-----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, Li2al9pzDk6QD8/DrD1X15jQfdmP/mOe1AhhAz85t0xTXR/VgfrrF1g1zAuDAkwJ qGY218K3u8K2JFQzGmZb8Q== 0001178913-04-000787.txt : 20040617 0001178913-04-000787.hdr.sgml : 20040617 20040617080106 ACCESSION NUMBER: 0001178913-04-000787 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040617 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOS BETTER ONLINE SOLUTIONS LTD CENTRAL INDEX KEY: 0001005516 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 0000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 001-14184 FILM NUMBER: 04867445 BUSINESS ADDRESS: STREET 1: 100 BOS RD CITY: TERADION ISRAEL STATE: L3 ZIP: 00000 MAIL ADDRESS: STREET 1: TERADION INDUSTRIAL PARK CITY: BEIT RABIN STATE: L3 ZIP: 20179 20-F 1 zk40755.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 20-F [_] 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, 2003 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 001-14184 B.O.S BETTER ON LINE SOLUTIONS LTD. (Exact name of Registrant as specified in its charter) ISRAEL (Jurisdiction of incorporation or organization) BEIT RABIN, 100 BOS ROAD, TERADYON INDUSTRIAL PARK, MISGAV, 20179, ISRAEL (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: NONE (Title of each class) Securities registered or to be registered pursuant to Section 12(g) of the Act: ORDINARY SHARES, PAR VALUE NIS 4.00 PER SHARE (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: NONE (Title of Class) 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: 4,167,509 ORDINARY SHARES, NIS 4.00 PAR VALUE PER SHARE, AS OF DECEMBER 31, 2003 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] ii TABLE OF CONTENTS
PART I 1 ITEM 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS 1 ITEM 2: OFFER STATISTICS AND EXPECTED TIMETABLE 1 ITEM 3: KEY INFORMATION REGARDING B.O.S 1 ITEM 4: INFORMATION ON THE COMPANY 12 ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS 26 ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 37 ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 48 ITEM 8: FINANCIAL INFORMATION 53 ITEM 9: THE OFFER AND LISTING 54 ITEM 10: ADDITIONAL INFORMATION 55 ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 69 ITEM 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 70 PART II 71 ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 71 ITEM 14: MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 71 ITEM 15: CONTROLS AND PROCEDURES 71 ITEM 16: [RESERVED] 71 ITEM 16A: AUDIT COMMITTEE FINANCIAL EXPERT 71 ITEM 16B: CODE OF ETHICS 71 ITEM 16C: PRINCIPAL ACCOUNTANT FEES AND SERVICES 71 ITEM 16D: EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 71 PART III 73 ITEM 17: FINANCIAL STATEMENTS 73 ITEM 18: FINANCIAL STATEMENTS 73 ITEM 19: EXHIBITS 73 SIGNATURES 75
iii PART I ITEM 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS Not required. ITEM 2: OFFER STATISTICS AND EXPECTED TIMETABLE Not required. ITEM 3: KEY INFORMATION REGARDING B.O.S. Unless the context in which such terms are used would require a different meaning, all references to "BOS", "we" or "our" refer to B.O.S. Better On-Line Solutions Ltd. 3A. SELECTED CONSOLIDATED FINANCIAL DATA The consolidated statement of operations data for B.O.S Better On-Line Solutions Ltd. set forth below with respect to the years ended December 31, 2003, 2002 and 2001, and the consolidated balance sheet data as of December 31, 2003 and 2002, have been derived from the Consolidated Financial Statements listed in Item 18, which have been prepared in accordance with generally accepted accounting principles ("GAAP") in the United States. The consolidated statement of operations data set forth below with respect to the years ended December 31, 2000 and 1999, and the consolidated balance sheet data as of December 31, 2001, 2000 and 1999, have been derived from other consolidated financial statements not included herein and have been prepared in accordance with U.S. GAAP. The financial statements for the years ended December 31, 2001, 2002 and 2003 were audited by Kost, Forer Gabbay & Kasierer, independent certified public accountants in Israel and a member of Ernst & Young Global, while the financial statements for the years ended December 31, 1999 and 2000 were audited by Somekh Chaikin, independent certified public accountants in Israel and members of KPMG International. The selected consolidated financial data presented below should be read in conjunction with Item 5: "Operating and Financial Review and Prospects" and the Notes to the Financial Statements included in this Form 20-F. On May 29, 2003, the Company effected a one-for-four reverse stock split. All share and per share numbers herein reflect adjustments resulting from this reverse stock split. 1 STATEMENT OF OPERATIONS DATA: (IN US THOUSANDS OF DOLLARS WITH THE EXCEPTION OF PER SHARE DATA) YEAR ENDED DECEMBER 31:
2003 2002 2001 2000 1999 ------- ------- ------- ------- ------- Revenues 5,728 9,441 6,042 7,294 6,720 Cost of revenues 1,455 2,300 2,703 2,399 1,936 ------- ------- ------- ------- ------- GROSS PROFIT 4,273 7,141 3,339 4,895 4,784 OPERATING EXPENSES: Research and development, net 1,846 2,182 1,757 2,177 1,486 Selling and marketing 2,178 3,705 4,811 4,185 3,024 General and administrative 1,317 1,697 1,425 2,279 2,181 Restructuring costs 678 - 132 83 ------- ------- ------- ------- ------- TOTAL OPERATING EXPENSES 6,019 7,584 8,125 8,724 6,691 OPERATING LOSS: (1,746) (443) (4,786) (3,746) (1,907) Financial income (expense), net 109 295 427 639 (91) Other income (expenses) (795) (95) (298) (479) 2,150 ------- ------- ------- ------- ------- EARNING (LOSS) BEFORE EQUITY IN LOSSES OF AN AFFILIATED COMPANY (2,432) (243) (4,657) (3,669) 152 Equity in losses of an affiliated company - - - (1,283) (696) ------- ------- ------- ------- ------- NET LOSS FROM CONTINUING OPERATIONS (2,432) (243) (4,657) (4,952) (544) Net earning (loss) related to discontinued operations 2,036 (7,674) (8,313) (2,743) (522) ------- ------- ------- ------- ------- NET LOSS (396) (7,917) (12,970) (7,695) (1,066) ======= ======= ======= ======= ======= Basic and diluted net loss per share from continuing operations $ (0.66) $ (0.08) $ (1.50) $ (1.66) $ (0.23) ======= ======= ======= ======= ======= Basic and diluted net earning (loss) per share related to discontinued operations $ 0.55 $ (2.46) $ (2.68) $ (0.92) $ (0.22) ======= ======= ======= ======= ======= Basic and diluted net loss per share $ (0.11) $ (2.54) $ (4.18) $ (2.58) $ (0.45) ======= ======= ======= ======= ======= Weighted average number of shares used in computing basic and diluted net earning (loss) per share 3,683 3,117 3,097 2,982 2,388 ======= ======= ======= ======= =======
2 YEAR ENDED DECEMBER 31:
BALANCE SHEET HIGHLIGHTED DATA: 2003 2002 2001 2000 1999 - ------------------------------- ------ ------ ------ ------ ------ CASH AND CASH EQUIVALENTS 3,872 5,246 8,325 16,470 261 Working Capital (*) 5,082 5,980 7,008 17,378 290 Total Assets 14,355 17,192 31,281 46,128 33,637 Short-term bank credit and current maturities of long-term debt - - 286 429 421 Long-term debt 951 794 794 1,049 1,542 Shareholders equity 10,873 8,722 16,478 29,444 13,675 (*)Working capital comprises of: Current assets 7,239 9,525 10,677 20,795 3,411 Less: current liabilities 2,157 3,545 3,669 3,417 3,121 ------ ------ ------ ------ ------ 5,082 5,980 7,008 17,378 290 ====== ====== ====== ====== ======
3B. CAPITALIZATION AND INDEBTEDNESS Not applicable 3C. REASONS FOR THE OFFER AND USE OF PROCEEDS Not applicable 3D. RISK FACTORS The following factors, in addition to other information contained or incorporated by reference in this Form 20-F, should be considered carefully. This report on Form 20-F contains forward-looking statements that are intended to be, and are hereby identified as, forward looking statements for the purposes of the safe harbor provisions of the Private Securities Reform Act of 1995. These statements address, among other things: our strategy; the anticipated development of our products; our anticipated use of proceeds; our projected capital expenditures and liquidity; our development of additional revenue sources; our development and expansion of relationships; the market acceptance of our products; and our technological advancement. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including all the risks discussed below and elsewhere in this report. 3 We urge you to consider that statements which use the terms "believe", "do not believe", "expect", "plan", "intend", "estimate", "anticipate", "projections", "forecast" and similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties. Except as required by applicable law, including the federal securities laws of the United States, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Market data and forecasts used in this report have been obtained from independent industry sources. We have not independently verified the data obtained from these sources and we cannot assure you of the accuracy or completeness of the data. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and additional uncertainties accompanying any estimates of future market size. OUR SALES IN THE US DEPEND ON ONE MASTER DISTRIBUTOR Up until the fourth quarter of 2002, we marketed our BOScom products through a US subsidiary (the BOS US division of PacInfoSystems). Currently, we market our products through one master distributor, Bosanova Inc. The sales of our products in the US market currently account for more than 50% of our sales. In the event that we encounter problems working with the master distributor, we may experience an interruption in sales until an alternative source of distribution can be found, which may have a material adverse effect our business. IN EARLY 2002 WE TRANSFORMED THE CORPORATE STRUCTURE OF THE COMPANY INTO A HOLDING COMPANY SPECIALIZING IN TECHNOLOGY. LATER IN 2002, WE DECIDED THAT THE COMPANY WOULD FOCUS ON VOIP PRODUCTS, THE CORE BUSINESS OF ITS ISRAELI SUBSIDIARY, BOSCOM LTD. OUR STATUS AS A HOLDING COMPANY MAY PROVE BURDENSOME WHICH WOULD ADVERSELY AFFECT OUR LONG-TERM GROWTH, AND OUR DECISION TO CONCENTRATE ON OUR CORE BUSINESS MAY NOT PROVE PROFITABLE. Our decision to operate as a holding company may increase costs and not prove profitable, and the focus on the VOIP products of our Israeli subsidiary, BOScom Ltd., has not yet proven to be successful. There can be no assurance that this focus on VOIP, rather than seeking a wide-range of technology investments, shall be successful and profitable in the future, and such focus may materially adversely affect our business condition and results of operations. WE ARE ENGAGED IN A HIGHLY COMPETITIVE INDUSTRY, AND IF WE ARE UNABLE TO KEEP UP WITH OR AHEAD OF THE TECHNOLOGY OUR SALES COULD BE ADVERSELY AFFECTED. ADDITIONALLY, WE ARE FAIRLY NEW PLAYERS IN THE HIGHLY COMPETITIVE VOIP SECTOR, AND THERE ARE NO ASSURANCES THAT WE WILL BE ABLE TO EFFECTIVELY COMPETE WITH THE MORE ESTABLISHED BUSINESSES IN THE SECTOR. IBM sells competing products to our own, and can exercise significant customer influence and technology control in the IBM host connectivity market. We may experience increased competition in the future from IBM or other companies, which may adversely affect our ability to continue to market our products and services successfully. We also compete against various companies that offer computer communications products based on other technologies that in certain circumstances can be competitive in price and performance to our products. There can be no assurance that these or other technologies will not capture a significant part of the existing or potential IBM midrange computer communications market. The market for our products is also characterized by significant price competition. We may therefore face increasing pricing pressures. There can be no assurance that competitors will not develop features or functions similar to those of our products, or that we will be able to maintain a cost advantage or that new companies will not enter these markets. We believe, however, that our significant proprietary know-how and experience in emulation technology gives us long-term advantages. 4 The VOIP market is very competitive with large companies such as Cisco competing for the same market segment. There can be no assurance that we will be able to successfully penetrate the market or realize significant revenues from our line of products and become profitable. Some of the Company's current and potential competitors have longer operating histories, greater name recognition, access to larger customer bases and significantly greater financial, technical and marketing resources than ours. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the promotion and sale of their products, than the Company. IN LATE 2002 WE DECIDED TO WIND UP THE BUSINESS OF OUR SUBSIDIARY, PACIFIC INFORMATION SYSTEMS, INC. ("PACINFOSYSTEMS"), DUE TO ITS SEVERE FINANCIAL SITUATION. PACINFOSYSTEMS HAS ALREADY SETTLED WITH A MAJORITY OF ITS EXTERNAL CREDITORS. In May 2002, the Company announced its intention to sell PacInfoSystems due to a change in the Company's business strategy. PacInfoSystems was the Company's wholly owned U.S. subsidiary that resold, installed and provided computer networking products to various business entities. Later, the Company decided to wind up PacInfoSystems instead of selling it due to its severe financial situation. As of this date, a settlement has been reached with a majority of PacInfoSystems' creditors, however, there can be no assurance that such a settlement will be reached with the remainder of the creditors, thus resulting in additional costs to the Company. Furthermore, certain actions involving PacInfoSystems, if occurred before the end of 2003, may have triggered a tax event for Mr. Jacob Lee, who sold PacInfoSystems to the Company in 1998. In such event, the Company may be obligated, under the purchase agreement, to grant Mr. Lee a loan on a full recourse basis for certain tax payments Mr. Lee may be liable for, currently estimated at approximately $1.5 million. The purchase agreement provides that the Company is to receive a security interest in shares of the Company that Mr. Lee holds at the time of the loan with a fair market value as of the date of the loan of at least 125% of the amount of the loan as security for the repayment of the loan. In addition, in the event the Company is required to loan such sum to Mr. Lee, the Company may also be required to reimburse Mr. Lee for certain interest on taxes that he may owe. It is possible that the windup of PacInfoSystems during 2002 and 2003 may have triggered such a tax event for Mr. Lee, which would result in an obligation by the Company to loan Mr. Lee such amount and to reimburse him for interest expenses incidental to the tax event. Such a loan and reimbursement may have a material adverse affect on our business condition and results of operations. THE COMPANY'S SHARES MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET FOR FAILURE TO MEET NASDAQ'S REQUIREMENTS. In late 2002 and early 2003 the Company received notice from the Nasdaq Stock Market that its ordinary shares were subject to delisting from the Nasdaq National Market for failure to meet Nasdaq's minimum bid price and shareholders' equity requirements ($10 million) for continued listing on the National Market. As a result of the hearing requested by the Company and supplemental information presented by the Company to the Nasdaq Listing Qualifications Panel by the Company, the Panel determined to continue the listing of the Company's securities on the Nasdaq National Market pursuant to a detailed exception to the Nasdaq National Market Rules, and the Company successfully met all the conditions set forth in the exception. However, there can be no assurance that the Company will be able to continue to meet these or other Nasdaq requirements to maintain its Nasdaq National Market listing, in which case it will need to apply for a transfer of its ordinary shares to the Nasdaq Small Cap Market. 5 IF ACTUAL MARKET CONDITIONS PROVE LESS FAVORABLE THAN THOSE PROJECTED BY MANAGEMENT, ADDITIONAL INVENTORY WRITE-DOWNS MAY BE REQUIRED Inventories may be written down for estimated obsolescence based upon assumptions about future demand and market conditions and could adversely affect our business condition and results of operations. As of December 31, 2003, inventory is presented net of $300,000 general provision for technological obsolescence and slow moving items (see also Note 5 to the Consolidated Financial Statements). OUR FUTURE LEVELS OF SALES AND PROFITABILITY ARE UNPREDICTABLE. Our ability to maintain and improve future levels of sales and profitability depends on many factors. These factors include: o the continued demand for our existing products; o our ability to develop and sell new products to meet customer needs; o management's ability to control costs and successfully implement our business strategy; and o our ability to manufacture and deliver products in a timely manner. There can be no assurance that we will experience any growth in sales or profitability in the future or that the levels of historic sales or profitability experienced during previous years will continue in the future. WE DEPEND ON CERTAIN KEY PRODUCTS FOR THE BULK OF OUR SALES. Our IBM midrange related products account for most of our sales. We anticipate that our IBM midrange related products will continue to account for a significant portion of our sales and profitability. If sales of our IBM midrange products were to decline significantly for any reason, or the profit margins on such products were to decrease significantly for any reason (including in response to competitive pressures), our financial results would be adversely affected. Over the past few years there has been a continuous global decrease in sales and revenues from the connectivity solutions sector (also known as the legacy family products) (see Item 4B). Although the Company's revenues in this sector have decreased as a result, in comparison to other players in this field, we have fared quite well, but there can be no assurance that we will continue to do so. To reduce the risk of such a decline or decrease due to competitive pressures or technical obsolescence, we are continually seeking to reduce costs, upgrade and expand the features of our IBM related products, expand the applications for which the products can be used and increase marketing efforts to generate new sales. Although we are developing and introducing new remote communications products and increasing our marketing efforts, there can be no assurance that the planned enhancements or the new developments will be commercially successful, or that we will be able to increase sales of our IBM midrange products. IF WE ARE UNSUCCESSFUL IN DEVELOPING AND INTRODUCING NEW PRODUCTS, WE MAY BE UNABLE TO EXPAND OUR BUSINESS. The market for some of our products is characterized by rapidly changing technology and evolving industry standards. The introduction of products embodying new technology and the emergence of new industry standards can render existing products obsolete and unmarketable and can exert price pressure on existing products. 6 We established our subsidiary Lynk, which is now known as BOScom, for the purpose of developing, manufacturing and marketing new products for remote networking connectivity and VOIP. However, the VOIP market has been unstable and vulnerable over the past years, and competing in such a market may be a risky endeavor. The VOIP market has suffered from low image due to availability, reliability and quality problems. As such, there can be no assurance that we will realize significant revenues from products developed and introduced by BOScom. Our ability to anticipate changes in technology and industry standards and successfully develop and introduce new and enhanced products as well as additional applications for existing products, in each case on a timely basis, will be critical in our ability to grow and remain competitive. Although these products are related to, and even incorporate our existing products, there can be no assurance that we will be able to successfully develop and market any such new products. If we are unable to develop products that are competitive in technology and price and responsive to customer needs, for technological or other reasons, our business will be materially adversely affected. WE DEPEND ON KEY PERSONNEL AND NEED TO BE ABLE TO RETAIN THEM AND OUR OTHER EMPLOYEES. Our success depends, to a significant extent, on the continued active participation of our executive officers, other members of management and key technical and sales and marketing personnel. In addition, there is significant competition for employees with technical expertise in our industry. Our success will depend, in part on: o our ability to retain the employees who have assisted in the development of our products; o our ability to attract and retain additional qualified personnel to provide technological depth and support to enhance existing products and develop new products; and o our ability to attract and retain highly skilled computer operating, marketing and financial personnel. We cannot make assurances that we will be successful in attracting, integrating, motivating and retaining key personnel. If we are unable to retain our key personnel and attract additional qualified personnel as and when needed, our business may be adversely affected. WE MAY BE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH AND EXPANSION, AND AS A RESULT, OUR BUSINESS RESULTS MAY BE ADVERSELY AFFECTED. Our goal is to grow significantly over the next few years. The management of our growth, if any, will require the continued expansion of our operational and financial control systems, as well as a significant increase in our manufacturing, testing, quality control, delivery and service capabilities. These factors could place a significant strain on our resources. Our inability to meet our manufacturing and delivery commitments in a timely manner (as a result of unexpected increases in orders, for example) could result in losses of sales, our exposure to contractual penalties, costs or expenses, as well as damage to our reputation in the marketplace. Our inability to manage growth effectively could have a material adverse effect on our business, financial condition and results of operations. 7 WE HAVE LIMITED EXPERIENCE IN MAKING ACQUISITIONS. We may wish to pursue the acquisition of businesses, products and technologies that are complementary to ours. However, to date, our management has had limited experience in making acquisitions. In June 1998, we acquired PacInfoSystems, which was based in Portland, Oregon, and in 2001 PacInfoSystems acquired Dean Technologies LLC ("Dean Tech"), which was based in Grapevine, Texas. Both businesses have since ceased operations. Acquisitions involve a number of other risks, including the difficulty of assimilating geographically diverse operations and personnel of the acquired businesses or activities and of maintaining uniform standards, controls, procedures and policies. There can be no assurance that we will not encounter these and other problems in connection with any acquisitions we may undertake. There can be no assurance that we will ultimately be effective in executing additional acquisitions. Any failure to effectively integrate future acquisitions could have an adverse effect on our business, operating results or financial condition. THE MEASURES WE TAKE IN ORDER TO PROTECT OUR INTELLECTUAL PROPERTY MAY NOT BE EFFICIENT OR SUFFICIENT. Our success is dependent upon our proprietary rights and technology. We currently rely on a combination of trade secret, copyright and trademark law, together with non-disclosure and invention assignment agreements, to establish and protect the proprietary rights and technology used in our products. Much of our proprietary information is not patentable. We generally enter into confidentiality agreements with our employees, consultants, customers and potential customers and limit the access to and the distribution of our proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our technology without authorization, or to develop similar technology independently. We do not believe that our products and proprietary rights infringe upon the proprietary rights of others. However, there can be no assurance that any other party will not argue otherwise. The cost of responding and adequately protecting ourselves against any such assertion may be material, whether or not the assertion is valid. Further, the laws of certain countries in which we sell our products do not protect our intellectual property rights to the same extent as do the laws of the United States. Substantial unauthorized use of our products could have a material adverse effect on our business. We cannot make assurances that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology. WE RELY ON CERTAIN KEY SUPPLIERS FOR THE SUPPLY OF COMPONENTS IN OUR PRODUCTS. We purchase certain components and subassemblies used in our existing products from a single supplier or a limited number of suppliers. In the event that any of our suppliers or subcontractors become unable to fulfill our requirements in a timely manner, we may experience an interruption in production until an alternative source of supply can be obtained, although we are of the opinion that the level of inventory held by the Company would probably be sufficient to cover such a period. FLUCTUATIONS IN OUR OPERATING RESULTS COULD RESULT IN LOWERED PRICES. Our sales and profitability may vary in any given year, and from quarter to quarter, primarily depending on the number of products sold in the United States and in Europe. In order to maintain and increase sales to the United States and to Europe, we may find it necessary to decrease prices. We will need to offer competitive, low entry prices in order to enter into new markets with new products and to continue our penetration into the European market with our VOIP products. 8 WE HAVE LIMITED CAPITAL RESOURCES AND WE MAY ENCOUNTER DIFFICULTIES RAISING CAPITAL. The continued expansion into the VOIP market will require additional resources and especially working capital. Our efforts to obtain a significant credit line from a financial institution have not been successful, and therefore we plan to raise additional capital and/or to enter into strategic alliances. However, the VOIP market has been unstable and vulnerable and we may encounter difficulties raising capital. If our efforts to raise capital do not succeed, our efforts to increase the business and to compete with our competitors may be seriously jeopardized, thus having a materially adverse effect on our business. THERE CAN BE NO ASSURANCE THAT WE WILL NOT BE CLASSIFIED AS A PASSIVE FOREIGN INVESTMENT COMPANY (A "PFIC"). Based upon its current and projected income, assets and activities, we do not believe that at this time the Company is a passive foreign investment company (a "PFIC") for US federal income tax purposes, but there can be no assurance that we won't be classified as such in the future. Such classification may have grave tax consequences for US shareholders. One method of avoiding such tax consequences is by making a "qualified electing fund" election for the first taxable year in which the Company is a PFIC. However, such an election is conditioned upon the Company furnishing US shareholders annually with certain tax information. The Company does not presently prepare or provide such information, and such information may not be available to US shareholders if the Company is subsequently determined to be a PFIC. WE HAVE SIGNIFICANT SALES WORLDWIDE AND COULD ENCOUNTER PROBLEMS IF CONDITIONS CHANGE IN THE PLACES WHERE WE MARKET OUR PRODUCTS. We have sold and intend to continue to sell our products in markets through distributors in North America and Europe. A number of risks are inherent in engaging in international transactions, including - o international sales and operations being limited or disrupted by longer sales and payment cycles, o possible encountering of problems in collecting receivables, o governmental controls, or export license requirements being imposed, o political and economic instability in foreign countries, o trade restrictions or changes in tariffs being imposed, and o laws and legal issues concerning foreign countries. If we should encounter such difficulties in conducting our international operations, it may adversely affect our business condition and results of operations. AS PART OF A GLOBAL SLOW DOWN IN TECHNOLOGY MARKETS, TECHNOLOGY-FOCUSED CORPORATIONS HAVE SUFFERED AND AS A RESULT THEIR SHARES HAVE DECLINED IN VALUE. Our Company, like other technology companies, has been significantly impacted by the current market slowdown in the technology industry. Lately, the industry has been showing initial signs of recovery, however, there can be no assurance that the technology market will fully recover or that our operating results will not continue to suffer as a consequence. INFLATION AND FOREIGN CURRENCY FLUCTUATIONS SIGNIFICANTLY IMPACT ON OUR BUSINESS RESULTS. The vast majority of our sales are made in US Dollars and most of our expenses are in US Dollars and New Israel Shekels ("NIS"). The Dollar cost of our operations in Israel is influenced by the extent to which any increase in the rate of inflation in Israel over the rate of inflation in the United States is offset by the devaluation of the NIS in relation to the Dollar. 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 devaluations lags behind inflation rate increases in Israel. 9 POLITICAL, ECONOMIC, AND SECURITY CONDITIONS IN ISRAEL AFFECT OUR OPERATIONS AND MAY LIMIT OUR ABILITY TO PRODUCE AND SELL OUR PRODUCTS OR PROVIDE OUR SERVICES. We are incorporated under the laws of the State of Israel, where we also maintain our headquarters and our principal manufacturing, research and development facilities. Political, economic, security and military conditions in Israel directly influence us. We could be adversely affected by any major hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners or a significant downturn in the economic or financial condition of Israel. The future of the "peace process" with the Palestinians is uncertain and has deteriorated due to Palestinian violence. Furthermore, the threat of a large-scale attack by Palestinians on Israeli civilians and key infrastructure remains a constant fear. The past three years of renewed terrorist attacks by the Palestinians has severely affected the Israeli economy in many ways. In addition, several countries still restrict business with Israel and with companies doing business in Israel. We could be adversely affected by adverse developments in the "peace process" or by restrictive laws or policies directed towards Israel or Israeli businesses. Generally, all nonexempt male adult citizens and permanent residents of Israel, including some of the Company's officers and employees, are obligated to perform military reserve duty annually, and are subject to being called to active duty at any time under emergency circumstances. While the Company has operated effectively under these requirements since its incorporation, we cannot predict the full impact of such conditions on the Company in the future, particularly if emergency circumstances occur. If many of the Company's employees are called for active duty, the Company's business may be adversely affected. Additionally, in recent years Israel has been going through a period of recession in economic activity, resulting in low growth rates and growing unemployment. Our operations could be adversely affected if the economic conditions in Israel continue to deteriorate. Also, due to significant economic reforms proposed by the Israeli government, there have been several general strikes and work stoppages in 2003 and 2004, affecting all banks, airports and ports. These strikes have had an adverse effect on the Israeli economy and on business. Following the passing of laws to implement economic measures, the Israeli trade unions have threatened further strikes or work stoppages, and these may have an adverse effect on the Israeli economy and our business. IF THE ISRAELI GOVERNMENT PROGRAMS THAT WE BENEFIT FROM ARE REDUCED OR TERMINATED, OUR COSTS AND TAXES MAY INCREASE. Under the Israeli Law for Encouragement of Capital Investments, 1959, facilities that meet certain conditions can apply for "Approved Enterprise" status. This status confers certain benefits including tax benefits. Our existing facilities have been designated as Approved Enterprises. If we attain taxable income in Israel, these tax benefits will help reduce our tax burden. In addition, in order to maintain our eligibility for the grants and tax benefits we receive, we must continue to satisfy certain conditions, including making certain investments in fixed assets and operations and achieving certain levels of exports. If we fail to satisfy such conditions in the future, we could be required to refund tax benefits which may have been received with interest and linkage differences to the Israeli Consumer Price Index. The law and regulations prescribing the benefits provide for an expiration date for the grant of new benefits. The expiration date has been extended several times in the past. The expiration date currently in effect is June 30, 2004 (which may be extended by ministerial decision until December 31, 2004), and no new benefits will be granted after that date unless the expiration date is again extended. There can be no assurance that new benefits will be available after June 30, 2004, or that existing benefits will be continued in the future at their current level or at any level. The Israeli Government authorities have indicated that the government may reduce or eliminate these benefits in the future. A termination or reduction of certain programs and tax benefits (particularly benefits available to the Company as a result of the Approved Enterprise status of the Company's facilities and programs) or a requirement to refund the tax benefits already received, would have a material adverse effect on the Company's business, operating results and financial condition. 10 Under the Law for the Encouragement of Industrial Research and Development, 1984 (the "Research Law"), research and development programs approved by a research committee appointed by the Israeli Government are eligible for grants in exchange for payment to the Government of royalties from the sale of products developed in accordance with the Program. Regulations issued under the Research Law generally provide for the payment of royalties to the Office of the Chief Scientist equal to 3.5% of sales of products developed as a result of a research project so funded until 100% of the dollar-linked grant is repaid. Royalties payable with respect to grants received under programs approved by the OCS after January 1, 1999, are subject to interest on the U.S. dollar-linked value of the total grants received at the annual rate of LIBOR applicable to U.S. dollar deposits on the date the grants were received The Research Law requires that the manufacture of any product developed as a result of research and development funded by the Israeli Government take place in Israel. It also provides that know-how from the research may not be transferred to third parties without the approval of the Israeli Office of the Chief Scientist in the Ministry of Industry and Trade. THE ANTI-TAKEOVER EFFECTS OF ISRAELI LAWS MAY DELAY OR DETER A CHANGE OF CONTROL OF THE COMPANY. Under the Israeli Companies Law, a merger is generally required to be approved by the shareholders and board of directors of each of the merging companies. Shares held by a party to the merger and certain of its affiliates are not counted toward the required approval. If the share capital of the company that will not be the surviving company is divided into different classes of shares, the approval of each class is also required. A merger may not be approved if the surviving company will not be able to satisfy its obligations. At the request of a creditor, a court may block a merger on this ground. In addition, a merger can be completed only after all approvals have been submitted to the Israeli Registrar of Companies and 70 days have passed from the time that a proposal for approval of the merger was filed with the Registrar. The Israeli Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer, if as a result of the acquisition, the purchaser would become a holder of 25% or more of the voting power at general meetings, and no other shareholder owns a 25% stake in the Company. Similarly, the Israeli Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become a holder of 45% or more of the voting power at general meetings, unless someone else already holds a majority of the voting power. These rules do not apply if the acquisition is made by way of a merger. The Israeli Companies Law provides specific rules and procedures for the acquisition of shares held by minority shareholders, if the majority shareholder holds more than 90% of the outstanding shares. Israeli tax law treats specified acquisitions, including a stock-for-stock swap between an Israeli company and a foreign company, less favorably than does U.S. tax law. These laws may have the effect of delaying or deterring a change in control of the Company, thereby limiting the opportunity for shareholders to receive a premium for their shares and possible affecting the price that some investors are willing to pay for the Company's securities. 11 INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company has agreements with its directors and senior officers which provide, subject to Israeli law, for the Company to indemnify these directors and senior officers for (a) monetary liability imposed upon them in favor of a third party by a judgment, including a settlement or an arbitral award confirmed by the court, as a result of an act or omission of such person in his capacity as a director or officer of the Company, and (b) reasonable litigation expenses, including attorney's fees, incurred by such a director or officer or imposed on him by a court, in a proceeding brought against him by or on behalf of the Company or by a third party, or in a criminal action in which he was acquitted, or in a criminal action which does not require criminal intent in which he was convicted, in each case relating to acts or omissions of such person in his capacity as a director or officer of the Company. Such indemnification may materially adversely affect our financial condition. ALL OF OUR DIRECTORS AND OFFICERS ARE NON-U.S. RESIDENTS AND ENFORCEABILITY OF CIVIL LIABILITIES AGAINST THEM IS UNCERTAIN. All of our directors and officers reside outside of the United States. Service of process upon them may be difficult to effect within the United States. Furthermore, because the majority of our assets are located in Israel, any judgment obtained in the United States against us or any of our directors and officers may not be collectible within the United States. ITEM 4: INFORMATION ON THE COMPANY 4A. HISTORY AND DEVELOPMENT OF THE COMPANY We were incorporated in Israel in 1990 as a private corporation under the Israeli Companies Ordinance, 1983. Our headquarters and manufacturing facilities are located at 100 Bos Road, Teradyon Industrial Zone, Misgav 20179 Israel. Our telephone number is 972-4-990-7555. In January 2002, the Company changed its organizational structure. As part of this change, the Company 's marketing, development, production and support activities were sold to Lynk, a B.O.S. subsidiary founded in 1995, to develop and market high-quality data access convergence and remote access solutions, and later VOIP hardware and software telephony, for the corporate market. Following the reorganization, Lynk changed its name to BOScom Ltd. On May 24, 2002, the Company announced its intention to sell PacInfoSystems (see Risk Factors and Note 1c to the Consolidated Financial Statements) due to a change in the Company's business strategy. PacInfoSystems was the Company's wholly-owned U.S. subsidiary that resold, installed and provided computer networking products to various business entities. Management formulated a new strategic plan that provided for the discontinuation of the computer networking business. As a result, the Company decided in May 2002 to sell PacInfoSystems and to write-off amortized goodwill associated with PacInfoSystems in the amount of $3.9 million. However, the Company's efforts to sell PacInfoSystems, whose financial situation was deteriorating, were not successful. Further developments, such as an arbitration judgment rendered against PacInfoSystem in the sum of approximately $650,000, continuation of poor sales results, termination of line of credit, as well as the loss of some key employees and members of the sales force, left the Company with little choice but to wind up the business. PacInfoSystems has already settled with a majority of its creditors, however, there can be no assurance that such a settlement will be reached with the remainder of the creditors. 12 Our U.S. subsidiaries are Lynk USA, Inc., and its subsidiary PacInfoSystems, Inc. (into which our U.S. subsidiary, Better On-Line Solutions Inc. was merged in early 2001). Both are non-operational and commencing the beginning of year 2003 we market our products in the U.S. through one Master Distributor. Our other subsidiaries are BOScom Ltd., in Israel, and its subsidiaries - Better On-Line Solutions Ltd. in the U.K; Better On-Line Solutions S.A.S. in France; and BOSDelaware, Inc., in the US. During 2003, the operation of the BOScom subsidiaries was ceased (although all subsidiaries still exist except for the French one) and the sales and marketing in Europe and USA have since been conducted through master distributors. In addition, we have an interest in Surf Communications Solutions Ltd. ("Surf"), the leading supplier of embedded network convergence software that lends flexibility and scalability to network products handling data modem, fax, and voice transmissions. Surf's open system software is integrated into equipment such as media gateways and remote access concentrators developed by original equipment manufacturers in the telecommunications, telephony, and data networking industries. In March 2003 the Company purchased from Catalyst Investments, L.P. ("Catalyst"), most of the Surf shares held by Catalyst (the "Transaction"). Under the terms of the Transaction, the Company purchased 191,548 of Catalyst's Preferred C shares in Surf, and a pro rata share of the Surf Preferred C warrants held by Catalyst, and in exchange it issued to Catalyst 2,529,100 ordinary shares of the Company (representing 19.9% of its current outstanding shares pre-issuance, as a result of which Catalyst held 16.6% of the outstanding Company shares, after the issuance). The Company has an option to purchase the remaining Catalyst Preferred C shares in Surf by January 31, 2006, and until such purchase shall be granted voting rights in these Surf shares, in addition to being entitled to profits resulting from the sale of these shares to a third party. In February 2004, these voting rights were assigned to Mr. Yair Shamir, one of the Company's directors. Thus, the Company now holds 19.8% in Surf, and 15.3% on a fully diluted basis (assuming the Company does not exercise its option to purchase the additional shares from Catalyst). Yair Shamir holds 0.2% in Surf (and 0.2% on a fully diluted basis), in addition to his holdings of 2.8% of the voting rights in Surf (2.3% on a fully diluted basis) assigned to him by the Company. The investment in Surf is accounted for according to the cost method. In the fourth quarter of 2003 the Company recorded an amortization of the carrying amount of the investment in the amount of $840,000. The amortization was made according to management's valuation of the fair market value of the investment in Surf, supported by an external valuation prepared by an expert. As of December 31, 2003, the carrying amount of the investment based on the cost accounting method was reduced to $ 3,112,000. We design, integrate and test our products in our facilities in northern Israel. In early 1996, we moved into a new facility, which resulted in the expansion of our production capabilities and has allowed us to continue to benefit from substantial Israeli tax incentives. 4B. BUSINESS OVERVIEW INDUSTRY BACKGROUND In the 1960s and 1970s, the business computing environment was typically organized with the mainframe in the data center and minicomputers at the division or department level. The host mainframe and minicomputers were accessed by "dumb" terminals at the user level. These host systems featured high performance and throughput and often ran custom-designed, critical applications such as organization-wide payroll, general ledger, inventory management and order processing programs. Because of the importance of the mainframe and minicomputers as central repositories of corporate data and critical applications, significant corporate resources were, and continue to be, dedicated to maintaining this installed hardware and software base. Although these host systems are capable of supporting enterprise-wide information system networks, their applications are generally characterized by limited availability, complex command sequences and character-based user interfaces. 13 With the introduction and proliferation of the personal computers in the 1980s, a substantial amount of corporate computing power was added to the worker's desktop, a change facilitated by the availability of increasingly powerful personal productivity applications such as spreadsheets and word processors. Personal computers began replacing dumb terminals and, as the business computing environment became increasingly heterogeneous, organizations found themselves with significant investments in multiple, but often incompatible, systems each performing different functions within an organization. Despite the functionality of personal computers, users still needed access to certain data and applications residing on host systems. Terminal emulation hardware and software was developed to provide host connectivity by allowing personal computers to emulate the dumb terminals they had replaced. Often, however, these terminal emulation products were complicated, difficult to use and allowed only a single connection to a single host. In addition, terminal emulation products made little or no provision for the integration of host data and applications with personal computers data and applications such as spreadsheets. Therefore, the full capabilities of the personal computers were not available to the user when the personal computer was used as a terminal. In the mid-1980s, the desire of personal computer users to share files and peripheral devices, and to communicate with other users, led to the widespread implementation of Local Area Networks. Local Area Networks significantly expanded an organization's ability to more efficiently connect increased numbers of its personal computer users to host environments through a "gateway" dedicated to LAN-to-host communication services. The personal computer software enabling this LAN-to-host connectivity continued to use terminal emulation technology. The emergence of the Internet/intranets in the 1990s has encouraged the development of numerous new products and services that enable and facilitate access and connectivity of host computers with computer networks. New IBM midrange products have expanded capabilities of the AS/400 in the area of electronic commerce. Continued widespread use of Twinax cable infrastructure has created a need to develop solutions that can provide these users with such features as e-mail, networking, and Internet. In addition, the advent of the telephony revolution, which allows transmittal of voice data over TCP/IP connections, has created a new direction for VOIP products. An industry trend noticed in the late 1990s was a move to a "thin client" environment. Larger enterprises use this method as a means to reduce cost of ownership by employing Microsoft Windows NT/2000 Terminal Servers, which enable central configuration and user management. Terminals ("thin clients") are deployed to users throughout the network to provide the requisite connectivity to host applications. BOS moved into this arena in early 2003 with a progressive release program culminating in a full suite of thin clients and Ethernet terminals. These devices, based on a wide range of operating systems (Linux, Windows XP and Windows CE.NET) feature embedded TN5250e/TN3720e emulation, various connectivity tools, office application viewers, and a Web browser, and support the new BOS 122-key driverless keyboard that functions equally well in both thin client and PC environments, with both emulation and office applications. In 1995 the first Client VOIP solution was introduced to the market by VocalTec, an Israeli company that demonstrated telephone calls over the internet. 14 Since then, in an accelerated mode, the VOIP (Voice over Internet Protocol) and IP Telephony (Internet Protocol Telephony) have become a market with a turnover of billions of dollars. Large companies like Cisco, as well as telephony players such as Lucent, Nortel, Siemens, Alcatel, Avaya and others are selling VoIP solutions and embedding such technologies into their product lines. Some players in this market develop solutions for carriers, others focus on the corporate market. According to market research performed by professional market analysis firms such as Advanced Business Link, the revenues in this market are expected to grow for at least the next 5 years. DESCRIPTION OF BUSINESS PRODUCT LINES Our Company operates in three main business product lines: (A) CONNECTIVITY - We create innovative and powerful solutions for seamless integration of personal computers and Local Area Networks into the midrange host environment. We also design, integrate, test, market and support superior products that provide efficient solutions to personnel connecting personal computers to IBM midrange hosts. Realizing the changing role of this IBM midrange environment in today's workplace, our mission is to provide our users with technologically advanced and cost-efficient solutions for connectivity between them and personal computers and local area networks, whether local or remote. We sell and support our products worldwide through distributors, and value-added resellers. Our proprietary products are sold to users of IBM iSeries, AS/400 and System 3x computers, which are predominantly medium to large sized corporations that use large data banks in their businesses and require the ability to integrate and manipulate the data into graphics and popular personal computer programs. The target market for our products is composed of the owners of approximately 500,000 IBM AS/400 and System 3x computers and the growing number of users who connect to these computers through the Internet, intranets and various other connectivity products. During 1999, we have been expanding our line of products and are now marketing and selling products that are not limited solely to users of midrange IBM computers. Our main product line is comprised primarily of TCP/IP to Twinax controllers that allows Legacy Twinax equipment to work locally or remotely via TCP/IP line to the AS/400. In addition we have a line of emulation software, to simulate a personal computer environment having the same functionality to which the users are accustomed (i.e. Windows or similar graphical interfaces), while using a midrange computer. The emulation solutions are offered at two levels - at the user interface level and at the computer connectivity level. At the user interface level, our emulation technology allows customers to utilize popular Windows functions and graphics. At the connectivity level, our connectivity technology provides personal computers with the ability to act as terminals for IBM midrange computers either through gateway, Internet or direct connection. We are using our expertise in the midrange computer environment to develop Internet/intranet solution products that will enable and enhance connectivity between IBM iSeries computers and personal computers via the Internet and intranets. In 2003, 82% of our sales were attributable to sales of connectivity products and services. Below is a description by category of our development activity in the connectivity product line: 15 (A1) AS/400 DISPLAY AND PRINTING EMULATION FOR LAN/WAN In December 1997, we announced our BOSaNOVA transmission control protocol / internet protocol product, a connectivity tool for organizations with either local or remote TCP/IP networks (intranet or extranet) of personal computers using Windows 9x/Me or NT/2000/XP operating systems connected to the AS/400. Development resources in 1999 were directed toward making TCP/IP connectivity available for Twinax users. The e-Twin@x technology has now been implemented in products such as the BOSaNOVA Plus, BOSaNOVA TCP/IP, and e-Twin@x Controller, which made its debut in the middle of 1999, and has been rapidly established as the remote computer controller of choice. (A2) BROWSER-BASED WEB-TO-HOST GUI DISPLAY AND PRINTING In December 1997, we introduced Jadvantage, a Java-based application that provides AS/400 and iSeries computer users with TN5250e emulation and printing on personal computers via an Internet browser. Jadvantage enables any user equipped with a Java-enabled Web browser to securely access iSeries or AS/400 applications, eliminating the need for the user to install and upgrade emulation software. Over the years, the Jadvantage has been improved greatly by the inclusion of support for native SCS printing, SQL-based data transfer, SSL protocol for bi-directional secure communications, and extended administrative capabilities. Version 5 of Jadvantage was released in 2003. The latest version expands client support to Netscape browsers, Macintosh computers and Linux platforms. The product is especially attractive to enterprises that want to make their iSeries applications available to remote users, whether they be branch offices, road warriors, home workers, distributors or customers. The built-in GUI toolbox makes "Web facing" applications (improving the midrange application's interface with graphics, fonts, colors, mouse-sensitive hot-spots, etc.) both quick and simple, in direct contrast to other products in the field. (A3)TWINAX-TO-ETHERNET CONTROLLERS The e-Twin@x Controller, which made its debut in 1999, supplies a secure, encrypted TN5250e connection to the AS/400 over the Internet or WAN, and provides local or remote Twinax networks with access to LAN resources. The e-Twin@x Controller allows enterprises to leverage their Twinax investments (in equipment and cabling) while providing the benefits of a TCP/IP connection. Dramatic improvements in performance, uptime and cost-efficiency are the result. A new model, the e-TwinSt@r, was released in 2002. It features native support for CAT5 cabling, in the form of built-in RJ45 sockets, saving customers with this environment the cost of an active star hub. (B) SOFTWARE UTILITIES - Our product BOSaNOVA PrintBoss, which introduced in late 1998 is an innovative and powerful solutions for document design, distribution and management solutions for a wide range of operating systems, including mainframe and UNIX. Recent collaborative efforts with printer manufacturers and software houses have proven BOSaNOVA PrintBoss' appeal as an original equipment manufacturer component, in addition to its suitability as an end user solution. The year 2000 saw the second major release of BOSaNOVA PrintBoss, which added support for e-Mail distribution, secure printing (complementing the existing check printing functionality), and document routing to multiple destinations capability. In 2001 we were awarded a large contract with one of Israel's leading banks to provide uniform, customized electronic forms to all its branches. This project was completed in 2002. In 2003, we realized a trend for the adoption of BOSaNOVA PrintBoss, which added support for e-Mail distribution, secure printing (complementing the existing check printing functionality), and document routing to multiple destinations capability. 16 In 2003, 8% of our sales were attributable to sales of Software Utility products and services. (C) COMMUNICATION SOLUTIONS BOS has developed a series of intelligent and highly versatile VOIP (Voice over IP) communication products designed for the corporate market. The gateways (described below- see "products") enable enterprises to reduce or completely eliminate inter-office communication costs or bypass long-distance costs using their private Intranet or the public Internet to carry telephone calls. They also provide a powerful means to extend PBX functionality to the enterprise's branch offices. The VOIP family of products includes a series of gateways and clients which work together seamlessly for a variety of business applications. All gateways are built using standard protocols and pass interoperability tests. Special attention has been given to building a robust platform with a user-friendly interface, automated installation procedures and powerful management tools. All enhancements complement the priority target of top-level voice quality connection. In 2003, 10% of our sales were attributable to sales of VOIP products and services. Until late 2002, we operated in a fourth business product line - COMPUTER NETWORKING: On June 1, 1998, we acquired 100% of the share capital of Pacific Information Systems, Inc. ("PacInfoSystems"), a U.S. corporation which resold, installed and provided computer networking products to various business entities. In 2001, PacInfoSystems acquired 100% of Dean Tech Technologies Associates, L.L.C. (Dean Tech). Dean Tech was an IBM Advanced Business Partner providing complete IT solutions utilizing IBM's industry-leading eServer pSeries and xSeries lines of servers, as well as IBM TotalStorage Solutions. 100% of our computer networking revenues were derived from sales to US customers. Both PacInfoSystems and Dean Tech have ceased all operations (see Item 4A). PRODUCTS We currently offer a variety of products that provide various connectivity, software utilities and communication solutions to customers. (A) CONNECTIVITY SOLUTIONS - Our products are divided into three areas: o (1) connectivity emulation solutions, o (2) gateway/server solutions, o (3) client solutions, (A1) CONNECTIVITY EMULATION SOLUTIONS Our emulation products provide personal computer users with easy access to computer applications and data on IBM midrange computers. These products establish communications connections between a customer's personal computer or Local Area Network and IBM midrange computers using familiar, easy-to-use modem network or Twinax hardware and software. 17 Our connectivity emulation products are comprised of personal computer adapter cards which, when installed with emulation software (of ours or of other providers), enable personal computers to function as Twinax terminals. These products are based on Stealth Technology(TM) which can easily integrate our products with those of other manufacturers, and the Ornev Chip, a computer chip for the software level that interfaces with the hardware of the IBM-compatible computer, and which we believe is superior to the other chips currently available in the market. We believe the Ornev Chip is faster (which is important during file transfer) and incorporates more sophisticated signal processing algorithms that make it especially reliable in situations involving communication lines of marginal quality. The Stealth Technology(TM) and the Ornev Chip reduce the personal computer resources consumed, such as memory or IRQ, as compared to other currently available products. As a result, products based on the Ornev Chip are easier to install than other currently available products, especially on Pentium computers. Our connectivity emulation products include emulation boards, emulation software, and terminals as described below: EMULATION BOARDS o NATIVE PLUS. An IBM-compatible Twinax card with 5250 Stealth Technology (TM). This product does not require a memory segment of the personal computer or its valuable resources in order to facilitate interaction with the hardware. o BOSaNOVA PLUS. An enhanced version of the Native Plus that includes a Twinax adapter card with feature-rich 5250 display/printer emulation software for either DOS, 16- or 32-bit Windows and 32-session APPC display/printer emulation software. This product is based on an IBM compatible Twinax card with 5250 Stealth Technology(TM). EMULATION SOFTWARE o BOSaNOVA TCP/IP. A robust client application that provides Windows9x/Me/NT/2000/XP users on a TCP/IP network with essential iSeries and AS/400 connectivity. The product includes BOS's rich 5250 emulation, LPD printing capabilities, file transfer and a remote command facility. This product was announced at the end of 1997 and released in the first quarter of 1998. o JADVANTAGE. A Java-based application that provides iSeries and AS/400 users with TN5250e emulation and printing and SQL-based data transfer on personal computers via an Internet browser. It is aimed at organizations that use the Internet and intranet for an increasing number of applications. Jadvantage enables any user equipped with a Java-enabled Web browser to securely access iSeries and AS/400 applications, eliminating the need to install and upgrade emulation software on each of the attached clients, and reducing the maintenance and overhead usually associated with installation and updating of client applications for secure communication over traditionally non-secure TCP/IP networks. Jadvantage includes SSL data encryption, IP address restriction and Jadvantage server log-in. TERMINALS o BOSaNOVA XTC-400 The BOSaNOVA XTC-400 delivers Windows(R) applications simply, securely, and cost-effectively throughout an organization with the BOSaNOVA XTC-400. Based on an Intel-compatible VIA 400 MHz processor and featuring the state-of-the-art Windows XP-embedded operating system, the BOSaNOVA XTC-400 includes BOScom's award-winning IBM-certified BOSaNOVA TCP/IP(R) TN5250e emulation and an optional 122-key driverless keyboard, providing iSeries customers with a unique opportunity to obtain a complete thin client solution from a single, industry-renowned manufacturer. 18 o BOSaNOVA LTC SERIES The BOSaNOVA LTC Series of thin client terminals provides an easily configurable solution to desktop computing. Whether the application is data entry, point of sale, training, ISP's, or web kiosks, these thin clients provide a highly cost-effective access to Windows desktop applications residing on a Microsoft Windows NT/2000 Terminal Server. Central configuration and user management drastically reduces cost of ownership, while the versatility of the hardware platform and customization capabilities increase user productivity. The high end LTC-600 provides almost twice the processing power and up to seven times the performance when compared to industry-standard Windows CE-based thin clients. o BOSaNOVA TBT-400 The BOSaNOVA TBT-400 Ethernet terminal offers the very best TN5250e and TN3270e emulation available for a LAN environment. In contrast to standard text-based terminals, the BOSaNOVA TBT-400 includes Windows 2000 Terminal Server (RDP) and Citrix Metaframe (ICA) clients in its basic configuration. Full support for 122 key keyboards is also built in to allow maximum productivity for users migrating from other 5250 or 3270 terminals. Performance tests measuring response time for its TN5250e and TN3270e embedded emulation indicate that the BOSaNOVA TBT-400 outperforms similar products based on Windows CE by a ratio of five to one. o BOSaNOVA WTC-400 The BOSaNOVA WTC-400, based on the industry-standard Windows CE.NET platform, provides cost-effective access to Windows desktop applications residing on a Microsoft Windows NT/2000/2003 Terminal Server. Unlike other CE.NET-based thin clients, which support only full-screen applications, the BOSaNOVA WTC-400 uniquely allows management of multiple browser windows within a single browser instance. As a result, even pop-up windows (which typically require the user to close the new window in order to revert to the parent window) are no longer a distraction to the standard user's workflow. This capability, alongside broad application compatibility and system integration flexibility, vastly improves the user experience and increases productivity. (A2) GATEWAY/SERVER SOLUTIONS Our gateway solutions provide host access to personal computers not directly connected to the host, either through remote gateways, which allow personal computer users to receive emulation sessions over telephone lines, or through Local Area Network gateways, which provide a bridge between the host and all personal computers on a local area network. Gateways, residing in the same physical premises as the host and connected to it directly, are connected to the host on one side, and either Local Area Network or serial communication port on the user side. Remotely attached gateways replace controllers and primarily serve users of one remote office or site. Most users at the remote site are connected through the Local Area Network to the gateway. Remote gateways usually utilize some sort of System Network Architecture protocol to connect to the host. 19 Our gateway/server products include: o E-TWIN@X CONTROLLER. This product provides IP over Twinax connection to local and remote iSeries and AS/400s, adding the benefits of a Local Area Network to existing Twinax infrastructure. This product eliminates the difficulty of maintaining System Network Architecture and Anynet protocols, replacing them with fast, state-of-the-art Transmission Control Protocol / Internet Protocol (TCP/IP). o ADVANCED SERVER FOR SAA. A gateway package for connecting LAN-based personal computers to IBM midrange (iSeries, AS/400 or Advanced 36) hosts. Advanced Server for SAA is comprised of server and client workstation software that facilitates communication between the personal computer and the host, thereby conserving host resources for more important tasks such as serving more simultaneous users. The product was introduced to the European market at the end of 1996 and to the US market in the fourth quarter of 1997. (A3) CLIENT SOLUTIONS Our client solution products provide personal computer users with access to IBM midrange hosts in several different ways. These products provide for workstation function with additional interfacing capabilities for host access on personal computers e.g. shared folders, file transfer, Dynamic Data Exchange (DDE) interfaces, High Level Language Application Programming Interface (HLLAPI) interfaces, along with documented application programming interfaces. Recent developments are Graphical User Interfaces (GUIs) (such as MorphMaster) in which the standard black and green host screens are transformed into graphic, Windows-like screens, and Structured Query Language (SQL) file transfers, whereby users can define and perform file transfers from the host to the personal computer (and vice versa) based on keywords. The Client Solution product line emulates Windows software and offers a personal computer/host file transfer system for Windows and Windows graphics. Client solution products include: o BOSaNOVA CLIENT FOR WINDOWS. An advanced midrange Windows client software solution, which enables communication with host systems through Twinax, Ethernet, Token Ring, SDLC, and TCP/IP. The product provides workstation and other functions in a variety of protocols. o VIA BOSaNOVA. A versatile PC/host file transfer system for Windows that provides flexible and powerful file transfer between a midrange host and stand-alone, LAN-based, or remote personal computers. When used in conjunction with LANbada/Twinax for Windows, all personal computers across a Local Area Network instantly receive file transfer capability. This software product has the built-in capability to convert host data into popular personal computer file formats, incorporating data into personal computer spreadsheet and database applications. (B) SOFTWARE UTILITIES o BOSaNOVA PRINTBOSS. A multi-platform forms design, distribution and management tool that can be installed on a personal computer and enables companies to eliminate pre-printed forms and create their own templates. Forms can be customized and improved with logos, barcodes, fonts, static and dynamic graphics, and formatted, resizable tables. Documents can be routed to different printers, fax servers, e-mail recipients or Web-based archives for efficient and aesthetic printing, without programming or changes to the host application. 20 (C) COMMUNICATION SOLUTIONS o BOSaNOVA GATEWAYS (FXO, FXS, E1/T1) a series of modular point-to-point VOIP gateways that integrate voice, telephony and data over IP, frame relay and circuit switched networks. The BOSaNOVA gateways family provides a complete, end-to-end VOIP solution including security, management and gatekeeper functionality, and delivers outstanding voice quality calls over IP networks. Gateways are available in FXO (2-, 4-, and 8-port) models and FXS models (2-, 4-, 8-, and 16-port models), which connect to private branch exchanges (PBXs) and/or extensions using standard analog interfaces and E1/T1 models (23/30 digital channels per adapter). o BOSaNOVA CONNECT a desktop device that allows mobile/remote workers to place and receive high-quality voice calls over IP networks using regular telephones. o BOSaNOVA Claro o A new family of intelligent VOIP gateways, premised on BOSaNOVA gateway technology which automatically and transparently routes calls from the PBX to either the PSTN or the IP network. o Positioned between the enterprise PBX and the PSTN (Public Switched Telephony Network), the Claro gateway selectively routes all PSTN-designated traffic over the PSTN, and captures all potential IP traffic for routing over the IP network. Traffic is routed over the IP network only when MOS-based QoS (quality of service) meets user-designated threshold levels. If QoS degrades below this level, in spite of quality-boosting algorithms, calls are dynamically routed over the PSTN instead of the IP network. In this way, carrier-grade quality of service is guaranteed for each call. MARKETING, DISTRIBUTION AND SALES We market our products primarily to medium to large sized corporations through a combination of direct sales, indirect distribution and original equipment manufacturers, with our primary focus on resellers and distributors. VOIP efforts have been concentrated in the European market. In the United States, up until the fourth quarter of 2002, we marketed our BOScom products through a US subsidiary (the BOS US division of PacInfoSystems). Currently, we market our products through one Master Distributor (Bosanova, Inc.) located in Phoenix, Arizona which coordinates the midrange connectivity-related marketing efforts of dozens of distributors and resellers, and also offers technical support and after-sales service. In Europe, up until the second quarter of 2003, we marketed our BOScom products through subsidiaries in U.K and France. Currently, we market our products through local distributors that provide pre and post sales support. The European operation is overseen by our UK master distributor, Paddock Ltd., and by our French master distributor BOSaNOVA URL. Products sold in the rest of the world are serviced from our headquarters in Israel. We further rely on peripheral product distributors who offer our products along with other products for the IBM midrange market. We also rely on value added resellers who offer system sales and installation which include a variety of our products. In addition, we heavily depend upon our own marketing resources operating from Israel. 21 Our principal customers include: Informatics, TwinData, Peak Systems Group, I/O Connections, KGA Technologies, and Machines & Media. We generally do not have any significant backlog because orders are usually shipped when received. Our Company's sales do not fluctuate seasonally. The following table sets forth our revenues from the continuing operations, by major geographic area, for the periods indicated below:
YEAR ENDED DECEMBER 31, (in thousands US$) 2003 % 2002 % 2001 % ----- ----- ----- ----- ----- ----- United States 2,974 52% 4,989 53% 3,184 53% Rest of World (mainly Europe) 1,198 21% 2,158 23% 1,603 26% Total outside of Israel 4,172 73% 7,147 76% 4,787 79% Israel 1,556 27% 2,294 24% 1,255 21% ----- ----- ----- ----- ----- ----- Total Revenues 5,728 100% 9,441 100% 6,042 100% ===== ===== ===== ===== ===== =====
See Note 16 to the Consolidated Financial Statements. MANUFACTURING Our products are designed, integrated and tested at our facility in Teradyon, Israel. The manufacturing is done by Israeli subcontractors using components and subassemblies supplied by vendors to our specifications. Certain components and subassemblies used by us in our existing products are purchased from a single supplier or a limited number of suppliers. Most of the imported components are purchased in Israel from local representatives of the manufacturers. Some of them have exclusive representative rights in Israel. In the event that these suppliers are unable to meet our requirements in a timely manner, we may experience an interruption in production until an alternative source of supply can be obtained. We do our best effort to keep sufficient quantities of components that will enable us to find a second source, when needed. We generally maintain an inventory of components and subassemblies which we believe is sufficient to limit the potential for such an interruption. Our current manufacturing facilities have sufficient capacity to exceed current demand. The prices of raw materials used in our industry are not volatile, although the price and availability of electronic components may vary due to changing demands in the market. INTELLECTUAL PROPERTY We currently rely on a combination of trade secrets, copyright and trademark law, together with non-disclosure agreements and technical measures, to establish and protect proprietary rights in our products. We believe that the improvement of existing products, reliance upon trade secrets and proprietary know-how and the development of new products are generally as important as patent protection in establishing and maintaining a competitive advantage. We believe that the value of our products is dependent upon our proprietary software and hardware remaining "trade secrets" or subject to copyright protection. 22 Generally, we enter into non-disclosure and invention assignment agreements with our employees and subcontractors. However, there can be no assurance that our proprietary technology will remain a trade secret, or that others will not develop a similar technology or use such technology in products competitive with those offered by us. While our competitive position may be affected by our inability to protect our proprietary information, we believe that because of the rapid pace of technological change in the industry, factors such as the technical expertise and the knowledge and innovative skill of our management and technical personnel, name recognition, the timeliness and quality of support services provided by us and our ability to rapidly develop, produce, enhance and market software products may be more significant in maintaining our competitive position. To date, no material claims have been made against us for infringement of proprietary rights of third parties. There can be no assurance, however, that third parties will not assert material infringement claims against us in the future. As the number of software products in the industry increases and the functionality of these products further overlaps, we believe that software programs will increasingly become subject to infringement claims. The cost of responding to any such assertion may be material, whether or not the assertion is valid. COMPETITION The connectivity market is subject to rapidly changing technology and evolving standards incorporated into personal computers, networks and host computers. BOS's products compete with products that have already been on the market for a number of years and manufactured by competitors, most of which have substantially greater financial, marketing and technological resources and name recognition than ours. Our competitors include IBM, Perle, Advanced Business Link, IGEL, CLI PowerTerm, NLynx, NetManage, Attachmate, and Seagull. BOScom is developing and introducing new products in an industry that is highly competitive. BOScom's competitors in the VoIP market include Cisco Systems, Inc., Multi-Tech, Mediatrix, VegaStream, and Quintum. There can be no assurance that these or other companies will not offer lower priced or more sophisticated products than those being developed or introduced by BOScom, and by so doing capture the market for such products. STRATEGY We believe that the trends described, together with the continuing proliferation of more powerful personal computers and the continued growth of information system networks, will stimulate increasing demand for personal computer interaction with enterprise information systems. We believe that our products can improve the cost effectiveness of customer information systems and increase user productivity with: o easy simultaneous access to and use of customer host and LAN-based computing resources; o familiar and easy-to-set-up and use communications among personal computers, LANs and host computers; o utilities and tools that simplify distributing computing between IBM midrange host systems and personal computer and LAN systems; o utilities and tools that improve the appearance and distribution efficiency of forms throughout the organization; and o utilities and tools that enhance and preserve customer investment in equipment and personnel training. 23 Our strategic objective is to strengthen our product line for the IBM midrange connectivity and emulation market and use our expertise to offer personal computer users the ability to access mainframe hosts through a lower cost personal computer platform. We believe our proprietary technology which permits personal computer users to increase speed without utilizing additional memory at the personal computer level and its advanced graphic capabilities give our product line distinct marketing advantages over competitive products. We believe we can expand our successful technological application to other markets and users. The key elements of our strategy are as follows: o MAXIMIZE EFFICIENCY FOR IBM MIDRANGE MARKET. We intend to expand and support our emulation product line for IBM midrange computers. This includes continuous upgrading and improvement of our connectivity emulation products for direct, gateway and Internet connection, and Windows emulation and graphics capabilities. We continually upgrade our client software to ensure its compatibility with each new Windows platform. We intend to streamline our manufacturing and distribution to better serve our present client base and access a greater share of the IBM midrange market. We have already begun to incorporate common components into our products in an effort to streamline manufacturing and intend to take steps to improve our destination networks. o DEVELOP NEW PRODUCTS AND APPLICATIONS FOR REMOTE NETWORKING CONNECTIVITY. Through our VoIP division, we expect to penetrate a new market significantly greater than our present market of IBM midrange users. BOScom's VoIP products, which allow users to emulate their office telephony at a remote location, appeal to the small office home office market, telemarketers operating from home, sales personnel traveling to client locations and employees interested in working at home. o DEVELOP NEW MARKETS FOR OUR VOIP PRODUCTS. We intend to develop new markets for our VOIP products, including corporate VOIP infrastructures as well as VOIP solutions for telephony service providers. o EXPAND MARKETING NETWORK. We intend to increase our marketing presence in the United States and Europe and to expand our distribution channels in these markets through the use of acquisitions, additional independent distributors and original equipment manufacturers as well as our sales representatives. We also intend to increase our marketing efforts to penetrate new markets within Europe. o ACQUISITION OF COMPLEMENTARY TECHNOLOGIES. We may, from time to time, make selective acquisitions of complementary technologies that we can sell through our existing distribution network. Since October 1997, we have held interests in Surf (see Item 4A). o WEB SITES: We maintain web sites where potential customers, investors and others can obtain the most updated information about its activities, products, press releases and financial information. 24 Our Web sites may be found at: boscorporate.com Bosweb.com boscom.com Jadvantage.com Bosanova.com e-twinaxcontroller.com Printbos.com EXCHANGE CONTROLS See Item 10D. For other government regulations affecting the Company's business, see Item 5, paragraph entitled `Grants and Participation'. 4C. ORGANIZATIONAL STRUCTURE The Company's wholly owned subsidiaries include: IN ISRAEL - BOScom Ltd. (changed its name from Lynk, a Division of B.O.S., in March 2002). Our initial investment in BOScom Ltd. was $336,000 for 86% of BOScom's shares. In 1999 BOScom entered into an agreement with The Industrial Finance Corporation ("IFC") under which BOScom received a three year $1,000,000 long-term loan and IFC received 3% of BOScom's share capital at par value. Thus, our shareholdings at BOScom were reduced to 83%. In 2000, we purchased an additional 14% of BOScom's shares and increased our holding in BOScom from 83% to 97%. The aggregate consideration for this acquisition included $640,000 in cash and 17,804 shares of our Company. In February 2002, we purchased from IFC its 3% of BOScom's shares (in consideration of the issuance of 3,750 Company ordinary shares), thereby bringing our ownership interest to 100%. IN EUROPE - BOScom has a UK subsidiary, Better On-Line Solutions Ltd, and its subsidiary, Better On-Line Solutions S.A.S in France, which, until mid-2003, distributed and serviced BOScom's products abroad. The UK subsidiary was originally a subsidiary of the Company itself, but became a subsidiary of BOScom as part of the reorganization implemented in January 2002. In mid-2003 we decided, due to cost-efficiency considerations, to cease operations in Europe through the subsidiaries and to market through distributors. IN THE U.S. - Lynk USA Inc., and its subsidiary PacInfoSystems (both Delaware corporations). Until the fourth quarter of 2002, PacInfoSystems had a subsidiary, Dean Tech Technologies Associates, L.L.C. ("Dean Tech"), a Texan corporation, which is in the process of being dissolved. As abovementioned, PacInfoSystems is in the process of dissolving as well. Lynk USA is not operational either. Until the fourth quarter of 2002, the marketing and distribution of the BOScom products was carried out through the "BOS US" division of PacInfoSystems (see item 4A). In October 2002, BOScom established a new wholly-owned subsidiary, BOSDelaware, a Delaware corporation, and in the future may market and distribute its products in the US through this subsidiary. Currently, the US marketing is carried out through a master distributor, Bosanova Inc., and BOSDelaware is not operational. The voting power we (or our subsidiaries) have in all subsidiaries, equates to the shareholdings. The Company also has an interest in Surf Communication Solutions Ltd. ("Surf"). Surf is a leading supplier of embedded network convergence software that lends flexibility and scalability to network products handling data modem, fax, and voice transmissions. Surf's open system software is integrated into equipment such as media gateways and remote access concentrators developed by original equipment manufacturers in the telecommunications, telephony, and data networking industries. We have been investing in Surf since 1997, and in March 2003 we purchased additional shares (see Item 4A). 25 4D. PROPERTY, PLANTS AND EQUIPMENT Our executive offices and engineering, development, testing, shipping and service operations are located in a facility occupying a total of approximately 3,300 square meters in Teradyon, Israel, pursuant to a lease which commenced in January 1996 and will expire in 2005. Under the terms of the lease, we had to pay rent of approximately $11,000 per month until December 31, 2000. Beginning January 1, 2001, the monthly rental payment has been reduced to approximately $9,300 per month. The facility is located in a part of Israel which has been designated by the government as a development "A" area. This designation relates to the benefits available to us as an "Approved Enterprise" under Israeli law, that entitles us and our shareholders to reduced income tax rates on our income and on dividend distributions. We believe that our facilities are sufficient to accommodate our anticipated needs in the foreseeable future. The latest lease commitment will expire in 2005. ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS The following management's discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and notes thereto. Certain matters discussed below and throughout this annual report are forward-looking statements that are based on our beliefs and assumptions as well as information currently available to us. Such forward-looking statements may be identified by the use of the words "anticipate", "believe", "estimate", "expect", "plan" and similar expressions. Such statements reflect our current views with respect to future events and are subject to certain risks and uncertainties. While we believe such forward-looking statements are based on reasonable assumptions, should one or more of the underlying assumptions prove incorrect, or these risks or uncertainties materialize, our actual results may differ materially from those described herein. Please read the section below entitled "Factors That May Affect Future Results" to review conditions that we believe could cause actual results to differ materially from those contemplated by the forward-looking statements. The Company's discussion and analysis of its financial condition and result of operations is based upon the Company's consolidated financial statements which have been prepared in accordance with generally accepted accounting principles ("GAAP ") in the United States of America. Prior to 2003, the consolidated financial statements were prepared in accordance with Israeli GAAP with reconciliation to U.S.GAAP. The Company believes that investors and other users of its financial statements would benefit if the primary financial statements were prepared in accordance with U.S., rather than Israeli, GAAP. CRITICAL ACCOUNTING POLICIES The preparation of these financial statements required the Company to make estimations and judgments, in accordance with U.S. GAAP, that affect the reporting amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, bad debts, inventories, investments in a company and legal contingencies. The Company based its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 26 For a review of the accounting policies that form the basis of the above-referenced estimates and judgments that the Company made in preparing its consolidated financial statements, please see Note 2 (Significant Accounting Policies) to the Consolidated Financial Statements. The following accounting policies had the most significant impact on the Financial Statements for the year ended December 31, 2003. REVENUE RECOGNITION We recognize revenues from sales of product and services in accordance with Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"), Staff Accounting Bulletin No. 104 "Revenue Recognition in Financial Statements" ("SAB 104") and Statement of Position No. 97-2 "Software Revenue Recognition" ("SOP 97-2") when delivery has occurred, persuasive evidence of an arrangement exists, the vendor's fee is fixed or determinable, no further obligation exists, and collection is reasonably assured. When a right of return exists, the Company defers revenues until the right of return expires. Determination of the probability of collection is based on management's judgments regarding the payment of fees for services rendered and products delivered. This determination is based on management's periodic assessment of the credit worthiness and other known factors of its customers and distributors. If this assessment will not properly reflect the actual collection, revenue recognized for any reporting period could be adversely affected. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company maintains an allowance for doubtful accounts for estimated losses, which may result from the inability of its customers to make required payments. Management exercises judgment as to its ability to collect outstanding receivables. Allowances for doubtful accounts are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, allowances for doubtful accounts are made based upon the age of the receivable. In determining the allowance, the Company analyzes its historical collection experience and current economic trends. If the historical data used to calculate the allowances for doubtful accounts do not reflect the future ability to collect outstanding receivables, additional allowances for doubtful accounts may be needed and the future results of operations could be materially affected. INVENTORIES Inventories are valued at the lower of cost or market value. Cost is determined as follows:
