or more persons are registered as joint holders of any share, any one of such persons may give effectual receipts for any dividends or other monies in respect of such share. The Company shall not be required to recognize any holder of a share as a holder other than the registered holder of such share. 8. Every shareholder registered in the Shareholders' Register shall be entitled, without payment, to receive within thirty days after allotment or registration of transfer (unless the conditions of issuance provide for a longer interval), one certificate under the Seal for all the shares registered in his name, and if the Board of directors so approves, several certificates, each for one or more of such shares. Each certificate shall specify the number and denoting numbers of the shares in respect of which it is issued and may also specify the amount paid up thereon; provided that, in the case of joint holders, the Company shall not be bound to issue more than one certificate to all the joint holders, and delivery of such certificate to one of them shall be sufficient delivery to all. Every certificate shall be signed by one Director and countersigned by the Secretary or some other person nominated by the Board of Directors for this purpose. 9. If any share certificate shall be defaced, worn out, destroyed or lost, it may be renewed on such evidence being produced, and such indemnity (if any) being given as the Board of Directors shall require and (in the case of defacement or wearing out) upon delivery of the old certificate and, in any case, upon payment of such sum not exceeding NIS 50 (fifty New Israeli Shekels) as the Board of Directors may from time to time require. 10. The Company may, directly or indirectly, purchase its own shares subject to the provisions of the Companies Law. If the Company purchases its own shares, such shares will not have any rights as long as they are owned by the Company. 11. (a) A subsidiary or some other corporate body under the Company's control (in this Article: "acquiring corporate body") may acquire shares of the Company subject to the provisions of the Companies Law, on condition that the subsidiary's Board of Directors or the Directors of the acquiring corporate body determined that - had the acquisition been made by the Company - it would have been permitted by the provisions of the Companies Law. (b) If the Company's shares were acquired by a subsidiary or by an acquiring corporate body, such shares shall not grant voting rights as long as they are owned by the subsidiary or by the acquiring body corporate. (c) If a prohibited distribution (as defined in Section 301 to the Companies Law) was made, then the refund specified in Section 310 to the Companies Law shall be made to the subsidiary or to the acquiring body corporate and the provisions of Section 311 shall apply, mutatis mutandis, to the Directors of the subsidiary and to the Directors of the acquiring body corporate. However, if the Company's Board of Directors determined that the distribution is permitted, then the responsibility shall be that of the Company's Directors, as provided in Section 311 to the Companies Law. (d) Notwithstanding the provisions of Sub-article (a), acquisition by a subsidiary or by an acquiring corporate body that is not wholly owned by the Company constitutes a distribution in an amount equal to the amount of the acquisition, multiplied by the proportion of rights in the subsidiary's capital or in the capital of the acquiring corporate body held by the Company. TRANSFER OF SHARES - ------------------ 12. No transfer of shares shall be registered unless a proper writing or instrument of transfer (in any customary form or any other form satisfactory to the Board of Directors) has been submitted to the Company (or its transfer agent), 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 Shareholders Register (which the Company guarantees to perform promptly from submission to it of the foregoing) in respect of the shares so transferred, the Company may continue to regard the transferor as the owner thereof. 13. The Board of Directors may refuse, without giving any reasons therefor, to register any transfer of shares where the Company has a lien on the shares, constituting the subject matter of the transfer, but fully paid-up shares may be transferred freely and such transfers do not require the approval of the Board of Directors. All instruments of transfer shall remain in the custody of the Company, but any such instrument which the Board of Directors refused to register shall be returned to the person from whom it was received, if such request be made by him. 14. The Transfer Records and the Shareholders Register and Debenture Holders (if any) Register and Debenture Stock Holders (if any) Register and other securities (if any) Register of the Company may be closed during such time as the Board of Directors may deem fit, not exceeding, in the aggregate, thirty (30) days in each year. TRANSMISSION OF SHARES - ---------------------- 15. In the case of the death of a shareholder, or a holder of a debenture, the survivor or survivors, where the deceased was a joint holder, and the executors and/or administrators and/or the legal heirs of the deceased where he was a sole or only surviving holder, shall be the only persons recognized by the Company as having any title to his shares or his debentures, but nothing herein contained shall release the estate of a deceased joint holder from any liability in respect of any share or any debenture jointly held by him. 16. Any person who becomes entitled to a share or a debenture in consequence of the death or bankruptcy or any shareholder may, upon producing such evidence of title as the Board of Directors shall require, with the consent of the Board of Directors, be registered himself as holder of the share or the debenture or, subject to the provisions as to transfers herein contained, transfer the same to some other person. 17. A person entitled to a share or a debenture by transmission shall be entitled to receive, and may given a discharge for, any dividends or interest or other monies payable in respect of the share or debenture, but he shall not be entitled in respect of it to receive notices of, or to attend or vote at meetings of the Company or, save as aforesaid, to exercise any of the rights or privileges of a shareholder or a holder of a debenture unless and until he shall become a shareholder in respect of the share or a holder of the debenture. ALTERATIONS OF CAPITAL - ---------------------- 18. Subject to the provisions of the Companies Law, the Company may from time to time by a majority vote at a meeting of shareholders of the Company: (a) consolidate and divide all or any of its share capital into shares of larger amount than its existing shares; or (b) cancel registered share capital that has not yet been issued, on condition that there are no undertakings of the Company - including conditional undertakings - to issue such shares; or (c) divide its share capital or any part thereof into shares of smaller amount than is fixed by its Articles of Association by sub-division of its existing shares or any of them , and so that as between the resulting shares, one or more of such shares may, by the Resolution by which such sub-division is effected, be given any preference or advantage as regards dividend, return of capital, voting or otherwise over the others or any other shares; or (d) reduce its share capital and any capital redemption reserve fund in any way that may be considered expedient. 19. The Company may, subject to the Companies Law, issue redeemable shares and redeem the same according to the terms and conditions which the Company shall determine. INCREASE OF CAPITAL - ------------------- 20. The Company may from time to time by a majority vote at a meeting of shareholders, whether all the shares for the time being authorized shall have been issued or all the shares for the time being issued shall have been fully called up or not, increase its share capital by the creation of new shares; such new capital to be of such amount and to be divided into shares of such respective amounts and (subject to any special rights for the time being attached to any existing class of shares) to carry such preferential, deferred or other special rights (if any) or to be subject to such conditions or restrictions (if any) in regard to dividend, return of capital, voting or otherwise as the General Meeting deciding upon such increase directs. 21. Except so far as otherwise provided by or pursuant to these Articles or by the conditions of issuance, any new share capital shall be considered as part of the original ordinary share capital of the Company, and shall be subject to the same provisions with reference to liens, transfer, transmission and otherwise as the original share capital. MODIFICATION OF CLASS RIGHTS - ---------------------------- 22. If, at any time, the share capital is divided into different classes of shares, the rights attached to any class (unless otherwise provided by the terms of issuance of the shares of that class) may be varied with the consent in writing of the holders of all the issued shares of that class, or with the sanction of a majority vote at a meeting of the shareholders passed at a separate meeting of the holders of the shares of the class. The provisions of these Articles relating to General Meetings shall apply, mutatis mutandis, to every such separate General Meeting. Any holder of shares of the class present in person or by proxy may demand a secret poll. 23. Unless otherwise provided by the conditions of issuance, the enlargement of an existing class of shares, or the issuance of additional shares thereof, shall not be deemed to modify or abrogate the rights attached to the previously issued shares of such class or of any other class. BORROWING POWERS - ---------------- 24. 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 sees fit and, in particular, by the issuance of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages, charges or other securities on the undertaking, or the whole or any part of the property of the Company, both present and future, including units uncalled or called but unpaid capital for the time being. POWERS OF THE GENERAL MEETING - ------------------------------ 25. Without derogating from the authority of the General Meeting pursuant to these Articles, the Company's decisions on the following matters shall be adopted at a General Meeting: (1) any changes in these Articles; (2) exercise of the powers of the Board of Directors in accordance with the provisions of Section 52(a) of the Companies Law; (3) appointment of the Company's Auditor; (4) appointment of External Directors, in accordance with the provisions of the Companies Law; (5) approval of acts and transactions that require approval by the General Meeting under the provisions of Articles 255 and 268 to 275 of the Companies Law; (6) the increase and reduction of the registered share capital, in accordance with the provisions of Articles 286 and 287 to the Companies Law; (7) a merger, as specified in Article 320(a) to the Companies Law. GENERAL MEETINGS - ---------------- 26. (a) General Meetings shall be held at least once in every calendar year at such time, not being more than fifteen months after the holding of the last preceding General Meeting, and at such time and place as may be determined by the Board of Directors. Such Annual General Meetings shall be called "Annual Meetings", and all other General Meetings of the shareholders shall be called "Special Meetings". The Annual Meeting shall receive and consider the Directors' Report, the Financial Statements, appoint auditors, elect directors, and transact any other business which, under these Articles or by the Companies Law, may be transacted at a General Meeting of the Company, provided that notice of such other business was given to shareholders in accordance with the provisions of these Articles. At a General Meeting, decisions shall be adopted only on matters that were specified on the agenda. (b) Any reference in these Articles to a "General Meeting" will be either a General Meeting or a Special Meeting, according to the context. 27. The Board of Directors may, whenever it deems necessary, and shall upon such requisition in writing as is provided by Section 63(b) of the Companies Law, convene a General Meeting. Any such request must state the purposes for which the meeting is to be called, be signed by the requesting shareholders, and must be deposited at the Office. Such request may consist of several documents in like form, each signed by one or more requesting shareholder. 28. Unless a longer period for notice is prescribed by the Companies Law, at least ten (10) days and not more than sixty (60) days notice of any General Meeting shall be given, specifying the place, the day and the hour of meeting and, in the case of special business, the nature of such business, shall be given in the manner hereinafter mentioned, to such shareholders as are under the provisions of these Articles, entitled to receive notices from the Company. Notices shall be given by mail or by personal delivery to every registered shareholder of the Company, to his address as described in the Shareholders Register of the Company or such other address as designated by him in writing for this purpose. Provided that the accidental omission to give such notice to, or the non-receipt of such notice by, any such shareholder shall not invalidate any resolution passed or proceeding held at any such meeting and, with the consent of all the shareholders for the time being entitled to receive notice of meetings, a meeting may be convened upon a shorter notice or without notice, and generally in such manner as such shareholders may approve. Such consent may be given at the meeting or retrospectively after the meeting. If the shareholder did not provide the Company any address for the delivery of notices, the shareholder shall be deemed to have waived his right to receive notices. 29. Only shareholders of record as reflected on the Company's Share Register at the close of business on the date fixed by the Board of Directors as the record date determining the then shareholders who will be entitled to vote, shall be entitled to notice of, and to vote, in person or by proxy, at a General Meeting and any postponement or adjournment thereof. The Board of Directors will fix the record date of not less than ten (10) nor more than sixty (60) days before the date of the General Meeting. PROCEEDINGS AT GENERAL MEETINGS - ------------------------------- 30. No business shall be transacted at any General Meeting unless a quorum is present when the meeting proceeds to business. The quorum at any Meeting shall be two shareholders present in person or by proxy, holding or representing at least thirty twenty five percent (25%) of the total voting rights in the Company. A company being a shareholder shall be deemed to be personally present for the purpose of this Article if represented by its representative duly authorized in accordance with Article 42. 31. If, within half an hour from the time appointed for the holding of a General Meeting, a quorum is not present, the meeting shall stand adjourned to the same day in the next week at the same time and place, or any time and hour as the Board of Directors shall designate and state in a notice to the shareholders entitled to vote at the original meeting, and if, at such adjourned meeting, a quorum is not present within half an hour from the time appointed for holding the meeting any two shareholders present in person or by proxy shall constitute a quorum. Notwithstanding the aforesaid, if a General Meeting was convened at the demand of shareholders as permitted by Section 63(b) of the Companies Law, then a quorum at such adjourned meeting shall be present only if one or more shareholders are present who held in the aggregate at least 5% of the issued share capital of the Company and at least 1% of the voting rights in the Company or one or more shareholders who hold in the aggregate at least 5% of the voting rights in the Company. 32. (a) At every General Meeting, a chairman shall be elected for that meeting. (b) The election of the meeting's chairman shall be held at the beginning of the meeting's discussions, which shall be opened by the chairman of the Board of Directors or by a Director whom the Board of Directors authorized to do so. 33. The chairman may, with the consent of any meeting at which a quorum is present, and shall, if so directed by the meeting, adjourn any meeting from time to time and from place to place as the meeting shall determine. Whenever a meeting is adjourned pursuant to the provisions of this Article for more than seven days, notice of the adjourned meeting shall be given in the same manner as in the case of an original meeting. Save as aforesaid, no shareholder shall be entitled to any notice of an adjournment, or of the business to be transacted at an adjourned meeting. No business shall be transacted at any adjourned meeting other than the business which might have been transacted at the meeting from which the adjournment took place. VOTES OF SHAREHOLDERS - --------------------- 34. Except as otherwise provided in these Articles, any resolution at a General Meeting shall be deemed adopted if approved by the holders of a majority of the voting rights in the Company represented at the meeting in person or by proxy and voting thereon. In the case of an equality of votes, either on a show of hands or a poll, the chairman of the meeting shall not be entitled to a further or casting vote. 35. At all General Meetings, a resolution put to a vote at the meeting shall be decided on a show of hands unless, before or upon the declaration of the result of the show of hands, a poll in writing be demanded by the chairman (being a person entitled to vote), or by at least two shareholders present, in person or by proxy, holding at least 5% of the issued share capital of the Company and, unless a poll be so demanded, a declaration by the chairman of the meeting that a resolution has been carried, or has been carried unanimously or by a particular vote, or lost, or not carried by a particular vote, shall be conclusive, and an entry to that effect in the Minute Book of the Company shall be conclusive evidence thereof, without proof of the number or proportion of the votes recorded in favor of or against such resolution. 36. If a poll be demanded in manner aforesaid, it shall be taken forthwith, and the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. The demand of a poll shall not prevent the continuance of a meeting for the transaction of any business other than the question on which a poll has been demanded. 37. Any shareholder which is not a natural person may, by resolution of its directors or other governing body, authorize such person as it thinks fit to act as its representative at any General Meeting, and the person so authorized to the satisfaction of the Company shall be entitled to exercise the same powers on behalf of such company, which he represents as that company could exercise if it were an individual shareholder. 38. Subject to any rights or restrictions for the time being attached to any class or classes of shares, every shareholder shall have one vote for each share of which he is the holder, whether on a show of hands or on a poll. 39. If any shareholder be a lunatic, idiot, or non compos mentis, he may vote by his committee, receiver, curator bonis or other legal curator, and such last-mentioned persons may give their votes either personally or by proxy. 40. If two or more persons are jointly entitled to a share then, in voting upon any question, the vote of the senior person who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other registered holders of the share and, for this purpose, seniority shall be determined by the order in which the names stand in the Shareholders Register. 41. Votes may be given either personally or by proxy. A proxy need not be a shareholder of the Company. 42. (a) The instrument appointing a proxy shall be in writing in the usual common form, or such form as may be approved by the Board of Directors, and shall be signed by the appointor or by his attorney duly authorized in writing or, if the appointor is a corporation, the corporation shall vote by its representative, appointed by an instrument duly signed by the corporation. (b) The instrument appointing a proxy shall be deemed to include authorization to demand a poll or to vote on a poll on behalf of the appointor. 43. A vote given in accordance with the terms of an instrument of proxy shall be valid notwithstanding the previous death or insanity of the principal, or revocation of the proxy, or transfer of the share in respect of which the vote is given, unless an intimation in writing of the death, revocation or transfer shall have been received at the Office before the commencement of the meeting or adjourned meetings at which the proxy is used. 44. The instrument appointing a proxy shall be deposited at the Office or at such other place or places, whether in Israel or elsewhere, as the Board of Directors may from time to time, either generally or in a particular case or class of cases prescribe, at least forty-eight (48) hours before the time appointed for holding the meeting or adjourned meeting at which the person named in such instrument proposes to vote; otherwise, the person so named shall not be entitled to vote in respect thereof; but no instrument appointing a proxy shall be valid after the expiration of twelve months from the date of its execution. 45. Subject to the provisions of the Companies Law, a resolution in writing (approved by letter, telex, facsimile or otherwise) by all the shareholders, in person or by proxy, for the time being entitled to vote at a General Meeting of the Company, shall be as valid and as effectual as a resolution adopted by a General Meeting duly convened, held and constituted for the purpose of passing such resolution. 46. A shareholder will be entitled to vote at the Meetings of the Company by several proxies appointed by him, provided that each proxy shall be appointed with respect to different shares held by the appointing shareholder. Every proxy so appointed on behalf of the same shareholder shall be entitled to vote as he sees fit. 47. No person shall be entitled to vote at any General Meeting (or be counted as a part of the quorum thereof) unless all calls then payable by him in respect of his shares in the Company shall have been paid. DIRECTORS POWERS AND RESPONSIBILITIES OF THE BOARD OF DIRECTORS - --------------------------------------------------------------- 48. (a) Without derogating from the authority of the General Meeting pursuant to these Articles and the Companies Law, the Board of Directors shall formulate the Company's policy and shall supervise the exercise of the General Manager's office and his acts, and as part thereof it - (1) shall determine the Company's plans of activity, the principles for financing such plans and the order of priority among them; (2) shall examine the Company's financial situation and set the framework of credit which the Company may take; (3) shall determine the organizational structure and the compensation policy of employees; (4) may decide to issue a series of debentures; (5) is responsible for the preparation and approval of the financial reports according to Section 171 to the Companies Law; (6) shall report to the Annual Meeting about the state of the Company's affairs and on its business results, as required by Section 173 to the Companies Law; (7) shall appoint and dismiss the General Manager, as provided by Section 250 to the Companies Law; (8) shall decide on the acts and transactions that require its approval in accordance with these articles or under the provisions of Sections 255 and 268 to 275 to the Companies Law; (9) may issue shares and securities convertible into shares up to the limit of the Company's registered share capital, under the provisions of Section 288 to the Companies Law; (10) may decide on a distribution according to Sections 307 and 308 to the Companies Law; (11) shall express its opinion on a special purchase offer, according to Section 329 to the Companies Law. (b) The powers of the Board of Directors under this Article cannot be delegated to the General Manager. DIRECTORS - --------- 49. The Board of Directors of the Company shall consist of a minimum of two (2) and a maximum of eleven (11) Directors. 50. (a) Except for External Directors (as defined in the Companies Law) and the Chief Executive Officer of the Company, all directors shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible, one class to hold office initially for a term expiring at the 2001 Annual Meeting of the Company, another class to hold office initially for a term expiring at the 2002 Annual Meeting of the Company, and another class to hold office initially for a term expiring at the 2003 Annual Meeting of the Company, with the members of each class to hold office until their successors have been duly elected and qualified. At each Annual Meeting following the 2001 Annual Meeting, the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the Annual Meeting of the Company held in the third year following the year of their election and until their successors have been duly elected and qualified. (b) Any director or directors may be removed from office at any time, but only for "cause" and only by the affirmative vote of (i) the holders of the majority of the Ordinary Shares present in person or by proxy and voting thereon, or (ii) a majority of the Board of Directors. For purposes of this clause (b): "cause" shall mean the willful and continuous failure of a director substantially to perform such director's duties to the Company (other than any such failure resulting from incapacity due to physical or mental illness) or the willful engaging by a director in gross misconduct materially and demonstrably injurious to the Company. (c) The Company shall appoint External Directors as and to the extent required by, and they shall hold office according to, the Companies Law, as long as the Company is required by the Companies Law to appoint External Directors. (d) The Chief Executive Officer of the Company will automatically be a director of the Company and his term of office as a director shall shall be vacated, ipso facto, when he ceases to serve as Chief Executive Officer of the Company. 51. (a) No person shall be nominated for the office of a director at a General Meeting, except for directors whose term of office expired at the time the General Meeting was convened, persons nominated for the office of a director by the Board of Directors, and as provided for in Article 51(b). (b) Any shareholder entitled to receive notice of and vote at a General Meeting desiring to propose a nominee for director to be elected at an Annual General Meeting of Shareholders has to deliver notice to the Secretary, at the Company's principal offices, not later than ninety (90) days prior to the date of the annual General Meeting at which meeting such election is to occur, whichever date is later. The notice shall set forth: (i) the name and address, as they appear on the Company's share register, of the shareholder proposing such nominee, (ii) the identity and background of the nominee, (iii) the class and number of shares of the Company beneficially owned by such shareholder, (iv) a representation that such shareholder is a shareholder of record and intends to appear by person or by proxy at such General Meeting to bring the General Meeting the nominee specified in the notice, (v) a brief description of the reasons for wanting to nominate such nominee as a director, (vi) any material interest that the shareholder has in the election of such nominee and (vii) the written consent of the nominee to be elected as a director of the Company. 