-----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, DZBhQFd2OpcTO5eAnGLf7IneVhHhGABIC1D4JwP3Lnm61PEWLFO14GHIdGZIE1Xe 5Y/hfP8+qJAW3GqZP5+9fA== /in/edgar/work/20000802/0000940180-00-000913/0000940180-00-000913.txt : 20000921 0000940180-00-000913.hdr.sgml : 20000921 ACCESSION NUMBER: 0000940180-00-000913 CONFORMED SUBMISSION TYPE: F-1/A PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 20000802 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIND CTI LTD CENTRAL INDEX KEY: 0001119083 STANDARD INDUSTRIAL CLASSIFICATION: [7371 ] FILING VALUES: FORM TYPE: F-1/A SEC ACT: SEC FILE NUMBER: 333-12266 FILM NUMBER: 684149 BUSINESS ADDRESS: STREET 1: INDUSTRIAL PARK BUILDING 7 PO BOX 144 STREET 2: 972-4-993-6666 CITY: YOQNEAM 20692 ISRAEL STATE: L3 ZIP: 00000 BUSINESS PHONE: 01197249936666 F-1/A 1 0001.txt AMENDMENT NO. 1 TO FORM F-1 Registration No. 333-12266 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 2, 2000. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- Amendment No. 1 to FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- MIND C. T. I. LTD. (Exact name of Registrant as specified in its charter) Israel 7371 Not Applicable (Primary Standard (I.R.S. Employer (State or other Industrial Identification No.) jurisdiction of Classification Code incorporation or Number) organization) -------------- Industrial Park, Building 7, P.O. Box 144 Yoqneam 20692, Israel Tel: 972-4-993-6666 Fax: 972-4-993-7776 (Address and telephone number of Registrant's principal executive offices) -------------- MIND C.T.I. Inc. 777 Terrace Avenue Hasbrouck Heights, NJ 07604 Tel: 201-288-3900 Fax: 201-288-4590 (Name, address, including zip code, and telephone number of agent for service) -------------- Copies to: Yehuda M. Levy, Adv. Neil Gold Phyllis G. Korff Aaron M. Lampert, Adv. Goldfarb, Levy, Eran & Co. Fulbright & Jaworski L.L.P. Skadden, Arps, Slate, Naschitz, Brandes & Co. Eliahu House, 2 Ibn Gvirol Street 666 Fifth Avenue Meagher & Flom LLP 5 Tuval Street Tel Aviv 64077, Israel New York, NY 10103 Four Times Square Tel Aviv 67897, Israel Tel: 972-3-608-9999 Tel: 212-318-3000 New York, NY 10036-6522 Tel: 972-3-623-5000 Fax: 972-3-608-9909 Fax: 212-752-5958 Tel: 212-735-3000 Fax: 972-3-623-5005 Fax: 917-777-2694
-------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [X] CALCULATION OF REGISTRATION FEE - ---------------------------------------------------------------------------------
Proposed Proposed maximum Title of each Class of maximum offering aggregate Amount of Securities to be Amount to be price per offering Registration Registered registered(1) ordinary share(2) price(2) Fee - --------------------------------------------------------------------------------- Ordinary shares, NIS 0.01 per share ....... 4,830,000 $12.00 $57,960,000 $15,302 - ---------------------------------------------------------------------------------
(1) Includes 630,000 ordinary shares issuable upon exercise of the underwriters' over-allotment option. (2) Estimated solely for the purpose of calculating the registration fee. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell securities and it is not soliciting an offer to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion, dated August 2, 2000 PROSPECTUS 4,200,000 Shares [LOGO OF MIND] Ordinary Shares - -------------------------------------------------------------------------------- This is our initial public offering of ordinary shares. We are offering 4,200,000 ordinary shares. No public market currently exists for our ordinary shares. We propose to list the ordinary shares on the Nasdaq National Market under the symbol "MNDO". We anticipate the public offering price to be between $10.00 and $12.00 per ordinary share. Investing in the ordinary shares involves risks. Risk Factors begin on page 5.