Raw and packaging materials - Moving Average Cost Method Products in progress and finished products - On the production costs basis with the addition of allocable indirect manufacturing costs
If actual market conditions prove less favorable than those projected by management, additional inventory write-downs may be required. Inventories are written down for estimated obsolescence based upon assumptions about future demand and market conditions. Likewise, favorable future demand and market conditions could positively impact future operating results if inventory that has been written down is sold. As of December 31, 2003, inventory is presented net of $300,000 general provision for technological obsolescence and slow moving items (see also Note 5 to the Consolidated Financial Statements). 27 INVESTMENT IN A COMPANY The investment in a company is stated at cost, since management believes that it does not have the ability to exercise significant influence over the operating and financial policies of this investee. In reaching this decision, management has evaluated all the facts and circumstances related to the investment. Judgments and evaluations about ability to exercise significant influence are complex and often subjective and can be affected by a variety of external and internal factors. If these facts or related circumstances change in the future, we may be required to account for this investment under the equity method of accounting. The Company's investment in a company is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an investment may not be recoverable, in accordance with Accounting Principle Board Opinion No.18 "The Equity Method of Accounting for Investments in Common Stock", ("APB No.18"). As of December 31, 2003, based on managements' most recent analyses supported by an external valuation, an impairment loss has been recorded in the amount of $ 840. LEGAL CONTINGENCIES The Company has been a party to various legal proceedings in the normal course of its business (see Item 8A for more details). The results of legal proceedings are difficult to predict and an unfavorable resolution of a lawsuit or proceeding may occur. Management believes that the prospects of these proceedings to prevail and recover a significant amount, seem remote, and accordingly no provision was recorded. As additional information becomes available, management will reassess the potential liability related to these legal proceedings and may revise its estimate of the probable cost of this proceedings. Such revisions in the estimates of the probable cost could have a material adverse effect on the Company's future results of operations and financial position. 5A. RESULTS OF OPERATIONS On May 29, 2003 we effected a 1:4 reverse stock split. All share and per share data for periods prior to that date have been retroactively adjusted to reflect this reverse stock split. COMPARISON OF 2003 AND 2002 Year 2003 results of operation reflected the reorganization made in the sales and marketing organization. In the United States, up until the fourth quarter of 2002, we marketed our BOScom products through a US subsidiary (the BOS US division of PacInfoSystems). Currently, we market our products through one Master Distributor (Bosanova, Inc.) In Europe, up until the second quarter of 2003, we marketed our BOScom products through subsidiaries in the U.K. and France. Currently, we market our products through local distributors that provide pre and post sales support. Products sold in the rest of the world are serviced from our headquarters in Israel. As a result of the above reorganization, the Company experienced a significant decrease in revenues in 2003, due to the distributors' margin, which was only partially compensated for by the decrease in sales and marketing expenses. Furthermore, as a result of the reorganization, in 2003 the Company recorded a restructuring cost of $680,000. Consolidated revenues for 2003 were $5,728,000 compared with $9,441,000 in 2002, a 39% decrease. The major reasons for the decrease were: (a) sales through master distributors in year 2003 compared to sales through subsidiaries in year 2002, as the margins of the master distributors decreased revenues; and (b) slowdown in sales due to global slowdown in the telecommunications industry. 28 Gross profit in 2003 totaled $4,273,000, representing 75% of revenues, compared with $7,141,000, constituting 76% of revenues in 2002. Cost of revenues of year 2003 includes income of $339,000 due to a reversal of a non-recurring royalty for the Office of the Chief Scientist (see also Note 14a to the Consolidated Financial Statements). Excluding such income, the gross profit for year 2003 represented 69% of revenues compared to 76% in year 2002, the major reasons for the decrease being (a) sales through master distributors in year 2003 compared to sales through subsidiaries in year 2002 which caused a decrease in the sale price while the cost of revenue remained virtually the same; and (b) revenues of BOSaNOVA PrintBoss in year 2003 decreased to $448,000 compared to $1,387,000 in year 2002. Since the BOSaNOVA PrintBoss is a software product with a relatively low cost of production, the decrease in its revenues in year 2003 compared to year 2002 significantly affected the gross profit. Net research and development costs in 2003 decreased by 15% to $1,846,000 compared to $2,182,000 in 2002. The expenses in 2003 included $283,000 funding that the Company received from the Office of the Chief Scientist. In 2002 the company did not receive such funding. Excluding the effect of the funds received from the Office of the Chief Scientist in 2003, the research and development costs in 2003 remained virtually the same as in year 2002. Selling and marketing expenses in year 2003 decreased by 41% to $2,178,000, compared to $3,705,000 in 2002. The major reason for such decrease was sales through subsidiaries in 2002, as opposed to sales through distributors in year 2003 after the operation of the subsidiaries was ceased. General and administrative expenses in year 2003 decreased by 22% to $1,317,000 compared to $1,697,000 in 2002. The major reason was the reduction in payroll of employees and directors, by 17%, effected July 2003. Restructuring costs in year 2003 amounted to $678,000 which resulted from ceasing the operation of the Company's subsidiaries in Europe. As a result of the foregoing, our operating loss in 2003 was $1,746,000 compared to an operating loss of $443,000 in 2002. The Company had net financial income of $109,000 in 2003 compared with net financial income of $295,000 in 2002. The decrease in the financial income is related to the decrease in cash and investment balances during 2003 and to decrease of financial income from translation of foreign currency into dollar. Other expenses for 2003 amounted to $795,000, compared to $95,000 in 2002. These expenses in 2003 included a cost of $840,000 due to impairment of the Company's investment in Surf (see note 7b to Consolidated Financial Statements). As a result, net loss from the continuing operations for 2003 amounted to $2,432,000 compared with $243,000 in 2002. On a per share basis, the net loss from the continuing operations in 2003 was $0.66 per share compared with a $0.08 net loss per share in 2002. (For details regarding computation of net loss per share, see Note 14d to the Consolidated Financial Statements.) The net earnings related to the discontinuing operations for 2003 was $2,036,000 compared with a loss of $7,674,000 in 2002. The earnings of 2003 resulted from debt settlement with more than 95% of PacInfoSystems' external creditors for an amount which was significantly lower than the face value of the debt. The total net loss for 2003 was $396,000, compared with $7,917,000 in 2002. On a per share basis, the net loss in 2003 was $0.11 per share compared with a $2.54 net loss per share in 2002. 29 COMPARISON OF 2002 AND 2001 Consolidated revenues for 2002 were $9,441,000, compared with $6,042,000 in 2001, a 56% increase. During 2002 we focused our sales on our core business products. The S&M activity was aimed to expand our customer base and distribution channels. During 2002 we succeeded in closing a software deal with one customer which represented about 13% of the total revenues. Gross profit in 2002 totaled $7,141,000, representing 76% of revenues, compared with $3,339,000, constituting 55% of revenues in 2001. The difference is related mainly to high provisions for slow inventory that the company made in 2001 relating to its IP old product line. Net research and development costs in 2002 increased 24% to $2,182,000, compared with $1,757,000 in 2001. The expenses in 2001 included $989,000 funding that the Company received from the Office of the Chief Scientist. In 2002 the company did not receive such funding. Gross research and development costs in 2002 decreased 21% to $2,182,000, compared with $2,746,000 in 2001, mainly due to HR costs reduction. We improved the R&D staff by replacing some of our engineers with new ones, who are better skilled and more efficient but paid lower salaries. In Europe we closed branches that were not economically efficient and made some personnel changes. These steps saved us $500,000 in operational and other expenses compared to 2001. In addition, we reduced our operational costs in the US by $550,000 compared to 2001. Selling and marketing expenses decrease by 23% to $3,705,000 in 2002 compared to $4,811,000 in 2001 mainly due to the closing of branches in Europe and the reduction of operations in the US. General and administrative expenses increased by 19% to $1,697,000 in 2002, compared to $1,425,000 in 2001. This increase is due to expenses related to 2002 reorganization of the US subsidiary and the closing of branches in Europe. As a result of the foregoing, our operating loss in 2002 was $443,000 compared with an operating loss of $4,786,000 in 2001. The Company had net financial income of $295,000 in 2002 compared with net financial income of $427,000 in 2001. The decrease in the financial income is related to a decrease in cash and investment balances during 2002. Other expenses for 2002 were $95,000, compared with other expenses of $298,000 in 2001. (For more details regarding other expenses, see Note 14c to the Consolidated Financial Statements). As a result of the foregoing, net loss from the continuing operations for 2002 amounted to $243,000 compared with $4,657,000 in 2001. On a per share basis, the net loss from continuing operations in 2002 was $0.08 per share compared with a $1.5 net loss per share in 2001. The net loss related to the discontinuing operations for 2002 was $7,674,000 compared with $8,313,000 in 2001. On a per share basis, the net loss from the discontinuing operations in 2002 was $2.46 per share compared with a $2.68 net loss per share in 2001. The total net loss for 2002 was $7,917,000, compared with $12,970,000 in 2001. On a per share basis, the net loss in 2002 was $2.54 per share compared with a $4.18 net loss per share in 2001. 30 VARIABILITY OF QUARTERLY OPERATING RESULTS Our revenues and profitability may vary in any given year, and from quarter to quarter, depending on the number of products sold. In addition, due to potential competition, uncertain market acceptance and other factors, we may be required to reduce prices for our products in the future. Our future results will be affected by a number of factors including our ability to: o increase the number of products sold, o develop, introduce and deliver new products on a timely basis, o anticipate accurately customer demand patterns and o manage future inventory levels in line with anticipated demand. These results may also be affected by currency exchange rate fluctuations and economic conditions in the geographical areas in which we operate. There can be no assurance that our historical trends will continue, or that revenues, gross profit and net income in any particular quarter will not be lower than those of the preceding quarters, including comparable quarters. IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS The US Dollar cost of our operations in Israel is influenced by the differential between the rate of inflation in Israel and any change in the value of the NIS relative to the Dollar. A devaluation of the NIS in relation to the US Dollar will have the effect of decreasing the costs in NIS and a converse effect in case of devaluation of the US Dollar in relation to the NIS. A devaluation of the NIS in relation to the US Dollar will have the effect of decreasing the Dollar value of any of our assets which consist of NIS (unless such asset is linked to the Dollar). Such a devaluation would also have the effect of reducing the Dollar amount of any of our liabilities which are payable in NIS (unless such payables are linked to the Dollar). Conversely, any increase in the value of the NIS in relation to the Dollar will have the effect of increasing the Dollar value of our assets which consist of NIS (unless such asset is linked to the Dollar). Such an increase would also have the effect of increasing the Dollar amount of any of our liabilities which are payable in NIS (unless such payables are linked to the Dollar). In the years ended December 31 2003, 2002, 2001, 2000 and 1999, the annual inflation rate in Israel as adjusted for the devaluation of the Israeli currency in relation to the Dollar was 5.7% (0.8)%, (7.8)%, 2.7% and 1.5%, respectively. The closing representative exchange rate of the Dollar at the end of each such period, as reported by the Bank of Israel, was NIS 4.379 NIS 4.737, NIS 4.416, NIS 4.041 and NIS 4.153, respectively. As a result, the Company experienced increases in the Dollar costs of operations in Israel in 1999, 2000 and 2003, and decreases in 2001 and 2002. EFFECTIVE CORPORATE TAX RATE The Israeli regular tax rate imposed on companies is 36%, however, the effective tax rate payable by a company (such as ours) which derives income from an "Approved Enterprise," may be considerably less. See Note 13 to the Consolidated Financial Statements and Item 10E ahead. Subject to relevant tax treaties, dividends or interest received by an Israeli corporation from subsidiaries are generally subject to tax (unless the subsidiary's income is subject to Israeli corporate tax) regardless of its status as an Approved Enterprise. We anticipate that most of our taxable income over the next several years will be tax exempt in Israel. Our U.S. and U.K. subsidiaries, however, will be subject to U.S. and U.K. corporate income taxes, respectively, on their taxable income. 31 On January 1, 2003, a comprehensive tax reform took effect in Israel. Pursuant to the reform, resident companies are subject to Israeli tax on income accrued or derived in Israel or abroad. In addition, the concept of "controlled foreign corporations" was introduced, according to which an Israeli company may become subject to Israeli taxes on certain income of a non-Israeli subsidiary if the subsidiary's primary source of income is passive income (such as interest, dividends, royalties, rental income or capital gains). The tax reform also substantially changed the system of taxation of capital gains. GRANTS AND PARTICIPATION Under the Law for the Encouragement of Industrial Research and Development, 1984 (the "Research Law"), research and development programs approved by a research committee appointed by the Israeli Government are eligible for grants in exchange for payment to the Government of royalties from the sale of products developed in accordance with the Program. Regulations issued under the Research Law generally provide for the payment of royalties to the Office of the Chief Scientist of 3.5% on sales of products developed as a result of a research project so funded until 100% of the dollar-linked grant is repaid. Royalties payable with respect to grants received under programs approved by the OCS after January 1, 1999, are subject to interest on the U.S. dollar-linked value of the total grants received at the annual rate of LIBOR applicable to U.S. dollar deposits at the date the grants received. The Research Law requires that the manufacture of any product developed as a result of research and development funded by the Israeli Government take place in Israel. It also provides that know-how from the research may not be transferred to third parties without the approval of the Israeli Office of the Chief Scientist in the Ministry of Industry and Trade. As of December 31, 2003, the total amount of grants which we received from the Office of the Chief Scientist, net of royalties paid or accrued, accumulated interest and net of non recurring royalty reversal recorded in year 2003 in the amount of $339,000, totaled $5,621,000, compared with $ 5,875,000 as of December 31, 2002. We are committed to paying royalties to the Fund for the Encouragement of Exports for its participation, by way of grants, in our marketing expenses outside of Israel. Royalties payable are 3% of the growth in exports, from the year we received the grant, up to 100% of the dollar-linked amount of the grant received at the date the grants received. The total amount of the grants we received from the Fund, net of royalties paid or accrued, was $144,000 on December 31, 2003, compared with $225,000 on December 31, 2002. CONDITIONS IN ISRAEL We are incorporated under the laws of Israel. Our offices and product development and manufacturing facilities are located in Israel. As a consequence, we are directly affected by political, economic and military conditions in Israel. Our operations would be substantially impaired if major hostilities involving Israel should occur or if trade between Israel and its present trading partners should be curtailed. See also Item 3D - Risk Factors. POLITICAL AND ECONOMIC CONDITIONS Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying from time to time in intensity and degree, has led to security and economic problems for Israel. A peace agreement between Israel and Egypt was signed in 1979. However, economic relations have been limited. Since 1993, a joint Israeli - Palestinian Declaration of Principles and several agreements between Israel and Palestinian representatives have been signed outlining interim self-government arrangements. Israel has since transferred the civil administration of the Gaza Strip and several major towns and villages in the West Bank to the Palestinian Authority. 32 In addition, Israel and several other Arab States announced their intention to establish trade and other relations and are discussing certain projects. As of the date hereof, Israel has not entered into any peace agreement with Syria or Lebanon. There is substantial uncertainty with regard to how the "peace process" will develop or what effect it may have on us. Furthermore, full diplomatic ties between Israel and Jordan were created following a peace treaty signed in 1994. The treaty expressed a mutual desire for full economic cooperation, the lifting of economic barriers and a strive towards the lifting of any economic boycotts by third parties. Despite the progress towards peace between Israel, its Arab neighbors and the Palestinians, certain countries, companies and organizations continue to participate in a boycott of Israeli firms. We do not believe that the boycott has had a material adverse effect on us, but there can be no assurance that restrictive laws, policies or practices directed towards Israel or Israeli businesses will not have an adverse impact on our business or financial condition in the future. Some of our employees are obligated to perform annual reserve duty in the Israel Defense Forces and may, at any time, be called for active military duty. While we have operated effectively under those and similar requirements in the past, no assessment can be made of the full impact of such requirements on us in the future, particularly if emergency circumstances occur. Israel's economy has been subject to many destabilizing factors including a period of high inflation in the early to mid-1980s. It has also been subject to low foreign exchange reserves, fluctuations in world commodity prices, military conflicts and civil unrest. The Government of Israel has intervened in several sectors of the economy, employing among other means, fiscal and monetary policies, import duties, foreign currency restrictions and control of wages, as well as prices and foreign currency exchange rates. In 1998, the Israeli currency control regulations were liberalized dramatically. As a result, Israeli citizens can generally freely purchase and sell Israeli currency and assets. The Government of Israel has periodically changed its policies in these areas. There are currently no Israeli currency control restrictions on remittances of dividends on ordinary shares or proceeds from the sale of ordinary shares; however, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time. The costs of our operations in Israel are generally incurred in New Israeli Shekels ("NIS"). If the inflation rate in Israel exceeds the rate of devaluation of the NIS against the US Dollar in any period, the costs of our Israeli operations, as measured in US Dollars, could increase. Israel's economy has, at various times in the past, experienced high rates of inflation. Like many Israeli companies, we receive grants and tax benefits from the Israeli Government. We also participate in programs sponsored by the Israeli Government. The reduction or termination of any such grants, programs or tax benefits, especially those benefits available as a result of the "Approved Enterprise" status of certain facilities in Israel, could have a materially adverse effect on future investments by us in Israel. TRADE AGREEMENTS Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development, and the International Finance Corporation. Israel is also a signatory to the General Agreement on Tariffs and Trade, which provides for reciprocal lowering of trade barriers among its members. In addition, Israel has been granted preferences under the Generalized System of Preferences, from Australia, Canada and Japan. These preferences allow Israel to export the products covered by such programs either duty-free or at reduced tariffs. 33 Israel and the European Union signed a Free Trade Agreement, which became effective on July 1, 1975, that confers certain advantages with respect to Israeli exports to most European countries and obligates Israel to lower its tariffs with respect to imports from these countries over a number of years. In 1985, Israel and the United States entered into an agreement to establish a Free Trade Area ("FTA"). The FTA has eliminated all tariff and certain non-tariff barriers on most trade between the two countries. On January 1, 1993, Israel and the European Free Trade Association ("EFTA"), entered into an agreement establishing a free-trade zone between Israel and the EFTA nations. In recent years, Israel has established commercial and trade relations with a number of other nations, including Russia, the People's Republic of China, India and the nations of Eastern Europe, with which Israel had not previously had such relations. 5B. LIQUIDITY AND CAPITAL RESOURCES We finance our activities by different means, including proceeds of equity financing, long-term loans, grants from the Office of the Chief Scientist in Israel and income from operating activities. In December 2003 we received net proceeds of $928,000 from a private placement with two European private investors. We issued these investors 357,143 ordinary shares at a price per share of $2.80. We also granted these investors certain incidental registration rights with respect to the ordinary shares they purchased. On June 10, 2004 the Company entered into a Securities Purchase Agreement (the "Purchase Agreement"), with Laurus Master Fund Ltd. (the "Investor"), under which the Company issued and sold to the Investor in a private placement (i) a Secured Convertible Term Note of a $2 million principal amount, due June 10, 2007 (the "Note") and (ii) a warrant to purchase 130,000 Ordinary Shares at an exercise price of $4.04 per share (the "Warrant"). The Warrant is exercisable, in whole or in part, until June 10, 2011. The Note bears interest at a fluctuating interest rate equal at all times to the prime rate plus 3%, subject to reduction if the average closing price of the Registrant's Ordinary Shares exceeds certain benchmarks. The proceeds from the private placement will be used for general working capital purposes and/or mergers and acquisitions. The Note is convertible into Ordinary Shares at a price of $3.08 per share (subject to adjustment). The principal amount of the Note is repayable in monthly installments, commencing as of October 1, 2004, in the initial amount of $20,000 eventually increasing to $73,600, and may be paid in cash or, subject to certain conditions, in Ordinary Shares. Interest on the Note is payable monthly and may be paid in cash or, subject to certain conditions, in Ordinary Shares. The Note is secured by a security interest in certain assets of the Company. The Company also entered into a Registration Rights agreement with the Investor pursuant to which the Company agreed to prepare and file with the Securities and Exchange Commission within 45 days a registration statement covering the resale of Ordinary Shares that is issuable upon conversion of the Note and/or exercise of the Warrants, and/or issuable in payment of principal and interest on the Note. As of December 31, 2003, we had $3,872,000 in cash and cash equivalents, $2,876,000 in marketable securities, and positive working capital of $5,082,000. Net cash used in operating activities of continuing operations in 2003 was $1,937,000 compared to cash provided by operating activities in 2002 in the amount of $127,000. The cash used in operating activities in year 2003 was adversely affected by a number of factors. First, a decrease in gross profit due to the sales through distributors instead of subsidiaries from mid 2003, which was not immediately compensated by decrease in the sales and marketing expenses in 2003. Second, the revenues of BOSaNOVA PrintBoss in year 2003 amounted to $448,000 compared to $1,387,000 in year 2002. Since the BOSaNOVA PrintBoss is a software product with a relatively low cost of production, the decrease in its revenues in year 2003 compared to year 2002 adversely affected the cash used in operating activities. Net cash provided by investing activities in 2003 was $519,000 which was mainly due to realization of restricted cash into cash and cash equivalents. 34 The Company does not currently have borrowings from financial institutions. Working capital and working capital requirements will vary from time-to-time and will depend on numerous factors, including but not limited to operating results, the level of resources devoted to research and development, new product introductions, grants from the Office of the Chief Scientist in Israel, marketing and acquisition activities. We have in-balance sheet financial instruments and off-balance sheet contingent commitments. Our in-balance sheet financial instruments consist of our assets and liabilities. Our cash is invested in short-term (less than 3 months) U.S. dollars and NIS interest bearing deposits with banks. Our receivables' aging is between 60 to 70 days and our current liabilities' aging is approximately 60 days. The fair value of our financial instruments is similar to their book value, with one exception. We believe that our investment in Surf has a substantial value. Our off-balance sheet contingent commitments consist of: (a) royalty commitments that are directly related to our future revenues, (b) lease commitments of our premises and vehicles, (c) directors and officers' indemnities, in excess of the proceeds received from liability insurance which we obtain and (d) legal proceeding. We believe that cash resources are sufficient to meet our needs for at least 12 months following the date of this submission. However, it is our intention to engage in equity and loan financing to further feature-rich products of the Company and establish distribution channels in new markets. There is, however, no assurance that we shall be able to obtain such financing. 5C. RESEARCH AND DEVELOPMENT We believe that our future growth will depend upon our ability to enhance our existing products and introduce new products on a timely basis. Since we commenced operations, we have conducted extensive research and development activities. In 2003, gross research and development costs totaled $2,129,000, compared to $2,182,000 in 2002 and $2,746,000 in 2001. Our research and development efforts have been focused on VOIP solutions, and our existing products for the IBM midrange market. We intend to finance our research and development activities with our own resources and grants from the Office of the Chief Scientist. Grants from the Chief Scientist totaled $283,000 in 2003 and $989,000 in 2001 (no grants were received for the year 2002). 5D. TREND INFORMATION The global slowdown in the telecommunications industry has taken its toll on our company. The effect of a prolonged slowdown may continue to result in lower sales and lower gross margins as our products may be subject to price pressure due to reduced demand, write-downs and write-offs. Over the past few years there has been a continuous global decrease in sales and revenues from the connectivity solutions sector (also known as the legacy family products) (see Item 4B). Although the Company's revenues in this sector have decreased as a result, in comparison to other players in this field, we have fared quite well. 35 Currently the Company's R&D focuses mainly on the company's VOIP line of products, that will successfully compete with Legacy telephony quality and reliability, and will allow special CTI (Computer Telephony Integration) features that are not available in Legacy telephony today. These products will allow seamless integration with legacy telephony systems, thus reducing the implementation price. In addition, the products will guaranty the quality of service and will allow the end users to use the telephone system in the same way that they used their non-IP-enabled system. Until now, complicated installation, non-transparent usage and inconsistent quality of service were the major issues that slowed-down the implementation of VOIP in the corporate market. With the new line of intelligent gateways, these hurdles are solved, thus opening new opportunities in this market. According to market research performed by professional market analysis firms such as Advanced Business Link, the revenues in this VOIP market are expected to grow for at least the next five years. Although the Company's business in this market has not fared well until now, we hope to overcome marketing and other hurdles, and become a significant player in this field, although there is no assurance that we will be able to do so. 5E. OFF-BALANCE SHEET ARRANGEMENTS In 1998, as part of PacInfoSystems' Share Purchase Agreement between the Company and Mr. Jacob Lee (the seller of PacInfoSystems who became a shareholder of the Company), certain actions involving PacInfoSystems, if occurring before the end of 2003, may trigger a tax event for Mr. Jacob Lee. In such event, the Company may be obligated, under the purchase agreement, to grant Mr. Lee a loan on a full recourse basis for certain tax payments Mr. Lee may be liable for, currently estimated at approximately $1.5 million. The purchase agreement provides that the Company is to receive a security interest in shares of the Company that Mr. Lee holds at the time of the loan with a fair market value as of the date of the loan of at least 125% of the amount of the loan as security for the repayment of the loan. In addition, in the event the Company is required to loan such sum to Mr. Lee, the Company may also be required to reimburse Mr. Lee for certain interest on taxes that he may owe. It is possible that the windup of PacInfoSystems during 2002 and 2003 may have triggered such a tax event for Mr. Lee, which would result in an obligation by the Company to loan Mr. Lee such amount and to reimburse him for interest expenses incidental to the tax event. 5F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS The following table summarizes our contractual obligations as of December 31, 2003: Payment due by period --------------------- Less than 1 1-3 3-5 More than Total year years years 5 years ---- ---- ---- ---- ---- Operating lease $471 $286 $185 - - Purchase obligation $415 $415 - - - Total $886 $701 $185 - -
The above table does not include contingent obligations to pay royalties to the Office of the Chief Scientist and to the Overseas Marketing Fund since the total amount to be paid under the terms of those agreements are a function of future sales (see note 11(a)(1) of the Consolidated Financial Statements). 36 ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 6A. DIRECTORS AND SENIOR MANAGEMENT The following is a listing of our directors, senior officers and key employees:
Name Age Position - ---- --- -------- Mr. Edouard Cukierman 39 Chairman of the Board of Directors Mr. Adiv Baruch 41 Director, President and Chief Executive Officer Mr. Eli Ben-Mayor 63 Director Mr. Israel Gal 53 Director Mr. Avishai Gluck (2) 32 Director Mr. Zvi Greengold 52 Director Mr. Andrea Mandel-Mantello 45 Director Mr. Yair Shamir 59 Director Mr. Ronen Zavlik (1) 43 Director Dr. Yael Ilan (1) 55 External Director Prof. Adi Raveh (1)(2) 56 External Director Mr. Nehemia Kaufman 55 Chief Financial Officer
(1) Member of the Audit Committee. (2) Member of the Remuneration Committee. MR. EDOUARD CUKIERMAN, 39, has been a director since May 2003, and Chairman of the Company since June 2003. He is the Chairman of Cukierman & Co. Investment House and CEO of the Catalyst Fund. Former President and Managing director of the Astra Fund, Mr. Cukierman provides a key role in determining and implementing Catalyst's investment selection and exit strategies for its investments. Mr. Cukierman holds several Board positions in portfolio companies including VCON, BOS and Orex CR. He is also the Vice Chairman of Citec Environment and services in Paris and a Board member of Lamina Technologies in Switzerland. In addition, Mr. Cukierman is on the Board of Sar-El, an Israeli Defense Forces volunteer organization and serves in the IDF Spokesman Unit (Reserves). In 1997, Mr. Cukierman was awarded the prize of Honor from the Israel-France Chamber of commerce as CEO of Astra. He was listed among the most influential businessman in the Israeli high-tech industry by Israel's most widely read newspaper. Mr. Cukierman holds an M.B.A. from INSEAD, Fontainebleau, France and a B.Sc. from the Technion - Israel Institute of Technology. MR. ADIV BARUCH, 41, has been a director since February 2004 and the Company's President and CEO service provider since January 1, 2004. From June 2004 he also serves as the CEO service provider of the Company's subsidiary, BOSom Ltd. From 1999 to 2003 he served as Executive VP Business Development of Ness Technologies, and has expertise in the Telecom and High-tech industries. Mr. Baruch is also a former partner and active director of IPEX, acquired by Ness. He has served as founder and an executive or director for several IT companies and Internet start-ups, and was significantly involved in the M&A process and in assisting these companies in their global expansion. Mr. Baruch is actively involved as the chairman of the Israeli Export Institute Hi-Tech and Telecom Division, and serves as a director for Ramdor Ltd., an Israeli public company traded on the TASE. He has a B.Sc. in Computer Science and Industrial Engineering from the Technion - Israel Institute of Technology. 37 MR. ELI BEN-MAYOR, 63, has been a director since June 2002. Mr. Ben-Mayor currently serves as Chairman of the Board of general manager of Vulcan Foundries, a multidisciplinary manufacturer and solution provider of castings and valves products and metal projects. Previously he was the General Manager of Rogosin Ltd. where he implemented a program geared to improve the operational and financial situation of the company. Prior to joining Rogosin, Mr. Ben-Mayor served as General Manager of several companies within the Clal Industries group. Recently he concluded a five-year service term as a director of ICL Israel Chemicals Financing and Issuing Ltd. Mr. Ben-Mayor holds a B.Sc. degree in Mechanical Engineering from the Technion - Israel Institute of Technology, and an MBA from Tel-Aviv University. MR. ISRAEL GAL, 53, B.O.S.' founder, served as B.O.S.' Chief Executive Officer and President from its inception in 1990 until January 2002, and then again from September 2002 until December 2003. Mr. Gal was the Chairman of the Board of Directors from 1990 until 2000 and also served as the CEO of one of the Company's subsidiaries, BOScom Ltd. until June 2004. Mr. Gal is currently the CTO of VOIP products in BOScom. From 1983 to 1989, Mr. Gal served as IBM midrange product manager at IIS. In 1989, Mr. Gal served as the product manager for sales and marketing of IIS in the United States. In 1979, Mr. Gal co-founded Liad Electronics Ltd. where he worked until 1983. From 1976 to 1979, Mr. Gal served as research and development engineer and product manager for Elbit Ltd. Mr. Gal received a Bachelors of Science in Electronic Engineering from the Technion-Israel Institute of Technology (the "Technion"). MR. AVISHAI GLUCK, 32, has been a director since February 2004. He serves as the Executive Vice President of Catalyst Investments. Mr. Gluck brings with him over 6 years of financial management, accounting and tax consultation experience. He has extensive knowledge of the Israeli high tech market, having screened hundreds of companies for Catalyst and as a senior corporate consultant at E&Y Israel. Mr. Gluck currently serves as a director in MTI Wireless-Edge Ltd. Prior to joining Catalyst, he held the position of Corporate Finance Consultant and accountant with Ernst & Young's Israeli affiliate Kost Forer & Gabbay, a leading Israeli CPA firm with a dominant position among Israeli technology companies. Mr. Gluck has a BA from Tel-Aviv University in Accounting and Economics and is a licensed CPA. MR. ZVI GREENGOLD, 52, has been a director since June 2002, and served as Chairman from September 2002 to June 2003. Mr. Greengold is currently self-employed in the field of industrial management, promotion and consulting, and serves as Chairman of Polysac Ltd. and Polyraz of kibbutz Maoz-Haim. From 2000 to 2001 he served as Managing Director of Caribbean Petroleum, Corp., a company that manufactures and markets fuel products in Puerto Rico. From 1999 to 2000 he served as General Manager of the Israeli Oil Refineries Ltd. From 1996 to 1998 Mr. Greengold served as Managing Director of Electrochemical Industries (1952) Ltd. (traded on TASE), a company that manufactures polyvinyl chloride and non-organic chemicals. From 1986 to 1996 he held various positions with Electrochemical Industries (1952) Ltd., including Chief Financial Officer, Vice President of Organization and Logistics, Vice President of Finance and Organization and Vice Managing Director. Mr. Greengold currently serves as an external director of two public Israeli companies. He holds a B.A degree in Economics and Administration from the Rupin College in Israel. MR. ANDREA MANDEL-MANTELLO, 45, has been a director since November 2003. Mr. Mandel-Mantello is Founder and Partner of Advicorp PLC, a UK Investment Bank regulated by the UK Financial Services Authority. He is an advisor on the first high yield corporate bond issue in Italy. From 2000 to 2001 he was an advisor to a US based private equity group on business development in Israel. Prior to his work at Advicorp, Mr. Mandel Mantello spent 9 years at SBC Warburg (now known as UBS) in London in various senior management positions including Executive Director of SBC Warburg, member of the Board of SBC Warburg Italia SIM S.p.A, and Country Head for Israel. Prior to working at SBCW Mr. Mandel-Mantello spent 2 years at Chemical Bank International Ltd. in London and 3 years at Banca Nazionale dell'Agricoltura in Rome. He holds a Bachelors degree in Economics and Political Science from Yale University. 38 MR. YAIR SHAMIR, 59, has been a director since May 2003. He has been the Chairman of the Catalyst Fund since 1999. He served as VCON Communication's Chief Executive Officer and Director since 1997. From 1995 to 1997, Mr. Shamir served as Executive Vice President of the Challenge Fund-Etgar L.P., an Israeli venture capital firm. From 1993 to 1995, he served as Chief Executive Officer of Elite Food Industries Ltd., one of Israel's largest branded food product companies. From 1988 to 1993, he served as Executive Vice President and General Manager of Scitex Corporation Ltd., a leading supplier of computer graphic systems. From 1963 to 1988, Mr. Shamir served in the Israeli Air Force as a pilot and commander. During his term in the Air Force, he attained the rank of colonel and the served as head of the Electronics Department, the highest professional electronics position within the Air Force. Mr. Shamir currently serves as a director of several public companies listed on the NASDAQ including Orckit Communications Ltd, Mercury Interactive Corporation and DSP Group Corporation as well as serving as a director of several private companies. Mr. Shamir is the Chairman of The Catalyst Fund, an Israel-based venture capital fund investing in late-stage companies mainly in the high technology sector. Mr. Shamir holds a B.Sc. in Electronic Engineering from the Technion - Israel Institute of Technology. MR. RONEN ZAVLIK, 43, has been a director since May 2003. He is a partner in the CPA firm of Grinberg-Zavlik, which he founded in 1987. His firm provides a wide range of audit, tax consultancy and CFO services, to a wide variety of companies. Mr. Zavlik provides internal auditing services to a number of large companies whose shares are traded on the Tel Aviv Stock Exchange, including Ma'ariv Holdings Ltd, Extra Plastic Ltd. Israel Land Development Malls and Shopping Centers Ltd and Israel Land Development Company Hotels Ltd. Mr. Zavlik holds a B.A. in Accountancy and Business Management from the College of Management in Tel-Aviv. Mr. Zavlik is a licensed CPA in Israel and a member of the Institute of Certified Public Accountants in Israel. DR. YAEL ILAN, 55, has been an external director since November 2002. Dr. Ilan is the president of Yedatel Ltd., an economic consulting company, and serves as a director of CI Systems in the technology sector. Until 1998 she served on the board of Bezeq - Israel's Telecommunication Company in which she headed the committee of technological policy and infrastructure and was a member of the audit committee and the committee for strategic planning and investment. From 1998 through 2000 she served as an external director of Elron Industries. In 2000-01 she founded and managed Optichrom, an optical component start-up. From 1995 through 2000 Dr. Ilan served as the head of program of the Broad Band Communication, a consortium of MAGNET - the Israeli Government hi-tech cooperation initiative. Dr. Ilan holds a Ph.D. in industrial engineering from Stanford University, a Ph.D. in physical chemistry from the Hebrew University and a Masters degree in business administration from the Hebrew University. PROF. ADI RAVEH, 56, has been an external director since February 2003. Prof. Raveh is a professor and head of the B.A. Program at the School of Business Administration, Hebrew University, Jerusalem. Since 1998 he served as an external director at Clal Insurance Company Ltd. Since 2002 he has served as the Chairman of the Board of Jerusalem Capital Markets Underwriting limited. He also serves as a director of Meitav - a Mutual Funds Management company (since 1995), and as a director of Peilim - a Portfolio Management company - part of Bank Hapoalim Group (since 1996). Since 1992 he is a director who represents the Hebrew University at Hi-Tech - a Technology Entrepreneurship located at Har-Hahotzvim, Jerusalem. Prof. Raveh also serves as a director of two start-up companies: A.D.M (Advanced Dialysis Methods Ltd.) and Virtouch Ltd. Between 1994-1999 he served as a director and a member of the executive committee of the Bank of Jerusalem, Ltd. Between 1996-1998 he served as a member of an ad-hoc committee of the Council of Higher Education. In 1999 he served as a member of the Budget Committee for Research at the Israel Science Foundation. Prof. Raveh holds a Ph.D. from the Hebrew University. He is the author of about 50 professional publications, was a visiting professor at Stanford University, Columbia University and Baruch College, N.Y., and has received a number of grants and honors. 39 MR. NEHEMIA KAUFMAN, 55, has provided CFO services to the Company since September 2002. Before then, from May 2002, he served as a consultant and CFO of the Company's subsidiary, BOScom Ltd. Mr. Kaufman is currently the Managing Director of Mocha Global Managerial Services Ltd. From 1999 to 2002 he co-founded and served as CFO of Trellis Photonics Ltd., from 1997 to 1999 Mr. Kaufman was self-employed as a CFO service provider, from 1995 to 1997 he served as CFO of Computer Direct Ltd. (TASE: CMDR), and from 1993 through 1995 he served as CFO of Rogosin Enterprises Ltd. (TASE: ROGO). Mr. Kaufman holds an MBA degree from the Hebrew University in Jerusalem (graduated with distinction) and a BA degree in Economics and Business Administration from Haifa University. 6B. BOARD COMPENSATION The directors who are not executive officers are paid a fee for their services as directors to the extent that such fees are approved by a general meeting of our shareholders. Until February 18, 2003, only the Company's external directors were paid for their service on the Company's Board of Directors and its committees. As resolved by the shareholders, the external directors are compensated according to the maximum rate permitted (now and in the future) by Israeli law and regulation. The current rates for companies the size of ours, are an annual fee of approximately $5,520, and a participation fee in meetings of approximately $290. On February 18, 2003 the shareholders approved compensation for all directors who are not employees or consultants1, including directors appointed in the future, at the same rate the external directors of the Company are paid. With respect to two incumbent directors, the shareholders' resolution provides that the compensation be paid retroactively since their appointment in June 2002. On June 26, 2003, the Board of Directors resolved to reduce the annual fee for all directors by 18%, effective July 1, 2003, as part of a cost reduction plan. Additionally, the Company's directors are granted options (see "Share Ownership" ahead, and "Related Party Transactions" under Item 7). The Company does not have any contracts with any of its non employee/consultant directors, that would provide for benefits upon termination of service. The following table presents the total compensation paid to or accrued on behalf of all of our directors and officers as a group for the year ended December 31, 2003: - -------- 1 However, the audit committee and the Board of Directors have approved, subject to shareholder approval at the upcoming annual meeting of shareholders, that Edouard Cukierman, Chairman of the Board, will receive remuneration (retroactively from the date of his nomination in May 2003) as a Board member, under the same terms as all other directors, despite his being (indirectly) a controlling shareholder and senior executive of Cukierman & Co. Investment House Ltd. (a service provider to the Company - see Item 7B), and therefore not eligible for remuneration according to the current shareholder resolution. Additionally, in November 2003 the audit committee and the Board of Directors approved a consulting agreement between Mr. Zvi Greengold and the Company's subsidiary, BOScom Ltd. (see Item 7B), and that the consulting fee shall be in addition to the remuneration and options Mr. Greengold receives as a director of the Company (as all directors who are non employees/consultants of the Company). For the avoidance of doubt, the shareholders shall be requested to ratify this resolution at the upcoming annual meeting. 40
Salaries, Directors' Fees, Service Fees2, Commissions Pension, Retirement and and Bonuses Similar Benefits -------- -------- All directors and officers as a group (then 13 persons) $370,000 $ 45,000
Such remuneration does not include amounts expended by the Company for expenses, including business association dues and expenses reimbursed to said officers, and other fringe benefits commonly reimbursed or paid by companies in the location in which the particular executive officer of the Company is located, as the case may be. 6C. BOARD PRACTICES Our Board of Directors is currently comprised of eleven directors, including two external directors. The directors are elected at the annual shareholders meeting, by a simple majority, to serve until the next annual meeting of our shareholders and until their respective successors are elected and qualified, with the exception of the external directors who, by rule of the Companies Law 1999, serve for three years. Our Articles of Association provide that the number of directors in the Company (including external directors) shall be determined from time to time by the annual general meeting of shareholders, provided that it shall not be less than four nor more than eleven. Our Articles of Association provide that the directors may appoint additional directors (whether to fill a vacancy or to expand the Board) so long as the number of directors so appointed does not exceed the number of directors authorized by shareholders at the annual general meeting, and such appointees shall serve until the next annual general meeting. Under the Companies Law and the regulations promulgated pursuant thereto, Israeli companies whose shares have been offered to the public in, or that are publicly traded outside of, Israel are required to appoint at least two natural persons as "external directors". No person may be appointed as an external director if the person, or a relative, partner or employer of the person, or any entity under the person's control, has or had, on or within the two years preceding the date of the person's appointment to serve as an external director, any affiliation with the company to whose board the external director is proposed to be appointed or with any entity controlling or controlled by such company or by the entity controlling such company. The term affiliation includes an employment relationship, a business or professional relationship maintained on a regular basis, control and service as an office holder (which term includes a director). In addition, no person may serve as an external director if the person's position or other business activities create, or may create, a conflict of interest with the person's responsibilities as an external director or interfere with the person's ability to serve as an external director or if the person is a member or employee of the Israel Securities Authority or of an Israeli stock exchange. If, at the time of election of an external director, all other directors are of the same gender, the external director to be elected must be of the other gender. External directors are elected for a term of three years and may be re-elected for one additional three-year term. Each committee of a company's board of directors that has the authority to exercise powers of the board of directors is required to include at least one external director and its audit committee must include all external directors. - ---------- 2 We receive CFO services from Mocha Global Managerial Services Ltd., and the services are provided by Mr. Nehemia Kaufman. From January 1, 2004 we receive managerial/CEO services from Signum Ltd., and the services are provided by Mr. Adiv Baruch. 41 External directors are elected at the general meeting of shareholders by a simple majority, provided that the majority includes at least one-third of the shareholders who are not controlling shareholders, who are present and voting, or that the non-controlling shareholders who vote against the election hold one percent or less of the voting power of the company. Under the Companies Law an external director cannot be dismissed from office unless: (i) the board of directors determines that the external director no longer meets the statutory requirements for holding the office, or that the external director is in breach of the external director's fiduciary duties and the shareholders 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; (ii) a court determines, upon a request of a director or a shareholder, that the external director no longer meets the statutory requirements of an external director or that the external director is in breach of his or her fiduciary duties to the company; or (iii) a 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 specified crimes. Our Articles of Association provide that a director may appoint, by written notice to us, any individual to serve as an alternate director, up to a maximum period of one month, if the alternate is not then a member of the Board. Any alternate director shall have all of the rights and obligations of the director appointing him or her and shall be subject to all of the provisions of the Articles of Association and the Companies Law. Unless the time period or scope of any such appointment is limited by the appointing director, such appointment is effective for all purposes for a period of one month, but in any event will expire upon the expiration of the appointing director's term, removal of the alternate at an annual general meeting, the bankruptcy of the alternate, the conviction of the alternate for an offense under Section 232 of the Companies Law, the legal incapacitation of the alternate, the removal of the alternate by court order or the resignation of the alternate. Currently, one alternate director has been appointed - Mr. Avishai Gluck has appointed Mr. Erez Miller as his alternate for the period of May 30, 2004 thru June 23, 2004, while Mr. Gluck is on military reserve duty. Officers serve at the discretion of the Board or until their successors are appointed. According to the provisions of our Articles of Association and the Companies Law, the board of directors convenes in accordance with the Company's requirements, and at least once every three months. In practice, the board of directors convenes more often. AUDIT COMMITTEE: The Companies Law requires public companies to appoint an audit committee comprised of at least three directors, including all of the external directors, and further stipulates that the chairman of the board of directors, any director employed by or providing other services to a company and a controlling shareholder or any relative of a controlling shareholder may not be members of the audit committee. The responsibilities of the audit committee include identifying flaws in the management of a company's business, making recommendations to the board of directors as to how to correct them and deciding whether to approve actions or transactions which by law require audit committee approval. An audit committee may not approve an action or 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 In order to comply with the Sarbanes-Oxley Act of 2002, the Board of Directors has expanded the role of the Company's Audit Committee to provide assistance to the Board of Directors in fulfilling its legal and fiduciary obligations with respect to matters involving the accounting, auditing, financial reporting and internal control functions of the Company. In carrying out these duties, the Audit Committee must meet at least once in each fiscal quarter with management at which time, among other things, it reviews, and either approves or disapproves, the financial statements of the Company for the immediately preceding fiscal quarter and conveys its conclusions in this regard to the Board of Directors. The Audit Committee also monitors generally the services provided by the Company's external auditors to ensure their independence, and reviews, and either approves or disapproves, all audit and non-audit services provided by them. The Company's external and internal auditors must also report regularly to the Audit Committee at its meetings, and the Audit Committee discusses with the Company's external auditors the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments and the clarity of disclosures in the Company's financial statements, as and when it deems it appropriate to do so. 42 Under the Sarbanes-Oxley Act of 2002, the Audit Committee is also responsible for the appointment, compensation, retention and oversight of the work of the Company's external auditors. However, under Israeli law, the appointment of external auditors requires the approval of the shareholders of the Company. Accordingly, the appointment of the external auditors is approved and recommended to the shareholders by the Audit Committee and ratified by the shareholders. Furthermore, pursuant to the Company's Articles of Association, the Board of Directors is the organ that has the authority to determine the compensation of the external auditors, however, the Board of Directors recently delegated its authority to the audit committee, so that a second discussion by the Board of Directors shall not be necessary. In 2003 the Company adopted an Audit Committee Charter which sets forth the responsibilities of the committee. REMUNERATION COMMITTEE The role of the Remuneration Committee is to provide assistance and make recommendations to the Board of Directors regarding matters related to the compensation of directors and certain employees of the Company. The Remuneration Committee of the Company meets on an ad hoc basis, and in the past has not always been active. Under the Israeli Companies Law, the Remuneration Committee may only make recommendations to the Board of Directors concerning the grant of options (and in some cases, such grants may need approval of the audit committee, the Board of Directors and the shareholders as well). 6D. EMPLOYEES As of December 31, 2003, we employed 57 employees worldwide, including those in our subsidiaries. Of the 57 employees, 55 are based in our facility in Israel (employed by us or BOScom), including 10 employees in administration and finance, 5 employees in marketing and sales, 26 employees in engineering, research and development, 6 employees in technical support, and 8 employees in manufacturing. We have 1 employee in the U.S. and 1 in the U.K. As of December 31, 2002 we employed 104 employees worldwide. As of December 31, 2001, we employed 181 employees worldwide. We believe that our relations with our employees are satisfactory. We have not experienced a collective labor dispute or strike. Israeli labor laws are applicable to all of our employees in Israel. The laws principally concern the length of the work day, 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. All Israeli employers, including us, are required to provide a certain escalation of wages in relation to the increase in the Israeli Consumer Price Index. The specific formula of such escalation varies according to agreements reached between the Government of Israel, the Manufacturers' Association and the Histadrut, the general labor union in Israel. The majority of our employees are covered by comprehensive life and pension insurance policies. The remainder are covered by retirement accounts. Israeli employees and employers are required to pay predetermined sums to the Israel National Insurance Institute which amounts also include, since January 1, 1995, payments for national health insurance. 43 6E. SHARE OWNERSHIP As of May 16, 2004, our directors and officers as a group, now consisting of 12 persons, hold an aggregate of 321,332 ordinary shares. We have also granted our officers and directors options to purchase 221,250 ordinary shares under our Stock Option Plans3. Of these options, none have been exercised until now and 168,750 had vested as of May 15, 2004. The only directors or officers who hold shares are: o Mr. Israel Gal (Director) holds 321,332 ordinary shares, amounting to 7.7% of the Company's outstanding shares4. o Mr. Yair Shamir has indirect holdings of less than 1%. The options granted to directors or officers who are serving as of the date of this report are outlined below:
Name No. of options Terms - ---- -------------- ----- Israel Gal5 18,750 1. All vested. 2. Exercisable - until November 10, 2004. 3. Exercise price -$18.00 Israel Gal 75,000 1. All vested. 2. Exercisable - until April 17, 2006. 3. Exercise price -$28.00 Each of6: 7,500 1. 2,500 vesting August 31, 2004; Zvi Greengold7, Eli 2,500 vesting August 31, 2005; Ben-Mayor, Yair Shamir, 2,500 vesting August 31, 2006. Ronen Zavlik, Yael Ilan, 2. Exercisable - until August 31, 2008. Adi Raveh 3. Exercise price -$1.84.
- ---------- 3 Does not include 7,500 options granted to Avishai Gluck, an executive of Catalyst Investments, serving on the Company's Board of Directors, which have been transferred to Catalyst (see also footnote 6), and does not include additional grants that have not yet been approved by the Company shareholders. 4 Does not include indirect ownership of 244,467 Ordinary Shares owned by Ms. Yael Gal, Mr. Israel Gal's spouse, as to which Mr. Gal disclaims beneficial ownership. Does not include options held by Mr. Gal - see table below. 5 Does not include, the grant of 12,805 options to Mr. Gal (vesting 50% on August 31 2004, and 50% on August 31 2005, exercise price - $2, exercisable until August 31, 2013), that was approved by the Board of Directors in August 2003 and is subject to shareholder approval at the upcoming annual general meeting. 6 Additionally, 7,500 options under the same vesting and exercise price terms, have been granted to an executive of Catalyst Investments, Avishai Gluck, serving on the Company's Board of Directors. The Audit Committee and the Board of Directors have resolved, subject to shareholder approval and retroactive from August 2003, that if executives of Catalyst on the Company's Board of Directors (currently: Edouard Cukierman and Avishai Gluck), transfer their right to be granted options, to Catalyst (the audit committee and Board of Directors have approved such transfer), then for purposes of vesting and exercise terms of the options, the holding period of a successor Catalyst executive on the Company's Board will be tacked to that of his predecessor, provided that the service 44
Andrea Mandel-Mantello 7,500 1. 2,500 vesting November 16, 2004; 2,500 vesting November 16, 2005; 2,500 vesting November 16, 2006. 2. Exercisable - until November 16, 2008. 3. Exercise price -$1.84. Nehemia Kaufman8 75,000 1. All vested. 2. Exercisable - until June 26, 2011. 3. Exercise Price - $4.00
On February 18, 2003 the Company's shareholders approved the grant of 7,500 options to any future first-time director, who is not an employee or paid consultant of the Company. The terms and conditions of the grant, as approved by the shareholders, are as follows: the exercise price shall be $1.84 (pre-split price of $0.46 - the closing price of the shares on the Nasdaq National Market on the date of approval by the shareholders); the options will vest over a three year period from the date of grant (one-third vesting every year) and be exercisable within five years from the date of grant. As the share price has fluctuated over the past year, the Board of Directors has resolved to bring before the annual shareholders meeting to be held in the summer of 2004, a proposal that future issuances to new directors will have an exercise price equal to the average closing price of the shares on the Nasdaq National Market on the 20 trading days preceding their appointment. Additionally, the audit committee and the Board of Directors have approved, subject to shareholder approval at the upcoming annual meeting of shareholders: (a) that Edouard Cukierman, Chairman of the Board, will be granted 7,500 options under the same terms as all other directors (with a grant date of August 31, 2003), despite his being (indirectly) a controlling shareholder and senior executive of Cukierman & Co. Investment House Ltd. (a service provider to the Company), and therefore not eligible for options according to the current shareholder resolution. (b) the grant of options to purchase 216,282 ordinary shares of the Company (equal to five percent (5%) of the Company's issued and outstanding share capital, on a fully diluted and as converted basis, on November 23, 2003), to Signum Ltd., the management services provider to the Company (exclusively through Adiv Baruch who serves in the capacity of President and Chief Executive Officer of the Company). The options shall vest and become exercisable in 36 equal monthly installments (fractions shall be rounded up) at the end of each month following the date of grant and shall be exercisable at any time during a period of ten years from the date of adoption of the Company's stock option plan (22.5.2013). The exercise price shall be $3 per ordinary share. Notwithstanding the foregoing, all options shall immediately vest and become exercisable upon (a) the occurrence of a merger, reorganization, or sale of the Company or a sale all or substantially all of the Company's shares or assets or (b) upon the termination by the Company of the management agreement other than for Cause (as defined in the management agreement), provided however that no such immediate vesting shall occur in the event of termination due to failure of Adiv Baruch to reach the annual goals set by the Company's Board of Directors. - -------------------------------------------------------------------------------- on the Board is consecutive. As of the date of this report, one Catalyst executive, Avishai Gluck, who was granted options on February 5, 2004, has transferred his options to Catalyst. In the event shareholder approval is received, the grant date of the options that were transferred to Catalyst by Avishai Gluck, will be August 31, 2003 (and not February 5, 2004), as Avishai Gluck replaced Boaz Harel, another Catalyst executive, on the Company's Board of Directors, and Boaz Harel was granted options on August 31, 2003. 7 In November 2003 the audit committee and the Board of Directors approved a consulting agreement between Mr. Zvi Greengold and the Company's subsidiary, BOScom Ltd. (see Item 7B), and that the consulting fee shall be in addition to the remuneration and options Mr. Greengold receives as a director of the Company (as all directors who are non employees/consultants of the Company). For the avoidance of doubt, the shareholders shall be requested to ratify this resolution at the upcoming annual meeting. 8 Additional terms of these options include certain restrictions on the sale of most of the shares derived from the exercise of the options. 45 SHARE OPTION PLANS The purpose of the Share Option Plans is to enable us to attract and retain qualified persons as employees, officers, directors, consultants and advisors and to motivate such persons by providing them with an equity participation in the company. In addition, the Incentive Stock Options (ISO)/ Restricted Stock Option (RSO) Plan is designed to afford qualified optionees certain tax benefits available under the U.S. Internal Revenue Code of 1986, as amended (the "Code"). The Section 102 Plan is designed to afford qualified optionees certain tax benefits under the Israel Income Tax Ordinance. The Share Option Plans will expire 10 years after their adoption, unless terminated earlier by the Board of Directors. The Share Option Plans are administered by the Board of Directors which has broad discretion, subject to certain limitations, to determine the persons entitled to receive options or rights to purchase (in the case of the Section 102 Plan). Under the Share Option Plans, the terms and conditions under which options or rights to purchase (in the case of the Section 102 Plan) are granted and the number of shares subject thereto shall be determined by the Board of Directors. The Board of Directors also has discretion to determine the nature of the consideration to be paid upon the exercise of an option and/or right to purchase granted under the Share Option Plans. Such consideration generally may consist of cash, or, at the discretion of the Board of Directors, cash and a recourse promissory note. Stock options issued as incentive stock options pursuant to the ISO/RSO Plan will only be granted to our employees, including those of all subsidiaries. The exercise price of incentive stock options issued pursuant to the ISO/RSO Plan must be at least equal to the fair market value of the ordinary shares as of the date of grant. The price per share under options awarded pursuant to the Section 102 Plan may be any price determined by the Board. The ordinary shares acquired upon exercise of an option are subject to certain restrictions on transfer, sale or hypothecation. Options are exercisable and restrictions on disposition of shares lapse pursuant to the terms of the individual agreements under which such options were granted or shares issued. Due to a tax reform in Israel, after January 1, 2003 the Company may not grant options pursuant to an "old" Section 102 Plan. Therefore, the Company may not grant any more options pursuant to the 2000 and 1995 Plans described below. Previous grants under these Plans remain unaffected 2003 PLAN In May 2003 the Company's shareholders approved the adoption of the 2003 Stock Option Plan, pursuant to which 625,000 ordinary shares were reserved for purchase by the employees, directors, consultants and service providers of the Company and its subsidiaries. The Board of Directors has resolved that no further grants shall be made from the existing plans (which, as of December 31, 2003, had in the aggregate 337,902 options left for issuance from the existing option pools previously approved by the shareholders). The Company has elected the benefits available under the "capital gains" alternative. There are various conditions that must be met in order to qualify for these benefits, including registration of the options in the name of a trustee (the "Trustee") for each of the employees who is granted options. Each option, and any ordinary shares acquired upon the exercise of the option, must be held by the Trustee for a period commencing on the date of grant and ending no earlier than 24 months after the end of the tax year in which the option was granted and deposited in trust with the Trustee. Pursuant to an election made by the Company, capital gains derived by optionees arising from the sale of shares derived from the exercise of options granted to them under Section 102, will be subject to a flat capital gains tax rate of 25% (instead of the gains being taxed as salary income at the employee's marginal tax rate). However, as a result of this election, the Company will no longer be allowed to claim as an expense for tax purposes the amounts credited to such employees as a benefit when the related capital gains tax is payable by them, as the Company was previously entitled to do. The Company may change its election in the year 2005. 46 As of December 31, 2003, we had 203,076 options outstanding under this plan, 135,576 at an exercise price of $2.00 per share, and 67,500 at an exercise price of $1.84 per share. None were vested as of December 31, 2003. 2001 PLAN In March 2002, the Company's shareholders approved the adoption of the 2001 Stock Option Plan, pursuant to which 250,000 ordinary shares were reserved for purchase by the Company's employees, directors, consultants or service providers, as determined by the Board of Directors or its authorized sub-committee. As of December 31, 2003, we had 104,418 options outstanding under this plan, 75,000 at an exercise price of $4.00 per share and 29,418 at an exercise price of $6.80 per share. Of these options, 60,668 were vested as of December 31, 2003. 2000 PLAN In April 2001, the Company's shareholders approved our 2000 Employees Incentive Share Option Plan, pursuant to which 112,500 ordinary shares were reserved for purchase. The plan is subject to Section 102 of the Israeli Income Tax Ordinance. As of December 31, 2003, we had 55,075 options outstanding under this plan, 45,325 at an exercise price of $28.00 per share and 9,750 at an exercise price of $6.80 per share. Of these options, 51,825 were vested as of December 31, 2003. 1999 PLAN In November 1999, the Company's shareholders approved the adoption of the 1999 Stock Option Plan (incentive and restricted stock options). The 1999 plan has 193,750 ordinary shares reserved in its favor. As of December 31, 2003, 44,257 of the options granted under this plan had been exercised, and there were 32,500 more options outstanding at an exercise price of $18.00 per share all of which had vested as of 31.12.2003. 1995 PLANS In December 1995, we adopted the following plans: (i) the Stock Option Plan (Incentive and Restricted Share Options) (the "ISO/RSO Plan"), which provides for the grant of incentive and restricted stock options and (ii) the Section 102 Stock Option/Stock Purchase Plan (the "Section 102 Plan" and together with the ISO/RSO Plan, the "Share Option Plans"). The Share Option Plans provide for the grant of options to purchase up to an aggregate of 50,000 ordinary shares. As of December 31, 2003, 22,300 of the options granted under this plan had been exercised, and there were 13,488 more options outstanding, 8,038 at an exercise price of $17.00 per share, and 5,450 at an exercise price of $18.00 per share. All of the outstanding options had vested as of December 31, 2003. 1994 PLAN In 1994, we adopted a plan for the grant of options to purchase 50,000 ordinary shares to our employees. As of December 31, 2003, 28,615 of the options granted under this plan had been exercised, and there were 17,695 more options outstanding, 3,695 at an exercise price of $10.60 and 14,000 at an exercise price of $14.00. All of the outstanding options had vested as of December 31, 2003. 47 ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 7A. MAJOR SHAREHOLDERS We are not directly or indirectly owned or controlled by another corporation or by any foreign government. The following table presents, to the best of our knowledge, certain information as of May 16, 2004 with respect to each shareholder known to the Company to be the beneficial owner of more than 5% of our outstanding ordinary shares. Except where indicated, we believe, based on information provided by the owners, that the beneficial owners of the ordinary shares listed below have sole investment and voting power with respect to those shares (subject to community property laws, where applicable). Applicable percentage ownership in the following table is based on 4,167,509 shares outstanding (out of which 5,338 are dormant shares) as of May 16, 2004.