52. The Directors in their capacity as such, shall be entitled to receive remuneration and reimbursement of expenses incurred by them in the course of carrying out their duties as Directors. 53. The office of a Director shall be vacated, ipso facto: (a) upon his resignation by written notice signed by him and delivered to the Office; (b) if he becomes bankrupt or enters into an arrangement with his creditors; (c) if he is or becomes of unsound mind; (d) if he be relieved of his office as provided in Article 50(b) hereof; (e) if he is prevented by applicable law from serving as a director of the Company. (f) if the Board of Directors terminate his office according to Section 231 of the Companies Law; (g) if court order is given according to Section 233 of the Companies Law. 54. (a) Subject to the provisions of the Companies Law, no Director shall be disqualified by virtue of his office from holding any office, or deriving any profit from any other office in the Company or from any company in which the Company shall be a shareholder or otherwise interested, or from contracting with the Company as a vendor, purchaser or otherwise. (b) Transactions entered into by the Company in which an office holder of the Company has a personal interest, directly or indirectly, will be valid in respect of the Company and the office holder only if approved by the Company's Board of Directors and, if such transactions are "irregular transactions" as defined in the Companies Law, only if approved in accordance with the requirements of the Companies Law. 55. A Director who has a personal interest in a matter which is brought for discussion before the Board of Directors may participate in said discussion, provided that he shall neither vote in nor attend discussions concerning the approval of the activities or the arrangements. If said Director did vote or attend as aforesaid, the approval given to the aforesaid activity or arrangements shall be invalid. 56. In the event of one or more vacancies on the Board of Directors, the continuing Directors may continue to act as long as the Board of Directors consists of at least a majority of the total number of Directors elected. However, in the event that the remaining Directors are not a majority of the total number of Directors elected, the remaining Director or Directors may call for the convening of a General Meeting for the purpose of the election of Directors. 57. Subject to the limitation on the number of Directors as specified in Article 49, the Board of Directors may, at any time and from time to time, appoint any other person as a Director, whether to fill a vacancy or to add to their number. Any Director so appointed shall hold office until the next Annual Meeting at which the term of the class to which they have been elected expires, and may be re-elected. 58. In case of any increase in the number of directors, the additional director or directors, and in case of any vacancy in the Board of Directors due to a death, resignation, removal, disqualification or any other cause, the successors appointed according to Article 57 to fill the vacancies shall be elected by a majority of the directors then in office. CONVENING THE BOARD OF DIRECTORS - -------------------------------- 59. (a) The Chairman of the Board of Directors may convene a meeting of the Board of Directors at any time. (b) The Board of Directors shall hold a meeting on a specified subject on the demand of two Directors, or if the Board of Directors consists of up to five Directors - one Director; (c) The Chairman of the Board of Directors shall convene the Board of Directors upon a demand said in Sub-article (b) of this Article 59 or if Section 122(d) to the Companies Law applies, due to a notice or report from the General Manager or due to a notice from the Auditor of the Company under Section 169 to the Companies Law. (d) If a meeting of the Board of Directors was not convened within 14 days after the date of a demand pursuant to Sub-article (b) of this Article 59, or after the date of a notice or report of the General Manager according to Section 122(d) to the Companies Law, or after notice of the Auditor under Section 169 to the Companies Law, then each of those persons enumerated in Sub-articles (b) and (c) may convene a meeting of the Board of Directors, which shall discuss the subject specified in the demand, notice or report, as the case may be. MEETINGS OF THE BOARD OF DIRECTORS AND THEIR CONDUCT - ---------------------------------------------------- 60. The agenda of a meeting of the Board of Directors shall be set by the Chairman of the Board of Directors, and it shall include: (1) subjects determined by the Chairman of the Board of Directors; (2) subjects determined as said in Section 98 to the Companies Law; (3) any subject which a Director or the General Manager requested at a reasonable time before the meeting was convened - of the Chairman of the Board of Directors to include in the agenda 61. (a) Notice of a meeting of the Board of Directors shall be delivered to all its members at a reasonable time before the meeting, but not later than forty eight (48) hours prior to the time set for any such meeting, (b) A notice under Sub-article (a) shall be delivered to the Director's address that was given to the Company in advance, and in it shall be stated the time of the meeting and the place where it will convene, as well as reasonable details on all the subjects on the agenda. 62. Notwithstanding the provision of Article 61 hereto, the Board of Directors may - with the consent of all the Directors - convene for a meeting without notice. GENERAL MANAGER - --------------- 63. The Board of Directors will appoint one or more persons as General Manager, and they will be titled as President or Chief Executive Officer (CEO) or Chief Operating Officer (COO). The Board of Directors may from time to time remove or discharge him or them from office (subject to the provisions of any agreement between any such person and the Company) and appoint another or others in his or their place or places. 64. The Board of Directors may from time to time appoint one or more Vice Presidents for certain functions, to carry out duties delegated to him (them) by the President, CEO or COO. 65. To the extent permitted by the Companies Law, the Board of Directors may from time to time confer upon and delegate to a President, CEO, COO or other Executive Officer then holding office, such authorities and duties of the Board of Directors as they may deem fit, and they may delegate such authorities and duties for such period and for such purposes and subject to such conditions and restrictions which they consider in the bests interests of the Company, and they may delegate such authorities and duties without waiving the authorities of the Board of Directors with respect thereto and it may from time to time revoke, cancel and alter such authorities and duties in whole or in part. 66. The remuneration of a President, CEO, COO or other Executive Officer shall be fixed by the Board of Directors, taking into consideration any agreement between him and the Company, and it may be in whole or in part, in the form of salary, share options, or commissions or profit sharing or a combination thereof. DIRECTOR'S ACTS AND AUTHORITIES - ------------------------------- 67. 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 a General Meeting. The authority conferred on the Board of Directors by this Article 67 shall be subject to the provisions of the Companies Law, of these Articles and any regulation or resolution consistent with these Articles adopted from time to time by the Company in a 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. 68. The Directors may postpone their meetings and otherwise regulate them as they shall deem fit. The quorum for the dispatch of business by the Board of Directors shall be determined by the Directors and, if not so determined, shall be the majority of the Directors then holding office. 69. A resolution in writing signed or otherwise approved in writing (by letter, telegram, telex, facsimile, electronic mail or otherwise) by all the Directors then in office shall be as valid and as effectual as a resolution adopted by the Board of Directors at a meeting of the Board of Directors duly convened and held. 70. Members of the Board of Directors, or of any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or of any committee, by means of a telephone conference or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute attendance in person at the meeting. 71. (a) The Board of Directors shall elect a Chairman for the meeting and fix the term of his office. The CEO shall not serve as Chairman of the Board of Directors and vice versa unless the holders of two thirds of the voting rights in the Company represented in person or by proxy and voting on such resolution at a General Meeting, who are not controlling shareholders of the Company or their representatives and who are present at the vote, adopt a decision to appoint the Chairman of the Board of Directors as the CEO, for a period not exceeding three years after the date of the adoption of the decision. (b) In the event that a Chairman was not elected or if the Chairman should fail to be present at a meeting fifteen (15) minutes after the time set for its convening, the remaining Directors shall elect one of those present to be Chairman of the meeting. (c) All questions that arise at meetings of the Board of Directors shall be decided by a majority of votes. In the event of a tie vote, the Chairman of the Board of Directors shall cast the deciding vote. 72. Any meeting of the Board of Directors at which a quorum is present shall have the authority to exercise all or part of the authorities, powers of attorney and discretion invested at such time in the Directors or regularly exercised by them. 73. Subject to the Companies Law, the Board of Directors may delegate its authorities in whole or in part to committees as it shall deem fit, and it may from time to time revoke such delegation. Any committee so created must, in exercising the authorities granted to it, adhere to all the instructions of the Board of Directors given from time to time and/or to the provisions of the Companies Law. 74. All acts done bona fide at any meeting of the Board of Directors, or of a committee of 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 meeting or any of them or any person(s) acting as aforesaid, or that they 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. 75. The Board of Directors shall cause proper Minutes to be kept of the following: (a) the names of all the Directors present at any meeting of the Board of Directors and at any meeting of a committee of the Board of Directors; (b) all proceedings and resolutions of General Meetings of the Company, Board of Directors' meetings and Committees of the Board of Directors' meetings. Any Minutes as aforesaid, if purporting to be signed by the Chairman of such meeting or by the Chairman of the next succeeding meeting, shall be accepted as prima facie evidence of the matters therein recorded. 76. [Reserved.] SHAREHOLDERS REGISTERS - ---------------------- 77. Subject to, and in accordance with, the provisions of the Companies Law, the Company may cause Shareholder Register to be kept at any place in Israel and may cause a copy of the Shareholder Register to be kept outside Israel as the Board of Directors may think fit and, subject to all applicable legal requirements, 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 registers. In addition to the Shareholders Register, the Company shall also keep a Register of Substantial Shareholders as defined in the Companies Law. SECRETARY - --------- 78. The Board of Directors may from time to time appoint a Secretary to the Company as it deems fit, and may appoint a temporary Assistant Secretary who shall act as Secretary for the term of his appointment. EX-2.1 3 dex21.txt FORM OF DEBENTURE Exhibit 2.1 THESE SECURITIES HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE LAWS OF ANY STATE OR ANY OTHER JURISDICTION, AND MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES EXCEPT IN TRANSACTIONS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. Issue Date: Principal Amount: I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED Libor + 1.5% Convertible Secured Debenture No: 1 1. Consideration. FOR VALUE RECEIVED, IIS INTELLIGENT INFORMATION SYSTEMS LIMITED (the "Company"), an Israeli company, with offices at Gutwirth Science-Based Industrial Center, Technion City, Haifa 32000, Israel, hereby promises to pay to the order of __________, whose address is ____________________, or its registered assigns (hereinafter, the "Registered Holder"), the principal sum of _________ Dollars ($________), in lawful money of the United States, on the "Maturity Date" (as defined below), with interest thereon from December 20, 2000 in like money at the rate of LIBOR plus one and a half percent (1.5%) per annum on the unpaid balance of this Debenture until paid or converted. Interest on this Debenture shall be payable quarterly, on the first business day of March, June, September and December of each year, commencing March 2001. The first interest payment will include interest accrued from December 20, 2000. The interest shall be increased by one percent (1%) for every four (4) weeks of delay by the Company in making the filings specified in Sections 4.c and 4.d of the Securities Purchase Agreement (the "Securities Purchase Agreement") of even date by and between the Company and the Purchasers listed therein (without derogating from any other remedy of the Registered Holder). Subject to Section 4 herein, principal payments shall be reduced by that portion of the principal amount of the Debenture that are converted into the Company's Ordinary Shares (the "Ordinary Shares"). "LIBOR" shall mean the London Inter Bank Offering Rate for three-month dollar deposits for similar amounts as published by the Wall Street Journal. The Company shall repay the principal amount in equal quarterly installments on the first business day of March , June, September and December of each year, commencing at the beginning of the third year following the issuance of the Debenture and ending at the end of the fifth year (each such payment date shall be referred to as an "Installment Date"), in such manner that on each Installment Date, the Company shall repay 8 1/3 % of the principal amount of the Debentures. 2. Payment. Principal and interest shall be payable at such address as the Registered Holder shall have designated to the Company in writing at least fifteen (15) business days prior to each Installment Date and the Maturity Date (and, in the event of failure to provide such address, at the address specified in section 1 above), in lawful tender of the United States. 3. Issuance of Notes. This Debenture has been issued by the Company pursuant to the authorization of the Board of Directors of the Company (the "Board") and issued pursuant to the Securities Purchase Agreement. Pursuant to the Securities Purchase Agreement, the Company issued units (the "Units"), each Unit consisting of $100,000 principal amount of the Debentures and 10,000 three-year non-redeemable warrants (the "Warrants"). Pursuant to the Securities Purchase Agreement, $3,000,000 in aggregate principal amount of Debentures were issued on the date hereof. The Securities Purchase Agreement contains certain additional terms that are binding upon the Company and each Registered Holder of the Debentures. A copy of the Securities Purchase Agreement may be obtained by any Registered Holder of the Debentures from the Company upon written request. Capitalized terms used but not defined herein shall have the meanings set forth in the Securities Purchase Agreement. The Debentures, together with any debentures from time to time issued in replacement thereof, whether pursuant to transfer and assignment, partial conversion thereof or otherwise, are hereinafter sometimes collectively referred to as the "Debentures." 4. Conversion Price. At the option of the Registered Holder hereof, all or any part of the unpaid principal amount of this Debenture may, upon execution of the Notice of Conversion attached hereto and the surrender of this Debenture to the Company for conversion, be convertible at any time following the date of issuance of this Debenture (the "Conversion Date") into fully paid non-assessable Ordinary Shares of the Company, at a conversion price (the "Conversion Price") equal to one (1) Ordinary Share for each $3 nominal value of the principal amount of the Debenture. The Conversion Price may be adjusted pursuant to the provisions of Section 9(c) hereof. 5. Conversion and Delivery. Subject to the limitations set forth below, Notice of Conversion may be given at any time after the date hereof. The Company shall convert this Debenture pursuant to such Notice of Conversion in accordance with Section 5 of the Securities Purchase Agreement. No fractional Ordinary Shares shall be issued upon conversion of this Debenture. The Registered Holder expressly waives his rights to receive a certificate for any fractional shares. If less than all of the unpaid principal amount evidenced by this Debenture shall be converted, the Company will, upon such exercise of the conversion privilege, execute and deliver to the Registered Holder hereof a new Debenture (dated the date hereof) evidencing the remaining amount of principal then outstanding. Notwithstanding the above, in the event that the closing price of the Company's Ordinary Shares for a period of at least fifteen (15) consecutive trading days is equal to or greater than $6.00, the Company may give written notice to the Registered Holder and the entire outstanding amount of this Debenture, shall be deemed to have been converted into Ordinary Shares of the Company on the day following receipt of such notice. 6. Early Repayment. Commencing on the first day of the 10th month following December 20, 2000 and ending at the end of the 15th month following the said date, the Company may effect early repayment of the Debentures by the payment of 166.66% of the principal amount of the Debenture (with respect to the principal amount not converted to shares at that time). In the event the Company wishes to perform such early repayment, it shall notify the Registered Holder, in writing, and shall consummate such early repayment within ten (10) days following the date of the notice. In the event of such early repayment the exercise price all of the Warrants shall be reduced to US$4 per share. 7. Covenants. (a) The Company will pay all taxes, assessments and governmental charges lawfully levied or assessed upon it, its property and any part thereof, and upon its income for profits, and any part thereof, before the same shall become delinquent; and will duly observe, and conform in all material aspects to, all lawful requirements of any governmental authority relative to any of its property, and all covenants, terms and conditions upon or under which any of its property is held; provided that nothing in this Section 7 shall require the Company to observe or conform to any requirement of governmental authority or to pay any such tax, assessment or governmental charges so long as the validity thereof shall be contested in good faith; and provided further the Company shall not be required to pay any such taxes, assessments or charges, if, in the judgment of the Board, such payment shall not be in the best interests of the Company in the conduct of its business. (b) Subject to the other provisions of this Debenture, the Company at all times will maintain its corporate existence and right to carry on its business and will duly procure all necessary renewals and extensions thereof and use its best efforts to maintain, preserve and renew all of its rights, powers, privileges and franchises; provided however, that nothing herein contained shall be construed to prevent the Company from ceasing or omitting to exercise any rights, powers, privileges or franchises which, in the judgment of the Board, can no longer be profitably exercised, nor to prevent the consolidation, merger or liquidation of any subsidiary or subsidiaries of the Company with or into the Company. (c) The Company will at no time close its stock transfer books against the transfer of any Ordinary Shares issued or issuable upon the conversion of, or in lieu of payments on, the Debentures, in any manner which interferes with the timely conversion of such Debentures, except as may otherwise be required to comply with applicable securities laws and the laws of the State of Israel. (d) The Company will not, by amendment of its Memorandum of Association or 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 pursuant to the Securities Purchase Agreement by the Company, and will at all times assist in good faith in the carrying out of all the provisions of this Debenture and the Securities Purchase Agreement and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the Registered Holders of the Debentures against impairment. (e) 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 (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Company shall mail to each Registered Holder of the Debentures, at least ten (10) 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. Notwithstanding anything contained herein to the contrary, no adjustment of the Conversion Price shall be made by reason of the issuance of shares pursuant to the acquisition by the Company of all or substantially all of the stock or assets of any other corporation or corporations. 8. Taxes. The issuance of certificates representing Ordinary Shares upon the conversion of this Debenture shall be made without charge to the converting Registered Holder of the Debenture for any tax with respect to such issue. 9. Floating Charge; Debenture Protection; Full Ratchet. (a) Upon the issuance of the Debentures the Company shall register a first degree floating charge over all its assets according to the Debenture in the form attached hereto in Exhibit 1 in favor of each of the Registered Holders. (b) Without derogating from the provisions of Section 9(a) above, in the event that at any time the Debentures are not converted or repaid in full, and the Company issues additional debentures upon preferred terms (as to the Conversion Price or Security), then the terms of the outstanding Debentures shall be amended to include such preferred terms, but this shall not constitute any breach or default hereunder. (c) In addition, until the repayment or conversion of the entire principal amount of the Debentures, in the event that the Company issues New Securities (as defined below) at a price lower than the Conversion Price, the Conversion Price of any part of the principal amount of this Debenture which has not been converted by such date will be automatically be reduced to such lower price. "New Securities" shall mean any shares of the Company, whether or not now authorized, and rights, options or warrants to purchase capital stock, and securities of any type whatsoever that are, or may become, convertible into capital stock; provided that the term "New Securities" shall not include (i) shares of the Company issuable upon exercise or options or warrants outstanding on the date hereof, 2000 or issued or granted pursuant to the Warrants; (ii) securities issued to employees and consultants of the Company pursuant to any stock option plan or stock purchases or stock bonus arrangement approved by the Board of Directors of the Company; (iii) securities issued pursuant to payment of any dividend or distribution with respect to all of the Company's issued and outstanding capital stock or (iv) securities issued to a strategic investor according to a strategic investor agreement, which, in addition to its equity investment in the Company, provides significant added value to the Company's business; For the purposes of any adjustment of the Conversion Price pursuant to this Section 9(c), the following provisions shall be applicable: (i) In the case of the issuance of Shares for consideration in whole or in part in property other than cash, the value of such property or consideration other than cash shall be deemed to be the fair market value of such property , irrespective of any accounting treatment. (ii) In the case of the issuance of Shares for consideration in whole or in part other than cash or property, the value of such consideration shall be deemed to be the aggregate value of such Shares, less the value of any other consideration received by the Company. (iii) In the case of the issuance of options or other rights to purchase or subscribe for securities by their terms convertible into or exchangeable for shares or options to purchase or other rights to subscribe for such convertible or exchangeable securities: (A) the aggregate maximum number of Ordinary Shares deliverable upon exercise of such options to purchase or rights to subscribe for 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, if any, received by the Company upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Shares covered thereby; (B) the aggregate maximum number of Ordinary Shares deliverable upon conversion of, or in exchange 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 received by the Company for any such securities and related options or rights, provided that in making the foregoing calculations, such convertible or exchangeable securities shall be deemed to have been converted or redeemed; and (C) if there is any change in the exercise price of, or number of shares deliverable upon exercise of, any such options or rights or upon the conversion or exchange of any such convertible or exchangeable securities (other than a change resulting from the antidilution provisions thereof), then the Conversion Price shall automatically be readjusted in proportion to such change. (c) Share Dividend; Subdivision; Split of Shares. If the number of -------------------------------------------- Ordinary Shares outstanding at any time prior to repayment or conversion of this Debenture is increased by a shares dividend payable in Ordinary Shares or by a subdivision or split-up of Ordinary Shares, then, following the record date fixed for the determination of holders of shares entitled to receive such shares dividend, subdivision or split-up, the Conversion Price shall be appropriately decreased and the number of Ordinary Shares issuable on conversion of the principal amount shall be increased in proportion to such increase in outstanding shares. (d) Combination of Shares. If, at any time prior to repayment or --------------------- conversion of this Debenture, the number of Ordinary Shares outstanding is decreased by a combination of the outstanding Ordinary Shares, then, following the record date for such combination, the Conversion Price shall be appropriately increased and the number of Ordinary Shares issuable on on conversion of the principal amount shall be increased in proportion to such increase in outstanding shares. (e) Calculations. All calculations under this Section 9 shall be made to ------------ the nearest one-tenth of a cent ($0.001) or to the nearest one-tenth of a share, as the case may be. 10. No Rights as Stockholder. The Registered Holder of this Debenture shall not, by reason of the ownership of this Debenture, have any rights whatsoever as a stockholder of the Company, or any other rights, whatsoever, except as stated in this Debenture and in the Securities Purchase Agreement. 