Per Share Total ---------- ------- Public Offering Price........................................ $ $ Underwriting Discount........................................ $ $ Proceeds to MIND C.T.I. Ltd.................................. $ $
We have granted the underwriters the right to purchase up to 630,000 additional ordinary shares within 30 days to cover over-allotments. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Lehman Brothers, on behalf of the underwriters, expects to deliver the ordinary shares to purchasers on or before , 2000. - -------------------------------------------------------------------------------- Lehman Brothers U.S. Bancorp Piper Jaffray CIBC World Markets Fidelity Capital Markets a division of National Financial Services Corporation , 2000 Inside Front Cover Graphics Description The MIND logo appears on the top right of the inside front cover. The words "Provider of High Quality Real-Time Billing and Customer Care Software for Internet Telephony Service Providers" appear at the center of the page, and below these words appears the following bullet points: . Operating in a rapidly growing industry . Strategic relationships with major vendors . Over 100 installations of MIND-iPhonEX Internet telephony billing systems worldwide A picture of a portion of our web-site appears within a large circle at the end of the page, and to the right of the circle appears our slogan "Keep us in Mind". Inside Back Cover Graphics Description The MIND logo appears on the top right of the inside back cover. The words "Enabling Internet Protocol technologies by implementing software at Internet speed" appears at the top of the page. In the center of the page appear the words "emerging Internet Industry", followed by the following three bullet points: . Real-Time billing . Modular Architecture . Supports multiple services On either side of the bullet points appear circles. The circle on the left contains the words "Unified Messaging", "Data", "Content" and "Voice", and the circle on the right contains a picture of a portion of our web-site. Our slogan "Keep us in Mind" appears on the bottom left corner of the page. TABLE OF CONTENTS
Page ---- Prospectus Summary.................. 1 Risk Factors........................ 5 Forward-looking Statements.......... 16 Use of Proceeds..................... 17 Dividend Policy..................... 17 Capitalization...................... 18 Dilution............................ 19 Selected Consolidated Financial and Operating Data..................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 21 Business............................ 32
Page ---- Management........................... 45 Related Party Transactions .......... 52 Principal Shareholders............... 54 Shares Eligible for Future Sale...... 56 Description of Ordinary Shares....... 58 Conditions in Israel................. 61 Taxation and Government Programs..... 63 Underwriting......................... 70 Legal Matters........................ 73 Experts.............................. 73 Enforceability of Civil Liabilities.. 73 Where You Can Find Additional Information......................... 74
You should only rely on the information contained in this prospectus. We have not authorized anyone to provide any different or additional information. This prospectus is not an offer to sell or a solicitation of an offer to buy ordinary shares in any jurisdiction where it is unlawful. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of ordinary shares. Until , 2000 (25 days after the date of this prospectus), all dealers that buy, sell or trade our ordinary shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. i PROSPECTUS SUMMARY This summary highlights information contained in other parts of this prospectus. You should read the entire prospectus carefully, including the section entitled "Risk Factors" and our consolidated financial statements and the notes to those financial statements, before deciding to buy our ordinary shares. We develop, manufacture and market real-time billing and customer care software for Voice over IP service providers. Voice over IP, also known as Internet telephony, is the real-time transmission of voice communications over the public Internet and private networks based on Internet Protocol, commonly known as IP. Internet Protocol is the process by which data is transmitted from one computer to another over the Internet. Our billing and customer care software, known as MIND-iPhonEX, enables providers of Voice over IP services to meet complex, mission-critical billing and customer care needs, such as authentication, authorization, accounting and reporting. Our software is also used by service providers to collect the data needed to initiate service and manage customer accounts. Mind-iPhonEx is scalable, which means that it is easily adapted to changes in the configuration and size of a service provider's network. It operates on the IP telecommunications equipment of major manufacturers, such as Cisco Systems Inc. and Lucent Technologies Inc. We also provide professional services, primarily to our billing and customer care customers, consisting of customization, installation, customer support, training and maintenance services and project management, which is advice to our customers regarding deployment of billing and customer care software over