Shares Beneficially Owned Name and Address Number Percent - ---------------- ------- ---- Catalyst Fund, LP(1) 947,275 22.7% 3 Daniel Frisch Street, Tel-Aviv 64731, Israel Mr. Israel Gal (2) 321,332 7.7% C/o B.O.S. Better OnLine Solutions Ltd. 100 Bos Drive Teradion 20197, Israel Ms. Yael Gal (3) 244,467 5.9% C/o B.O.S. Better OnLine Solutions Ltd. 100 Bos Drive Teradion 20197, Israel M. Wertheim Holdings, Ltd. 279,958 6.7% Twin Towers 2, 35 Zabotinski Street Ramat-Gan, Israel Hillswood Holdings Limited 310,119 7.4% C/o Credit Suise Trust Limited Guernsey Office P.O. Box 122, Helvetia Court South Esplanade, St. Peter Port Guernsey, GY1 4EE Channel Islands Officers and directors as a group (4) 321,332 7.7%
(1) Does not include options to purchase 7,500 ordinary shares that were transferred to Catalyst by their executive on the Company's Board of Directors (see Item 6E). (2) Does not include indirect ownership of 244,467 ordinary shares owned by Ms. Yael Gal, Mr. Israel Gal's spouse, as to which Mr. Gal disclaims beneficial ownership. Does not include options held by Mr. Gal (see Item 6E). (3) Does not include indirect ownership of 321,332 ordinary shares owned by Mr. Israel Gal, Ms. Yael Gal's spouse, as to which Ms. Gal disclaims beneficial ownership. 48 (4) Does not include indirect ownership of 244,467 ordinary shares owned by Ms. Yael Gal, Mr. Israel Gal's spouse, as to which Mr. Gal disclaims beneficial ownership. Does not include 221,250 options to purchase ordinary shares of the Company granted and currently held by Officers and/or Directors of the Company. Of the major shareholders, to the best of our knowledge, only the holdings of M. Wertheim Holdings Ltd. changed over the last three years (all figures adjusted to represent the 1:4 reverse-split effected May 29, 2003): as of December 31, 2001 - 147,627 ordinary shares, as of December 31, 2002 until today - 279,958 ordinary shares. Hillswood Holdings Limited became a shareholder only in December 2003. The shareholders' holdings reflect their voting rights. The Company's major shareholders do not have different voting rights than other shareholders, with respect to their shares. As of May 16, 2004, there were 37 record holders of ordinary shares, of which 18 were registered with addresses in the United States, representing approximately 49% of the outstanding ordinary shares. However, the number of record holders in the United States is not representative of the number of beneficial holders nor is it representative of where such beneficial holders are resident since many of the ordinary shares are held of record by brokers and other nominees. 7B. RELATED PARTY TRANSACTIONS GRANT OF OPTIONS TO THE COMPANY'S NON-EMPLOYEE/CONSULTING DIRECTORS On February 18, 2003, the Company's shareholders approved the issuance of a one-time grant of 7,500 options to purchase ordinary shares of the Company, under one of the Company's Stock Option Plans (at the discretion of the Board of Directors) to all then current Company directors (including the external directors) and any future first-time directors who are not employees or paid consultants of the Company9. The terms and conditions of the grant are as follows: (a) Exercise Price of each option - $1.84 ($0.46 pre-split -the closing price of the Company's Shares on the Nasdaq National Market on the date of the approval by the shareholders)10. (b) Option Terms - The Options will vest and become exercisable over a period of three years, in three equal parts as follows: 33.33% after one year from the date of grant, with an additional 33.33% becoming exercisable upon the expiration of each of the two years thereafter. (c) Maximum Option Term - Five years from grant. (d) Payment - Payment for ordinary shares purchased upon exercise of Options must be made in full upon exercise of the Option, by cash or check or cash equivalent, or by the assignment of the proceeds of a sale of some or all of the shares being acquired upon exercise of an Option, or by any combination of the foregoing. (e) Restrictions on Transfer of Plan Shares - Options are exercisable in whole or in part at such times after the date of grant as set forth above. Options are exercisable during the lifetime of the Option holder only by such Option holder, and may not be assigned or transferred except by an advance approval of the Company's Audit Committee, by will or by the laws of descent and distribution. Options shall be exercisable during the term the Option holder holds office as a director of the Company or within 60 days after leaving this position, with certain exceptions in the case of the Option holder's death or disability. - ---------- 9 At this time, the incumbent directors who have been granted options pursuant to this resolution include: Messrs. Zvi Greengold, Eli Ben-Mayor, Yair Shamir, Ronen Zavlik, Avishai Gluck, Andrea Mandel-Mantello, Prof. Adi Raveh and Dr. Yael Ilan. Edouard Cukierman shall be entitled to options, despite his being (indirectly) a controlling shareholder and senior executive of Cukierman & Co. Investment House Ltd., a service provider to the Company, if so approved at the upcoming shareholders meeting (see Item 6E). Avishai Gluck has transferred his options to Catalyst, after having received audit committee approval. 10 As the share price has fluctuated over the past year, the Board of Directors has resolved to bring before the annual shareholders meeting to be held in the summer of 2004, a proposal that future issuances to new directors will have an exercise price equal to the average closing price of the shares on the Nasdaq National Market on the 20 trading days preceding their appointment. 49 REMUNERATION OF THE COMPANY'S NON-EMPLOYEE/CONSULTING DIRECTORS On February 18, 2003, the Company's shareholders approved the remuneration of the directors of the Company (including directors appointed in the future) who are not employees or paid consultants of the Company11, at the same rate the external directors of the Company are paid, and with respect to Messrs. Greengold and Ben-Mayor, the remuneration shall be paid retroactively since the date of their appointment to the Board of Directors in June 2002. At the annual general meeting held on March 13, 2002, the shareholders resolved to remunerate the external directors according to the maximum rate permitted now and in the future by Israeli law and regulations. The current rates for companies the size of ours, are an annual fee of approximately $5520, and a participation fee in meetings of approximately $290. On June 26, 2003, the Board of Directors resolved to reduce the annual fee for all directors by 18%, effective July 1, 2003, as part of a cost reduction plan. INDEMNITY UNDERTAKINGS BY THE COMPANY TO ITS DIRECTORS AND OFFICERS On February 18, 2003, the Company's shareholders approved indemnity undertakings to its directors and officers (including future directors and officers as may be appointed from time to time), in excess of any insurance proceeds, not to exceed, in the aggregate over the years, a total amount of $2,500,000 (two and a half million dollars). SETTLEMENT AGREEMENT BETWEEN THE COMPANY, CATALYST INVESTMENTS L.P, AND CERTAIN SHAREHOLDERS In January 2003, the Company's Board of Directors approved the transaction with Catalyst Investments, L.P. ("Catalyst" and the "Transaction"), pursuant to which Catalyst was issued Company shares, in exchange for the sale of most of its Surf shares to the Company (see also Item 4A). Shortly thereafter, certain shareholders filed suit against the Company demanding that a shareholders meeting be convened and requesting a declaratory judgment that the transaction is subject to shareholder approval. The court issued a temporary restraining order, EX PARTE, prohibiting the Company from signing the transaction agreements and closing the deal, and scheduled a hearing in the presence of all parties. The Company's position was that the shareholders lack voting authority with regard to the Transaction. - ---------- 11 Edouard Cukierman shall also be entitled to such remuneration, despite his being (indirectly) a controlling shareholder and senior executive of Cukierman & Co. Investment House Ltd., a service provider to the Company, if so approved at the upcoming shareholders meeting (see Item 6E). Additionally, the audit committee and the Board of Directors approved a consulting agreement between Mr. Zvi Greengold and the Company's subsidiary, BOScom Ltd., and that the consulting fee shall be in addition to the remuneration and options Mr. Greengold receives as a director of the Company (as all directors who are non employees/consultants of the Company). For the avoidance of doubt, the shareholders shall be requested to ratify this resolution at the upcoming annual meeting. 50 In February 2003, a settlement agreement reached between the parties provided for the dismissal of the lawsuit, so that the Transaction will be executed without the need for shareholder approval. Under the settlement agreement, Catalyst is prohibited, until February 1, 2005, from entering into a voting agreement of any kind, with other shareholders of the Company, unless some of the plaintiff shareholders enter into voting agreements of their own. Catalyst also represented that it purchased the Company shares for investment purposes and undertook to not sell its shares until February 1, 2006, subject to certain agreed-upon exceptions. The settlement agreement also provided Catalyst with the same registration rights with regard to the purchased shares, as some of the plaintiff shareholders received when they invested in the Company in May 2000. Furthermore, all parties waived claims against each other and against the directors of the Company, with regard to the Transaction, as well as any claims against Orwer Ltd. and/or Mr. Aviram Wertheim, with relation to the private placement between the Company and Orwer Ltd., which did not take place despite the authorization given by the shareholders in March 2002. SERVICES AGREEMENT WITH CUKIERMAN & Co. INVESTMENT HOUSE LTD. The Company's audit committee and Board of Directors have approved the engagement of Cukierman & Co. Investment House Ltd., to provide non-exclusive investment-banking services and business development services to the Company, effective April 15, 2003. Cukierman & Co. is a company indirectly controlled by Mr. Edouard Cukierman, who, since June 26, 2003, serves as Chairman of our Board of Directors, and is a co-manager of the Catalyst Fund, the Company's largest shareholder. For its services, Cukierman & Co. is paid a monthly sum of $10,000 plus VAT, in addition to a success fee of 4-6% for a consummated private placement. According to its terms the Company may terminate the agreement at any time, by giving one month prior written notice. CONSULTING AGREEMENT BETWEEN BOSCOM AND ZVI GREENGOLD The Company's audit committee and Board of Directors have approved a consulting agreement between the Company's subsidiary, BOScom Ltd. and Mr. Zvi Greengold (a director of the Company and Chairman of the Board of Directors of BOScom), effective September 1, 2003, and that the consulting fee of 4,500 NIS per month (approximately $1,000) plus applicable VAT and reimbursement of expenses, shall be in addition to the remuneration and options Mr. Greengold receives as a director of the Company (as do all directors who are non employees/consultants of the Company). The consulting services include accompanying management in formalization of managerial processes and providing consulting services to the CEO. The agreement may be terminated by either party for any reason by 30 day advance written notice. For the avoidance of doubt, the shareholders shall be requested to ratify this resolution at the upcoming annual meeting. MANAGEMENT AGREEMENT WITH SIGNUM LTD. The Company's audit committee and Board of Directors have approved, subject to shareholder approval, an agreement with Signum Ltd. to provide management services to the Company (exclusively through Adiv Baruch who serves in the capacity of President and Chief Executive Officer of the Company), effective January 1, 2004. Signum is entitled to a monthly gross management fee of NIS 79,698, (approximately $18,000) plus Value Added Tax, based on a NIS - US Dollar exchange rate of NIS4.4 to 1 US Dollar, that shall be adjusted at the beginning of every calendar quarter in accordance with the NIS - US Dollar exchange rate on the last day of the previous quarter. In connection with the preparation by the Board of Directors of the annual work plan and budget of the Company, the Board of Directors shall annually establish an annual bonus to be paid to Signum provided that Signum shall have satisfied or exceeded the goals or milestones established by the Board of Directors for the respective year. 51 Additionally, Signum shall be granted options to purchase 216,282 ordinary shares of the Company (equal to five percent (5%) of the Company's issued and outstanding share capital, on a fully diluted and as converted basis, on November 23, 2003). The options shall vest and become exercisable in 36 equal monthly installments (fractions shall be rounded up) at the end of each month following the date of grant and shall be exercisable at any time during a period of ten years from the date of adoption of the Company's stock option plan (22.5.2013). The exercise price shall be $3 per ordinary share. Notwithstanding the foregoing, all options shall immediately vest and become exercisable upon (a) the occurrence of a merger, reorganization, or sale of the Company or a sale all or substantially all of the Company's shares or assets or (b) upon the termination by the Company of the management agreement other than for Cause (as defined in the agreement), provided however that no such immediate vesting shall occur in the event of termination due to failure of Adiv Baruch to reach the annual goals set by the Company's Board of Directors. Furthermore, pursuant to the agreement, Signum will have PRO RATA preemptive rights (taking into account all of the ordinary shares as if the options had vested and Signum had exercised all such options) with regard to future issuance of securities of the Company, under certain terms and conditions. ASSIGNMENT OF VOTING RIGHTS TO MR. YAIR SHAMIR On February 5, 2004 the audit committee and Board of Directors approved an Assignment and Assumption Agreement, between the Company, Catalyst Investments L.P, and Mr. Yair Shamir (who is a director of the Company and the Chairman of Catalyst Investments), according to which the voting rights in all but one of the Surf shares that the Company has an option to purchase from Catalyst (se Item 4A), have been assigned to Yair Shamir. Pursuant to the agreement, Yair Shamir irrevocably undertook to assign the voting rights to the Company immediately upon the earlier to occur of the following, and subject to the receipt of a written request from the Company to effect such assignment: a) at the time Surf's shares are offered to the public in a public offering pursuant to a registration statement filed by Surf under the Securities Act of 1933 or a similar act of another jurisdiction, or b) the Company exercises its option to purchase the additional shares from Catalyst. 7C. INTERESTS OF EXPERTS AND COUNSEL Not applicable. 52 ITEM 8: FINANCIAL INFORMATION. 8A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION CONSOLIDATED FINANCIAL STATEMENTS See Item 18. SALES OUTSIDE ISRAEL The total amount of export sales of the Company has been as follows: 2003- $4,173,000 (totaling 73% of all revenues); 2002 - $7,147,000 (totaling 76% of all revenues); 2001 - $4,787,000 (totaling 79% of all revenues); LEGAL PROCEEDINGS In 2001, our US subsidiary, PacInfoSystems acquired 100% of Dean Tech. The effective date of the acquisition was January 1, 2001. The total purchase price, including acquisition costs, consisted of $275,000 in cash plus Dean Tech's total amount of cash and accounts receivables, less accounts payable, and plus payments to the sellers of certain annual earn-out payments until April 15, 2004. During the second quarter of 2002, the sellers of Dean Tech disputed the financial audit and earnings calculations of Dean Tech for the year ended 2001, which directly affected their earn-out payment for that year. Their dispute was submitted to the American Arbitration Association ("AAA") and contained a claim for an earn-out payment in the amount of $900,000 against PacInfoSystems. In October 2002, the AAA resolved that PacInfoSystems should pay the sellers of Dean Tech $618,000 plus $29,000 arbitration costs. In July 2003 BOS entered into an Agreement and Assignment of the AAA Judgment with the sellers of Dean Tech, and negotiated a final payment of $324,000, made by BOS to the sellers of Dean Tech PacInfoSystems is responsible for collecting sales taxes on sales of products to customers in various states. Between 1999 and 2001 PacInfoSystems had not remitted collected sales taxes to several states on a timely basis. As of December 31, 2001, the financial statements included a liability for taxes, interest and estimated penalties amounting to $1,392,000. During 2002, PacInfoSystems paid its unpaid sales taxes according to certain amnesties with state authorities in the amount of $772,000. As a result, PacInfoSystems reversed the provision for interests and penalties in the amount of $568,000. During year 2003 the Company reached a final settlement with the tax authorities, which resulted in additional sales tax expenses in year 2003 in the amount of $28,000. As of December 31, 2003 there is no sales tax debt. In July 2002, Operate Lease, Ltd., a company from which the Company leased cars for its employees, claimed that the Company's termination notice of the leasing agreement in March 2002 constituted a breach of the agreement and Operate Lease demanded compensation in the amount of NIS 1,278,968 (the nominal sum of the claim is equivalent to approximately $292,000, as of December 31, 2003). The Company denied the claim and to date, no legal proceeding has been filed. The Company does not believe that the chances of Operate Lease prevailing and recovering a significant amount, are high, and therefore no provision was recorded. 53 On the basis of an audit conducted by the Office of the Chief Scientist in October 2002, the Company was required to pay royalties in the sum of $473,200 for the years 1991-1999 (in excess of royalties already paid for this period). The Company paid $23,367 and appealed with respect of the remainder of the sum claimed. In July 2003 the company entered into an agreement with the Chief Scientist pursuant to which the required royalties for the years 1991-1999 were reduced from $473,200 to $247,000. The Company has recorded a provision for the reduced amount. DIVIDEND POLICY We intend to reinvest our earnings and therefore do not anticipate paying any cash dividends in the foreseeable future. The declaration and payment of any cash dividends in the future will be determined by the Board of Directors in light of the conditions existing at the time. This will include our earnings and financial condition. We may only pay cash dividends in any fiscal year out of "profits," as determined under Israeli statutory standards. Any dividends paid out of Approved Enterprise earnings (i.e. tax exempt income) will be liable to tax. As we do not intend to distribute these earnings, no provision has been made for this additional tax in our Financial Statements. 8B. SIGNIFICANT CHANGES Not applicable. ITEM 9: THE OFFER AND LISTING. 9A. OFFER AND LISTING DETAILS Our ordinary shares are traded, and our warrants, until they expired on April 2, 2000, were traded in the over-the-counter market in the United States, as quoted on the NASDAQ Small Capitalization Market under the symbol "BOSC" and "BOSCW," respectively. In September 2000, our shares started to be traded on the NASDAQ National Market. In January 2002, our shares began trading, as well, on the Tel-Aviv Stock Exchange, under the symbol "BOS", pursuant to the dual-listing regulations of the Israeli Securities Authority. Prices set forth below are high and low reported closing sale prices for our ordinary shares and warrants of the Company, as reported by NASDAQ for the period indicated. All share prices have been retroactively adjusted to reflect the 1:4 reverse stock split effected May 29, 2003.
Ordinary Shares Warrants -------------------- ------------------ Period High Low High Low 1999 Annual 34.76 6.52 8.88 0.20 2000 Annual 71.24 10.36 40.00* 4.56* 2001 Annual 16.68 3.64 2002 Annual 7.92 2.40 First Quarter 7.92 5.56 Second Quarter 6.56 2.96 Third Quarter 4.40 2.80 Fourth Quarter 3.76 2.40 2003 Annual 3.97 1.67 First Quarter 1.96 1.92 Second Quarter 2.40 1.99 Third Quarter 1.90 1.67 Fourth Quarter 3.97 2.60 2003 December 3.49 2.72 2004 January 3.10 2.87 February 2.91 2.31 March 4.00 2.46 April 3.25 2.53 May 2.69 1.77
(*) The warrants expired and ceased to be traded on April 2, 2000. 54 9B. PLAN OF DISTRIBUTION Not applicable. 9C. MARKETS Our securities are traded on the NASDAQ Stock Exchange (symbol "BOSC") and the Tel-Aviv Stock Exchange (symbol "BOS"). 9D. SELLING SHAREHOLDERS Not applicable. 9E. DILUTION Not applicable. 9F. EXPENSES OF ISSUE Not applicable. ITEM 10: ADDITIONAL INFORMATION. 10A. SHARE CAPITAL Not applicable. 10B. MEMORANDUM AND ARTICLES OF ASSOCIATION In March 2002 the Company adopted new Articles of Association, in view of the Israeli Companies Law, 1999. Set forth below is a summary of certain provisions governing our share capital. This summary is not complete and should be read together with our Memorandum and Articles of Association, copies of which have been filed as exhibits to the Annual Report. 1. OBJECTS OF THE COMPANY: The company's objects and purposes are outlined in the Memorandum of Association. These objects include: the development of sophisticated interfaces for IBM mainframe computers; the export of hi-tech products to Europe and the USA; and research, development and manufacture of products in the sphere of communication networks. The Company's Articles of Association (Article 2) allow it to engage in any legal business. 55 2. PROVISIONS RELATED TO THE DIRECTORS OF THE COMPANY: (a) Approval of Certain Transactions under the Companies Law: We are subject to the provisions of the Israeli Companies Law 1999, which became effective on February 1, 2000. The Companies Law codifies the fiduciary duties that an Office Holder has to the Company. An "Office Holder" is defined in the Companies Law as any Director, General Manager or any other Manager directly subordinate to the General Manager and any other person with similar responsibilities. An Office Holder's fiduciary duties consist of a Duty of Loyalty and a Duty of Care. The Duty of Loyalty includes: the avoidance of any conflict of interest between the Office Holder's position in the company and his personal affairs; the avoidance of any competition with the company; the avoidance of any exploitation of any business opportunity of the Company in order to receive personal advantage for himself or others; and a duty to reveal to the Company any documents or information relating to the Company's affairs that the Office Holder has received due to his position. The Duty of Care requires an Office Holder to act at a level of care that a reasonable Office Holder in the same position would employ under the same circumstances. This includes the duty to utilize reasonable means to obtain (1) information regarding the appropriateness of a given action brought for his approval or performed by him by virtue of his position and (2) all other information of importance pertaining to the foregoing actions. Under the Companies Law, all arrangements with regard to the compensation of Office Holders who are not Directors require the approval of the Board of Directors. Arrangements regarding the compensation of Directors require Audit Committee, Board and Shareholder approval. The Companies Law requires that an Office Holder of a company promptly disclose to the company's Board of Directors any personal interest that he or she may have, and all related material information known to him in connection with any existing or proposed transaction by the company. This disclosure must be made by the Office Holder, whether orally or in writing, no later than the first meeting of the Company's Board of Directors which discusses the particular transaction. An Office Holder is deemed to have a "personal interest" if he, certain members of his family, or a corporation in which he or any one of those family members is a 5% or greater shareholder or exercises or has the right to exercise control, has an interest in a transaction with the company. An "Extraordinary Transaction" is defined as a transaction - other than in the ordinary course of business, not on market terms, or that is likely to have a material impact on the company's profitability, assets or liabilities. In the case of a transaction that is not an Extraordinary Transaction, after the office holder complies with the above disclosure requirements, only board approval is required. The transaction must not be adverse to the company's interests. In the case of an Extraordinary Transaction, the company's Audit Committee and the Board of Directors, and, under certain circumstances, the shareholders of the company must approve the transaction, in addition to any approval stipulated by the Articles of Association. An Office Holder who has a personal interest in a matter that is considered at a meeting of the Board of Directors or the Audit Committee may not be present at this meeting or vote on this matter, unless a majority of the members of the Board of Directors or Audit Committee, respectively, have a personal interest in the matter, in which case they may all be present and vote, after which the matter must be approved by the shareholders of the Company. 56 (b) Borrowing powers exercisable by the Directors are not specifically outlined in the Company's Articles of Association, however, according to Article 15: "Any power of the Company which has not been vested in another organ pursuant to the Companies Law or the articles may be exercised by the Board of Directors". (c) The Company's Articles of Association do not contain provisions regarding the retirement of directors under an age limit requirement, nor do they contain a provision requiring a Director to hold any Company shares in order to qualify as a Director. For further reference to the Articles of Association regarding the Company's directors, see Item 6. 3. WITH REGARD TO THE RIGHTS, PREFERENCES AND RESTRICTIONS ATTACHING TO THE SHARES, THE COMPANY'S ARTICLES OF ASSOCIATION PROVIDE THE FOLLOWING: (a),(c),(d): Dividends, Rights to Share in the Company's Profits and Rights to Share in any Surplus upon Liquidation All holders of paid-up ordinary shares of the Company have an equal right to participate in the distribution of (i) dividends, whether by cash or by bonus shares; (ii) Company assets; and (iii) the Company's surplus assets upon winding up, all pro rata to the nominal value of the shares held by them (Articles 4.2.2, 4.2.3 and 7.3). The Board of Directors is the organ authorized to decide upon the distribution of dividends and bonus shares (Article 26). The shareholders who are entitled to a dividend are the shareholders on the date of the resolution for the dividend or on a later date if another date is specified in the resolution on the dividend's distribution. If the Board of Directors does not otherwise determine, any dividend may be paid by way of a cheque or payment order that shall be sent by mail in accordance with the registered address of the shareholder or person entitled thereto, or in the case of registered joint shareholders to the shareholder whose name appears first in the shareholders' register in relation to the joint shareholding. Every such cheque shall be drawn up to the order of the person to whom it is being sent. The receipt of a person who on the date of the dividend's declaration is listed in the shareholders' register as the holder of any share or, in the case of joint shareholders, of one of the joint shareholders shall serve as confirmation of all the payments made in connection with such share. For the purpose of implementing any resolution pursuant to the provisions of this paragraph, the Board of Directors may settle, as it deems fit, any difficulty arising in relation to the distribution of the dividend and/or bonus shares, including determine the value for the purpose of the said distribution of certain assets and resolve that payments in cash shall be made to members in reliance upon the value thus determined, determine regulations in relation to fractions of shares or in relation to non-payment of amounts less than NIS 200. (b) Voting Rights All holders of paid-up ordinary shares of the Company have an equal right to participate in and vote at the Company's general meetings, whether ordinary or special, and each of the shares in the Company shall entitle its holder, present at the meeting and participating in the vote, himself, by proxy or through a voting instrument, to one vote (Article 4.2.1). Shareholders may vote either in person or through a proxy or voting instrument, unless the Board of Directors prohibited voting through a voting instrument on a certain matter and stated so in the notice of the meeting (Articles 14.1 and 14.6). A resolution at the general meeting shall be passed by an ordinary majority unless another majority is specified in the Companies Law or the Company's Articles of Association (Article 14.3). Directors of the Company stand for reelection at every annual meeting (Article 16.2) and not at staggered intervals, with the exception of the External directors who are appointed for a period of 3 years under the Israeli Companies Law, 1999. The Articles do not provide for cumulative voting. 57 (e) Redemption The Company may, subject to any applicable law, issue redeemable securities on such terms as determined by the Board of Directors, provided that the general meeting of shareholders approves the Board of Director's recommendation and the terms determined (Article 27). (g) Capital Calls by the Company The Board of Directors may only make calls for payment upon shareholders in respect of monies not yet paid for shares held by them (Article 7.2). (h) Discrimination No provision in the Company's Articles of Association discriminates against an existing or prospective holder of securities, as a result of such shareholder owning a substantial amount of shares. 4. MODIFICATION OF RIGHTS OF HOLDERS OF STOCK The general meeting of shareholders may resolve to create new shares of an existing class or of a new class with special rights and/or restrictions (Article 9.1). So long as not otherwise provided in the shares' issue terms and subject to the provisions of any law, the rights attached to a particular class of shares may be altered, after a resolution is passed by the Company and with the approval of a resolution passed at a general meeting of the holders of the shares of such class or the written agreement of all the class holders. The provisions of the Company's Articles of Association regarding general meetings shall apply, mutatis mutandis, to a general meeting of the holders of a particular class of shares (Article 10.1). The rights vested in the holders of shares of a particular class that were issued with special rights shall not be deemed to have been altered by the creation or issue of further shares ranking equally with them, unless otherwise provided in such shares' issue terms (Article 10.2). The above mentioned conditions are not more onerous than is required by law. 5. ANNUAL GENERAL MEETINGS AND EXTRAORDINARY GENERAL MEETINGS General meetings shall be convened at least once a year at such place and time as determined by the Board of Directors but no later than 15 months from the last general meeting. Such general meetings shall be called "annual meetings". The Company's other meetings shall be called "special meetings" (Article 12.1). The annual meeting's agenda shall include a discussion of the Board of Directors' reports and the financial statements as required at law. The annual meeting shall appoint an auditor, appoint the directors pursuant to these articles and discuss all the other matters which must be discussed at the Company's annual general meeting, pursuant to these articles or the Law, as well as any other matter determined by the Board of Directors (Article 12.2). The Board of Directors may convene a special meeting pursuant to its resolution and it must convene a general meeting if it receives a written requisition from any one of the following (hereinafter referred to as "requisition") (i) two directors or one quarter of the directors holding office; and/or (ii) one or more shareholders holding at least 5% of the issued capital and at least 1% of the voting rights in the Company; and/or (iii) one or more shareholders holding at least 5% of the voting rights in the Company (Article 12.3). A requisition must detail the objects for which the meeting must be convened and shall be signed by the persons requisitioning it and sent to the Company's registered office. The requisition may be made up of a number of documents in an identical form of wording, each of which shall be signed by one or more of the persons requisitioning the meeting (Article 12.4). Where the Board of Directors is required to convene a special meeting, it shall do so within 21 days of the requisition being submitted to it, for a date that shall be specified in the invitation and subject to the law (Article 12.5). 58 Notice to the Company's members regarding the convening of a general meeting shall be sent to all the shareholders listed in the Company's shareholders' register at least 21 days prior to the meeting and shall be published in other ways insofar as required by the law. The notice shall include the agenda, proposed resolutions and arrangements with regard to a written vote. The accidental omission to give notice of a meeting to any member, or the non-receipt of notice sent to such member, shall not invalidate the proceedings at such meeting (Article 12.6). The shareholders entitled to participate in and vote at the general meeting are the shareholders on the date specified by the Board of Directors in the resolution to convene the meeting, and subject to the law (Article 14.1). No discussions may be commenced at the general meeting unless a quorum is present at the time of the discussion's commencement. A quorum is the presence of at least two shareholders holding at least 25% of the voting rights (including presence through a proxy or a voting instrument), within half an hour of the time fixed for the meeting's commencement (Article 13.1). If no quorum is present at a general meeting within half an hour of the time fixed for the commencement thereof, the meeting shall be adjourned for one week, to the same day, time and place, or to a later time if stated in the invitation to the meeting or in the notice of the meeting (hereinafter referred to as "the adjourned meeting") (Article 13.2). The quorum for the commencement of the adjourned meeting shall be any number of participants. The Articles of Association provide that all shareholder resolutions shall be passed by an ordinary (simple) majority of the votes cast, unless another majority is specified in the Companies Law or in the Articles (Article 14.3). 6. LIMITATIONS ON THE RIGHTS TO OWN SECURITIES There are no limitations on the rights to own the Company's securities, including the rights of non-residents or foreign shareholders to do so. 7. CHANGE OF CONTROL Under the Companies Law, a merger is generally required to be approved by the shareholders and board of directors of each of the merging companies. If the share capital of the company that will not be the surviving company is divided into different classes of shares, the approval of each class is also required, unless determined otherwise by the court. A majority of votes approving the merger shall suffice, unless the company (like ours) was incorporated in Israel prior to the Companies Law of 1999, in which case a majority of 75% of the voting power is needed in order to approve the merger. Additionally, unless the court determines differently, a merger will not be approved if it is objected to by a majority of the shareholders present at the meeting, after excluding the shares held by the other party to the merger, by any person who holds 25% or more of the other party to the merger and by the relatives of and corporations controlled by these persons. Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties of the merger. Also, a merger can be completed only after all approvals have been submitted to the Israeli Registrar of Companies and 70 days have passed from the time that a proposal for approval of the merger was filed with the Registrar. The Companies Law also provides that an acquisition of shares in a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become a holder of 25% or more of the voting power at general meetings. This rule does not apply if there is already another holder of 25% or more of the voting power at general meetings. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become a holder of more than 45% of the voting power of the company. This rule does not apply if someone else already holds a majority of the voting power of the company. These tender offer requirements do not apply to companies whose shares are listed for trading outside of Israel if, under local law or the rules of the stock exchange on which their shares are traded, there is a limitation on the percentage of control which may be acquired or the purchaser is required to make a tender offer to the public. 59 Under the Companies Law, a person may not acquire shares in a public company if, after the acquisition, he will hold more than 90% of the shares or more than 90% of any class of shares of that company, unless a tender offer is made to purchase all of the shares or all of the shares of the particular class. The Companies Law also 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, that shareholder shall be precluded from purchasing any additional shares. If a tender offer is accepted and less than 5% of the shares of the company are not tendered, all of the shares will transfer to the ownership of the purchaser. If 5% or more of the shares of the company are not tendered, the purchaser may not purchase shares in a manner which will grant him more than 90% of the shares of the company. 8. DISCLOSING SHARE OWNERSHIP The Company has no bylaw provisions governing the ownership threshold, above which shareholder ownership must be disclosed. 10C. MATERIAL CONTRACTS All material contracts have been described in detail throughout this form, wherever applicable. 10D. EXCHANGE CONTROLS All exchange control restrictions imposed by the State of Israel have been removed, although there are still reporting requirements for foreign currency transactions. Legislation remains in effect, however, pursuant to which currency controls can be imposed by administrative action at any time. Pursuant to the General Permit issued by the Israeli Controller of Foreign Currency, at the Bank of Israel (under the Currency Control Law, 1978), non-residents of Israel who purchase our ordinary shares will be able to convert any proceeds from the sale of these ordinary shares, as well as dividend and liquidation distributions, if any, into non-Israeli currency, provided that Israeli Income Tax has been paid (or withheld) on such amounts (to the extent applicable). There are no limitations on the Company's ability to import and export capital. 10E. TAXATION The following is a summary of the material Israeli tax consequences, Israeli foreign exchange regulations and certain Israeli government programs affecting the Company. To the extent that the discussion is based on new tax or other legislation that has not been subject to judicial or administrative interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax or other authorities in question. The discussion is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations. 60 ISRAELI TAX CONSIDERATIONS On January 1, 2003 a comprehensive tax reform took effect in Israel. Pursuant to the reform, resident companies are subject to Israeli tax on income accrued or derived in Israel or abroad. In addition, the concept of "controlled foreign corporation" was introduced according to which an Israeli company may become subject to Israeli taxes on certain income of a non-Israeli subsidiary if the subsidiary's primary source of income is passive income. The tax reform also substantially changes the taxation of capital gains. GENERAL CORPORATE TAX STRUCTURE Israeli companies are generally subject to corporate tax at the rate of 36% of their taxable income. However in the Company's case, the rate is currently effectively reduced, as described below. TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959. The Company's facilities have been granted Approved Enterprise status pursuant to the Law for the Encouragement of Capital Investments, 1959 (the "Investment Law"), which provides certain tax and financial benefits to investment programs that have been granted such status. The Investment Law provides that a proposed capital investment in eligible facilities may, upon application to the Investment Center of the Ministry of Industry and Trade of the State of Israel, be designated as an "approved enterprise." Each certificate of approval for an approved enterprise relates to a specific investment program delineated both by its financial scope, including its capital sources, and by its physical characteristics, e.g., the equipment to be purchased and utilized pursuant to the program. The tax benefits derived from any such certificate of approval relate only to taxable income attributable to the specific approved enterprise. If a company has more than one approval or only a portion of its capital investments are approved, its effective tax rate is the result of a weighted combination of the applicable rates. Income derived from activity that is not integral to the activity of the enterprise should not be divided between the different enterprises and should not enjoy tax benefits. Taxable income of a company derived from an approved enterprise is subject to company tax at the rate of 10-25% (subject to the percentage of the foreign shareholders holding in the company), rather than 36%, for the benefit period. This period is ordinarily seven years commencing with the year in which the approved enterprise first generates taxable income, and is limited to 12 years from completion of the investment under the approved plan (commencement of production) or 14 years from the date of approval, whichever is earlier. The Investment Law also provides that a company that has an approved enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved investment program. A Foreign Investors Company ("FIC"), as defined in the Investment Law, may enjoy benefits for a period of up to 10 years, or 12 years if it complies with certain export criteria stipulated in the Investment Law. A company owning an approved enterprise may elect to receive an alternative package of benefits. Under the alternative package, a company's undistributed income derived from an approved enterprise will be exempt from company tax for a period of between two and ten years from the first year of taxable income, depending on the geographic location of the approved enterprise within Israel, and such company will be eligible for a reduced tax rate for the remainder of the benefits period. The Company has four approved enterprise programs under the Capital Investments Law, which entitle the Company to some tax benefits. In our first program, we elected to participate in a government guaranteed loans and grants approved enterprise program and have received grants from the investment center. Income derived from the first program which began in 1991 and completed in 1992, was subject to a reduced tax rate of 25% for the period of seven years ended 1999. In our second and third programs we have elected to participate in government guaranteed loans programs. Income derived from these programs, which began in 1992 and 1994, respectively, are tax exempt for a period of ten years commencing on the first year of taxable income. 61 In our fourth program, we have elected to participate in the "alternative benefit program". Income derived from "alternative benefit program" which began in 1997 is exempt from tax for a period of ten years, starting in the first year in which we generate taxable income from the approved enterprise. The tax benefit period for this program will expire through 2010.The fourth plan was extended until 2001. During 2002, as part of the transfer of operations from the Company to BOScom, all tax benefits that were related to the Approved Enterprise of the Company, were transferred to BOScom. Since 2002, we elected not to participate in any approved enterprise program. Accordingly, taxable income generated in that period will be split by the assets ratio into a taxable income that is entitled to the benefits of the approved enterprise and into an income that will be taxed at the 36% corporate tax rate. Our subsidiary, BOScom, also has a production facility, which was granted an "Approved Enterprise" status and had a separate investment program. BOScom elected to receive the "alternative benefits". Accordingly, income derived from BOScom's investment program, which commenced operations in 1997 is exempt from income tax for a period of ten years commencing from the first year in which taxable income is generated. In 2002, BOScom applied for a second program in the "alternative benefits route". Currently, the application has not yet been approved. The tax-exempt income attributable to the "Approved Enterprise" can be distributed to shareholders without imposing tax liability on the Company only upon the complete liquidation of the Company. In the event of a distribution of such tax-exempt income as a cash dividend in a manner other than in the complete liquidation of the Company and BOScom, the Company (or BOScom) will be required to pay corporate tax at the reduced corporate tax rate applicable to such profits between 10% and 25%. In addition, dividends from approved enterprises are generally taxable at the reduced rate of 15% if distributed during the tax exemption period or within 12 years thereafter (this time limit does not apply to an FIC). Tax must be withheld at source, regardless of whether the dividend is converted into foreign currency. The Company currently intends to reinvest the amounts of tax-exempt income and not to distribute such income as dividends. The Investment Center of the Ministry of Industry and Trade bases its decision as to whether or not to approve an application, on the criteria set forth in the Investment Law and regulations, the then prevailing policy of the Investment Center, and the specific objectives and financial criteria of the applicant. Accordingly, there can be no assurance that any such application will be approved. In addition, the benefits available to an approved enterprise are conditional upon the fulfillment of conditions stipulated in the Investment Law and its regulations and the criteria set forth in the specific certificate of approval, as described above. In the event that a company does not meet these conditions, it would be required to refund the amount of tax benefits, with the addition of the consumer price index linkage adjustment and interest. TAX BENEFITS AND GRANTS FOR RESEARCH AND DEVELOPMENT Israeli tax law allows, under certain conditions, a tax deduction in the year incurred for expenditures (including capital expenditures) in scientific research and development projects, if the expenditures are approved by the relevant Israeli government ministry, determined by the field of research, the research and development is for the promotion of the enterprise and is carried out by or on behalf of the company seeking such deduction. 62 In case the tax deduction, in the year research and development expenditures are incurred, is not approved by the relevant Israeli government ministry, the Company will be entitled for the tax deduction over a period of three years. TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXATION), 1969 According to the Law for the Encouragement of Industry (Taxation), 1969, or the Industry Encouragement Law, an "Industrial Company" is a company resident in Israel and at least 90% of the income of which, in any tax year, determined in Israeli currency, exclusive of income from certain government loans, capital gains, interest and dividends, is derived from an "Industrial Enterprise" owned by it. An "Industrial Enterprise" is defined as an enterprise whose major activity in a given tax year is industrial production activity. Until December 31, 2001 the Company qualified as an "Industrial Company" within the definition of the Industry Encouragement Law. Under the Industry Encouragement Law, Industrial Companies are entitled to certain preferred corporate tax benefits. Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. In January 2002, subsequent to the Company's restructure transforming it into a holding company by transferring its industrial operations to its wholly-owned subsidiary, BOScom, the Company disqualified from being an "Industrial Company" and therefore the benefits described above are not available since then. SPECIAL PROVISIONS RELATING TO TAXATION UNDER INFLATIONARY CONDITIONS The Income Tax Law (Inflationary Adjustments), 1985, generally referred to as the "Inflationary Adjustments Law," represents an attempt to overcome the problems presented to a traditional tax system by an economy undergoing rapid inflation. The Inflationary Adjustments Law is highly complex. The material aspects to the Company can be described as follows: There is a special tax adjustment for the preservation of equity whereby certain corporate assets are classified broadly into fixed, inflation resistant, assets and non-fixed (soft) assets. Where a company's equity, as defined in law, exceeds the depreciated cost of fixed assets, a deduction from taxable income that takes into account the effect of the applicable annual rate of inflation on such excess is allowed, up to a ceiling of 70% of taxable income in any single tax year, with the unused portion permitted to be carried forward on a linked basis. If the depreciated cost of fixed assets exceeds a company's equity, then such excess multiplied by the applicable annual rate of inflation is added to taxable income. Subject to certain limitations, depreciation deductions on fixed assets and losses carried forward are adjusted for inflation based on the increase in the Israeli consumer price index (CPI). Under Law, results for tax purposes are measured in real terms, in accordance with the changes in the Israeli CPI, or in the exchange rate of the dollar for a "foreign investors' company". The Company elected to measure its results for tax purposes on the basis of the changes in the Israeli CPI. CAPITAL GAINS TAX ON SALES OF ORDINARY SHARES Israeli law generally imposes a capital gains tax on the sale of securities and other capital assets, by both residents and non-residents of Israel, unless a specific exemption is available or unless a treaty between Israel and the country of a non-resident provides otherwise. Until the Israeli tax reform that became effective on January 1, 2003, sales by both residents and non-residents of Israel (other than certain Israeli corporations) of securities of Israeli companies that qualified as "Industrial Companies" or Industrial Holding Companies" on recognized stock exchanges outside of Israel were exempt from the capital gains tax. This exemption did not apply to dealers in securities in Israel and persons subject to Inflationary Adjustments Law who were taxed at regular tax rates applicable to business income. Subsequent to the disqualification of the Company as an "Industrial Company" since January 2002, a sale of shares on the Nasdaq National Market by the Company's Israeli shareholders was not tax exempt under paragraph 4a of the Regulation for "Exemption of Capital Gain Incurred in a Sale of Shares" (1981) (the "Regulation"). However, since January 2002, the Company registered its shares for trade in the Tel Aviv Stock Exchange (TASE). Accordingly, sales (other than by certain Israeli corporations) of securities of Israeli companies were subject to tax exemption throughout the year 2002, if sold on the TASE. However, the tax reform of January 2003 repealed these exemptions and now imposes a 15% capital gains tax on Israeli resident individuals, in respect of gains derived after January 1, 2003 from the sale of shares of an Israel company on the TASE or a recognized stock exchange outside Israel, and the status of an Industrial Company is no longer relevant. The 15% tax rate does not apply to dealers in securities, persons subject to Inflationary Adjustments Law, and shareholders who acquired their shares prior to an initial public offering. This tax does not affect non-residents who are exempt from Israeli capital gains tax on any gains derived from the sale of shares publicly traded on a recognized stock exchange, provided such shareholders did not acquire their shares prior to an initial public offering. 63 THE US-ISRAEL TAX TREATY Pursuant to the Convention Between the Government of the United States of America and the Government of Israel with Respect to Taxes on Income, as amended (the "United States- Israel Tax Treaty"), the sale, exchange or disposition of ordinary shares by a person who qualifies as a resident of the United States within the meaning of the United States-Israel Tax Treaty and who is entitled to claim the benefits afforded to such person by the United States- Israel Tax Treaty (a "Treaty United States Resident") generally will not be subject to the Israeli capital gains tax unless such Treaty United States Resident holds, directly or indirectly, shares representing 10% or more of the Company's voting power during any part of the 12- month period preceding such sale, exchange or disposition, subject to certain conditions. A sale, exchange or disposition of ordinary shares by a Treaty United States Resident who holds, directly or indirectly, shares representing 10% or more of the Company's voting power at any time during such preceding 12-month period would be subject to such Israeli tax, to the extent applicable; however, under the United States-Israel Tax Treaty, such Treaty United States Resident would be permitted to claim a credit for such taxes against the United States federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations specified in the treaty. The United States-Israel Tax Treaty does not relate to United States state or local taxes. TAXATION OF NON-RESIDENT HOLDERS OF ORDINARY SHARES Non-residents of Israel are subject to Israeli income tax on income accrued or derived from sources in Israel, including passive income such as dividends, royalties and interest. On distributions of dividends, other than bonus shares and stock dividends, income tax at the rate of 25%, (or 15% for dividends generated by an approved enterprise) is withheld at the source, unless a different rate is provided in a treaty between Israel and the shareholder's country of residence. Under the United States- Israel Tax Treaty, the maximum tax on dividends paid to a holder of ordinary shares who is a Treaty United States Resident will be 25%, however, under the Investment Law, dividends generated by an approved enterprise are taxed at the rate of 15%. The Treaty further provides that a 12.5% Israeli dividend withholding tax will apply to dividends paid to a United States corporation owning 10% or more of an Israeli company's voting shares during, in general, the current and preceding tax years of the Israeli company. The lower 12.5% rate applies only on dividends distributed from income not derived from an Approved Enterprise in the applicable period and does not apply if the company has certain amounts of passive income. Under an amendment to the Inflationary Adjustments Law 1985, effective January 1,1999, non-Israeli corporations might be subject to Israeli taxes on the sale of traded securities in an Israeli company, subject to the provisions of any applicable double taxation treaty. 64 FOREIGN EXCHANGE REGULATIONS Dividends, if any, paid to the holders of the ordinary shares, and any amounts payable upon dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of the ordinary shares to an Israeli resident, may be paid in non-Israeli currency or, if paid in Israeli currency, may be converted into freely repatriable dollars at the rate of exchange prevailing at the time of conversion. UNITED STATES FEDERAL INCOME TAXES The following general discussion sets forth the material United States federal income tax consequences applicable to the following persons who purchase, hold or dispose of the ordinary shares as capital assets ("U.S. Shareholders"): (i) citizens or residents (as defined for U.S. federal income tax purposes) of the United States; (ii) corporations or other entities taxable as corporations created or organized in or under the laws of the United States or any state thereof; (iii) estates, the income of which is subject to United States federal income taxation regardless of its source; and (iv) a trust if (a) a U.S. court is able to exercise primary supervision over its administration and (b) one or more U.S. persons have the authority to control all of its substantial decisions. This discussion is based on the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), United States Treasury Regulations promulgated thereunder and administrative and judicial interpretations thereof, all as in effect as of the date of this Annual Report on Form 20-F. This discussion generally considers only U.S. Shareholders that will hold the ordinary shares as capital assets and does not consider (a) all aspects of U.S. federal income taxation that may be relevant to particular U.S. Shareholders by reason of their particular circumstances (including potential application of the alternative minimum tax), (b) U.S. shareholders subject to special treatment under the U.S. federal income tax laws, such as financial institutions, insurance companies, broker-dealers, tax-exempt organizations, financial institutions or foreign individuals or entities, (c) U.S. Shareholders owning directly or by attribution 10% or more of the Company's outstanding voting shares, (d) U.S. Shareholders who hold the ordinary shares as part of a hedging, straddle or conversion transaction, (e) U.S. Shareholders who acquire their ordinary shares in a compensatory transaction, (f) U.S. Shareholders whose functional currency is not the dollar, or (g) any aspect of state, local or non-United States tax law. THE FOLLOWING SUMMARY DOES NOT ADDRESS THE IMPACT OF AN INVESTOR'S INDIVIDUAL TAX CIRCUMSTANCES. ACCORDINGLY, EACH INVESTOR SHOULD CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF AN INVESTMENT IN THE ORDINARY SHARES, INCLUDING THE EFFECTS OF APPLICABLE STATE, LOCAL OR FOREIGN TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS. DIVIDENDS PAID ON THE ORDINARY SHARES Distributions paid on ordinary shares (including any Israeli taxes withheld) to a U.S. Shareholder will be treated as ordinary dividend income for United States federal income tax purposes to the extent of the Company's current and accumulated earnings and profits (as computed for U.S. federal income tax purposes). Such dividends, which will be treated as foreign source income for U.S. foreign tax credit purposes, generally will not qualify for the dividends-received deduction available to corporations. Distributions in excess of such earnings and profits will be applied against and will reduce the shareholder's tax basis in the ordinary shares and, to the extent in excess of such tax basis, will be treated as gain from a sale or exchange of such ordinary shares. The amount of the distribution will equal the US Dollar value of the distribution, calculated by reference to the exchange rate in effect on the date the distribution is received (or otherwise made available to the U.S. Shareholders), regardless of whether a payment in Israeli currency is actually converted to US Dollars at that time. U.S. Shareholders should consult their own tax advisors concerning the treatment of foreign currency gain or loss, if any, on any Israeli currency received which is converted into US Dollars subsequent to receipt. 65 Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, qualified dividend income received by an individual U.S. Shareholder for taxable years beginning after December 31, 2002 and beginning before January 1, 2009 are taxed at reduced rates of either 5 or 15 percent, depending upon the amount of such shareholder's taxable income. If an individual U.S. Shareholder does not hold ordinary shares for more than 60 days during the 120 day period beginning 60 days before an ex-dividend date, dividends received on ordinary shares are not eligible for reduced rates. Dividends received from a foreign corporation that was a passive foreign investment company (as further discussed below) in either the taxable year of the distribution or the preceding taxable year are not qualified dividend income. Qualified dividend income includes dividends received from a "qualified foreign corporation." A "qualified foreign corporation" includes a foreign corporation whose shares are readily tradable on an established securities market in the United States as well as a foreign corporation that is entitled to the benefits of a comprehensive income tax treaty with the United States which includes an exchange of information program. Israel and the United States are parties to a comprehensive income tax treaty which includes an exchange of information program. The United States Treasury Department will periodically issue guidance regarding which income tax treaties will be satisfactory for treating a corporation as a "qualified foreign corporation". In the event ordinary shares should not be readily tradable on an established securities market in the United States, individual U.S. Shareholders should consult their own tax advisors as to whether any distributions paid on ordinary shares will be taxed for United States federal income tax purposes at reduced tax rates. CREDIT FOR ISRAELI TAXES WITHHELD Subject to certain conditions and limitations, any Israeli tax withheld or paid with respect to dividends on the ordinary shares generally will be eligible for credit against a U.S. Shareholder's United States federal income tax liability at such U.S. Shareholder's election. The Code provides limitations on the amount of foreign tax credits that a U.S. Shareholder may claim, including extensive separate computation rules under which foreign tax credits allowable with respect to specific categories of income cannot exceed the United States federal income taxes otherwise payable with respect to each such category of income. Dividends with respect to the ordinary shares generally will be classified as foreign source "passive income" for the purpose of computing a U.S. Shareholder's foreign tax credit limitations for U.S. foreign tax credit purposes. The availability of the Israeli withholding tax as a foreign tax credit will also be subject to certain restrictions on the use of such credits, including a prohibition on the use of the credit to reduce liability for the United States individual and corporate minimum taxes by more than 90%. Alternatively, U.S. Shareholders that do not elect to claim a foreign tax credit may instead claim a deduction for Israeli income tax withheld or paid, but only for a year in which these U.S. Shareholders elect to do so for all foreign income taxes. The rules relating to foreign tax credits are complex, and you should consult your tax advisor to determine whether and if you would be entitled to this credit. DISPOSITION OF THE ORDINARY SHARES The sale or exchange of ordinary shares generally will result in the recognition of capital gain or loss in an amount equal to the difference between the amount realized on the sale or exchange and the U.S. Shareholder's tax basis in the ordinary shares. Such gain or loss generally will be long-term capital gain or loss if the U.S. Shareholder's holding period of the ordinary shares exceeds one year at the time of the disposition. Certain limitations apply to the deductibility of capital losses by both corporate and non-corporate taxpayers. Under the Code, gain or loss recognized by a U.S. Shareholder on a sale or exchange of ordinary shares generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes. Under the tax treaty between the United States and Israel, however, gain derived from the sale, exchange or other disposition of ordinary shares by a holder who is a resident of the United States for purposes of the treaty and who sells the ordinary shares within Israel may be treated as foreign source income for U.S. foreign tax credit purposes. U.S. Shareholders should consult their own tax advisors regarding the treatment of any foreign currency gain or loss on any Israeli currency received in respect of the sale, exchange or other disposition of ordinary shares. 66 PASSIVE FOREIGN INVESTMENT COMPANY STATUS A foreign corporation generally will be treated as a "passive foreign investment company" ("PFIC") if, after applying certain "look-through" rules, either (i) 75% or more of its gross income is passive income or (ii) 50% or more of the average value of its assets is attributable to assets that produce or are held to produce passive income. Passive income for this purpose generally includes dividends, interest, rents, royalties and gains from securities and commodities transactions. The look-through rules require a foreign corporation that owns at least 25% by value, of the stock of another corporation to treat a proportionate amount of assets and income as held or received directly by the foreign corporation. The Company has not made the analysis necessary to determine whether or not it is currently a PFIC or whether it has ever been a PFIC. However, the Company does not believe that it was a PFIC in 2003. However, there can be no assurance that the Company is not, has never been or will not in the future be a PFIC. If the Company were to be treated as a PFIC, any gain recognized by a U.S. Shareholder upon the sale (or certain other dispositions) of ordinary shares (or the receipt of certain distributions) generally would be treated as ordinary income, and a U.S. Shareholder may be required, in certain circumstances, to pay an interest charge together with tax calculated at maximum rates on certain "excess distributions," including any gain on the sale or certain dispositions of ordinary shares. In order to avoid this tax consequence, a U.S. Shareholder (i) may be permitted to make a "qualified electing fund" election, in which case, in lieu of such treatment, such holder would be required to include in its taxable income certain undistributed amounts of the Company's income or (ii) may elect to mark-to-market the ordinary shares and recognize ordinary income (or possible ordinary loss) each year with respect to such investment and on the sale or other disposition of the ordinary shares. Additionally, if the Company is deemed to be a PFIC, a U.S. Shareholder who acquires ordinary shares in the Company from a decedent will be denied the normally available step-up in tax basis to fair market value for the ordinary shares at the date of the death and instead will have a tax basis equal to the decedent's tax basis if lower than fair market value. Neither the Company nor its advisors have the duty to or will undertake to inform U.S. Shareholders of changes in circumstances that would cause the Company to become a PFIC. U.S. Shareholders should consult their own tax advisors concerning the status of the Company as a PFIC at any point in time after the date of this Annual Report on Form 20-F. The Company does not currently intend to take the action necessary for a U.S. Shareholder to make a "qualified electing fund" election in the event the Company is determined to be a PFIC. 67 INFORMATION REPORTING AND BACK UP WITHHOLDING. A non-corporate U.S. Shareholder may, under certain circumstances, be subject to information reporting requirements and "backup withholding" at a 30% rate on cash payments in the United States of dividends on, and the proceeds of disposition of, ordinary shares. Backup withholding will apply only if a U.S. Shareholder: (a) fails to furnish its social security or other taxpayer identification number ("TIN") within a reasonable time after the request therefor; (b) furnishes an incorrect TIN; (c) is notified by the IRS that it has failed properly to report payments of interest and dividends; or (d) under certain circumstances, fails to certify, under penalty of perjury, that it has furnished a correct TIN and has not been notified by the IRS that it is subject to backup withholding for failure to report interest and dividend payments. U.S. Shareholders should consult their tax advisors regarding their qualification for exemption, if applicable. The amount of backup withholding from a payment to a U.S. Shareholder generally will be allowed as a credit against such U.S. Shareholder's federal income tax liability and may entitle such U.S. Shareholder to a refund, provided that the required information is furnished to the IRS. 10F. DIVIDENDS AND PAYING AGENTS Not applicable. 10G. STATEMENT BY EXPERTS Not applicable. 10H. DOCUMENTS ON DISPLAY The documents concerning the Company that are referred to in the form may be inspected at the Company's office in Israel. 10I. SUBSIDIARY INFORMATION For information relating to the Company's subsidiaries, see Item 4 - "Organizational Structure" as well as the Company's Consolidated Financial Statements (Items 8 and 18 of this form). 68 ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. CURRENCY EXCHANGE RATE RISK MANAGEMENT The Company's functional currency is the US Dollar. Since the Company operates in Israel and Europe it manages assets and liabilities in currencies other than US Dollar such as Israeli Shekel, UK Pound and Euro. The excess balance of monetary assets on liabilities in non-dollar currencies in the Balance Sheet as of 31.12.03 and 31.12.02 ("Balance Sheet Exposure") is presented in the table below. The data is presented in US Dollars (in thousands):
DECEMBER 31, 2003 DECEMBER 31, 2002 --------------------------- ----------------------------- ISRAELI CURRENCY (1) ISRAELI CURRENCY (1) ----------------- OTHER ------------------ OTHER NON-DOLLAR NON-DOLLAR CURRENCIES CURRENCIES LINKED(2) UNLINKED (3) LINKED(2) UNLINKED (3) U.S.$ U.S.$ U.S.$ U.S.$ U.S.$ U.S.$ ------- ------- ------- ------- ------- ------- CURRENT ASSETS: Cash and cash equivalents $ - $ 629 $ 41 $ - $ 117 $ 128 Accounts receivable - trade - 388 2 - 250 686 Other accounts receivable - 87 68 - 188 133 ------- ------- ------- ------- ------- ------- $ - $ 1,104 $ 111 $ - $ 555 $ 947 ======= ======= ======= ======= ======= ======= CURRENT LIABILITIES: Accounts payable - trade $ - $ 41 $ 16 $ - $ 947 $ 76 Other accounts payable - 406 110 29 936 518 ------- ------- ------- ------- ------- ------- $ - $ 447 $ 126 $ 29 $ 1,883 $ 594 ======= ======= ======= ======= ======= ======= NET $ - $ 1,551 $ (15) $ (29) $(1,328) $ 353 ======= ======= ======= ======= ======= =======
(1) The above does not include balances in Israeli currency linked to the US dollar. (2) To the Israeli Consumer Price Index (Israeli CPI). (3) Primarily Pound Sterling. The Company does not use financial instruments and derivatives, but manages the risk of Balance Sheet Exposure by attempting to maintain a similar balance of assets and liabilities in any given currency. The selling prices of our products in Israel and Europe are quoted and collected in the local currency. The purchases and salary expenses in Israel and Europe are paid in the local currency. A material change in currency exchange rate of the NIS, Sterling or Euro compared to the US Dollar may have an effect on the Company's financial results and cash flow. CREDIT RISK MANAGEMENT The company sells its products and purchases products from vendors on credit terms. 69 Customer payment terms are based on a credit check performed in relation to every new customer, and on periodic evaluations of the prevailing terms. Provisions are made for doubtful debts on a specific basis and, in management's opinion, appropriately reflect the loss inherent in collection of the debts. Management bases this provision on its assessment of the risk of the debt. The table below presents the accounts receivables balance by geographical market as of 31.12.03 and 31.12.02:
DECEMBER 31, --------------- 2003 2002 ------ ------ United States $ 392 $ 669 Europe $ 117 $ 686 Israel $ 566 $ 168 ------ ------ $1,075 $1,523 ====== ======
INTEREST RATE RISK The Company's exposure to market risk for changes in interest rates, is due to its investment of its surplus funds. The Company has a conservative investment policy. According to this policy the Company invests in bank deposits and in high level marketable securities. A material change in yields of the securities which the company invests in and the need of cash before the securities' maturation, may have an effect on the Company's financial results and cash flow. A material change in interest we receive on our bank deposits, may have an effect on the Company's financial results and cash flow. BANK RISK The Company invests and manages the majority of its funds in two banks which are among the five largest in Israel. ITEM 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES. Not applicable. 70 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: CONTROLS AND PROCEDURES The Company performed an evaluation of the effectiveness of its disclosure controls and procedures that are designed to ensure that the material financial and non-financial information required to be disclosed on Form 20-F and filed with the Securities and Exchange Commission is recorded, processed, summarized and reported timely. Based on the Company's evaluation, the Company's management, including the CEO and CFO, has concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report are effective. Notwithstanding the foregoing, there can be no assurance that the Company's disclosure controls and procedures will detect or uncover all failures of persons within the Company to disclose material information otherwise required to be set forth in the Company's reports. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation thereof. Therefore, no corrective actions with regard to significant deficiencies and material weaknesses were taken. ITEM 16: [RESERVED] ITEM 16A: AUDIT COMMITTEE FINANCIAL EXPERT The Company's board of directors has determined that Prof. Adi Raveh and Mr. Ronen Zavlik, both members of the audit committee, are "audit committee financial experts", as defined by the applicable SEC regulations. ITEM 16B: CODE OF ETHICS The Company has adopted a Code of Ethics applicable to its executive officers, directors and all other employees. A copy of the code may be obtained, without charge, upon a written request addressed to the Company's investor relations department. ITEM 16C: PRINCIPAL ACCOUNTANT FEES AND SERVICES The Company's principal accountants for the years 2002 and 2003 were Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global. The table below summarizes the audit and other fees paid by the Company and its consolidated subsidiaries to Kost Forer Gabbay & Kasierer, during each of 2002 and 2003: 71
YEAR ENDED DECEMBER 31, 2003 YEAR ENDED DECEMBER 31, 2002 AMOUNT PERCENTAGE AMOUNT PERCENTAGE Audit Fees $ 40,000 61% $ 62,000 51% Audit-Related Fees (1) $ 7,650 12% $ - - Tax Fees (2) $ 8,000 12% $ 31,000 25% All Other Fees (3) $ 9,500 15% $ 29,500 24% Total $ 65,150 100% $122,500 100%
(1) "Audit-related fees" are fees related to assurance and associated services that traditionally are performed by the independent auditor, including consultation concerning reporting standards. (2) "Tax fees" are fees for consulting services rendered by the Company's auditors with respect to employee tax services, tax benefits under the Israeli law for encouragement of investment and tax aspects of restructuring. (3) "All Other Fees" are fees for consulting services rendered by the Company's auditors with respect to the restructuring and requests for grants from the Israeli Office of the Chief Scientist. The Audit Committee pre-approves on an annual basis the audit and certain non-audit services provided to the Company by its auditors. Such annual pre-approval is given with respect to particular services and sets forth a specific budget for such services. Additional services not covered by the annual pre-approval may be approved by the Audit Committee on a case-by-case basis as the need for such services arises. Furthermore, the Audit Committee has authorized the Committee Chairman and one other Committee member to pre-approve engagements of the Company's auditors so long as the fee for each such engagement does not exceed $5,000 and so long as the engagement is notified to the Committee at its next subsequent meeting. Any services pre-approved by the Audit Committee (or by the Chairman and one other Committee member) must be permitted by applicable law. ITEM 16D: EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES Not yet applicable to Registrant 72 PART III ITEM 17: FINANCIAL STATEMENTS Not applicable. ITEM 18: FINANCIAL STATEMENTS The following financial statements are filed as part of this Annual Report:
Page ---- Report of Independent Auditors F-2 Consolidated Balance Sheets F-3 - F-4 Consolidated Statements of Operations F-5 Statement of Changes in Shareholders' Equity F-6 Statements of Cash Flows F-7 - F-8 Notes to Consolidated Financial Statements F-9 - F-30
ITEM 19: EXHIBITS The following exhibits are filed as part of this Annual Report: 1.1 Memorandum of Association, as amended (incorporated by reference to the Company's Annual Report on Form 20-F filed on June 27, 2003). 1.2 Articles of Association, as amended (incorporated by reference to the Company's Annual Report on Form 20-F filed on June 27, 2003). 4.1 Form of Indemnification Agreement between the Company and its officers and directors (incorporated by reference to the Company's Current Report on Form 6-K filed on January 17, 2003). 4.2 Share Purchase Agreement, dated as of February 23, 2003, and Option Agreement and Registration Rights Agreement, dated as of March 30, 2003, by and between Catalyst Investments L.P. and the Registrant. 4.3 Share Purchase Agreement and Registration Rights Agreement, dated as of December 14, 2003, by and between Hillswood Holdings Limited and Vamos Inc. and the Registrant. 4.4 Services Agreement, dated as of April 15, 2003, between Cukierman & Co. Investment House Ltd., BOScom Ltd. and the Registrant. 4.5 Management Agreement between Signum Ltd., Adiv Baruch and the Registrant, dated as of January 1, 2004. 4.6 Securities Purchase Agreement, Master Security Agreement and Registration Rights Agreement, dated as of June 10, 2004, by and between Laurus Master Fund Ltd. and the Registrant. 8.1 List of subsidiaries (incorporated by reference to Item 4C of this Annual Report on Form 20-F). 10.1 Consent of Kost Forer Gabbay & Kasierer, a member of Ernst &Young Global. 73 31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934. 31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934. 32.1 Certification by Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934. 74 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. B.O.S. Better On-Line Solutions, Ltd. /s/ Adiv Baruch /s/ Nehemia Kaufman - --------------- ------------------- Adiv Baruch Nehemia Kaufman President and Chief Executive Officer Chief Financial Officer Date: June 17, 2004 75 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2003 IN U.S. DOLLARS INDEX
PAGE -------- REPORT OF INDEPENDENT AUDITORS F2 CONSOLIDATED BALANCE SHEETS F3 - F4 CONSOLIDATED STATEMENTS OF OPERATIONS F5 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY F6 CONSOLIDATED STATEMENTS OF CASH FLOWS F7 - F8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F9 - F30
- - - - - - - - - - - - [ERNST & YOUNG LOGO] o KOST FORER GABBAY & KASIERER o Phone: 972-3-6232525 3 Aminadav St. Fax: 972-3-5622555 Tel-Aviv 67067, Israel REPORT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND SHAREHOLDERS OF B.O.S. BETTER ONLINE SOLUTIONS LTD. AND SUBSIDIARIES We have audited the accompanying consolidated balance sheets of B.O.S Better OnLine Solution Ltd. ("the Company") and subsidiaries as of December 31, 2003 and 2002, 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, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 2003, in conformity with U.S. generally accepted accounting principles. As discussed in the notes to the consolidated financial statements, effective January 1, 2002 the Company changed its method of accounting for goodwill to conform with Statement of Financial Accounting Standards No.142,"Goodwill and Other Intangible Assets" see Note 2(k). Tel-Aviv, Israel KOST FORER GABBAY & KASIERER March 22, 2004 A Member of Ernst & Young Global F-2 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS
DECEMBER 31, ------------------- 2003 2002 -------- -------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 3,872 $ 5,246 Restricted cash (Note 3) - 700 Marketable securities (Note 6) 1,014 819 Trade receivables (net of allowance for doubtful accounts of $ 171 in 2003 and $ 347 in 2002) 1,075 1,523 Other accounts receivable and prepaid expenses (Note 4) 317 382 Inventories (Note 5) 961 855 -------- -------- 7,239 9,525 -------- -------- LONG-TERM INVESTMENTS: Long-term marketable securities (Note 6) 1,862 2,226 Long-term prepaid expenses - 15 Severance pay funds 684 563 Investment in a company (Note 7) 3,112 2,042 -------- -------- Total long-term investments 5,658 4,846 -------- -------- PROPERTY AND EQUIPMENT, NET (Note 8) 598 965 -------- -------- GOODWILL (Note 9) 741 741 -------- -------- ASSETS RELATED TO DISCONTINUED OPERATIONS (Note 1c) 119 1,115 -------- -------- $ 14,355 $ 17,192 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-3 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
DECEMBER 31, ------------------- 2003 2002 -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Trade payables $ 464 $ 1,044 Employee and payroll accruals 404 717 Deferred revenues 378 491 Accrued expenses and other liabilities (Note 10) 911 1,293 -------- -------- Total current liabilities 2,157 3,545 -------- -------- ACCRUED SEVERANCE PAY 951 794 -------- -------- LIABILITIES RELATED TO DISCONTINUED OPERATIONS (Note 1c) 374 4,131 -------- -------- COMMITMENTS AND CONTINGENT LIABILITIES (Note 11) SHAREHOLDERS' EQUITY: Share capital (Note 12)- Ordinary shares of NIS 4.00 par value: Authorized: 8,750,000 shares at December 31, 2003 and 2002; Issued 4,167,509 and 3,177,264 shares at December 2003 and 2002, respectively; Outstanding: 4,162,126 and 3,171,881 shares at December 2003 and 2002, respectively 4,309 3,690 Additional paid-in capital 43,247 41,319 Treasury shares (5,383 Ordinary shares at December 31, 2003 and 2002) (150) (150) Accumulated deficit (36,533) (36,137) -------- -------- 10,873 8,722 -------- -------- $ 14,355 $ 17,192 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-4 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
YEAR ENDED DECEMBER 31, ------------------------------- 2003 2002 2001 -------- -------- --------- Revenues $ 5,728 $ 9,441 $ 6,042 Cost of revenues 1,794 2,300 2,703 Non recurring royalty reversal (Note 14a) (339) - - -------- -------- --------- Gross profit 4,273 7,141 3,339 -------- -------- --------- Operating costs and expenses: Research and development 2,129 2,182 2,746 Less - grants and participation (283) - (989) Sales and marketing 2,178 3,705 4,811 General and administrative 1,317 1,697 1,425 Restructuring and related costs 678 - 132 -------- -------- --------- Total operating costs and expenses 6,019 7,584 8,125 -------- -------- --------- Operating loss (1,746) (443) (4,786) Financial income, net (Note 14b) 109 295 427 Other expenses (Note 14c) (795) (95) (298) -------- -------- --------- Net loss from continuing operations (2,432) (243) (4,657) Net income (loss) related to discontinued operations (Note 1c) 2,036 (7,674) (8,313) -------- -------- --------- Net loss $ (396) $ (7,917) $ (12,970) ======== ======== ========= Basic and diluted net loss per share from continuing operations (Note 14d) $ (0.66) $ (0.08) $ (1.50) ======== ======== ========= Basic and diluted net income (loss) per share from discontinued operations (Note 14d) $ 0.55 $ (2.46) $ (2.68) ======== ======== ========= Basic and diluted net loss per share NIS 4.00 par value (Note 14d) $ (0.11) $ (2.54) $ (4.18) ======== ======== =========
The accompanying notes are an integral part of the consolidated financial statements. F-5 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES STATEMENTS OF SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
TREASURY NUMBER ADDITIONAL SHARES TOTAL OF ORDINARY SHARE PAID-IN ACCUMULATED HELD BY SHAREHOLDERS' SHARES CAPITAL CAPITAL DEFICIT A TRUSTEE EQUITY ----------- ------- ---------- ----------- ---------- ------------- Balance at January 1, 2001 3,102,264 $ 3,628 $ 41,216 $ (15,250) $ (150) $ 29,444 Stock based compensation - - 4 - - 4 Net loss - - - (12,970) - (12,970) --------- ------- -------- --------- ------ --------- Balance at December 31, 2001 3,102,264 3,628 41,220 (28,220) (150) 16,478 Issuance of shares 3,750 3 27 - - 30 Issuance of shares related to the private placement in 2000 71,250 59 (1) - - 58 Reversal of accrued issuance expenses - - 66 - - 66 Stock based compensation related to warrants issued to service providers - - 7 - - 7 Net loss - - - (7,917) - (7,917) --------- ------- -------- --------- ------ --------- Balance at December 31, 2002 3,177,264 3,690 41,319 (36,137) (150) 8,722 Issuance of shares related to share swap transaction 633,102 537 1,059 - - 1,596 Issuance of shares related to the private placement in 2003 357,143 82 846 - - 928 Stock based compensation related to warrants issued to service providers - - 23 - - 23 Net loss - - - (396) - (396) --------- ------- -------- --------- ------ --------- Balance at December 31, 2003 4,167,509 $ 4,309 $ 43,247 $ (36,533) $ (150) $ 10,873 ========= ======= ======== ========= ====== =========