11. Events of Default. In case one or more of the following events of default shall have occurred: (a) default in the due and punctual payment of interest upon or principal of any of the Debentures as and when the same becomes due and payable either at maturity or otherwise, which such default continues for five (5) days; or (b) failure to deliver the Ordinary Shares required to be delivered upon conversion of Debentures in the manner and at the time required by Section 5 of the Securities Purchase Agreement, which such failure continues for five (5) days; or (c) failure on the part of the Company to duly observe or perform any of its other covenants or agreements contained in the Debentures or to cure any material breach in a material representation contained in the Securities Purchase Agreement for a period of forty-five (45) days after the date on which written notice of such failure requiring the same to be remedied has been given by a Registered Holder to the Company; or (d) a decree or order by a court having jurisdiction has been entered adjudging the Company a bankrupt or insolvent, or approving a petition seeking reorganization of the Company under any applicable bankruptcy law and such decree or order has continued undischarged or unstayed for a period of ninety (90) days; or a decree or order of a court having jurisdiction for the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of the Company or of all or substantially all of its property, or for the winding-up or liquidation of its affairs, has been entered, and has remained in force undischarged or unstayed for a period of ninety (90) days; or (e) the Company institutes proceedings to be adjudicated a voluntary bankrupt, or consents to the filing of a bankruptcy proceeding against it, or files a petition or answer or consent seeking reorganization under applicable law, or consents to the filing of any such petition or to the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of it or of all or substantially all of its property, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts generally as they become due; then, and in each and every such case, so long as such event of default has not been remedied and unless the principal of all the Debentures has already become due and payable, the holders of not less than seventy five percent (75%) in principal amount of the Debentures then outstanding, by notice in writing to the Company, may declare the principal of his Debenture then outstanding and the interest accrued thereof, if not already due and payable, to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything herein contained to the contrary notwithstanding. 12. Transferability. This Debenture is transferable, in whole or in part in accordance with the terms of Section 5 of the Securities Purchase Agreement. Upon obtaining such written consent, the Registered Holder may submit a written notification, in person or by his duly authorized attorney, demanding for a transfer of the Debenture on the register of the Company maintained at its principal offices. The Company may deem and treat the person in whose name this Debenture is registered as the absolute owner hereof, for the purpose of receiving payment of the principal thereof and interest hereon, whether or not the same shall be overdue, and for all other purposes whatsoever, including but without limitation, the giving of any written notices required hereunder, and the Company shall not be affected by any notice to the contrary. 13. Non-Recourse. No recourse shall be had for the payment of the principal of or the interest on this Debenture or any part hereof, or for any claim based hereon or otherwise in respect hereof, or of the indebtedness represented hereby, against any incorporator, stockholder, officer or director, as such, past, present or future of the Company either directly or through the Company, whether by virtue of any constitutional provision, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all liability, if any, of that character against any such incorporator, stockholder, officer or director being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. 14. Acceptance of Holder. This Debenture is subject to all of the covenants, obligations, conditions, rights, limitations and other provisions stated herein, to all of which the Holder and each successive holder hereof by acceptance of any Debenture assents. 15. Amendments and Modification. Changes in or additions to this Debenture may be made, and compliance with any covenant or condition herein set forth may be omitted only if the Company shall obtain the written consent from the Registered Holder of this Debenture. 16. Non-Waiver. Neither any failure nor any delay on the part of the Registered Holder of this Debenture in exercising any right, power, or privilege hereunder shall operate as a waiver of any rights of any holder hereof, nor shall a single or partial exercise of any right preclude any other or further exercise of any other right, power of privilege accorded to any Registered Holder hereof. 17. Governing Law. This Debenture shall be construed and enforced in accordance with and governed by the laws of Israel, without giving effect to principles of conflicts of law. 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 shall be conclusive and binding, and may be enforced in Israel by suit on the judgment or in any other manner provided by law. The Parties hereby consent to the jurisdiction of the courts of Tel-Aviv, and hereby waive, to the maximum extent permitted by law, any objection, including any objections based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. 18. Headings. The headings contained in this Debenture are for reference purposes only and shall not affect the meaning of interpretation of this Debenture. [Signature Page Follows] IN WITNESS WHEREOF, the Company has caused this Debenture to be executed as of the date first written above. I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED By: __________________________________ Name: Robi Hartman Title: Chairman and CEO Attest: By: ___________________________ Name: Title: NOTICE OF CONVERSION The conversion form appearing below should only be executed by the Registered Holder desiring to convert all or part of the principal amount of the Debenture attached hereto. CONVERSION FORM Date: _______________________ TO: I.I.S. INTELLIGENT INFORMATION SYSTEMS Gutwirth Science-Based Industrial Center Technion City, Haifa 32000 Israel The undersigned hereby exercises the conversion privilege upon the terms and conditions set forth in the attached Debenture, to the extent of the maximum number of Ordinary Shares issuable pursuant to the terms of Sections 4 and 5 of the Debenture, and accordingly, authorizes the Company to apply $__________ principal amount of the attached Debenture to payment in full for such Ordinary Shares. Please register such shares and make delivery thereof as follows: Registered in the Name of (Giving First or Middle Name in Full) Name__________________________________________ (Please Print) Address_______________________________________ DELIVERY INSTRUCTIONS To be completed ONLY if Certificates are to be mailed to persons other than Registered Holders. Name__________________________________________ (Please Print) Address_______________________________________ Signature_____________________________________ ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfer unto ________________________________________________________the within Debenture and all rights thereunder, hereby irrevocably authorizing the Company to transfer said note on the books of the Company, with full power of substitution in the premises. Dated: Signature: ____________________________ Print Name:____________________________ In the presence of: Signature: ____________________________ Print Name:____________________________ EX-2.2 4 dex22.txt FORM OF WARRANT Exhibit 2.2 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT CANNOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE WARRANT OR SHARES UNDER SUCH ACT AND APPLICABLE LAWS OR SOME OTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT. I.I.S INTELLIGENT INFORMATION SYSTEMS LIMITED WARRANT TO PURCHASE ORDINARY SHARES Void after Right to Purchase ______ Ordinary Shares (Subject to adjustment) PREAMBLE I.I.S. Intelligent Information Systems Ltd. ("IIS" or the "Company"), an Israeli company, hereby certifies that, for value received, ____________, whose address is ___________________________________________, or its registered assigns (hereinafter, the "Registered Holder"), is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time before 5:00 P.M. Israeli time, on December 20, 2003 (the "Expiration Date"), _________ of the Company's fully paid and non-assessable Ordinary Shares, par value NIS 0.003 per share (the "Ordinary Shares"), at the purchase price per share of $4.50 (the "Initial Exercise Price"). The number of such Ordinary Shares and the Initial Exercise Price are subject to adjustment as provided herein. This Warrant is one of the Warrants to Purchase Ordinary Shares (the "Warrants"), evidencing the right to purchase Ordinary Shares of the Company, issued pursuant to a Securities Purchase Agreement (the "Securities Purchase Agreement"), dated January 31, 2001, between the Company and the Purchasers identified therein. The Securities Purchase Agreement contains certain additional terms that are binding upon the Company and each Registered Holder of the Warrants. A copy of the Securities Purchase Agreement may be obtained by any Registered Holder of the Warrants from the Company upon written request. Capitalized terms used but not defined herein shall have the meanings set forth in the Securities Purchase Agreement. Section 1. Exercise of Warrant. ------------------- (a) Exercise by Payment. To exercise this Warrant in whole or in part, the ------------------- holder hereof shall deliver to the Company at its principal office, (a) a written notice, in substantially the form of the Subscription Notice appearing at the end of this Warrant, of such holder's election to exercise this Warrant, which notice shall specify the number of Ordinary Shares to be purchased, (b) an official bank check, payable to the Company in an amount equal to the multiple of the Exercise Price (as adjusted) and the number of Ordinary Shares being purchased, and (c) this Warrant. The Company shall as promptly as practicable, and in any event within 20 days thereafter, execute and deliver or cause to be executed and delivered, in accordance with such notice, a certificate or certificates representing the aggregate number of Ordinary Shares specified in such notice. The share certificate or certificates so delivered shall be issued in the name of such holder or such other name as shall be designated in such notice. Such certificate or certificates shall be deemed to have been issued and such holder or any other person so designated to be named therein shall be deemed for all purposes to have become a holder of record of such shares as of the date such notice is received by the Company as aforesaid. If this Warrant shall have been exercised only in part, the Company shall, at the time of delivery of said certificate or certificates, deliver to such holder a new Warrant evidencing the rights of such holder to purchase the remaining Ordinary Shares called for by this Warrant, which new Warrant shall in all other respects be identical to this Warrant, or, at the request of such holder, appropriate notation may be made on this Warrant and the same returned to such holder. The Company shall pay all expenses, taxes and other charges payable in connection with the preparation, issue and delivery of such share certificates and new Warrants, except that, in case such share certificates or new Warrants shall be registered in a name or names other than the name of the holder of this Warrant, funds sufficient to pay all shares transfer taxes that are payable upon the issuance of such shares certificate or certificates or new Warrants shall be paid by the holder hereof at the time of delivering the notice of exercise mentioned above. (b) All shares issued upon the exercise of this Warrant shall be validly issued, fully paid and non-assessable and, if the Common Shares is then listed on a national securities exchange, then Common Shares issued upon the exercise of this Warrant shall be duly listed thereon. (c) The Company shall not be required upon any exercise of this Warrant to issue a certificate representing any fraction of a share of Warrant Shares, but, in lieu thereof, shall pay to the holder of this Warrant cash in an amount equal to a corresponding fraction (calculated to the nearest 1/100 of a share) of the market value of one share of Warrant Shares, as of the date of receipt by the Company of notice of exercise of this Warrant, as determined in good faith by the Board of Directors of the Company. Section 2. Transfer, Division and Combination. ---------------------------------- This Warrant and all rights hereunder are transferable, in whole or in parts, on such books at such office, upon surrender of this Warrant at such office, together with a written assignment of this Warrant duly executed by the holder hereof or his agent or attorney and funds sufficient to pay any shares transfer taxes payable upon the making of such transfer. Upon such surrender and payment the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denominations specified in such instrument of assignment, and this Warrant shall promptly be canceled. If and when this Warrant is assigned in blank, the Company may (but shall not be obliged to) treat the bearer hereof as the absolute owner of this Warrant for all purposes and the Company shall not be affected by any notice to the contrary. This Warrant may be divided upon presentation hereof at such principal office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the holder hereof or his agent or attorney. Subject to compliance with the preceding paragraph as to any transfer that may be involved in such division, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided in accordance with such notice. The Company shall pay all expenses, taxes (other than share transfer taxes) and other charges payable in connection with the preparation, issue and delivery of Warrants hereunder. Section 3. Restrictions on Transfer of Warrants and Shares. ----------------------------------------------- This Warrant shall be transferable only under circumstances such that the transfer is exempt from the requirements of registration under the Securities Act of 1933, as amended (or any similar statute then in effect) and any applicable state securities law. Section 4. Certain Covenants. ----------------- The Company covenants and agrees that: (a) it will at all times reserve and set apart and have, free from preemptive or any other third party rights, a number of shares of authorized but unissued Ordinary Shares sufficient to enable it at any time to fulfill all its obligations hereunder; and (b) before taking any action that would cause an adjustment reducing the Exercise Price below the then par value of the shares issuable upon exercise of the Warrants, the Company will take any corporate action that may be necessary in order that the Company may validly and legally issue fully paid and nonassessable at such adjusted Exercise Price. Section 5. Notices. ------- In case the Company proposes (a) to pay any dividend payable in shares (of any class or classes) or in Convertible Securities upon its Ordinary Shares or make any distribution (other than ordinary cash dividends) to the holders of its Ordinary, or (b) to grant to the holders of its Ordinary Shares generally any rights or options, or (c) to effect any capital reorganization or reclassification of shares of the Company, or (d) to consolidate with, or merge into, any other corporation, to transfer all or substantially all of its assets, or to become a party to a transaction involving the sale of the outstanding shares of the Company, or (e) to effect the liquidation, dissolution or winding up of the Company, then the Company shall cause notice of any such intended action to be given to all holders of record of outstanding Warrants not less than 30 days before the date on which the transfer books of the Company shall close or a record be taken for such share dividend, distribution or granting of rights or options, or the date when such capital reorganization, reclassification, consolidation, merger, transfer, sale, liquidation, dissolution or winding up shall be effective, as the case may be. Any notice or other document required or permitted to be given or delivered to holders of record of Warrants shall be mailed first-class postage prepaid to each such holder at the last address shown on the books of the Company maintained for the registry and transfer of the Warrants. Any notice or other document required or permitted to be given or delivered to holders of record of shares issued pursuant to Warrants shall be mailed by postage prepaid to each such holder at such holder's address as the same appears on the share records of the Company. Any notice or other document required or permitted to be given or delivered to the Company shall be mailed first class postage prepaid to the principal office of the Company, as set forth under Section 1 hereof, or delivered to the office of one of the Company's executive officers at such address, or such other address within the United States of America as shall have been furnished by the Company to the holders of record of such Warrants and the holders of record of such shares. Section 6. Limitation of Liability; Not Shareholders; Rights Offers. -------------------------------------------------------- (a) No provision of this Warrant , in the absence of affirmative action by the holder hereof to purchase shares, shall be construed as conferring upon the holder hereof the right to vote or to consent or to receive dividends or to receive notice as a shareholder in respect of meetings of shareholders for the election of directors of the Company or any other matter whatsoever as shareholders of the Company. (b) No provision hereof, in the absence of affirmative action by the holder hereof to purchase shares, and no mere enumeration herein of the rights or privileges of the holder hereof, shall give rise to any liability of such holder for the purchase price or as a shareholder of the Company, whether such liability is asserted by the Company, creditors of the Company or others. (c) If the Company's shareholders are offered any securities whatsoever by a rights issue, the Company shall offer identical rights on the same terms and conditions to the holder of this Warrant, as if the holder had exercised this Warrant in full immediately prior to the date of conferring the right to participate in the rights issue. Section 7. Loss, Destruction, etc, of Warrants. ----------------------------------- Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, mutilation or destruction of any Warrant, and in the case of any such loss, theft or destruction upon delivery of a bond of indemnity in such form and amount as shall be reasonably satisfactory to the Company, or in the event of such mutilation upon surrender and cancellation of the Warrant, the Company will make and deliver a new Warrant, of like tenor, in lieu of such lost, stolen, destroyed or mutilated Warrant. Any Warrant issued under the provisions of this Section 7 in lieu of any Warrant alleged to be lost, --------- destroyed or stolen, or of any mutilated Warrant, shall constitute an original contractual obligation on the part of the Company. Section 8. Adjustment. ---------- The Initial Exercise Price shall be subject to adjustment from time to time or upon exercise as provided in this Section 8. --------- (a) Additional Issuances. If the Company shall, at any time or from -------------------- time to time prior to the exercise or Expiration Date, whichever is earlier (the "Option Period"), issue any New Securities for consideration per share less than the applicable Exercise Price in effect immediately prior to the issuance of such Additional Shares, the Exercise Price for the Warrant in effect immediately prior to each such issuance shall automatically (except as otherwise provided in this Section 8(a)) be lowered to that price. ------------ "New Securities" shall mean any shares of the Company, whether or not now authorized, and rights, options or warrants to purchase capital stock, and securities of any type whatsoever that are, or may become, convertible into capital stock; provided that the term "New Securities" shall not include (i) securities offered to the public; (ii) securities issued pursuant to the acquisition of another corporation by the Company by merger, purchase of substantially all the assets of another corporation or any other reorganization whereby the Company owns not less than fifty-one percent (51%) of the voting power of such corporation (iii) shares of the Company issuable upon exercise or options or warrants outstanding on the date hereof or issued or granted pursuant to this Warrant; (iv) securities issued to employees or consultants of the Company pursuant to any stock option plan or stock purchases or stock bonus arrangement approved by the Board of Directors of the Company; (v) securities issued pursuant to payment of any dividend or distribution with respect to all of the Company's issued and outstanding capital stock; or (vi) Ordinary Shares issued pursuant to the conversion of Debentures or exercise of warrants issued pursuant to the Securities Purchase Agreement; or (vii) securities issued to a strategic investor, who, in addition to its equity investment in the Company, has the capability to provide significant added value to the Company's business.; For the purposes of any adjustment of the Exercise Price pursuant to this Section 8(a), the following provisions shall be applicable: ------------ (i) In the case of the issuance of Ordinary Shares for consideration in whole or in part in property other than cash, the value of such property or consideration other than cash shall be deemed to be the fair market value of such property, irrespective of any accounting treatment. (ii) In the case of the issuance of Ordinary Shares for consideration in whole or in part other than cash or property, the value of such consideration shall be deemed to be the aggregate par value of such Shares, less the value of any other consideration received by the Company. (iii) In the case of the issuance of options or other rights to purchase or subscribe for securities by their terms convertible into or exchangeable for shares or options to purchase or other rights to subscribe for such convertible or exchangeable securities: (A) the aggregate maximum number of Ordinary Shares deliverable upon exercise of such options to purchase or rights to subscribe for 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, if any, received by the Company upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Shares covered thereby; (B) the aggregate maximum number of Ordinary Shares deliverable upon conversion of, or in exchange 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 received by the Company for any such securities and related options or rights, provided that in making the foregoing calculations, such convertible or exchangeable securities shall be deemed to have been converted or redeemed; (C) if there is any change in the exercise price of, or number of shares deliverable upon exercise of, any such options or rights or upon the conversion or exchange of any such convertible or exchangeable securities (other than a change resulting from the antidilution provisions thereof), then the Exercise Price shall automatically be readjusted in proportion to such change; and (D) upon the expiration of any such options or rights or the termination of any such rights to convert or exchange such convertible or exchangeable securities, the Exercise Price shall be automatically readjusted to the Exercise Price that would have obtained had such options, rights or convertible or exchangeable securities not been issued. (b) Share Dividend; Subdivision; Split of Shares. If the number of -------------------------------------------- Ordinary Shares outstanding at any time during the Option Period is increased by a shares dividend payable in Ordinary Shares or by a subdivision or split-up of Ordinary Shares, then, following the record date fixed for the determination of holders of shares entitled to receive such shares dividend, subdivision or split-up, the Exercise Price shall be appropriately decreased and the number of Ordinary Shares issuable on exercise of the Warrant shall be increased in proportion to such increase in outstanding shares. (c) Combination of Shares. If, at any time during the Option Period, --------------------- the number of Ordinary Shares outstanding is decreased by a combination of the outstanding Ordinary Shares, then, following the record date for such combination, the Exercise Price shall be appropriately increased and the number of Ordinary Shares issuable on exercise of the Warrant shall be decreased in proportion to such decrease in outstanding shares. (d) Reorganization; Merger, etc. In the event, at any time during --------------------------- the Option Period, of any capital reorganization, or any reclassification, exchange or substitution of the shares of the Company (other than a change in par value or from par value to no par value or from no par value to par value or as a result of a share dividend or subdivision, split-up or combination of shares), or the consolidation or merger of the Company with or into another person (other than consolidation or merger in which the Company is the continuing corporation and which does not result in any change in the powers, designations, preferences and rights, or the qualifications, limitations or restrictions, if any, of the share capital of the Company) or of the sale or other disposition of all or substantially all the properties and assets of the Company as an entirety to any other person (any such transaction, an "Extraordinary Transaction"), then the Company shall provide appropriate adjustment to the Exercise Price and other terms of this Warrant after the effectiveness of such Extraordinary Transaction such that the Warrant upon the effectiveness of the Extraordinary Transaction shall be exercisable into the kind and number of shares or other securities or property of the Company, or of the corporation resulting from or surviving such Extraordinary Transaction, that a holder of the number of Ordinary Shares deliverable (immediately prior to the effectiveness of the Extraordinary Transaction) upon exercise of this Warrant would have been entitled to receive upon such Extraordinary Transaction. The provisions of this Section 8(d) shall similarly apply to successive ------------ Extraordinary Transactions. (e) Calculations. All calculations under this Section 8 shall be ------------ made to the nearest one-tenth of a cent ($0.001) or to the nearest one-tenth of a share, as the case may be. (f) Deferred Issuance. In any case in which the provisions of this ----------------- Section 8 shall require that an adjustment shall become effective immediately - --------- after a record date for an event, the Company may defer until the occurrence of such event (1) issuing to the holder of any Warrant exercised after such record date and before the occurrence of such event the additional shares issuable upon such exercise by reason of the adjustment required by such event over and above the shares issuable upon such exercise before giving effect to such adjustment, and (2) paying to such holder any cash amounts in lieu of fractional shares; provided, however, that the Company shall deliver to such holder a due bill or - -------- ------- other appropriate instrument evidencing such holder's right to receive such additional