their IP networks. We have installed MIND-iPhonEX for a large base of customers worldwide, including Bell Atlantic Corp., Deutsche Telekom AG, China Ministry of Post and Telecommunications (China Telecom), China United Telecommunications Corp. (China Unicom), Singapore Telecommunications Ltd., iBasis Inc., and Southnet TeleComm Services Inc. In addition to our billing and customer care software products for Voice over IP, we provide a call management system used by organizations for call accounting, traffic analysis and fraud detection. This enterprise software, which we call PhonEX, has been installed in many locations throughout the world for customers including Credit Suisse First Boston and Deutsche Post AG. Voice over IP service providers can offer their subscribers enhanced voice and data communications services and lower rates for telephony services. These advantages are contributing to the rapid growth in demand for IP telephony services. Voice over IP providers include Internet service providers, and Internet telephony service providers. In addition, traditional telecommunications service providers are increasingly offering IP telephony to remain competitive. International Data Corporation estimated that total Voice over IP use is expected to increase from 2.7 billion minutes in 1999 to 135 billion minutes in 2004, representing a compound annual growth rate of 119%. Revenues derived from providing Voice over IP services are expected to increase from $480 million in 1999 to $19 billion in 2004, representing a compound annual growth rate of 109%. According to Frost and Sullivan, the worldwide market for gateway equipment that allows interconnections between IP-based and traditional telephone networks was $279.2 million in 1998 and is estimated to grow to approximately $9.2 billion in 2004. We believe that the expected growth in the Voice over IP market indicated by this estimated increase in sales of gateway equipment will lead to an increased demand for billing and customer care software products that enable providers of Voice over IP services to bill their subscribers for the services used. Billing and customer care software is among the key components of any telephony service provider's system because they enable the service provider to track and bill for usage, manage revenues and customer relations, and devise marketing programs and rate plans. As service providers broaden their service offerings to include Voice over IP, the demand for more sophisticated billing and customer care software suitable for these services is growing. 1 Our objective is to be a leader in the market for billing and customer care software for Voice over IP. In addition, we intend to offer billing and customer care software for other IP-based services as the market for this type of software grows. The key elements of our strategy include: . Leverage our brand name recognition and technical expertise. We believe that our early position in the market and our reputation for offering high quality, reliable billing and customer care software has provided us with significant brand name recognition among Voice over IP providers. We intend to leverage our reputation, brand name recognition and expertise to be a leader in the market for billing and customer care software for Voice over IP. . Enhance alliances with industry leaders. We have established cooperative alliances with leading manufacturers of IP telecommunications equipment such as Cisco, Lucent, Netspeak and VocalTec Ltd. Our alliances allow us to broaden our marketing capabilities significantly, support new features offered by equipment vendors as these features are introduced to the market, and maintain our technology leadership over our competitors. We intend to continue to leverage these alliances in order to solidify and expand our market presence. . Maintain and expand technological expertise. We believe that our reputation in the market is due in large part to our technological expertise, which we intend to maintain and expand in order to enhance our existing products and develop new products for growing markets. . Offer convergent IP billing products. As providers of IP-based services continue to broaden their service offerings, we believe that they will increasingly need billing and customer care products that allow them to monitor and bill their customers based on the type and content of the services provided. We intend to leverage our position in the market for billing and customer care software for Voice over IP and our technical expertise to be a leading provider of convergent billing software products. . Expand professional services opportunities. Our customers increasingly require professional services, including customization, project management, installation and training, technical support and maintenance. This provides us with the opportunity to increase our revenue base from existing customers. We were incorporated under the laws of the State of Israel in 1995 as MIND C.T.I. Ltd. Our principal executive offices are located at Industrial Park, Building 7, Yoqneam 20692, Israel. Our telephone number is 1-888-270-4056. Recent Operating Results Our unaudited revenues were $3,630,000 for the three months ended June 30, 2000 compared to $1,821,000 for the three months ended June 30, 1999 and our unaudited net income was $879,000 for the three months ended June 30, 2000 compared to $408,000 for the three months ended June 30, 1999. Our unaudited net loss applicable to ordinary shares was $4,538,000 for the three months ended June 30, 2000 compared to net income applicable to ordinary shares of $408,000 for the three months ended June 30, 1999. The net loss applicable to ordinary shares in the 2000 period resulted from amortization in the amount of $5,417,000 relating to the beneficial conversion feature of our preferred shares for the three months ended June 30, 2000. 