The accompanying notes are an integral part of the consolidated financial statements. F-6 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER DECEMBER 2003 31, 2002 31, 2001 ------------ ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (396) $ (7,917) $ (12,970) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Net loss (income) from discontinuing operations (2,036) 7,674 8,313 Depreciation and amortization 307 390 568 Impairment of property and equipment 110 95 - Accrued severance pay, net 36 (49) (26) Amortization of premium on marketable securities 101 89 28 Interest on investment in affiliate - - (42) Impairment of investment in a company 840 - - Capital loss from sale of property and equipment 6 - 32 Gain on sale of marketable securities (13) - - Stock based compensation related to warrants issued to service providers 23 7 4 Decrease (increase) in trade receivables 448 (28) 832 Decrease in other accounts receivable and prepaid expenses 131 186 106 Increase in inventories (106) (548) 1,024 Increase (decrease) in trade payables (580) 596 (500) Increase (decrease) in employees and payroll accruals, deferred revenues, accrued expenses and other liabilities (808) (368) 961 -------- -------- --------- Net cash flows provided by (used in) continuing operations (1,937) 127 (1,670) Net cash provided by (used in) operating activities from discontinuing operations (1,032) 728 2,576 -------- -------- --------- Net cash provided by (used in) operating activities (2,969) 855 906 -------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (64) (163) (389) Proceeds from sale of property and equipment 8 9 23 Purchase of other assets - - (4) Investment in long-term marketable securities (971) (196) (2,912) Investment in a company (155) - (2,000) Realization of (investment in) restricted cash 700 (700) - Proceeds from sale of marketable securities 1,001 - - -------- -------- --------- Net cash provided by (used in) investing activities from continuing operations 519 (1,050) (5,282) Net cash used in investing activities from discontinuing operations - (160) (1,909) -------- -------- --------- Net cash provided by (used in) investing activities 519 (1,210) (7,191) -------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term loan - (286) (429) Proceeds from issuance of shares 928 58 - Payment for acquisition of a subsidiary - - (66) Issuance expenses related to investment in a company (159) - - -------- -------- --------- Net cash provided by (used in) financing activities from continuing operations 769 (228) (495) Net cash used in financing activities from discontinuing operations (47) (3,216) (1,095) -------- -------- --------- Net cash provided by (used in) financing activities 722 (3,444) (1,590) -------- -------- --------- Decrease in cash and cash equivalents (1,728) (3,799) (7,875) Decrease (increase) in cash and cash equivalents of discontinuing operations 354 720 (270) Cash and cash equivalents at the beginning of the year 5,246 8,325 16,470 -------- -------- --------- Cash and cash equivalents at the end of the year $ 3,872 $ 5,246 $ 8,325 ======== ======== =========
The accompanying notes are an integral part of the consolidated financial statements. F-7 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 2003 2002 2001 ------------ ------------ ------------ Supplemental disclosure of cash flow activities: (i) Net cash paid during the year for: Interest $ 1 $ 82 $ 570 ======= ===== ===== (ii) Non-cash activities: Investment in a company against issuance of shares $ 1,755 $ 30 $ - ======= ===== ===== Reversal of issuance expenses payable $ - $ 66 $ - ======= ===== =====
The accompanying notes are an integral part of the consolidated financial statements. F-8 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 1:- GENERAL B.O.S. Better Online Solutions Ltd. is an Israeli corporation together with its subsidiaries (hereinafter "the Company" or "BOS"): a. Since January 2002, the Company's structure was re organized by transforming the Company into a holding company specializing in high tech investments and by merging the Company's connectivity operations into BOScom. As such, on January 1, 2002, the net assets pertaining to the connectivity operations were transferred to BOScom. The Company's wholly owned subsidiary, "BOScom" operates in connectivity, software utilities and communication solution product lines. Connectivity - A solutions for seamless integration of personal computers and Local Area Networks into the midrange host environment. "BOScom" also design, integrate, test, market and support superior products that provide efficient solutions to personnel connecting personal computers to IBM midrange hosts. Software Utilities - Powerful solutions for document design, distribution and management solutions for a wide range of operating systems, including mainframe and UNIX. Communication Solutions - BOScom developed a series of Voice over Internet protocol (" VOIP ") communication products designed for the corporate market. The gateways enable enterprises to reduce or eliminate inter-office communication costs or bypass long-distance costs using their private Intranet or the public Internet to carry telephone calls. They also provide a powerful means to extend Private Branch Exchange ("PBX") functionality to the enterprise's branch offices. In 2003, the Company reorganized BOScom activity by ceasing the operation off all of its wholly owned marketing subsidiaries in the UK and France and began to sell its products directly through independent distributors. As a result, the Company reduced the total worldwide employees by approximately 49 employees and incurred $ 678 thousand in restructuring costs in accordance with SFAS 146 "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No.146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured, initially at fair value, only when the liability is incurred. The provisions of SFAS No.146 are effective for exit or disposal activities that are initiated after December 31, 2002. b. Accounting principles: The consolidated financial statements for all years presented are prepared in accordance with generally accepted accounting principles ("GAAP ") in the United States of America. Prior to 2003, the consolidated financial statements were prepared in accordance with Israeli GAAP with reconciliation to U.S.GAAP. c. Discontinued operation: On June 1, 1998, the Company acquired 100% of the share capital of Pacinfo ("Pacinfo"), a U.S. corporation. Pacinfo is a reseller of computer networking products. In April 2001, Pacinfo acquired Dean Technologies Associated LLC. ("DT") Texas limited Liability Company, which was also engaged in the computer-networking segment. F-9 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 1:- GENERAL (CONT.) In May 2002, the Board of Directors of the Company decided to sell all Pacinfo activity. During the fourth quarter of 2002, following unsuccessful efforts to sell Pacinfo and due to poor economic condition and continued operating losses together with a loss of key officers and employees, the Company initiated a plan to cease operations of Pacinfo and to proceed with a voluntary liquidation of the Company. The results of operations including revenue, operating expenses and other income and expenses of Pacinfo for 2003, 2002 and 2001 have been reclassified in the accompanying statements of operations as discontinued operations. The Company's balance sheets at December 31, 2003 and 2002 reflect the net liabilities of the Pacinfo as liabilities and assets related to discontinued operations within liabilities related to discontinuing operations and assets related to discontinuing operations. The carrying amounts of the major classes of assets and liabilities included as part of the discontinued operation are:
DECEMBER 31, ------------------- 2003 2002 -------- -------- Cash $ 69 $ 423 Trade receivables, other receivables and prepaid expenses 18 597 Property and equipment, net 32 95 -------- -------- Assets of discontinued operation $ 119 $ 1,115 ======== ======== Trade payables $ 299 $ 2,456 Accrued expenses and other liabilities 75 1,675 -------- -------- Liabilities of discontinued operation $ 374 $ 4,131 ======== ========
The results of operations, including revenues, cost of revenues and operating expenses of Pacinfo operation for 2003, 2002 and 2001 have been reclassified in the statements of operations. Taxes were not attributed to the discontinued operation due to utilization of losses from previous years, for which a valuation allowance was provided. Summarized selected financial information of the discontinued operation is as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 2003 2002 2001 ------- -------- -------- Revenues $ 25 $ 32,912 $ 53,168 ======= ======== ======== Net income (loss) $ 2,036 $ (7,674) $ (8,313) ======= ======== ========
d. The Company had one major customer in 2003, which constituted 52 % of the revenues. This major customer is the Company's master distributor in the U.S. In the event that the Company encounters problems working with the master distributor, the Company may experience an interruption in sales until an alternative source of distribution can be found, which may have a material adverse effect on the financial statements. F-10 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES 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 ("dollar"): A substantial portion of the Company's revenues is generated in U.S. dollar ("dollars"). In addition, most of the Company's costs are incurred in dollars. Company's management believes that the dollar is the primary currency of the economic environment in which the Company operate. Thus, the functional and reporting currency of the Company is the dollar. Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S. dollars in accordance with Statement No. 52 of the Financial Accounting Standards Board ("FASB") "Foreign Currency Translation". All transactions gains and losses from the remeasurement of monetary balance sheet items are reflected in the statements of operations as financial income or expenses as appropriate. c. Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Inter-company transactions and balances including profits from inter-company sales not yet realized outside the group have been eliminated upon consolidation. d. Cash equivalents: Cash equivalents are short-term highly liquid investments that are readily convertible to cash originally purchased with maturities of less than three months. e. Marketable securities: The Company accounts for investments in debt securities in accordance with Statement of Financial Accounting Standard No.115,"Accounting for Certain Investments in Debt and Equity Securities"("SFAS No.115"). Management determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date. Debt securities are classified as held-to-maturity When the Company has the positive intent and ability to hold the securities to maturity and are stated at amortized cost. The amortized cost of held-to-maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and decline in value judged to be other than temporary and interest are included in financial income, net. F-11 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.) f. Restricted cash Restricted cash is primarily invested in certificates of deposit, which mature within one year and was used as security for the line of credit granted to Pacinfo in 2002 (see Notes 1c and Note 3). g. Inventories: Inventory write-offs are provided to cover risks arising from slow-moving items or technological obsolescence. As of December 31, 2003, inventory is presented net of $ 300 general provision for technological obsolescence and slow moving items (see also note 5). Inventories are valued at the lower of cost or market value. Cost is determined as follows: Raw and packaging materials- Moving average cost method. Products in progress and finished products - On the production costs basis with the addition of allocable indirect manufacturing costs. h. Grants and royalty-bearing grants: Grants and royalty-bearing grants from the Chief Scientist of the Ministry of Industry and Trade in Israel for funding certain approved research projects and for funding marketing activities are recognized at the time the Company is entitled to such grants, on the basis of the related costs incurred, and are presented as a deduction of research and development costs. i Investment in a company: From 1997 to 1999, the Company had an investment in a company which was accounted for according to the equity method. During 2001, the investment was reduced to zero in the books due to the fact that the Company's share in the investee losses exceeded the investment and the Company had no additional guaranty for the investee's liabilities. An additional investment made in that company during 2002 and 2003 is stated at cost, since the Company does not have the ability to exercise significant influence over the operating and financial policies of this investee (see Note 7a). The Company's investments in a company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an investment may not be recoverable, in accordance with Accounting Principle Board Opinion No.18 "The Equity Method of Accounting for Investments in Common Stock", ("APB No.18"). As of December 31, 2003, based on managements' most recent analyses supported by external valuation, an impairment loss has been recorded in the amount of $ 840. F-12 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.) j. Property and equipment: Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by using the straight-line method over the estimated useful lives of the assets, at the following annual rates:
% ------- Computers and peripheral equipment 20 - 33 Office furniture and equipment 6 - 15 Leasehold improvements 10
The Company's property and equipment are reviewed for impairment in accordance with Statement of Financial Accounting Standard No. 144 "Accounting for the Impairment or Disposal of Long- Lived Assets" ("SFAS No. 144") whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Impairment losses have been recorded amounted to $ 110, $ 95 and $ 0 for the years ended December 31, 2003, 2002 and 2001, respectively. k. Goodwill: Goodwill represents excess of the costs over the net assets of businesses acquired. Under Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") goodwill acquired in a business combination on or after July 1, 2001, is not amortized. SFAS No. 142 requires goodwill to be tested for impairment on adoption and at least annually thereafter or between annual tests in certain circumstances, and written down when impaired, rather than being amortized as previous accounting standards required. Goodwill attributable to each of the reporting units is tested for impairment by comparing the fair value of each reporting unit with its carrying value. Fair value is determined using discounted cash flows. Significant estimates used in the methodologies include estimates of future cash flows, future short-term and long-term growth rates, weighted average cost of capital and estimates of market multiples for each of the reportable units. As of December 31, 2003, no impairment losses have been identified. l. Research and development costs: Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," ("SFAS No. 86") requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company product development process, technological feasibility is established upon completion of a working model. Research and development costs incurred in the process of developing product improvements or new products, are generally charged to expenses as incurred, net of participation of the Office of the Chief Scientist of the Israeli Ministry of Industry and Trade. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release are insignificant. F-13 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.) m. Severance pay: The Company's liability for severance pay for Israeli resident employees is calculated pursuant to Israeli severance pay law based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date. Employees are entitled to one month's salary for each year of employment or a portion thereof. The Company's liability for its Israeli resident employees is covered by insurance policies designed solely for distributing severance pay. The value of these policies is recorded as an asset in the Company's balance sheet. The insurance policies include profits accumulated up to the balance sheet date. The insurance policies may be withdrawn only upon complying with the Israeli severance pay law or labor agreements. The value of the deposited funds is based on the cash surrendered value of these policies and includes profits. Severance expenses for 2003, 2002 and 2001, amounted to $ 178, $ 114, and $ 264, respectively. n. Revenue recognition: The Company's products are generally a bundled hardware and software solution that are delivered together. The Company sells its products primarily through distributors and resellers. The Company derives its revenues from the sale of products, license fees for its products, maintenance, support and services. Revenues from product sales are recognized in accordance with Staff Accounting Bulletin No. 104 "Revenue Recognition in Financial Statements" ("SAB 104") when delivery has occurred, persuasive evidence of an arrangement exists, the vendor's fee is fixed or determinable, no further obligation exists, and collectibility is reasonably assured. When a right of return exists, the Company defers revenues until the right of return expires. Revenues subject to certain price protection and stock rotation are deferred until distributor sells the products, or until the right expires. Revenue from license fees is recognized in accordance with Statement of Position (SOP 97-2) "Software Revenue Recognition", when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant obligations with regard to implementation remain, the fee is fixed or determinable, and collectibility is probable. The Company generally does not grant a right of return to its customers. When a right of return exists, the Company defers revenue until the right of return expires, at which time revenue is recognized provided that all other revenue recognition criteria have been met. The provision for product returns is based on prior experience and is net of estimated manufacturing reimbursements. Revenues from maintenance and support are recognized ratably over the period of the maintenance contract. Revenues from software license that require significant customization, integration and installation are recognized as they are completed, in accordance with SOP 81-1 "Accounting for Performance of Construction-Type and Certain Production-Type Contracts" guidelines. F-14 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.) o. Warranty: The Company provides a warranty between 3 to 36 months at no extra charge, whereby defective hardware covered by the warranty should be sent back to the Company. The Company estimates the costs that may be incurred under its warranty and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect the Company's warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Changes in the Company's product warranty during the year 2003 period are as follows: Balance, beginning of the year $ 174 Changes in warranties during the year (32) ----- Balance, end of the year $ 132
p. Income taxes: The Company account for income taxes in accordance with Statement of Financial Accounting Standards, SFAS 109, "Accounting for Income Taxes". This Statement prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. q. Concentrations of credit risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, trade receivables, other accounts receivable and marketable securities. Cash and cash equivalents are invested mainly in U.S. dollars in deposits with major banks in Israel. Such deposits may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the investments of the Company are financially sound and, accordingly, minimal credit risk exists with respect to these investments. The trade receivables of the Company derived from sales to customers located primarily in the United States, Europe and Israel. The Company generally do not require collateral; however, in certain circumstances, the Company may require letters of credit, other collateral, additional guarantees or advanced payments. The Company performs ongoing credit evaluations of its customers and to date (except for customer relating to the discontinuing operations) has not experienced material losses. An allowance for doubtful accounts is determined with respect to specific debts that are doubtful of collection. Investments in marketable securities are conducted through a bank in Israel, and include investments in corporate and governmental debentures. Management believes that the financial institutions that hold the Company's investments are financially sound, the portfolio is well diversified and accordingly, minimal credit risk exists with respect to these investments. The Company have no off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. F-15 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.) r. Basic and diluted net loss per share: Basic net loss per share is calculated based on the weighted average number of Ordinary shares outstanding during each year. Diluted net loss per share is calculated 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 SFAS No. 128, "Earnings Per Share". The total weighted average number of shares related to the outstanding options and warrants excluded from the calculations of diluted net loss per share, since they would have an anti-dilutive effect, were 505,178, 288,804 and 243,380 for the years ended December 31, 2003, 2002 and 2001, respectively. s. 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 plan. Under APB-25, when the exercise price of the Company's employee stock options equals or is above than the market price of the underlying shares on the date of grant, no compensation expense is recognized. The Company applies SFAS No. 123 "Accounting for stock Based Compensation" ("SFAS No. 123") and EITF 96-18, "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction With, Selling, Goods or Services", with respect to warrants issued to non-employees. SFAS No. 123 requires the use of option valuation models to measure the fair value of the warrants at the date of grant. Pro-forma disclosure is required by SFAS No. 123 , had the compensation expense for stock options granted under the Company's plans, been determined based on the fair value at the date of grant. The Company's net loss and loss per Ordinary share in 2003, 2002 and 2001 would have changed to the pro forma amounts shown below:
YEAR ENDED DECEMBER 31, ------------------------------ 2003 2002 2001 ------- -------- --------- Net loss as reported $ (396) $ (7,917) $ (12,970) Deduct: stock-based compensation expense determined under fair value method for all awards 124 341 1,187 ------- -------- --------- Pro forma net loss $ (520) $ (8,258) $ (14,157) ======= ======== ========= Pro forma basic and diluted net loss per share $ (0.14) $ (2.65) $ (4.56) ======= ======== =========
The fair value of each option granted is estimated on the date of grant, using the Black Scholes option pricing model with expected volatility of approximately 64%, 71% and 79% in 2003, 2002 and 2001, respectively and using the following weighted average assumptions: (1) Dividend yield of zero percent for each year. (2) Risk-free interest rate of 1.8%, 1.5% and 2% in 2003, 2002 and 2001, respectively. (3) Expected average lives of the options of three years from the date of grant as of 2003, 2002 and 2001. F-16 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.) t. Fair value of financial instruments: The following methods and assumptions were used by the Company in estimating their fair value disclosures for financial instruments: The carrying amounts of cash and cash equivalents, restricted cash, trade receivables, other accounts receivable and trade payables approximate their fair value due to the short-term maturities of such instruments. The fair value for marketable securities is based on quoted market prices. u. Impact of recently issued accounting standards: In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and clarifies (1) the accounting guidance on derivative instruments (including certain derivative instruments embedded in other contracts) and (2) hedging activities that fall within the scope of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 149 amends SFAS No. 133 to reflect decisions made (1) as part of the Derivatives Implementation Group ("DIG") process that effectively required amendments to SFAS No. 133, (2) in connection with other projects dealing with financial instruments, and (3) regarding implementation issues related to the application of the definition of a derivative. SFAS No. 149 is effective (1) for contracts entered into or modified after June 30, 2003, with certain exceptions, and (2) for hedging relationships designated after June 30, 2003. The guidance is to be applied prospectively. Generally, SFAS No. 149 improves financial reporting by (1) requiring that contracts with comparable characteristics be accounted for similarly and (2) clarifying when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is not expected to have a material impact on the Company's financial statements. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34" ("FIN No. 45"). FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN No. 45 does not prescribe a specific approach for subsequently measuring the guarantor's recognized liability over the term of the related guarantee. It also incorporates, without change, the guidance in FASB Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of Others," which is being superseded. The disclosure provisions of FIN No. 45 are effective for financial statements of interim or annual periods that end after December 15, 2002, and the provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantor's year-end. The adoption of FIN No. 45 did not have a material impact on the results of operations or financial position. F-17 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.) In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities" ("FIN 46"). The objective of FIN No. 46 is to improve financial reporting by companies involved with variable interest entities. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN No. 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN No. 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period ending after March 15, 2004. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. As of December 31, 2003, the Company does not expect the adoption of FIN No. 46 to have a material impact on its consolidated financial statements. In November 2002, Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables". EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 applied to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. Additionally, companies will be permitted to apply the consensus guidance in this issue to all existing arrangements as the cumulative effect of a change in accounting principle in accordance with APB Opinion No. 20, "Accounting Changes". The adoption of EITF Issue No. 00-21 did not have a material impact upon the Company's financial position, cash flows or results of operations. v. Reclassification: Certain amounts from prior years have been reclassified to conform to the current year presentation. As a result of the decision of the Board of Directors to cease the operations of Pacinfo (the Computer Networking Segment), the financial statements of the Company classify the assets, liabilities and operations of Pacinfo as a discontinued operations. NOTE 3:- RESTRICTED CASH As of December 31, 2003, a fixed charge that was granted in order to secure the line of credit to Pacinfo has expired. F-18 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 4:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
DECEMBER 31, --------------- 2003 2002 ------ ------ Government authorities $ 62 $ 104 Prepaid expenses 107 189 Other 148 89 ------ ------ $ 317 $ 382 ====== ======
NOTE 5:- INVENTORIES
DECEMBER 31, --------------- 2003 2002 ------ ------ Raw materials (including packaging materials) $ 299 $ 429 Products in progress 277 228 Finished products 385 198 ------ ------ $ 961 $ 855 ====== ======
The inventories are presented net of provision for technological obsolescence and slow-moving items of $ 300 as of December 31, 2003 and 2002. NOTE 6:- MARKETABLE SECURITIES The following is a summary of held-to-maturity securities:
DECEMBER 31, ------------------------------------------------------------------------------------------------- 2003 2002 ----------------------------------------------- ----------------------------------------------- ESTIMATED ESTIMATED GROSS GROSS FAIR GROSS GROSS FAIR AMORTIZED UNREALIZED UNREALIZED MARKET AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE --------- ---------- ---------- --------- --------- ---------- ---------- --------- HELD-TO-MATURITY: Government debts $ 612 $ 9 $ - $ 621 $ 1,036 $ 17 $ - $ 1,053 Corporate debentures 2,264 50 - 2,314 2,009 8 (35) 1,982 ------- ---- ---- ------- ------- ---- ----- ------- $ 2,876 $ 59 $ - $ 2,935 $ 3,045 $ 25 $ (35) $ 3,035 ======= ==== ==== ======= ======= ==== ===== =======
Aggregate maturities of held-to-maturity securities for years subsequent to December 31, 2003 are:
ESTIMATED FAIR AMORTIZED COST MARKET VALUE -------------- -------------- HELD-TO-MATURITY: 2004(short-term marketable securities) $ 1,014 $ 1,027 2005 1,568 1,604 2006 294 304 ------- ------- $ 2,876 $ 2,935 ======= =======
F-19 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 7:- INVESTMENT IN A COMPANY a. Investment in Surf In November 2001, the Company invested $ 1,000 as part of a private placement in Surf Communication System Ltd. ("Surf"). At the same time, the Company converted its convertible loan in the amount of $ 1,042 (principal and accrued interest) into Preferred shares in Surf at an exercise price equal to Surf's fair value as determined in the investment agreement. As a result of this private placement, the Company's holding in Surf was diluted to 17%, Accordingly the investment was accounted based on the cost accounting method. In March 2003, the Company engaged with Catalyst Investors L.P. ("Catalyst"), in order to purchase additional 191,548 series C Preferred shares of Surf. In consideration, the Company issued to Catalyst Ordinary Shares, representing 19.90% of the issued and outstanding share capital of the Company immediately prior to the transaction and prior to the issuance of the shares, at a purchase price of $2.776, aggregating to $ 1,755. Catalyst also granted the Company, at no additional consideration, an option to purchase on or prior to January 31, 2006, any shares of Surf then held by Catalyst at an exercise price of $9.1632 plus interest of 4.75%. In the event that Catalyst will sell its remaining shares in Surf prior to January 1, 2006, the Company will be entitled to the gain that will be realized in such sale. As a result of this investment, the Company's holding in Surf increased to 19.8%. The Company's management believes that following the investment the Company is still unable to exercise a significant influence over Surf's operating and financial policies. The carrying amount of the investment based on the cost accounting method was $ 3,112. b. Impairment Under APB 18, a loss in value of an investment accounted for under the cost method, which is other than a temporary decline, should be recognized as a realized loss, establishing a new carrying value for the investment. Factors the Company considered in making this evaluation included: the length of time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the investee, including cash flows of the investee and any specific events which may influence the operations of the investee and the intent and ability of the Company to retain its investments for a period of time sufficient to allow for any anticipated recovery in market value. As of December 31, 2003, the fair value of the investment was less than its carrying amount. Therefore based on managements' analyses (supported by external valuation) the Company recorded a provision for loss on its investments in Surf of $ 840, during the year ended December 31, 2003. This provision has been presented as "Other expenses", in the consolidated statement of operations. F-20 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 8:- PROPERTY AND EQUIPMENT
DECEMBER 31, ------------------- 2003 2002 -------- -------- Cost: Computers and software $ 1,798 $ 1,816 Office furniture and equipment 532 682 Leasehold improvements 778 774 Vehicles 6 6 -------- -------- 3,114 3,278 -------- -------- Accumulated depreciation: Computers and software 1,561 1,398 Office furniture and equipment 351 385 Leasehold improvements 598 526 Vehicles 6 4 -------- -------- 2,516 2,313 -------- -------- Depreciated cost $ 598 $ 965 ======== ========
Depreciation expenses amounted to $ 307, $ 390 and $ 386 for the years ended December 31, 2003, 2002 and 2001, respectively. NOTE 9:- GOODWILL a. Purchase of additional holdings in BOScom: In February 2002, the Company purchased additional 3% of the share capital of BOScom in consideration of $ 30. The consideration was paid by the issuance of 3,750 Ordinary shares of the Company. Consequently, BOScom became a wholly owned subsidiary. As a result of the purchase, the Company recorded an additional amount $ 30 as goodwill. As of December 31, 2002 and 2003 the amortized goodwill amounted to $ 741. b. The pro forma results of operations presented below for the years ended December 31, 2001, 2002 and 2003, reflect the impact on results of operations had the Company adopted the non-amortization provisions of SFAS No. 142 effective January 1, 2001:
YEAR ENDED DECEMBER 31, ------------------------------- 2003 2002 2001 -------- -------- --------- Reported net loss $ (396) $ (7,917) $ (12,970) Goodwill amortization - - 182 -------- -------- --------- Adjusted net loss $ (396) $ (7,917) $ (12,788) ======== ======== ========= Basic net loss per share: Reported net loss $ (0.11) $ (2.54) $ (4.18) Goodwill amortization - - 0.06 -------- -------- --------- Adjusted basic and diluted net loss per share $ (0.11) $ (2.54) $ (4.12) ======== ======== =========
F-21 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 10:- ACCRUED EXPENSES AND OTHER LIABILITIES
DECEMBER 31, ---------------- 2003 2002 ------ ------- Government of Israel $ 635 $ 882 Provision for warranty 132 174 Other 144 237 ------ ------- $ 911 $ 1,293 ====== =======
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES a. Commitments: 1. Royalty commitments: i) Under the Company's research and development agreements with the Office of the Chief Scientist ("OCS") and pursuant to applicable laws, the Company is required to pay royalties at the rate of 3.5% of sales of products developed with funds provided by the OCS, up to an amount equal to 100% of the research and development grants (dollar-linked) received from the OCS. The obligation to pay these royalties is contingent upon actual sales of the products. Royalties payable with respect to grants received under programs approved by the OCS after January 1, 1999, are subject to interest on the U.S. dollar-linked value of the total grants received at the annual rate of LIBOR applicable to U.S. dollar deposits at the time the grants are received. As of December 31, 2003, the Company has an outstanding contingent obligation to pay royalties in the amount of approximately $ 5,621, in respect of these grants. ii) The Israeli Government, through the Overseas Marketing Fund, awarded the Company grants for participation in expenses for overseas marketing. The Company is committed to pay royalties to the Fund for Encouragement of Marketing Activities at the rate of 3% of the increase in export sales, up to the amount of the grants received by the Company linked to the dollar and bearing interest of LIBOR (for a period of six months). As of December 31, 2003, the Company had outstanding contingent obligations to pay royalties of $ 144 with respect to these grants. 2. Other commitments: The premises occupied by the Company and the Company's motor vehicles are rented under various operating lease agreements. The lease agreements for the premises and the motor vehicles expire on various dates ending in 2005. F-22 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.) Minimum future rental payments due under the above leases, at rates in effect at December 31, 2003, are as follows:
YEAR ENDED DECEMBER 31, ----------------------- 2004 $ 286 2005 185 ----- $ 471 =====
Rental payments in 2003, 2002 and 2001 amounted to $ 426, $ 383 and $ 283, respectively. b. In July 2002, the Company received a claim letter from Operate Lease Ltd., under which it claims that the Company's termination notice of the leasing agreement in March 2002 constitutes a breach of the agreement and Operate Lease is demanding compensation in which the nominal claim amount of $ 292. No legal proceeding has yet been filed. At this stage, according to the Company's counsel assessment, the prospects of Operate Lease to prevail and recover a significant amount, seem remote. The financial statements do not include any provision in that regard. c. In 1998, as part of Pacinfo Share Purchase Agreement between the Company and Mr. Jacob Lee (the seller of Pacinfo who became a shareholder of the Company), certain actions involving PacInfoSystems, if occurring before the end of 2003, may trigger a tax event for Mr. Jacob Lee. The Company may be obligated, under the purchase agreement, to grant Mr. Lee a loan on a full recourse basis for certain tax payments Mr. Lee may be liable for, currently estimated at approximately $1,500. The Company will receive a security interest in shares of the Company that Mr. Lee holds at the time of the loan with a fair market value as of the date of the loan of at least 125% of the amount of the loan as security for the repayment of the loan. In addition, in the event the Company is required to loan such sum to Mr. Lee, the Company may also be required to reimburse Mr. Lee for certain interest on taxes that he may owe. It is possible that the windup of PacInfoSystems during 2002 and 2003 may have triggered such a tax event for Mr. Lee, which would result in an obligation by the Company to loan Mr. Lee such amount and to reimburse him for interest expenses incidental to the tax event. NOTE 12:- SHAREHOLDERS' EQUITY a. In February 2003, the Board of Directors resolved to effect a one-to-four reverse split. The reverse split was approved by the shareholders in May 2003 and became effective on May 29, 2003. Upon effecting the reverse split; 4 Ordinary shares of NIS 1 par value each, have been converted and reclassified as one Ordinary share of NIS 4 par value. All shares, options and earnings per share amounts have been retroactively adjusted for all periods presented to reflect the stock splits. b. In December 2003, the Company completed a private placement for the Company's Ordinary Shares with two European private investors. The Company issued to the investors 357,143 shares at a purchase price of $ 2.80, for consideration of $ 928 thousand (net of $ 72 issuance expenses). F-23 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA NOTE 12:- SHAREHOLDERS' EQUITY (CONT.) c. Stock options plan: During 1994, 1995, 1999, 2000, 2001 the Board of Directors of the Company adopted stock option plans ("the Plans") pursuant to which 656,250 options for the purchase of the Company's Ordinary shares may be granted to officers, directors, consultants and employees of the Company. The Board of Directors has resolved that no further grants shall be made from the existing plans which, as of December 31, 2003, had in the aggregate 337,902 options left for issuance from the existing option pools previously approved by the shareholders. In May 2003 the Company's shareholders approved the adoption of the 2003 Stock Option Plan, pursuant to which 625,000 Ordinary Shares are reserved for purchase by employees, directors, consultants and service providers of the Company. As of December 31, 2003, an aggregate to 414,424 of these options are still available for future grant. Each option granted under the plans expires between 5-10 years from the date of the grant. The options vest gradually over a period ranging between two to three years. Any options, which are cancelled or forfeited before expiration, become available for future grants. The following is a summary of the Company's stock options granted to officers, directors, and employees among the various plans:
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2003 2002 2001 --------------------- --------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE OF OPTIONS PRICE OF OPTIONS PRICE OF OPTIONS PRICE ---------- -------- ---------- -------- ---------- -------- Options outstanding at beginning of year 211,929 16.00 243,380 16.48 224,740 21.16 Changes during the year: Granted 278,076 8.97 55,000 6.76 98,048 8.20 Forfeited or cancelled (63,753) 12.53 (86,451) 11.40 (79,408) 19.48 ---------- ---------- ---------- Options outstanding at end of year 426,252 11.93 211,929 16.00 243,380 16.48 ========== ======== ========== ======== ========== ======== Options exercisable at the end of the year 194,926 20.36 169,054 16.24 127,293 18.32 ========== ======== ========== ======== ========== ========
The options outstanding as of December 31, 2003, have been separated into ranges of exercise price as follows:
WEIGHTED OPTIONS WEIGHTED OPTIONS AVERAGE OUTSTANDING WEIGHTED AVERAGE EXERCISABLE EXERCISE RANGE OF AS OF AVERAGE REMAINING AS OF PRICE OF EXERCISE DECEMBER 31, EXERCISE CONTRACTUAL DECEMBER 31, OPTIONS PRICE 2003 PRICE LIFE (YEARS) 2003 EXERCISABLE --------------- ------------ -------- ------------ ------------ ----------- 1.84-2.00 203,076 1.95 8.07 - - 6.80 39,168 6.80 7.78 35,918 6.8 10.60 3,695 10.60 3.76 3,695 10.60 14.00 14,000 14.00 3.27 14,000 14.00 17.00-18.00 45,988 17.83 5.27 45,988 17.83 28.00 120,325 28.00 3.84 95,325 28.00 ------------ ------------ 426,252 11.93 6.13 194,926 20.36 ============ ============ ============ ===========
F-24 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA NOTE 12:- SHAREHOLDERS' EQUITY (CONT.) Options granted to employees in 2003, 2002 and 2001, have an exercise price equal to the fair market value of Ordinary share at the grant date. The weighted average fair values of the options granted during 2003, 2002 and 2001 were $ 3.91, $ 3.2 and $ 4.27, respectively. h. Options issued to service providers: The Company accounts for these options in accordance with the provisions of SFAS 123 and EITF 96-18. The fair value for these options was estimated at the date of grant using an option pricing model with the following assumptions: risk-free interest rate of 1.5%, dividend yields of 0% volatility of 0.7, and an expected life of 2.5 year. The compensation expense that has been recorded in the consolidated financial statements regarding these warrants for the years 2003, 2002 and 2001 were $ 23, $ 7 and $ 4, respectively. The Company's outstanding warrants to service providers as of December 31, 2003 are as follows:
WARRANTS FOR ORDINARY EXERCISE PRICE WARRANTS EXERCISABLE ISSUANCE DATE SHARES PER SHARE EXERCISABLE THROUGH ---------------- ------------ --------------- ----------- ------------- October 2002 75,000 $ 4.00 31,250 June 2011 December 2002 938 $ 8.00 938 December 2005 December 2002 937 $ 4.00 937 December 2005 March 2003 1,025 $ 8.00 1,025 December 2005 March 2003 1,026 $ 4.00 1,026 December 2005 ------------ ----------- 78,926 35,176 ============ ===========
NOTE 13:- TAXES ON INCOME a. Tax benefits under the Law for the Encouragement of Capital Investments, 1959: The Company's production facilities have been granted an "Approved Enterprise" status under the above Law under four separate investment programs. According to the Capital Investments Law, the Company has elected to receive for the first program state-guaranteed loans and grants, for the second and third programs, the Company has elected to receive only state-guaranteed loans. As for the fourth program, the Company has elected the "alternative benefits" and has waived Government grants in return for a tax exemption. The Company is also a "Foreign Investors' Company", as defined by the abovementioned law, and as such, is entitled to a 10-year period of benefits and to an additional reduction in tax rates, up to 10% or 25% (based on the percentage of foreign ownership in each taxable year). Income from the second, third, fourth programs, which commenced operations in 1992, 1994, 1997, respectively, are exempt from income tax for a period of ten years commencing with the first year in which they generate taxable income. During 2002, as part of the transfer of operations from the Company to BOScom, all tax benefits that were related to the Approved Enterprise of the Company, were transferred to BOScom. In addition, since 2002, the Company's investment are not subject to Approved Enterprise program. Accordingly, taxable income generated in that period will be split by the assets ratio into a taxable income that is entitled to the benefits of the approved enterprise and into an income that will be taxed at the 36% corporate tax rate. F-25 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 13:- TAXES ON INCOME (CONT.) BOScom has also a production facility, which was granted an "Approved Enterprise" status and had a separate investment program. BOScom elected to receive the "alternative benefits". Income derived from BOScom investment program, which commenced operations in 1997 and 2002, are exempt from income tax for a period of ten years commencing with the first year in which taxable income is generated. The period of tax benefits detailed above is subject to limits of the earlier of 12 years from commencement of production, or 14 years from receiving the approval. Accordingly, the period of benefits relating to all investment programs expire in the years 2001 through 2014. The entitlement to the above benefits is conditional upon the Company's and BOScom's fulfilling the conditions stipulated by the above law, regulations published thereunder and the instruments of approval for the specific investments in "Approved Enterprises". In the event of failure to comply with these conditions, the benefits may be canceled and the Company and BOScom may be required to refund the amount of the benefits, in whole or in part, including interest. The tax-exempt income attributable to the "Approved Enterprise" can be distributed to shareholders without imposing tax liability on the Company only upon the complete liquidation of the Company. In the event of a distribution of such tax-exempt income as a cash dividend in a manner other than in the complete liquidation of the Company and BOScom, the Company and BOScom will be required to pay tax at the rate of 10% to 25% on the amount distributed. In addition, these dividends will be subject to 15% withholding tax. The Company's Board of Directors has determined that such tax-exempt income will not be distributed as dividends. Accordingly, no deferred taxes have been provided on income attributable to the Company "Approved Enterprise". If the Company and BOScom derive income from sources other than an "Approved Enterprise", such income will be taxable at the regular corporate tax rate of 36%. b. Loss carryforwards: Domestic: The Company and its Israeli subsidiary have accumulated losses for Israel income tax purposes as of December 31, 2003, in the amount of approximately $ 14,000. These losses may be carryforward (linked to the Israeli Consumer Price Index ("CPI")) and offset against taxable income in the future for an indefinite period. Foreign: As of December 31, 2003, the U.S. subsidiaries which were classified as discontinuing operations had U.S. Federal and State net operating loss carryforward of approximately $ 11,300, that can be carried forward and offset against taxable income and expire through 2021. Utilization of U.S. net operating losses may be subject to substantial annual limitations due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state law provisions. The annual limitations may result in the expiration of net operating losses before utilization. As of December 31, 2003, B.O.S. U.K. had net operating loss carryforward of approximately $ 3,900, which can be carried forward indefinitely and offset against taxable income. F-26 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 13:- TAXES ON INCOME (CONT.) c. Taxable income under the Inflationary Income Tax (Inflationary Adjustments) Law 1985: Results of the Company and its Israeli subsidiary for tax purposes are measured and reflected in real terms in accordance with the changes in the Israeli CPI. As explained in Note 2b, the financial statements are presented in U.S. dollars. The difference between the change in the Israeli CPI and in the NIS/U.S. dollar exchange rate causes a difference between taxable income or loss and the income or loss before taxes reflected in the financial statements. In accordance with FASB 109, the Company has not provided deferred income taxes on this difference between the reporting currency and the tax bases of assets and liabilities. d. Deferred income taxes: Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows:
DECEMBER 31, ------------------- 2003 2002 -------- -------- Net operating loss carryforward $ 5,975 $ 4,013 Reserves and allowances 105 598 -------- -------- Net deferred tax asset before valuation allowance 6,080 4,611 Valuation allowance (6,080) (4,611) -------- -------- Net deferred tax asset $ - $ - ======== ========
The Company has provided valuation allowances in respect of deferred tax assets resulting from tax loss carryforwards and other reserves and allowances due to its history of operating losses and current uncertainty concerning its ability to realize these deferred tax assets in the future. e. Tax assessments: The Company and BOScom received final assessments through the 1997 tax year. NOTE 14:- SUPPLEMENTARY INFORMATION TO STATEMENTS OF OPERATIONS a. Non recurring royalty reversal: Certain research and development activities of the Company are supported by the OCS. In return for the OCS's participation, the Company was committed to pay royalties as described in Note 11a.1. During the third quarter of 2003, the OCS completed its examination of the Company's technology and use of grant funding for the years 1991 through 1999, which reduced the royalties' expenses provision. Accordingly, the Company reversed $339 of accrued royalties as a reduction in cost of sales during the third quarter of 2003. F-27 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 14:- SUPPLEMENTARY INFORMATION TO STATEMENTS OF OPERATIONS (CONT.)
YEAR ENDED DECEMBER 31, --------------------------------- 2003 2002 2001 -------- -------- --------- b. Financial income: Interest on bank deposits and marketable securities $ 158 $ 243 $ 504 Other (mainly translation gains) 48 140 330 -------- -------- --------- 206 383 834 -------- -------- --------- Financial expenses: In respect of long-term loans - (14) (46) Other (mainly translation losses) (97) (74) (361) -------- -------- --------- (97) (88) (407) -------- -------- --------- $ 109 $ 295 $ 427 ======== ======== ========= c. Other expenses: Capital loss from sale of property and equipment $ (6) $ - $ (32) Impairment of property and equipment - (95) - Impairment of investment in a company (840) - - Prior year's royalties to the Israeli Chief Scientist - - (100) Legal settlement - - (111) Other 51 - (55) -------- -------- --------- $ (795) $ (95) $ (298) ======== ======== ========= d. Loss per share: 1. Numerator: Numerator for basic and diluted net earnings (loss) per share - Net loss from continuing operations $ (2,432) $ (243) $ (4,657) ======== ======== ========= Net income (loss) from discontinued operation $ 2,036 $ (7,674) $ (8,313) ======== ======== ========= Net loss available to Ordinary shareholders $ (396) $ (7,917) $ (12,970) ======== ======== ========= 2. Denominator (in thousands): Denominator for basic and diluted net earnings (loss) per share - Weighted average number of shares 3,683 3,117 3,102 ======== ======== =========
F-28 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS NOTE 15:- RELATED PARTIES The Company has entered an engagement with an Investment House, to provide non-exclusive investment-banking services and business development services to the Company, effective April 15, 2003. The Investment House is a company indirectly controlled by the Chairman of our Board of Directors, and is a co-manager of the Catalyst Fund, the Company's largest shareholder. For its services, The Investment House is paid a monthly sum of $10, in addition to a success fee of 4-6% for a consummated private placement. According to its terms the Company may terminate the agreement at any time, by giving one month prior written notice. NOTE 16:- SEGMENTS AND GEOGRAPHICAL INFORMATION a. Subsequent to the liquidation of Pacinfo operation, the Computer Networking Segment, the Company manages its business on a basis of one reportable segment, which consists of three product lines. See Note 1 for a description of the Company's business. Total revenues are attributed to geographic areas based on the location of customers in accordance with Statement of Financial Accounting No. 131, "Disclosures about Segments of an Enterprise and Related Information": ("SFAS 131"). The following presents total revenues and long-lived assets for the years ended December 31, 2003, 2002 and 2001:
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------- 2003 2002 2001 ----------------------- ----------------------- ----------------------- TOTAL * LONG-LIVED TOTAL * LONG-LIVED TOTAL * LONG-LIVED REVENUES ASSETS REVENUES ASSETS REVENUES ASSETS -------- ------------ -------- ------------ -------- ------------ United States $ 2,974 $ 5 $ 4,989 $ 10 $ 3,184 $ 134 Europe 1,198 - 2,148 154 1,491 184 Israel 1,556 1,334 2,294 1,542 1,255 1,689 Other - 10 - 112 - -------- -------- -------- -------- -------- -------- $ 5,728 $ 1,339 $ 9,441 $ 1,706 $ 6,042 $ 2,007 ======== ======== ======== ======== ======== ========
*) Long-lived assets comprise goodwill and property and equipment. b. Product lines: Total revenues from external customers divided on the basis of the Company's product lines are as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 2003 2002 2001 -------- -------- -------- Connectivity $ 4,670 $ 7,156 $ 5,028 Software Utilities 492 1,387 428 Voice over IP 566 898 586 -------- -------- -------- $ 5,728 $ 9,441 $ 6,042 ======== ======== ======== c. Major customers data as a percentage of total revenues: Customer A 52% - - ======== ======== ======== Customer B 2% 13% - ======== ======== ========
F-29 B.O.S. BETTER ONLINE SOLUTIONS LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE NOTE 17:- SUBSEQUENT EVENT (UNAUDITED) On June 10, 2004 the Company has entered into a Securities Purchase Agreement (the "Purchase Agreement"), with Laurus Master Fund Ltd. (the "Investor"), under which the Company issued to the Investor in a private placement (i) a Secured Convertible Term Note of a $2,000 principal amount, due June 10, 2007 (the "Note"). The Note is convertible into Ordinary Shares at a price of $3.08 per share (subject to adjustment). The principal amount of the Note is repayable in monthly installments, commencing as of October 1, 2004, in the initial amount of $20 eventually increasing to $74, and may be paid in cash or, subject to certain conditions, in Ordinary Shares. Interest on the Note is payable monthly and may be paid in cash or, subject to certain conditions, in Ordinary Shares. The Note is secured by a security interest in certain assets of the Company, and (ii) a warrant to purchase 130,000 Ordinary Shares at an exercise price of $4.04 per share (the "Warrant"). The Warrant is exercisable, in whole or in part, until June 10, 2011. The Note bears interest at a fluctuating interest rate equal at all times to the prime rate plus 3%, subject to reduction if the average closing price of the Company's Ordinary Shares exceeds certain benchmarks. ---------- F-30 EX-99 2 exhibit_4-2.txt EXHIBIT 4.2 SHARE PURCHASE AGREEMENT THIS SHARE PURCHASE AGREEMENT (this "AGREEMENT") is made as of February 23, 2003 (the "EFFECTIVE Date"), by and between B.O.S. Better Online Solutions Ltd., a company organized under the laws of Israel ("BOS"), and Catalyst Investments, L.P., a limited partnership registered under the laws of Israel ("Catalyst"). BOS and Catalyst shall be referred to herein collectively as the "PARTIES". RECITALS WHEREAS, BOS is a holder of (i) 465,000 Ordinary Shares of Surf Communication Solutions Ltd., a company organized under the laws of Israel ("SURF"), and (ii) 222,883 Preferred C Shares of Surf; and WHEREAS, Catalyst is a holder of (i) 316,484 Preferred C Shares of Surf (the "SURF PREFERRED C Shares", and (ii) a warrant to purchase 79,121 Preferred C Shares of Surf (the "WARRANTS"); WHEREAS, the Board of Directors of BOS believes it in the best interests of BOS to purchase (i) 191,548 Preferred C Shares of Surf (the "SURF SHARES"), (ii) an option to purchase on or prior to January 31, 2006 any shares of Surf then held by Catalyst, which are owned by it on the date hereof or issued with respect thereto, and the right to receive any proceeds in excess of the option exercise price pursuant to a disposition of such shares prior to the option exercise date, all subject to the terms and conditions of the Option Agreement (as defined below), and (iii) the Surf Warrants (as defined below) which will be transferred to BOS under this Agreement and under the Option Agreement pro rata to the number of the Surf Preferred C Shares to be transferred to BOS hereunder and thereunder in exchange for 2,529,100 Ordinary Shares of BOS (the "BOS SHARES"), and WHEREAS, the Board of Directors of Catalyst believes it in the best interests of Catalyst to purchase 2,529,100 Ordinary Shares of BOS in exchange for 191,548 Preferred C Shares of Surf held by Catalyst; and WHEREAS, concurrently with the execution and delivery of this Agreement, and as a condition and inducement to enter into this Agreement, Catalyst shall grant BOS (i) Warrants to purchase 47,887 Surf Shares (the "SURF WARRANTS", together with the Surf Shares, the "SURF SECURITIES"), (ii) an option to purchase additional Surf Preferred C Shares held by Catalyst under the terms and conditions set forth herein and under the Option Agreement (as defined below); and WHEREAS, concurrently with the execution and delivery of this Agreement, and as a condition and inducement to enter into this Agreement, BOS shall grant Catalyst registration rights with respect to the BOS Shares under the terms and conditions set forth herein and under the BOS Registration Rights Agreement (as defined below); and WHEREAS, the Parties wish to define the respective rights and obligations of the Parties in connection with the exchange of the transactions contemplated hereby. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein set forth, the Parties hereby agree as follows: ARTICLE 1 THE EXCHANGE 1.01 TRANSACTIONS AT CLOSING Subject to the terms and conditions of this Agreement, at the Closing (as defined below), the following transactions shall occur, which transactions shall be deemed to take place simultaneously and no transaction shall be deemed to have been completed or any document delivered until all such transactions have been completed and all required documents delivered: (1) PURCHASE AND SALE OF BOS SHARES Catalyst shall purchase, and BOS shall sell and issue to Catalyst the BOS Shares, representing 19.90% of the issued and outstanding share capital of BOS immediately prior to the Closing and prior to the issuance of the BOS Shares, at a purchase price of $0.694 per share, which equals to the average of the closing prices of the BOS Shares on NASDAQ in the last thirty days immediately prior to November 27, 2002, the date of the term sheet entered into by the Parties, and which equals to a purchase price of $1,755,195 (the "BOS SHARES PURCHASE PRICE"), PROVIDED, HOWEVER, that BOS shall set-off the BOS Shares Purchase Price due by Catalyst to BOS under this Subsection 1.01(1) against payment of the Surf Shares Purchase Price due to Catalyst from BOS under Subsection 1.01(2). The BOS Shares shall have the rights, preferences, privileges and restrictions set forth in the Articles of Association of BOS (the "BOS ARTICLES OF ASSOCIATION"). (2) PURCHASE AND SALE OF SURF SHARES BOS shall purchase, and Catalyst shall sell and transfer to BOS the Surf Shares, representing, immediately prior to the Closing, (i) 5.24% of the issued and outstanding Preferred C Shares of Surf, and (ii) 3.48% of the share capital of Surf on an as converted basis, assuming conversion of all Preferred Shares of Surf into Ordinary Shares of Surf at a ratio of 1 to 1, at a purchase price of $9.1632 per share, which is the original purchase price paid by Catalyst to Surf on November 14, 2001 and on November 17, 2002 for the Surf Shares, and which equals to $1,755,195 (the "SURF SHARES PURCHASE PRICE", and together with the BOS Shares Purchase Price, the "PURCHASE PRICE"). Catalyst shall assign to BOS all rights attached to the Surf Shares, and all rights held by Catalyst immediately prior to the date hereof by virtue of its holdings of the Surf Shares, in each case, under the Shareholders Rights Agreement dated as of November 14, 2001 among Surf, the New Shareholders and the Existing Shareholders (as such terms are defined therein) (the "SURF SHAREHOLDERS AGREEMENT") and under the Registration Rights Agreement dated as of November 14, 2001 among Surf, the Preferred C Holders, the Preferred A+B Holders and the Ordinary Holders (as such terms are defined therein) (the "SURF REGISTRATION RIGHTS AGREEMENT"). Catalyst shall set-off the BOS Shares Purchase Price due by it to BOS under Subsection 1.01(1) against payment of the Surf Shares Purchase Price due to it from BOS under this Subsection 1.01(2). Catalyst covenants to BOS that immediately after the Closing (i) the Surf Shares shall have the rights, preferences, privileges and restrictions set forth in the Articles of Association of Surf (the "SURF ARTICLES OF ASSOCIATION"), the Surf Shareholders Agreement and the Surf Registration Rights Agreement, and (ii) BOS shall have, by virtue of its holdings of the Surf Shares, the rights, preferences, privileges and restrictions under the Surf Shareholders Agreement, and under the Surf Registration Rights Agreement. (3) SET-OFF For the avoidance of doubt, the Parties' intention is that the Surf Shares Purchase Price shall be fully set-off against the BOS Shares Purchase Price, and that the respective Purchase Prices will be paid by both Parties in equity and not in cash, PROVIDED, HOWEVER, that in the event that any third party exercises its right of first refusal with respect to the Surf Shares, then (i) the number of Surf Shares which BOS shall purchase hereunder shall be reduced by the number of shares purchased by such third party pursuant to exercise of its right of first refusal, and (ii) Catalyst shall purchase the BOS Shares in exchange for (a) the Surf Shares which were not purchased by such third parties pursuant to exercise of right of first refusal, and (b) cash payment equals to the Surf Shares sold to such third parties pursuant to exercise of such right of first refusal times the Surf Shares Purchase Price. (4) OPTION In order to induce BOS to enter into this Agreement, subject to the terms and conditions of this Agreement, at the Closing, Catalyst shall grant BOS, for no additional consideration, an option to purchase on or prior to January 31, 2006, any shares of Surf then held by Catalyst subject to the terms and conditions of the Option Agreement in the form attached hereto as EXHIBIT A (the "OPTION AGREEMENT"), including without limitation, the right of BOS to receive for no additional consideration any after-tax proceeds to Catalyst in excess of the exercise price of the option derived from any disposition by Catalyst of Preferred C Shares held by it prior to the option exercise date or within eighteen months thereafter, all in accordance with the terms and conditions of the Option Agreement. (5) SURF WARRANTS In order to induce BOS to enter into this Agreement, subject to the terms and conditions of this Agreement, at the Closing, Catalyst shall transfer to BOS, for no additional consideration, the Surf Warrants (6) SURF COMMITTEES Catalyst hereby undertakes and covenants to BOS that, in the event that BOS wishes to appoint a representative of BOS as a member of the Board committees of Surf, then Catalyst shall support such appointment, and shall use its best efforts to perform such further acts and execute such further documents as may required to effect such appointment. (7) BOS REGISTRATION RIGHTS In order to induce Catalyst to enter into this Agreement, subject to the terms and conditions of this Agreement, BOS shall grant Catalyst, by virtue of its holdings of the BOS Shares, certain registration rights, which shall be subject to the terms and conditions of the Registration Rights Agreement in the form attached hereto as EXHIBIT B (the "BOS REGISTRATION RIGHTS AGREEMENT"). 1.02 CLOSING The closing of the transactions contemplated hereby (the "CLOSING"), shall take place at the offices of Catalyst not later than April 6, 2003 (the "CLOSING DATE"). The Closing shall be effective as of, and the consummation of the transactions contemplated hereby shall be deemed to occur at, the close of business on the Closing Date. ARTICLE 2 TERMINATION 2.01 TERMINATION PRIOR TO CLOSING The transactions contemplated herein may be terminated at any time but not later than the Closing Date: (1) by mutual consent of all of the Parties; or (2) by and at the option of (i) BOS, if prior to April 6, 2003, the closing conditions set out in Articles 6 hereunder have not been fulfilled, and (ii) Catalyst, if prior to April 6, 2003, the closing conditions set out in Articles 7 hereunder have not been fulfilled, and, in each case, as a result the Closing shall not have occurred on or before the Closing Date; or (3) by and at the option of any Party, if any order, decree, ruling, or charge of any court, forbidding any of the Parties to approve and/or adopt, and/or enter into, this Agreement or the Ancillary Agreements, or otherwise forbidding and/or preventing the consummation of any of the transactions contemplated by this Agreement and the Ancillary Agreements, will be in force and effect on the Closing Date. 2.02 PROCEDURE UPON TERMINATION PRIOR TO CLOSING In the event of termination by any of the Parties or both Parties, pursuant to Section 2.01 hereof, written notice thereof shall forthwith be given to the other Party and the transactions contemplated by this Agreement shall be terminated, without further action by the Parties hereto. If the transactions contemplated by this Agreement are terminated as provided herein, no Party and none of its directors, officers, stockholders, affiliates, controlling persons, agents or advisors (including, without limitation, attorneys, accountants, consultants, financial advisors and any representatives of your agents and advisors) shall have any liability or further obligation to any other Party to this Agreement, and each Party shall bear its own fees and expenses incurred in preparation and negotiation of this Agreement and the Ancillary Agreements, (including without limitation legal and accounting). ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF CATALYST Catalyst represents and warrants to BOS that the statements contained in this Section 2 are true, correct and complete in all material respects as of the date of this Agreement and acknowledges that BOS is relying on such representations and warranties in entering into this Agreement: 3.01 CORPORATE ORGANIZATION AND STANDING Catalyst is a limited partnership duly organized, validly existing under the laws of Israel and has all corporate power and authority to conduct its business and to own and use its property, except where the failure to be so qualified would not have a material adverse effect on the business, operations, results of operations or financial condition of Catalyst, or the ability of Catalyst to consummate the transactions contemplated by this Agreement (for the purpose of this Article 3, a "CATALYST MATERIAL ADVERSE EFFECT"). 3.02 CORPORATE AUTHORIZATION; BINDING AGREEMENT Catalyst has all corporate power to enter into this Agreement, the Option Agreement, the BOS Registration Rights Agreement and all exhibits hereto and thereto (the "ANCILLARY AGREEMENTS") and to transfer the Surf Warrants. This Agreement and the Ancillary Agreements have been, or will have been, at the time of their respective execution and delivery, duly executed and delivered by a duly authorized officer of Catalyst. Prior to the execution of this Agreement and the Ancillary Agreements, Catalyst shall have acted to complete all corporate action on the part of Catalyst necessary for the authorization, execution and delivery of this Agreement and the Ancillary Agreements, and the sale and delivery of the Surf Shares. Prior to the execution of this Agreement, Catalyst shall have completed all actions, and obtained all consents, required under the Surf Shareholders Agreement and the Surf Registration Rights Agreement for the transfer and assignment to BOS of any rights (a) granted to Catalyst by virtue of the Surf Securities, and (b) attached to the Surf Securities pursuant to the Surf Shareholders Agreement and the Surf Registration Rights Agreement. This Agreement and the Ancillary Agreements constitute the valid and legally binding obligation of Catalyst, enforceable in accordance with their terms, except as (i) such enforceability may be limited by bankruptcy, insolvency, reorganization, arrangement, moratorium or similar laws relating to or affecting the rights of creditors generally, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defences and to the discretion of the court before which any proceeding therefor may be brought. 3.03 NO CONFLICT Neither the execution and delivery of this Agreement and the Ancillary Agreements, nor the consummation of the transactions or the performance of the obligations contemplated hereby and thereby will result in any violation or breach of the constating documents, by-laws, policy, board resolution or shareholders resolution of Catalyst. 3.04 NO CONSENT To Catalyst's best knowledge, no consent of any governmental body or (except for rights of first refusal of Surf's shareholders with respect to the Surf Preferred C Shares and Surf's Board of Directors' approval) third party is required to be made or obtained by Catalyst in connection with the execution and delivery of this Agreement and the Ancillary Agreements by Catalyst or the consummation by Catalyst of the transactions or the performance of the obligations contemplated hereby and thereby by Catalyst. 3.05 COMPLIANCE WITH LAW To Catalyst's knowledge, it has been and is currently conducting its business in all material respects in accordance with all applicable laws, rules, regulations, orders, decrees and other requirements of all applicable governmental bodies, except for failures to so comply which, could not, individually or in the aggregate, affect Catalyst's ability to consummate the transactions contemplated hereby. 3.06 SHARE CAPITAL To the best of Catalyst's knowledge, the authorized share capital of Surf consists as of the date hereof of: 15,631,286 Ordinary Shares, par value NIS0.01 per share (the "ORDINARY SHARES"), of which (i) 2,341,666 Ordinary Shares are issued and outstanding, (ii) 883,208 Ordinary Shares are reserved for issuance upon the exercise of employee, director and consultant options granted under Surf's Option Plan, of which 851,904 are issued and outstanding, and 31, 304 are reserved for future issuance, (i) 340,000 have been designated Preferred A Shares, all of which are issued and outstanding, (ii) 130,000 have been designated Preferred A1 Shares, all of which are issued and outstanding, (iii) 169,500 have been designated Preferred B Shares, all of which are issued and outstanding, (iv) 18,834 have been designated Preferred B1 Shares, all of which are issued and outstanding, and (v) 3,710,380 have been designated Preferred C Shares, of which 3,655,094 are issued and outstanding, including 316,484 which are held by Catalyst, and 55, 286 are reserved for future issuance. To Catalyst's actual knowledge, except as set forth in the Surf Articles of Association, the Surf Registration Rights Agreement and the Surf Shareholders Agreement, except as set forth on the capitalization table of Surf attached hereto as SCHEDULE 3.06, and except for options issued under Surf's employee stock option plan, there are no other equity securities, preemptive rights, rights of first refusal, convertible securities, equity securities having any rights and privileges in preference to the Surf Shares, exchange rights, outstanding warrants, options or other rights to subscribe for, purchase or acquire from Surf and/or Catalyst any equity securities of Surf and there are not any contracts, agreements, undertakings, promises or binding commitments providing for the issuance of, sale of, or the granting of rights to acquire, any equity securities of Surf or under which Surf and/or Catalyst is, or may become, obligated to issue, sale or otherwise to become outstanding any Surf securities. 3.07 SURF SHARES AND SURF WARRANTS Catalyst has good and valid title to the Surf Preferred C Shares and the Warrants. The Surf Preferred C Shares have been duly and validly authorized, and are issued and outstanding and fully paid and nonassessable. The Surf Shares, transferred and sold in accordance with this Agreement and the Option Agreement, will be duly and validly authorized and issued, fully paid, nonassessable, and free of any right of first refusal (which was waived or will be waived prior to the Closing), and a copy of such waivers or notices of right of first refusal with delivery confirmation, which were unanswered (and consequently, the holders of the right of first refusal are deemed to have waived such right) shall be delivered to BOS prior to the Closing. The Surf Shares will have the rights, preferences, privileges and restrictions set forth in the Surf Articles of Association, and will be free and clear of any liens, claims, encumbrances or third party rights of any kind (except as specified in the Surf Articles of Association, the Surf Registration Rights Agreement and in the Surf Shareholders Agreement) and at the closing will have been duly registered in the name of BOS in Surf's share register. The Warrants have been duly and validly authorized and issued, and the Surf Warrants are transferred free of any right of first refusal and at the closing will be duly registered in the name of BOS in Surf's share register. The shares issuable upon exercise of the Surf Warrants, if issued on the Effective Date, would be duly authorized and reserved for issuance by all necessary corporate action and, when issued in accordance with the terms of the Surf Articles of Association, would be duly and validly issued, fully paid and non-assessable, and would have the rights, preferences, privileges and restrictions set forth in the Surf Articles of Association, and will be free and clear of any liens, encumbrances, claims, or third party rights of any kind (except as specified in the Surf Articles of Association, the Surf Registration Rights Agreement and in the Surf Shareholders Agreement). Catalyst is a shareholder of Surf and is the record owner of the Surf Preferred C Shares and the Warrants and all rights thereto, free and clear of all liens, claims, charges, encumbrances, restrictions, rights, options to purchase, proxies, voting trust and other voting agreements, understandings, calls or commitments of any kind. Other than the Surf Shareholders Agreement, Catalyst is not a party or subject to any agreement or understanding which affects or relates to the voting of any security of Surf (including, without limitation, Surf Preferred C Shares and the Warrants). As of the Closing, BOS shall have the same rights as Catalyst has prior to the Closing, under the Surf Registration Rights Agreement and the Surf Shareholders Agreement, with respect to the Surf Shares and the Surf Warrants. 3.08 KNOWLEDGE AND EXPERIENCE Catalyst recognizes that its purchase of the BOS Shares involves a high degree of risk, and has evaluated the merits and risks of the purchase of the BOS Shares. Catalyst has the requisite knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of an investment in BOS. 3.09 RECEIPT OF INFORMATION Without derogating from any representations and warranties made by BOS hereunder, Catalyst acknowledges that it has conducted a due diligence examination of BOS and its subsidiaries and has been furnished by BOS with the documents and information regarding BOS and its subsidiaries which it has requested, and has had an opportunity to ask questions and receive answers from the duly authorized officers or other representatives of BOS and its subsidiaries regarding BOS', and its subsidiaries', business, assets and financial position and the terms and conditions of the BOS Shares. 3.10 DISCLOSURE Article 3 of this Agreement does not contain any untrue statement of a material fact in view of the circumstances in which they were made. BOS has the right to rely fully upon the representations, warranties, covenants and agreements of Catalyst contained in this Agreement. 3.11 SECURITIES LAWS (1) Catalyst is purchasing the BOS Shares for investment purposes, for its own account and not with a view to, or for sale in connection with, any distribution thereof in violation of federal or state US securities laws or Israeli Securities Law, and Catalyst agrees that it will not divide its interest in the BOS Shares with others, resell, or otherwise distribute the BOS Shares in violation of federal or state US securities laws or Israeli Securities Law; (2) Catalyst is (and will be as of the Closing) an "accredited investor" as defined in Rule 501 of Regulation D under the Securities Act as presently in effect; and (3) Catalyst's principal place of business or primary residence for purpose of federal and state securities laws is as listed in its respective signature block. 3.12 LEGENDS It is understood that the certificates evidencing the BOS Shares may bear one or all of the following legends or similar legends: (1) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THESE SHARES UNDER THE SECURITIES ACT OF 1933 OR AN OPINION OF THE COMPANY'S COUNSEL THAT REGISTRATION IS NOT REQUIRED UNDER THE SAID ACT." (2) Any legend required by the securities laws of any state within the U.S. or other jurisdiction. (3) Any legend required pursuant to the BOS Registration Rights Agreement. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BOS BOS represents and warrants to Catalyst that except as set forth on the BOS Schedule of Exceptions attached hereto as EXHIBIT C (the "SCHEDULE OF EXCEPTIONS"), the statements contained in this Article 4 are true, correct and complete in all material respects as of the date of this Agreement, and acknowledges that Catalyst is relying on such representations and warranties in entering into this Agreement: 4.01 CORPORATE ORGANIZATION AND STANDING BOS is a corporation duly organized, validly existing under the laws of Israel and has all corporate power and authority to conduct its business and to own and use its property, except where the failure to be so qualified would not have a material adverse effect on the business, operations, results of operations or financial condition of BOS, or the ability of BOS to consummate the transactions contemplated by this Agreement (for the purpose of this Article 3, a "BOS MATERIAL ADVERSE EFFECT"). Boscom Ltd. ("BOSCOM") is a wholly owned subsidiary of BOS and a corporation duly organized, validly existing under the laws of Israel and has all corporate power and authority to conduct its business and to own and use its property, except where the failure to be so qualified would not have a Material Adverse Effect. Pacific Information Systems Inc. ("PACIFIC") is a wholly owned subsidiary of Lynk USA, Inc., ("LYNK"), which is a wholly owned subsidiary of BOS, and both Pacific and Lynk are corporations duly organized, validly existing under the laws of Delaware and has all corporate power and authority to conduct its business and to own and use its property, except where the failure to be so qualified would not have a BOS Material Adverse Effect. BOS's Ordinary Shares are currently listed on the NASDAQ and the TASE. 4.02 CORPORATE AUTHORIZATION; BINDING AGREEMENT BOS has all corporate power to enter into this Agreement and the Ancillary Agreements. This Agreement and the Ancillary Agreements have been, or will have been, at the time of their respective execution and delivery, duly executed and delivered by a duly authorized officer of BOS. Prior to the Closing of this Agreement and the Ancillary Agreements, BOS shall have acted to complete all corporate action on the part of BOS, necessary for the authorization, execution and delivery of this Agreement and the Ancillary Agreements, and the issuance, sale and delivery of the BOS Shares. This Agreement and the Ancillary Agreements constitute the valid and legally binding obligation of BOS, enforceable in accordance with their terms, except as (i) such enforceability may be limited by bankruptcy, insolvency, reorganization, arrangement, moratorium or similar laws relating to or affecting the rights of creditors generally, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defences and to the discretion of the court before which any proceeding therefor may be brought. 4.03 NO CONFLICT Neither the execution and delivery of this Agreement and the Ancillary Agreements, nor the consummation of the transactions or the performance of the obligations contemplated hereby and thereby will result in any violation or breach of the constating documents, by-laws, policy, board resolution or shareholders resolution of BOS. 4.04 NO CONSENT To BOS's best knowledge, except for reporting obligations and approvals required under applicable security laws and market regulations, no consent of any governmental body or third party is required to be made or obtained by BOS in connection with the execution and delivery of this Agreement and the Ancillary Agreements by BOS or the consummation by BOS of the transactions or the performance of the obligations contemplated hereby and thereby by BOS. 4.05 COMPLIANCE WITH LAW To BOS's knowledge, it has been and is currently conducting its business in all material respects in accordance with all applicable laws, rules, regulations, orders, decrees and other requirements of all applicable governmental bodies, except for failures to so comply which, could not, individually or in the aggregate affect BOS' ability to consummate the transactions contemplated hereby, except for compliance with continued listing requirements on the NASDAQ, which has been disclosed to Catalyst by BOS as part of Catalyst's due diligence investigation. BOS is not aware of any non-compliance with any disclosure requirements under applicable security laws. 4.06 SHARE CAPITAL Except as set forth on the Schedule of Exceptions, the authorized share capital of BOS will consist immediately prior to the Closing of: 35,000,000 Ordinary Shares, par value NIS 1.00 per share, of which (i) 12,709,056 Ordinary Shares are issued and outstanding, (ii) 2,244,316 Ordinary Shares are reserved for issuance upon the exercise of employee, director and consultant options granted under BOS's Option Plan, of which as of 31.12.02, 1,147,716 were issued and outstanding, and 1,096,600 were reserved for future issuance. Except as set forth on the Schedule of Exceptions, there are no other equity securities, convertible securities, outstanding warrants, options or other rights to purchase from BOS any equity securities of BOS and there are not any contracts or binding commitments providing for the issuance of, sale of, or the granting of rights to acquire, any equity securities of BOS. Israel Gal, CEO of BOS and Boscom holds options to purchase securities of Boscom under terms approved by the shareholders at the annual General Meeting shareholders held March 13, 2002. 4.07 ORWER TRANSACTION On March 13, 2002, the BOS shareholders approved an issuance of 1 million Ordinary Shares of BOS, at a price of $2 per share, and the grant of an option to purchase within 1 year an additional 1 million Ordinary Shares of BOS at a purchase price of $3 per share, to Orwer Ltd., an Israeli company, wholly owned by Mr. Aviram Wertheim and his spouse ("Orwer"). In May 2002, Mr. Wertheim announced that Orwer would not be purchasing the shares, and therefore in July 2002 the Company terminated the private placement agreement. 4.08 BOS SHARES The BOS Shares, when issued and sold in accordance with this Agreement, will be duly and validly authorized and issued, fully paid, nonassessable, and free of any right of first refusal, and will have the rights, preferences, privileges and restrictions set forth in the BOS Articles of Association and in Section 3.12, and will be free and clear of any liens, claims, encumbrances (except as specified in the BOS Articles of Association), and duly registered in the name of Catalyst. 4.09 FINANCIAL INFORMATION. (a) The audited consolidated financial statements of BOS as of December 31, 2001, and the related statements, and unaudited financial statements of BOS as of September 30, 2002, are true, correct and complete and present truly and fairly the financial position of BOS as of the respective dates thereof, all in accordance with generally accepted accounting principles consistently applied throughout the periods covered therein on a basis consistent with those applied in prior periods, and have been prepared in accordance with the books and records of BOS as at the applicable dates and for the applicable periods. (b) Subject to section 4.15 hereunder, and other than as reported in BOS' current reports, since September 30, 2002, there has not been any event or material adverse change in the conditions of BOS as reflected in the Financial Statements which, individually or collectively with other events or changes could have a BOS Material Adverse Effect. 