shares, and such cash, upon the occurrence of the event requiring such adjustment. (g) Adjustment in case of Early Repayment. In the event that the ------------------------------------- Company makes early repayment of the Debenture issued to the Registered Holder pursuant to the Securities Purchase Agreement, the Initial Exercise Price will be reduced to $4.00 (and if the Initial Exercise Price shall then be subject to all the adjustments hereunder, effected both before and after such adjustment). (h) Statement of Adjustment. Whenever the Exercise Price is adjusted ----------------------- pursuant to any of the foregoing provisions of this Section 8, the Company shall --------- promptly prepare a written statement signed by the President of the Company, setting forth the adjustment, determined as provided in this Section, and in reasonable detail the facts requiring such adjustment and the calculation thereof. Such statement shall be filed among the permanent records of the Company and a copy thereof shall be furnished to the holder of this Warrant without request and shall at all reasonable times during business hours be open to inspection by holders of the Warrants. Section 9. Negotiability, Etc. This Warrant is issued upon the ------------------- following terms, to all of which each Registered Holder or owner hereof by the taking hereof consents and agrees: (a) subject to the terms of the Securities Purchase Agreement, title to this Warrant may be transferred by endorsement (by the Registered Holder hereof executing the form of assignment at the end hereof) and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery; (b) any person in possession of this Warrant properly endorsed is authorized to represent himself as absolute owner hereof and is empowered to transfer absolute title hereto by endorsement and delivery hereof to a bona fide purchaser hereof for value; each prior taker or owner waives and renounces all of his equities or rights in this Warrant in favor of each such bona fide purchaser, and each such bona fide purchaser shall acquire absolute title hereto and to all rights represented hereby; and (c) until this Warrant is transferred on the books of the Company, the Company may treat the Registered Holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. Section 10. Governing Law, Exclusive Jurisdiction. ------------------------------------- This Warrant shall be governed by the laws of the State of Israel, without giving effect to the rules respecting conflict of law. Any dispute connected herewith shall be submitted solely to the courts of Tel-Aviv, which are granted exclusive jurisdiction over any such dispute. Section 11. Entire Agreement; Modification; Waiver. This Warrant -------------------------------------- constitutes the entire agreement between the parties pertaining to the subject matter herein, and supersedes all prior and contemporaneous agreements, representations, and understandings of the parties. No supplement, modification, or amendment of this Warrant shall be binding unless executed in writing by the parties hereto. No waiver of any of the provisions of this Warrant shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. [Signature page follows] IN WITNESS WHEREOF, the Company has caused this Warrant to be executed and delivered in its name by a duly authorized officer. Dated: I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED By: ______________________________ Name: Robi Hartman Title: Chairman and CEO. Attest: By: _____________________________ Name: ___________________________ Title: __________________________ SUBSCRIPTION NOTICE The undersigned, the holder of the foregoing Warrant, hereby elects to exercise purchase rights represented by such Warrant for, and to purchase thereunder, __________ Ordinary Shares covered by such Warrant and herewith makes payment in full therefor of $__________ cash, and requests that certificates for such shares (and any securities or property deliverable upon such exercise) be issued in the name of and delivered to __________________________________________ whose address is __________________________________________. The undersigned agrees that, in the absence of an effective registration statement with respect to Ordinary Shares issued upon this exercise, the undersigned is acquiring such Ordinary Shares for investment and not with a view to distribution thereof and that the certificate or certificates representing such Ordinary Shares will bear an appropriate legend. Name: _____________________ By: _______________________ Title: ____________________ Dated: ____________________ ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto _____________________________ the rights represented by the foregoing Warrant of ____________________ and appoints __________________________ attorney to transfer said rights on the books of said corporation, with full power of substitution in the premises. Name: _____________________ By: _______________________ Title: ____________________ Dated: ____________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatever. EX-4.1 5 dex41.txt PURCHASE AND ASSIGNMENT AGREEMENT Exhibit 4.1 PURCHASE AND ASSIGNMENT AGREEMENT By and Between I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD. a company incorporated under the laws of the State of Israel of Gutwirth Science Center, Technion City, 3200, Haifa, Israel (hereinafter "Buyer") of the first part and EASTEK EMBEDDED SYSTEMS (MEITAV) LTD. a company incorporated under the laws of the State of Israel of 39 Givati Street, Ramat-Gan, Israel (hereinafter "Seller") of the second part and Mr. Danny Shavit an Israeli citizen and resident (I.D. No. 53486619) of 50 Nachal Sorek Street, Modi'in, Israel (hereinafter "Founder") of the third part WHEREAS Seller wishes to sell, assign and transfer to Buyer all the material activities, assets and rights, and certain obligations of Seller in the Business (as defined below); and WHEREAS Buyer wishes to purchase and obtain by assignment from Seller the Business, all in accordance with the terms and conditions set forth hereinbelow; NOW, THEREFORE, the parties do hereby stipulate, affirm and agree as follows: 1. Preamble and Appendices ----------------------- 1.1 The preamble to this Agreement and the appendices attached hereto constitute integral parts hereof. 1.2 The headings used in this Agreement are for convenience of reference only and do not constitute a part of this Agreement and will not be deemed to limit, characterize or in any way affect any provision of this Agreement. 2. Definitions ----------- 2.1 Unless otherwise specifically stated herein, for the purpose of this Agreement each of the following terms shall have the respective meaning ascribed to it below. 2.2 The term "Business" means all the material activities, assets and rights, and the Assumed Liabilities of the Seller in the field of software tools for testing adapters and storage devices, text- to-speech software engine, products for blind and visually impaired persons and performance of software development projects. 2.3 The term "Agreements" means those agreements (also including insurance policies, purchase orders and other documents which create rights or obligations) listed in Appendix 2.3 hereto. 2.4 The term "Assumed Liabilities" means those liabilities of Seller pertaining to the Business that are specified in Appendix 2.4 hereto, which are to be assigned to and assumed by Buyer. The Assumed Liabilities include, among other things, service obligations towards clients who purchased products and services from Seller - to the extent expressly specified in Appendix 2.4 hereto. 2.5 The term "Tangible Assets" means materials, stocks of any kind, equipment, tools, utensils, apparatus and appliances as detailed in Appendix 2.5 hereto. 2.6 The term "Technology" means the technology, know- how, inventions, developments, software, customer lists and customer information and any other documentation and electronic media which are owned or used by Seller and/or Founder, or are accessible or licensed to them, with regard to the Business. A list and a short description of all the licensing agreements to which Eastek is a party is attached as Appendix 2.6 hereto. 2.7 The term "Proprietary Rights" means any and all intellectual property rights (such as patent applications, patents, copyrights, designs, trade secrets, trade marks and names, brand names, domain names etc.) and moral rights owned and/or used by Seller and Founder relating to the Technology and the Business, including among all other things the knowhow and rights under the agreement between Eastek and Prof. Uzi Ornan. To avoid doubts, to date Seller and Founder do not own and have not applied for any patents or designs with regard to the Technology and the Business. 2.8 The term "Goodwill" means the goodwill of the Business and the goodwill of the Founder with regard to the Business. 2.9 The terms "Assets" means the Tangible Assets, the Technology, the Proprietary Rights and the Goodwill. 2.10 The term "Financial Reports" means the audited financial reports of Seller as of 31 December 1999 and the year then ended, and the reviewed financial reports as of 30 September 2000 and the period then ended. 2.11 The term "Closing" means the closing of the transaction hereunder. 3. Representations and Warranties by Seller and Founder ---------------------------------------------------- 3.1 Seller and Founder, jointly and severally, hereby represent and warrant to Buyer as set forth below. 3.2 Seller is the exclusive owner of the Assets and any other rights pertaining to the Business, free and clear of all liens, encumbrances, payment obligations and claims and rights of third parties, except the Assumed Liabilities and subject to the provisions of section 3.3.3 below. The Founder confirms that he has assigned to Seller, prior to the date of this Agreement, all his interest and/or title in any of the Assets, and especially in the Proprietary Rights. 3.3 3.3.1 Seller and/or Founder have developed the Technology and the Proprietary Rights independently of any proprietary knowhow or rights of third parties (unless in the public domain or properly licensed to Seller). 3.3.2 The use, commercialization and utilization of the Technology and the Proprietary Rights do not and will not constitute, create or cause any infringement or misappropriation of any intellectual property rights of third parties. No such claim of infringement or misappropriation pertaining to the Business has been made nor, to the best knowledge of Founder and Seller, is threatened against Seller or Founder. 3.3.3 The foregoing provisions notwithstanding, certain elements of the Technology are not owned by Seller and Founder. However, such elements are in the public domain or are covered by off-the-shelf licenses granted to Seller and assignable by it. Furthermore, certain elements of the Technology are subject to the agreement between the Seller and Prof. Uzi Ornan (which agreement was presented to Buyer and is included in the list of Agreements in Appendix 2.3). 3.3.4 Seller is not obligated or under any liability to make payments by way of royalties, fees or otherwise to any third party with respect to the use of the Technology and present and planned operations of the Business, except as included in the Assumed Liabilities. 3.3.5 The Proprietary Rights and the Technology, together with public domain and licensed elements, comprise all of the intellectual property which is used or necessary with regard to the Business as conducted and as contemplated to be conducted. Seller has a valid right to use the licensed elements of the Technology for the Business as conducted and as contemplated to be conducted. 3.4 The list of Tangible Assets in Appendix 2.5 hereto comprises all of the tangible assets of the Seller. All the Tangible Assets are in operable and useable condition, and are fully insured. 3.5 The list of Agreements in Appendix 2.3 hereto comprises all the agreements of Seller and Founder pertaining to the Business. The Agreements are in full force and effect, were not infringed by the Seller nor - to the best knowledge of Seller and Founder - by the other parties to the Agreements. 3.6 The total exposure under the Assumed Liabilities is not and shall not be higher - in the aggregate - than NIS 600,000. Should the Assumed Liabilities and aggregate amounts which Buyer is required to pay to third parties consequent to the purchase of the Business (including, without limitation, payment of royalties, commissions, profit sharing, revenue sharing etc. related to or arising from the sale of products or knowhow and the grant of licenses) exceed the sum of NIS 600,000; the Seller and the Founder - jointly and severally - will either pay the excess sum directly to the entitled party/ies or reimburse the Buyer for such payment. 3.7 The Financial Reports were prepared in accordance with Israeli accounting standards and principles consistently applied, and they show and describe all the assets, liabilities (including future and contingent liabilities) and results of operations of the Seller. Since the last Financial Report date, no material change occurred in the value of the assets and liabilities and/or in the operations of the Business. 3.8 Seller is the employer of the employees listed in Appendix 3.8 hereto, which are all the employees of the Business. The full terms of employment of all such employees are as detailed in Appendix 3.8 hereto. All obligations towards the employees and/or related to their employment up to the date of the Closing (including, among others, severance payments, pension payments, sick days, vacation days and all others), were either paid in full or are covered by monies deposited in appropriate funds, or will be made and deposited prior to the Closing, unless they are included in the Assumed Liabilities. 3.9 The Founder is the holder and owner of the entire share capital of the Seller. Except for the Founder, no other person or entity is entitled to shares or has the right to purchase shares in Seller. 3.10 Seller and Founder have all requisite power and authority to execute, deliver and perform this Agreement. All necessary corporate proceedings of Seller have been duly taken to authorize the execution, delivery and performance of this Agreement by Seller. This Agreement is the legal, valid and binding obligation of Seller and Founder, and is enforceable as to Founder and Seller in accordance with its terms. 3.11 Neither the execution, delivery or performance of this Agreement nor the consummation of the transactions contemplated hereby do or will: (a) conflict with, result in a breach or violation of or constitute (or with notice or lapse of time or both constitute) a default under the Articles of Association of Seller or under any law, statute, regulation, order, judgment or decree applicable to Seller or Founder or under any instrument, contract or other agreement to which Seller or Founder is a party or by which Seller or Founder (or any of their properties, assets or business) is subject or bound, (b) require Seller and Founder to obtain any authorization, consent, approval, order or waiver from, or to make any filing with, any court or governmental entity or agency or to obtain the approval or consent of any other person or entity. 3.12 There are no actions, suits, proceedings, investigations or claims pending or, to the best knowledge of Seller and Founder, threatened against or involving and/or relating to the Assets and/or the Business. 3.13 Seller and Founder have provided to Buyer all information in their possession or available to them which is relevant to the Assets, the Assumed Liabilities and the Business. 3.14 Seller and Founder are aware that Buyer is relying on the representations set forth above. 4. Representations of Buyer ------------------------ 4.1 Buyer hereby represents and warrants to Seller and Founder as set forth below. 4.2 Buyer has all requisite power and authority to execute, deliver and perform this Agreement. All necessary corporate proceedings of Buyer have been duly taken to authorize the execution, delivery and performance of this Agreement by Buyer. This Agreement is the legal, valid and binding obligation of Buyer, and is enforceable as to Buyer in accordance with its terms. 4.3 Buyer has received the information requested by it, and has reviewed carefully the Business, the Assets, the Agreements and the Assumed Liabilities and found them satisfactory to its needs, all subject to the representations of the Seller and the Founder contained herein. The Business and the Assets are being sold to Buyer in "As Is" state, but without prejudice to the representations of Seller and the Founder contained herein. 4.4 Buyer has the financial, managerial and organizational resources and ability to carry out its undertakings hereunder. 4.5 Neither the execution, delivery or performance of this Agreement nor the consummation of the transactions contemplated hereby do or will: (a) conflict with, result in a breach or violation of or constitute (or with notice or lapse of time or both constitute) a default under the Articles of Association of Buyer or under any law, statute, regulation, order, judgment or decree applicable to Buyer or under any instrument, contract or other agreement to which Buyer is a party or by which Buyer (or any of its properties, assets or business) is subject or bound, (b) require Buyer to obtain any authorization, consent, approval, order or waiver from, or to make any filing with, any court or governmental entity or agency or to obtain the approval or consent of any other person or entity. 5. Sale and Assignment ------------------- 5.1 Seller hereby irrevocably sells and assigns to Buyer, and Buyer hereby purchases and receives from Seller, as of the Closing, all right, title and interest in the Business and the Assets, free and clear of all liens, encumbrances, payment obligations and claims and rights of third parties (including any taxation authority), and Buyer further assumes the Assumed Liabilities; provided however that there is no assumption by Buyer of any liabilities (including past, present, future and contingent liabilities) in excess NIS 600,000. 5.2 Seller and Buyer shall cooperate to notify any party to the Agreements and/or any party which has granted any permit, approval and license, of the assignment and transfer according to this Agreement, no later than seven (7) days following the date of execution hereof. Seller shall obtain the consent of each of the aforementioned third parties to said assignment, inasmuch as such consent is required according to any applicable law, regulation or contract. Without limiting the generality of the foregoing, Seller will submit to Buyer the consents of Prof. Ornan, of the company Control and Monitoring Circuits (MEITAV) Ltd and of the commercial banks to whom Seller is indebted, to the sale and assignment of the Assets hereunder. 5.3 5.3.1 Seller shall terminate the employment of all those employees whom Buyer does not wish to employ, and will pay to such employees all the payments due to them at and as a result of the termination. 5.3.2 The Founder and certain employees acceptable to Buyer (collectively: the "Transferred Employees") will be employed by Buyer. Seller and Founder confirm that such employees have agreed to be employed by Buyer under terms similar to their current terms of employment (as detailed in Appendix 3.8 hereto), and that Seller and Founder made no promises to the Transferred Employees with regard to a raise in their salaries and other benefits subsequent to the Closing. Seller shall transfer to Buyer all rights relating to monies accrued on behalf of the Transferred Employees in any severance and/or pension and/or educational and/or similar fund. 5.4 The Founder confirms his agreement to be employed by Buyer for a period of at least three years following the Closing. The Buyer and the Founder will sign and execute a customary employment contract. The salary and benefits package will be as set forth in that contract. 6. General Obligations ------------------- 6.1 Any liabilities and obligations based upon, relating to or resulting from the rights and assets being sold and assigned pursuant to this Agreement, including without limitation, payments due to any authority or third party, to the extent relating to the period prior to the Closing, not including the Assumed Liabilities, shall be borne and paid solely by Seller and Founder, regardless of the date such liabilities and obligations are claimed. Any such liabilities and obligations and payments which accrue after the Closing shall be borne solely by Buyer, subject to the provisions of section 3.6 above. 6.2 Each of the parties shall indemnify and hold the other party harmless against and in respect of any losses, liabilities, obligations, damages, claims, proceedings, judicial verdicts and decrees, settlements, assessments, audits, fines and arrears, costs and expenses (including reasonable attorneys' fees) arising out of or relating to the breach of such party's commitments, representations and warranties contained in this Agreement. 7. Consideration for the Business and the Assets --------------------------------------------- 7.1 In consideration of the Business and the Assets sold and assigned to Buyer hereunder, Buyer assumes the Assumed Liabilities and will issue to Seller 80,000 shares of its common stock. Buyer confirms that its outstanding share capital consists only of common stock. 7.2 At the Closing, Buyer will issue two share certificates for the above shares - one certificate for 60,000 shares and one certificate for 20,000 shares, and will deliver/deposit these certificates as follows: 7.2.1. The first certificate, for 60,000 shares, will be delivered to the Seller at the Closing. 7.2.2 The second certificate, for 20,000 shares, will be deposited in the hands of Advocate Itzhak Lev (the "Trustee", whose fees and expenses will be borne and paid by the Seller and/or Founder), and the Trustee will deliver this certificate to the Seller twelve months after the Closing - provided that no claims are made by any third party with regard to the Assets that were sold and assigned to Buyer hereunder, and provided that Seller and Founder are not in default hereunder. 7.2.3 Should the Seller not be entitled to receive from the Trustee the above certificate, such certificate will be returned to Buyer, and the number of shares covered by such certificate will be deducted from the total number of the consideration shares specified in section 7.1 above. 7.3 Buyer will pay the sums of the Assumed Liabilities as they become due - as detailed in Appendix 2.4 hereto. 7.4 The total value of the transaction hereunder is NIS 600,000 plus the market value of 80,000 Buyer's shares ("Total value"). VAT will be added to the Total Value. At the Closing, Seller will submit to Buyer a tax invoice (HESHBONIT MAS) for the Total Value plus VAT. Buyer will pay the VAT sum until the 15th day of the month following the Closing month, and will pay the balance of the invoice by assuming the Assumed Liabilities and by issuing 80,000 of its shares to the Seller. 8. Closing ------- 8.1 The Closing will occur within 5 business days after execution of the Agreement by both parties. 8.2 At the Closing, Seller and Founder shall provide to Buyer all the following items: 8.2.1 The resolution of Seller's Board of Directors confirming the execution of this Agreement and the transactions contemplated hereby, and appointing signatories to sign and execute this Agreement and all related documents on behalf of Seller. 8.2.2 All the records relating to the Business, the Assets and the Assumed Liabilities. 8.2.3 A compliance certificate, signed by Seller and the Founder, confirming the completion of all acts which should have been completed by Seller and Founder prior to the Closing, and confirming that all representations of Seller and Founder contained herein are true and complete as if made on the date of the Closing. 8.2.4 The assignment deeds and the consents as per section 5.2 above. 8.2.5 The consent of the Transferred Employees as per section 5.3.2 above. 8.2.6 A confirmation certificate signed by Seller's legal counsel, and a confirmation certificate signed by Seller's accountants, in a form mutually satisfactory. 8.3 At the Closing, Buyer shall provide to Seller and Founder all the following items: 8.3.1 The resolution of Buyer's Board of Directors confirming the execution of this Agreement and the transactions contemplated hereby, and appointing signatories to sign and execute this Agreement and all related documents on behalf of Seller. 8.3.2 A compliance certificate, signed by Buyer, confirming the completion of all acts which should have been completed by Buyer prior to the Closing, and confirming that all representations of Buyer contained herein are true and complete as if made on the date of the Closing. 8.3.3 The Share Certificates as per section 7.2 above will be deposited with the Trustee. 8.3.4 A confirmation certificate signed by Buyer's legal counsel, in a form mutually satisfactory. 8.4 The failure of Seller and Founder to provide the items as per section 8.2 above, and the failure of Buyer to provide the items as per section 8.3 above, within 5 business days after the execution of this Agreement by both parties, will be deemed a breach of the Agreement. 9. Non Competition --------------- 9.1 Seller undertakes not to compete directly or indirectly anywhere in the world, whether by itself or by means of a subsidiary, affiliate or otherwise with the Business. For purposes of this Section 9, subsidiaries and affiliates shall have the meaning as ascribed to said terms in the Securities Law, 1968. Seller further agrees not to solicit the transfer of employees from Buyer to Seller or any third party. 9.2 This section 9 shall apply for a period of five years after the Closing, or until Seller ceases to be a shareholder of Buyer, whichever the later. 10. Miscellaneous ------------- 10.1 This Agreement constitutes the entire and sole agreement and understanding between the parties relating to the subject matter hereof, and cancels any prior understandings or agreements, whether oral or written, concerning the subject matter hereof. 10.2 This Agreement shall be governed by and construed in accordance with the laws of the State of Israel, without giving effect to its conflict of laws provisions, and the parties hereto consent to the exclusive jurisdiction of the Courts sitting in the city of Haifa. 10.3 Notices to be served hereunder shall be in writing as hereinafter provided and shall be served upon the parties at the addresses set forth below. Notices served by registered or certified mail shall be deemed to have been received on the fifth business day after postage. Notices served by fax or e-mail shall be deemed to be in writing and to have been received on the business day following the day of dispatch thereof. 10.4 No waiver by a party or failure to enforce any of its rights hereunder shall be construed as a waiver to enforce other rights or the same right on future occasions. No amendment, modification or waiver of any of the provisions of this Agreement shall be effective unless made in writing and signed by the party against whom such amendment, modification or waiver is sought to be enforced. 10.5 Each party may offset any consideration it may owe any other party hereto under this or any other agreement, against any indebtedness of the other party towards the first party. 10.6 After the completion of all the transactions contemplated hereby, Seller may enter into winding-up proceedings. In such case, Founder will remain fully responsible for all the undertakings and representations hereunder. In witness hereof, the parties hereto have executed this Agreement, on this 30th day of November 2000.
___________________________ _________________________ _______________________ I.I.S. INTELLIGENT INFORMATION EASTEK EMBEDDED SYSTEMS DANNY SHAVIT SYSTEMS LTD. (MEITAV) LTD. By: Robi Hartman By: Danny Shavit Title: CEO and President Title: CEO and President Date: November 30, 2000 Date: November 30, 2000 Date: November 30, 2000
LIST OF APPENDICES - ------------------ Appendix 2.3 - Agreements Appendix 2.4 - Assumed Liabilities Appendix 2.5 - Tangible Assets Appendix 2.6 - List and short description of all license agreements Appendix 3.8 - Employees and terms of employment EX-4.2 6 dex42.txt EMPLOYMENT AGREEMENT Exhibit 4.2 Employment Agreement -------------------- Between I.I.S. Inteligent Information Systems Ltd., (reg. No. 52-003504-9) Haifa, Israel (the "Company") And Mr. Danny Shavit (I.D. No. 53486619), 50 Nachal Sorek Street, Modi'in, Israel (the "Employee") 1. Employment Agreement 1.1 The parties confirm that as of 23 November 2000 (the "Effective Date"), the Employee is a full-time employee of the Company, under the terms herein, in a senior position. 1.2 The Employee agrees to dedicate his full time, experience, talent, expertise and knowledge to the Company, and to fulfill his job in the Company in a loyal and dedicated manner, and in accordance with the policy and instructions of his superiors in the Company. 1.3 During the period of this Agreement, the Employee may not engage in any other commercial activity, except for the Company. To avoid doubts, the Employee may hold shares in companies that are not in competition with the Company, and may participate in meetings of such companies in his free time, provided that his dedication to the Company will not be effected. 1.4 The Employee is not allowed to obligate and/or bind the Company in any way and/or create any commitments, except as expressly authorized. 1.5 All reasonable Procedures and Directives of the Company applicable to subjects of work behavior, discipline etc., will be considered an integral part of this Agreement. 1.6 This Agreement forms the complete and exclusive agreement between the parties as to its subject matter; and it cancels any prior verbal or written agreement related thereto. Any change to this Agreement requires a duly signed document. 1.7 Failure or delay of either party to require the performance of any term under this Agreement, or the waiver by either party of any breach under this Agreement, shall not prevent subsequent enforcement of such terms, nor be deemed a waiver of any subsequent or prolonged breach. 2. Remuneration 2.1 Salary: the Employee's gross salary will be NIS 27,000 per month. 2.2 Overtime Global Payment: the parties confirm that the Employee's job will require overtime work and work at irregular hours, without the need to approve and record each such hour. In consideration thereof, the Company will pay the Employee a gross sum of NIS 7,000 per month. 2.3 Taxes, social security payments, social benefits and other obligatory payments which are to be borne by the Employee according to applicable laws and regulations - will be deducted from all the above payments. 2.4 Vacation: the Employee is entitled to 23 days per a full calendar year, at times to be mutually acceptable. 2.5 Car: the Company will provide a Company/lease car of the same standard as applicable to other employees of the Company at the same level as that of the Employee. The Company will cover all expenses of the car, except costs and expenses related to traffic violations and gross negligence of the Employee. Tax on the value of this benefit (as prescribed by the income tax regulations) will be paid by the Employee. The Employee will behave in such way as to preserve the good condition of the car. At the Employee's option the Company will pay to the Employee the sum of NIS 1,800 per month instead of the above car arrangement. All taxes related to this benefit will be borne by the Employee. 2.6 Pension Plan - Bituach Menahalim: the Company will take over and continue the existing Bituach Menahalim policy of the Employee. The Company will pay into this plan 13.33% of the salary and the overtime global payment each month, and the Employee will pay into this plan 5% of his salary and the overtime global payment. The foregoing will be in lieu of the Company's obligations under the Severance Payment Law (Pizuyei Piturin). To avoid any doubts, the parties hereby declare, confirm and agree that the continuation of the above policy does not mean and will not be interpreted as if the employment hereunder is a continuation of the Employee's previous employment. The Company is not liable for any payment or other obligation towards the Employee by virtue of his previous employment. Without prejudice to the generality of the foregoing, the Company shall not be liable for severance pay (Pizueyei Piturim) with regard to the period prior to the Effective Date. 2.7 Keren Hishtalmut - the Company will pay into a mutually defined fund 7.5% of the salary and the overtime global payment each month, and the Employee will pay into this fund 2.5% of his salary and the overtime global payment up to the "ceiling" as determined by the tax authorities. 2.8 Sick Leave: the Employee is entitled to payment for up to 30 sick days per year, which may accumulate up to 90 days. There shall be no cash payment for non-used sick days. 2.9 Expenses: the Employee will be reimbursed for out of pocket expenditures related to his work, in accordance with reasonable procedures which shall be similar to those applicable to other employees of the Company at the same level as that of the Employee. 2.10 As an additional incentive for the Employee to accept employment with the Company, the Company shall issue in favor of the Employee 100,000 shares of its common stock. The Company will issue three share certificates for the above shares - the first certificate for 30,000 shares, the second for 35,000 shares and the third for 35,000 shares, and will deposit these certificates in the hands of Advocate Itzhak Lev (the "Trustee"). The Trustee will release and deliver to the Employee the first certificate 12 months after the Closing, the second certificate 24 months after the Closing and the third certificate 36 months after the Closing; always provided that until the release date of each certificate the Employee has not resigned from his work and was not fired for Cause (for the purpose of this section, a "Cause" means any of the following: a material breach of this Employment Agreement or of the fiduciary -------- obligations of the Employee, unauthorized disclosure or use of the Company's intellectual property, a continuous refusal to carry out legitimate work assignments, self dealing, embezzlement or misappropriation of Company's property by the Employee, serious damage to the Company's property which is intentionally caused by the Employee). Furthermore, the Trustee will not release any certificate as long as there is (if there is) an outstanding claim by any third party with regard to the Assets that were sold and assigned to the Company under its agreement with Eastek Embedded Systems (MEITAV) Ltd. If on the release date of any certificate there exists any of the above reasons for non-release of the certificate, such certificate will be returned to the Company, and the number of shares covered by such certificate will be deducted from the total number of the incentive shares specified in this section 2.10 above. The Employee hereby agrees and confirms that the issue and release of the incentive shares hereby, shall not create any liability on the part of the Company for social or other payments, rights and benefits. Any taxes or other compulsory payments which may become due as a result of the issue and/or release of the incentive shares, shall be payable by the Employee; and the Employee hereby confirms that the Company is entitled to deduct the sums of such taxes and compulsory payments from any sum which the Company may owe the Employee. 2.11 In addition to the shares as per section 2.10 above, the Company may enroll the Employee in its incentive Stock Option Plan, and may grant to the Employees options to purchase shares of the Company, under such terms as will be specified by that plan and in quantity and price as will be determined by the Company. The issue and exercise of the Options and the issue of shares thereby, shall not entail or create any liability on the part of the Company for social or other payments, rights and benefits. 2.12 The amount and details of the Employee's salary and other benefits are confidential. This information may not be disclosed to other employees or to people who are not authorized by the Company. 3. Secrecy and Non-Compete Provisions 3.1 Any invention, technology, system, product, component, software, copyright, process and the like related to the business of the Company (collectively referred to as "Knowhow"), whether patentable or patented or not and whether subject to any other legal protection or not, arising out of the Employee's or others' work for the Company, shall be the exclusive property of the Company. The Employee will promptly submit to the Company full details related to Knowhow; and will execute patent applications and assignments as may be requested by the Company (whether during or after the employment period) to confirm and register the Company's ownership thereof. 3.2 Any and all information related to trade secrets, commercial relations, actual and potential clients and suppliers, technology and products, and any other information of a proprietary or confidential nature; which relate to the Company and/or to third parties with whom the Company has business relations; will hereinafter be together referred to as "Information". Information may include commercial, technical, marketing, financial, administrative and management subjects. The Information and any part thereof are and shall be the exclusive property of the Company or such aforementioned third parties. The Employee will not use any part of the Information, nor disclose or make it available to others, unless in the line of his job in the Company. The foregoing provisions will survive the termination of this Agreement. However, these provisions shall not apply to Information which is in the public domain, nor to general professional knowhow of the Employee which was acquired by him prior to his work for the Company. Upon termination of the employment hereunder, the Employee shall immediately return to the Company all materials of any kind (whether in written or electronic form, computer files or otherwise) concerning the Information, including all copies thereof, and he shall not retain any copies of such materials. 3.3 Without prejudice to the generality of the foregoing, the Employee agrees that during the period of this Agreement plus a "freeze period" (as defined below) after the termination - for any reason - of the Employee's employment; he will not, directly or indirectly, for his own account or for the account of others (including without limitation as a stockholder, director, officer, investor, partner, employee, sole proprietor, independent contractor or cusultant), do or participate or assist or allow to do any of the following: a) engage in any business in competition with the business of the Company; b) request or advise any past, present or future business associate of the Company to decrease or cancel their business with the Company; c) cause any employee of the Company to terminate his employment with the Company or to work for the Employee or for any party associated with him. The "freeze period" shall be equal in length to the employment period hereunder, but not shorter than 6 months nor longer than 24 months. 3.4 The Employee shall not use or dislocate any property or documents of the Company, except in the line of his duties for the Company. 3.5 The Employee acknowledges and agrees that a breach of any material provision of this chapter 3 will cause the Company substantial and irreparable harm. The Employee consents and agrees therefore, in such event, in addition to any other remedies available to the Company, to have an injunction, temporary restraining order, preliminary injunction and permanent injunction issued by any arbitrator or competent court, as the case may be, restraining and enjoining the Employee from breaching or violating this Agreement. The Employee agrees that, in connection with any remedy sought pursuant to this section, it shall not be necessary to provide any guarantee or any other security by the Company. 3.6 The Employee confirms that he does not bring and was not required to bring to the Company any proprietary materials of third parties, except information regarding certain third parties (suppliers, clients etc.) which may be used by the Company in its business. The Employee further confirms that he is under no restrictions relevant to the fulfillment of his job in the Company, whether by virtue of former employment, business dealings or otherwise. 4. Period of Employment 4.1 This Agreement is made for an un-defined period, subject to the right of each party, at any time, to terminate it by giving a 60 days written notice. Notwithstanding the above, the Company may terminate the employment immediately at any time after giving notice, provided it pays the Employee a sum equal to the salary for the remaining notice period. 4.2 Each party may terminate the Agreement immediately in any of the following cases: (a) a material breach of this Agreement or breach of confidence or loyalty by the other party, (b) medical or mental incapacity of the Employee, (c) gross negligence or misconduct which cause a significant damage or cost to the Company, (d) criminal behavior. 4.3 Upon termination of the employment hereunder for reasons other than those specified in paragraph 4.2 above, and provided that the Employee transfers to the person replacing him all matters related to his job in an orderly and satisfactory manner, the Company shall release to the Employee's name the right to all sums which have been accumulated for his benefit in the Pension Plan and Keren Hishtalmut mentioned in paragraphs 2.6 and 2.7 above (including employer's contributions). Such sums are on account of severance compensation (Pizuyei Piturim) - if due. 4.4 Except as provided in paragraph 4.3 above and except as may be provided in a later duly executed written agreement, and subject to the provisions of all applicable cogent laws, termination of this Agreement is without liability of the Company for any claims or payments beyond those earned or accrued in the course of the employment hereunder; and the Employee hereby waives any and all such claims towards the Company, its parent company and any other third party. And in Witness, the parties sign and execute this Agreement, on this 30th day of November 2000. ___________________ ___________________ The Company The Employee EX-4.3 7 dex43.txt PROPERTY LEASE EXHIBIT 4.3 SUMMARY TRANSLATION FROM THE ORIGINAL HEBREW UNPROTECTED LEASE AGREEMENT --------------------------- BY AND BETWEEN West End Technology Investment Ltd.(the "LESSEE") And I.I.S Intelligent Information Systems Ltd. (the "LESSOR") WHEREBY the Lessor is the owner and has the right to rent out an office of 170 square meters, on the 11th floor of an office building at 33 Jabotinsky Street, in Ramat-Gan (the PROPERTY, a sketch of which is attached to this Agreement); and WHEREBY the Property exists in a building that was completed after the year 1968, and there is no protected tenant in the Property, and no key money has been paid for the Property, and no contributions in the building of the Property have been made, or any other payments of a similar nature, and the Lessee is aware that the lease shall not be a protected lease under the Tenant Protection Law; and WHEREBY the Lessor is interested in renting the Property from the Lessee, and the Lessee is interested in renting the Property to the Lessor, in a unprotected lease, under the terms set out in this agreement; Therefore the parties have agreed to the following: 1. The preamble and appendixes of this Agreement form an integral part of the Agreement. 2. The Lessee declares that it has examined the Property and has found it satisfactory to its needs. The Lessor declares that to the best of its knowledge, there is no hidden defect in the Property. In accordance to the Lessor's statement in the preamble and herein, the Lessee hereby renounces any claim of non-conformity, defect or right of cancellation. 3. The Lessor hereby rents to the Lessee, and the Lessee rents from him, the Property for an undefined period of time, that shall begin on February 1st, 2001. Both parties shall have the right to terminate the Agreement at any time, by written notice of 75 days in advance. At the beginning of the lease, both parties shall hold a delivery protocol, where they shall specify the condition of the Property. 4. The Lessee accepts and declares that the laws of the Tenant Protection Law do not protect the Lease covered by this Agreement, and that this law, or any similar ones will not protect him. 5. The Property will be used only for managing the offices and as a development center of the Lessee. The Lessee may not change the purpose of the lease without express written agreement of the Lessor. 6. The Lessee undertakes not to hold any movable property outside the Property, and to conduct his business without causing noise, pungent odors, air pollution or any other nuisance to the Lessor, the neighbors, or any other person in the building or it's vicinity, other than is reasonable in the normal purpose of the lease. The Lessee undertakes to run his activities in a careful and responsible manner, and furthermore undertakes to comply with all the laws, regulations, by-laws and rules that apply to the property and it's use, and not endanger it in any way. The Lessee will use all precautions to keep from any damage to himself, the Lessor, the building, the property and to any other person or property. 7. The Lessee undertakes not to assign this Agreement, or any right granted by it, to any other party, and not to allow any other party to use the property, whether for consideration, or not. The Lessor may sell the property, or parts of it, without the Lessee's agreement, as long as the Lessee's rights are unaffected. 8. The Lessee is responsible for the condition of the Property, and will repair any damage, except any caused by reasonable wear and tear. The Lessor will pay for all repairs due as a result or normal day to day use, or that occur as a result of defects in the structure, or any other damage not the result of the Lessee's use. 9. The Lessee undertakes not to make any changes, additions or construction in the structure without the Lessors's permission, in writing, in advance. At the end of the lease, the Lessee will dismantle all additions/changes at his own expense, and will return the Property to it's original condition, unless agreed otherwise between the party's. 10. The Lessee is responsible for all damages occurring as a result of the Lessee's use of the property, and he will reimburse the Lessor for all expenses accrued in repairing these damages. To remove all doubt, the Lessee is not responsible for any damage that has not occurred as a result of his use of the Property. 11. The rent shall be 17 US$ per square meter, per month. The rent shall be in Shekels, and shall be set at the last published rate before the time for payment occurs, plus VAT. The rent shall be payable per month, each month in advance. In addition to the rent, the Lessee shall also pay other additional expenses, such as: municipal taxes, electricity, water, telephone, maintenance of the building and peripherals, and any other running expenses of the Property. 12. The Lessee is responsible for insuring his own property, and any third party that comes into contact with it, his employees and guests, against ant damage that may be caused by them, or to them. The Lessor is responsible for insuring the structure of the Property itself. 13. Representatives of the Lessor will have the right of entry to the Property, at reasonable hours, with advance notice, in order to ensure that the conditions of this agreement are being met, or to carry out whatever actions are needed under this Agreement, or under the law. 14. At the end of the lease, as stated in section 3, the Lessee will vacate the Property, and return it to the Lessor clean and free from all chattels and people, in the condition it was received, except for all reasonable wear and tear, and any damages not the responsibility of the Lessee. For any delay in returning the Property, the Lessee will pay the agreed damages of 2.5 the regular rent, and this without limiting any other or additional rights of the Lessor. 15. It is agreed that the Lessor may use the Property for his continuing needs, as long as he is not interfering with the Lessee's ongoing activities. The Lessee is not to receive any payment for this use. 16. This Agreement is the whole and only agreement between the party's regarding the subject matter, and cancels and other agreement,, either verbal or in writing, that has been made before. Any change in conditions must be a signed agreement. 17. Any concession, extension, discount, not realizing a right, or delaying such action, under this Agreement, will only be authorized if done by a signed document, and even then will only apply to the specific action stated, and will not harm the rights of the party to the Agreement to realize the right if there is a change or extension of the damage to it. 18. Any notification sent from one party to the other by registered mail will be deemed to have been given on the third working day from the date sent. Notifications sent by fax or electronic mail will be deemed to have been received the day after they have been sent. Notifications given physically in person are deemed to have been received the moment given. This Agreement has been signed on the 30th day of January 2001. West End Technology IIS Intelligent Information Investments Ltd. Systems Ltd. - --------------------------------- ----------------------------------- The Lessor The Lessee The undersigned hereby represents that the above is a fair and accurate English translation from the original Hebrew of the lease agreement dated January 30, 2001, entered into between West End Technology Investments Ltd. and I.I.S. Intelligent Information Systems Ltd. I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED By: /s/ Robi Hartman ------------------------------------ Robi Hartman, Chief Executive Officer Date: June 27, 2001 EX-4.4 8 dex44.txt SECURITIES PURCHASE AGREEMENT Exhibit 4.4 SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT, dated as of January 31, 2001, is entered into by and between IIS INTELLIGENT INFORMATION SYSTEMS LIMITED, an Israeli company, located at Gutwirth Science-Based Industrial Center, Technion City, Haifa 32000, Israel (the "Company"), and the purchasers listed on Exhibit A attached hereto (each, a "Purchaser," and collectively, the "Purchasers"). W I T N E S S E T H: WHEREAS, the Purchasers wish to purchase, and the Company wishes to issue, upon the terms and subject to the conditions of this Agreement, units (the "Units"), each Unit consisting of $100,000 principal amount of the Company's convertible secured debentures (the "Debentures") and three-year non-redeemable warrants to acquire 10,000 Ordinary Shares, par value NIS .003 per share (the "Ordinary Shares") of the Company (the "Warrants"). The Debentures are convertible into the Company's Ordinary Shares, on the terms set forth therein, and the Warrants may be exercised for the purchase of the Company's Ordinary Shares, on the terms set forth therein; and WHEREAS, the Company and the Purchasers are executing and delivering this Agreement in reliance upon the exemptions from registration provided by Regulation D ("Regulation D") promulgated by the United States Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Securities Act"), and/or Section 4(2) of the Securities Act. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. AGREEMENT TO PURCHASE; PURCHASE PRICE a. Purchase. Each of the Purchasers hereby agrees to purchase from the Company the number of Units set forth next to its name on Exhibit A hereto. The Debentures shall be issued in substantially the form attached hereto as Exhibit B, and the Warrants shall be issued in substantially the form attached hereto as Exhibit C. The purchase price for the Units is as set forth on Exhibit A hereto. b. Closing. The Debentures and Warrants to be purchased by the Purchasers hereunder, in definitive form, shall be delivered by or on behalf of the Company for the account of each such Purchaser, in consideration of payment that was effected by such Purchaser on December 20, 2000, at the offices of Efrati, Galili & Co., 6 Wissotsky Street, Tel-Aviv at 9:30 a.m., Israeli time on January __, 2001, or at such other time and date as the 1 purchasers or their representative, if any, and the Company may agree upon in writing, such date being referred to herein as the "Closing Date". 2. PURCHASER REPRESENTATIONS AND WARRANTIES; ACCESS TO INFORMATION; INDEPENDENT INVESTIGATION. Each Purchaser represents and warrants to, and covenants and agrees with, the Company as follows (except that Meir Noga is not making the representation set out in b. below): a. The Purchaser is purchasing the Units and will be acquiring the Ordinary Shares issuable upon conversion of, and in lieu of interest payments on, the Debentures and upon exercise of the Warrants for its own account, for investment purposes only and not with a view towards the public sale or distribution thereof and not with a view to or for sale in connection with any distribution thereof; b. The Purchaser is (i) an "accredited investor," as that term is defined in Rule 501 of the General Rules and Regulations under the Securities Act, (ii) experienced in making investments of the kind described in this Agreement and the related documents, (iii) able, by reason of the business and financial experience of its officers (if an entity) and professional advisors, to protect its own interests in connection with the transactions described in this Agreement and the related documents, and (iv) able to afford the entire loss of its investment in the Units; c. All subsequent offers and sales of the Debentures or the Warrants and the Ordinary Shares issuable upon conversion or exercise of, or in lieu of interest payments on, the Debentures, or upon exercise of the Warrants shall be made pursuant to an effective registration statement under the Securities Act or pursuant to an applicable exemption from registration; d. The Purchaser understands that the Units are being offered and sold to it in reliance upon exemptions from the registration requirements of the United States federal and state securities laws, and that the Company is relying upon the truth and accuracy of the Purchaser's representations and warranties, and the Purchaser's compliance with its agreements, each as set forth herein, in order to determine the availability of such exemptions and the eligibility of the Purchaser to acquire the Units; e. The Purchaser and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Units which have been requested by such Purchaser. The Purchaser and its advisors, if any, have been afforded the opportunity to ask questions of the Company, and have received answers to any such inquiries to their satisfaction. f. The Purchaser acknowledges that it has been furnished with or has acquired copies of the Company's Annual Report on Form 20-F (the "1999 Annual Report") filed with the Commission for year ended December 31, 1999, and each Form 6-K filed thereafter until the date hereof and the Proxy Statement of the Company dated July 31, 2000 (the "Offering Materials"). The Purchaser is not relying upon any representations or 2 other information (whether oral or written) other than as set forth in this Agreement, and the Offering Materials. g. The Purchaser acknowledges that in making its decision to purchase the Units, it has relied upon independent investigations made by it and its representatives, if any, and the Purchaser and such representatives, if any, have been provided access and the opportunity to examine all material, publicly available books and records of the Company, all material contracts and documents relating to this offering and have had an opportunity to ask questions and to receive answers from the Company or persons acting on its behalf concerning the terms and conditions of this offering. The Purchaser and its advisors, if any, have been furnished with access to all publicly available materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Units which have been requested. The Purchaser and its advisors, if any, have received answers to any such inquiries which they have deemed to be satisfactory. h. The Purchaser understands that no federal or state agency has passed on or made any recommendation or endorsement of the Units. i. Among the risks associated with an investment by the Purchaser in the Units are: (1) the Company's limited access to additional capital, (2) risks associated with technology-based companies generally, including the risks of technological change and new products, and (3) the limited trading market of the Ordinary Shares, and the consequent lack of liquidity of an investment in the Debentures and the Warrants. In addition, the Purchasers acknowledge that they are aware that StoreAge Networks Ltd ("StoreAge") is a start-up high-tech company and that the shares held by the Company in StoreAge are the Company's only material asset; in the event that the Company does not obtain significant cash for its shares in StoreAge, the Company may not be able to repay the principal amount of the Debentures, and the Purchasers could lose their entire investment. In addition, the Purchasers acknowledge that the Company has not made any representations to the Purchasers as to the prospects of success of StoreAge. In addition, the Purchaser acknowledges that the transfer of the shares of StoreAge held by the Company are subject to certain restrictions on transfer and, to the extent relevant, the Purchaser undertakes to comply with such restrictions. j. This Agreement has been duly and validly authorized, executed and delivered on behalf of the Purchaser and is a valid and binding agreement of the Purchaser, enforceable in accordance with its terms, except to the extent that enforcement of this Agreement may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws now or hereafter in effect relating to creditors' rights generally and to general principles of equity. k. Organization. The Purchaser (if a company) is a company duly organized, validly existing and in good standing under its respective jurisdiction of incorporation. l. Legality. The Purchaser has the power and authority to enter into this Agreement to purchase the Debentures and the Warrants. This Agreement has been duly and validly 3 executed and delivered by and on behalf of the Purchaser, and is a valid and binding agreement of the Purchaser, enforceable against it in accordance with its terms, except to the extent that enforcement of this Agreement may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws now or hereafter in effect relating to creditors' rights generally and to general principles of equity. m. Non-contravention. The execution and delivery of this Agreement, and each of the other Primary Documents, and the consummation by the Purchaser of the other transactions contemplated by this Agreement and each of the other Primary Documents (as defined in section 3.g. below), does not and will not conflict with or result in a breach by the Purchaser of any of the terms or provisions of, or constitute a default under any indenture, mortgage, deed of trust or other material agreement or instrument to which the Purchaser is a party or by which it or any of its properties or assets are bound, or any material existing applicable law, rule, or regulation or any applicable decree, judgment or order of any court, in their respective jurisdictions, federal or state regulatory body, administrative agency, or any other governmental body having jurisdiction over the Purchasers, their subsidiaries, or any of their properties or assets, except such conflict, breach or default which would not have a material adverse effect on the transactions contemplated by this Agreement or by the other Primary Documents. n. Approvals. No authorization, approval or consent of any court, governmental body, regulatory agency, self-regulatory organization, stock exchange or market or the shareholders of any of the Purchaser is required to be obtained by the Purchaser for the entry into or the performance of this Agreement and the other Primary Documents, except such authorizations, approvals and consents that have been obtained. 3. REPRESENTATIONS OF THE COMPANY The Company represents and warrants to each Purchaser that: a. Organization. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Israel. Each of the Company's subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its respective jurisdiction. b. Capitalization. On the date hereof, the authorized capital of the Company shall consist of 16,666,666 Ordinary Shares, of which 8,907,126 were issued and outstanding as of December 21, 2000. Schedule 1 hereto sets forth the options, warrants and convertible securities of the Company (the "Derivative Securities") which are outstanding on the date hereof. c. Concerning the Ordinary Shares. The Ordinary Shares issuable upon conversion of, the Debentures, and upon exercise of the Warrants, when so issued, shall be duly and validly issued, fully paid and non-assessable, and will not subject the holder thereof to personal liability by reason of being such a holder. There are no preemptive rights of any 4 stockholder of the Company, as such, to acquire the Ordinary Shares issuable to the Purchaser's pursuant to the terms of the Debentures or the Warrants. d. Reporting Company Status. The Company's Ordinary Shares are registered under Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company has duly and timely filed all materials and documents required to be filed pursuant to all reporting obligations under either Section 13(a) or 15(d) of the Exchange Act for a period of at least twelve (12) months immediately preceding the offer and sale of the Units. The Company's Ordinary Shares are listed and traded on the Nasdaq SmallCapMarket ("Nasdaq"), and the Company is not aware of any pending action or proceeding of any kind to suspend the trading of the Ordinary Shares. e. Authorized Shares. The Company has legally available a sufficient number of authorized and unissued Ordinary Shares as may be reasonably necessary to effect the conversion of the Debentures and the exercise of the Warrants. f. Legality. The Company has the requisite corporate power and authority to enter into this Agreement and to issue and deliver the Debentures and the Warrants. The issuance of the Debentures and the Warrants (and the Ordinary Shares issuable upon conversion of, the Debentures and exercise of the Warrants) have been duly and validly authorized by all necessary corporate action by the Company, and this Agreement has been duly and validly executed and delivered by and on behalf of the Company, and is a valid and binding agreement of the Company, enforceable against it in accordance with its terms, except to the extent that enforcement of this Agreement may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws now or hereafter in effect relating to creditors' rights generally and to general principles of equity. g. Transaction Agreements. This Agreement, the Registration Rights Agreement, the form of which is attached hereto as Exhibit D (the "Registration Rights Agreement" and together with this Agreement, the Debentures and the Warrants, the "Primary Documents"), and the transactions contemplated thereby, have been duly and validly authorized by the Company, this Agreement has been duly executed and delivered by the Company and this Agreement is, and the Primary Documents, when executed and delivered by the Company, will each be, valid and binding agreements of the Company, enforceable in accordance with their respective terms, except to the extent that enforcement of each of the Primary Documents may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws now or hereafter in effect relating to creditors' rights generally and to general principles of equity. h. Non-contravention. The execution and delivery of this Agreement, and each of the other Primary Documents, and the consummation by the Company of the other transactions contemplated by this Agreement and each of the other Primary Documents, does not and will not conflict with or result in a breach by the Company of any of the terms or provisions of, or constitute a default under, the Memorandum of Association or the Articles of Association of the Company, or any indenture, mortgage, deed of trust or 5 other material agreement or instrument to which the Company or any of its subsidiaries is a party or by which they or any of their properties or assets are bound, or any material existing applicable law, rule, or regulation or any applicable decree, judgment or order of any court, Israeli or United States federal or state regulatory body, administrative agency, or any other governmental body having jurisdiction over the Company, its subsidiaries, or any of their properties or assets, except such conflict, breach or default which would not have a material adverse effect on the transactions contemplated by this Agreement or by the other Primary Documents. i. Approvals. No authorization, approval or consent of any court, governmental body, regulatory agency, self-regulatory organization, stock exchange or market or the Shareholders of the Company is required to be obtained by the Company for the entry into or the performance of this Agreement and the other Primary Documents, except such authorizations, approvals and consents that have been obtained. j. SEC Filings. None of the reports or documents filed by the Company with the Commission since January 1, 1999 contained, at the time they were filed, any untrue statement of a material fact or omitted to state any material fact required to be stated therein, or necessary to make the statements made therein in light of the circumstances under which they were made, not misleading. k. Absence of Certain Changes. Since December 31, 1999, except as disclosed in the Company's reports on Form 6-K, there has been no material adverse change and no material adverse development in the business properties, operations, financial condition or results of operations of the Company. l. Title to Properties; Liens and Encumbrances. The Company has good and marketable title to all of its properties and assets, both real and personal, and has good title to all its leasehold interests, in each case subject only liens, and conditional sale agreementscreated in the ordinary course of business. The Company's assets are not subject to any pledge or charges, of any kind whatsoever, except certain pledges imposed on certain motor vehicles and the first -ranking floating charge on all its assets which have been registered in favor of the Purchasers. m. Patents and Other Proprietary Rights. The Company has sufficient title and ownership of all patents, trademarks, service marks, trade names, copyrights, trade secrets, information, proprietary rights and processes necessary for the conduct of its business as now conducted and as proposed to be conducted, and such business does not, and would not, conflict with or constitute an infringement on the rights of others. n. Permits. The Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its business as now conducted, the lack of which would materially and adversely affect the business, or financial condition of the Company. The Company is not in default in any material respect under any of such franchises, permits, licenses or similar authority. o. Absence of Litigation. Except as set forth in the Offering Material, there is no action, 6 suit, proceeding, inquiry or investigation before or by any court, public board or body pending or, to the knowledge of the Company or any of its subsidiaries, threatened against or affecting the Company or any of its subsidiaries, in which an unfavorable decision, ruling or finding would have a material adverse effect on the properties, business, condition (financial or other), results of operations or prospects of the Company and its subsidiaries, taken as a whole, or the transactions contemplated by the Primary Documents, or which would adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under the Primary Documents. p. No Default. Each of the Company and its subsidiaries is not in default in the performance or observance of any material obligation,, covenant or condition contained in any material indenture, mortgage, deed of trust or other instrument or agreement to which it is a party or by which it or its property may be bound. q. Taxes. All applicable tax returns required to be filed by the Company and each of its subsidiaries have been filed, or if not yet filed have been granted extensions of the filing dates which extensions have not expired, and all taxes, assessments, fees and other governmental charges upon the Company, its subsidiaries, or upon any of their respective properties, income or franchises, shown in such returns and on assessments received by the Company or its subsidiaries to be due and payable have been paid, or adequate reserves therefor have been set up if any of such taxes are being contested in good faith; or if any of such tax returns have not been filed or if any such taxes have not been paid or so reserved for, the failure to so file or to pay would not in the aggregate have a material adverse effect on the business or financial condition of the Company and its subsidiaries, taken as a whole. r. Investment Company Act. The Company is not an "investment company" as defined in Section 3(a) of the Investment Company Act of 1940, as amended. s. Agent Fees. The Company has not incurred any liability for any finder's or brokerage fees or agent's commissions in connection with the offer and sale of the Units hereunder. t. Private Offering. Subject to the accuracy of the Purchaser's representations and warranties set forth in Section 2 hereof, the offer, sale and issuance of the Units as contemplated by this Agreement are exempt from the registration requirements of the Securities Act. The Company agrees that neither the Company nor anyone acting on its behalf will offer any of the Units, the Debentures or the Warrants or any similar securities for issuance or sale, or solicit any offer to acquire any of the same from anyone so as to render the issuance and sale of the Units subject to the registration requirements of the Securities Act. u. Full Disclosure. The representations and warranties of the Company set forth in this Agreement do not contain any untrue statement of a material fact or omit any material fact necessary to make the statements contained herein, in light of the circumstances under which they were made, not misleading. 7 4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS. a. Transfer Restrictions. Each Purchaser acknowledges that (1) neither the Debentures nor the Warrants have been, and are not being registered under the Securities Act and, except as provided in the Registration Rights Agreement, the Ordinary Shares issuable upon conversion of the Debentures, and upon exercise of the Warrants, have not been and are not being registered under the Securities Act, and may not be transferred unless (A) subsequently registered thereunder or (B) the Purchaser shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form and substance to the Company, to the effect that such Debentures, Warrants or Ordinary Shares (collectively, the "Securities"), to be sold or transferred may be sold or transferred pursuant to an exemption from such registration; (2) any sale of the Securities made in reliance upon Rule 144 under the Securities Act may be made only in accordance with the terms of said Rule and further, if said Rule is not applicable, any resale of the Securities under circumstances in which the seller, or the person through whom the sale is made, may be deemed to be an underwriter, as that term is used in the Securities Act, may require compliance with another exemption under the Securities Act and the rules and regulations of the Commission thereunder; and (3) neither the Company nor any other person is under any obligation to register the Securities (other than pursuant to the Registration Rights Agreement) under the Securities Act or to comply with the terms and conditions of any exemption thereunder. The provisions of Section 4(a) and 4(b) hereof shall be binding upon any subsequent transferee of the Debentures and the Warrants. b. Restrictive Legend. Each Purchaser acknowledges and agrees that the Debentures and the Warrants, and, until such time as the Ordinary Shares issuable upon conversion of the Debentures, or upon exercise of the Warrants shall have been registered under the Securities Act as contemplated by the Registration Rights Agreement and sold in accordance with such Registration Statement, such securities shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of such Securities). THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL OR OTHER EVIDENCE SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED. c. Filings. The Company undertakes and agrees to make all necessary filings in connection with the sale of the Units to each Purchaser as required by Israeli and/or United States laws and regulations, or by any domestic securities exchange or trading market, 8 including, if applicable, the filing of a notice on Form D (at such time and in such manner as required by the Rules and Regulations of the Commission), and to provide copies thereof to the Purchaser promptly after such filing or filings. d. Nasdaq Listing. Within thirty (30) Business Days after the Closing Date, the Company will take such actions as shall be necessary to cause the listing of the Ordinary Shares issuable upon conversion of the Debentures, and upon exercise of the Warrants on Nasdaq, and upon request, shall furnish to each Purchaser evidence of such actions, including copies of any documents filed with Nasdaq to effectuate such listing. e. Reporting Status. So long as any of the Purchasers beneficially own any of the Securities, the Company shall file all reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act, and, except in connection with an acquisition transaction in which at least 50% of the Company's voting equity securities are acquired by another entity, the Company shall not terminate its status as an issuer required to file reports under the Exchange Act even if the Exchange Act or the rules and regulations thereunder would permit such termination. f. Use of Proceeds. The Company has used the proceeds from the issuance of the Units (excluding amounts paid by the Company for legal fees and finder's fees in connection with the sale of the Units) for the sole purpose of investing in StoreAge as part of an investment by existing Shareholders and/or external investors of $25,000,000. g. Reservation of Ordinary Shares. The Company will at all times have authorized and reserved for the purpose of issuance a sufficient number of Ordinary Shares to provide for the conversion of the Debentures and the exercise of the Warrants. The number of Ordinary Shares reserved for issuance by the Company upon conversion of the Debentures or upon exercise of the Warrants shall at all times be allocated pro rata among the Purchasers based upon the aggregate purchase price of the Units purchased by each Purchaser, and no Purchaser may at any time convert its Debentures or exercise Warrants so as to obtain a greater number of Ordinary Shares than its pro rata allocation of the Company's reserved Ordinary Shares. In the event that a Purchaser shall sell or otherwise transfer, in whole or in part, any of its Securities (except for Ordinary Shares of the Company subject to an effective registration statement under the Securities Act or otherwise freely tradable by such Purchaser), each transferee shall, for purposes of determining such transferee's allocation of the Company's reserved Ordinary Shares, be allocated a pro rata portion of the initial purchase price paid by the Transferor upon its purchase of the Units. h. Board of Directors. The Company shall use its best efforts to ensure that in the event that the Purchasers hold (together) at least