4.10 KNOWLEDGE AND EXPERIENCE BOS recognizes that its purchase of the Surf Securities involves a high degree of risk, and has evaluated the merits and risks of the purchase of the Surf Securities. BOS has the requisite knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of an investment in Surf. 4.11 INVESTMENT INTENT BOS represents that its purchase of the Surf Securities is made solely for its own account, for investment, and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act or the Israel Securities Law. BOS furthermore has no current commitment or obligation, contingent or otherwise, to anyone to dispose of the Surf Securities, and has no current plan or intent to dispose of the Surf Securities. 4.12 BOS' RELATIONSHIP WITH SURF Without derogating from any representations and warranties made by Catalyst hereunder, BOS hereby acknowledges that as of the date hereof, it holds shares in Surf. 4.13 NASDAQ LISTING BOS had a hearing before the Nasdaq Listing Qualification Panel to review the Nasdaq delisting notice. While there can be no assurance that the Panel will grant the Company's request for continued listing, the Company is exploring possible avenues to preserve the Nasdaq listing. 4.14 REGISTRATION RIGHTS Except as set out on the Schedule of Exceptions, the Company has not granted any registration rights with respect to any of its shares. 4.15 DISCLOSURE BOS is in compliance with all current disclosure requirements under (i) the United States Securities Exchange Act of 1934, and all regulations promulgated thereunder, and (ii) the Israel Securities Law, 5728-1968, and all regulations promulgated thereunder, to the extent applicable to BOS. All materials disclosed by BOS pursuant to the aforementioned securities laws are correct. This Article 4 does not contain any untrue statements of a material fact, in view of the circumstances in which they were made. Changes in the conditions of BOS, subsequent to September 30, 2002, have been specifically disclosed to Catalyst pursuant to this Agreement or as set forth on the Schedule of Exceptions (Exhibit C hereto). Catalyst has the right to rely fully upon the representations, warranties, covenants and agreements of BOS contained in this Agreement. Notwithstanding the foregoing, except as explicitly provided in Section 4.01 and 4.09(a) hereunder, the information regarding Pacific and BOS' liabilities with respect to Pacific is given on an 'AS IS' basis, and it is understood and agreed that no warranties of any kind are given by BOS with respect to the potential exposure of BOS to liabilities arising from and/or relating to Pacific. ARTICLE 5 COVENANTS OF THE PARTIES 5.01 THIRD PARTY CONSENTS 5.01.1 CATALYST THIRD PARTY CONSENTS Catalyst has taken and delivered, or immediately after the date hereof, shall take and deliver, all notices and take all actions required to be taken by it under the Surf Articles of Association, the Surf Shareholders Agreement and the Surf Registration Rights Agreement for the transfer of the Surf Securities to BOS, and the transfer and assignment to BOS of all rights attached to the Surf Securities, and all rights granted to Catalyst as a holder of the Surf Securities, under the Surf Articles of Association, the Surf Shareholders Agreement and the Surf Registration Rights Agreement. 5.01.2 BOS THIRD PARTY CONSENTS BOS shall take all actions required for the issuance of the BOS Shares to Catalyst. 5.02 CONFIDENTIALITY; PUBLIC ANNOUNCEMENTS Both before and after the Closing Date or the termination of this Agreement for any reason, the Parties will consult with each other before issuing any press release or news media release or otherwise making any public statements with respect to this Agreement and/or the Ancillary Agreements and the transactions contemplated hereby. 5.03 ACCESS TO INFORMATION AND CONFIDENTIALITY (1) During the course of negotiating this Agreement and after the execution thereof, and until the Closing and thereafter, each of the parties (the "DISCLOSING PARTY") shall provide and have provided to the other party (the "RECEIVING PARTY"), its counsel and consultants (collectively, the "REPRESENTATIVES") access to confidential information of the Disclosing Party. (2) Any information disclosed to the Receiving Party or to its Representative, which has not previously been made available to the general public by the Disclosing Party, shall be considered confidential (individually and collectively, the "INFORMATION"). (3) The Receiving Party acknowledges the confidential character of the Information and agrees that the Information is the valuable property of the Disclosing Party. The Receiving Party agrees not to reproduce any of the Information without the prior written consent of the Disclosing Party, not to use any Information for any purpose except as permitted by and in the performance of this Agreement, and not to divulge all or any part of the Information to any third party. (4) In the event that any of the Parties is requested or becomes legally compelled to disclose the terms of this Agreement or the transactions contemplated hereby in contravention of Sections 5.02 or 5.03, such Party shall provide the other Party with prompt written notice of that fact so that the appropriate Party may seek (with the co-operation and reasonable efforts of the other Party) a protective order, confidential treatment or other appropriate remedy. In such event, such Party shall furnish only that portion of the information, which is legally required and shall exercise reasonable efforts to obtain reliable assurance that confidential treatment will be accorded such information to the extent reasonably requested by the other Party. (5) All Non-Disclosure Agreements and confidentiality obligations undertaken by the Parties, if any, will remain in full force and effect regardless of the execution and consummation or termination of this Agreement. ARTICLE 6 BOS CLOSING CONDITIONS The obligations of BOS to effect the transactions contemplated hereby shall be subject to the satisfaction of BOS, at or before the Closing, of each of the following conditions any one of which may be waived in writing, in whole or in part, by BOS: 6.01 REPRESENTATIONS AND WARRANTIES TRUE The representations and warranties of Catalyst set forth in this Agreement shall each be true, complete and accurate as of the date of this Agreement 6.02 PERFORMANCE Catalyst shall have performed and complied with all agreements, obligations and conditions required by this Agreement to be performed or complied with by it on or prior to the Closing, including, without limitation, completion of the sale and transfer of the Surf Shares to BOS, and the assignment of all rights attached to the Surf Shares, and all rights held by Catalyst immediately prior to the date hereof by virtue of its holdings of the Surf Shares, in each case, under the Surf Articles of Association, the Surf Shareholders Agreement and under the Surf Registration Rights Agreement. 6.03 CONSENTS Catalyst shall have duly obtained and secured all permits, approvals, consents and authorizations necessary or required lawfully to consummate this Agreement and the Ancillary Agreements, and to sell and transfer the Surf Shares, the Surf Warrants. Without limiting the generality of the foregoing, Catalyst shall provide (i) a certified copy of the decision of Surf's Board of Directors approving the transfer of the Surf Securities to BOS, and (ii) a certified copy of Surf's register of shareholders, registering BOS as the holder of the Surf Securities. BOS shall have duly obtained the following permits, approvals, consents and authorizations necessary or required lawfully to consummate this Agreement and the Ancillary Agreements: (i) approval by NASDAQ of issuance of the BOS Shares, (ii) approval by TASE of issuance of the BOS Shares, and (iii) issuance of the BOS Shares certificates by the transfer agent of BOS. 6.04 SHARE CERTIFICATES; WARRANTS (A) Catalyst shall have delivered to BOS validly executed (i) share certificates representing the Surf Shares, issued in the names of BOS, and (ii) the Surf Warrants issued in the name of BOS; and (B) Surf shall have duly registered in the share register of Surf the transfer of (a) the Surf Shares, and (b) the Surf Warrants to BOS. 6.05 OPTION AGREEMENT AND PROXY; REGISTRATION RIGHTS AGREEMENT The Option Agreement and the irrevocable proxy attached thereto as Exhibit B, and the Registration Rights Agreement shall have been executed by Catalyst and delivered to BOS. 6.06 WAIVER OF RIGHTS; NOTICES. Catalyst shall have delivered to BOS a copy of the notices of right of first refusal with respect to the Surf Securities that Catalyst delivered to Surf, requesting that Surf deliver same to all holders of such right of first refusal with respect to the Surf Securities, and a confirmation that all such notices were delivered to the holders of such right of first refusal and were unanswered or rejected (and consequently, the holders of the right of first refusal are deemed to have waived such right). 6.07 NO ACTION No order, decree, ruling, or charge of any court, forbidding any of the Parties to approve and/or adopt, and/or enter into, this Agreement or the Ancillary Agreements, or otherwise forbidding and/or preventing the consummation of any of the transactions contemplated by this Agreement and the Ancillary Agreements, will be in force and effect on the Closing Date. 6.08 CATALYST COMPLIANCE CERTIFICATE Catalyst shall have delivered to BOS a duly executed Compliance Certificate, dated as of the Closing Date, in the form attached hereto as EXHIBIT D. 6.09 LEGAL OPINION Catalyst shall have delivered to BOS a legal opinion in the forms attached hereto as EXHIBIT E. 6.10 PURCHASE PRICE To the extent not fully set-off in accordance with the provisions of Section 1.01(3) (as a result of exercise of any right of first refusal with respect to the Surf Shares), Catalyst shall have transferred to BOS the Purchase Price in United States Dollars by wire transfer to a bank account or such other form of payment as is mutually agreed by BOS and Catalyst to a bank account designated in writing by BOS. ARTICLE 7 CATALYST CLOSING CONDITIONS The obligations of Catalyst to effect the transactions contemplated hereby shall be subject to the satisfaction of Catalyst, at or before the Closing, of each of the following conditions any one of which may be waived in writing, in whole or in part, by Catalyst: 7.01 REPRESENTATIONS AND WARRANTIES TRUE. The representations and warranties of BOS set forth in this Agreement shall each be true, complete and accurate as of the date of this Agreement. 7.02 PERFORMANCE. BOS shall have performed and complied with all agreements, obligations and conditions required by this Agreement to be performed or complied with by it on or prior to the Closing, including, without limitation, completed the issuance, sale and delivery of the BOS Shares to Catalyst. 7.03 CONSENTS. BOS shall have duly obtained and secured all permits, approvals, consents and authorizations that shall be necessary or required lawfully to consummate this Agreement and the Ancillary Agreements and to issue and sell the BOS Shares. Without limiting the generality of the foregoing, BOS shall provide Catalyst with a copy of the decision of BOS' Board of Directors approving the issuance of the BOS Shares to Catalyst. 7.04 SHARE CERTIFICATES BOS shall have delivered to Catalyst validly executed share certificates representing the BOS Shares, issued in the names of Catalyst. Surf shall have delivered to either of BOS or Catalyst validly executed (i) share certificates representing the Surf Shares, issued in the names of BOS, and (ii) the Surf Warrants issued in the name of BOS; and Surf shall have duly registered in the share register of Surf the transfer of (a) the Surf Shares, and (b) the Surf Warrants to BOS. 7.05 NO ACTION No order, decree, ruling, or charge of any court, forbidding any of the Parties to approve and/or adopt, and/or enter into, this Agreement or the Ancillary Agreements, or otherwise forbidding and/or preventing the consummation of any of the transactions contemplated by this Agreement and the Ancillary Agreements, will be in force and effect on the Closing Date. 7.06 OPTION AGREEMENT AND PROXY; REGISTRATION RIGHTS AGREEMENT The Option Agreement and the irrevocable proxy attached thereto as Exhibit B, and the Registration Rights Agreement shall have been executed by BOS and delivered to Catalyst. 7.07 BOS COMPLIANCE CERTIFICATE BOS shall have delivered to Catalyst a duly executed Compliance certificate, dated as of the Closing Date, in the form attached hereto as EXHIBIT F. 7.08 LEGAL OPINION BOS shall have delivered to Catalyst a legal opinion in the forms attached hereto as EXHIBIT G. ARTICLE 8 LIMITATION ON REMEDIES 8.01 BREACH OF THE OPTION AGREEMENT In the event of a breach of the Option Agreement, at any time after the Closing, BOS may proceed to protect and enforce its rights, whether for the specific performance of any term contained in the Option Agreement or for an injunction against the breach of any such term, or to enforce any other legal or equitable right of BOS, or to claim any monetary remedy with regard to any direct and indirect damages caused to BOS by such breach, PROVIDED that in the event of a claim for monetary remedy, the sole remedy of BOS shall be paid by means of the Option Shares calculated according to the Exercise Price (as such terms are defined in the Option Agreement), PROVIDED HOWEVER, that only in the event that such transfer of Surf Shares is impossible for any reason, BOS will be compensated in cash. 8.02 BREACH OF THIS AGREEMENT In the event of a breach of this Agreement, including without limitation, liabilities, damages, deficiencies, judgments, settlements, costs of investigation or other expenses (including but not limited to interest, penalties and reasonable attorneys' fees and disbursements) resulting from or arising out of any act or omission of either party, or any breach of any representation or warranty contained in this Agreement and all exhibits attached hereto, and the Ancillary Agreements, both Parties and/or their successors may proceed to protect and enforce their rights, provided that in the event of a claim for monetary remedy, the sole remedy of the plaintiff shall be restitution of the Surf Shares or the BOS Shares sold hereunder, as the case may be, calculated according to the Surf Shares Purchase Price and the BOS Shares Purchase Price, as applicable, provided however, that only in the event that such restitution is impossible for any reason, the plaintiff will be compensated in cash, which shall not exceed the Purchase Price, and further provided, that such claim has been filed within one year of the Effective Date hereunder. ARTICLE 9 MISCELLANEOUS 9.01 PAYMENT OF EXPENSES Except as otherwise provided hereunder, each Party shall pay its own fees and expenses incurred in preparation, negotiation, execution and delivery of this Agreement and the Ancillary Agreements, and the performance of its obligations hereunder and thereunder (including, without limitation, legal, accounting and travel). 9.02 NOTICES All notices and other communications required or permitted hereunder to be given to any Party shall be in writing and shall be faxed or mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand or by messenger, addressed to such party's address as set forth below: If to B.O.S. Better Online Solutions Ltd., to the addresses set forth in its signature block, with a copy to: Ephraim Abramson & Co., Advocates 16 B King George Street Ninth Floor Jerusalem 94229 Israel Facsimile: (02) 623-3694 (02) 625-9264 and: Zvi Firon, Adv Firon, Karni, Sarov and Firon, Renato Jarach 111 Arlozorov Street Tel Aviv, Israel If to Catalyst Investments, L.P., to the addresses set forth in its signature block, with a copy to: Fischer, Behar, Chen & Co. 3 Daniel Frisch St. Tel Aviv 64731 Israel Facsimile: (03) 609-1116 Or such other address with respect to a Party as such Party shall notify each other Parties in writing as above provided. Any notice sent in accordance with this Section 9.02 shall be effective (i) if mailed, seven (7) business days (and fourteen (14) business days for international mail) after mailing, (ii) if sent by messenger, upon delivery, (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), and (iv) one (1) business day (and three (3) business days for international mail) after the business day of deposit with Federal Express or similar overnight courier, freight prepaid, PROVIDED, HOWEVER, that any notice change of address shall only be valid upon receipt thereof. 9.03 ASSIGNMENT This Agreement may not be assigned in whole or in part by any Party without the prior written consent of the other Parties. 9.04 AMENDMENT This Agreement may be modified, supplemented or amended only by a written instrument executed by all of the Parties. 9.05 SURVIVAL The provisions of Sections 5.02, 5.03, Article 8 and this Article 9 shall survive the termination of this Agreement for any reason. 9.06 REMEDIES CUMULATIVE; SPECIFIC PERFORMANCE The rights and remedies of the Parties shall be cumulative (and not alternative). Each Party acknowledges and agrees that the other Party may be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Each Party agrees that the other Party may be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in any court having competent jurisdiction, in addition to any other right or remedy to which they may be entitled, at law or in equity. 9.07 WAIVER Any Party may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other Party hereto, (ii) waive any inaccuracies in the representations and warranties made to such Party contained herein or in any document delivered pursuant hereto, and (iii) waive compliance with any of the agreements or conditions for the benefit of such Party contained herein. Any agreement on the part of a Party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such Party. 9.08 GOVERNING LAW This Agreement shall be exclusively governed by and construed according to the laws of Israel, without regard to the conflict of laws provisions thereof. 9.09 ARBITRATION Any controversy or claim arising under, out of, or in connection with this Agreement, its validity, its interpretation, its execution or any breach or claimed breach thereof, shall be settled by a single arbitrator, who shall be Mr. Yossi Shahak, and if Mr. Yossi Shahak is unwilling or unavailable to serve as an arbitrator, the arbitrator shall be an attorney with experience in complex corporate transactions to be mutually selected by the Parties' legal counsels (the "ARBITRATOR"), and if the Parties are unable to reach an agreement on the identity of the arbitrator with in thirty (30) days, the arbitrator shall be appointed by court having competent jurisdiction. The arbitration shall take place in Tel Aviv, Israel, in the Hebrew language. The Arbitrator shall be exempt from the civil procedure rules and the rules of evidence, but shall be bound by substantive law and by the duty of citing grounds for his ruling. The Arbitrator shall be authorized to issue injunctions and interim orders. The execution of this Agreement by the parties shall be deemed the execution of an arbitration agreement as required by the Israeli Arbitration Law, 5728-1968. 9.10 FURTHER ASSURANCES Each of the Parties 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 Ancillary Agreements and the intentions of the parties as reflected hereby and thereby. 9.11 BINDING EFFECT; BENEFITS This Agreement shall inure to the benefit of, and be binding upon, the Parties and their respective successors and permitted assigns. Nothing contained in this Agreement, express or implied, is intended to confer upon any person or entity other than the Parties' respective successors and permitted assigns any rights or remedies under or by reason of this Agreement. 9.12 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. 9.13 COUNTERPARTS This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. 9.14 ENTIRE AGREEMENT This Agreement, together with all schedules and exhibits hereto, constitute the full and entire understanding and agreement between the Parties with regard to the subject matters hereof and thereof, and shall replace any previous agreement between the Parties, whether or not separate or together with other parties. 9.15 RULES OF CONSTRUCTION The Parties agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement, and therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document be construed against the party drafting such agreement or document. Words denoting the singular include the plural and vice versa and words denoting any gender include all genders. Any reference to a statute shall mean the statute in force as at the date hereof, unless otherwise expressly provided. The use of headings is for convenience of reference only and shall not affect the construction of this Agreement. When calculating the period of time within which or following which any act is to be done or step taken, the date which is the reference day in calculating such period shall be excluded. If the last day of such period is not a business day, the period shall end on the next business day. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF this Share Purchase Agreement has been executed by duly authorized officers of each of the Parties as of the date first above written. B.O.S. BETTER ONLINE SOLUTIONS LTD. By: ________________________ Name: Title: Address: CATALYST INVESTMENTS, L.P. By: ________________________ Name: Title: Address: EXHIBITS
Exhibit A - Option Agreement Exhibit B - BOS Registration Rights Agreement Exhibit C - Schedule of Exceptions [omitted] Exhibit D - Catalyst Compliance Certificate [omitted] Exhibit E - Catalyst Legal Opinion [omitted] Exhibit F - BOS Compliance Certificate [omitted] Exhibit G - BOS Legal Opinion [omitted]
SCHEDULES Schedule 3.06 - Surf Capitalization Table [omitted] OPTION AGREEMENT THIS OPTION AGREEMENT (this "AGREEMENT") is made as of March 30, 2003 (the "EFFECTIVE DATE"), by and between B.O.S. Better Online Solutions Ltd., a company organized under the laws of Israel ("BOS"), and Catalyst Investments, L.P. ("CATALYST"). BOS and Catalyst shall be referred to herein collectively as the "PARTIES". RECITALS WHEREAS, Catalyst, prior to consummating the transactions contemplated hereby and under the Share Purchase Agreement (as defined below), is a holder of (i) 316,484 Preferred C Shares (the "PREFERRED C Shares") of Surf Communication Solutions Ltd., a company organized under the laws of Israel ("SURF"), and (ii) warrants to purchase 79,121 Preferred C Shares of Surf (the "WARRANTS"); and WHEREAS, concurrently with the execution and delivery of this Agreement, BOS and Catalyst are entering into a Share Purchase Agreement (the "SHARE PURCHASE AGREEMENT"), which provides that, upon the terms and conditions thereof, Catalyst will sell to BOS certain equity securities of Surf owned by it; and WHEREAS, as a condition to BOS's willingness to enter into the Share Purchase Agreement, Catalyst agrees to grant BOS (i) a right to receive any Surplus (as defined below) received by Catalyst as a result of the sale of any Preferred C Shares of Surf held by it and not sold to BOS under the Share Purchase Agreement, and (ii) an option to purchase such and or all Preferred C Shares in the event not sold by Catalyst prior to the Option Expiration Date (as defined below), in each case, under the terms and conditions set forth herein; and WHEREAS, this Agreement is entered into as, and forms, an integral part of the Share Purchase Agreement; and WHEREAS, the Parties wish to define the respective rights and obligations of the Parties in connection with the option grant contemplated hereby. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein set forth, the Parties hereby agree as follows: 1. NUMBER OF ORDINARY SHARES AVAILABLE FOR PURCHASE Catalyst hereby grants BOS an irrevocable option (the "OPTION") to purchase, at any time and from time to time on or prior to January 31, 2006 (the "OPTION EXPIRATION DATE") on one or a number of occasions, any or all of the 124,936 Preferred C Shares owned by Catalyst on the Effective Date, or hereafter acquired by Catalyst pursuant to exercise of the Warrant, to purchase 31,234 Preferred C Shares which are held by Catalyst on the Effective Date (the "OPTION SHARES"), including all associated rights under (a) the Registration Rights Agreement, dated as of November 14, 2001 among Surf, the Preferred C Holders, the Preferred A+B Holders and the Ordinary Holders (as such terms are defined therein) (the "REGISTRATION RIGHTS AGREEMENT") and (b) the Shareholders Agreement dated as of November 14, 2001 among Surf, the New Shareholders and the Existing Shareholders (as such terms are defined therein) (the "SHAREHOLDERS AGREEMENt"), at an exercise price of US$9.1632 plus interest at a rate of 4.75% per annum, accrued from the Effective Date until the Option exercise date, per Preferred C Share, or a higher exercise price at the sole discretion of BOS, subject to adjustments under Section 6 (the "EXERCISE PRICE"), PROVIDED, HOWEVER, that in the event that any third party exercises its right of first refusal with respect to the Option Shares, then the number of Option Shares which BOS shall purchase pursuant to the exercise of the Option shall be reduced by the number of shares purchased by such third party pursuant to exercise of its right of first refusal. BOS hereby acknowledges that any transactions consummated pursuant to this Agreement are subject to applicable rights of first refusal of Surf shareholders. 2. TRANSFER OF PREFERRED C SHARES BY CATALYST 2.1 CATALYST UNDERTAKING. (a) Insofar as Catalyst sells or otherwise disposes (a "DISPOSITION") of any Preferred C Shares of Surf owned by Catalyst on the Effective Date, or hereafter acquired by Catalyst pursuant to the exercise of the Warrants, at any time after the Effective Date, and prior to the Option Expiration Date (the "UPSIDE PERIOD") at a price greater than the Exercise Price, then Catalyst shall pay BOS such sale price less (x) U.S. $9.1632 per share and (y) any applicable tax as stated in writing by Catalyst's accountants (the "SURPLUS"). BOS shall have a right to appeal to the tax authorities with respect to the tax imposed on Catalyst pursuant to such transaction. In the event that Catalyst purchases Preferred C Shares of Surf after the Effective Date other than pursuant to the exercise of the Warrants (the "NEW SHARES"), and subsequently sells Preferred C Shares of Surf, then the number of shares to be subject to this Section 2.1 shall be pro-rated between the Option Shares and the New Shares, unless otherwise agreed by the Parties. For purposes of this section 2.1(a), the above shall also apply in the event of a Disposition by Catalyst of any Preferred C Shares or Surf Warrants consummated on or prior to July 31, 2007, PROVIDED that the negotiations with respect thereto commenced before the Option Expiration Date, and such Disposition will be deemed for all purposes as a "Disposition" hereunder. . (b) Subject to the terms of this Agreement, Catalyst agrees and covenants to BOS that it shall sell the Option Shares within the Upside Period to any purchaser designated by BOS (including without limitation, BOS, an affiliate of BOS or any third party), PROVIDED that the purchase price of the Option Shares pursuant to such sale shall be in excess of (x) the Exercise Price plus (y) any applicable taxes paid by Catalyst pursuant to such sale. 3. EXERCISE OF OPTION. The Option may be exercised by delivering to Catalyst at its principal office the Notice of Exercise attached hereto as EXHIBIT A duly completed and duly executed by BOS. The exercise of Option in connection with the following events, may be made conditional upon the completion of such events: (a) acquisition of Surf by another entity by means of any transaction or series of related transactions (including, without limitation, a merger, consolidation or reorganization of Surf with or into another corporation), or a sale of all, or substantially all of the assets of Surf (including, without limitation, intellectual property rights which in the aggregate constitute substantially all of Surf's material assets); (b) a firmly underwritten public offering pursuant to a registration statement filed by Surf under the Securities Act of 1933 or a similar act of another jurisdiction; or (c) either Catalyst or Surf (1) makes an assignment for the benefit of creditors, admits in writing its inability to pay its debts as they become due, or files a voluntary petition in bankruptcy, (2) is adjudicated as bankrupt or insolvent, (3) files any petition or answer seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law, or regulation, (4) files any answer admitting or not contesting the material allegations of a petition filed against Catalyst, as applicable in any such proceeding, or (5) seeks, consents to, or acquiesces in, the appointment of any trustee, receiver, or liquidator of Catalyst or of all or any substantial part of the assets of Catalyst; (6) the commencement of an action against Catalyst seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any present or future statute, law or regulation, such action shall not have been dismissed within ninety (90) days. 4. CLOSING. Upon exercise of the Option hereunder, promptly following expiration or exercise of the right of first refusal with respect to the Option Shares, (the "CLOSING"), (a) Catalyst shall deliver to BOS (i) a duly executed share transfer deed; (ii) a share certificate representing the number of Option Shares specified in the Exercise Notice held by it; (iii) a pro-rata portion of the Warrants held by Catalyst on the date of such exercise; and (iv) a copy of any notices of exercise of rights of first refusal or all waivers, consents or approvals by third party having rights of first refusal with respect to the Option Shares, whereby each such third party waives such right of first refusal or confirmation of Surf, stating that such rights have been waived or expired; against delivery of (b) payment by BOS to Catalyst of the Purchase Price for the Option Shares so transferred and being purchased by delivery of a certified check or bank check in immediately available funds. 5. OPTION CONFERS VOTING RIGHTS. As long as the Option is outstanding and unexercised, BOS shall have a right to vote all except for one of the Option Shares as a shareholder of Surf at its sole and absolute discretion at any meeting of the shareholders of Surf and in any written resolution of the shareholders of Surf, and for that purpose Catalyst shall grant BOS a proxy to vote all minus one Option Shares in the form attached hereto as EXHIBIT B. The Parties agree that Catalyst shall retain voting rights with respect to one of the Option Shares, and Catalyst hereby agrees and covenants to BOS that it will vote such share in the same manner as BOS votes the Option Shares at BOS's sole discretion. Notwithstanding BOS' rights hereunder, BOS undertakes not to vote the Option Shares in such a manner that will cause Catalyst to be subject to a financial obligation without Catalyst's prior written consent to assume such obligation, unless BOS has agreed in writing to personally assume such financial obligation. 6. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF OPTION SHARES The number and kind of securities purchasable upon the exercise of the Option and the Exercise Price shall be subject to adjustment from time to time upon the occurrence of the following events: In the event of any change in Surf's equity securities by reason of stock dividends, stock splits, reverse stock splits, mergers, recapitalizations, combinations, exchange of shares and the like, the type and number of Option Shares and/or the Exercise Price, as the case may be, shall be adjusted appropriately, so BOS shall receive, upon exercise of the Option, the number and class of shares or other securities or property that BOS would have received in respect of the Option Shares if the Option had been exercised immediately prior to such event or the record date therefore, as applicable. 7. EXERCISE OF WARRANTS. Catalyst hereby covenants to BOS that during the term of this Agreement it shall not exercise the Warrants without the prior written consent of BOS, which may be granted or withheld at BOS's discretion. In addition, Catalyst hereby agrees and covenants to BOS that it will exercise the Warrants if so directed by BOS, at its sole discretion, and such exercise shall be deemed exercise of the Option with respect to the shares underlying such Warrant, PROVIDED that BOS shall bear the exercise price of the Warrants and any tax imposed on Catalyst with respect thereto, if any such tax is imposed, and such exercise price shall be deemed the Exercise Price of such shares. Notwithstanding the foregoing, if BOS shall have not exercised the Option in full on or prior to the date which is 45 days prior to the Warrant's termination date, (November 14, 2005) (hereinafter: the "WARRANT TERMINATION DATE"), Catalyst shall have a right to notify BOS of its wish to exercise the Warrant. BOS shall then notify Catalyst in writing no later than 30 days prior to the Warrant Termination Date whether or not it intends to exercise the Warrant, and if BOS indicated that is does not intend to exercise the Warrant, Catalyst will then have a right to exercise the Warrant at its own expense. . For further clarity, in the event that Catalyst exercises such Warrant, the shares issued by Catalyst pursuant to such exercise shall be deemed to be Option Shares hereunder. 8. PAYMENT OF EXPENSES. Except as otherwise provided hereunder, each Party shall pay its own fees and expenses incurred in preparation, negotiation, execution and delivery of this Agreement and the, and the performance of its obligations hereunder. 9. NOTICES All notices and other communications required or permitted hereunder to be given to any Party shall be in writing and shall be faxed or mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand or by messenger, addressed to such party's address as set forth below: If to B.O.S. Better Online Solutions Ltd., to the addresses set forth in its signature block, with a copy to: Ephraim Abramson & Co., Advocates 16 B King George Street Ninth Floor Jerusalem 94229 Israel Facsimile: (02) 623-3694 (02) 625-9264 and: Zvi Firon, Adv Firon, Karni, Sarov and Firon, Renato Jarach 111 Arlozorov Street Tel Aviv, Israel Facsimile: (03) 695-3802 If to Catalyst Investments, L.P., to the addresses set forth in its signature block, with a copy to: Fischer, Behar, Chen & Co. 3 Daniel Frisch St. Tel Aviv 64731 Israel Facsimile: (03) 609-1116 Or such other address with respect to a Party as such Party shall notify each other Parties in writing as above provided. Any notice sent in accordance with this Section 9 shall be effective (i) if mailed, seven (7) business days (and fourteen (14) business days for international mail) after mailing, (ii) if sent by messenger, upon delivery, (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), and (iv) one (1) business day (and three (3) business days for international mail) after the business day of deposit with Federal Express or similar overnight courier, freight prepaid, PROVIDED, HOWEVER, that any notice change of address shall only be valid upon receipt thereof. 10. ASSIGNMENT This Agreement may not be assigned in whole or in part by any Party without the prior written consent of the other Parties. 11. AMENDMENT; WAIVER This Agreement may be modified, supplemented or amended only by a written instrument executed by each Party. The terms and conditions hereto may be waived by a written instrument executed by the Party waiving compliance. 12. REMEDIES CUMULATIVE; SPECIFIC PERFORMANCE The rights and remedies of the Parties shall be cumulative (and not alternative). Each Party acknowledges and agrees that the other Party may be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Each Party agrees that the other Party may be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in any court having competent jurisdiction, in addition to any other right or remedy to which they may be entitled, at law or in equity. In the event of termination or breach of the Share Purchase Agreement, the Parties hereto shall have available to them the remedies set forth in the Share Purchase Agreement in addition to the remedies available to them by law. 13. GOVERNING LAW This Agreement shall be exclusively governed by and construed according to the laws of Israel, without regard to the conflict of laws provisions thereof. 14. ARBITRATION. Any controversy or claim arising under, out of, or in connection with this Agreement, its validity, its interpretation, its execution or any breach or claimed breach thereof, shall be settled by a single arbitrator, who shall be Mr. Yossi Shahak, and if Mr. Yossi Shahak is unwilling or unavailable to serve as an arbitrator, the arbitrator shall be an attorney with experience in complex corporate transactions to be mutually selected by the Parties' legal counsels (the "ARBITRATOR"), and if the Parties are unable to reach an agreement on the identity of the Arbitrator within thirty (30) days, the Arbitrator shall be appointed by a court having competent jurisdiction. The arbitration shall take place in Tel Aviv, Israel, in the Hebrew language. The Arbitrator shall be exempt from the civil procedure rules and the rules of evidence, but shall be bound by substantive law and by the duty of citing grounds for his ruling. The Arbitrator shall be authorized to issue injunctions and interim orders. The execution of this Agreement by the parties shall be deemed the execution of an arbitration agreement as required by the Israeli Arbitration Law, 5728-1968. 15. FURTHER ASSURANCES. Each of the Parties shall provide all such further information, perform such further acts and execute such further documents as may reasonably be necessary to carry out and give full effect to the provisions of this Agreement and the intentions of the parties as reflected thereby. 16. BINDING EFFECT; BENEFITS This Agreement shall inure to the benefit of, and be binding upon, the Parties and their respective successors and permitted assigns. Nothing contained in this Agreement, express or implied, is intended to confer upon any person or entity other than the Parties' respective successors and permitted assigns any rights or remedies under or by reason of this Agreement. 17. 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. 18. COUNTERPARTS This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. 19. ENTIRE AGREEMENT This Agreement, together with all exhibits hereto and the Share Purchase Agreement constitute the full and entire understanding and agreement between the Parties with regard to the subject matters hereof and thereof, and shall replace any previous agreement between the Parties, whether or not separate or together with other parties. 20. RULES OF CONSTRUCTION The Parties agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement, and therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document be construed against the party drafting such agreement or document. Words denoting the singular include the plural and vice versa and words denoting any gender include all genders. Any reference to a statute shall mean the statute in force as at the date hereof, unless otherwise expressly provided. The use of headings is for convenience of reference only and shall not affect the construction of this Agreement. When calculating the period of time within which or following which any act is to be done or step taken, the date which is the reference day in calculating such period shall be excluded. If the last day of such period is not a business day, the period shall end on the next business day. IN WITNESS WHEREOF this Option Agreement has been executed by duly authorized officers of each of the Parties as of the date first above written. B.O.S. BETTER ONLINE SOLUTIONS LTD. By: ________________________ Name: Title: Address: CATALYST INVESTMENTS, L.P. By: ________________________ Name: Title: Address: EXHIBIT A NOTICE OF EXERCISE [omitted] EXHIBIT B PROXY [omitted] REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT") is made as of March 30, 2003, by and between B.O.S. Better Online Solutions Ltd., a company organized under the laws of Israel ("BOS" or the "COMPANY"), and Catalyst Investments, L.P., a limited partnership organized under the laws of Israel ("CATALYST"). BOS and Catalyst shall be referred to herein collectively as the "PARTIES". WITNESSETH WHEREAS, concurrently with the execution and delivery of this Agreement, BOS and Catalyst are entering into a Share Purchase Agreement (the "SHARE PURCHASE AGREEMENT"), which provides that, upon the terms and conditions thereof, BOS will sell to Catalyst 2,529,100 Ordinary Shares of BOS (the "BOS SHARES"); and WHEREAS, as a condition to Catalyst's willingness to enter into the Share Purchase Agreement, BOS agrees to grant Catalyst registration rights with respect to the BOS Shares under the terms and conditions set forth herein; and WHEREAS, BOS is a party to that certain Registration Rights Agreement Made as of May 3, 2000, by and among BOS, Mr. Israel Gal, Mrs. Yael Gal, Mr. Jacob Lee and Mrs. Miran Lee and the persons and corporation listed on Schedule 1 thereto (the "EXISTING SHAREHOLDERS") (the "EXISTING REGISTRATION RIGHTS AGREEMENT"), providing, among other things that the Company may not, without the prior written consent by holders of at least a majority of the then outstanding Registrable Securities (as defined therein), enter into an agreement for the grant of (i) registration rights senior to or in parity with the rights of the holders under the Existing Registration Rights Agreement, or (ii) demand registration; and WHEREAS, BOS, Catalyst, Mr. Israel Gal, holders of a majority of the outstanding Registrable Securities (as defined in the Existing Registration Rights Agreement) and others are parties to that certain Settlement Agreement, dated February 10, 2003 (the " SETTLEMENT AGREEMENT"), which has been approved by the District Court of Tel-Aviv, providing, among other things for the grant of piggyback registration rights in parity with the rights of the holders under the Existing Registration Rights Agreement and two demand registrations. A copy of the Settlement Agreement is attached hereto as EXHIBIT A. WHEREAS, the Parties wish to define the respective rights and obligations of the Parties in connection with the grant of registration rights contemplated hereby. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein set forth, the Parties hereby agree as follows: 1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall have the following respective meanings: "ACT" means the Securities Act of 1933, as amended, or any successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "COMMISSION" means the Securities and Exchange Commission, or any other Federal agency at the time administering the Act. "ORDINARY SHARES" shall mean the Company's Ordinary Shares NIS 1- par value per share. "EXCHANGE ACT" means the Securities Exchange Act of 1934 as amended, or any successor federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "HOLDER" means any person who is then the record owner of Registrable Securities which have not been sold to the public. "REGISTRABLE SECURITIES" shall mean all Ordinary Shares of the Company issued to Catalyst pursuant to the Share Purchase Agreement, excluding Ordinary Shares which (a) have been registered under the Securities Act pursuant to an effective registration statement filed thereunder and disposed of in accordance with the registration statement covering them, (b) have been publicly sold pursuant to Rule 144 under the Securities Act, or (c) are then immediately available for sale pursuant to Rule 144 under the Securities Act. For the avoidance of doubt, should the Company modify its share capital in any way (e.g. stock spit, reverse stock split, etc.), any additional shares issued to Catalyst as a result of such modification shall also constitute Registrable Securities as defined hereunder. If Catalyst purchases after the date hereof additional Ordinary Shares of BOS from Mr. Jacob Lee and/or Ms. Miran Lee, then Catalyst shall have a right at its sole discretion to determine that such Ordinary Shares shall be deemed Registrable Securities under this Agreement, subject to the limitations set forth in Sections (a), (b) and (c) above. The term "REGISTER" means to register under the Act and applicable state securities laws for the purpose of effecting a public sale of securities. 2. REQUIRED REGISTRATION (a) At any time commencing 60 days after the closing Catalyst may request, once a year, that the Company register under the Securities Act all or any portion of the Registrable Securities held by Catalyst for sale in the manner specified in such notice, PROVIDED HOWEVER that the registration is requested for at least 200,000 Registrable Securities (as adjusted upon any recapitalization event). Notwithstanding anything to the contrary contained herein, no request may be made under this Section 2 within 180 days after the effective date of a registration statement filed by the Company covering a firm commitment underwritten public offering in which the Holders of Registrable Securities under this Agreement and under the Existing Registration Rights Agreement shall have been entitled to join pursuant to Sections 3 or 4 hereof and in which there shall have been effectively registered all shares of Registrable Securities as to which registration shall have been requested. 2 (b) Following receipt of any notice under this Section 2, the Company shall immediately notify all Holders of Registrable Securities under this Agreement and under the Existing Registration Rights Agreement from whom notice has not been received and shall use its best efforts to register under the Securities Act, for public sale in accordance with the method of disposition specified in such notice from requesting Holder, the number of Registrable Securities specified in such notice (and in all notices received by the Company from other holders within 30 days after the giving of such notice by the Company). If such method of disposition shall be an underwritten public offering, the Company shall designate the managing underwriter of such offering, subject to the approval of the Holders, which approval shall not be unreasonably withheld or delayed. The Company shall shall not be obligated to effect, or take any action to effect, any registration pursuant to this Section 2 after the Company has effected two (2) registrations pursuant to this Section 2, PROVIDED, HOWEVER that unless (i) the registration statement is withdrawn and such withdrawal is not attributable to adverse information concerning the Company's operations, condition or prospects or (ii) the number of Registrable Securities covered thereby is reduced, in either case at the request of Holders of Registrable Securities covered thereby, such obligation shall be deemed satisfied only when the registration statement covering all Registrable Securities specified in notices received as aforesaid, for sale in accordance with the method of disposition specified by the requesting Holders, shall become effective and, if such Registrable Securities shall have been sold pursuant thereto. The company not more than once in any period of twelve consecutive months, may defer the effectiveness of such registration for up to one hundred eighty (180) days from the date of the notice of request is received, upon determination by the Board of Directors that such registration would be detrimental to the Company. (c) The Company shall be entitled to include in any registration statement referred to in this Section 2 for sale in accordance with the method of disposition specified by the requesting Holders. Ordinary Shares to be sold by the Company for its own account, except and to the extent that in the opinion of the managing underwriter (if such method of disposition shall be an underwritten public offering), such inclusion would adversely affect the marketing of the Registrable Securities to be sold. If Ordinary Shares are included by the Company for its own account and such Ordinary Shares constitute at least 51% of the total shares covered by the registration statement filed pursuant to this Section 2, such registration will be deemed to have been completed pursuant to Section 3 hereof and not this Section 2. Except for registration statements on Form S-4 or Form S-8 or any successor thereto, the Company will not file with the Commission any other registration statement with respect to its Ordinary Shares, whether for its own account or that of other Holders, from the date of receipt of a notice from requesting Holders pursuant to this Section 2 until the completion of the period of distribution of the registration contemplated thereby. 3 3. INCIDENTAL REGISTRATION. If the Company at any time (other than pursuant to Section 2 or Section 4) proposes to register any of its securities under the Securities Act for sale to the public, for its own account (except with respect to registration statements on Form S-1, Form S-8, their respective successor forms, or another form not available for registering the Registrable Securities for sale to the public), each such time it will give written notice to all Holders of outstanding Registrable Securities of its intention so to do. The Company shall, upon the written request of any such Holder, received by the Company within 20 days after the giving of any such notice by the Company, to register any of its Registrable Securities (which request shall state the intended method of disposition thereof) use its best efforts to cause the Registrable Securities as to which registration shall have been so requested to be included in the securities to be covered by the registration statement proposed to be filed by the Company all to the extent requisite to permit the sale or other disposition by the Holder (in accordance with its written request) of such Registrable Securities so registered. In the event that any registration pursuant to this Section 3, shall be, in whole or in part, an underwritten public offering of Ordinary Shares, the number of Ordinary Shares to be included in such underwriting may be reduced (pro rata among the requesting Holders under this Agreement and under the Existing Registration Agreement, based upon the numbers of Ordinary Shares owned by such Holders) subject to any registration rights; if and to the extent that the managing underwriter shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold by the Company therein. Notwithstanding the foregoing provisions, the Company may withdraw any registration statement referred to in this Section 3 without thereby incurring any liability to the Holders of Registrable Securities (other than as provided in Section 6). 4. FORM F-3 REGISTRATION. If at any time (i) a Holder or Holders of Registrable Securities under this Agreement and under the Existing Registration Rights Agreement requests that the Company file a registration statement on Form S-3 or any successor thereto for a public offering of all or part of the Registrable Securities held such requesting Holder or Holders, the reasonably anticipated aggregate price to the public of which would exceed $1,000,000, and (ii) the Company is a registrant entitled to use Form S-3 or any successor thereto to register such shares, then the Company shall use its reasonable best efforts to register under the Securities Act on Form S-3 or any successor thereto, for public sale in accordance with the method of disposition specified in such notice, the number of Registrable Securities specified in such notice. Whenever the Company is required by this Section 4 to use its reasonable best efforts to effect the registration of Registrable Securities, each of the procedures and requirements of Section 2 (including but not limited to the requirement that the Company notify all Holders of Registrable Securities under this Agreement and under the Existing Registration Rights Agreement from whom notice has not been received and provide them with the opportunity to participate in the offering) shall apply to such registration: PROVIDED HOWEVER that there shall be no limitation on the number if registrations on Form S-3 which may be issued and obtained under this Section 4: and PROVIDED FURTHER HOWEVER, that the requirements contained in the first sentence of Section 2(a) shall not apply to any registration on Form S-3 which may be requested under this Section 4. 4 (b) The Company shall not be obliged to effect any registration, qualification or compliance, pursuant to this Section 4 if: (i) Form S-3 (or any successor form to Form S-3 regardless of its designation) is not available for such offering by the Holders; (ii) the aggregate net offering price (after deduction of underwriting discounts and commissions) of the Registrable Securities specified in such request is less than $1,000,000; (iii) the Company has already effected one registration on Form S-3 within the previous six-month period; or (iv) the Company shall furnish to the Holders a certificate signed by the president of the Company stating that, in good faith judgment of the Board of directors, it would not be in the best interests of the Company and its stockholders for such Form S-3 registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration for a period of not more than one hundred eighty (180) days after receipt of the request of the Holder or Holders under this Section 4; provided however that the Company shall not utilize this right more than once in any twelve month period. 5. EXPENSES. The Company shall pay all out-of-pocket costs in connection with any registration pursuant to this Agreement. The costs and expenses of any such registration shall include, without limitation, the fees and expenses of the Company's counsel and its accountant and all other out-of-pocket costs and expenses of the Company incident to the preparation, printing and filing under the Securities Act of the registration statement and all amendments and supplements thereto; and the cost of furnishing copies of each preliminary prospectus, each final prospectus and each amendment or supplement thereto to underwriters, dealers and other purchasers of the securities so registered under the "blue sky" laws of various jurisdictions, the fees and expenses of the Company's transfer agent, the fees and expenses of one counsel for the Holders, expenses of all marketing and promotional efforts requested by the managing underwriter and all other costs and expenses of complying with the foregoing provisions hereof with respect to such legislation. The Holders shall bear underwriting discounts, selling commissions and transfer taxes with respect to the shares sold by them pursuant to the registration. 5 6. REGISTRATION PROCEDURES. In the case of each registration effected by the Company pursuant to this Agreement, the Company will keep each Holder of Registrable Securities included in such registration advised in writing as to the initiation of each registration and as to the completion thereof. At its expense, the Company will do the following for the benefit of such Holders: (a) Keep such registration effective for a period of 90 days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs and amend or supplement such registration statement and the prospectus contained therein from time to time to the extent necessary to comply with the Act and applicable state securities laws. If at any time the Commission should institute or threaten to institute any proceedings for the purpose of issuing or should issue a stop order suspending the effectiveness of any such registration statement, the Company will promptly notify the Holder and will use reasonable efforts to prevent the issuance of any such stop order or to obtain the withdrawal thereof as soon as possible. (b) Use its best efforts to register or qualify the Registrable Securities covered by such registration under the applicable securities or "blue sky" laws of such jurisdictions as the selling shareholders may reasonably request; PROVIDED that the Company shall not be obligated to qualify to do business in any jurisdiction where it is not then so qualified or otherwise required to be so qualified or to take any action which would subject it to the service of process in suits other than those arising out of such registration. (c) Furnish such number of prospectuses and other documents incident thereto as a Holder or underwriter from time to time may reasonably request. (d) To the extent required, the Company will enter into any underwriting agreement reasonably necessary to effect the offer and sale of Ordinary Shares PROVIDED that such underwriting agreement contains customary underwriting provisions and is entered into by the Holder and PROVIDED further that, if the underwriter so requests, the underwriting agreement will contain customary contribution provisions on the part of the Company. (e) To the extent then permitted under applicable professional guidelines and standards, use its best efforts to obtain a comfort letter from the Company's independent public accountants in customary form and covering by comfort letters and an opinion from the Company's counsel in customary form and covering such matters of the type customarily covered in a public issuance of securities, in each case addressed to the Holders and provide copies thereof to the Holders. (f) Permit the counsel to the selling shareholders whose expenses are being paid pursuant to Section 4 hereof to inspect and copy such corporate documents as he may reasonably request. 6 7. INDEMNIFICATION (a) The Company will and hereby does, indemnify and hold harmless each Holder, each of its officers, directors and partners and each person controlling such Holder within the meaning of the Act, with respect to which registration, qualification or compliance has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls such underwriter within the meaning of the Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact in any prospectus, offering, circular or other document (including any related registration statement, modification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Act or the Exchange Act or securities act of any state or any rule or regulation thereunder applicable to the Company in connection with any such registration, qualification or compliance, and will reimburse each such Holder, each of its officers, directors and partners and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating and defending any such claim, loss, damage, liability or action, whether or not resulting in any liability, PROVIDED that the Company will not be liable in any such case to the extent that any such claim, loss damage, liability or expense arises out of or is (x) based upon any such untrue statement or omission or alleged untrue statement or omission made in reliance upon information furnished in writing to the Company by the Holders or any underwriter or any controlling person of the Holders or any such underwriter specifically for use therein or (y) made in any preliminary prospectus if the prospectus contained in the registration statement as declared effective or in the form filed by the Company with the Commission pursuant to Rule 424 under the Securities Act shall have corrected such statement or omission, ample copies of such prospectus (together with a statement that such corrected prospectus must be used in lieu of all prior prospectuses) shall have been provided by the Company to the Holders or underwriter, and a copy of such prospectus shall not have been sent or otherwise delivered to such person by the Holders or underwriter at or prior to the confirmation of such sale to such person. (b) By requesting confirmation under this Agreement, each Holder shall agree in the same manner and to the same extent as set forth in the preceding paragraph, to indemnify and to hold harmless the Company and its directors, officers and each person, if any, who controls the Company within the meaning of the Securities Act and any underwriter (as defined in the Securities Act) of any shares offered by the Holders, against any such claim, loss, damage, liability or expense, joint or several, to which any such persons may be subject under the Securities Act or otherwise, and to reimburse any of such persons for any legal or other expenses reasonably incurred by them in connection with investigating or defending against any such claim, loss, damage, liability or expense, but only to the extent it arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission of a material fact in any registration statement under which the Holders' shares were registered under the Securities Act pursuant to this Agreement, any prospectus contained therein, or any amendment or supplement thereto, which was based upon and made in conformity with information furnished in writing to the Company by the Holders or such underwriter expressly for use therein, provided HOWEVER, that payments by each Holder hereunder shall be limited to an amount equal to the net proceeds received by such Holder upon the sales of the securities. 7 (c) Each party entitled to indemnification under this Section 7 (the "INDEMNIFIED PARTY") shall give notice to the party required to provide indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought. The failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations under this Section 7, except and to the extent the Indemnifying Party has been prejudiced as a consequence thereof and in no event shall such failure relieve the underlying party from any other liability which it may have to such indemnified party. The Indemnifying Party will be entitled to participate in, and to the extent that it may elect by written notice delivered to the Indemnified Party promptly after receiving the aforesaid notice from such Indemnified Party, at its own expense to assume the defense of any such claim or any litigation resulting therefrom, with counsel reasonably satisfactory so such Indemnified Party, PROVIDED that the Indemnified Party may participate in such defense at its expense, notwithstanding the assumption of such defense by the Indemnifying Party, and PROVIDED, further, that if the defendants in any such action shall include both the Indemnified Party and the Indemnifying Party and the Indemnified Party shall have reasonably concluded that there may be legal defenses available to it and/or other Indemnified Parties which are different form or additional to those available to the Indemnifying Party, the Indemnified Party or Parties shall have the right to select separate counsel to assert such legal defenses and to otherwise participate in the defense of such action on behalf of such Indemnified Party or Parties and the fees and expenses of such counsel shall be paid by the Indemnifying Party. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall (i) furnish such information regarding itself of the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with defense of such claims and litigation resulting therefrom and (ii) shall reasonably assist the Indemnifying Party in any such defense, PROVIDED that the Indemnified Party shall not be required to expend its funds in connection with such assistance. 8 (d) No Holder shall be required to participate in a registration pursuant to which it would be required to execute an underwriting agreement in connection with a registration effected under Section 2 or 3 which imposes indemnification or contribution obligations on such Holder more onerous than those imposed hereunder: PROVIDED HOWEVER that the Company shall not be deemed to breach those provisions of Section 2 or 3 if a Holder is not permitted to participate in a registration on account of his refusal to execute an underwriting agreement on the basis of this sub-section (d). 8. LOCK-UP AGREEMENT. If requested by the underwriter in any registered public offering by the Company, the Holder agrees not to sell or otherwise transfer any Registrable Securities for such period of time after the date of such offering as may be requested by the underwriter, but in no event to exceed 180 days from the close of the initial public offering and 90 days from the close of any subsequent registered public offering, PROVIDED that all executive officers and directors of the Company enter into similar agreements. 9. INFORMATION BY HOLDER. Each Holder of Registrable Securities included in any registration shall furnish to the Company such information regarding such Holder and the distribution proposal by such Holder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Agreement or otherwise required by applicable state or federal securities laws. 10. LIMITATIONS ON REGISTRATION RIGHTS. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the Registrable Securities under this Agreement enter into any agreement with any holder or prospective holder of any securities of the Company, not having any registration rights on the date hereof, which would give any such holder or prospective holder the right to require the Company, upon any registration of any of its securities, to include, among the securities which the Company is then registering, securities owned by such holder, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of its securities will not limit the number of Registrable Securities sought to be included by the Holders of Registrable Securities hereunder. 11. EXCEPTION TO REGISTRATION. The Company shall not be required to effect a registration under this Agreement if (i) in the written opinion of counsel for the Company, which counsel and the opinion so rendered shall be reasonably acceptable to the Holders of the Registrable Securities, such Holders may sell without registration under the Act all Registrable Securities for which they requested registration under the provisions of the Act and in the manner and in the quantity in which the Registrable Securities were proposed to be sold, or (ii) the Company shall have obtained from the Commission a "no action: letter to that effect; PROVIDED that this Section 11 shall not apply to sales made under Rule 144 (k) or any successor rule promulgated by the Commission until after the effective date of the Company's initial registration of shares under the Act. 9 12. RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the Commission which may permit the sale of restricted securities (as that term is used in Rule 144 under the Act) to the public without registration, the Company agrees to: (a) make and keep public information available as those terms are understood and defined in Rule 144 under the Act, at all times from and after ninety days following the effective date of the first registration under the Act filed by the Company for an offering of its securities to the public; (b) use its best efforts to file with the Commission in a timely manner, all reports and other documents required of the Company under the Act and the Exchange Act at any time after it has become subject to such reporting requirements; and (c) so long as a Holder owns any restricted securities, furnish to the Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time from and after ninety days following the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Act and Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as the Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing the Holder to sell any such securities without registration. 13. LISTING APPLICATION. If share of any class of stock of the Company shall be listed on a national securities exchange, the Company shall, at its expense, include in its listing application all of the shares of the listed class then owned by any Holder. 14. ASSIGNMENT OF REGISTRATION RIGHTS. Any of the Holders may assign its rights (but only with all related obligations) to cause the Company to register Shares hereunder to (i) a transferee or assignee of such securities who, after such assignment or transfer, holds at least thirty three percent (33%) of the Registrable Securities held by such transferring Holder on the date hereof, or (ii) any amount of Registrable Securities to a limited liability company or corporation, in any transfer to an affiliated entity and any current and former constituent partners, members, shareholders and affiliates of such Holder or an affiliated entity, PROVIDED HOWEVER that such transfer or assignment is made pursuant to the provisions of the Company's Articles of Association, including without limitation, the provisions relating to transfer of securities, and FURTHER PROVIDED that (a) the Company is, as soon as practicable and in any event within twenty one (21) days after such transfer, is furnished with a written notice of the name and address of such transferee or assignee and a description of the securities with respect to which such registration rights are being assigned; (b) such transferee or assignee agrees in writing to be bound by and subject to the terms and conditions of this Agreement; and (c) such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act. 10 15. MISCELLANEOUS. (a) All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto (including without limitation transferees of any Registrable Securities) whether so expressed or not. (b) All notices, requests, consents and other communications hereunder shall be in writing and shall be mailed by certified or registered mail, return receipt requested, postage pre-paid, or telecopied or sent by facsimile method addressed as follows: If to the Company, or a Holder, at the address of such party as set forth on the signature block or the most recent address as is shown on the stock records of the Company; and If to any subsequent Holder of Registrable Securities, to it at such address as may have been furnished to the Company in writing by such party, or, in case, at such other address or addresses as shall have been furnished in writing to the Company (in the case of a Holder of registrable Securities) or to the Holders of Registrable Securities (in the case of the Company) in accordance with the provisions of this paragraph. (c) This Agreement shall be governed by and construed in accordance with the state of New York, without giving effect to the conflicts of laws thereof. (d) This Agreement may not be amended or modified, and no part hereof may be waived, without the written consent of the Company and the holders of at least a majority of the then outstanding Registrable Securities. (e) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 11 (f) If any provision of this Agreement shall be held to be illegal, invalid or unenforceable, such illegality, invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render illegal, invalid or unenforceable, any other provision of this Agreement, and this Agreement shall be carried out as if any such illegal, invalid or unenforceable provision were not contained herein. (g) This Agreement contains the entire agreement between the parties hereto with respect to registration rights, and supersedes all prior agreements relating to the same subject matter. (THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK) 12 IN WITNESS WHEREOF this Registration Rights Agreement has been executed by duly authorized officers of each of the Parties as of the date first above written. B.O.S. BETTER ONLINE SOLUTIONS LTD. By: ________________________ Name: Title: Address: CATALYST INVESTMENTS, L.P. By: ________________________ Name: Title: Address: 13 EXHIBIT A SETTLEMENT AGREEMENT [omitted] EX-99 3 exhibit_4-3.txt EXHIBIT 4.3 SHARE PURCHASE AGREEMENT This SHARE PURCHASE AGREEMENT (this "Agreement") is made and entered into as of December 14, 2003, by and among B.O.S Better Online Solutions Ltd., an Israeli company (the "Company"), and the other parties listed on SCHEDULE 1 hereto (each an "Investor" and collectively, the "Investors"). WHEREAS, subject to the terms and conditions herein, the Investors desire to acquire from the Company, and the Company desires to issue to the Investors Ordinary Shares of the Company, par value NIS 4.00 each (each, a "Share" and collectively, the "Shares", and when referred to the shares to be purchased by each Investor, such number of shares as set forth opposite such Investor's name in the column labeled "No. of Shares" on SCHEDULE 1 hereto) for the amounts set forth in SCHEDULE 1 hereto. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Investors hereby agree as follows: 1. PURCHASE AND SALE OF SHARES. 1.1 Subject to the satisfaction of the terms and conditions described in this Agreement, at the Closing (as defined below) the Company agrees to sell to each Investor, and each Investor severally agrees to purchase from the Company, such number of Shares, against such amount, as is set forth opposite such Investor's name in the columns labeled "No. of Shares" and "Purchase Amount", respectively, on SCHEDULE 1 hereto. 2. CLOSING. The execution and delivery of this Agreement shall occur upon delivery by facsimile of executed signature pages of this Agreement and all other documents, instruments and writings required to be delivered pursuant to this Agreement to Amit, Pollak, Matalon & Co., NYP Tower, 17 Yitzhak Sadeh St., Tel-Aviv 67775 Israel attn: Yonatan Altman, Adv., Fax: (972) 3 561-3620. The closing of the purchase and sale of the Shares will take place eight (8) days after the date hereof (or, if such date is not a business day, on the next business day thereafter), on which date the conditions for Closing set forth in Sections 6 and 7 herein shall be satisfied in full or waived by the appropriate party thereunder, or at such different date as may be mutually acceptable to the Investors and the Company (the "Closing"). At the Closing, each Investor shall deliver to the Company payment in full for the Shares to be purchased by such Investor in the amount set forth opposite such Investor's name in the column labeled "No. of Shares" on SCHEDULE 1, via wire transfer of immediately available funds or bank or cashier's check. At the Closing, the Company will deliver to an Investor representative in Israel, designated for this purpose by each Investor in writing, a duly executed share certificate reflecting such number of shares set forth opposite such Investor's name in column labeled "No. of Shares". 3. USE OF PROCEEDS. The Company shall use the proceeds from the transactions contemplated hereby to enhance the general working capital of the Company, to finance potential acquisitions or as otherwise decided by the Company's Board of Directors. 4. REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company hereby represents and warrants to each Investor that: 4.1 CORPORATE ORGANIZATION. The Company is a corporation duly organized and validly existing under the laws of Israel, and has the corporate power to own its property and to carry on its business as now being conducted. The Company's shares are traded on the Nasdaq National Market and on the Tel-Aviv Stock Exchange and as such it is subject to both US and Israeli Securities Laws. 4.2 DUE AUTHORIZATION AND VALID ISSUANCE. The Company has the corporate power to enter into this Agreement and the Registration Rights Agreement (as defined below) (collectively, the "Transaction Documents"). The Transaction Documents have been, or will have been, at the time of their respective execution and delivery, duly executed and delivered by a duly authorized officer of the Company. Prior to the Closing of this Agreement, the Company shall have acted to complete all corporate action necessary on its part for the issuance, sale and delivery of the Shares. The Shares being purchased by the Investors hereunder will, upon issuance and payment therefore pursuant to the terms hereof, be duly authorized, validly issued, fully-paid and nonassessable. 4.3 BINDING AGREEMENT. The Transaction Documents constitute valid and legally binding obligations of the Company enforceable against the Company in accordance with their terms, except as (i) such enforceability may be limited by bankruptcy, insolvency, reorganization, arrangement, moratorium or similar laws relating to or affecting the rights of creditors and contracting parties generally, (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefore may be brought, and (iii) rights to indemnity and contribution may be limited by Israeli or U.S. state or federal securities laws applicable to the Company or by the public policy underlying such laws. 4.4 NON-CONTRAVENTION. Neither the execution and delivery of the Transaction Documents, nor the consummation of the transactions or the performance of the obligations contemplated hereby and thereby will result in any violation or breach of Company's articles of association, by-laws, board resolutions or shareholders resolutions. 4.5 NO CONSENT. To the Company's best knowledge, and in reliance on the representations of the Investors given in Section 5 hereof, except for reporting obligations and approvals required under applicable security laws and market regulations in Israel and the United States and for approvals by the Office of the Chief Scientist and the Investment Center of the Ministry of Industry, Trade and Labor (if required), no consent of any governmental body or third party is required to be made or obtained by the Company in connection with the execution and delivery of the Transaction Documents by the Company or the consummation by the Company of the transactions or the performance of the obligations contemplated hereby and thereby by the Company. - 2 - 4.6 CAPITALIZATION. The authorized share capital of the Company consists as of the date hereof: 8,750,000 Ordinary Shares, par value NIS 4.00 per share, of which, as of September 30, 2003, 3,810,366 Ordinary Shares are issued and outstanding, 515,272 Ordinary shares are reserved for issuance upon the exercise of warrants and of employee, director and consultant options already granted by the Company and further 421,924 Ordinary Shares are reserved for issuance under the Company's 2003 Israeli Share Option Plan, upon the exercise of options to be granted thereunder. Any change in the above capitalization between the date hereof and the date of the Closing shall not constitute a default under this Agreement, provided, however, that such change is the result of the conversion or exercise of convertible securities, options or warrants of the Company. 4.7 FINANCIAL STATEMENTS. (a) The audited consolidated financial statements of the Company as of December 31, 2002 and the related notes thereto, as filed by the Company with the Securities and Exchange Commission under Form 20-F for the year ending December 31, 2002, and the Consolidated Balance Sheets and Consolidated Statements of Operations of the Company as of September 30, 2003, as published by the Company on November 17, 2003, are true, correct and complete in all material respects and fairly present the financial position of the Company as of their respective dates, and have been prepared in accordance with the books and records of the Company as at the applicable dates and for the applicable periods. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods therein specified, except as may be disclosed in the notes to such financial statements, or as may be permitted by the Securities and Exchange Commission and except as disclosed in the filings the Company made in connection with such statements, if any. (b) Other than as reported in the Company's current reports, since September 30, 2003, there has not been any event or material adverse change in the financial conditions of the Company as reflected in the financial statements which, individually or collectively with other events or changes, could have a material adverse effect on the Company. 4.8 LEGAL PROCEEDINGS. Except as disclosed in the Company's public filings, there is no material legal or governmental proceeding pending or, to the knowledge of the Company, threatened to which the Company is or may be a party. 4.9 INTELLECTUAL PROPERTY. The Company, either directly or through its subsidiaries, owns or possesses sufficient rights to use all material patents, patent rights, trademarks, copyrights, licenses, inventions, trade secrets, trade names and know-how (collectively, "Intellectual Property") described or referred to in the Company's public filings as owned or possessed by it, except where the failure to currently own or possess would not have a material adverse effect on the Company, (ii) to the knowledge of the Company, the Company is not infringing, nor has it received any notice of, any asserted infringement of, any rights of a third party with respect to any Intellectual Property that, individually or in the aggregate, would have a material adverse effect on the Company. 4.10 COMPLIANCE WITH LAW. To the knowledge of the Company, the business of the Company is conducted in accordance with applicable laws, except to extent that, individually or in the aggregate, would not cause a material adverse effect on the Company. - 3 - 4.11 DISCLOSURE. The representations and warranties of the Company contained in this Section 4 as of the date hereof and as of the Closing, do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements herein, in light of the circumstances under which they are made, not misleading. 5. REPRESENTATIONS OF THE INVESTORS. Each of the Investors severally represents to the Company that: 5.1 ENFORCEABILITY. If such Investor is a corporation, partnership, limited liability company, trust or other entity, (i) it is authorized and qualified and has full right and power to become an investor in the Company, is authorized to purchase the Shares and to perform its obligations pursuant to the provisions hereof, (ii) the person signing the Transaction Documents to which such Investor is a party and any other instrument executed and delivered therewith on behalf of such Investor has been duly authorized by such entity and has full power and authority to do so, and (iii) such Investor has not been formed for the specific purpose of acquiring an interest in the Company. 5.2 RESTRICTIONS ON TRANSFERABILITY AND HEDGING. 5.2.1 Such Investor understands that (i) the Shares have not yet been registered under the Securities Act of 1933, or under the laws of any other jurisdiction; (ii) such Shares cannot be sold, transferred or otherwise disposed of unless they are subsequently registered under the Securities Act and, where required, under the laws of other jurisdictions or unless an exemption from registration is then available; (iii) there is now no registration statement on file with the Securities and Exchange Commission with respect to the Shares to be purchased by the Investor. 5.2.2 Such Investor acknowledges and agrees that the certificates representing the Shares shall bear restrictive legends as counsel to the Company may determine are necessary or appropriate, including without limitation, legends under applicable securities laws similar to the following: "The shares represented by this certificate have not been registered under the Securities Act of 1933. The shares have been acquired for investment and may not be sold, transferred, assigned or otherwise disposed of in the absence of an effective registration statement with respect to the shares evidenced by this certificate, filed and made effective under the Securities Act of 1933, or an opinion of the Company's counsel that registration under such Act is not required." 5.2.3 The Company will not register any transfer of Shares not made pursuant to registration under the Securities Act, or pursuant to an available exemption from registration. 5.2.4 Such Investor agrees not to engage in hedging transactions with regard to the Shares sold pursuant to the Transaction Documents. - 4 - 5.3 OFFSHORE TRANSACTION. Such Investor is not a "U.S. Person", as such term is defined in Regulation S under the Securities Act of 1933, its principal address is outside the United States and it has no present intention of becoming a resident of (or moving its principal place of business to) the United States. Such Investor was located outside the United States at the time any offer to sell and any other action in connection with such offer and sale was made to such Investor and at the time that the buy order was originated by the Investor. The Shares are being acquired solely for such Investor's own account, and in no event and without derogating from the foregoing, for the account or the benefit of a U.S. person. 5.4 INVESTMENT PURPOSES. The Shares are being acquired for investment purposes. The Shares are not being purchased with a view to, or for sale in connection with, any distribution or other disposition thereof. The Investor has no present plans to enter into any contract, undertaking, agreement or arrangement for any such resale, distribution or other disposition and it will not divide its interest in the Company's Shares with others, resell or otherwise distribute the Shares in violation of federal or state US Securities laws or the Israeli Securities Law. 5.5 INFORMATION AND ADVICE. 5.5.1 Such Investor has carefully reviewed and understands the risks of a purchase of the Shares. In connection with such Investor's investment in the Company, it has obtained the advice of its own investment advisors, counsel and accountants (the "Advisors"). Such Investor and its Advisors have reviewed the Company's public filings and have been furnished with all materials relating to the Company or the offering of the Shares (the "Offering") that they have requested. Such Investor and its Advisors have been afforded the opportunity to ask questions of the Company concerning the financial and other affairs of the Company and the conditions of the Offering and to obtain any additional information necessary to verify the accuracy of any representations or information set forth with respect to the Shares. 