five percent (5%) of the Company's issued and outstanding share capital, the Purchasers shall be entitled to appoint one (1) director to the Board of Directors of the Company. In addition, as long as the Debentures remain unpaid, the Purchasers (as a group) will have the right to appoint an observer to the Board of Directors of the Company. The observer will have the right to participate in the meetings of the Board of Directors, with no right to vote. 9 5. TRANSFER AGENT INSTRUCTIONS. a. The Company warrants that no instruction other than the instructions referred to in this Section 5 and stop transfer instructions to give effect to Sections 4(a) and 4(b) hereof prior to the registration and sale of the Ordinary Shares issuable upon conversion of the Debentures, or upon exercise of the Warrants under the Securities Act will be given by the Company to the transfer agent and that such Ordinary Shares shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement, the Registration Rights Agreement, and applicable law. Nothing in this Section shall affect in any way the Purchaser's obligations and agreement to comply with all applicable securities laws upon resale of the Securities. If a Purchaser provides the Company with an opinion of counsel reasonably satisfactory to the Company that registration of a resale by the Purchaser of any of the Securities in accordance with clause (1)(B) of Section 4(a) of this Agreement is not required under the Securities Act, the Company shall (except as provided in clause (2) of Section 4(a) of this Agreement) permit the transfer of the Securities and, in the case of the Ordinary Shares, promptly instruct the Company's transfer agent to issue one or more certificates for Ordinary Shares without legend in such names and in such denominations as specified by the Purchaser. b. The Company will permit each Purchaser to exercise its right to convert the Debentures or to exercise the Warrants by faxing an executed and completed Notice of Conversion or Form of Election to Purchase, as applicable, to the Company, and delivering within three (3) business days thereafter, the original Notice of Conversion (and the related original Debentures) or Form of Election to Purchase (and the related original Warrants) to the Company by express courier, duly endorsed. Each date on which a Notice of Conversion or Form of Election to Purchase is received by the Company in accordance with the provisions hereof shall be deemed a "Conversion Date." The Company will transmit the certificates representing the Ordinary Shares issuable upon conversion of any Debentures or upon exercise of any Warrants (together with the Debentures not so converted, or the Warrants not so exercised) to such Purchaser via express courier or by electronic transfer, as soon as practicable thereafter (but in all events within three (3) business days), after receipt by the Company of the original Notice of Conversion (and the related original Debentures) or the original Form of Election to Purchase (and the related original Warrants) to be converted (the "Delivery Date"). For purposes of this Agreement, such conversion of the Debentures or exercise of the Warrants shall be deemed to have been made immediately prior to the close of business on the Conversion Date. c. In lieu of delivering physical certificates representing the Ordinary Shares issuable upon the conversion of the Debentures or exercise of the Warrants, provided the Company's transfer agent is participating in the Depositary Trust company ("DTC") Fast Automated Securities Transfer program, on the written request of a Purchaser who shall have previously instructed such Purchaser's prime broker to confirm such request to the Company's transfer agent, the Company shall use commercially reasonable efforts to cause its transfer agent to electronically transmit such Ordinary Shares to the Purchaser by crediting the account of the Purchaser's prime broker with DTC through its Deposit 10 Withdrawal Agent Commission ("DWAC") system no later than the applicable Delivery Date. 6. CONDITIONS TO THE COMPANY'S OBLIGATION TO ISSUE THE UNITS. The Purchaser understands that the Company's obligation to issue the Units on the Closing Date to the Purchasers pursuant to this Agreement is conditioned upon: a. The accuracy on the Closing Date of the representations and warranties of the applicable Purchaser contained in this Agreement as if made on such Closing Date and the performance by the Purchasers on or before such Closing Date of all covenants and agreements of the applicable Purchasers required to be performed on or before such Closing Date; b. There shall not be in effect any law, rule or regulation prohibiting or restricting the transactions contemplated hereby, or requiring any consent or approval which shall not have been obtained. 7. CONDITIONS TO THE PURCHASERS' OBLIGATION TO PURCHASE THE UNITS. The Company understands that each Purchaser's obligation to purchase the Units on the Closing Date is conditioned upon: a. The accuracy in all material respects on the Closing Date of the representations and warranties of the Company contained in this Agreement as if made on the Closing Date, and the performance in all material respects by the Company on or before the Closing Date of all covenants and agreements of the Company required to be performed on or before the Closing Date; b. On the Closing Date, the Purchaser shall have received an opinion of Israeli counsel for the Company, dated the Closing Date, in form, scope and substance reasonably satisfactory to each Purchaser, to the effect set forth in Exhibit E hereto, and an opinion of U.S. counsel for the Company, dated the Closing Date, in form, scope and substance reasonably satisfactory to each Purchaser, to the effect set forth in Exhibit F attached hereto; c. The Company shall have executed and delivered a signed counterpart to the Registration Rights Agreement; d. On or prior to the Closing Date, there shall not have occurred any of the following: (i) a suspension or material limitation in the trading of securities generally on the New York Stock Exchange or Nasdaq or; (ii) a general moratorium on commercial banking activities in New York or the State of Israel declared by the applicable banking authorities. 11 8. EXPENSES. The Company covenants and agrees with the Purchasers that the Company will pay or cause to be paid the following: (a) the fees, disbursements and expenses of the Company's counsel and accountants in connection with the issuance of the Securities, and (b) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section 8. If the Company fails to satisfy its obligations or to satisfy any condition set forth in this Agreement, as a result of which the Units are not delivered to any of the Purchasers on the terms and conditions set forth herein, the Company shall reimburse such Purchasers for any out-of-pocket expenses reasonably incurred by such in making preparations for the purchase, sale and delivery of the Units not so delivered, without derogating from any other remedy available to the Purchasers under these circumstances. 9. GOVERNING LAW; MISCELLANEOUS This Agreement shall be governed by and interpreted in accordance with the laws of the State of Israel. Each of the parties consents to the exclusive jurisdiction of the Tel-Aviv courts, Israel in connection with any dispute arising under this Agreement or any of the Primary Documents or relating to the offer or sale of the Units, the Debentures, the Warrants and Ordinary Shares, and hereby waives, to the maximum extent permitted by law, any objection, including any objections based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. The Purchasers are entering into this Agreement, each separately from the others, thus each Purchaser will not be responsible for any act or omission of the other Purchasers, including a breach by the latter of any of the provisions or representations contained herein. This Agreement may be signed in one or more counterparts, each of which shall be deemed an original. The headings of this Agreement are for convenience of reference only and shall not form part of, or affect the interpretation of this Agreement. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or enforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. This Agreement shall inure to the benefit of, and be binding upon the successors and assigns of each of the parties hereto, including any transferees of the Securities. This Agreement may be amended only by an instrument in writing signed by the party to be charged with enforcement. This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. 10. NOTICES. Any notice required or permitted hereunder shall be given in writing (unless otherwise specified herein) and shall be effective upon personal delivery, via facsimile (upon receipt of confirmation or error-free transmission) or two business days following deposit of such notice with an internationally recognized courier service, with postage prepaid and addressed to each of the other parties thereunto entitled at the following addresses, or at such other addresses as a party may designate by ten days advance written notice to each of the other parties hereto. COMPANY: IIS INTELLIGENT INFORMATION SYSTEMS LIMITED Gutwirth Science-Based Industrial Center, Technion City Haifa 31015, Israel 12 ATT: Chairman and CEO TEL: 972-4-8328803 FAX: 972-4- 8328804 with a copy to: Efrati, Galili & Co. 6 Wissotsky Street Tel-Aviv 62338 ATT: Ian Rostowsky, Adv. TEL: 972-3-605 1010 FAX: 972-3-604 0111 PURCHASERS: At the addresses set forth on the signature page of this Agreement, as such addresses may be updated in writing from time to time by each of the Purchasers. with a copy to: Gil Ron, Advocate 3A Jabotinsky Street Ramat-Gan 52520 Israel ATT: Gil Ron TEL: 972-3-613-7979 FAX: 972-3-613-7969 11. CONFIDENTIALITY. Each of the Company and the Purchaser agrees to keep confidential, and not to disclose to or use for the benefit of any third party the terms of this Agreement, any of the other Primary Documents or any other information which at any time is designated in writing by the other party as confidential without the prior written approval of the other party; provided, however, that this -------- -------- provision shall not apply to information which, at the time of disclosure, is already part of the public domain (except by breach of this Agreement) and information which is required to be disclosed by law or applicable regulation. [Signature Page Follows] 13 IN WITNESS WHEREOF, this Agreement has been duly executed by each of the undersigned. "COMPANY" I.I.S. INTELLIGENT INFORMATION SYSTEMS By: _________________________________ Name: Robi Hartman Title: Chairman and CEO "PURCHASERS" CDC Holdings Ltd. By: _________________________________ Name: Title: Armour Investments Ltd. By: Name: Title: Industrial Systems & Equipment Co. By: _________________________________ Name: Title: _________________ Meir Noga _________________ Nachum Ezra 14 EXHIBIT A PURCHASERS EXHIBIT B FORM OF DEBENTURE EXHIBIT C FORM OF WARRANT EXHIBIT D REGISTRATION RIGHTS AGREEMENT EXHIBIT E OPINION OF EFRATI, GALILI & CO. EXHIBIT F OPINION OF BROWN, RAYSMAN OPTIONS WARRANTS AND CONVERTIBLE SECURITIES 15 EXHIBIT A TO SECURITIES PURCHASE AGREEMENT ------------------------------------------ PURCHASERS
Principal Amount of Purchaser Debentures Purchased Number of Warrants - --------- -------------------- ------------------ CDC Holdings Ltd. $2,100,000 210,000 - ------------------------------------------------------------------------------------ Armour Investments Ltd. $ 400,000 40,000 - ------------------------------------------------------------------------------------ Industrial Systems & Equipment Co. $ 300,000 30,000 - ------------------------------------------------------------------------------------ Meir Noga $ 100,000 10,000 - ------------------------------------------------------------------------------------ Nachum Ezra $ 100,000 10,000 - ------------------------------------------------------------------------------------
16 SCHEDULE 1 TO SECURITIES PURCHASE AGREEMENT OPTIONS, WARRANTS & CONVERTIBLE SECURITIES 17 EX-4.5 9 dex45.txt SHAREHOLDERS RIGHTS AGREEMENT Exhibit 4.5 SHAREHOLDERS' RIGHTS AGREEMENT ------------------------------ THIS SHAREHOLDERS RIGHTS AGREEMENT (this "Agreement") made as of the 18th day of January, 2001, by and among: STOREAGE NETWORKING TECHNOLOGIES LTD., a private company organized under the laws of the State of Israel, with offices at Gutwirth Science Center, Building 640, Technion City, Haifa, Israel (the "Company"); -and- IIS INTELLIGENT INFORMATION SYSTEMS LTD., a private company that is a wholly- owned subsidiary of IIS INTELLIGENT INFORMATION SYSTEMS LTD. organized under the laws of the State of Israel, with offices at Gutwirth Science Center, Building 640, Technion City, Haifa, Israel ("IIS"); -and- NELSON NAHUM, of 36a Shimkin Street, Haifa (the "Key Employee"); -and- OPHIRTECH LTD., a company organized under the laws of the State of Israel, with offices at 8 Shderot Shaul Hamelech, Tel Aviv, Israel ("Ophir"); -and- KOONRAS TECHNOLOGIES LTD., a company organized under the laws of the State of Israel, with offices at 21 Ha'arba'ah Street, Tel Aviv, Israel ("Koonras"); -and- GENESIS PARTNERS II L.D.C., a Limited Duration Company organized under the laws of the State of Cayman Islands ("Genesis Partners") and GENESIS PARTNERS II (Israel) L.P., a limited partnership organized under the laws of the Cayman Islands ("Genesis Partners (Israel)"), with offices at Top Tower, 50 Dizengoff St., Tel Aviv, Israel (Genesis Partners and Genesis Partners (Israel) shall be referred to collectively as "Genesis"); - -and- CISCO SYSTEMS, INC., a public company incorporated under the laws of the state of California ("Cisco"), with office at 170 West Tasman Drive, San Jose, California, 95134-17066, U.S.A. -1- - -and- MORGAN KEEGAN & COMPANY, INC., MORGAN KEEGAN OPPORTUNITY FUND, L.P. and MORGAN KEEGAN EMPLOYEE INVESTMENT FUND, L.P., corporations incorporated under the laws of the state of Delaware (collectively, "Morgan"), with offices at 50 North Front Street, Memphis, Tennessee 38103, U.S.A. - -and- The other investors listed in Annex 1 attached hereto (the "Other Investors"). ------- (Ophir, Koonras, Genesis and IIS shall be referred, collectively, as the "Initial Purchasers"; Cisco, Morgan and the Other Investors shall be referred to, collectively, as the "Additional Purchasers"; each of the Initial Purchasers and the Additional Purchasers shall be referred to individually as a "Purchaser" and collectively as "Purchasers") Each of the above mentioned parties to this Agreement shall be referred to as a "Party" and all of such parties as the "Parties". W I T N E S S E T H: WHEREAS, the Initial Purchasers purchased 4,139,271 Series B Convertible Preferred Shares of the Company (the "Preferred B Shares") in accordance with the terms of that certain Share Purchase Agreement, dated December 13, 2000, as amended on January 18, 2001 (the "Initial SPA"); and WHEREAS, the Additional Purchasers are subscribing for additional Preferred B Shares in accordance with the terms of the Share Purchase Agreement, dated January 18, 2001 (the "Additional SPA") (the Initial SPA and the Additional SPA shall be referred to, collectively, as the "Share Purchase Agreement"); and WHEREAS, the Parties wish to terminate the Shareholders Rights Agreement entered into on October 21, 1999 and the Shareholders Rights Agreement entered into on December 13, 2000, among certain shareholders of the Company and the Company (collectively, the "Previous SRA") so that, all the provisions of the Previous SRA would have no further force or effect (as of the date of this Agreement), and as of the date of this Agreement would be replaced by all the provisions of this Agreement as detailed below; and WHEREAS, in order to induce the Company and its shareholders to approve the issuance of the Preferred B Shares to the Additional Purchasers and to induce the Additional Purchasers to invest funds in the Company pursuant to the Share Purchase Agreement, the Parties hereby agree that certain rights shall be granted to the -2- Company's shareholders as set forth herein; NOW, THEREFORE, in consideration of the mutual premises and covenants set forth herein, the Parties hereby agree as follows: 1. Affirmative Covenants --------------------- 1.1. Delivery of Financial Statements. The Company shall deliver to (a) -------------------------------- each holder of Preferred B Shares and each holder of Series A Convertible Preferred Shares (the "Preferred A Shares") and (b) each holder of Ordinary Shares for so long as such holder owns more than 5% of the outstanding share capital in the Company on a fully diluted basis (in each case in this Section 1 an "Entitled Shareholder"): 1.1.1. As soon as practicable, but in any event within fifty (50) days after the end of each fiscal year of the Company, audited consolidated financial statements of the Company and of the Company's subsidiary - StoreAge Networking Technologies, Inc. (the "Subsidiary"), including the balance sheet as of the end of such year and statements of income and cash flow of the Company for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, United States dollar denominated, prepared in accordance with US generally accepted accounting principles ("GAAP"), audited by a firm of Independent Certified Public Accountants who are members of the Israeli Institute of Certified Public Accountants and are affiliated with one of the "Big Five" accounting firms (an "Israeli CPA"), 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 accordance with GAAP consistently applied, and present fairly and accurately 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 made in accordance with US generally accepted auditing standards, and in a form suitable for such Entitled Shareholder to conform with the reporting requirements which apply to a publicly traded company; and 1.1.2. As soon as practicable, but in any event within forty five (45) days after the end of the first, second and third quarter in each year, the unaudited, but reviewed, consolidated financial statements of the Company and of the Subsidiary, including the balance sheet as at the end of each such period and unaudited statements of income and cash flow of the Company for such period, setting forth in each case in comparative form the figures for the corresponding period of the previous fiscal year, -3- all in reasonable detail, United States dollar-denominated, certified, by the chief financial officer of the Company (the "CFO"), reviewed by an Israeli CPA and in a form suitable for such Entitled Shareholder to conform with the reporting requirements which apply to a publicly traded company. The CFO's certificate shall state that such financial statements were prepared in accordance with GAAP consistently applied. 1.1.3. As soon as practicable, but in any event within fifteen (15) days after the end of each calendar month, the Company shall deliver to the Entitled Shareholders monthly management reports containing information of the business of the Company for such month in the form acceptable to the Company and the Purchasers and any such other reports as shall from time to time be directed by the Board of Directors. 1.1.4. At least forty five (45) days prior to the first day of each fiscal year, the Company shall prepare and present to the Entitled Shareholders detailed financial and operational projections for the year and a financial summary projection, broken down into yearly and quarterly financial forecasts and other such projections as directed by the Purchasers. 1.1.5. Any other information as may be reasonably requested by the Entitled Shareholders, including, inter alia, information required for the purpose of preparing or filing a prospectus and/or any other filing pursuant to the securities authorities and/or any other information required under any law. It is agreed that in such events the Entitled Shareholder may be entitled to transfer that information, if necessary for the purposes mentioned above, to any of its affiliates or subsidiaries, provided that the Entitled Shareholder shall reimburse the Company for any and all expenditure which is borne by the Company in connection with obtaining or providing such information, if information of that kind in not obtained by the Company in the ordinary course of business. 1.1.6. All of the information provided under this Section 1.1 shall be presented to the Purchasers in English. 1.2. Additional Information. Until a firm commitment underwritten public ---------------------- offering managed by an internationally recognized underwriter of Ordinary Shares of the Company yielding at least $30 million (Thirty Million US Dollars) net to the Company and which reflects a pre- offering valuation of the Company of more than U.S. $150,000,000 (One Hundred Fifty Million US Dollars) ("Qualified IPO"), the Company will permit the authorized representative of each Entitled Shareholder at such Entitled Shareholder's expense, full and free access, at reasonable times and upon reasonable notice, to any of the properties of the Company, including its books and records, and to discuss its affairs, finances and accounts with the Company's officers -4- and auditors. Without derogating from the foregoing, should the Company receive written notification from a Party that it does not desire to receive any further Confidential Information (as defined herein) from the Company, as provided in Section 12.2 below, such Party shall not be entitled to any additional information pursuant to this Section 1.2. 1.3. Delivery of Information to Directors. In addition, the Company ------------------------------------ will deliver to each of the Preferred Directors (as defined below), to the Cisco and Koonras Observers and to the Directors appointed by IIS the following information: (a) promptly following the occurrence of any Event, as defined hereinafter likely to have a material adverse effect upon the Company or its business, a written summary of such Event and its foreseeable implications. "Event" - includes, without limitation: (i) any material change in the information that was known to the Company which may have a material adverse affect on the Company; (ii) occurrence of new Events that render the information supplied to the Entitled Shareholders untrue or incomplete in any material way; or (iii) occurrence of any technological impediment which may cause a material adverse change in the current or prospective business of the Company; and (b) with reasonable promptness, such other information and data with respect to the Company, as an Entitled Shareholder may from time to time reasonably request. This Section 1.3 shall not derogate from any rights which any Entitled Shareholder or the directors designated by any of them may be entitled to under applicable law. 1.4. Accounting. The Company will maintain and cause each of its ---------- subsidiaries to maintain adequate records and books of accounts, and a system of accounting established and administered in accordance with GAAP consistently applied, and will reserve on its books and cause each of its operating subsidiaries to reserve on its books all such proper reserves as shall be required by GAAP. 1.5. Insurance. The Company will maintain and shall pay all premiums --------- and maintain in full force and effect, employers liability, fire and casualty insurance policies with coverage sufficient in amount to allow it to replace its material properties, which might be damaged or destroyed. In addition to the foregoing, at the direction of the Board of Directors, the Company shall obtain from financially sound and reputable insurers a product liability insurance policy as is necessary for the Company to conduct its business. The Company shall obtain a Directors and Officers liability insurance policy in an amount as shall be determined by the Company's Board of Directors, within such time as resolved by the Board of Directors. All the above insurance shall be of such type and in such amount customary for companies similarly situated. 1.6. Confidentiality and Non-Competition Agreements. Unless otherwise ---------------------------------------------- specifically approved by the Board of Directors, the Company will not employ or otherwise -5- contract with, or continue to 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 Confidentiality and Non-Competition Agreement in such form approved by the Company's Board of Directors. 