5.5.2 The Company has answered all reasonable inquiries that such Investor and its Advisors have made concerning the Company or any other matters relating to the creation and operations of the Company and the terms and conditions of the Offering. 5.6 SOPHISTICATION AND RISK. 5.6.1 It has such knowledge and experience in financial and business matters, that it is capable of evaluating, and has evaluated, the merits and risks of the Offering. By reason of its business or financial experience, it has the capacity to protect its interests in connection with an investment in the Company. 5.6.2 It understands that no Israeli or U.S. federal or state agency has passed upon the Shares or made any finding or determination as to the fairness of the transactions contemplated in the Transaction Documents. 5.6.3 It understands that the Shares are speculative investments which involve a high degree of risk, including the risk that such Investor might lose its entire amount invested in the Company. - 5 - 5.6.4 It understands that any tax benefits that may be available to such Investor may be lost through adoption of new laws, amendments to existing laws or regulations, or changes in the interpretation of existing laws and regulations. 5.6.5 It has the financial ability to bear the economic risk of its investment in the Company and has adequate net worth and means of providing for the Investor's current needs and contingencies to sustain a complete loss of the Investor's investment and has no need for liquidity in the Investor's investment in the Company. 5.6.6 It is an "Accredited Investor," as such term is defined in Rule 501 of Regulation D under the Securities Act of 1933. 5.7 NO SOLICITATION. At no time was such Investor presented with or solicited by any leaflet, public promotional meeting, newspaper or magazine article, radio or television advertisement or any other form of general advertising or general solicitation concerning the Offering. 5.8 BROKER-DEALER. The Investor is not a broker-dealer, nor is it an affiliate of any broker-dealer. 5.9 FURTHER INDEBTEDNESS. Such Investor acknowledges that no provision of the Transaction Documents executed and delivered by the Company in connection with this Agreement restricts, or shall be construed to restrict, in any way the ability of the Company to incur indebtedness or to issue share capital or other equity securities (or securities convertible into equity securities) of the Company or to grant liens on its property and assets. 5.10 VOTING AND/OR INVESTMENT CONTROL OVER THE INVESTOR. Each Investor has made available to the Company a list of individuals who have or share voting and/or investment control over such Investor. The Investor shall update such list as reasonably requested by the Company to comply with request for such information from any regulatory body. 5.11 INDEPENDENT INVESTMENT. No Investor has agreed to act with any other Investor for the purpose of acquiring, holding, voting or disposing of the Shares purchased hereunder, and each Investor is acting independently with respect to its investment in the Shares. Nothing contained herein or in any Transaction Document, and no action taken by any Investor pursuant thereto, shall be deemed to constitute the Investors, or any of them, as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Investors, or any of them, are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. 5.12 NO CONTROL. Such Investor has a minority limited partnership interest in Catalyst Fund L.P. ("Catalyst") and pursuant to the Catalyst Partnership Agreement, it does not partake in any way, directly or indirectly, in the control over Catalyst. For the purpose of this section "control" shall include the ability to direct the activity of Catalyst, the holding of 25 percent or more of the partnership interest in Catalyst, the holding of any interest in the General Partner of Catalyst, the holding of a position in Catalyst's Investment Committee, Advisory Board or any other similar body. - 6 - 5.13 HOLDINGS. SCHEDULE 1 attached hereto reflects the holdings of the Company's shares by each Investor and its affiliates as of the date hereof, and as of the Closing. 5.14 AVAILABILITY OF EXEMPTIONS. The Investor understands that the Shares are being offered and sold in reliance on a transactional exemption or exemptions from the registration requirements of Israeli and U.S. Federal and state securities laws and the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of such Investor set forth herein in order to determine the applicability of such exemptions and the suitability of such Investor to acquire the Shares. 5.15 DISCLOSURE. The representations and warranties of the Investor contained in this Section 5 as of the date hereof and as of the Closing, do not contain any untrue statement of a material fact or omit to state a material fact required to be stated herein or necessary to make the statements herein, in light of the circumstances under which they are made, not misleading. Each Investor understands and confirms that the Company will rely on the foregoing representations in effecting the transaction contemplated in the Transaction Documents and other transactions in securities of the Company. 6. CONDITIONS OF EACH INVESTOR'S OBLIGATION AT THE CLOSING. The obligation of each Investor to purchase its respective Shares is subject to the fulfillment or waiver by such Investor prior to or on the date of the Closing of the conditions set forth in this Section 6. In the event that any such condition is not satisfied to the satisfaction of an Investor, then such non-satisfied Investor shall not be obligated to proceed with the purchase of such securities. 6.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company under this Agreement shall be true in all material respects as of the Closing, with the same effect as though made on and as of such date. 6.2 COMPLIANCE WITH AGREEMENTS. The Company shall have performed and complied in all material respects with all agreements or conditions required by this Agreement to be performed and complied with by it prior to or as of the Closing. 6.3 REGISTRATION RIGHTS AGREEMENT. As of the Closing, the Registration Rights Agreement in the form attached hereto as EXHIBIT A (the "Registration Rights Agreement") shall have been executed and delivered by the Company and each Investor. 6.4 NO INJUNCTION. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement 6.5 MINIMUM INVESTMENT. The aggregate Purchase Amount committed to by the Investors hereunder shall be no less than $1,000,000. - 7 - 7. CONDITIONS OF THE COMPANY'S OBLIGATION AT THE CLOSING. The obligation of the Company to issue the Shares to the Investors at the Closing is subject to the fulfillment or waiver by the Company prior to or on the Closing of the conditions set forth in this Section 7. In the event that any such condition is not satisfied to the satisfaction of the Company, then the Company shall not be obligated to proceed with the sale of the securities under this Agreement. 7.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of all Investors under this Agreement shall be true in all material respects as of the Closing, with the same effect as though made on and as of such date. 7.2 COMPLIANCE WITH AGREEMENTS. All Investors shall have performed and complied in all respects with all agreements or conditions required by this Agreement to be performed and complied with by it prior to or as of the Closing. 7.3 REGISTRATION RIGHTS AGREEMENT. As of the Closing, the Registration Rights Agreement shall have been executed and delivered by all of the Investors. 7.4 NO INJUNCTION. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement. 7.5 DELIVERY OF PURCHASE AMOUNT. Each of the Investors shall have delivered to the Company its respective Purchase Amount for the Shares at the Closing Date. 7.6 GOVERNMENT APPROVALS. The Company shall have received all necessary approvals by the Office of the Chief Scientist and the Investment Center of the Ministry of Industry, Trade and Labor with respect to the transactions contemplated hereby. The Investors shall have executed the confirmations required by the Office of Chief Scientist for the grant of such approvals. 7.7 NOTICES TO NASDAQ AND THE TASE. The Company shall have made all required filings of notices with Nasdaq and the Tel Aviv Stock Exchange. The Company shall use its best efforts to complete such filings. 7.8 DESIGNATION OF INVESTORS' REPRESENTATIVES. Each Investor delivered to the Company a written notice designating such Investor's representative in Israel for the purpose of receipt of the shares certificate. 8. CONFIDENTIALITY. Any information disclosed to each of the Investors or their respective counsel and consultants (collectively, the "Representatives"), which has not previously been made available to the general public by the Company, if any, shall be considered Confidential Information. Each Investor acknowledges the confidential nature of the Confidential Information it may have received, and agrees that the Confidential Information is the valuable property of the Company. Each Investor agrees that it and its Representatives shall not reproduce any of the Confidential Information without the prior written consent of the Company, nor shall they use any Confidential Information for any purpose except as permitted by and in the performance of this Agreement, or divulge all or any part of the Confidential Information to any third party. The confidentiality obligations undertaken by the Investors hereunder will remain in full force and effect regardless of the execution and consummation or termination of this Agreement. - 8 - 9. MISCELLANEOUS. 9.1 AMENDMENTS. This Agreement may be modified, supplemented or amended only by a written instrument executed by all of the parties. 9.2 NOTICES. Any notice that is required or provided to be given under this Agreement shall be deemed to have been sufficiently given and received for all purposes, (i) when delivered in writing by hand, upon delivery; (ii) if sent via facsimile, upon transmission and electronic confirmation of receipt (and if transmitted and received on a non-business day, on the first business day following transmission and electronic confirmation of receipt), (iii) seven (7) business days (and fourteen (14) business days for international mail) after being sent by certified or registered mail, postage and charges prepaid, return receipt requested, or (iv) three (3) business days after being sent by internationally overnight delivery providing receipt of delivery, to the following addresses: if to the Company, B.O.S. Better On Line Solutions Ltd., Beit Rabin, 100 BOS Road, Teradyon Industrial Park, Misgav 20179, Israel attn: Mr. Nehemia Kaufman, CFO , facsimile: (972) 4 999-0334, with a copy to Amit, Pollak Matalon & Co., NYP Tower, 17 Yitzhak Sadeh St., Tel-Aviv 67775 Israel attn: Yonatan Altman, Adv. Fax: (972) 3 561-3620; or at any other address designated by the Company to the Investors in writing; if to an Investor, to its address listed on SCHEDULE 1 hereto or at any other address designated by the Investor to the Company in writing. 9.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Without limitation to Section 8 above, all representations and warranties contained herein or in any Transaction Document or in any other certificate delivered hereunder or thereunder shall survive after the execution and delivery of this Agreement or such certificate or document, as the case may be, for a period of 24 months from the date hereof. All covenants and agreements in any Transaction Documents shall survive in accordance with their terms. This Section shall survive the termination of this Agreement for any reason. 9.4 DELAYS OR OMISSIONS; WAIVER. Except as expressly provided herein, no delay or omission to exercise any right, power or remedy accruing to any party under this Agreement shall impair any such right, power or remedy of such party nor shall it be construed to be a waiver of any breach or default, or an acquiescence thereto, or of a similar breach or default thereafter occurring; nor shall any waiver of any single breach or default 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 hereto 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. 9.5 OTHER REMEDIES. Any and all remedies herein expressly conferred upon a party shall be deemed cumulative with, and not exclusive of, any other remedy conferred hereby or by law on such party, and the exercise of any one remedy shall not preclude the exercise of any other. - 9 - 9.6 ENTIRE AGREEMENT. This Agreement and the exhibits and schedules hereto, constitute the entire understanding and agreement of the parties hereto with respect to the subject matter hereof and thereof and supersede all prior and contemporaneous agreements or understandings, inducements or conditions, express or implied, written or oral, between the parties with respect hereto and thereto. 9.7 HEADINGS. All section headings herein are inserted for convenience only and shall not modify or affect the construction or interpretation of any provision of this Agreement. 9.8 SEVERABILITY. Should any one or more of the provisions of this Agreement (including its exhibits and schedules) or of any agreement entered into pursuant to this Agreement be determined to be illegal or unenforceable, all other provisions of this Agreement and of each other agreement entered into pursuant to this Agreement, shall be given effect separately from the provision or provisions determined to be illegal or unenforceable and shall not be affected thereby. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision, which will achieve, to the extent possible, the economic, business and other purposes of the void or unenforceable provision. 9.9 ASSIGNMENT. This Agreement may not be assigned in whole or in part by any Investor without the prior written consent of the Company. 9.10 GOVERNING LAW AND VENUE. This Agreement shall be construed in accordance with and governed by the internal laws of the State of Israel, without regard to conflict of laws provisions. Any dispute arising under or in relation to this Agreement shall be adjudicated in the competent court of Tel Aviv-Jaffa district only, and each of the parties hereby submits irrevocably to the exclusive jurisdiction of such court. 9.11 COUNTERPARTS. This Agreement may be executed concurrently in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 9.12 FURTHER ACTIONS. At any time and from time to time, each party agrees, without further consideration, to take such actions and to execute and deliver such documents as may be reasonably necessary to effectuate the purposes of this Agreement. 9.13 INDEPENDENT NATURE OF INVESTORS' OBLIGATIONS AND RIGHTS. The obligations of each Investor under any Transaction Document are several and not joint with the obligations of any other Investor, and no Investor shall be responsible in any way for the performance of the obligations of any other Investor under any Transaction Document. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.) - 10 - IN WITNESS WHEREOF, the undersigned have executed and delivered this Agreement as of the date first set forth above. B.O.S. BETTER ON LINE SOLUTIONS LTD. By:____________________________ Name: ___________________ Title: __________________ HILLSWOOD HOLDINGS LIMITED By:____________________________ Name: ___________________ Title: __________________ VAMOS INC. By:____________________________ Name: ___________________ Title: __________________ - 11 - SCHEDULE 1
NO. OF PRE-CLOSING HOLDINGS POST-CLOSING HOLDINGS PURCHASE SHARES -------------------- ----------------------- INVESTOR'S NAME AND ADDRESS AMOUNT PURCHASED Amount Percent Amount Percent - --------------------------- -------- ------- ------ ------- ------- ------- HILLSWOOD HOLDINGS LIMITED $750,000 267,857 42,262 1.1% 310,119 7.44% PO Box 3136, Akara Building, Suite 8, Wickams Cay 1, Road Town Tortola, BVI Address: Hillswood Holdings Ltd. c/o Credit Suisse Trust Limited, Guernsey Office, P.O. Box 122, Helvetia Court, South Esplanade, St. Peter Port, Guernsey, GY1 4EE, Channel Islands For the attention of Frank Robinson Fax. 44 1481 726 218
- 12 -
VAMOS INC. $250,00 89,286 ---- ---- 89,286 2.14% c/o GISE 37 G. Sisini Street Athens 115 28 Greece Tel: + 30 210 725 8686 Fax: + 30 210 725 8685 With a copy to: Mr. Chandran Gnanakuru, Director Curzon Associates Ltd. 5th Floor, 12 Berkeley Street London W1J 8DT, United Kingdom Tel: 44 (0) 20 7318 2901 (direct) Fax: 44 (0) 20 7318 2949 Mobile: 44 (0) 7973 640043 Total $1,000,000 357,143
- 13 - EXHIBIT A REGISTRATION RIGHTS AGREEMENT - 14 - REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT") is made as of December 14, 2003, by and between B.O.S. Better Online Solutions Ltd., a company organized under the laws of Israel ("BOS" or the "COMPANY"), and the other parties listed on Schedule 1 hereto (each an "INVESTOR" and collectively, the "INVESTORS"). BOS and the Investors shall be referred to herein collectively as the "PARTIES". WITNESSETH WHEREAS, concurrently with the execution and delivery of this Agreement, the Parties are entering into a Share Purchase Agreement (the "PURCHASE AGREEMENT"), which provides that, upon the terms and conditions thereof, BOS will sell to the Investors Ordinary Shares of BOS as more fully provided therein (the "BOS SHARES"); and WHEREAS, BOS agrees to grant the Investors registration rights with respect to the BOS Shares under the terms and conditions set forth herein; and WHEREAS, BOS is party to certain Registration Rights Agreements (the "EXISTING REGISTRATION RIGHTS AGREEMENTS") with the shareholders listed therein (collectively, the "EXISTING SHAREHOLDERS") which require the consent of the holders of at least a majority of the then outstanding Registrable Securities (as defined therein) in order for BOS to enter into an agreement for the grant of registration rights senior to or in parity with the rights of such Existing Shareholders; and WHEREAS, BOS has not obtained such consent and consequently the registration rights granted hereunder shall be subordinate to the rights of the Existing Shareholders; and WHEREAS, the Parties wish to define the respective rights and obligations of the Parties in connection with the grant of registration rights contemplated hereby. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein set forth, the Parties hereby agree as follows: 1. DEFINITIONS. As used in this Agreement the following terms shall have the following meanings: (a) "Closing" means the date that the Closing shall occur under the Purchase Agreement. (b) "Commission" means the Securities and Exchange Commission or any other Federal agency at the time administering the Securities Act. (c) "Exchange Act" means the Securities Exchange Act of 1934 or any successor Federal statute, and the rules and regulations of the Commission promulgated thereunder, all as the same shall be in effect from time to time. (d) "Existing Shareholders" means holders of the Company's Registrable Securities, that are entitled to registration rights pursuant to their respective Existing Registration Agreement. (e) "Investors" means the persons identified on Schedule 1 hereto. (f) "Ordinary Shares" means the ordinary shares of the Company, par value NIS 4.00 each. (g) "Primary Shares" means at any time the authorized but unissued shares of Ordinary Shares held by the Company in its treasury. (h) "Purchase Agreement" means the Share Purchase Agreement between the Company and the Investors, to which this Agreement is attached as Exhibit A. (i) "Registrable Securities" means the Ordinary Shares defined as Registrable Securities under the Existing Registration Rights Agreements. (j) "Registrable Shares" means Ordinary Shares purchased by the Investors at the Closing (as such term is defined in the Purchase Agreement) as described on Schedule 1. As to any particular Registrable Shares, such Registrable Shares shall cease to be Registrable Shares when (i) they have been registered under the Securities Act, the registration statement in connection therewith has been declared effective and they have been disposed of pursuant to such effective registration statement, (ii) they are eligible to be sold or distributed without volume limitations pursuant to Rule 144(k), or (iii) they shall have ceased to be outstanding. (k) "Rule 144" means Rule 144 promulgated under the Securities Act or any successor rule thereto or any complementary rule thereto (such as Rule 144A). (l) "Securities Act" means the Securities Act of 1933, as amended, or any successor Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. 2 2. INCIDENTAL REGISTRATION. 2.1 If the Company at any time shall determine to prepare and file with the Commission a registration statement relating to an offering of its equity securities, for its own account or the account of others (except with respect to registration statements on Form F-4, Form S-8 or another form not available for registering the Registrable Shares for sale to the public), each such time it will give written notice to all holders of Registrable Shares of its intention so to do. The Company shall, upon the written request of any such holder, received by the Company within 20 days after the giving of any such notice by the Company, to register any of its Registrable Shares, use its best efforts to cause the Registrable Shares as to which registration shall have been so requested to be included in the securities to be covered by the registration statement proposed to be filed by the Company, all to the extent requisite to permit the sale or other disposition by the holders of such Registrable Shares. Notwithstanding the above, Registrable Shares shall be included in such registration statement only to the extent that their inclusion will not limit the number of Registrable Securities sought to be included by the Existing Shareholders or reduce the offering price thereof. 2.2 In the event that any registration pursuant to this Section 2, shall be, in whole or in part, an underwritten public offering, and the managing underwriter advises the Company that the inclusion of all Primary Shares, Registrable Shares, and/or Registrable Securities proposed to be included in such registration would interfere with the successful marketing (including pricing) of the offering, then the size of the offering shall be reduced accordingly and include first the Primary Shares and the Registrable Securities proposed to be registered (allocated subject to and in accordance with any rules of priority provided under the Existing Registration Agreements) and then the available number of Registrable Shares. Notwithstanding the foregoing provisions, the Company may withdraw any registration statement referred to in this Section 2 without thereby incurring any liability to the holders of the Registrable Shares. 3. HOLDBACK AGREEMENT If the Company at any time shall register Primary Shares under the Securities Act for sale to the public pursuant to a firm commitment public offering, the Investors shall not sell publicly, make any short sale of, grant any option for the purchase of, or otherwise dispose publicly of, any Registrable Shares as required by any underwriter in connection with such registration, and without the prior written consent of the Company, for up to 90 days from the close of such offering. 3 4. PREPARATION AND FILING. 4.1 If and whenever the Company shall have filed a registration statement which includes Registrable Shares, the Company shall , as expeditiously as practicable: (a) use its best efforts to cause a registration statement that registers such Registrable Shares to become and remain effective for a period of 180 days or until all of such Registrable Shares have been disposed of (if earlier); it being understood that such registration statement may, in the Company's discretion, be on any form that the Company is eligible to use to register the resale of the Registrable Shares; it being further understood that before or following the effectiveness of a registration statement covering the Registrable Shares, the Company may change to another form of registration statement for which the Company is then eligible to register its securities, provided that at least one registration statement covering the Registrable Shares not yet sold remains effective during such 180 day period or until all of such Registrable Shares have been disposed of (if earlier). In addition, by or before the conclusion of such 180 day period, the Company may take such actions for any such registration statement covering Registrable Shares (or, in the Company's discretion, a registration statement on another form that the Company is eligible to use to register its securities) to remain effective for such additional time period as the Company shall decide in its sole discretion; (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement (or, in the Company's discretion, a registration statement on another form that the Company is eligible to use to register its securities) effective for a period of 180 days or until all of such Registrable Shares have been disposed of (if earlier) and to comply with the provisions of the Securities Act with respect to the sale or other disposition of such Registrable Shares, or such longer period as is determined by the Company pursuant to Section 4.1(a) hereof; (c) use its best efforts to register or qualify such Registrable Shares under such other securities or blue sky laws of such jurisdictions as the Investors reasonably request and do any and all other acts and things that may be reasonably necessary or advisable to enable the Investors to consummate the disposition in such jurisdictions of the Registrable Shares owned by the Investors; provided, however, that the Company will not be required to qualify generally to do business, subject itself to general taxation or consent to general service of process in any jurisdiction where it would not otherwise be required to do so but for this paragraph (c) or to provide any material undertaking or make any changes in its By-laws or Articles of Association which the Board of Directors determines to be contrary to the best interests of the Company or to modify any of its contractual relationships then existing; 4 (d) furnish to the Investors holding such Registrable Shares such number of copies of a summary prospectus, if any, or other prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as such Investors may reasonably request in order to facilitate the public sale or other disposition of such Registrable Shares; (e) without limiting subsection (c) above, use its best efforts to cause such Registrable Shares to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Company to enable the Investors holding such Registrable Shares to consummate the disposition of such Registrable Shares; (f) notify the Investors holding such Registrable Shares on a timely basis at any time when a prospectus relating to such Registrable Shares is required to be delivered under the Securities Act within the appropriate period mentioned in subparagraph (a) of this Section 4, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing and, at the request of an Investor, prepare and furnish to such Investor a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the offerees of such shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (g) provide a transfer agent and registrar (which may be the same entity and which may be the Company) for such Registrable Shares; (h) issue to any underwriter to which the Investors may sell shares in such offering certificates evidencing such Registrable Shares; 5 (i) list such Registrable Shares on the automated quotation system of the National Association of Securities Dealers, Inc. (the "NASD"); (j) subject to all the other provisions of this Agreement, use its best efforts to take all other steps accessory to effect the registration of such Registrable Shares contemplated hereby. 4.2 The Investors, upon receipt of any notice from the Company of any event of the kind described in Section 4.1(f) hereof, shall forthwith discontinue disposition of the Registrable Shares pursuant to the registration statement covering such Registrable Shares until the Investors' receipt of the copies of the supplemented or amended prospectus contemplated by Section 4.1(f) hereof, and, if so directed by the Company, the Investors shall deliver to the Company all copies then in the Investors' possession, of the prospectus covering such Registrable Shares at the time of receipt of such notice. 5. EXPENSES All expenses (other than underwriting discounts and commissions relating to the Registrable Shares, as provided in the last sentence of this Section 5) incurred by the Company in complying with Section 4, including, without limitation, all registration and filing fees (including all expenses incident to filing with the NASD), fees and expenses of complying with securities and blue sky laws, printing expenses, and fees and expenses of the Company's legal counsel and accountants shall be borne by the Company; provided, however, that all underwriting discounts and selling commissions applicable to the Registrable Shares shall be borne by the holders selling such Registrable Shares in proportion to the number of Registrable Shares sold by each such shareholder. 6 6. INDEMNIFICATION (a) In connection with any registration of any Registrable Shares under the Securities Act pursuant to this Agreement, the Company shall indemnify and hold harmless each Investor, each underwriter, broker or any other person acting on behalf of the holders of Registrable Shares against any losses, claims, damages or liabilities, joint or several (or actions in respect thereof), to which any of the foregoing persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or allegedly untrue statement of a material fact contained in the registration statement under which such Registrable Shares were registered under the Securities Act, any preliminary prospectus or final prospectus contained therein or otherwise filed with the Commission, any amendment or supplement thereto or any document incident to registration or qualification of any Registrable Shares, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or, with respect to any prospectus, necessary to make the statements therein in light of the circumstances under which they were made not misleading, or any violation by the Company of the Securities Act or state securities or blue sky laws applicable to the Company and relating to action or inaction required of the Company in connection with such registration or qualification under such state securities or blue sky laws; and shall reimburse each Investor, such underwriter, such broker or such other person acting on behalf of the holders of Registrable Shares for any legal or other expenses reasonably incurred by any of them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the with respect to any particular Investor, the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action (including any legal or other expenses incurred) arises out of or is based upon an untrue statement or allegedly untrue statement or omission or alleged omission made in said registration statement, preliminary prospectus, final prospectus, amendment supplement or document incident to registration or qualification of any Registrable Shares in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such Investor or his counsel or underwriter specifically for use in the preparation thereof; provided further, however, that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any untrue statement, omission or alleged omission made in any preliminary prospectus but eliminated or remedied in the final prospectus (filed pursuant to Rule 424 of the Securities Act), such indemnity agreement shall not inure to the benefit of any Investor, underwriter, broker or other person acting on behalf of holders of the Registrable Shares from whom the person asserting any loss, claim, damage, liability or expense purchased the Registrable Shares which are the subject thereof, if a copy of such final prospectus had been made available to such person and such Investor, underwriter, broker or other person acting on behalf of holders of the Registrable Shares and such final prospectus was not delivered to such person with or prior to the written confirmation of the sale of such Registrable Shares to such person. (b) In connection with any registration of Registrable Shares under the Securities Act pursuant to this Agreement, each Investor shall, severally and not jointly, indemnify and hold harmless (in the same manner and to the same extent as set forth in the preceding paragraph of this Section 6) the Company, each director of the Company, each officer of the Company who shall sign such registration statement, each representative of the Company, including the Company's counsel, each underwriter, broker or other person acting on behalf of the holders of Registrable Shares and each person who controls any of the foregoing persons within the meaning of the Securities Act with respect to any statement or omission from such registration statement, any preliminary prospectus or final prospectus contained therein or otherwise filed with the Commission, any amendment or supplement thereto or any document incident to registration or qualification of any Registrable Shares, if such statement or omission was made in reliance upon and in conformity with written information furnished to the Company or such underwriter by such Investor specifically for use in connection with the preparation of such registration statement, preliminary prospectus, final prospectus, amendment, supplement or document. 7 (c) Promptly after receipt by an indemnified party of notice of the commencement of any action involving a claim referred to in the preceding paragraphs of this Section 6, such indemnified party will, if a claim in respect thereof is made against an indemnifying party, give written notice to the latter of the commencement of such action. The failure of any indemnified party to notify an indemnifying party of any such action shall not (unless such failure shall have a material adverse effect on the indemnifying party) relieve the indemnified party on account of this Section 6. In case any such action is brought against an indemnified party, the indemnifying party will be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be responsible for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof; provided, however, that if any indemnified party shall have reasonably concluded that there may be one or more legal or equitable defenses available to such indemnified party which are additional to or conflict with those available to the indemnifying party, or that such claim or litigation involves or could have an effect upon matters beyond the scope of the indemnity agreement provided in this Section 6, the indemnifying party shall not have the right to assume the defense of such action on behalf of such indemnified party (but shall have the right to participate therein with counsel of its choice) and such indemnifying party shall reimburse such indemnified party and any person controlling such indemnified party for that portion of the fees and expenses of any counsel retained by the indemnified party which is reasonably related to the matters covered by the indemnity agreement provided in this Section 6. If the indemnifying party is not entitled to, or elects not to, assume the defense of a claim, it will not be obligated to pay the fees and expenses of more than one counsel with respect to such claim. 8 (d) If the indemnification provided for in this Section 6 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, claim, damage, liability or action referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amounts paid or payable by such indemnified party as a result of such loss, claim, damage, liability or action in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions which resulted in such loss, claim, damage, liability or action as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties agree that it would not be just and equitable if contribution pursuant hereto were determined by pro rata allocation or by any other method or allocation which does not take account of the equitable considerations referred to herein. No person guilty of fraudulent misrepresentation shall be entitled to contribution from any person. 7. UNDERWRITING AGREEMENT No shareholder may participate in any underwritten registration hereunder unless such shareholder (a) agrees to register such shareholder's Ordinary Shares on the basis provided in any underwriting arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably and customarily required under the terms of such underwriting arrangements. 8. INFORMATION BY HOLDER Each Investor shall furnish to the Company such written information regarding such Investor and the distribution proposed by the Investor as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Agreement. 9. EXCHANGE ACT COMPLIANCE The Company shall comply with all of the reporting requirements of the Exchange Act applicable to it (excluding Section 14 of the Exchange Act if not then applicable to the Company) and shall comply with all other public information reporting requirements of the Commission which are conditions to the availability of Rule 144 for the sale of the Ordinary Shares. The Company shall cooperate with the Investors in supplying such information as may be necessary for the Investors to complete and file any information reporting forms presently or hereafter required by the Commission as a condition to the availability of Rule 144. 9 10. CONFLICT OF RIGHTS The Company has, in the past, granted to the Existing Shareholders registration rights that are superior to or at par with the registration rights granted hereunder. The Company shall not, after the date hereof, without the prior written consent of the holders of a majority of the Registrable Shares, grant any registration rights to holders of the Company's securities not having any registration rights on the date hereof that (i) prohibit the registration rights granted hereunder or limit the number of Registrable Shares sought to be included by the Investors hereunder or (ii) include the right to a demand registration, unless such right shall also be granted to the Investors. Notwithstanding the above, the Company shall be required to grant demand rights pursuant to sub section (ii) above only to Investors holding in the aggregate at the time of the demand no less than 150,000 Registrable Shares (as adjusted for any share combination or subdivision). 11. TERMINATION This Agreement shall terminate and be of no further force or effect when there shall no longer be any Registrable Shares outstanding, provided that Sections 5 and 6 shall survive any termination of this Agreement. Without limitation to the above, no holder or Registrable Shares shall be entitled to exercise any right provided hereunder after ten (10) years following the date hereof. 12. MISCELLANEOUS 12.1. This Agreement shall bind and inure to the benefit of the Company and the Investors and, subject to Section 12.2, the respective successors and assigns of the Company and the Investors. 12.2. An Investor may assign his rights hereunder to any purchaser or transferee of Registrable Shares; provided, however, that such purchaser or transferee shall, as a condition to the effectiveness of such assignment, be required to execute a counterpart to this Agreement agreeing to be treated as an Investor whereupon such purchaser or transferee shall have the benefits of, and shall be subject to the restrictions contained in, this Agreement as if such purchaser or transferee was originally included in the definition of an Investor herein and had originally been a party hereto. 12.3. This Agreement and the other writings referred to herein or therein or delivered pursuant hereto or thereto, contains the entire agreement between each of the Investors and the Company with respect to the subject matter hereof and supersede all prior and contemporaneous arrangements or understandings with respect thereto. With the written consent of the holders of majority of the then outstanding Registrable Shares, the obligations of the Company under this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) or the Company and the Investors may enter into a supplementary agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement. Written notice of any such waiver, consent or agreement of amendment, modification or supplement shall be given to the Investors who have not previously consented thereto in writing. 10 12.4. Any notice that is required or provided to be given under this Agreement shall be deemed to have been sufficiently given and received for all purposes, (i) when delivered in writing by hand, upon delivery; (ii) if sent via facsimile, upon transmission and electronic confirmation of receipt (and if transmitted and received on a non-business day, on the first business day following transmission and electronic confirmation of receipt), (iii) seven (7) business days (and fourteen (14) business days for international mail) after being sent by certified or registered mail, postage and charges prepaid, return receipt requested, or (iv) three (3) business days after being sent by internationally overnight delivery providing receipt of delivery, to the following addresses: if to the Company: B.O.S. Better On Line Solutions Ltd., Beit Rabin, 100 BOS Road, Teradyon Industrial Park, Misgav 20179, Israel attn.: Mr. Nehemia Kaufman, CFO, facsimile: (972) 4 999-0334, with a copy to Amit, Pollak Matalon & Co., NYP Tower, 17 Yitzhak Sadeh St., Tel-Aviv 67775 Israel attn: Yonatan Altman, Adv. Fax: (972) 3 561-3620; or at any other address designated by the Company to the Investors in writing; if to an Investor, to its address listed on Schedule 1 hereto or at any other address designated by the Investor to the Company in writing. 12.5. This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. 12.6. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be a part of this Agreement. 12.7. This Agreement shall be construed in accordance with and governed by the internal laws of the State of Israel, without regard to conflict of laws provisions. Any dispute arising under or in relation to this Agreement shall be adjudicated in the competent court of Tel Aviv-Jaffa district only, and each of the parties hereby submits irrevocably to the exclusive jurisdiction of such court. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.) 11 IN WITNESS WHEREOF, the undersigned have executed and delivered this Agreement as of the date first set forth above. B.O.S. BETTER ON LINE SOLUTIONS LTD. By:____________________________ Name: ____________________ Title: ___________________ HILLSWOOD HOLDINGS LIMITED By:____________________________ Name: ____________________ Title: ___________________ VAMOS INC. By:____________________________ Name: ____________________ Title: ___________________ 12 SCHEDULE 1
NO. OF PRE-CLOSING HOLDINGS POST-CLOSING HOLDINGS PURCHASE SHARES ------------------ ----------------------- INVESTOR'S NAME AND ADDRESS AMOUNT PURCHASED Amount Percent Amount Percent - --------------------------- ---------- --------- ------ ------- ------- ------- HILLSWOOD HOLDINGS LIMITED $ 750,000 267,857 42,262 1.1% 310,119 7.44% PO Box 3136, Akara Building, Suite 8, Wickams Cay 1, Road Town Tortola, BVI Address: Hillswood Holdings Ltd. c/o Credit Suisse Trust Limited, Guernsey Office, P.O. Box 122, Helvetia Court, South Esplanade, St. Peter Port, Guernsey, GY1 4EE, Channel Islands For the attention of Frank Robinson Fax. 44 1481 726 218
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PRE-CLOSING HOLDINGS POST-CLOSING HOLDINGS ------------------ ----------------------- VAMOS INC $ 250,00 89,286 ----- ----- 89,286 2.14% c/o GISE 37 G. Sisini Street Athens 115 28 Greece Tel: + 30 210 725 8686 Fax: + 30 210 725 8685 With a copy to: Mr. Chandran Gnanakuru, Director Curzon Associates Ltd. 5th Floor, 12 Berkeley St London W1J 8DT, United Kingdom Tel: 44 (0) 20 7318 2901 (direct) Fax: 44 (0) 20 7318 2949 Mobile: 44 (0) 7973 640043 Total $1,000,000 357,143
14 EX-99 4 exhibit_4-4.txt EXHIBIT 4.4 SERVICES AGREEMENT EFFECTIVE AS OF THE 15TH DAY OF APRIL 2003 (The "Effective Date") Between 1. B.O.S. BETTER ONLINE SOLUTIONS LTD. (HEREINAFTER "BOS") AND 2. BOSCOM LTD. (HEREINAFTER "BOSCOM") (BOS AND BOSCOM HEREINAFTER JOINTLY AND SEVERALLY, THE "COMPANY") And CUKIERMAN & CO. INVESTMENT HOUSE LTD. 51-267516-6 (hereinafter - "CUKIERMAN & CO.") (hereinafter the Company and Cukierman & Co. each a "Party" and, together the "Parties") This services agreement (the "AGREEMENT") confirms the parties' understanding that the Company has engaged Cukierman & Co. to act as its non-exclusive advisor in connection with the transactions described herein. Now therefore, in consideration for the promises and mutual agreements and covenants contained herein, the Parties hereby agree as follows: 1. Subject to the provisions of this Agreement, Cukierman & Co will commence performing non-exclusive investment-banking Services for the Company (hereinafter the "Services") as of the Effective Date. The parties hereto agree that the Company may freely solicit and receive similar and competing services from any other person or entity during the term of this Agreement. The Company will keep Cukierman & Co. timely informed about any significant events in the Company which may compete with the provisions of the Services. 1/9 2. Cukierman & Co Representations: Cukierman & Co hereby represents that it has the necessary abilities, qualifications and experience to provide the services under this Agreement and will devote sufficient of its qualified and appropriate employees for such purpose. Cukierman & Co. will use its best efforts to assist the Company in the transactions described below. In no event, however, shall Cukierman & Co. be obligated to sell, acquire, place, underwrite or sub-underwrite any securities or to lend money to or on behalf of the Company or to effect any of the transactions described herein. 3. Cukierman & Co will prepare all the necessary material needed to present the Company to potential investors in a just and professional manner. 4. Cukierman & Co. shall identify and notify the Company in writing the identity of potential investors and strategic partners, and the Company may approve in writing, at its sole and absolute discretion that such entities will qualify as "APPROVED ENTITIES" under this Agreement. Cukierman & Co. shall only contact Approved Entities, and in the event that Cukierman & Co. approach any person or entity which is not an Approved Entity hereunder, the Company will be under no obligation to pay Cukierman & Co. Success Fees (as defined below) or any other payment. 5. The term of this Agreement (the "Term") shall commence on the Effective Date and shall continue for a period of twelve (12) consecutive calendar months. This Agreement shall be automatic monthly renewed, unless terminated by either Party in accordance with Section 11 (i). 6. Scope of Services: (i) Private Placement (a) Definition: The sale by the Company of Company's securities, directly to any Approved Entity. (b) Target: to raise US$ 5-10M within 9-12 months. (c) A Private Placement Transaction shall be deemed to have been successfully completed if a sale by the Company of the Company's securities directly to an Approved Entity shall have been completed and closed (including the obtaining of any regulatory approval necessary to complete such a sale). 2/9 (ii) Mergers and/or Acquisitions: Aimed at entities with great capacities in Marketing/Technology which are synergetic to the core VoIP business of the Company, as defined from time to time by the Company's management. Cukierman & Co. shall only contact Approved Entities, and only after the Success Fees regarding such Mergers and/or Acquisitions have been mutually agreed in writing by the Parties. In the event that Cukierman & Co. approach any person or entity which is not an Approved Entity hereunder, and/or approach an Approved Entity whilst the Success Fees regarding such Merger and/or Acquisitions have not yet been mutually agreed in writing by the Parties, the Company will be under no obligation to pay Cukierman & Co. Success Fees or any other payment. (iii) Business Development: The Parties shall enter into a separate agreement to be mutually agreed by the Parties (the "Business Development Agreement"). The Business Development Agreement shall include the terms and conditions of success fees to be paid to Cukierman & Co., and shall not include any additional retainer payment. (Private Placements, Merger and/or Acquisitions, Business Development shall be referred to hereinafter the "Transactions"). 7. Method (i) Cukierman & Co will use its experience, connections and wide knowledge of the global financial markets and the investment-banking arena to assist the Company in raising funds and/or in M&A transactions as defined hereinabove (ii) Cukierman & Co will target Approved Entities, in parallel and in coordination with the Company, as potential investors and/or potential strategic partners. (iii) Cukierman & Co together with the Company will then manage the process until the Transaction is consummated, providing introduction and full support in the negotiating process up to the point of closing the deal. 8. Team - Cukierman & Co assigned resources: For Private Placement: Mr. David Chouchena, For M&A: Mr. Uzie Ovitz For Strategic Alliances: Mr. Modi Ashkenazy 3/9 9. Remuneration (i) Retainer (a) In consideration of Cukierman & Co's ongoing provision of the Services under this Agreement and under the Business Development Agreement, including but not necessarily limited to the Transactions (including time, office expenses etc.), Cukierman & Co will be paid a monthly sum of US$ 10,000+ V.A.T. commencing on April 15, 2003. (b) Cukierman & Co will submit its invoice to the Company by the beginning of each working month. (c) A monthly retainer will be paid 45 days after receipt by the Company of such invoice. (d) In case the Company will ask to continue with part of the offered services the retainer for each will be as follows: Business Development: $3,650 per month; Private Placement activities: $3,650 per month and Mergers and Acquisitions activities: $2,700 per month. (ii) Success Fees for the successful consummation of a Transaction involving a Private Placement will be as follows: (a) BOS will pay Cukierman & Co success fees from the Proceeds of the Transactions (hereinafter the "Success Fees") IN RESPECT OF A TRANSACTION INVOLVING A PRIVATE PLACEMENT FROM WHICH THE PROCEEDS ARE IN CASH: (1) 6% of the total cash proceeds up to US$10,000,000, or (2) in the event that the proceeds are in excess of US$10,000,000, 4% of the total cash proceeds but not less than US$ 600,000. IN RESPECT OF A TRANSACTION INVOLVING A PRIVATE PLACEMENT FROM WHICH THE PROCEEDS ARE IN NON-CASH: (3) Half of the above percentages for the respective non-cash proceeds. (b) The Company shall pay the above Success Fees to Cukierman & Co. in the same form (cash, shares, options, warrants or other) and ratio in which it receives the proceeds from the relevant Transaction. Notwithstanding the aforesaid if the Company is due to pay Cukierman & Co. Success Fees in respect of a Transaction for which the proceeds were received in a mixture of cash and non-cash, Cukierman & Co. will have the option to be paid its Success Fees in a ratio in which the cash element is actually greater than the ratio in which the Company has received the proceeds from such relevant Transaction provided that such cash element is not less than 10% of the amount of cash proceeds which the Company received from the relevant Transaction and provided that the aggregate of the cash element and the value of the non-cash element (duly adjusted) shall not exceed the total value of the Success Fees calculated according to Section 9 (ii) (a) hereinabove and Section 9 (ii) (e) hereinunder. In addition, the Company will be entitled to increase the proportion of cash Success Fees paid to Cukierman & Co. out of the total payable Success Fees, at its sole decision. It is hereby agreed that in the event that the non-cash proceeds is subject to any restrictions on the disposal thereof (a "Lock-Up") that the Lock-Up shall also apply to the non-cash proceeds payable to Cukierman & Co. under this Agreement. 4/9 (c) For the avoidance of doubt it is hereby clarified that Cukierman & Co will not be entitled to any Success Fees for Transactions with persons or entities that had not been approved as Approved Entities by the appropriate Company organs. (d) The Success Fees will be paid no later than 15 business days after the actual receipt of the Transaction proceeds by the Company as a result of a Transaction deemed to have been successfully completed according to Sections 6 (i) (c). (e) The basis of calculating the value of non-cash proceeds derived from the consummation of certain Transactions as detailed in Sections 9 (ii) (a) (3) and 9 (ii) (b) above, will be mutually agreed in good faith between the Company and the relevant Approved Entity and such valuation will govern the corresponding calculation of the Success Fees due in respect of the consummation of such Transactions. In the event that the Company and the relevant Approved Entity have not agreed on the basis for a valuation for whatsoever reason, then the Parties will, in the first instance, endeavour to agree such basis between themselves and, if unsuccessful, will refer the matter to an evaluator whose identity will be mutually agreed between the Parties or, in the absence of such agreement the evaluator will be BOS' external auditor (iii) Success Fees for M&A: After the Company has agreed to a specific M&A activity the Success Fees in respect thereof, will then be discussed between the Parties and the agreed-upon terms shall be drafted and signed in an Addendum to be attached to this Agreement 5/9 (iv) Expenses (a) When a Cukierman & Co representative travels abroad on behalf of the Company, the Company will arrange, reserve and pay the travel expenses (including flight, hotel, transportation). In addition, other reasonable travel and accommodation expenses incurred by Cukierman & Co staff will be repaid against official receipts, in accordance with the Company's standard procedure. (b) In addition, when a Cukierman & Co representative travels abroad on behalf of the Company, the Company will pay an additional per diem of US$55 to cover all other expenses including meals. (b) All foreign travel will require the Company's prior written approval. 10. In the event that Cukierman & Co. wishes to engage with any third party in respect of its undertakings under this Agreement, it must obtain the Company's prior written approval before entering any such engagement. The Company's approval to the entering of such engagement will be subject, inter alia, to the third party entering into a confidentiality agreement and NDA with the Company in a form acceptable to the Company. Cukierman's decision to engage such approved third party, will be at its sole discretion and sole responsibility. In no case will the Company be bound to any liability toward or by such third parties engaged by Cukierman and Co. including any liability to indemnify such third party and/or any payment of success fee.. 11. Termination (i) Neither Party may terminate this Agreement during the first three months after the entering hereof. Thereafter, either Party may terminate this Agreement, with or without cause, by giving the other Party 30 days prior written notice. (ii) Cukierman & Co will only be entitled to receive Success Fees, as determined in this Agreement, for Transactions between the Company and Approved Entities which are completed and closed (including the obtaining of any regulatory approval necessary to complete such a Transaction) within 9 months from the termination of this Agreement. (iii) An Approved Entity shall be automatically withdrawn from the Approved Entities list if (i) Cukierman & Co. fails to create a dialog between this Approved Entity and the Company within 3 months from its approval date or (ii) the Approved Entity stops communicating with the Company and Cukierman & Co. for a period of 5 consecutive months. 12. The Agreement shall be governed by and construed in accordance with the Israeli law. Notwithstanding the foregoing, Cukierman & Co. confirm that they know that BOS is registered on the NASDAQ and undertake that during the period of providing services hereunder it shall comply with all laws and regulations applicable to public companies registered on the NASDAQ. 6/9 13. Confidentiality Cukierman & Co. and the Company shall not disclose any part of the Agreement to any external entity without the explicit consent of the other party. Upon successful closing of a transaction within the scope of the Agreement, Cukierman & Co. shall be entitled to publicly disclose its involvement as advisor to the Company. The content, time, and form of this disclosure shall be coordinated with the Company and subject to its prior written approval in order to avoid, inter-allia, any selective public disclosure exposure. Any information provided by the Company to Cukierman & Co. in connection with this Agreement (prior to or after to the date of the Agreement) shall be kept confidential, Cukierman & Co. shall not disclose, allow access to, transmit, or transfer the confidential information to any other party, and shall only be used by Cukierman & Co. for purposes of its engagement hereunder, except information that can be clearly proven by documentation (i) was in Cukierman & Co.' possession prior to its disclosure by the Company; (ii) is publicly disclosed other than in violation of the Agreement; (iii) is obtained by Cukierman & Co. from a person other than the Company who, to the knowledge of Cukierman & Co., is not bound by a confidentiality undertaking ; (iv) the Company agrees in prior written consent may be disclosed; or (v) is legally required to be disclosed under compulsion of law , by order or act of any court or governmental or regulatory authority or body, PROVIDED, HOWEVER, that Cukierman & Co. shall provide prompt prior written notice thereof to the Company to enable it to seek a protective order or otherwise prevent or contest such disclosure and reasonably cooperate with the Company in attempting to limit or prevent such required disclosure. Cukierman & Co. may also disclose such information to those of its own and its affiliates' respective officers, directors, employees, representatives, auditors and professional advisers who have an actual need to know such information for purposes of performing the services described in the Agreement. Cukierman & Co. shall, prior to disclosing the confidential information to such officers, directors, employees, representatives, auditors and professional advisers, obtain their agreement to receive and use the confidential information on a confidential basis on the same conditions as contained in this Agreement. Cukierman & Co.' obligations under the first sentence of this paragraph shall terminate five years from the date hereof. The confidential information shall not be reproduced in any form or stored in a data base without the prior written consent of the Company. All copies of the confidential information shall contain the same proprietary notices, which appear on the original information. Upon termination or expiration of the Agreement or upon request of the Company, whichever first occurs, Cukierman & Co. shall immediately return to the Company the confidential information and all copies thereof, in all forms and permanently delete the confidential information from all retrieval systems and data bases in which it may be found. 7/9 In the event of a breach of the confidentiality obligations hereunder, in addition to and not in substitution for any other remedy available to it in respect of such breach, the Company shall be entitled to injunctive relief which restrains Cukierman & Co. and the respective officers, directors, employees, representatives, auditors and professional advisers of Cukierman & Co. from committing or continuing such breach. For the avoidance of any doubt, the provision of this Section 13 shall survive the termination of this Agreement. 14. No Obligation to Accept: This agreement does not constitute a commitment by the Company, the Company's shareholders and the Company's management to accept any of the Transactions proposed or offered to the Company by Cukierman & Co. 15. Cukierman & Co. is providing services to the Company in relation to Transactions. Cukierman & Co. shall not regard any person (including any person who is a director or employee of the Company) as its client in relation to the Transactions and will not be responsible to any other person for providing protections afforded to clients of Cukierman & Co. or advising any other person involved in Transactions. 16. No provision of this Agreement shall be deemed waived and no breach excused, unless such waiver or consent excusing the breach shall be in writing and signed by the party to be charged with such waiver or consent. 17. Indemnification:. The Company hereby agrees that in the event that it, acting in the capacity of a principle, is the subject of a legal complaint or action, the Company shall indemnify and hold harmless Cukierman & Co. and its directors, officers, employees, agents, affiliates and representatives from and against any and all third party claims, actions (including shareholder derivative actions), proceedings, damages or liabilities, based on or arising out of (a) any untrue statement of a material fact required to be contained in any document provided by the Company and, (b) any failure to include therein any material fact required to be stated or necessary to render the statements therein not misleading. The Company shall not, however, be responsible for any such losses, claims, demands, damages, liabilities or expenses to the extent that they are finally judicially determined to have resulted from Cukierman & Co.' bad faith, negligence, wilful misconduct, non-performance or breach of this Agreement. Where Cukierman & Co. is the subject of a claim arising out of any untrue statement included in any material information provided by the Company, or the omission or the alleged omission to state therein a material information necessary to make such information not misleading, then the total amount recoverable from Cukierman & Co. shall be limited to such proportion (the "Liability") as is finally judicially determined to be just and equitable, having regards to the relative responsibility of (i) Cukierman & Co. and (ii) any other person (including for the avoidance of doubt, both the Company (and any director, employee, agent, subsidiary or affiliate of the Company) and any co-advisor or other person unrelated to the Company) who is jointly or severally liable (an "Other Party"). For the avoidance of doubt, any limitation or exclusion or restriction on the liability of any Other Party under any jurisdiction, whether arising under statute or contract or resulting from death, bankruptcy or insolvency (a "Liability Limitation") shall be ignored for the purposes of determining the extent of responsibility of that Other Party under clause (ii) above. 8/9 The Company shall not be liable for any settlement of any litigation or proceeding effected without its prior written consent. For the avoidance of any doubt, the provision of this Section 17 shall survive the termination of this Agreement. 18. The entering into of this Agreement by the BOS and BOSCOM is subject to the approval of their respective boards of directors. - ------------------------ ------------------------ ------------------------ Name: ISRAEL GAL Name: ISRAEL GAL Name: NEHEMIA KAUFMAN Title: CEO Title: CEO Title: CFO Signature Signature Signature BOSCOM LTD. B.O.S. BETTER ONLINE SOLUTIONS LTD. - ------------------------ ------------------------ ------------------------ ------------------------------------------------- Name: DAVID CHOUCHENA Title: MANAGING DIRECTOR Signature CUKIERMAN & CO. INVESTMENT HOUSE LTD. ------------------------------------------------- 9/9 EX-99 5 exhibit_4-5.txt EXHIBIT 4.5 MANAGEMENT AGREEMENT MANAGEMENT AGREEMENT (the "AGREEMENT") entered into as of the 1st day of January, 2004, by and among BOS BETTER ONLINE SOLUTIONS LTD., a company incorporated under the laws of the State of Israel, maintaining its principal place of business at Rabin House, Teradyon Industrial Park, Misgav (the "COMPANY"), ADIV BARUCH, Israeli I.D. number 057671398, residing at 9 Avigdor St. Tel-Aviv, Israel ("BARUCH"), and SIGNUM LTD., a company incorporated under the laws of the State of Israel, and maintaining its principal place of business at 22 Maskit Street, Herzliya, Israel (the "Contractor"). WHEREAS The Company desires to engage the Contractor to provide management services as described below and the Contractor desires to provide such services, according to the terms and conditions hereinafter set forth. NOW, THEREFORE, it is hereby agreed as follows: 1. ENGAGEMENT (a) The Company agrees to engage the Contractor and the Contractor agrees to be engaged by the Company on the terms and conditions set out in this Agreement. (b) The Contractor shall provide management services exclusively through Baruch, who shall serve in the capacity of President and Chief Executive Officer of the Company. Baruch shall perform the duties, undertake the responsibilities and exercise the authority customarily performed, undertaken and exercised by persons situated in a similar capacity, subject to the direction of the Board of Directors of the Company. Baruch shall report regularly to the Board of Directors with respect to his activities. Without limitations to the above, Baruch shall also participate in the marketing activities of the Company's Subsidiary, BOScom Ltd., as directed by the Company's Board of Directors. (c) During the term of this Agreement, Baruch shall not be engaged in employment or perform management services for any third party, without the prior written consent of the Company. 2. STOCK OPTION GRANT (a) The Company hereby undertakes to grant to the Contractor, as soon as practicable, an Option (the "OPTION") to purchase 216,282 Ordinary Shares of the Company, NIS4.00 par value each ("ORDINARY SHARES") equal to five percent (5%) of the Company's issued and outstanding share capital, on a fully diluted and as converted basis, on November 23, 2003. The Contractor shall enter into the Company's standard Stock Option Agreement and the grant of the Option hereunder shall be subject to the terms and conditions set forth in the Company's 2003 Israeli Share Options Plan (the "PLAN"). The Options shall be granted pursuant to Section 3(i) of the Income Tax Ordinance. The Contractor shall be subject to the Company's Trading Windows policy. - 1 - (b) The Option shall vest and become exercisable in 36 equal monthly installments of 1/36 of the aggregate number of Ordinary Shares subject to the Option (fractions shall be rounded up) at the end of each month following the date of grant and shall be exercisable by the Contractor at any time during a period of ten (10) years from the date of adoption of the Plan, subject however to the provisions of the Company's Stock Option Agreement and Plan. The exercise price of the Option shall be $3 per Ordinary Share. (c) The Company undertakes that all Ordinary Shares issued to the Contractor upon exercise of the Option shall be duly authorized and validly issued, fully paid and nonassessable, free and clear of liens, claims, charges, encumbrances, and any third party rights, options to purchase, proxies, voting agreements, calls or commitments of every kind. (d) Notwithstanding the foregoing, the Option shall immediately vest and become exercisable with respect to the aggregate number of Ordinary Shares subject to the Option upon (a) the occurrence of a merger, reorganization, or sale of the Company or a sale all or substantially all of the Company's shares or assets or (b) upon the termination by the Company of this Agreement other than for Cause, provided however that no such immediate vesting shall occur in the event of termination due to failure of Baruch to reach the annual goals set by the Company's Board of Directors. (e) The Contractor will have PRO RATA preemptive rights (taking into account all of the Ordinary Shares subject to the Option as if the Option had vested and the Contractor had exercised such Option with respect to all of the Ordinary Shares subject to such Option) with regard to any future issuance of securities of the Company, made at a price per Ordinary Share of no less than $3.00, on the same price and other terms and conditions as such issuance, other than issuances of: (i) Ordinary Shares or options to purchase Ordinary Shares issued to employees, directors and/or consultants and approved by the Company's Board of Directors; (ii) Ordinary shares issued as dividends, (iii) securities issued pursuant to a stock split or other reclassification, (iv) securities issued pursuant to a business or asset acquisition or other similar transaction, (v) securities issued to a strategic partner, as designated by the Company's Board of Directors. The Contractor's right hereunder shall expire upon termination of this Agreement for any reason whatsoever. 3. MANAGEMENT FEES (a) MONTHLY MANAGEMENT FEE. In consideration for the services provided to the Company hereunder, the Company agrees to pay the Contractor and the Contractor agrees to accept a monthly gross management fee (the "MANAGEMENT FEE") in an amount equal to NIS 79,698, plus Value Added Tax, based on a NIS - US Dollar exchange rate of NIS4.4 to 1 US Dollar. The Management Fee shall be adjusted at the beginning of every calendar quarter in accordance with the NIS - US Dollar exchange rate on the last day of the previous quarter. (b) PAYMENT PROCEDURES. At the beginning of each calendar month, the Contractor shall provide the Company with an itemized invoice detailing the services rendered to the Company and the Management Fee due the Contractor therefor. The Company shall pay the Management Fee to the Contractor within 5 business days from its receipt of said invoice. All payments required to be made by the Company to the Contractor hereunder (other than as required by applicable tax laws) will be made by wire transfer to the Contractor's bank account number 646665 at Bank Mizrachi of Israel, Branch 410, Israel. - 2 - (c) In connection with the preparation by the Board of Directors of the annual work plan and budget of the Company, the Board of Directors shall annually establish an annual bonus to be paid to the Contractor provided that the Contractor shall have satisfied or exceeded the goals or milestones established by the Board of Directors for the respective year. (d) OUT OF POCKET EXPENSES. The Company shall pay or reimburse the Contractor for all reasonable expenses incurred by the Contractor in discharge of its responsibilities hereunder, whether in Israel or outside Israel, including costs related to the lease, under the Company's operative leasing plan, of an automobile (mutually agreed on by the Company and Contractor) for Baruch's use and costs of a dedicated telephone line and cellular telephone (including usage charges) both telephones to be used exclusively by Baruch. The Company shall obtain a Company credit card for the use of Baruch in discharge of his responsibilities hereunder. 4. TERM AND TERMINATION OF AGREEMENT (a) Contractor's engagement under this Agreement shall commence as of January 1, 2004 and shall end on the earliest of: (i) the death or Disability (as defined herein) of Baruch; (ii) the termination of the Contractor's engagement as provided below. The term "DISABILITY" shall mean: any physical or mental illness or injury as a result of which Baruch remains absent from work for a period of three (3) successive months. Disability shall be deemed to have occurred upon the end of such three-months period. (b) The Company may terminate this Agreement without Cause (as defined below) at any time upon written notice of one hundred eighty (180) days to the Contractor, and the Contractor may terminate this Agreement at any time upon written notice of thirty (30) days (each such period, the "NOTICE PERIOD") specifying the effective date of termination (such date, and the date of termination pursuant to sub-Section (d) below, the "TERMINATION DATE"). (c) During such Notice Period (except in the event of termination for Cause) the Contractor shall be entitled to Management Fees pursuant to Section 3. (d) Notwithstanding the above, The Company may, at any time, terminate this Agreement with Cause upon written notice to Contractor. (e) The term "Cause" shall mean: (a) Contractor's or Baruch's material breach of trust and/or fiduciary duties including but not limited to prohibited disclosure to unauthorized persons or entities of confidential or proprietary information of or relating to the Company, (b) Contractor's or Baruch's material breach of the terms of this Agreement; or (c) conviction of Baruch and/or a principal of the Contractor for the commission of a felony. (f) During the period following notice of termination by any party, Baruch shall transfer his position to his replacement in an orderly and complete manner and shall return to the Company all documents, professional literature and equipment belonging to the Company, which may be in his possession at such time. - 3 - 5. COMPETITIVE ACTIVITY During the term of this Agreement and until 12 months thereafter, Contractor and/or Baruch will not directly or indirectly: (a) Carry on or hold an interest in any company, venture, entity or other business (other than a minority interest in a publicly traded company), which competes with the products or services of the Company or its subsidiaries, including those products or services contemplated in a plan adopted by the Board of Directors of the Company or its subsidiaries (a "competing business"); (b) Act as a consultant, executive, officer, employee, agent, or in any managerial or other capacity in a competing business or supply, in competition with the Company or its subsidiaries, services ("restricted services") to any person who was provided with services by the Company or its subsidiaries at any time during the twelve (12) months immediately prior to the Termination Date; (c) Solicit, canvass or approach or endeavor to solicit, canvass or approach any person who, was provided with services by the Company or its subsidiaries at any time during the twelve (12) months immediately prior to the Termination Date, for the purpose of offering restricted services or products which compete with the products supplied by the Company or its subsidiaries at the Termination Date; or (d) Employ, solicit or entice away or endeavor to solicit or entice away from the Company or its subsidiaries any person employed by the Company or its subsidiaries any time during the twelve (12) months immediately prior to the Termination Date with a view to inducing that person to leave such employment and to act for another employer in the same or a similar capacity. (e) If any one or more of the terms contained in this Section 5 shall, for any reason, be held to be excessively broad with regard to time, geographic scope or activity, such term shall be construed in a manner to enable it to be enforced to the maximum extent compatible with applicable law. The Contractor and Baruch acknowledge that the Company has entered into this Agreement in reliance on the undertakings set forth in this Section 5, and that given Baruch's access to information regarding the Company and its position, the provisions of Section 5 are reasonable and necessary to protect Company's business and the rights of the parties hereto. The Contractor and Baruch further acknowledge that the terms herein and the Management Fee payable to the Contractor by the Company include fair and reasonable consideration for Contractor's and Baruch's non-competition undertakings herein. 6. CONFIDENTIALITY Contractor and Baruch acknowledge that this Agreement creates a relationship of confidence and trust between the Contractor and/or Baruch and the Company with respect to any information: (i) applicable to the business of the Company; or (ii) applicable to the business of any supplier, client or customer of the Company, which may become known or learned by Baruch, the Contractor, its directors, officers, controlling shareholders, and employees during the term of this Agreement. - 4 - For the Purposes of this Agreement, "Confidential Information" shall mean the following: (i) information that has been created, discovered, developed, or otherwise become known to the Company (including without limitation information created, discovered, developed, or made known by Baruch and/ or the Contractor, its directors, officers, controlling shareholders, and employees during the term of this Agreement, arising out of the Contractor's engagement by the Company or disclosed by the Baruch and/or the Contractor, its directors, officers, controlling shareholders, and employees to the Company prior to the date hereof) or in which proprietary rights have been assigned or otherwise conveyed to the Company, including but not limited to trade secrets, processes, formulas, data, know-how, improvements, inventions, techniques, business and marketing plans, strategies, forecasts, and customer lists ("Proprietary Information"); (ii) information that is disclosed in the furtherance of the business of the Company including, without limitation, the area of activity in which the Company is involved, the Company's technical, business and financial information, documentation, records, files, memoranda, reports, drawings, plans, price lists, customer lists, and the like; (iii) information that contains financial projections and forecasts concerning developments of the Company's future business; and (iv) any other information of a confidential nature relating to the Company. For the purpose of this Section 6 references to the Company shall include also the Company's subsidiaries. Baruch, the Contractor, its directors, officers, controlling shareholders, and employees shall treat all Confidential Information as follows: (a) Use all Confidential Information received solely in furtherance of the business of the Company; (b) Take strict precautions to maintain the confidentiality of all Confidential Information received from the date of receipt, and take appropriate action, by instruction, agreement or otherwise with any person permitted access to any Confidential Information received, to ensure that the Contractor will be able to satisfy its obligations under this Agreement; (c) Refrain from copying or disclosing any Confidential Information to any unauthorised third party; (d) Upon the written request of the Company, promptly destroy or return to the Company any and all copies on any media containing Confidential Information. In the event of termination of this Agreement, the Contractor and/or Baruch will deliver to the Company all documents and data of any nature pertaining to its engagement with the Company, and the Contractor and/or Baruch will not retain any documents or data of any description or any reproduction of any description containing or pertaining to any Proprietary Information or other Confidential Information. 7. OWNERSHIP OF INVENTIONS AND WORK PRODUCT The Contractor and/or Baruch will promptly disclose to the Company, or any persons designated by it, all improvements, inventions, formulae, ideas, processes, techniques, know-how and data, whether or not patentable or otherwise registerable, made or conceived or reduced to practice or learned by Baruch, the Contractor, its directors, officers, controlling shareholders, and employees, either alone or jointly with others, during the term of this Agreement, prior thereto (to the extent that the same is related to or useful in the business of the Company) or as a result of tasks assigned by the Company or as a result of the use of premises and/or equipment owned, leased, or contracted for by the Company (all such improvements, inventions, formulas, processes, techniques, know-how, and data are hereinafter referred to as "Inventions"). - 5 - The Contractor and/or Baruch agree that all Inventions are and shall be the sole property of the Company and its assigns, and the Company and its assigns shall be the sole owner of all patents and other rights in connection with such Inventions. The Contractor and/or Baruch hereby assign to the Company any rights the Contractor and/or Baruch may have or acquire (if any) in such Inventions. The Contractor and/or Baruch further agree to assist the Company in every reasonable and proper way (at the Company's expense) to obtain and from time to time enforce patents on such Inventions in any and all countries, including the execution of all documents required in applying for and enforcing patents on such Inventions, as the Company may desire, together with any assignments of such Inventions to the Company or persons designated by it. Such assistance shall include, without limitation, the execution and delivery of any requested affidavits and documents of assignment and conveyance and the provision of testimony in connection with any proceeding affecting the right, title or interest of the Company in any Invention. The Contractor's and/or Baruch's obligation to assist the Company in obtaining and enforcing patents for such Inventions in any or all countries shall continue beyond the term of this Agreement, but the Company shall compensate the Contractor at a reasonable rate for time actually spent by Baruch, after termination and at the Company's request, in rendering such assistance. 8. REPRESENTATIONS AND WARRANTIES a. Baruch, the Contractor, its directors, officers, controlling shareholders, and employees shall inform the Company, immediately upon becoming aware of every matter in which such person or, if applicable, a member of his immediate family has a personal interest which might, in such person's reasonable opinion, create a conflict of interests with the Contractor's duties under this Agreement. b. Contractor represents and warrants that it is a corporation duly organized and validly existing under the laws of the State of Israel. Contractor has all requisite power and authority to execute, deliver and perform this Agreement, and to consummate the transactions contemplated hereby. This Agreement constitutes valid and legally binding obligations of Contractor, enforceable against it in accordance with its terms. c. Each of Baruch and the Contractor represents and warrants that the execution and delivery of this Agreement and the fulfilment of the terms hereof will not constitute a default under or breach of any agreement or other instrument to which it is a party or by which it is bound, including without limitation, any confidentiality or non competition agreement, and do not require the consent of any person or entity. 9. NOTICES For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by registered mail, postage prepaid, addressed to the respective addresses set forth below or last given by each party to the other, except that notice of change of address shall be effective only upon receipt. - 6 - The initial addresses of the parties for purposes of this Agreement shall be as follows: The Company: Rabin House, Teradyon Industrial Park, Misgav The Contractor: 22 Maskit Street Herzliya 10. INDEPENDENT CONTRACTOR a. The Contractor will serve as an independent contractor to and not as an agent or employee of the Company or any of its affiliates. The Contractor will be solely responsible for any and all taxes and other such assessments made or imposed by any governmental authority in connection with the any payments made by the Company pursuant to this Agreement. In the event that pursuant to any law or regulation, tax is required to be withheld at source from any payment made to Contractor, the Company shall withhold said tax at the rate set forth in the certification issued by the appropriate taxing authority and provided to Company by the Contractor, or in the absence of such certification, at the Contractor or at the rate determined by said law or regulation. b. Contractor undertakes to maintain a proper set of accounting books as required by law, to open and/or maintain a file with the Israeli Income Tax Authorities and with the Israel National Insurance Institute and to pay all required taxes and make other compulsory payments in accordance with the law. c. It is agreed between the parties that in the event that, despite the aforestated, as a result of demand and/or request of the Contractor, Baruch, any of his representatives, his successors, or any person or entity acting on Baruch's behalf or for Baruch's benefit, a duly authorized legal body or other authorized forum, orders the Company to grant Baruch the rights and privileges of a salaried employee for the services rendered in accordance with this Agreement, the following provisions shall apply: (i) For the period as to which it is determined than an employer-employee relationship existed between the Company and the Baruch (the "Relevant Period") Baruch's total monthly salary shall be that sum which is equal to 55% of the monthly Management Fees (not including Value Added Tax) which the Contractor actually received during the Relevant Period (the "Monthly Wage") together with any applicable Tosefet Yoker increase, to the extent that such increase has been applied to all salaried employees of the Company. (ii) The Contractor shall immediately return to the Company all amounts paid to it in excess of the Monthly Wage for the Relevant Period, linked to the Consumer Price Index from the date of payment by the Company up to the date of return by the Contractor. It is hereby expressly agreed that any further payment by the Company to Contactor/Baruch shall be contingent on the full repayment of the aforementioned amounts. (iii) The aforesaid shall also be deemed as a settlement and admission of payment for purposes of Section 29 of the Severance Pay Law- 1963. - 7 - 11. MISCELLANEOUS a. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Contractor, Baruch and the Company. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. b. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Israel. c. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. d. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof, provided however that this Agreement is subject to and contingent upon the approval by the Company's Audit Committee, Board of Directors and Shareholders. In the event such approval is not obtained, this Agreement shall be deemed null and void. e. This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns, and the Company shall require such successor or assign to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. The term "SUCCESSORS AND ASSIGNS" as used herein shall mean a corporation or other entity acquiring all or substantially all the assets and business of the Company (including this Agreement) whether by operation of law or otherwise. f. Each of Contractor and/or Baruch undertakes not to assign any of its rights and obligations hereunder without the prior written consent of Company, and any attempt to assign without such consent shall be null and void. g. The provisions of Sections 5, 6, 7 and 10 of this Agreement shall survive the rescission or termination, for any reason, of this Agreement. h. The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. BOS BETTER ONLINE SOLUTIONS LTD. SIGNUM LTD. By: ____________ By: ____________ Title: _________ Title: _________ ________________ ADIV BARUCH - 8 - EX-99 6 exhibit_4-6.txt EXHIBIT 4.6 B.O.S. BETTER ON-LINE SOLUTIONS LTD. SECURITIES PURCHASE AGREEMENT JUNE 10, 2004 TABLE OF CONTENTS
PAGE ---- 1. AGREEMENT TO SELL AND PURCHASE 1 2. FEES AND WARRANT 1 3. CLOSING, DELIVERY AND PAYMENT 2 3.1 CLOSING 2 3.2 DELIVERY 2 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY 3 4.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION 3 4.2 SUBSIDIARIES 3 4.3 CAPITALIZATION; VOTING RIGHTS 3 4.4 AUTHORIZATION; BINDING OBLIGATIONS 4 4.5 LIABILITIES 5 4.6 AGREEMENTS; ACTION 5 4.7 OBLIGATIONS TO RELATED PARTIES 5 4.8 CHANGES 6 4.9 TITLE TO PROPERTIES AND ASSETS; LIENS, ETC 7 4.10 INTELLECTUAL PROPERTY 8 4.11 COMPLIANCE WITH OTHER INSTRUMENTS 8 4.12 LITIGATION 8 4.13 TAX RETURNS AND PAYMENTS 9 4.14 EMPLOYEES 9 4.15 REGISTRATION RIGHTS AND VOTING RIGHTS 9 4.16 COMPLIANCE WITH LAWS; PERMITS 9 4.17 ENVIRONMENTAL AND SAFETY LAWS 10 4.18 VALID OFFERING 10 4.19 FULL DISCLOSURE 10 4.20 INSURANCE 11 4.21 SEC REPORTS 11 4.22 LISTING 11 4.23 NO INTEGRATED OFFERING 11 4.24 STOP TRANSFER 11 4.25 DILUTION 11 5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER 12 5.1 NO SHORTING 12 5.2 REQUISITE POWER AND AUTHORITY 13 5.3 INVESTMENT REPRESENTATIONS 13 5.4 PURCHASER BEARS ECONOMIC RISK 13 5.5 ACQUISITION FOR OWN ACCOUNT 13 5.6 PURCHASER CAN PROTECT ITS INTEREST 14 5.7 ACCREDITED INVESTOR 14 5.8 LEGENDS 14
i
6. COVENANTS OF THE COMPANY 15 6.1 STOP-ORDERS 15 6.2 LISTING 15 6.3 MARKET REGULATIONS 16 6.4 REPORTING REQUIREMENTS 16 6.5 USE OF FUNDS 16 6.6 ACCESS TO FACILITIES 16 6.7 TAXES 16 6.8 INSURANCE 17 6.9 INTELLECTUAL PROPERTY 17 6.10 PROPERTIES 18 6.11 CONFIDENTIALITY 18 6.12 REQUIRED APPROVALS 18 6.13 REISSUANCE OF SECURITIES 19 6.14 OPINION 19 7. COVENANTS OF THE PURCHASER 20 7.1 CONFIDENTIALITY 20 7.2 NON-PUBLIC INFORMATION 20 8. COVENANTS OF THE COMPANY AND PURCHASER REGARDING INDEMNIFICATION 20 8.1 COMPANY INDEMNIFICATION 20 8.2 PURCHASER'S INDEMNIFICATION 20 9. CONVERSION OF CONVERTIBLE NOTE 21 9.1 MECHANICS OF CONVERSION 21 10.REGISTRATION RIGHTS 23 10.1 REGISTRATION RIGHTS GRANTED 23 10.2 OFFERING RESTRICTIONS 23 11.MISCELLANEOUS 23 11.1 GOVERNING LAW 23 11.2 SURVIVAL 24 11.3 SUCCESSORS 24 11.4 ENTIRE AGREEMENT 24 11.5 SEVERABILITY 24 11.6 AMENDMENT AND WAIVER 24 11.7 DELAYS OR OMISSIONS 24 11.8 NOTICES 25 11.9 ATTORNEYS' FEES 26 11.10 TITLES AND SUBTITLES 26 11.11 FACSIMILE SIGNATURES; COUNTERPARTS 26 11.12 BROKER'S FEES 26 11.13 CONSTRUCTION 26
ii LIST OF EXHIBITS - --------------------------------------------------------------------------------
Form of Convertible Term Note Exhibit A Form of Warrant Exhibit B Forms of Opinions Exhibits C1-C2 Form of Escrow Agreement Exhibit D
iii SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT (this "Agreement") is made and entered into as of June 10, 2004, by and among B.O.S. BETTER ON-LINE SOLUTIONS LTD., a corporation incorporated under the laws of the State of Israel (p.c. number 520042565) (the "Company"), BOScom Ltd., a corporation incorporated under the laws of the State of Israel (organizational identification number (51-2236431) (solely with respect to the representations and warranties pertaining to it) (the "Subsidiary"), and Laurus Master Fund, Ltd., a Cayman Islands company (the "Purchaser"). RECITALS WHEREAS, the Company has authorized the sale to the Purchaser of a Convertible Term Note in the aggregate principal amount of Two Million Dollars in the currency of the United States ($2,000,000) (the "Note"), which Note is convertible into shares of the Company's Ordinary Shares, NIS 4.00 nominal value per share (the "Ordinary Shares") at an initial fixed conversion price of $3.08 per share of Ordinary Shares (the "Fixed Conversion Price"); WHEREAS, the Company wishes to issue a warrant to the Purchaser to purchase up to 130,000 Ordinary Shares (subject to adjustment as set forth therein) in connection with Purchaser's purchase of the Note; WHEREAS, Purchaser desires to purchase the Note and the Warrant (as defined in Section 2) on the terms and conditions set forth herein; and WHEREAS, the Company desires to issue and sell the Note and Warrant to Purchaser on the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises, representations, warranties and covenants hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. AGREEMENT TO SELL AND PURCHASE. Pursuant to the terms and conditions set forth in this Agreement, on the Closing Date (as defined in Section 3), the Company agrees to sell to the Purchaser, and the Purchaser hereby agrees to purchase from the Company, a Note in the aggregate principal amount of $2,000,000 (the "Purchase Price") convertible into the Company's Ordinary Shares in accordance with the terms of the Note and this Agreement. The issuance of the Note purchased on the Closing Date shall be known as the "Offering." A form of the Note is annexed hereto as Exhibit A. The Note will mature on the Maturity Date (as defined in the Note). Collectively, the Note and Warrant and Ordinary Shares issuable in payment of the Note, upon conversion of the Note and upon exercise of the Warrant are referred to as the "Securities." 2. FEES AND WARRANT. On the Closing Date: (a) The Company will issue and deliver to the Purchaser a Warrant (the "Warrant") to purchase up to 130,000 Ordinary Shares in connection with the Offering (the "Warrant Shares") pursuant to Section 1 hereof. The Warrant must be delivered on the Closing Date. A form of Warrant is annexed hereto as Exhibit B. All the representations, covenants, warranties, undertakings, and indemnification, and other rights made or granted to or for the benefit of the Purchaser by the Company are hereby also made and granted in respect of the Warrant and the Company's Ordinary Shares issuable upon exercise of the Warrant (the "Warrant Shares"). (b) Subject to the terms of Section 2(d) below, the Company shall pay to Laurus Capital Management, LLC, the manager of the Purchaser, a closing payment in an amount equal to three and one-half percent (3.50%) of the aggregate principal amount of the Note. The foregoing fee is referred to herein as the "Closing Payment." (c) The Company shall reimburse the Purchaser for its reasonable legal fees for services rendered to the Purchaser in preparation of this Agreement and the Related Agreements (as hereinafter defined), and expenses incurred in connection with the Purchaser's due diligence review of the Company and its Subsidiary and all related matters. Amounts required to be paid under this Section 2(c) for such legal fees and expenses shall be $45,000 (the "Expense Payment"), of which a deposit of $12,500 (the "Deposit) was previously paid by the Company to the Purchaser, and the remaining $32,500 will be paid on the Closing Date. (d) The Closing Payment and the Expense Payment (net of the Deposit) shall be on the Closing Date, as provided below out of funds held pursuant to a Funds Escrow Agreement of even date herewith among the Company, Purchaser, and an Escrow Agent (the "Funds Escrow Agreement") and a disbursement letter (the "Disbursement Letter"). 3. CLOSING, DELIVERY, PAYMENT AND OTHER CLOSING CONDITIONS. 3.1 CLOSING. The execution and delivery of this Agreement and the Related Agreements shall occur upon exchange by facsimile of executed signature pages and all other documents, instruments and writings required to be delivered pursuant hereto and thereto. Subject to the terms and conditions herein, the closing of the transactions contemplated hereby (the "Closing"), shall take place on which date the conditions for Closing set forth in Section 9 herein shall be satisfied in full or waived by the Company, or at such different date as the Company and Purchaser may mutually agree (such date is hereinafter referred to as the "Closing Date"). 3.2 DELIVERY. Pursuant to the Funds Escrow Agreement in the form attached hereto as Exhibit D at the Closing on the Closing Date, the Company will deliver to the Purchaser, among other things, (i) a Note in the form attached as Exhibit A representing the Purchase Price; (ii) a Warrant in the form attached as Exhibit B in the Purchaser's name representing 130,000 Warrant Shares, (iii) the Closing Payment, and (iv) the Expense Payment (net of the Deposit) and the Purchaser will deliver to the Company, among other things, the Purchase Price [amounts set forth in the Disbursement Letter] by certified funds or wire transfer to an account designated by the Company. 2 3.3 OTHER CLOSING CONDITIONS. Prior to closing of this transaction, the Company will obtain the necessary board approvals. 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to the Purchaser as follows (which representations and warranties are supplemented by the Company's filings under the Securities Exchange Act of 1934 (collectively, the "Exchange Act Filings") and the Company's Audited Consolidated Financial Statements as of December 31, 2003 (including the notes thereto) (the "Financial Statements")): 4.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. Each of the Company and the Subsidiary is a corporation duly incorporated and validly existing under the laws of its jurisdiction of incorporation. Each of the Company and the Subsidiary has the corporate power and authority to own and operate its properties and assets and carry on its respective business as presently conducted, except as would not have a Material Adverse Effect (as defined below), and to execute and deliver, as applicable, (i) this Agreement, (ii) the Note and the Warrant to be issued in connection with this Agreement, (iii) the Master Security Agreement dated as of the date hereof among the Company and the Purchaser (as amended, modified or supplemented from time to time, the "Master Security Agreement"), (iv) the Registration Rights Agreement relating to the Securities dated as of the date hereof between the Company and the Purchaser, (v) the Escrow Agreement dated as of the date hereof among the Company, the Purchaser and the escrow agent referred to therein and (vi) all other agreements related to this Agreement and the Note and referred to herein (the preceding clauses (ii) through (vi), collectively, the "Related Agreements"), to issue and sell the Note and the Ordinary Shares issuable upon conversion of the Note (the "Note Shares"), to issue and sell the Warrant and the Warrant Shares, and to carry out the provisions of this Agreement and the Related Agreements and to carry on its business as presently conducted. Each of the Company and the Subsidiary is duly qualified and is authorized to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions in which failure to do so has not, or could not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the business, assets, liabilities, condition (financial or otherwise), properties, or operations of the Company and it Subsidiary, taken as a whole (a "Material Adverse Effect"). 4.2 [RESERVED] 4.3 CAPITALIZATION; VOTING RIGHTS. (a) The authorized capital stock of the Company, as of the date hereof consists of 8,750,000 Ordinary Shares nominal value NIS 4.00 per share, of which, as of December 31, 2003, 4,167,509 Ordinary Shares are issued and 4,162,126 Ordinary Shares are outstanding. 3 (b) Except as disclosed on Schedule 4.3, the Exchange Act Filings or the Financial Statements, other than: (i) the shares reserved for issuance under the Company's stock option plans; and (ii) shares which may be granted pursuant to this Agreement and the Related Agreements, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal), proxy or shareholder agreements, or arrangements or agreements of any kind for the purchase or acquisition from the Company of any of its securities. Except as disclosed on Schedule 4.3, the Exchange Act Filings or the Financial Statements, neither the offer, issuance or sale of any of the Note or the Warrant, or the issuance of any of the Note Shares or Warrant Shares, nor the consummation of any transaction contemplated hereby will result in a change in the price or number of any securities of the Company outstanding, under anti-dilution or other similar provisions contained in or affecting any such securities. (c) All issued and outstanding Ordinary Shares of the Company: (i) have been duly authorized and validly issued and are fully paid and nonassessable; and (ii) were issued in compliance with all applicable state and federal laws concerning the issuance of securities. (d) The rights, preferences, privileges and restrictions of the Ordinary Shares are as stated in the Company's Articles of Association (the "Articles"). The Note Shares and Warrant Shares shall have been, on or before the Closing Date, duly and validly reserved for issuance. When issued in compliance with the provisions of this Agreement and the Company's Articles, the Securities will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances; provided, however, that the Securities may be subject to restrictions on transfer under state, federal and/or Israeli securities laws as set forth herein or as otherwise required by such laws at the time a transfer is proposed. 4.4 AUTHORIZATION; BINDING OBLIGATIONS. All corporate action on the part of the Company and the Subsidiary (including their respective officers and directors) necessary for the authorization of this Agreement and the Related Agreements, the performance of all obligations of the Company hereunder and under the other Related Agreements at the Closing and, the authorization, sale, issuance and delivery of the Note and Warrant has been taken or will be taken prior to the Closing. This Agreement and the other Related Agreements, when executed and delivered and to the extent it is a party thereto, will be valid and binding obligations of the Company and with respect to the representations and warranties pertaining to it the Subsidiary, enforceable against each such person in accordance with their terms, except: (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights; and (b) general principles of equity that restrict the availability of equitable or legal remedies. Except as disclosed on Schedule 4.4, in the Exchange Act Filings or the Financial Statements, the sale of the Note, the subsequent conversion of the Note into Note Shares, are not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with. The issuance of the Warrant and the subsequent exercise of the Warrant for Warrant Shares are not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with. 4 4.5 LIABILITIES. Neither the Company nor the Subsidiary has any material contingent liabilities, except current liabilities incurred in the ordinary course of business and liabilities disclosed in any Exchange Act Filings, in the Financial Statements or that would not be reasonably likely to have a Material Adverse Effect. 4.6 AGREEMENTS; ACTION. Except as set forth on Schedule 4.6 or as disclosed in any Exchange Act Filings or the Financial Statements: (a) there are no agreements, understandings, instruments, contracts, judgments, orders, writs or decrees to which the Company or the Subsidiary is a party or by which it is bound which may involve: (i) obligations (contingent or otherwise) of, or payments to, the Company in excess of $500,000 (other than obligations of, or payments to, the Company arising from purchase or sale agreements entered into in the ordinary course of business); (ii) the transfer or license of any material patent, copyright, trade secret or other proprietary right to or from the Company (other than licenses arising from the purchase of "off the shelf" or other standard products); or (iii) provisions restricting the development, manufacture or distribution of the Company's products or services. (b) Since December 31, 2003, neither the Company nor the Subsidiary has: (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its share capital; (ii) incurred any indebtedness for money borrowed or any other liabilities (other than ordinary course obligations) individually in excess of $500,000 or, in the case of indebtedness and/or liabilities individually less than $500,000, in excess of $1,000,000 in the aggregate; (iii) made any loans or advances to any person (other than the Company's subsidiaries) in excess, individually or in the aggregate, of $500,000, other than ordinary course advances for travel expenses; or (iv) sold, exchanged or otherwise disposed of any of its material assets or rights, other than the sale of its inventory in the ordinary course of business or as a result of discontinued operations. (c) For the purposes of subsections (a) and (b) above, all indebtedness, liabilities, agreements, understandings, instruments and contracts involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. 4.7 OBLIGATIONS TO RELATED PARTIES. Except as set forth on Schedule 4.7 or disclosed in any of the Exchange Act Filings or in the Financial Statements, there are no obligations of the Company or of the Subsidiary to officers, directors, shareholders or employees of the Company or the Subsidiary other than: (a) for payment of salary or fees for services rendered and for bonus payments; (b) reimbursement for reasonable expenses incurred on behalf of the Company and its Subsidiary; 5 (c) for other standard employee benefits made generally available to all employees (including stock option agreements outstanding or to be entered into under any stock option plan approved by the Board of Directors of the Company); and (d) obligations listed in the Company's financial statements. Except as listed in the Company's financial statements, disclosed in any of the Company's Exchange Act Filings, in the Financial Statements or set forth on Schedule 4.7, to the Company's knowledge, none of the officers, directors, key employees or shareholders holding 10% or more of the Company's share capital or any members of their immediate families, are indebted to the Company, individually, in excess of $50,000 or have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation which competes with the Company, other than passive investments in publicly traded companies (representing less than one percent (1%) of such company) which may compete with the Company. Except as listed in the Financial Statements, disclosed in any of the Company's Exchange Act Filings or set forth on Schedule 4.7, (i) to the Company's knowledge no officer, director or shareholder holding 10% or more of the Company's share capital, or any member of their immediate families, is, directly or indirectly, interested in any material contract between any third party and the Company and (ii) except with respect to the Company's subsidiaries, the Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 4.8 CHANGES. Since December 31, 2003, except as disclosed in any Exchange Act Filing, in the Financial Statements or in any Schedule to this Agreement or to any of the Related Agreements, there has not been: (a) any change in the business, assets, liabilities, condition (financial or otherwise), properties operations of the Company or its Subsidiary, which individually or in the aggregate has had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; (b) any resignation or termination of any officer, key employee or group of employees of the Company or of its Subsidiary; (c) any material change, except in the ordinary course of business or as would not have a Material Adverse Effect, in the contingent obligations of the Company or of its Subsidiay by way of guaranty, endorsement, indemnity, warranty or otherwise; (d) any damage, destruction or loss, whether or not covered by insurance, which has had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; (e) any waiver by the Company or its Subsidiary of a material right or of a material debt owed to it; (f) any direct or indirect loans made by the Company or its Subsidiary to any stockholder, employee, officer or director of the Company or its Subsidiary, other than advances made in the ordinary course of business or loans which do not, in the aggregate, exceed $50,000; 6 (g) any material change in any compensation arrangement or agreement with any employee, officer, director or shareholder of the Company or its Subsidiary (h) any declaration or payment of any dividend or other distribution of the assets of the Company or its Subsidiary; (i) any labor organization activity related to the Company or its Subsidiary; (j) any debt, obligation or liability incurred, assumed or guaranteed by the Company or its Subsidiary, except those for immaterial amounts and for current liabilities incurred in the ordinary course of business; (k) any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets owned by the Company or its Subsidiary; (l) any change in any material agreement to which the Company or its Subsidiary is a party or by which either the Company or its Subsidiariy is bound which either individually or in the aggregate has had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; (m) any other event or condition of any character that, either individually or in the aggregate, has had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; or (n) any arrangement or commitment by the Company or its Subsidiary to do any of the acts described in subsection (a) through (m) above. 4.9 TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. Except as set forth on Schedule 4.9, in the Company's Exchange Act Filings or in the Financial Statements, each of the Company and its Subsidiary has good and marketable title to its material properties and assets, and good title to its material leasehold estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than: (a) those resulting from taxes which have not yet become delinquent; (b) minor liens and encumbrances which do not materially detract from the value of the property subject thereto or materially impair the operations of the Company or its Subsidiary; and (c) those that have otherwise arisen in the ordinary course of business. All material facilities, machinery, equipment, fixtures, vehicles and other properties owned, leased or used by the Company and its Subsidiary are in good operating condition and repair and are reasonably fit and usable for the purposes for which they are being used, except as would not have a Material Adverse Effect. Except as set forth on Schedule 4.9, the Company and its Subsidiary are in compliance with all material terms of each lease to which it is a party or is otherwise bound except those that would not be reasonably likely to have a Material Adverse Effect. 7 4.10 INTELLECTUAL PROPERTY. (a) , Each of the Company and its Subsidiary owns or possesses sufficient legal rights to use all material patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes described or referred to in the Company's Exchange Act Filings or Financial Statements as necessary for its business as now conducted (the "Intellectual Property"), without any known infringement of the rights of others. Except as disclosed in the Company's Exchange Act Filings, in the Financial Statements, in connection with grants made by the OCS (as defined below) and for licenses granted in the ordinary course of business, there are no outstanding options, licenses or agreements of any kind relating to the foregoing proprietary rights. (b) Neither the Company nor its Subsidiary has received any communications alleging that the Company or its Subsidiary has violated any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity, nor is the Company or its Subsidiary aware of any basis therefor. (c) The Company does not believe it is necessary to utilize any inventions, trade secrets or proprietary information of any of its employees made prior to their employment by the Company or its Subsidiary, except for inventions, trade secrets or proprietary information that have been rightfully assigned to the Company or its Subsidiary. 4.11 COMPLIANCE WITH OTHER INSTRUMENTS. Neither the Company nor its Subsidiary is in violation or default of (x) any term of its Articles or Memorandum of Association, or (y) any material provision of any indebtedness, mortgage, indenture, contract, agreement or instrument to which it is party or by which it is bound or of any judgment, decree, order or writ, which violation or default, in the case of this clause (y), has had, or could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. The execution, delivery and performance of and compliance with this Agreement and the Related Agreements to which it is a party, and the issuance and sale of the Note by the Company and the other Securities by the Company each pursuant hereto and thereto, will not, with or without the passage of time or giving of notice, result in any such material violation, or be in conflict with or constitute a default under any such term or provision, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or its Subsidiary or the suspension, revocation, impairment, forfeiture or nonrenewal of any material permit, license, authorization or approval applicable to the Company, its business or operations or any of its assets or properties, except as would not be reasonably expected to have a Material Adverse Effect. 8 4.12 LITIGATION. Except as set forth on Schedule 4.12 hereto, in the Company's Exchange Act Filings or in the Financial Statements, there is no action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened against the Company or its Subsidiary that prevents the Company or its Subsidiary from entering into this Agreement or the other Related Agreements, or from consummating the transactions contemplated hereby or thereby, or which has had, or could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect or any change in the current equity ownership of the Company or its Subsidiary, nor is the Company aware that there is any basis to assert any of the foregoing. Neither the Company nor its Subsidiary is a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company or its Subsidiary currently pending or which the Company or its Subsidiary intends to initiate. 4.13 TAX RETURNS AND PAYMENTS. Each of the Company and its Subsidiary has timely filed all tax returns required to be filed by it for the periods up to and including December 31, 2001. All taxes shown to be due and payable on such returns, any assessments imposed, and all other taxes due and payable by the Company or its Subsidiary on or before the Closing, have been paid or will be paid prior to the time they become delinquent, except as would not have a Material Adverse Effect. Except as set forth on Schedule 4.13, in the Exchange Act Filings or in the Financial Statements, neither the Company nor its Subsidiary has been advised: (a) that any of its returns have been or are being audited as of the date hereof; or (b) of any deficiency in assessment or proposed judgment to of its taxes. The Company has no knowledge of any liability of any tax to be imposed upon its properties or assets as of the date of this Agreement that is not adequately provided for or which would be reasonably likely to have a Material Adverse Effect. 4.14 EMPLOYEES. Except as set forth on Schedule 4.14, in the Exchange Act Filings, or in the Financial Statements the Company is in compliance with all applicable material laws respecting employment, collective bargaining and wages and hours and have withheld all amounts required by law or by agreement to be withheld from the wages, salaries and other payments to its employees. 4.15 REGISTRATION RIGHTS AND VOTING RIGHTS. Except as set forth on Schedule 4.15 and except as disclosed in the Exchange Act Filings or in the Financial Statements, neither the Company nor its Subsidiary is presently under any obligation, and neither the Company nor its Subsidiary has granted any rights, to register any of the Company's or its Subsidiarys' presently outstanding securities or any of its securities that may hereafter be issued. Except as set forth on Schedule 4.15 and except as disclosed in Exchange Act Filings or in the Financial Statements, to the Company's knowledge, no shareholder of the Company or any of its Subsidiary is party to an existing agreement with respect to the voting of equity securities of the Company or its Subsidiary. 9 4.16 COMPLIANCE WITH LAWS; PERMITS. Neither the Company nor its Subsidiary is in material violation of any applicable statute, rule, regulation, order or restriction of any domestic Israeli or, to the Company's knowledge, foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties which has had, or could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. Except as set forth herein or on Schedule 4.16, no governmental orders, permissions, consents, approvals or authorizations are required to be obtained and no registrations or declarations are required to be filed in connection with the execution and delivery of this Agreement or any other Related Agreement and the issuance of any of the Securities, except such as has been, or shall be on or before the Closing Date, duly and validly obtained or filed or with respect to any filings that must be made after the Closing, as will be filed in a timely manner. Each of the Company and its Subsidiary has all material franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 4.17 ENVIRONMENTAL AND SAFETY LAWS. Neither the Company nor its Subsidiary is in material violation of any applicable Israeli statute, law or regulation relating to the environment or occupational health and safety, and to its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. Except as set forth on Schedule 4.17, no Hazardous Materials (as defined below) are used or have been used, stored, or disposed of by the Company or its Subsidiary or, to the Company's knowledge, by any other person or entity on any property owned, leased or used by the Company or its Subsidiary. For the purposes of the preceding sentence, "Hazardous Materials" shall mean: (a) materials which are listed or otherwise defined as "hazardous" or "toxic" under any applicable Israeli laws and regulations that govern the existence and/or remedy of contamination on property, the protection of the environment from contamination, the control of hazardous wastes, or other activities involving hazardous substances, including building materials; or (b) any petroleum products or nuclear materials. 4.18 VALID OFFERING. Assuming the accuracy of the representations and warranties of the Purchaser contained in this Agreement and in any Related Agreement, the offer, sale and issuance of the Securities will be exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), and will have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws. 4.19 FULL DISCLOSURE. There is no material information relating to the Company or its Subsidiary, which the Company and/or its Subsidiary believe is reasonably necessary for the Purchaser to make its investment decision, which was not previously disclosed to Purchaser, or appears in the Schedules hereto, in the Company's Exchange Act Filings or in the Financial Statements. Neither this Agreement, the Related Agreements, the exhibits and schedules hereto and thereto nor any other document delivered by the Company or its Subsidiary to Purchaser or its attorneys or agents in connection herewith or therewith or with the transactions contemplated hereby or thereby, contain any untrue statement of a material fact nor omit to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances in which they are made, not misleading. 10 4.20 INSURANCE. The Subsidiary has general commercial, product liability, fire and casualty insurance policies with coverages which the Company believes are customary for companies similarly situated to the Subsidiary in the same or similar business. 4.21 SEC FILINGS. Except as set forth on Schedule 4.21, the Company has filed with the Securities and Exchange Commission (the "SEC") all proxy statements, reports and other documents required to be filed by it under the Exchange Act, as a foreign private issuer (collectively, the "SEC Reports"). Except as set forth on Schedule 4.21, each SEC Report was, at the time of its filing, in substantial compliance with the requirements of its respective form and none of the SEC Reports, nor the financial statements (and the notes thereto) included in the SEC Reports, as of their respective filing dates, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 4.22 LISTING. The Company's Ordinary Shares are listed for trading on the NASDAQ National Market ("NASDAQ") and the Tel-Aviv Stock Exchange ("TASE") and satisfy all requirements for the continuation of such listing. Except as disclosed in the Company's Exchange Act Filings or in the Financial Statements, the Company has not received any notice that its Ordinary Shares will be delisted from NASDAQ or that its Ordinary Shares does not meet all requirements for listing. 4.23 NO INTEGRATED OFFERING. Neither the Company, nor its Subsidiary or affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would cause the offering of the Securities pursuant to this Agreement or any of the Related Agreements to be integrated with prior offerings by the Company for purposes of the Securities Act such that would subject the offering, issuance and sale of the Securities hereunder to the registration requirements of Section 5 of the Securities Act, or any applicable exchange-related stockholder approval provisions, nor will the Company or any of its affiliates or its Subsidiary take any action or steps that would cause the offering of the Securities to be integrated with other offerings. 4.24 STOP TRANSFER. The Securities are restricted securities as of the date of this Agreement. Neither the Company nor its Subsidiary will issue any stop transfer order or other order impeding the sale and delivery of any of the Securities at such time as the Securities are registered for public sale or an exemption from registration is available, except as required by state and federal or Israeli securities laws, by NASDAQ or by TASE. 4.25 DILUTION. The Company specifically acknowledges that its obligation to issue the Ordinary Shares upon conversion of the Note and exercise of the Warrant is binding upon the Company and enforceable regardless of the dilution such issuance may have on the OWNERSHIP interests of other shareholders of the Company. 4.26 The Company is entitled to certain tax benefits, based on its status as an Approved Enterprise under the Law for the Encouragement of Capital Investments 5744-1984. The Company has not received any notice that it has not complied, in all material respects, with the terms and provisions of its Approved Enterprise status and applicable laws and regulations in order to retain its status as an Approved Enterprise. 11 4.27 The Company has received grants in support of its research and development through the Office of the Chief Scientist of the Ministry of Industry and Trade of the State of Israel (the "OCS") as listed in SCHEDULE 4.27 hereto, in the Exchange Act Filings or in the Financial Statements (the "GRANTS"). The Company has not received any notice that it is not in compliance, in all material respects, with the terms and conditions of the Grants, or that is has not duly fulfilled, in all material respects, all the undertakings relating thereto. The Company is not aware of any event or other set of circumstances which might lead to the revocation or material modification of any of the Grants. 4.28 PATRIOT ACT. The Company certifies that, to the best of Company's knowledge, neither the Company nor its Subsidiary has been designated, and is not owned or controlled, by a "suspected terrorist" as defined in Executive Order 13224. The Company hereby acknowledges that the Purchaser seeks to comply with all applicable laws concerning money laundering and related activities. In furtherance of those efforts, the Company hereby represents, warrants and agrees that: (i) none of the cash or property that the Company or its Subsidiary will pay or will contribute to the Purchaser has been or shall be derived from, or related to, any activity that is deemed criminal under United States law; and (ii) no contribution or payment by the Company or its Subsidiary to the Purchaser, to the extent that they are within the Company's and/or its Subsidiary's control shall cause the Purchaser to be in violation of the United States Bank Secrecy Act, the United States International Money Laundering Control Act of 1986 or the United States International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. The Company shall promptly notify the Purchaser if any of these representations ceases to be true and accurate regarding the Company or its Subsidiary. The Company agrees to provide the Purchaser any additional information regarding the Company or its Subsidiary that the Purchaser reasonably deems necessary or convenient to ensure compliance with all applicable laws concerning money laundering and similar activities. The Company understands and agrees that if at any time it is discovered that any of the foregoing representations are incorrect, or if otherwise required by applicable law or regulation related to money laundering similar activities, the Purchaser may undertake appropriate actions to ensure compliance with applicable law or regulation, including but not limited to segregation and/or redemption of the Purchaser's investment in the Company. The Company further understands that the Purchaser, if required by applicable law, may release confidential information about the Company and its Subsidiary and, if applicable, any underlying beneficial owners, to proper authorities if the Purchaser, in its sole discretion, determines that it is in the best interests of the Purchaser in light of relevant rules and regulations under the laws set forth in subsection (ii) above. 5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser hereby represents and warrants to the Company as follows (such representations and warranties do not lessen or obviate the representations and warranties of the Company set forth in this Agreement): 5.1 NO SHORTING. The Purchaser or any of its affiliates and investment partners has not, will not and will not cause any person or entity, directly or indirectly, to engage in "short sales" of the Company's Ordinary Shares or any other hedging strategies as long as the Note shall be outstanding. This Section 5.1 shall survive the Closing of the transactions contemplated hereby. 12 5.2 REQUISITE POWER AND AUTHORITY. The Purchaser is duly organized, validly existing and in good standing under the laws of the country of its formation and has all necessary power and authority under all applicable provisions of law to execute and deliver this Agreement and the Related Agreements and to carry out their provisions. All corporate action on Purchaser's part required for the lawful execution and delivery of this Agreement and the Related Agreements have been or will be effectively taken prior to the Closing. Upon their execution and delivery, this Agreement and the Related Agreements will be valid and binding obligations of Purchaser, enforceable in accordance with their terms, except: (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights; and (b) as limited by general principles of equity that restrict the availability of equitable and legal remedies. 5.3 INVESTMENT REPRESENTATIONS. Purchaser understands that the Securities are being offered and sold pursuant to an exemption or exemptions from registration requirements of Israeli and US Federal and state securities laws and that the Company is relying upon the truth and accuracy of Purchaser's representations contained in the Agreement, including, without limitation, that the Purchaser is an "accredited investor" within the meaning of Regulation D under the Securities Act . The Purchaser confirms that it has received or has had full access to all the information it considers necessary or appropriate to make an informed investment decision with respect to the Note and the Warrant to be purchased by it under this Agreement and the Note Shares and the Warrant Shares acquired by it upon the conversion of the Note and the exercise of the Warrant, respectively. The Purchaser further confirms that it has had an opportunity to ask questions and receive answers from the Company regarding the Company's and its Subsidiary's business, management and financial affairs and the terms and conditions of the Offering, the Note, the Warrant and the Securities and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify any information furnished to the Purchaser or to which the Purchaser had access. 5.4 PURCHASER BEARS ECONOMIC RISK. The Purchaser has substantial experience in evaluating and investing in private placement transactions of securities in companies similar to the Company so that it is capable of evaluating the merits and risks of its investment in the Company and has the capacity to protect its own interests. The Purchaser must bear the economic risk of this investment until the Securities are sold pursuant to: (i) an effective registration statement under the Securities Act; or (ii) an exemption from registration is available with respect to such sale. 13 5.5 ACQUISITION FOR OWN ACCOUNT. The Purchaser is acquiring the Note and Warrant and the Note Shares and the Warrant Shares for the Purchaser's own account for investment only, and not as a nominee or agent and not with a view towards or for resale in connection with their distribution. Purchaser has not offered the Securities for sale by any means of general solicitation or general advertising including, but no limited to, any advertisements, articles, notices or other communications published in any newspaper, magazine, or similar medium or broadcast over television or radio, or any seminar or meeting whose attendees were invited by any general solicitation or general advertising. 5.6 PURCHASER CAN PROTECT ITS INTEREST. The Purchaser represents that by reason of its, or of its management's, business and financial experience, the Purchaser has the capacity to evaluate the merits and risks of its investment in the Note, the Warrant and the Securities and to protect its own interests in connection with the transactions contemplated in this Agreement and the other Related Agreements. Further, Purchaser is aware of no publication of any advertisement in connection with the transactions contemplated in the Agreement or the Related Agreements. 5.7 ACCREDITED INVESTOR. Purchaser represents that it is an "accredited investor" within the meaning of Regulation D under the Securities Act. 5.8 LEGENDS. (a) The Note shall bear substantially the following legend: "THIS NOTE AND THE ORDINARY SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS. THIS NOTE AND THE ORDINARY SHARES ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE OR SUCH SHARES UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO B.O.S. BETTER ON-LINE SOLUTIONS LTD. THAT SUCH REGISTRATION IS NOT REQUIRED." (b) The Note Shares and the Warrant Shares, if not issued by DWAC system (as hereinafter defined), shall bear a legend which shall be in substantially the following form until such shares are covered by an effective registration statement filed with the SEC: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THESE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT TO THE SHARES EVIDENCED BY THIS CERTIFICATE, FILED AND MADE EFFECTIVE UNDER THE SECURITIES ACT AND APPLICABLE STATE LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO B.O.S. BETTER ON-LINE SOLUTIONS LTD. THAT SUCH REGISTRATION IS NOT REQUIRED." 14 (c) The Warrant shall bear substantially the following legend: "THIS WARRANT AND THE ORDINARY SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND THE ORDINARY SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR THE UNDERLYING ORDINARY SHARES UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO B.O.S. BETTER ON-LINE SOLUTIONS LTD. THAT SUCH REGISTRATION IS NOT REQUIRED." 5.9 CONTROL OVER THE PURCHASER. The Purchaser has made available to the Company a complete and detailed list of individuals who have or share voting and/or investment control over the Purchaser. Purchaser acknowledges that such information shall be provided by the Company to the OCS and the Investment Center of the Ministry of Industry, Trade and Labor of the State of Israel (the "Investment Center"), whose approval of the transactions contemplated hereby is a condition to the Company's obligations hereunder. Purchaser shall update such list as reasonably requested by the Company, to comply with any request for such information from any regulatory body, including, without limitation the OCS and the Investment Center. This Section 5.9 shall survive the Closing of the transactions contemplated hereby. 6. COVENANTS OF THE COMPANY. Until irrevocable payment in full by the Company (Subject to Section 6.12) of all amounts due to Purchaser under the Note and the Related Agreements, the Company covenants and agrees with the Purchaser as follows: 6.1 STOP-ORDERS. The Company will advise the Purchaser, promptly after it receives notice of issuance by the SEC, any state securities commission or any other regulatory authority of any stop order or of any order preventing or suspending any offering of any securities of the Company, or of the suspension of the qualification of the Ordinary Shares of the Company for offering or sale in any jurisdiction, or the initiation of any proceeding for any such purpose. 15 6.2 LISTING. The Company shall promptly secure the listing of the Ordinary Shares issuable upon conversion of the Note and upon the exercise of the Warrant on the NASDAQ National Market or on any other market upon which the Company's Ordinary Shares are then listed (the "Principal Market") (subject to official notice of issuance) and shall maintain such listing so long as any other Ordinary Shares shall be so listed. Except with respect to the listing on the Tel-Aviv Stock Exchange, the Company will maintain the listing of its Ordinary Shares on the Principal Market, and will comply in all material respects with the Company's reporting, filing and other obligations under the bylaws or rules of the National Association of Securities Dealers ("NASD") and such exchanges, as applicable. 6.3 MARKET REGULATIONS. The Company shall notify the SEC, NASD, the Israeli Securities Authority and the Tel-Aviv Stock Exchange and applicable state authorities, in accordance with their requirements, of the transactions contemplated by this Agreement, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Securities to the Purchaser. 6.4 REPORTING REQUIREMENTS. The Company will timely file with the SEC all reports required to be filed pursuant to the Exchange Act by foreign private issuers and refrain from terminating its status as an issuer required by the Exchange Act to file reports thereunder even if the Exchange Act or the rules or regulations thereunder would permit such termination. 6.5 USE OF FUNDS. The Company agrees that it will use the proceeds of the sale of the Note and the Warrant for general working capital purposes, and/or mergers and acquisitions only. 6.6 ACCESS TO FACILITIES Each of the Company and its Subsidiary will permit any representatives designated by the Purchaser (or any successor of the Purchaser), upon reasonable notice and during normal business hours, at such person's expense and accompanied by a representative of the Company, to: (a) visit and inspect any of the properties of the Company or its Subsidiary; (b) examine the corporate and financial records of the Company or any of its Subsidiary (unless such examination is not permitted by federal, state or local law or by contract) and make copies thereof or extracts therefrom; and (c) discuss the affairs, finances and accounts of the Company or its Subsidiary with the directors, officers and independent accountants of the Company or its Subsidiary. Notwithstanding the foregoing, neither the Company nor its Subsidiary will provide any material, non-public information to the Purchaser unless the Purchaser signs a confidentiality agreement and otherwise complies with Regulation FD, under the federal securities laws 6.7 TAXES. Each of the Company and its Subsidiary will promptly pay and discharge, or cause to be paid and discharged, when due and payable, all lawful taxes, assessments and governmental charges or levies imposed upon the income, profits, property or business of the Company and its Subsidiary; provided, however, that any such tax, assessment, charge or levy need not be paid if the validity thereof shall currently be contested in good faith by appropriate proceedings and if the Company and/or such Subsidiary shall have set aside on its books adequate reserves with respect thereto, and provided, further, that the Company and its Subsidiary will pay all such taxes, assessments, charges or levies forthwith upon the commencement of proceedings to foreclose any lien which may have attached as security therefor 16 6.8 INSURANCE. Each of the Company and its Subsidiary will keep its assets which are of an insurable character insured by financially sound and reputable insurers against loss or damage by fire, explosion and other risks customarily insured against by companies in similar business similarly situated as the Company and its Subsidiary; and the Subsidiary will maintain, with financially sound and reputable insurers, insurance against other hazards and risks and liability to persons and property to the extent and in the manner which the Company reasonably believes is customary for companies in similar business similarly situated as the Company and its Subsidiary and to the extent available on commercially reasonable terms. The Company will bear the full risk of loss from any loss of any nature whatsoever with respect to the assets pledged to the Purchaser as security for its obligations hereunder and under the Related Agreements. At the Company's and its Subsidiary's cost and expense in amounts and with carriers reasonably acceptable to Purchaser, the Company and its Subsidiary shall (i) keep its material properties insured against the hazards of fire, flood and such other hazards that are included in "Extended Fire" insurance, for such properties' full value; (ii) maintain Third Party Liability insurance against claims for personal injury, death or property damage suffered by others with the limit of liability of_NIS 5 Million per occurrence and in the aggregate; (iii) maintain Employers' Liability Insurance with the limit of liability of $5 Million per occurrence and in the aggregate; and (iv) furnish Purchaser with (x) a certificate evidencing the maintenance of such insurance coverage at least thirty (30) days before any expiration date, (y) excepting the Employer's Liability Insurance, endorsements to such policies naming Purchaser as "co-insured" or "additional insured" , and (z) evidence that as to Purchaser the insurance coverage shall not be impaired or invalidated by the insurer and the insurer will provide Purchaser with at least thirty (30) days notice prior to cancellation. The Company and the Subsidiary shall instruct the insurance carriers that in the event of any loss thereunder in excess of $50,000 in the aggregate, upon the occurrence and during the continuance of an Event of Default beyond any applicable cure period and until such Event of Default is cured, or waived by the Purchaser in its sole discretion, the carriers shall make payment for such loss to the Company and/or the Subsidiary and Purchaser jointly. In the event that as of the date of receipt of each loss recovery upon any such insurance, the Purchaser has not declared an Event of Default with respect to this Agreement or any of the Related Agreements, then the Company and/or such Subsidiary shall be permitted to direct the application of such loss recovery proceeds toward investment in property, plant and equipment that would comprise "Pledgor Collateral" secured by Purchaser's security interest pursuant to its security agreement, with any surplus funds to be applied toward payment of the obligations of the Company to Purchaser. In the event that Purchaser has properly declared an event of default with respect to this Agreement or any of the Related Agreements, then all loss recoveries received by Purchaser upon any such insurance thereafter may be applied to the obligations of the Company hereunder and under the Related Agreements, in such order as the Purchaser may determine. Any surplus (following satisfaction of all Company obligations to Purchaser) shall be paid by Purchaser to the Company or applied as may be otherwise required by law. Any deficiency thereon shall be paid by the Company or the Subsidiary, as applicable, to Purchaser, on demand. 17 6.9 INTELLECTUAL PROPERTY. Each of the Company and its Subsidiary shall maintain in full force and effect its existence, rights and franchises and all licenses and other rights to use Intellectual Property owned or possessed by it and reasonably deemed to be necessary to the conduct of its business. 6.10 PROPERTIES. Each of the Company and its Subsidiary will keep its material properties in good repair, working order and condition, reasonable wear and tear excepted, and from time to time make all needful and proper repairs, renewals, replacements, additions and improvements thereto, except as would not have a Material Adverse Effect; and each of the Company and its Subsidiary will at all times comply with each provision of all leases to which it is a party or under which it occupies property if the breach of such provision could, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 6.11 CONFIDENTIALITY The Company agrees that it will not disclose, and will not include in any public announcement, the name of the Purchaser, unless expressly agreed to by the Purchaser or unless and until such disclosure is required by law or applicable regulation, and then only to the extent of such requirement. Notwithstanding the foregoing, the Company may disclose Purchaser's identity and the terms of this Agreement to its current and prospective debt and equity financing sources. 6.12 REQUIRED APPROVALS. For so long as twenty-five percent (25%) of the principal amount of the Note is outstanding, the Company, without the prior written consent of the Purchaser, shall not: (a) directly or indirectly declare or pay any dividends, other than dividends paid to the Company or any of its wholly-owned subsidiaries; (b) liquidate, dissolve or effect a material reorganization provided, however, that the Company may merge or effect a material reorganization if the Company is the surviving entity; (c) become subject to (including, without limitation, by way of amendment to or modification of) any agreement or instrument which by its terms would (under any circumstances) restrict the Company's or its Subsidiary's right to perform the provisions of this Agreement, any other Related Agreement or any of the agreements contemplated hereby or thereby; (d) (i) create, incur, assume or suffer to exist any indebtedness (exclusive of trade debt and debt incurred to finance the purchase of equipment (not in excess of ten percent (10%) per annum of the fair market value of the Company's assets) whether secured or unsecured other than (x) the Company's indebtedness to the Purchaser, (y) indebtedness set forth on SCHEDULE 6.12(D) attached hereto and made a part hereof and any refinancings or replacements thereof on terms no less favorable to the Company than the indebtedness being refinanced or replaced, and (z) any debt incurred in connection with the purchase of assets, or any refinancings or replacements thereof on terms no less favorable to the Company than the indebtedness being refinanced or replaced; (ii) cancel any debt owing to it in excess of $500,000 in the aggregate during any 12 month period; (iii) assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any obligations of any other person, except the endorsement of negotiable instruments by the Company for deposit or collection or similar transactions in the ordinary course of business or guarantees of indebtedness of the Company's subsidiaries or otherwise permitted to be outstanding pursuant to this clause (d); and 18 (e) create or acquire any subsidiary after the date hereof unless (i) such subsidiary is a wholly-owned subsidiary of the Company or (ii) such Subsidiary becomes party to the Master Security Agreement (either by executing a counterpart thereof or an assumption or joinder agreement in respect thereof) and, to the extent required by the Purchaser, satisfies each condition of this Agreement and the other Related Agreements as if such subsidiary was a subsidiary on the Closing Date. 6.13 REISSUANCE OF SECURITIES. The Company agrees to reissue certificates representing the Securities without the legends set forth in Section 5.7 above at such time as: (a) the holder thereof is permitted to dispose of such Securities pursuant to Rule 144(k) under the Securities Act; or (b) upon resale subject to an effective registration statement after such Securities are registered under the Securities Act. The Company agrees to cooperate with the Purchaser in connection with all resales pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions necessary to allow such resales provided the Company and its counsel receive reasonably requested representations from the selling Purchaser and broker, if any. 6.14 OPINIONS. On the Closing Date, the Company will deliver to the Purchaser opinions acceptable to the Purchaser substantially in the forms of Exhibits C1 and C2 hereto, from the Company's external legal counsels. The Company will provide, at the Company's expense, such other legal opinions to be issued in connection with sales effected under Rule 144 of the Securities Act, or in connection with a request by or on behalf of the Company's Transfer Agent in the future as are deemed reasonably necessary by the Purchaser (and acceptable to the Purchaser) in connection with the conversion of the Note and exercise of the Warrant. 6.15 On or prior to the Closing Date the Company will execute and deliver to the Purchaser the Related Agreements signed by the Company and its Subsidiary (if required) and any debentures attached thereto. 6.16 On or prior to the Closing Date, the Company will execute and deliver to the Purchaser a confirmation by the board of directors of the Company according to section 282 of the Companies Law - 1999, together with a copy of resolutions by the Company's Board of Directors, authorizing the execution and performance of this Agreement, the Related Agreements and the transactions contemplated hereby and thereby. 19 6.17 The Company will at all times have authorized and reserved a sufficient number of Ordinary Shares for the full conversion of the Note and exercise of the Warrants. 7. COVENANTS OF THE PURCHASER. The Purchaser covenants and agrees with the Company as follows: 7.1 CONFIDENTIALITY. The Purchaser agrees that it will not disclose, and will not include in any public announcement, the name of the Company, unless expressly agreed to by the Company or unless and until such disclosure is required by law or applicable regulation, and then only to the extent of such requirement. 7.2 NON-PUBLIC INFORMATION. The Purchaser agrees not to effect any sales in the Company's Ordinary Shares while in possession of material, non-public information regarding the Company if such sales would violate applicable securities law. This Section 7 shall survive the Closing of the transactions contemplated hereby. 8. COVENANTS OF THE COMPANY AND PURCHASER REGARDING INDEMNIFICATION. 8.1 COMPANY INDEMNIFICATION. The Company agrees to indemnify, hold harmless, reimburse and defend the Purchaser, each of the Purchaser's officers, directors, agents, affiliates, control persons, and principal shareholders, against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the Purchaser which results, arises out of or is based upon: (i) any misrepresentation by the Company or its Subsidiary or breach of any warranty by the Company or its Subsidiary in this Agreement, any other Related Agreement or in any exhibits or schedules attached hereto or thereto; or (ii) any breach or default in performance by Company or its Subsidiary of any covenant or undertaking to be performed by Company or its Subsidiary hereunder, under any other Related Agreement or any other agreement entered into by the Company and Purchaser relating hereto or thereto. Nothing herein shall be deemed to expand the Subsidiary's liability hereunder or under any Related Agreement, beyond its liability in connection with the representations and warranties made by the Subsidiary hereunder. 8.2 PURCHASER'S INDEMNIFICATION. Purchaser agrees to indemnify, hold harmless, reimburse and defend the Company and each of the Company's officers, directors, agents, affiliates, control persons and principal shareholders, at all times against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the Company which results, arises out of or is based upon: (i) any misrepresentation by Purchaser or breach of any warranty by Purchaser in this Agreement or in any exhibits or schedules attached hereto or any Related Agreement; or (ii) any breach or default in performance by Purchaser of any covenant or undertaking to be performed by Purchaser hereunder, or under any other Related Agreement. 20 9. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT THE CLOSING. The obligations of the Company to issue the Note and the Warrant to the Investors at the Closing is subject to the fulfillment (or waiver by the Company) prior to or on the Closing Date of the conditions set forth below. In the event that any such condition is not met to the satisfaction of the Company, then the Company shall not be obligated to proceed with the transactions contemplated hereunder and in the Related Agreements, and shall not be subject to any liability hereunder or thereunder. 9.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Purchaser under this Agreement and the related Agreements shall be true in all material respects as of the Closing Date, with the same effect as though made on and as of such date. 9.2 COMPLIANCE WITH AGREEMENTS. Purchaser shall have performed and complied in all respects with all agreements or conditions required by this Agreement and the Related Agreements to be performed and complied with by it prior to or as of the Closing Date. 9.3 NO INJUNCTION. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction, which prohibits the consummation of any of the transactions contemplated by this Agreement and the Related Agreements. 9.4 DELIVERY OF PURCHASE AMOUNT. The Purchaser shall have delivered to the Company the Purchase Amount on or before the Closing Date. 9.5 GOVERNMENT APPROVALS. The Company shall have received all necessary approvals by the OCS and the Investment Center with respect to the transactions contemplated hereby and by the Related Agreements. The Purchaser shall have executed any confirmations required by the OCS and/or the Investment Center for the grant of such approvals. 9.6 NOTICES TO NASDAQ THE TASE AND THE ISA. The Company shall have made all required filings of notices with NASDAQ, the Tel Aviv Stock Exchange and the Israel Securities Authority and has received no notice adversely effecting the performance of the transactions contemplated hereunder and in the Related Agreements. The Company shall use its commercially reasonable efforts to complete such filings. 21 10. CONVERSION OF CONVERTIBLE NOTE. 10.1 MECHANICS OF CONVERSION. (a) Provided the Purchaser has notified the Company of the Purchaser's intention to sell the Note Shares and the Note Shares are included in an effective registration statement or are otherwise exempt from registration when sold: (i) upon the conversion of the Note or part thereof, the Company shall, at its own cost and expense, take all necessary action (including the issuance of an opinion of counsel reasonably acceptable to the Purchaser following a request by the Purchaser) to assure that the Company's transfer agent shall issue the Company's Ordinary Shares in the name of the Purchaser (or its nominee) or such other persons as designated by the Purchaser in accordance with Section 10.1(b) hereof and in such denominations to be specified representing the number of Note Shares issuable upon such conversion; and (ii) the Company warrants that no instructions other than these instructions have been or will be given to the transfer agent of the Company's Ordinary Shares and that after the Effectiveness Date (as defined in the Registration Rights Agreement) the Note Shares issued will be freely transferable subject to the prospectus delivery requirements of the Securities Act and the provisions of this Agreement, and will not contain a legend restricting the resale or transferability of the Note Shares. (b) Purchaser will give notice of its decision to exercise its right to convert the Note or part thereof by telecopying or otherwise delivering an executed and completed notice including a breakdown in reasonable detail of the Principal Amount and accrued interest being converted (the "Notice of Conversion") all as more fully provided in the Note. The Purchaser will not be required to surrender the Note until the Purchaser receives a credit to the account of the Purchaser's prime broker through the DWAC system (as defined below), representing the Note Shares or until the Note has been fully satisfied. Each date on which a Notice of Conversion is telecopied or delivered to the Company in accordance with the provisions hereof shall be deemed a "Conversion Date." Pursuant to the terms of the Notice of Conversion, the Borrower will issue instructions to the transfer agent accompanied by an opinion of counsel within one (1) business day of the date of the delivery to Borrower of the Notice of Conversion and shall cause the transfer agent to transmit the certificates representing the Conversion Shares to the Holder by crediting the account of the Purchaser's prime broker with the Depository Trust Company ("DTC") through its Deposit Withdrawal Agent Commission ("DWAC") system within three (3) business days after receipt by the Company of the Notice of Conversion (the "Delivery Date") (c) The Company understands that a delay in the delivery of the Note Shares in the form required pursuant to Section 10 hereof beyond the Delivery Date could result in economic loss to the Purchaser. In the event that the Company fails to direct its transfer agent to deliver the Note Shares to the Purchaser via the DWAC system within the time frame set forth in Section 10.1(b) above and the Note Shares are not delivered to the Purchaser by the Delivery Date, as compensation to the Purchaser for such loss, the Company agrees to pay late payments to the Purchaser for late issuance of the Note Shares in the form required pursuant to Section hereof upon conversion of the Note in the amount equal to the greater of: (i) $500 per business day after the Delivery Date; or (ii) the Purchaser's actual damages from such delayed delivery. Notwithstanding the foregoing, the Company will not owe the Purchaser any late payments if the delay in the delivery of the Note Shares beyond the Delivery Date is solely out of the control of the Company and the Company is actively trying to cure the cause of the delay. The Company shall pay any payments incurred under this Section in immediately available funds upon demand and, in the case of actual damages, accompanied by reasonable documentation of the amount of such damages. Such documentation shall show the number of Ordinary Shares the Purchaser is forced to purchase (in an open market transaction) which the Purchaser anticipated receiving upon such conversion, and shall be calculated as the amount by which (A) the Purchaser's total purchase price (including customary brokerage commissions, if any) for the Ordinary Shares so purchased exceeds (B) the aggregate principal and/or interest amount of the Note, for which such Conversion Notice was not timely honored. 22 10.2 Nothing contained herein or in any document referred to herein or delivered in connection herewith shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum permitted by applicable law. In the event that the rate of interest or dividends required to be paid or other charges hereunder exceed the maximum amount permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by the Company to the Purchaser and thus refunded to the Company. 11. REGISTRATION RIGHTS, OFFERING RESTRICTIONS. 11.1 REGISTRATION RIGHTS GRANTED. The Company hereby grants registration rights to the Purchaser pursuant to a Registration Rights Agreement dated as of even date herewith between the Company and the Purchaser. 11.2 OFFERING RESTRICTIONS. Except as previously disclosed in the SEC Reports, in the Exchange Act Filings, in the Financial Statements, or stock or stock options granted to employees or directors of the Company (these exceptions hereinafter referred to as the "Excepted Issuances"), neither the Company nor its Subsidiary will issue any securities with a continuously variable/floating conversion feature which are or could be (by conversion or registration) free-trading securities (i.e. Ordinary Shares subject to a registration statement) prior to the full repayment or conversion of the Note (together with all accrued and unpaid interest and fees related thereto) (the "Exclusion Period"). 12. MISCELLANEOUS. 12.1 GOVERNING LAW. THIS AGREEMENT AND EACH RELATED AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. ANY ACTION BROUGHT BY EITHER PARTY AGAINST THE OTHER CONCERNING THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT SHALL BE BROUGHT ONLY IN THE STATE COURTS OF NEW YORK OR IN THE FEDERAL COURTS LOCATED IN THE STATE OF NEW YORK. BOTH PARTIES AND THE INDIVIDUALS EXECUTING THIS AGREEMENT AND THE OTHER RELATED AGREEMENTS ON BEHALF OF THE COMPANY AGREE TO SUBMIT TO THE JURISDICTION OF SUCH COURTS AND WAIVE TRIAL BY JURY. IN THE EVENT THAT ANY PROVISION OF THIS AGREEMENT OR ANY OTHER RELATED AGREEMENT DELIVERED IN CONNECTION HEREWITH IS INVALID OR UNENFORCEABLE UNDER ANY APPLICABLE STATUTE OR RULE OF LAW, THEN SUCH PROVISION SHALL BE DEEMED INOPERATIVE TO THE EXTENT THAT IT MAY CONFLICT THEREWITH AND SHALL BE DEEMED MODIFIED TO CONFORM WITH SUCH STATUTE OR RULE OF LAW. ANY SUCH PROVISION WHICH MAY PROVE INVALID OR UNENFORCEABLE UNDER ANY LAW SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF ANY OTHER PROVISION OF ANY AGREEMENT. 23 12.2 SURVIVAL. The representations, warranties, covenants and agreements made herein shall survive any investigation made by the Purchaser and the closing of the transactions contemplated hereby to the extent provided therein. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of either party pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by such party hereunder solely as of the date of such certificate or instrument. 12.3 SUCCESSORS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, heirs, executors and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of the Securities from time to time, other than the holders of Ordinary Shares which have been sold by the Purchaser pursuant to Rule 144 or an effective registration statement. Purchaser may not assign its rights hereunder to a competitor of the Company or its Subsidiary. 12.4 ENTIRE AGREEMENT. This Agreement, the Related Agreements, the exhibits and schedules hereto and thereto and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 12.5 SEVERABILITY. In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 12.6 AMENDMENT AND WAIVER. (a) This Agreement may be amended or modified only upon the written consent of the Company and the Purchaser or their respective successors. (b) The obligations of the Company and the rights of the Purchaser under this Agreement may be waived only with the written consent of the Purchaser or its successors. (c) The obligations of the Purchaser and the rights of the Company under this Agreement may be waived only with the written consent of the Company or its successors. 12.7 DELAYS OR OMISSIONS. It is agreed that no delay or omission to exercise any right, power or remedy accruing to any party, upon any breach, default or noncompliance by another party under this Agreement or the Related Agreements, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of or in any similar breach, default or noncompliance thereafter occurring. All remedies, either under this Agreement or the Related Agreements, by law or otherwise afforded to any party, shall be cumulative and not alternative. 24 12.8 NOTICES. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) when sent by confirmed facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (c) three (3) business days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent as follows:
IF TO THE PURCHASER, TO: B.O.S. Better On-Line Solutions Ltd. Beit Rabin, 100 BOS Road, Teradyon Industrial Park, Misgav 20179, Israel Attention: Chief Financial Officer Facsimile: (972) 4 999-0334 WITH A COPY TO: Amit, Pollak, Matalon & Ben-Naftali, Erez & Co.NYP Tower, 17 Yitzhak Sadeh Street, 19th Floor Tel Aviv 67775 Attention: Shlomo Landress, Esq. Facsimile: (972) 3 561-3620 IF TO THE COMPANY, TO: Laurus Master Fund, Ltd. c/o Ironshore Corporate Services ltd. P.O. Box 1234 G.T. Queensgate House, South Church Street Grand Cayman, Cayman Islands Facsimile: 345-949-9877
25
WITH A COPY TO: John E. Tucker, Esq. 825 Third Avenue 14th Floor New York, NY 10022 Facsimile: 212-541-4434
or at such other address as the Company or the Purchaser may designate by written notice to the other parties hereto given in accordance herewith. 12.9 ATTORNEYS' FEES. In the event that any suit or action is instituted to enforce any provision in this Agreement, the prevailing party in such dispute shall be entitled to recover from the losing party all reasonable and actually incurred fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including, without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 12.10 TITLES AND SUBTITLES. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 12.11 FACSIMILE SIGNATURES; COUNTERPARTS. This Agreement may be executed by facsimile signatures and in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 12.12 BROKER'S FEES, STAMP TAXES. Except as set forth on Schedule 12.12 hereof, each party hereto represents and warrants that no agent, broker, investment banker, person or firm acting on behalf of or under the authority of such party hereto is or will be entitled to any broker's or finder's fee or any other commission directly or indirectly in connection with the transactions contemplated herein. Each party hereto further agrees to indemnify each other party for any claims, losses or expenses incurred by such other party as a result of the representation in this Section 12.12 being untrue. The Company shall bear all stamp taxes required to be paid in connection with this Agreement, the Note and/or the Warrant. 12.13 CONSTRUCTION. Each party acknowledges that its legal counsel participated in the preparation of this Agreement and the Related Agreements and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Agreement to favor any party against the other. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK 26 IN WITNESS WHEREOF, the parties hereto have executed the SECURITIES PURCHASE AGREEMENT as of the date set forth in the first paragraph hereof. COMPANY: PURCHASER: B.O.S. BETTER ON-LINE SOLUTIONS LTD. LAURUS MASTER FUND, LTD. By: By: ----------------------- ----------------------- Name: Name: ----------------------- ----------------------- Title: Title: ----------------------- ----------------------- BOSCOM, LTD. By: ----------------------- Name: ----------------------- Title: ----------------------- 27 EXHIBIT A FORM OF CONVERTIBLE NOTE [omitted] A-1 EXHIBIT B FORM OF WARRANT [omitted] B-1 EXHIBITS C1-C2 OPINIONS [omitted] C-1 EXHIBIT D FORM OF ESCROW AGREEMENT [omitted] D-2 THIS NOTE AND THE ORDINARY SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS NOTE AND THE ORDINARY SHARES ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO B.O.S. BETTER ON-LINE SOLUTIONS LTD. THAT SUCH REGISTRATION IS NOT REQUIRED. SECURED CONVERTIBLE TERM NOTE FOR VALUE RECEIVED, B.O.S. BETTER ON-LINE SOLUTIONS LTD., a corporation incorporated under the laws of the State of Israel (the "BORROWER"), hereby promises to pay to LAURUS MASTER FUND, LTD. a Cayman Islands company c/o Ironshore Corporate Services Ltd., P.O. Box 1234 G.T., Queensgate House, South Church Street, Grand Cayman, Cayman Islands, Fax: 345-949-9877 (the "HOLDER") or its registered assigns or successors in interest, on order, the sum of Two Million United States Dollars ($2,000,000), together with any accrued and unpaid interest hereon, on June 10, 2007 (the "MATURITY DATE") if not sooner paid. Capitalized terms used herein without definition shall have the meanings ascribed to such terms in that certain Securities Purchase Agreement dated as of the date hereof between the Borrower and the Holder (the "PURCHASE AGREEMENT"). The following terms shall apply to this Note: ARTICLE I INTEREST & AMORTIZATION 1.1(a) INTEREST RATE. Subject to Section 4.11 and 5.6 hereof, interest payable on this Note shall accrue at a rate per annum (the "Interest Rate") equal to the "prime rate" published in THE WALL STREET JOURNAL from time to time, plus three percent (3.0%). The Interest Rate shall be increased or decreased as the case may be for each increase or decrease in the prime rate in an amount equal to such increase or decrease in the prime rate; each change to be effective as of the day of the change in such rate and also subject to Section 1.1(b) hereof. In no event, however, shall the Interest Rate be less than zero percent (0.00%). Interest shall be (i) calculated on the basis of a 360 day year, (ii) payable monthly, in arrears, commencing on September 1, 2004 and on the first business day of each consecutive calendar month thereafter until the Maturity Date (and on the Maturity Date), whether by acceleration or otherwise (each, a "REPAYMENT DATE"). 1.1 (b) INTEREST RATE ADJUSTMENT. The Interest Rate shall be calculated on the last business day of each month hereafter until the Maturity Date (each a "DETERMINATION DATE") and be subject to adjustment. If (i) the Borrower shall have registered the Borrower's Ordinary Shares underlying the conversion of the Note and that certain warrant issued to the Holder (the "Warrant") on a registration statement declared effective by the SEC, and (ii) the average closing price of the Ordinary Shares as reported by Bloomberg, L.P. on the Principal Market (as defined below) for any five ((5) consecutive trading days during the fifteen (15) days immediately preceding a Determination Date, exceeds the then applicable Fixed Conversion Price, then the Interest Rate for the succeeding calendar month shall automatically be reduced by 200 basis points (2.0%) for each incremental twenty five percent (25%) increase in the market price of the Ordinary Shares above the then applicable Fixed Conversion Price. If (i) the Borrower shall not have registered the Borrower's Ordinary Shares underlying the conversion of the Note and the Warrant on a registration statement declared effective by the SEC, and (ii) the average closing price of the Ordinary Shares as reported by Bloomberg, L.P. on the Principal Market (below) for any five (5) consecutive trading days during the fifteen (15) days immediately preceding a Determination Date exceeds the Fixed Conversion Price, then the Interest Rate for the succeeding calendar month shall automatically be reduced by 100 basis points (1.0%) for each incremental twenty five percent (25%) increase in the market price of the Ordinary Shares above the then applicable Fixed Conversion Price. 1.2 MINIMUM MONTHLY PRINCIPAL PAYMENTS. Amortizing payments of the aggregate principal amount outstanding under this Note at any time (the "PRINCIPAL AMOUNT") shall begin on October 1, 2004 and shall recur on the first calendar day of each succeeding month thereafter until the Maturity Date (each, an "AMORTIZATION DATE") as set forth in the table below:
DATE PRINCIPAL AMOUNT DATE PRINCIPAL AMOUNT - ------- ------- ------- ------- 10/1/04 $20,000 12/1/05 $73,600 11/1/04 $20,000 1/1/06 $73,600 12/1/04 $20,000 2/1/06 $73,600 1/1/05 $20,000 3/1/06 $73,600 2/1/05 $20,000 4/1/06 $73,600 3/1/05 $20,000 5/1/06 $73,600 4/1/05 $20,000 6/1/06 $73,600 5/1/05 $20,000 7/1/06 $73,600 6/1/05 $73,600 8/1/06 $73,600 7/1/05 $73,600 9/1/06 $73,600 8/1/05 $73,600 10/1/06 $73,600 9/1/05 $73,600 11/1/06 $73,600 10/1/05 $73,600 12/1/06 $73,600 11/1/05 $73,600 1/1/07 $73,600 2/1/07 $73,600 3/1/07 $73,600 4/1/07 $73,600 5/1/07 $73,600 6/1/07 $73,600