1.7. Protection of Intellectual Property. The Company undertakes to ----------------------------------- use its best efforts to diligently protect any future development of the Company and of its subsidiaries by, inter alia, filing for patents in the United States and other jurisdictions, conducting searches to verify the status of the intellectual property, and taking such customary measures, in any such case, to protect the secrecy and value of the Company's and its subsidiaries intellectual property. The Company shall avoid and shall cause its subsidiaries to avoid an infringement of intellectual property rights of others of which it is aware, including by the design and use of non-infringing products, processes or the like. 1.8. Employee Stock Option Plan. All options issued after the Closing -------------------------- of the Share Purchase Agreement to employees, officers and consultants of the Company shall be in accordance with the Company's current employee stock option plan or any other employee stock option plan adopted by the Board of Directors. 1.9. Use of Proceeds. The Company shall use the net cash proceeds from --------------- the sale of the Preferred B Shares in the manner set forth in Section 7 of the Share Purchase Agreement. 1.10. Internal Auditor. Until an IPO, as long as Koonras holds more ---------------- than 20% of the issued and outstanding share capital of the Company (on an as-converted basis), then, upon the demand of Koonras, the Company's Board of Directors shall appoint an internal auditor (as such term defined in the Companies Law - 1999) to the Company. 1.11. Compensation. The Company shall not pay and shall cause its ------------ subsidiaries to not pay to its directors, officers and key employees management compensation in excess of that compensation customarily paid to management in companies in similar business without the consent of the Board or Directors. 1.12. Reserved Conversion Shares. The Company shall at all time -------------------------- reserve and keep available out of its authorized but unissued shares of Ordinary Shares, for the purpose of effecting the conversion of the Preferred B Shares and the Preferred A Shares and otherwise complying with the terms of this Agreement and the terms of the Share Purchase Agreement, such number of its duly authorized shares of Ordinary Shares as shall be sufficient to effect the conversion of the Preferred B Shares from time to time outstanding or otherwise comply with the terms of this Agreement and the terms of the Share Purchase Agreement. 1.13. Restrictive Agreements Forbidden. The Company shall not become a -------------------------------- party to any agreement, which by its terms restricts the Company's -6- performance of this Agreement, the Share Purchase Agreement and any and all agreement and instruments entered by the parties hereunder and thereunder, or the Amended Articles. 1.14. Compliance with Laws. The Company shall comply, and cause its -------------------- subsidiaries to comply, with all applicable laws, rules, regulations and orders, noncompliance with which could materially and adversely affect their respective business or condition, financial or otherwise. 1.15. IIS-StoreAge Agreement. The Company and IIS agree that, for such ---------------------- time as Cisco (together with any Permitted Transferee of Cisco, as defined in the Amended Articles) holds shares in the Company constituting 5% or more of the issued and outstanding share capital of the Company, the Company and IIS shall not amend the agreement entered between the Company and IIS (in the form attached to the Share Purchase Agreement as Exhibit R(1) without ------------ the prior written consent of Cisco. 2. Negative Covenants ------------------ 2.1. Prior to such time as the consummation of a Qualifying IPO the following actions and resolutions shall not be taken by the Company (and the Company shall not cause any subsidiary thereof to take such action) without first obtaining the written consent of at least two of the Preferred Directors, as defined below (in the case of actions of the Board of Directors), or the written consent of the holders of at least a 70% of the Preferred A Shares and Preferred B Shares then issued and outstanding collectively (in the case of actions of the shareholders): 2.1.1. voluntary liquidation, winding up, reorganization, merger or consolidation with or into any corporation or entity, or sale, assignment, lease, or other disposition of all or substantially all of the Company's assets; 2.1.2. the declaration or payment of any dividend (whether in cash or shares) or any other distribution of cash or other assets; 2.1.3. any amendment to or modification of the Company's Articles or Memorandum of Association; 2.1.4. Without limitation to Section 2.2 below, any increase in or modification of the Company's authorized share capital, and the issuance of any securities of the Company (including but not limited to option, warrants etc.) at an exercise or price per share which is lower than US$ 3.28695 (purchase price per each Preferred B Share), subject to recapitalization adjustments; 2.1.5. any material change in the nature or character of the business as currently conducted or contemplated to be conducted by the Company; 2.1.6. any transaction, agreement or arrangement, which is not in the -7- ordinary course of business of the Company relating to the Company's intellectual property; 2.1.7. the terms of an IPO; 2.1.8. the purchase of any securities or substantially all of the assets, of any person or entity; 2.1.9. entering into any transaction with (i) any shareholder or director of the Company or any of their respective affiliates, shareholders, partners, directors or officers or (ii) with any officer of the Company; 2.1.10. any loan granted to the Company exceeding the amount of US$100,000, the imposition of liens and/or charges on any of the Company's assets and any grant of guarantees to or by the Company; 2.1.11. any loan granted by the Company exceeding the aggregate amount of US$50,000; 2.1.12. designation or discharge of the chief executive officer and other executive officers of the Company; 2.1.13. approval of the annual budget and working plan and any expenditure which deviates therefrom; 2.1.14. redemption on the Company's shares; 2.1.15. call on the Company's shares; 2.1.16. any amendment to the Company's Stock Option Plan or the adoption of any compensation or stock plan; and 2.1.17. entering into any engagement and/or agreement and/or commitment and/or undertaking with Morgan Keegan & Company, Inc. 2.2. Prior to the consummation of a Qualifying IPO, the following actions of the Company shall require the affirmative vote of the holders of Preferred A Shares or Preferred B Shares (in each case, each voting as a separate class), as the case may be: 2.2.1. The authorization, creation and/or issuance of securities of the Company with rights same, pari passu or superior to the rights conferred upon the holders of Preferred A Shares or Preferred B Shares, as the case may be; and 2.2.2. Any action which would have the effect of amending or affecting the rights, preferences and privileges of the Preferred A Shares or Preferred B Shares, as the case may be. 3. The Company's Board of Directors -------------------------------- 3.1. Prior to the consummation of a Qualifying IPO, the Board of Directors of the Company and the board of each subsidiary thereof shall consist -8- of not more than seven (7) directors, appointed as follows: 3.1.1. The majority of holders of Preferred A Shares shall collectively be entitled to appoint one (1) member to the Company's Board of Directors (the "Preferred A Director"); 3.1.2. The majority of holders of Preferred B Shares shall be entitled to appoint two (2) members to the Company's Board of Directors (the "Preferred B Directors"); (the Preferred A Director and the Preferred B Directors shall be referred to herein, collectively, as the "Preferred Directors") 3.1.3. The holder(s) of the majority of the Ordinary Shares shall be entitled to appoint two (2) members to the Company's Board of Directors. 3.1.4. The Company's Chief Executive Officer shall serve as a member of the Board of Directors. 3.1.5. An additional member (one), who shall be an industry expert, shall be appointed to the Board of Directors by the other members of the Board. 3.2. For so long as Koonras holds 5% or more of the issued and outstanding share capital of the Company, it shall be entitled to appoint 1 non-voting observer to the Board of Directors of the Company. 3.3. For so long as Cisco holds 5% or more of the issued and outstanding share capital of the Company, it shall be entitled to appoint 1 non-voting observer to the Board of Directors of the Company and a member to the technical advisory sub-committee of the Board of Directors of the Company. 4. Conversion and Anti-Dilution ---------------------------- 4.1. The holders of Preferred Shares shall be entitled to broad-based anti- dilution protection. The terms of such anti-dilution protection are as described in Exhibit B. --------- 4.2. The Preferred A and B Shares are convertible into Ordinary Shares of the Company. The Conversion terms are as described in Exhibit B. --------- 5. Liquidation Preference ---------------------- The Preferred B shares will be senior to all other equity securities of the Company in the event of actual or deemed liquidation of the Company, bankruptcy or winding up of the Company, or sale of all or substantially all of the assets of the Company for cash or assets. The terms of the liquidation preference are as described in Exhibit B. --------- 6. Dividends -------- The holders of Preferred B Shares and the holders of Preferred A Shares shall have a dividend preference. The terms of such preference are as described in Exhibit B. --------- -9- 7. Key Employee No Sale -------------------- 7.1. Until the earlier of: (i) a Qualifying IPO, (ii) Deemed Liquidation, where the shareholders of the Company prior to the merger do not hold more than 50% of the surviving entity, or (iii) sale of all or substantially all of the Company's assets (the "Restrictive Period") Key Employee shall not sell, transfer, assign, pledge or otherwise dispose of any shares of the Company held by him (each a "Transfer"), except to Permitted Transferees (as such term is defined in the Amended Articles), provided that such Permitted Transferee agrees in writing to be bound by the provisions of this Agreement and the Amended Articles including the No-Sale provision set forth in this Subsection 7.1, and except as provided pursuant to Section 7.2 herein, as if such Permitted Transferees were Key Employee. 7.2. Notwithstanding the foregoing, during the Restrictive Period Key Employee shall be entitled to sell, in one or more transactions, shares of the Company owned by him not exceeding in the aggregate $200,000 (Two Hundred Thousand US Dollars) in value. 7.3. In the event that the Key Employee or any of his Permitted Transferees should sell any shares in contravention of this Agreement (a "Prohibited Transfer"), the Purchasers may proceed to protect and enforce their rights by suit in equity or by action at law, whether for the specific performance of any term contained in this Agreement or for an injunction against the breach of any such term or in furtherance of the exercise of any power granted in this Agreement, or to enforce any other legal or equitable right of the holders of Preferred A and B Shares or to take one or more of such actions. 8. Exit ---- The Parties shall have the right to transfer their respective shares in the Company, together with the right of first refusal and tag-along rights. The terms of such right to transfer shares are as described in the Amended Articles attached hereto as Exhibit B. --------- 9. Bring-Along ----------- The Parties agree that "bring-along" provisions with respect to sale of shares of the Company will be as set forth in Exhibit B. --------- 10. Preemptive Rights ----------------- The Parties shall have preemptive rights in the event of issue of any additional shares of the Company. The terms of such preemption right are as described in Exhibit B. --------- 11. Right of First Refusal ---------------------- The Parties shall have right of first refusal to purchase any shares of the -10- Company offered for sale by and shareholder of the Company. The terms of such right are as described in Exhibit B. --------- 12. Confidentiality --------------- 12.1. The Parties hereby undertake to maintain in strict confidentiality all trade, business, technical or other information regarding the Company, its affiliated entities and their business affairs including, without limitation, all marketing, sales, technical and business know-how, intellectual property, trade secrets, identity and requirements of customers and prospective customers, the Company's methods of doing business and any and all other information relating to the operation of the Company (collectively, the "Confidential Information"). The Parties shall at no time disclose any Confidential Information to any person, firm, or entity, and for any purpose, without the prior written consent of the Company and shall use their best efforts to cause their authorized representatives not to disclose such information without the prior written consent of the Company. 12.2. Confidential Information shall not include information that (i) is or becomes part of the public domain other than as a result of breach of this Agreement, (ii) becomes available to the Parties on a non-confidential basis from a source other than the Company, provided that the source is not bound with respect to that information by a confidentiality agreement with the Company or is otherwise prohibited from transmitting that information by a contractual legal or other obligation, (iii) have been in the possession or known to the parties prior to disclosure of the information by the Company, (iv) have been developed by or for them or their related entities without use of the Confidential Information, (v) becomes available to the Parties by wholly lawful inspection or analysis of products offered for sale, provided, however, that no Party shall be entitled to use or disclose such Confidential Information except in connection with its investment in the Company and in no event shall use it in a way that may materially adversely affect the Company's business, unless expressly authorized by the Company in writing, or (vi) is transmitted by a Party after receiving written notification from the other Party that it does not desire to receive any further Confidential Information. To avoid any doubt it is hereby clarified that the foregoing exclusions shall not be construed to exclude information pertaining to any and all intellectual property assigned and/or transferred by IIS to the Company. Notwithstanding the foregoing, each Party may disclose information with respect to the Company, which it is required to disclose pursuant to judicial action or other governmental agency action or applicable law or regulation. In the event either Party becomes legally compelled to disclose any Confidential Information, each Party shall provide the other with prompt notice. Both Parties shall cooperate with each other to the fullest extent possible so that the relevant Party may seek a protective order or other appropriate remedy, at its own expense. -11- 12.3. Subject to the Section 10.11 (Public Announcements) of the Share ---------------------------------- Purchase Agreement, all institutional investors in the Company ------------------ may, without first obtaining such written consent, make general statements, not containing Confidential Information or technical information, regarding the nature and progress of the Company's business, and may provide summary information regarding the Company's financial information in its reports to its respective shareholders or limited partners and may, if required by law, annex to such reports the full financial information to be provided hereunder by the Company. 13. Miscellaneous ------------- 13.1. Termination of the Previous SRA. By entering into this ------------------------------- Agreement, the shareholders of the Company hereby terminate the Previous SRA as of the date of this Agreement, and as of the date of this Agreement all the rights and privileges granted to either party by virtue of such Agreement shall become null and void. 13.2. 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 hereby. 13.3. Governing Law; Jurisdiction. This Agreement shall be governed by --------------------------- and construed exclusively 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 courts for the Tel Aviv-Jaffa district, and each of the Parties hereby submits irrevocably to the jurisdiction of such court. 13.4. Successors and Assigns. Except as otherwise expressly limited ---------------------- herein, this Agreement shall be binding upon and inure to the benefit of and be enforceable by the Purchasers and the Company and their respective successors and assigns. 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 from a Purchaser to any other entity which controls, is controlled by or is under common control with, such Purchaser, (b) assignments and transfers to a Purchaser's limited partners and to affiliated limited 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, (c) assignments and transfers to any investment fund or trust or partnership controlled or managed or advised or promoted by a Purchaser and (d) assignment and transfer from the Company to a company which has succeeded to substantially all of the business and assets of the Company in compliance with this Agreement and has assumed in writing its obligations under this Agreement. -12- 13.5. Entire Agreement; Amendment and Waiver. Subject to Section 13.2, -------------------------------------- this Agreement, the Exhibits hereto, the Share Purchase Agreement and the schedules thereto, the Registration Agreement and the schedules thereto, the Warrant and the Amended Articles constitute the full and entire understanding and agreement between the Parties with regard to the subject matters hereof and thereof, and as of the date hereof, supersedes all other agreements between or among any of the parties with respect to the subject matter hereof, including the Previous SRA (but excluding the Share Purchase Agreement executed on October 21, 1999). Any term of this Agreement may be amended, waived or discharged (either prospectively or retroactively and either generally or in a particular instance), by a written instrument signed by all the Parties to this Agreement. 13.6. Notices, etc. 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 sent by e-mail (provided that telephone confirmation of receipt is provided) or otherwise delivered by hand or by messenger, 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 Company: StoreAge Networking Technologies Ltd. Gutwirth Science Center, Building 640, Technion City, Haifa, Israel Fax: +972-4-8329040 Attn: Eli Shapira, CEO E-mail: Eshapira@store-age.com With a copy (which will not Kleinhendler & Halevy constitute notice) to: 30 Kalisher Street Tel-Aviv 65257 Fax: 972-3-5107528 Attention: Nitzan Hirsch-Falk E-Mail: nitzan@khlaw.co.il If to IIS: IIS Intelligent Information Systems Investments (1994) Ltd. Gutwirth Science Center, Building 640, Technion City, Haifa, Israel Fax: +972-4-8329040 Attn: Robi Hartman E-mail: Rhartman@westendgroup.com If to Key Employee: Nelson Nahum 36a Shimkin Street, Haifa, Israel Fax: ___________________
-13- If to Ophir: 3 Danieal Frish St., 13th Floor Tel Aviv, Israel Fax: +972-3-6095851 E-mail: yrmo@netvision.net.il Attn: Yirmi Kaplan With a copy (which will not Baratz, Gilat, Bar-Nathan & Co., Law constitute notice) to: Offices 8 Shaul Hamelech Blvd. Tel Aviv 64733 Israel Fax: 972-3-696-0986 E-mail: lori@bgb-law.co.il Attn: Lori Almouli-Confino, Adv. If to Koonras: 21 Ha'arba'ah Street, Tel Aviv, Israel Fax: 972-3-6957511 E-mail: ashachar@poalim-investments.co.il Attn: Avi Shahar With a copy (which will not Baratz, Gilat, Bar-Nathan & Co., Law constitute notice) to: Offices 8 Shaul Hamelech Blvd. Tel Aviv 64733 Israel Fax: 972-3-696-0986 E-mail: lori@bgb-law.co.il Attn: Lori Almouli-Confino, Adv. If to Genesis: 50 Top Tower, Tel Aviv, Israel Fax: 972-3-5262696 E-mail: eyal@genesispartners.co.il Attn: Eyal Kishon With a copy (which will not Baratz, Gilat, Bar-Nathan & Co., Law constitute notice) to: Offices 8 Shaul Hamelech Blvd. Tel Aviv 64733 Israel Fax: 972-3-696-0986 E-mail: lori@bgb-law.co.il Attn: Lori Almouli-Confino, Adv. If to Morgan Keegan Morgan Keegan & Company, Inc. 50 North Front Street Memphis, TN 38103, U.S.A. Fax:001-(901)-579-4979 E-mail: Bill.Ryan@morgankeegan.com Attn: William D. Ryan
-14- If to Cisco Systems, Inc. 170 West Tasman Drive San Jose, California, 95134-17066 U.S.A. Attn: Senior Vice President, Legal and Government Affairs Fax: 001-(408)-5265925 With a copy (which will not Zellermayer, Pelossof and Co., Adv. constitute notice) to: Rubinstein House, 20 Lincoln St. Tel Aviv, Israel Attn: Guy Even Ezra, Adv. Fax: 972-3-6255500 If to the Other Investors To their respective addresses set forth in Annex 1
or such other address with respect to a party as such party shall notify each other party in writing as above provided. Any notice sent in accordance with this Section shall be effective (i) if mailed, five (5) business days after mailing, (ii) if sent by messenger, upon delivery, 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. 13.7. 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. 13.8. 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. -15- 13.9. Construction. All capitalized terms not defined herein shall have the ------------ meaning ascribed to such term in the Share Purchase Agreement. 13.10. 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. Signatures appearing on a faxed page shall be deemed original signatures and shall be enforceable against the Parties transmitting such signature pages by facsimile. 13.11. 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 form an integral and inseparable part of this Agreement. [REMAINING OF PAGE INTENTIONALLY LEFT BLANK] -16- IN WITNESS WHEREOF, this Agreement has been duly executed on the date herein above set forth: _________________________ ____________________ STOREAGE NETWORKING OPHIRTECH LTD. TECHNOLOGIES LTD. ______________________________ ______________________________ IIS INTELLIGENT INFORMATION KOONRAS TECHNOLOGIES LTD. SYSTEMS LTD. _________________________________ ___________________________ GENESIS PARTNERS II L.D.C CISCO SYSTEMS, INC. _________________________________ _______________________ GENESIS PARTNERS II (ISRAEL) L.P. NELSON NAHUM __________________________________ _______________________________ MORGAN KEEGAN & COMPANY, INC. MORGAN KEEGAN OPPORTUNITY FUND, L.P. ___________________________________________________ MORGAN KEEGAN EMPLOYEE INVESTMENT FUND, LP ___________________________________ ___________________________ THE CHALLENGE FUND-ETGAR II L.P. -17- EX-8.1 10 dex81.txt SUBSIDIARIES OF THE COMPANY Exhibit 8.1 Significant Subsidiaries of I.I.S. Intelligent Information Systems Limited --------------------------------------------------------------------------
Jurisdiction of List of Significant Incorporation or Subsidiaries Organization Business Name - ------------------- ---------------- ------------- None
EX-10.1 11 dex101.txt CONSENT OF KOST FORER AND GABBAY EXHIBIT 10.1 [ERNST & YOUNG LETTERHEAD] CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8) pertaining to the Employees' Stock Option Plan and forms F-3 (File No. 333-8240, 333-12764 and 333-59548) of I.I.S. Intelligent Information Systems Limited of our report dated March 11, 2001, with respect to the consolidated financial statements and schedules of I.I.S. Intelligent Information Systems Limited included in the Annual Report (Form 20-F) for the year ended December 31, 2000, filed with the Securities and Exchange Commission. /s/ KOST, FORER & GABBAY --------------------------------------- Tel-Aviv, Israel KOST, FORER & GABBAY June 27, 2001 A member of Ernst & Young International -----END PRIVACY-ENHANCED MESSAGE-----