Subject to Section 3 below, beginning on the first Amortization Date, the Borrower shall make monthly payments to the Holder on each Repayment Date, each in the amount set forth above, together with any accrued and unpaid interest to date on such portion of the Principal Amount plus any and all other amounts which are then owing under this Note but have not been paid (collectively, the "MONTHLY AMOUNT"). All payments hereunder shall be paid by wire transfer of immediately available funds to the account designated by the Holder in a written notice delivered to the Borrower at least three business days in advance of the Repayment Date. ARTICLE II CONVERSION REPAYMENT 2.1 (a) PAYMENT OF MONTHLY AMOUNT IN CASH OR ORDINARY Shares. Each month by the fifth (5th) business day prior to each Amortization Date (the "NOTICE DATE"), the Holder shall deliver to Borrower a written Monthly Conversion Notice in the form of EXHIBIT B attached hereto converting the Monthly Amount payable on the next Repayment Date in either cash or Ordinary Shares, or a combination of both (each, a "REPAYMENT NOTICE"). If a Repayment Notice is not delivered by the Holder on or before the applicable Notice Date for such Repayment Date, then, the Borrower shall pay the Monthly Amount due on such Repayment Date in cash. Any portion of the Monthly Amount paid in cash on a Repayment Date, shall be paid to the Holder an amount equal to 100% of such unconverted portion of the Monthly Amount due and owing to Holder on the Repayment Date. If the Holder converts all or a portion of the Monthly Amount into Ordinary Shares as provided herein, the number of such shares to be issued by the Borrower to the Holder on such Repayment Date shall be the number determined by dividing (x) the portion of the Monthly Amount to be paid in shares of Ordinary Shares, by (y) the then applicable Fixed Conversion Price. For purposes hereof, the initial "FIXED CONVERSION PRICE" means $3.08 (which has been determined on the date of this Note as an amount equal to 110% of the average closing price for the twenty (20) trading days immediately prior to the date of this Note, but in no event shall the fixed conversion price be less than USD$3.08.) The Fixed Conversion Price may be adjusted in accordance with the provisions of Section 3.4(b) below. (b) MONTHLY AMOUNT CONVERSION GUIDELINES. Subject to Sections 2.1(a), 2.2, and 3.2 hereof, the Holder shall convert all or a portion of the Monthly Amount due on each Repayment Date into Ordinary Shares if the average closing price of the Ordinary Shares as reported by Bloomberg, L.P. on the Principal Market for any five (5) consecutive trading days during the fifteen (15) days immediately preceding such Repayment Date was greater than or equal to one hundred and ten percent (110%) of the Fixed Conversion Price, provided, however, that such conversions shall be up to but not exceed twenty five percent (25%) of the aggregate dollar trading volume of the Ordinary Shares for the thirty (30) day trading period immediately preceding the Repayment Date. Any part of the Monthly Amount due on a Repayment Date that the Holder has not converted into Ordinary Shares, shall be paid by the Borrower in cash on such Repayment Date. Any part of the Monthly Amount due on such Repayment Date which must be paid in cash (as a result of the closing price of the Ordinary Shares on one or more of the five (5) consecutive trading days during the fifteen (15) days immediately preceding the applicable Repayment Date being less than 110% of the Fixed Conversion Price) shall be paid in cash at the rate of 100% of the Monthly Amount otherwise due on such Repayment Date, within three (3) business days of the applicable Repayment Date. 2.2 NO EFFECTIVE REGISTRATION. Notwithstanding anything to the contrary herein, none of the Borrower's obligations to the Holder may be converted into Ordinary Shares unless (i) an effective current Registration Statement (as defined in the Registration Rights Agreement) covering the Ordinary Shares to be issued in connection with the satisfaction of such obligations exists or an exemption from registration of the Ordinary Shares is available pursuant to Rule 144 of the Securities Act and (ii) no Event of Default hereunder exists and is continuing, unless such Event of Default is cured within any applicable cure period or is otherwise waived in writing by the Holder in whole or in part at the Holder's option. Any amounts converted by the Holder pursuant to this Section 2.2 shall be deemed to constitute payments of outstanding fees, interest and principal arising in connection with Monthly Amounts for the remaining Repayment Dates, in chronological order. 2.4 OPTIONAL REDEMPTION IN CASH. The Borrower will have the option of prepaying this Note ("OPTIONAL REDEMPTION") by paying to the Holder a sum of money equal to one hundred and twenty percent (120%) of the then outstanding principal amount of this Note together with accrued but unpaid interest thereon and any and all other sums due, accrued or payable to the Holder arising under this Note, the Purchase Agreement, or any Related Agreement (the "REDEMPTION AMOUNT") outstanding on the day written notice of redemption (the "NOTICE OF REDEMPTION") is given to the Holder. The Notice of Redemption shall specify the date for such Optional Redemption (the "REDEMPTION PAYMENT DATE") which date shall be seven (7) business days after the date of the Notice of Redemption (the "REDEMPTION PERIOD"). A Notice of Redemption shall not be effective with respect to any portion of this Note for which the Holder has a pending election to convert pursuant to Section 3.1, or for conversions initiated or made by the Holder pursuant to Section 3.1 during the Redemption Period. The Redemption Amount shall be determined as if such Holder's conversion elections had been completed immediately prior to the date of the Notice of Redemption. On the Redemption Payment Date, the Redemption Amount must be paid in good funds to the Holder. In the event the Borrower fails to pay the Redemption Amount on the Redemption Payment Date as set forth herein, then such Redemption Notice will be null and void. ARTICLE III CONVERSION RIGHTS 3.1. HOLDER'S CONVERSION RIGHTS. The Holder shall have the right, but not the obligation, to convert all or any portion of the then aggregate outstanding principal amount of this Note, together with interest and fees due hereon, into Ordinary Shares subject to the terms and conditions set forth in this Article III. The Holder may exercise such right by delivery to the Borrower of a written notice of conversion in the form of EXHIBIT A attached hereto (the "Notice of Conversion") not less than one (1) business day prior to the date upon which such conversion shall occur. The date upon which such conversion shall occur is the "CONVERSION DATE". 3.2 CONVERSION LIMITATION. Notwithstanding anything contained herein to the contrary, the Holder shall not be entitled to convert pursuant to the terms of the Note an amount that would (a) be convertible into that number of Ordinary Shares which, when added to the number of Ordinary Shares otherwise beneficially owned by such Holder including those issuable upon exercise of warrants held by such Holder would exceed 4.99% of the outstanding Ordinary Shares of the Borrower at the time of conversion or (b) (ii) exceed twenty five percent (25%) of the aggregate dollar trading volume of the Ordinary Shares for the thirty (30) day trading period immediately preceding delivery of a Notice of Conversion to the Borrower. For the purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and Regulation 13d-3 thereunder. The conversion limitation described in this Section 3.2 shall automatically become null and void without any notice to Borrower upon the occurrence and during the continuance beyond any applicable grace period of an Event of Default, or upon 75 days prior notice to the Borrower, except that at no time shall the beneficial ownership exceed 19.99% of the Borrower's outstanding Ordinary Shares as of the date hereof. Notwithstanding anything contained herein to the contrary, the number of Ordinary Shares issuable by the Borrower and acquirable by the Holder pursuant to the terms of this Note and/or the Warrant issued by the Borrower to the Holder pursuant to the Securities Purchase Agreement, shall not exceed an aggregate of 833,085 of the Borrower's Ordinary Shares, (subject to appropriate adjustment for stock splits, stock dividends, or other similar recapitalizations affecting the Ordinary Shares). 3.3 MECHANICS OF HOLDER'S CONVERSION. (a) In the event that the Holder elects to convert this Note into Ordinary Shares, the Holder shall give notice of such election by delivering an executed and completed Notice of Conversion to the Borrower and such Notice of Conversion shall provide a breakdown in reasonable detail of the Principal Amount, accrued interest and fees being converted. On each Conversion Date (as hereindefined) and in accordance with its Notice of Conversion, the Holder shall make the appropriate reduction to the Principal Amount, accrued interest and fees as entered in its records and shall provide written notice thereof to the Borrower within two (2) business days after the Conversion Date. (b) Pursuant to the terms of the Notice of Conversion, the Borrower will issue instructions to the transfer agent accompanied by an opinion of counsel within 2 business days of the date of the delivery to Borrower of the Notice of Conversion and shall cause the transfer agent to transmit the certificates representing the Note Shares to the Holder by crediting the account of the Holder's designated broker with the Depository Trust Corporation ("DTC") through its Deposit Withdrawal Agent Commission ("DWAC") system within three (3) business days after receipt by the Borrower of the Notice of Conversion (the "DELIVERY Date"). In the case of the exercise of the conversion rights set forth herein the conversion privilege shall be deemed to have been exercised and the Note Shares issuable upon such conversion shall be deemed to have been issued upon the date of receipt by the Borrower of the Notice of Conversion. The Holder shall be treated for all purposes as the record holder of such Ordinary Shares. 3.4 CONVERSION MECHANICS. (a) The number of Ordinary Shares to be issued upon each conversion of this Note shall be determined by dividing that portion of the principal and interest and fees to be converted, if any, by the then applicable Fixed Conversion Price. In the event of any conversions of outstanding principal amount under this Note in part pursuant to this Article III, such conversions shall be deemed to constitute conversions of outstanding principal amount applying to Monthly Amounts for the remaining Repayment Dates in chronological order. No fractional shares shall be issued upon any conversion of this Note. The value of any fractional shares shall be paid in cash. (b) The Fixed Conversion Price and number and kind of shares or other securities to be issued upon conversion is subject to adjustment from time to time upon the occurrence of certain events, as follows: A. STOCK SPLITS, COMBINATIONS AND DIVIDENDS. If the Ordinary Shares are subdivided or combined into a greater or smaller number of Ordinary Shares, or if a dividend is paid on the Ordinary Shares in Ordinary Shares, the Fixed Conversion Price , as the case may be, shall be proportionately reduced in case of subdivision of shares or stock dividend or proportionately increased in the case of combination of shares, in each such case by the ratio which the total number of Ordinary Share outstanding immediately after such event bears to the total number of Ordinary Shares outstanding immediately prior to such event. B. During the period the conversion right exists, the Borrower will reserve from its authorized and unissued Ordinary Shares a sufficient number of shares to provide for the issuance of Ordinary Shares upon the full conversion of this Note. The Borrower represents that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. The Borrower agrees that its issuance of this Note shall constitute full authority to its officers, agents, and transfer agents who are charged with the duty of executing and issuing share certificates to execute and issue the necessary certificates for Ordinary Shares upon the conversion of this Note. C. SHARE ISSUANCES. Subject to the provisions of this Section 3.4, if the Borrower shall at any time prior to the conversion or repayment in full of the Principal Amount issue any Ordinary Shares or securities convertible into Ordinary Shares to a person other than the Holder (except (i) pursuant to Subsections A or B above; (ii) pursuant to options, warrants, or other obligations to issue shares outstanding on the date hereof as disclosed to Holder in writing; (iii) pursuant to any financing transaction in which the Holder (or any of its affiliates) participates or is entitled to any fees; (iv) pursuant to options that may be issued under any employee stock option plan adopted by the Borrower); or (v) grant of options to service provides against their services, issuances in connection with strategic alliances, and issuances in connection with merger and acquisition transactions approved by the board of directors of the Company, for a consideration per share (the "Offer Price") less than the Fixed Conversion Price in effect at the time of such issuance, then the Fixed Conversion Price shall be adjusted at the time of issuance of such securities by multiplying the then applicable Fixed Conversion Price by the following fraction: A + B ----------------------------- (A + B) + [((C - D) x B) / C] A = Actual shares outstanding prior to such offering B = Actual shares sold in the offering C = Fixed Conversion Price D = Offering Price D. RECLASSIFICATION, ETC. If the Borrower at any time shall, by reclassification or otherwise, change the Ordinary Shares into the same or a different number of securities of any class or classes, this Note, as to the unpaid Principal Amount and accrued interest thereon, shall thereafter be deemed to evidence the right to purchase an adjusted number of such securities and kind of securities as would have been issuable as the result of such change with respect to the Note Shares immediately prior to such reclassification or other change. 3.5 ISSUANCE OF NEW NOTE. Upon any partial conversion of this Note, a new Note containing the same date and provisions of this Note shall, at the request of the Holder, be issued by the Borrower to the Holder for the principal balance of this Note and interest which shall not have been converted or paid. The Borrower will pay no costs, fees or any other consideration to the Holder for the production and issuance of a new Note. 3.6 RIGHTS OF SHAREHOLDERS. No Holder shall be entitled, as a Note holder, to vote or receive dividends or be deemed the holder of the Note Shares or any other securities of the Company which may at any time be issuable upon the conversion of this Note for any purpose, nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of shares, reclassification of shares, change of nominal value, consolidation, merger, conveyance, or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until the Note Shares purchasable upon the conversion hereof shall have become deliverable, as provided herein. ARTICLE IV EVENTS OF DEFAULT Upon the occurrence and continuance of an Event of Default beyond any applicable grace period, the Holder may make all sums of principal, interest and other fees then remaining unpaid hereon and all other amounts payable hereunder immediately due and payable. In the event of such an acceleration, within five (5) days after written notice from Holder to Borrower (each occurrence being a "DEFAULT NOTICE PERIOD") the amount due and owing to the Holder shall be 120% of the outstanding principal amount of the Note (plus accrued and unpaid interest and fees, if any) (the "DEFAULT PAYMENT"). If, with respect to any Event of Default, the Borrower cures the Event of Default by the end of the Default Notice Period, the Event of Default will be deemed to no longer exist and any rights and remedies of Holder pertaining to such Event of Default will be of no further force or effect. The Default Payment shall be applied first to any fees due and payable to Holder pursuant to the Note or the Related Agreements, then to accrued and unpaid interest due on the Note and then to the outstanding principal balance of the Note. The occurrence of any of the following events set forth in Sections 4.1 through 4.8, inclusive, is an "EVENT OF DEFAULT": 4.1 FAILURE TO PAY PRINCIPAL, INTEREST OR OTHER FEES. The Borrower (i) fails to pay when due any installment of principal, interest or other fees hereon in accordance herewith, or (ii) the Borrower fails to pay when due any amount exceeding $200,000 due under any other promissory note issued by Borrower (unless the Borrower shall in good faith contest the validity of such amounts), and in any such case, such failure shall continue for a period of three (3) days following the date upon which any such payment was due. 4.2 BREACH OF COVENANT. The Borrower breaches any covenant or any other term or condition of this Note, the Purchase Agreement or the Registration Rights Agreement in any material respect, or the Borrower or its Subsidiary, BOScom Ltd. (the "Subsidiary"), breaches any covenant or any other term or condition of any Related Agreement in any material respect and, any such case, such breach, if subject to cure, continues for a period of fifteen (15) days after the occurrence thereof. 4.3 BREACH OF REPRESENTATIONS AND WARRANTIES. Any representation or warranty made by the Borrower in this Note or the Purchase Agreement, or by the Borrower or the Subsidiary in any Related Agreement, shall, in any such case, be false or misleading in any material respect on the date that such representation or warranty was made or deemed made that has a material adverse effect on the Company's performance of its obligations to the Holder, or the practical realization by the Holder of any benefit or remedy it may have under the Note or the Related Agreements. 4.4 RECEIVER OR TRUSTEE. The Borrower shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business; or such a receiver or trustee shall otherwise be appointed. 4.5 JUDGMENTS. Any money judgment, writ or similar final process shall be entered or filed against the Borrower or any of its Subsidiaries or any of their respective property or other assets for more than $200,000 , and shall remain unvacated, unbonded or unstayed for a period of thirty (30) days. 4.6 BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings or relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower or any of its Subsidiaries and such proceedings, solely if instituted against the Borrower or any of its Subsidiaries, shall continue undismissed or unstayed for ninety (90) business days. No cure period shall apply for proceedings or relief under any bankruptcy law or any law for the relief of debtors shall be instituted by the Borrower. 4.7 STOP TRADE. An SEC stop trade order or Principal Market trading suspension of the Ordinary Shares shall be in effect for ten (10) consecutive trading days or five (5) days during a period of ten (10) consecutive days, excluding in all cases a suspension of all trading on a Principal Market, PROVIDED that the Borrower shall not have been able to cure such trading suspension within thirty (30) days of the notice thereof or list the Ordinary Shares on another Principal Market within sixty (60) days of such notice. The "Principal Market" for the Ordinary Shares shall include the NASD OTC Bulletin Board, NASDAQ SmallCap Market, NASDAQ National Market System, American Stock Exchange, New York Stock Exchange (whichever of the foregoing is at the time the principal trading exchange or market for the Ordinary Shares), or any securities exchange or other securities market on which the Ordinary Shares is then being listed or traded. Notwithstanding the above, any suspension of trading on, or the delisting of the Ordinary Shares of the Tel Aviv Stock Exchange shall not be deemed an Event of Default hereunder or under the Related Agreements. 4.8 FAILURE TO DELIVER ORDINARY SHARES OR REPLACEMENT NOTE. The Borrower shall fail (i) to timely deliver Ordinary Shares to the Holder pursuant to and in the form required by this Note, and Section 9 of the Purchase Agreement, if such failure to timely deliver Ordinary Shares shall not be cured within two (2) business days or (ii) to deliver a replacement Note to Holder within seven (7) business days following the required date of such issuance pursuant to this Note, the Purchase Agreement or any Related Agreement (to the extent required under such agreements). Notwithstanding the foregoing, the Borrower will not be deemed in default hereunder for any delay in the delivery of the Ordinary Shares or a replacement Note, which is out of the control of the Borrower (including any delays in processing by a transfer agent) and the Borrower is actively trying to cure the cause of such delay. 4.9 DEFAULT UNDER RELATED AGREEMENTS OR OTHER AGREEMENTS. The occurrence and continuance of any Event of Default (as defined in any Related Agreement) or any event of default (or similar term) under any other material indebtedness in excess of $200,000. 4.10 [Reserved] DEFAULT RELATED PROVISIONS 4.11 PAYMENT GRACE PERIOD. Following the occurrence and continuance of an Event of Default beyond any applicable cure period hereunder, and for as long as such Event of Default has not been cured, the Borrower shall pay the Holder a default interest rate of two percent (2%) per month on all amounts due and owing under the Note, which default interest shall be payable upon demand. 4.12 CONVERSION PRIVILEGES. The conversion privileges set forth in Article III shall remain in full force and effect immediately from the date hereof and until this Note is paid in full. 4.13 CUMULATIVE REMEDIES. The remedies under this Note shall be cumulative. ARTICLE V MISCELLANEOUS 5.1 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of any party hereof in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available. 5.2 NOTICES. Any notice herein required or permitted to be given shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party notified, (b) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient, if not, then on the next business day, (c) ten business days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) two business days after deposit with a internationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Borrower at the address provided in the Purchase Agreement executed in connection herewith, with a copy to Shlomo Landress, Esq. NYP Tower, 17 Yitzhak Sadeh Street, 19th Floor, Tel Aviv 67775, facsimile number (972) 3 561-3620 and to the Holder at the address provided in the Purchase Agreement for such Holder, with a copy to John E. Tucker, Esq., 825 Third Avenue, 14th Floor, New York, New York 10022, facsimile number (212) 541-4434, or at such other address as the Borrower or the Holder may designate by ten days advance written notice to the other parties hereto. A Notice of Conversion shall be deemed given when made to the Borrower pursuant to the Purchase Agreement. 5.3 AMENDMENT PROVISION. The term "Note" and all reference thereto, as used throughout this instrument, shall mean this instrument as originally executed, or if later amended or supplemented, then as so amended or supplemented, and any successor instrument issued pursuant to Section 3.5 hereof, as it may be amended or supplemented. 5.4 ASSIGNABILITY. This Note shall be binding upon the Borrower and its successors and assigns, and shall inure to the benefit of the Holder and its successors and assigns, and may be assigned by the Holder in accordance with the requirements of the Purchase Agreement. This Note shall not be assigned by the Borrower without the consent of the Holder. 5.5 GOVERNING LAW. This Note shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the state courts of New York or in the federal courts located in the state of New York. Both parties and the individual signing this Note on behalf of the Borrower agree to submit to the jurisdiction of such courts. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision of this Note is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or unenforceability of any other provision of this Note. Nothing contained herein shall be deemed or operate to preclude the Holder from bringing suit or taking other legal action against the Borrower in any other jurisdiction to collect on the Borrower's obligations to Holder, to realize on any collateral or any other security for such obligations, or to enforce a judgment or other court in favor of the Holder. 5.6 MAXIMUM PAYMENTS. Nothing contained herein shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum permitted by applicable law. In the event that the rate of interest required to be paid or other charges hereunder exceed the maximum permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by the Borrower to the Holder and thus refunded to the Borrower. 5.7 SECURITY INTEREST AND GUARANTEE. The Holder has been granted a security interest in certain assets of the Borrower as more fully described in the Master Security Agreement dated as of the date hereof. The obligations of the Borrower under this Note are guaranteed by certain Subsidiaries of the Borrower pursuant to the Subsidiary Guaranty dated as of the date hereof. 5.8 CONSTRUCTION. Each party acknowledges that its legal counsel participated in the preparation of this Note and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Note to favor any party against the other. 5.9 COST OF COLLECTION. If default is made in the payment of this Note, the Borrower shall pay to Holder reasonable costs of collection, including reasonable attorney's fees. [Balance of page intentionally left blank; signature page follows.] IN WITNESS WHEREOF, the Borrower has caused this Convertible Term Note to be signed in its name effective as of this 10th day of June, 2004. B.O.S. BETTER ON-LINE SOLUTIONS LTD. By:________________________________ Name:______________________________ Title:_____________________________ THIS WARRANT AND THE ORDINARY SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS WARRANT AND THE ORDINARY SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO B.O.S. BETTER ON-LINE SOLUTIONS LTD. THAT SUCH REGISTRATION IS NOT REQUIRED. Right to Purchase up to 130,000 Ordinary Shares of B.O.S. BETTER ON-LINE SOLUTIONS LTD. (subject to adjustment as provided herein) ORDINARY SHARES PURCHASE WARRANT No. _________________ Issue Date: June 10, 2004 B.O.S. BETTER ON-LINE SOLUTIONS LTD. a corporation incorporated under the laws of the State of Israel hereby certifies that, for value received, LAURUS MASTER FUND, LTD., or assigns (the "Holder"), is entitled, subject to the terms set forth below, to purchase from the Company (as defined herein) from and after the Issue Date of this Warrant and at any time or from time to time before 5:00 p.m., New York time, through the close of business June 10, 2011 (the "Expiration Date"), up to 130,000 fully paid and nonassessable Ordinary Shares (as hereinafter defined), NIS 4.00 nominal value per share, at the applicable Exercise Price per share (as defined below). The number and character of such Ordinary Shares and the applicable Exercise Price per share are subject to adjustment as provided herein. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" shall include B.O.S. Better On-Line Solutions Ltd. and any corporation which shall succeed, or assume the obligations of, B.O.S. Better On-Line Solutions Ltd. hereunder. (b) The term "Ordinary Shares" includes (i) the Company's Ordinary Shares, nominal value NIS 4.00 per share; and (ii) any other securities into which or for which any of the securities described in (i) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (c) The term "Other Securities" refers to any shares (other than Ordinary Shares) and other securities of the Company or any other person (corporate or otherwise) which the Holder of the Warrant at any time shall be entitled to receive, or shall have received, on the exercise of the Warrant, in lieu of or in addition to Ordinary Shares, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Ordinary Shares or Other Securities pursuant to Section 4 or otherwise. B-1 (d) The "Exercise Price" applicable under this Warrant shall be a price of $4.04 per Ordinary Share acquired hereunder. Capitalized terms used herein without definition shall have the meanings ascribed to such terms in that certain Securities Purchase Agreement dated as of the date hereof between the Borrower and the Holder. 1. EXERCISE OF WARRANT. 1.1 NUMBER OF SHARES ISSUABLE UPON EXERCISE. From and after the date hereof through and including the Expiration Date, the Holder shall be entitled to receive, upon exercise of this Warrant in whole or in part, by delivery of an original or fax copy of an exercise notice in the form attached hereto as Exhibit A (the "Exercise Notice") and payment in accordance with Section 2.2 below, Ordinary Shares of the Company (the "Warrant Shares"), subject to adjustment pursuant to Section 4. This Warrant may be exercised in whole or in part. 1.2 FAIR MARKET VALUE. For purposes hereof, the "Fair Market Value" of an Ordinary Share as of a particular date (the "Determination Date") shall mean: (a) If the Company's Ordinary Shares are traded on the American Stock Exchange or another national exchange or are quoted on the National or SmallCap Market of The Nasdaq Stock Market, Inc.("Nasdaq"), then the closing or last sale price, respectively, reported for the last business day immediately preceding the Determination Date. (b) If the Company's Ordinary Shares are not traded on the American Stock Exchange or another national exchange or on the Nasdaq but is traded on the NASD OTC Bulletin Board, then the mean of the average of the closing bid and asked prices reported for the last business day immediately preceding the Determination Date. (c) Except as provided in clause (d) below, if the Company's Ordinary Shares are not publicly traded, then as the Holder and the Company agree or in the absence of agreement, by arbitration in accordance with the rules then in effect of the American Arbitration Association, before a single arbitrator to be chosen from a panel of persons qualified by education and training to pass on the matter to be decided. (d) If the Determination Date is the date of a liquidation, dissolution or winding up, or any event deemed to be a liquidation, dissolution or winding up pursuant to the Company's Articles of Association (the "Articles"), then all amounts to be payable per share to holders of the Ordinary Shares pursuant to the Articles in the event of such liquidation, dissolution or winding up, plus all other amounts to be payable per share in respect of the Ordinary Shares in liquidation under the Articles, assuming for the purposes of this clause (d) that all of the Ordinary Shares then issuable upon exercise of the Warrant are outstanding at the Determination Date. 1.3 COMPANY ACKNOWLEDGMENT. The Company will, at the time of the exercise of the Warrant, upon the request of the Holder hereof acknowledge in writing its continuing obligation to afford to such Holder any rights to which such Holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant. If the Holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such Holder any such rights. 1.4 TRUSTEE FOR WARRANT HOLDERS. In the event that a bank or trust company shall have been appointed as trustee for the Holders of the Warrant pursuant to Subsection 3.2, such bank or trust company shall have all the powers and duties of a warrant agent (as hereinafter described) and shall accept, in its own name for the account of the Company or such successor person as may be entitled thereto, all amounts otherwise payable to the Company or such successor, as the case may be, on exercise of this Warrant pursuant to this Section 1. 2. PROCEDURE FOR EXERCISE. 2.1 DELIVERY OF SHARE CERTIFICATES, ETC., ON EXERCISE. The Company agrees that the Ordinary Shares purchased upon exercise of this Warrant shall be deemed to be issued to the Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares in accordance herewith. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within three (3) business days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct in compliance with applicable securities laws, a certificate or certificates for the number of duly and validly issued, fully paid and nonassessable Ordinary Shares (or Other Securities) to which the Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such Holder would otherwise be entitled, cash equal to such fraction multiplied by the then Fair Market Value of one full share, together with any other shares or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1 or otherwise. 2.2 EXERCISE. (a) Payment may be made either (i) in cash, by wire transfer or by certified or official bank check payable to the order of the Company equal to the applicable aggregate Exercise Price, (ii) by delivery of the Warrant, or Ordinary Shares receivable upon exercise of the Warrant in accordance with Section (b) below, or (iii) by a combination of any of the foregoing methods, for the number of Ordinary Shares specified in such Exercise Notice (as such exercise number shall be adjusted to reflect any adjustment in the total number of Ordinary Shares issuable to the Holder per the terms of this Warrant) and the Holder shall thereupon be entitled to receive the number of duly authorized, validly issued, fully-paid and non-assessable Ordinary Shares (or Other Securities) determined as provided herein. (b) Notwithstanding any provisions herein to the contrary, if the Fair Market Value of one Ordinary Share is greater than the Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being exercised) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Exercise Notice in which event the Company shall issue to the Holder a number Ordinary Shares computed using the following formula: X=Y (A-B) ------- A Where X = the number of Ordinary Shares to be issued to the Holder Y = the number of Ordinary Shares purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised (at the date of such calculation) A = the Fair Market Value of one of the Company's Ordinary Shares (at the date of such calculation) B = Exercise Price (as adjusted to the date of such calculation) 3. EFFECT OF REORGANIZATION, ETC.; ADJUSTMENT OF EXERCISE PRICE. 3.1 REORGANIZATION, CONSOLIDATION, MERGER, ETC. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, including the sale of substantially all of the Company's outstanding share capital to a corporate third party, in consideration for such third party's securities, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition to the consummation of such a transaction, proper and adequate provision shall be made by the Company whereby the Holder of this Warrant, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Ordinary Shares (or Other Securities) issuable on such exercise prior to such consummation or such effective date, the shares and other securities and property (including cash) to which such Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such Holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in Section 4. 3.2 DISSOLUTION. In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, concurrently with any distributions made to holders of its Ordinary Shares, shall at its expense deliver or cause to be delivered to the Holder the shares and other securities and property (including cash, where applicable) receivable by the Holder of the Warrant pursuant to Section 3.1, or, if the Holder shall so instruct the Company, to a bank or trust company specified by the Holder and having its principal office in New York, NY as trustee for the Holder of the Warrant (the "Trustee"). 3.3 CONTINUATION OF TERMS. Upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) referred to in this Section 3, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares and other securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such shares or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in Section 4. In the event this Warrant does not continue in full force and effect after the consummation of the transactions described in this Section 3, then the Company's securities and property (including cash, where applicable) receivable by the Holders of the Warrant will be delivered to Holder or the Trustee as contemplated by Section 3.2. 4. EXTRAORDINARY EVENTS REGARDING ORDINARY Shares. In the event that the Company shall (a) issue additional Ordinary Shares as a dividend or other distribution on outstanding Ordinary Shares, (b) subdivide its outstanding Ordinary Shares, or (c) combine its outstanding Ordinary Shares into a smaller number of Ordinary Shares, then, in each such event, the Exercise Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Exercise Price by a fraction, the numerator of which shall be the number of Ordinary Shares outstanding immediately prior to such event and the denominator of which shall be the number of Ordinary Shares outstanding immediately after such event, and the product so obtained shall thereafter be the Exercise Price then in effect. The Exercise Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 4. The number of Ordinary Shares that the Holder of this Warrant shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive shall be increased or decreased, as the case may be, to a number determined by multiplying the number of Ordinary Shares that would otherwise (but for the provisions of this Section 4) be issuable on such exercise by a fraction of which (a) the numerator is the Exercise Price that would otherwise (but for the provisions of this Section 4) be in effect, and (b) the denominator is the Exercise Price in effect on the date of such exercise. 5. CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment or readjustment in the Ordinary Shares (or Other Securities) issuable on the exercise of the Warrant, the Company at its expense will promptly cause its Chief Financial Officer or other appropriate designee to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional Ordinary Shares (or Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of Ordinary Shares (or Other Securities) outstanding or deemed to be outstanding, and (c) the Exercise Price and the number of Ordinary Shares to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the Holder of the Warrant and any Warrant agent of the Company (appointed pursuant to Section 13 hereof). 6. RESERVATION OF SHARES, ETC., ISSUABLE ON EXERCISE OF WARRANT. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrant, Ordinary Shares (or Other Securities) from time to time issuable on the exercise of the Warrant. 7. REPRESENTATIONS AND WARRANTIES BY THE HOLDER. The Holder represents and warrants to the Company as follows: 7.1 Holder understands that the Warrant is being offered and sold pursuant to an exemption or exemptions from registration requirements of Israeli and US Federal and state securities laws and that the Company is relying upon the truth and accuracy of Holder's representations contained in that Securities Purchase Agreement of even date herewith, including, without limitation, that the Holder is an "accredited investor" within the meaning of Regulation D under the Securities Act of 1933. 7.2 Holder has substantial experience in evaluating and investing in private placement transactions of securities in companies similar to the Company so that it is capable of evaluating the merits and risks of its investment in the Company and has the capacity to protect its own interests. Holder is able to bear the economic risk of this investment. 7.3 Holder is acquiring the Warrant and the Ordinary Shares issuable upon exercise of the Warrant for its own account for investment only, and not as a nominee or agent and not with a view towards or for resale in connection with their distribution. 8. ASSIGNMENT; EXCHANGE OF WARRANT. Subject to compliance with applicable securities laws, this Warrant, and the rights evidenced hereby, may be transferred by any registered Holder hereof (a "Transferor") in whole or in part. On the surrender for exchange of this Warrant, with the Transferor's endorsement in the form of Exhibit B attached hereto (the "Transferor Endorsement Form") and together with evidence reasonably satisfactory to the Company demonstrating compliance with applicable securities laws, which shall include, without limitation, a legal opinion from the Transferor's counsel that such transfer is exempt from the registration requirements of applicable securities laws, the Company at its expense but with payment by the Transferor of any applicable transfer taxes) will issue and deliver to or on the order of the Transferor thereof a new Warrant of like tenor, in the name of the Transferor and/or the transferee(s) specified in such Transferor Endorsement Form (each a "Transferee"), calling in the aggregate on the face or faces thereof for the number of Ordinary Shares of Ordinary Stock called for on the face or faces of the Warrant so surrendered by the Transferor. 9. REPLACEMENT OF WARRANT. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 10. REGISTRATION RIGHTS. The Holder of this Warrant has been granted certain registration rights by the Company. These registration rights are set forth in a Registration Rights Agreement entered into by the Company and the Purchaser dated as of even date of this Warrant. 11. MAXIMUM EXERCISE. Notwithstanding anything contained herein to the contrary, the Holder shall not be entitled to convert pursuant to the terms of the Note or the Warrant an amount that would (a) be convertible into that number of Ordinary Shares which, when added to the number of Ordinary Shares otherwise beneficially owned by such Holder including those issuable upon exercise of warrants of the Company held by such Holder would exceed 4.99% of the outstanding Ordinary Shares of the Company at the time of conversion or (b) (ii) exceed twenty five percent (25%) of the aggregate dollar trading volume of the Ordinary Share for the thirty (30) day trading period immediately preceding delivery of a Notice of Conversion to the Company. For the purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and Regulation 13d-3 thereunder. The conversion limitation described in this Section 11 shall automatically become null and void without any notice to Company upon the occurrence and during the continuance beyond any applicable grace period of an Event of Default, or upon 75 days prior notice to the Company, except that at no time shall the beneficial ownership exceed 19.99% of the borrower's Ordinary Shares. Notwithstanding anything contained herein to the contrary, the number of Ordinary Shares issuable by the Company and acquirable by the Holder a pursuant to the terms of this Warrant and/or the Note issued by the Company to the Holder pursuant to this Securities Purchase Agreement, shall not exceed an aggregate of 833,085 of the Company's Ordinary Shares, (subject to appropriate adjustment for stock splits, stock dividends, or other similar recapitalizations affecting the Ordinary Shares). 12. RIGHTS OF SHAREHOLDERS. No Holder shall be entitled, as a Warrant holder, to vote or receive dividends or be deemed the holder of the Ordinary Shares or any other securities of the Company, which may at any time be issuable upon the exercise of this Warrant for any purpose, nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of shares, reclassification of shares, change of nominal value, consolidation, merger, conveyance, or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until the Warrant shall have been exercised and the Ordinary Shares issuable upon the exercise hereof shall have become deliverable, as provided herein. 13. WARRANT AGENT. The Company may, by written notice to each Holder of the Warrant, appoint an agent for the purpose of issuing Ordinary Shares (or Other Securities) on the exercise of this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 8, and replacing this Warrant pursuant to Section 9, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 14. TRANSFER ON THE COMPANY'S BOOKS. 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. 15. NOTICES, ETC. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such Holder or, until any such Holder furnishes to the Company an address, then to, and at the address of, the last Holder of this Warrant who has so furnished an address to the Company. 16. VOLUNTARY ADJUSTMENT BY THE COMPANY. The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 17. MISCELLANEOUS. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be governed by and construed in accordance with the laws of State of New York without regard to principles of conflicts of laws. Any action brought concerning the transactions contemplated by this Warrant shall be brought only in the state courts of New York or in the federal courts located in the state of New York; provided, however, that the Holder may choose to waive this provision and bring an action outside the state of New York. The Company hereby agrees to submit to the jurisdiction of such courts and waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision of this Warrant is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of this Warrant. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. Each of the Company and the Holder acknowledges that its legal counsel participated in the preparation of this Warrant and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Warrant to favor any party against the other party. [BALANCE OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS.] IN WITNESS WHEREOF, the Company has executed this Warrant as of the date first written above. B.O.S. BETTER ON-LINE SOLUTIONS LTD. By: ----------------------- Name: ----------------------- Title: - ----------------------- ----------------------- MASTER SECURITY AGREEMENT THIS MASTER SECURITY AGREEMENT (this "SECURITY AGREEMENT") made as of the 10th day of June 2004, by and between B.O.S. Better On-Line Solutions Ltd., a company incorporated under the laws of the State of Israel, company number 52-004256-5 (the "PLEDGOR") and Laurus Master Fund a Cayman Islands company (the "PURCHASER"). WHEREAS Pledgor and the Purchaser, have entered into a Securities Purchase Agreement dated June 10, 2004 (the "PURCHASE AGREEMENT") WHEREAS the Pledgor has agreed to enter into this Security Agreement in order to secure the Obligations (as defined below) of the Pledgor to the Purchaser pursuant to the Purchase Agreement, the Note, the Warrant and the Related Agreements. NOW, THEREFORE, IT IS AGREED AS FOLLOWS: 1. The Preamble to this Security Agreement constitutes an integral part thereof. All capitalized terms used herein and not defined herein shall have the meaning assigned to such terms in the Purchase Agreement. 2. To secure the full and punctual payment and performance of all Obligations (as hereafter defined), the Pledgor hereby assigns and grants to the Purchaser the following security interests: (a) A first priority floating charge on all assets of the Pledgor, now owned or at any time hereafter acquired by the Pledgor, or in which the Pledgor now has or at any time in the future may acquire any right, title or interest (the "PLEDGOR COLLATERAL"), including without limitation, all accounts, inventory, equipment, goods, promissory notes, contractual rights (subject to any assignment or pledge limitations included therein) chattel paper, investment property (excluding the Pledged Shares (as defined below) and any interests in Surf Communications Solutions Ltd. but including all other equity interests owned by the Pledgor), letter-of-credit rights, intellectual property, trademarks and tradestyles in which the Pledgor now has or hereafter may acquire any right, title or interest, all proceeds and products thereof (including, without limitation, proceeds of insurance) and all additions, accessions and substitutions thereto or therefore. A debenture with respect the said pledge is attached as EXHIBIT A hereto. (b) A first priority fixed charge on all of its right, title and interest in all outstanding and issued shares (144,330 Ordinary Shares) of BOScom Ltd. held by the Pledgor and any additional shares of BOScom Ltd. that Pledgor may acquire, receive and/or otherwise be entitled to (the "PLEDGED SHARES"). A debenture with respect the Pledged Shares is attached as EXHIBIT B hereto. 3. Notwithstanding anything other provision herein, any security interest granted by the Pledgor hereunder shall be subject to any restriction, if such exist, on the transfer of intellectual property imposed by or pursuant to the regulations and directives of the Ministry of Industry and Trade and the Office of the Chief Scientist applicable to the Company. 4. The term "OBLIGATIONS" as used herein shall mean and include all debts, indebtedness, obligations and liabilities of the Pledgor to the Purchaser whether now existing or hereafter arising, direct or indirect, liquidated or unliquidated, absolute or contingent, due or not due and whether under, pursuant to or evidenced by a note, agreement, guaranty, instrument or otherwise and arising under, out of, or in connection with: (i) the Purchase Agreement, (ii) the Note, (iii) the Warrant, (iv) the Related Agreements (the Purchase Agreement, the Note, the Warrant and the Related Agreements and this Security Agreement, as each may be amended, modified, restated or supplemented from time to time, are collectively referred to as the "DOCUMENTS"), and in connection with any documents, instruments or agreements relating to or executed in connection with the Documents or any documents, instruments or agreements referred to therein, provided however that the realization of any pledge under this Security Agreement shall at all times be limited to the then outstanding amount payable to Purchaser under the Note and to any expenses and costs related to the realization of such pledge. 5. The Pledgor hereby represents, warrants and covenants to the Purchaser that: (a) it is a corporation validly existing and duly incorporated under the laws of the State of Israel; (b) its legal name is as set forth in its Certificate of Incorporation as amended through the date hereof and it will provide the Purchaser thirty (30) days' prior written notice of any change in its legal name; (c) its organizational identification number (if applicable) is as set forth above and it will provide the Purchaser thirty (30) days' prior written notice of any change in its organizational identification number; (d) it is the lawful owner of the Pledgor Collateral and the Pledged Shares, it has the sole right to grant a security interest therein and will defend such collateral against all claims and demands of all persons and entities; (e) it will keep the Pledgor Collateral and the Pledged Shares free and clear of all attachments, levies, taxes, liens, security interests and encumbrances of every kind and nature ("ENCUMBRANCES"), except for such Encumbrances which by their terms are junior to the security interests granted to the Purchaser and were created after receipt of the prior written consent of the Purchaser (which consent shall not be unreasonably withheld) or with respect to the Pledgor Collateral only, are made in the ordinary course of business; 2 (f) it will not, without the Purchaser' prior written consent, which consent shall not be unreasonably withheld, sell, exchange, lease, pledge or otherwise dispose of or give any other rights in the Pledgor Collateral and the Pledged Shares except, with respect to the Pledgor Collateral only and not including the Pledged Shares, for sales and/or exchanges of tangible assets that are part of the Pledgor Collateral and for leases, pledges on assets imposed in connection with the purchase or lease thereof or other dispositions in the ordinary course of business. (g) it will insure or cause Pledgor Collateral to be insured in accordance with the provisions of the Purchase Agreement; (h) it will upon reasonable notice and during normal business hours allow the Purchaser or the Purchaser' representatives free access to and the right of inspection of the tangible Pledgor Collateral; (i) Pledgor hereby agrees to indemnify and save the Purchaser harmless from all loss, costs, damage, liability and/or expense, including reasonable attorneys' fees, that the Purchaser may sustain or incur to enforce payment, performance or fulfillment of any of the Obligations and/or in the enforcement of this Security Agreement or in the prosecution or defense of any action or proceeding either against the Purchaser or the Pledgor concerning any matter growing out of or in connection with this Security Agreement, and/or any of the Obligations and/or any of the Pledgor Collateral and the Pledged Shares, except to the extent caused by the Purchaser's own gross negligence or willful misconduct (as determined by a court of competent jurisdiction in a final and non-appealable decision). Notwithstanding the above, in no event shall Pledgor's aggregate liability pursuant to all sections of this Security Agreement exceed the then outstanding amount payable to Purchaser under the Note and to any expenses and costs related to the realization of such pledge. 6. The occurrence of any of the following events or conditions shall constitute an "Event of Default": (a) Breach of any covenant, warranty or representation made or furnished to the Purchaser by the Pledgor in any of the Documents, which, after given prior notice if subject to cure, shall not be cured for a period of thirty (30) business days; (b) the loss, theft, substantial damage, destruction to or of any material portion of the Pledgor Collateral; the sale or encumbrance of the Pledgor Collateral except as set forth under sections 5(e) or 5(f) above; the sale or encumbrance of the Pledged Shares or the making of any seizure or attachment thereof or thereon except to the extent: (i) such loss, damage or destruction is covered by insurance proceeds; (ii) said encumbrance is junior to the security interest provided hereunder and was registered per written prior consent provided by Purchaser, which consent shall not be unreasonably withheld; or 3 (iii) said seizure or attachment does not secure indebtedness in excess of $50,000 or such seizure or attachment has not been removed or otherwise released within thirty (30) business days of the creation or the assertion thereof; (c) Pledgor is not able to pay its matured current debts, shall cease operations, dissolve, terminate its business existence, make an assignment for the benefit of creditors, suffer the appointment of a receiver, trustee, liquidator or custodian of all or any material part of the Pledgor's property, which appointment shall not have been revoked within thirty (30) business days; (d) Pledgor shall become subject to any proceedings under any applicable bankruptcy or insolvency law, which if commenced against the Pledgor, shall not be dismissed within thirty (30) business days; (e) The Pledgor shall repudiate, purport to revoke or fail to perform any or all of its obligations under the Note (after given no less than 15-days prior notice and after passage of applicable cure period, if any); (f) an Event of Default shall have occurred under and as defined in the Purchase Agreement or in any Related Agreement (after passage of applicable cure period, if any); (g) any event which materially adversely affects the value of any of the Pledged Shares and/or the Pledgor Collateral. The Pledgor shall promptly notify the Purchaser in writing of such event. (h) any event or series of events occur(s), which, in the reasonable opinion of the Purchaser, may have a material adverse effect on the business, condition (financial or otherwise), or results of operations of the Pledgor or on the ability of the Pledgor to comply with any of its material obligations hereunder or under the Purchase Agreement, provided that Purchaser gives the Pledgor a written notice for declaring a Default Event under this subclause (h), and further provided that the Pledgor shall be entitled to provide a written response to the Purchaser within fourteen (14) days, it being agreed however, that nothing herein nor the Pledgor's written response shall limit or delay the Purchaser's right, in its discretion, to declare a Default Event hereunder and exercise the remedies available to the Purchaser hereunder, immediately after Pledgor's written response. 7. Upon the occurrence of any Event of Default and at any time thereafter, the Purchaser may declare all Obligations immediately due and payable and the Purchaser shall have the remedies of a secured party provided in this Agreement and under any applicable law. Any proceeds of any foreclosures on any of the Pledgor Collateral or the Pledged Shares shall be first applied by the Purchaser to the payment of all expenses in connection with the sale of the Pledgor Collateral or the Pledged Shares, including reasonable attorneys' fees and other legal expenses and disbursements and the reasonable expense of retaking, holding, preparing for sale, selling, and the like, and any balance of such proceeds shall be applied by the Purchaser toward the payment of any outstanding Obligations in such order of application as the Purchaser may elect, and the Pledgor shall be liable for any deficiency. 4 8. If the Pledgor defaults in the performance or fulfillment of any of the terms, conditions, promises, covenants, provisions or warranties to be performed or fulfilled under or pursuant to this Security Agreement, the Purchaser may, at its option without waiving its right to enforce this Security Agreement according to its terms, immediately or at any time thereafter but subject to notice to the Pledgor, perform or fulfill the same or cause the performance or fulfillment of the same for Pledgor's account and at Pledgor's cost and expense, and the cost and expense thereof (including reasonable attorneys' fees) shall be added to the Obligations and shall be payable on demand with interest thereon at the highest rate permitted by law. 9. No delay or failure on the Purchaser's part in exercising any right, privilege or option hereunder shall operate as a waiver of such or of any other right, privilege, remedy or option, and no waiver whatever shall be valid unless in writing, signed by the Purchaser and then only to the extent therein set forth, and no waiver by the Purchaser of any default shall operate as a waiver of any other default or of the same default on a future occasion. The Purchaser's books and records containing entries with respect to the Obligations shall be admissible in evidence in any action or proceeding, and unless Pledgor presents records or other evidence to the contrary, shall be binding upon the Pledgor for the purpose of establishing the items therein set forth and shall constitute prima facie proof thereof. The Purchaser shall have the right to enforce any one or more of the remedies available to the Purchaser, successively, alternately or concurrently. 10. The Pledgor shall cooperate with the Purchaser and execute all documents as may be reasonably necessary to register the Pledged Shares and the Pledgor Collateral with the Israeli Registrar of Companies and/or any other Registrar, including, inter alia, the document(s) in the form annexed hereto as EXHIBIT C hereto, and shall bear all stamp taxes with respect to such registrations. The Pledgor undertakes to register such registrations with the Israeli Registrar of Companies within 3 business days in Israel. The Pledgor shall pay upon demand, all reasonable expenses, including reasonable attorney's fees, of enforcing the Purchaser's rights and remedies hereunder in the event of a breach by the Pledgor as well as with respect to expenses resulting from exercising the pledge of any of the Pledged Shares, and/or the Pledgor Collateral. 11. This Security Agreement shall terminate upon full payment of all the Obligations, including the Note, and the Purchaser undertakes to promptly sign any and all forms required in order to remove any and all security interests granted by Pledgor hereunder. 12. This Security Agreement shall be governed by and construed in accordance with the laws of the State of Israel and cannot be terminated orally. Notwithstanding the above, if legally possible, the Purchaser will be entitled to initiate any legal action according to the terms of this Agreement and elect to realize any or all of the Pledged Shares and/or the Pledgor Collateral, pursuant to the laws of the State of New York. In such event the competent courts of New York will have the exclusive jurisdiction and this Security Agreement shall be governed by and construed with the laws of the State of New York. 5 13. All of the rights, remedies, options, privileges and elections given to the Purchaser hereunder shall inure to the benefit of the Purchaser's successors and assigns. The term "Purchaser" as herein used shall include the Purchaser's company, any parent of the Purchaser's company, any of the Purchaser's subsidiaries and any co-subsidiaries of The Purchaser' parent, whether now existing or hereafter created or acquired, and all of the terms, conditions, promises, covenants, provisions and warranties of this Security Agreement shall inure to the benefit of and shall bind the representatives, successors and assigns of each of us and them. 14. All notices hereunder shall be sufficiently given if mailed or delivered to the addresses set forth below. IN WITNESS WHEREOF this Master Security Agreement has been executed by the parties hereto as of the date first above written. B.O.S. BETTER ON-LINE SOLUTIONS LTD. Beit Rabin, 100 BOS Road, Teradyon Industrial Park, Misgav 20179, Israel Attention: Chief Financial Officer Facsimile: (972) 4 999-0334 By: ------------------------- Name: ------------------------- Date: ------------------------- LAURUS MASTER FUND LTD. - -------------------------------------- By: ------------------------- Name: ------------------------- Date: ------------------------- 6 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of June 10, 2004, by and between B.O.S. Better On-Line Solutions Ltd., an Israeli corporation (the "Company"), and Laurus Master Fund, Ltd., a Cayman Islands Company (the "Purchaser"). This Agreement is made pursuant to the Securities Purchase Agreement, dated as of the date hereof, by and between the Purchaser and the Company (the "Securities Purchase Agreement"), and pursuant to the Note and the Warrant referred to therein. The Company and the Purchaser hereby agree as follows: 1. DEFINITIONS. Capitalized terms used and not otherwise defined herein that are defined in the Securities Purchase Agreement shall have the meanings given to such terms in the Securities Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings: "AFFILIATE" of any specified person means any other person, directly or indirectly, controlling or controlled by or under common control with such specified person. For the purpose of this definition "control" as used with respect to any person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such person, whether through the ownership of voting securities or by agreement or otherwise. "COMMISSION" means the Securities and Exchange Commission. "ORDINARY Shares" means the Company's Ordinary Shares, NIS 4.00 nominal value per share. "EFFECTIVENESS DATE" means the 90th day following the date hereof, or the 120th day following the date hereof if the Registration Statement is reviewed by the Commission. "EFFECTIVENESS PERIOD" shall have the meaning set forth in Section 2(a). "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and any successor statute. "FILING DATE" means, with respect to the Registration Statement required to be filed hereunder, a date no later than forty five (45) days following the date hereof, and with respect to shares of Ordinary Stock issuable to the Holder as a result of adjustments to the Fixed Conversion Price made pursuant to Section 3.4 of the Secured Convertible Term Note or Section 4 of the Warrant or otherwise, sixty (60) days (ninety (90) days if the request is made between February 1 and March 31,) days after the occurrence such event or the date of the adjustment of the Fixed Conversion Price. "HOLDER" or "HOLDERS" means the Purchaser or any of its successors to the extent any of them hold Registrable Securities, provided that only registered holders of Registrable Securities shall be counted for purposes of calculating any proportion of holders entitled to take any action, receive any damages or give any notice pursuant to this Agreement. "INDEMNIFIED PARTY" shall have the meaning set forth in Section 5(c). "INDEMNIFYING PARTY" shall have the meaning set forth in Section 5(c). "MAJORITY HOLDERS" shall means the Holders of a majority of the then outstanding aggregate principal amount of Registrable Securities registered under a Registration Statement, provided that Registrable Securities which have been sold or otherwise transferred pursuant to the Registration Statement or Rule 144 shall not be included in the calculation of Majority Holders. "NOTE" has the meaning set forth in the Securities Purchase Agreement. "PROCEEDING" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. "PROSPECTUS" means the prospectus included in the Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. "REGISTRABLE SECURITIES" means the shares of Ordinary Shares issued upon the conversion of the Note and issuable upon exercise of the Warrant. "REGISTRATION STATEMENT" means each registration statement required to be filed hereunder, including the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. "RULE 144" means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "RULE 415" means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "SECURITIES ACT" means the Securities Act of 1933, as amended, and any successor statute. "TRADING MARKET" means any of the NASD OTC Bulletin Board, NASDAQ SmallCap Market, the Nasdaq National Market, the American Stock Exchange, the New York Stock Exchange and the Tel Aviv Stock Exchange. "WARRANT" means the Ordinary Shares purchase warrant issued pursuant to the Securities Purchase Agreement. 2. All references in this Agreement to amendments or supplements to the Registration Statement, any preliminary Prospectus or Prospectus shall be deemed to mean and include the filing of any document under the Exchange Act, after the date of such Registration Statement, preliminary Prospectus or Prospectus, as the case may be, which is incorporated by reference therein. REGISTRATION. (a) On or prior to the Filing Date the Company shall prepare and file with the Commission a Registration Statement covering the Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form F-3 (except if the Company is not then eligible to register for resale the Registrable Securities on Form F-3, in which case such registration shall be on another appropriate form in accordance herewith). The Company shall cause the Registration Statement to become effective and remain effective as provided herein. The Company shall use its reasonable commercial efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event no later than the Effectiveness Date. The Company shall use its reasonable commercial efforts to keep the Registration Statement continuously effective under the Securities Act until the date which is the earlier date of when (i) all Registrable Securities have been sold; (ii) all Registrable Securities may be sold by non-Affiliates of the Company immediately without registration under the Securities Act and without volume restrictions pursuant to Rule 144(k), as determined by the counsel to the Company on the basis of the Holders' representations, pursuant to a written opinion letter to such effect, addressed and acceptable to the Company's transfer agent; or (iii) the second anniversary of the Closing Date (the "Effectiveness Period"). (b) If: (i) the Registration Statement is not filed on or prior to the Filing Date; (ii) the Registration Statement is not declared effective by the Commission by the Effectiveness Date; (iii) after the Registration Statement is filed with and declared effective by the Commission, the Registration Statement ceases to be effective (by suspension, excluding a suspension of all trading on the Trading Market, or otherwise) as to all Registrable Securities to which it is required to relate at any time prior to the expiration of the Effectiveness Period (without being succeeded immediately by an additional registration statement filed and declared effective) for a period of time which shall exceed 30 days in the aggregate per year or more than 20 consecutive calendar days (defined as a period of 365 days commencing on the date the Registration Statement is declared effective); or (iv) the Ordinary Shares are not listed or quoted on any Trading Market, or is suspended from trading on any Trading Market (except for the Tel Aviv Stock Exchange) for a period of three (3) consecutive trading days (provided the Company shall not have been able to cure such trading suspension within 30 days of the notice thereof or list the Ordinary Stock on another Trading Market); (any such failure or breach being referred to as an "Event," and for purposes of clause (i) or (ii) the date on which such Event occurs, or for purposes of clause (iii) the date which such 30 day or 20 consecutive day period (as the case may be) is exceeded, or for purposes of clause (iv) the date on which such three (3) trading day period is exceeded, being referred to as "Event Date"), then until the applicable Event is cured, the Company shall pay to each Holder an amount in cash, as liquidated damages and not as a penalty, equal to 2.0% for each thirty (30) day period (prorated for partial periods) on a daily basis of the outstanding principal amount of the Note. While such Event continues, such liquidated damages shall be paid not less often than each thirty (30) days. Any unpaid liquidated damages as of the date when an Event has been cured by the Company shall be paid within seven (7) business days following the date on which such Event has been cured by the Company. (c) Within three business days of the Effectiveness Date, the Company shall cause its counsel to issue a blanket opinion in the form attached hereto as Exhibit A, to the transfer agent stating that the shares are subject to an effective registration statement and can be reissued free of restrictive legend upon notice of a sale by Purchaser and confirmation by Purchaser that it has complied with the prospectus delivery requirements, provided that the Company has not advised the transfer agent orally or in writing that the opinion has been withdrawn. Copies of the blanket opinion required by this Section 2(c) shall be delivered to Purchaser within the time frame set forth above. 3. REGISTRATION PROCEDURES. If and whenever the Company is required by the provisions hereof to effect the registration of any Registrable Securities under the Securities Act, the Company will, by the Filing Date: (a) prepare and file with the Commission the Registration Statement with respect to such Registrable Securities, respond as promptly as possible to any comments received from the Commission, and use its reasonable commercial efforts to cause the Registration Statement to become and remain effective for the Effectiveness Period with respect thereto, and promptly provide to the Purchaser copies of all filings and Commission letters of comment relating thereto; (b) prepare and file with the Commission such amendments and supplements to the Registration Statement and the Prospectus used in connection therewith as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by the Registration Statement and to keep such Registration Statement effective until the expiration of the Effectiveness Period; (c) furnish to the Purchaser such number of copies of the Registration Statement and the Prospectus included therein (including each preliminary Prospectus) as the Purchaser reasonably may request to facilitate the public sale or disposition of the Registrable Securities covered by the Registration Statement; (d) use its commercially reasonable efforts to register or qualify the Purchaser's Registrable Securities covered by the Registration Statement under the securities or "blue sky" laws of such jurisdictions within the United States as the Purchaser may reasonably request, provided, however, that the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction; (e) list the Registrable Securities covered by the Registration Statement with any securities exchange on which the Ordinary Shares of the Company are then listed; (f) immediately notify the Purchaser at any time when a Prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event, of which the Company has knowledge, as a result of which the Prospectus contained in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; and (g) make available for inspection by the Purchaser and any attorney, accountant or other agent retained by the Purchaser, all relevant publicly available, non-confidential financial and other records, pertinent corporate documents and properties of the Company as is customary for due diligence examinations in connection with public offerings, and cause the Company's officers, directors and employees to supply all such relevant publicly available non-confidential information reasonably requested by the attorney, accountant or agent of the Purchaser. 4. REGISTRATION EXPENSES. All expenses relating to the Company's compliance with Sections 2 and 3 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Company, fees and expenses (including reasonable counsel fees) incurred in connection with complying with state securities or "blue sky" laws, fees of the NASD, transfer taxes, fees of transfer agents and registrars, fees of, and disbursements incurred by, one counsel for the Holders (to the extent such counsel is required due to Company's failure to meet any of its obligations hereunder), are called "Registration Expenses". All selling commissions applicable to the sale of Registrable Securities, including any fees and disbursements of any special counsel to the Holders beyond those included in Registration Expenses, are called "Selling Expenses." The Company shall only be responsible for all Registration Expenses and not for any Selling Expenses. 5. INDEMNIFICATION. (a) In the event of a registration of any Registrable Securities under the Securities Act pursuant to this Agreement, the Company will indemnify and hold harmless the Purchaser, and its officers, directors and each other person, if any, who controls the Purchaser within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which the Purchaser, or such persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement under which such Registrable Securities were registered under the Securities Act pursuant to this Agreement, any preliminary Prospectus or final Prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Purchaser, and each such person for any reasonable legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon (A) any untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by or on behalf of the Purchaser or any such person in writing specifically for use in any such document; (B) use of the Registration Statement or the related Prospectus following a Discontinuation Event, provided Purchaser received prior notice of such Discontinuation Event; or (C) if the Purchaser fails to deliver a Prospectus, as then amended or supplemented, provided that the Company shall have delivered to the Purchaser such Prospectus. Notwithstanding the foregoing, the Company shall not be liable for any losses, claims, damages or liabilities by reason of any compromise, consent to entry of judgment, or settlement effected without the Company's prior written consent, which consent shall not be unreasonably withheld or conditioned. (b) In the event of a registration of the Registrable Securities under the Securities Act pursuant to this Agreement, the Purchaser will indemnify and hold harmless the Company, and its officers, directors and each other person, if any, who controls the Company within the meaning of the Securities Act, against all losses, claims, damages or liabilities, joint or several, to which the Company or such persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact which was furnished in writing by the Purchaser to the Company expressly for use in (and such information is contained in) the Registration Statement under which such Registrable Securities were registered under the Securities Act pursuant to this Agreement, any preliminary Prospectus or final Prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and each such person for any reasonable legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, provided, however, that the Purchaser will be liable in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished in writing to the Company by or on behalf of the Purchaser specifically for use in any such document. Notwithstanding the provisions of this paragraph, the Purchaser shall not be required to indemnify any person or entity in excess of the amount of the aggregate net proceeds received by the Purchaser in respect of Registrable Securities in connection with any such registration under the Securities Act. (c) Promptly after receipt by a party entitled to claim indemnification hereunder (an "Indemnified Party") of notice of the commencement of any action, such Indemnified Party shall, if a claim for indemnification in respect thereof is to be made against a party hereto obligated to indemnify such Indemnified Party (an "Indemnifying Party"), notify the Indemnifying Party in writing thereof, but the omission so to notify the Indemnifying Party shall not relieve it from any liability which it may have to such Indemnified Party other than under this Section 5(c) and shall only relieve it from any liability which it may have to such Indemnified Party under this Section 5(c) if and to the extent the Indemnifying Party is substantially prejudiced by such omission. In case any such action shall be brought against any Indemnified Party and it shall notify the Indemnifying Party of the commencement thereof, the Indemnifying Party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel satisfactory to such Indemnified Party, and, after notice from the Indemnifying Party to such Indemnified Party of its election so to assume and undertake the defense thereof, the Indemnifying Party shall not be liable to such Indemnified Party under this Section 5(c) for any legal expenses subsequently incurred by such Indemnified Party in connection with the defense thereof; if the Indemnified Party retains its own counsel, then the Indemnified Party shall pay all fees, costs and expenses of such counsel, provided, however, that, if the defendants in any such action include both the indemnified party and the Indemnifying Party and the Indemnified Party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the Indemnifying Party or if the interests of the Indemnified Party reasonably may be deemed to conflict with the interests of the Indemnifying Party, the Indemnified Party shall have the right to select one separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the reasonable expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the Indemnifying Party as incurred. (d) In order to provide for just and equitable contribution in the event of joint liability under the Securities Act in any case in which that an Indemnified Party or any officer, director or controlling person thereof, makes a claim for indemnification pursuant to this Section 5 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced, notwithstanding the fact that this Section 5 provides for indemnification in such case, then the Indemnifying Party will contribute to the aggregate losses, claims, damages or liabilities to which it may be subject (after contribution from others) in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and the relative fault of the Indemnified Party as well as any other relevant equitable considerations. Relative fault shall be determined by reference to, among other things, whether any untrue statement or omission or alleged untrue statement of a material fact or the omission to state a material fact relates to information provided by the Indemnifying Party or the Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. Notwithstanding the foregoing, no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. (e) The provisions of this Section 5 will remain in full force and effect and survive the sale by the Purchaser of the Registrable Securities covered by the Registration Statement. 6. [RESERVED]. 7. MISCELLANEOUS. (a) REMEDIES. In the event of a breach by the Company or by a Holder, of any of their respective obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. (b) NO PIGGYBACK ON REGISTRATIONS. Except as and to the extent specified in Schedule 7(b) hereto, neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may, without the consent of the Holder, which consent shall not be unreasonably withheld, include securities of the Company in any Registration Statement other than the Registrable Securities, and the Company shall not after the date hereof enter into any agreement providing any such right for inclusion of shares in the Registration Statement to any of its security holders. Except as and to the extent specified in Schedule 7(b) hereto, the Company has not previously entered into any agreement granting any registration rights with respect to any of its securities to any person that have not been fully satisfied. (c) COMPLIANCE. Each Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to the Registration Statement. (d) DISCONTINUED DISPOSITION. Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of a Discontinuation Event (as defined below), such Holder will forthwith discontinue disposition of such Registrable Securities under the applicable Registration Statement until such Holder's receipt of the copies of the supplemented Prospectus and/or amended Registration Statement or until it is advised in writing by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. The Company may provide appropriate stop orders to enforce the provisions of this paragraph. For purposes of this Section 7(d), a "Discontinuation Event" shall mean (i) when the Commission notifies the Company whether there will be a "review" of such Registration Statement and whenever the Commission comments in writing on such Registration Statement (the Company shall provide true and complete copies thereof and all written responses thereto to each of the Holders); (ii) any request by the Commission or any other Federal or state governmental authority for amendments or supplements to such Registration Statement or Prospectus or for additional information; (iii) the issuance by the Commission of any stop order suspending the effectiveness of such Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; (v) the occurrence of any event or passage of time that makes the financial statements included in such Registration Statement ineligible for inclusion therein or any statement made in such Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to such Registration Statement, Prospectus or other documents so that, in the case of such Registration Statement or Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (e) PIGGY-BACK REGISTRATIONS. If at any time during the Effectiveness Period there is not an effective Registration Statement covering all of the Registrable Securities and the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form F-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, then the Company shall send to each Holder written notice of such determination and, if within fifteen (15) days after receipt of such notice, any such Holder shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities such holder requests to be registered to the extent the Company may do so without violating registration rights of others which exist as of the date of this Agreement, subject to customary underwriter cutbacks applicable to all holders of registration rights and subject to obtaining the consent of any selling stockholder(s) to such inclusion under such registration statement. (f) AMENDMENTS AND WAIVERS. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Majority Holders. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of certain Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of at least a majority of the Registrable Securities to which such waiver or consent relates; provided, however, that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence. (g) NOTICES. Any notice or request hereunder may be given to the Company or the Purchaser at the respective addresses set forth below or as may hereafter be specified in a notice designated as a change of address under this Section 7(g). Any notice or request hereunder shall be given by registered or certified mail, return receipt requested, hand delivery, overnight mail, Federal Express or other national overnight next day carrier (collectively, "Courier") or telecopy (confirmed by mail). Notices and requests shall be, in the case of those by hand delivery, deemed to have been given when delivered to any party to whom it is addressed, in the case of those by mail or overnight mail, deemed to have been given five (5) business days after the date when deposited in the mail or three (3) business days after the date when deposited with the overnight mail carrier, in the case of a Courier, the two (2) business days following timely delivery of the package with the Courier, and, in the case of a telecopy, when confirmed. The address for such notices and communications shall be as follows: IF TO THE COMPANY: B.O.S. Better On-Line Solutions Ltd. To the address set forth under the Company's name on the signature page hereto. WITH A COPY TO: Amit, Pollak, Matalon & Ben-Naftali, Erez & Co. NYP Tower, 17 Yitzhak Sadeh Street, 19th Floor Tel Aviv 67775 Attention: Shlomo Landress, Esq. Facsimile: (972) 3 561-3620 IF TO A PURCHASER: To the address set forth under Purchaser's name on the signature page hereto. IF TO ANY OTHER PERSON WHO IS THEN THE REGISTERED HOLDER: To the address of such Holder as it appears in the stock transfer books of the Company or such other address as may be designated in writing hereafter in accordance with this Section 7(g) by such person. (h) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of each Holder. Each Holder may assign their respective rights hereunder in the manner and to the persons as permitted under the Note and the Security Agreement with the prior written consent of the Company, which consent shall not be unreasonably withheld. (i) EXECUTION AND COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof. (j) GOVERNING LAW. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all Proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement shall be commenced exclusively in the state and federal courts sitting in the City of New York, Borough of Manhattan. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any Proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such Proceeding is improper. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. If either party shall commence a Proceeding to enforce any provisions hereunder, then the prevailing party in such Proceeding shall be reimbursed by the other party for its reasonable attorneys fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding. (k) CUMULATIVE REMEDIES. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. (l) SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (m) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. [BALANCE OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. B.O.S. BETTER ON-LINE SOLUTIONS LTD. LAURUS MASTER FUND, LTD. By: By: --------------------- --------------------- Name: Name: --------------------- --------------------- Title: Title: --------------------- --------------------- ADDRESS FOR NOTICES: ADDRESS FOR NOTICES: Beit Rabin, 100 BOS Road 825 Third Avenue - 14th Floor Teradyon Industrial Park, Misgav 20179 New York, NY 10022 Israel Attention: Nehemia Kaufman, CFO Attention: David Grin Facsimile: (972) 4 999-0334 Facsimile: 212-541-4434 EX-99 7 exhibit_10-1.txt EXHIBIT 10.1 CONSENT OF INDEPENDENT AUDITORS We hereby consent to the incorporation by reference in the previously filed Registration Statements on Form S-8 (No. 333-110696, 333-100971 and 333-11650) of B.O.S. Better Online Solutions Ltd. of our report dated March 22, 2004, with respect to the consolidated financial statements of B.O.S. Better Online Solutions Ltd. included in this Annual Report on Form 20-F for the year ended December 31, 2003. /S/ Kost Forer Gabbay & Kasierer June 17, 2004 KOST FORER GABBAY & KASIERER Tel Aviv, Israel A member of Ernst & Young Global EX-99 8 exhibit_31-1.txt EXHIBIT 31.1 CERTIFICATION PURSUANT TO RULE 13A-14(A) OR RULE 15D-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934. I, Adiv Baruch, certify that: 1. I have reviewed this annual report on Form 20-F of B.O.S. Better Online Solutions Ltd (the "registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986]; (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and (d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 17, 2004 /s/ Adiv Baruch - --------------- Adiv Baruch, President and Chief Executive Officer EX-99 9 exhibit_31-2.txt EXHIBIT 31.2 CERTIFICATION PURSUANT TO RULE 13A-14(A) OR RULE 15D-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934. I, Nehemia Kaufman, certify that: 1. I have reviewed this annual report on Form 20-F of B.O.S. Better Online Solutions Ltd (the "registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986]; (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and (d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 17, 2004 /s/ Nehemia Kaufman - ------------------- Nehemia Kaufman, Chief Financial Officer EX-99 10 exhibit_32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO RULE 13A-14(B) OR RULE 15D-14(B) OF THE SECURITIES EXCHANGE ACT OF 1934. In connection with the Annual Report on Form 20-F of B.O.S Better Online Solutions Ltd., a company organized under the laws of the State of Israel (the "COMPANY"), for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "REPORT"), each of the undersigned officers of the Company certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to such officer's knowledge, that: 1. the Report fully complies, in all material respects, with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Report. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. By: /S/ Adiv Baruch By: /S/ Nehemia Kaufman - ------------------- ----------------------- Adiv Baruch Nehemia Kaufman President and Chief Executive Officer Chief Financial Officer Date: June 17, 2004 -----END PRIVACY-ENHANCED MESSAGE-----