2 The Offering Ordinary shares offered............. 4,200,000 shares Ordinary shares to be outstanding after this offering................ 21,283,298 shares Over-allotment option granted to the underwriters by us.................. 630,000 shares Use of proceeds..................... We intend to use the net proceeds of this offering to expand sales and marketing of our products worldwide, to enhance our product development programs, to purchase property, plant and equipment, to provide working capital and for other general corporate purposes, including potential acquisitions. Proposed Nasdaq National Market symbol............................. MNDO
The above information excludes from the number of ordinary shares to be outstanding after this offering 1,106,000 shares. As of May 31, 2000, 747,820 of the excluded shares are issuable upon the exercise of outstanding options and 358,180 of the excluded shares are reserved for issuance under our share option plan. About this Prospectus Unless otherwise indicated, all information contained in this prospectus: . assumes no exercise of the underwriters' option to purchase up to 630,000 additional ordinary shares from us to cover over-allotments; . assumes an initial offering price of $11.00 per ordinary share, the midpoint of the estimated initial public offering price range; . reflects a 19-for-1 share dividend that was effected in April 2000; and . assumes the conversion of Series A and B preferred shares into ordinary shares at a conversion rate of 19.7037 ordinary shares for every Series A preferred share and 20 ordinary shares for every Series B preferred share, which will take place immediately prior to this offering. 3 Summary Consolidated Financial Data The following tables present summary consolidated financial data derived from our consolidated financial statements. You should read this along with the sections of this prospectus entitled "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes.
Years Ended Three Months Ended December 31, March 31, --------------------- ------------------ 1997 1998 1999 1999 2000 ------ ------ ------- ------------------ (In thousands except per share data) Consolidated Statement of Operations Data: Revenues: Sales of licenses.................. $1,500 $3,385 $ 6,791 $ 1,287 $ 2,642 Services........................... 491 685 1,405 298 529 ------ ------ ------- -------- --------- Total revenues....................... 1,991 4,070 8,196 1,585 3,171 Cost of revenues..................... 432 631 1,318 288 423 ------ ------ ------- -------- --------- Gross profit......................... 1,559 3,439 6,878 1,297 2,748 Research and development expenses, net................................. 397 1,049 1,918 417 894 Selling, general and administrative expenses: Selling expenses................... 430 1,055 2,110 429 809 General and administrative expenses.......................... 352 591 1,000 219 363 Non-cash compensation................ 1 1 26 -- 78 ------ ------ ------- -------- --------- Operating income..................... 379 743 1,824 232 604 Financial and other income, net...... 77 99 137 15 21 ------ ------ ------- -------- --------- Income before taxes on income........ 456 842 1,961 247 625 Taxes on income...................... 114 201 447 58 144 ------ ------ ------- -------- --------- Net income........................... 342 641 1,514 189 481 Accretion of mandatorily redeemable convertible A preferred shares to mandatory redemption value.......... -- -- -- -- (6,672) ------ ------ ------- -------- --------- Net income (loss) applicable to ordinary shares..................... $ 342 $ 641 $ 1,514 $ 189 $(6,191) ====== ====== ======= ======== ========= Earnings (loss) per ordinary share: Basic.............................. $ 0.03 $ 0.05 $ 0.10 $ 0.01 $ (0.42) ====== ====== ======= ======== ========= Diluted............................ $ 0.03 $ 0.05 $ 0.10 $ 0.01 $ (0.42) ====== ====== ======= ======== ========= Weighted average number of ordinary shares used in computation of earnings (loss) per share: Basic.............................. 11,163 12,246 14,667 13,928 14,892 ====== ====== ======= ======== ========= Diluted............................ 11,200 12,283 14,984 14,115 14,892 ====== ====== ======= ======== =========
As of March 31, 2000 --------------------- Pro forma Actual As Adjusted -------- ----------- (In thousands) (unaudited) Consolidated Balance Sheet Data: Cash and cash equivalents................................ $16,473 $57,839 Working capital.......................................... 14,061 55,427 Total assets............................................. 20,663 62,029 Mandatorily redeemable convertible preferred shares...... 20,778 -- Total shareholders' equity (capital deficiency).......... $ (5,906) $56,238
The pro forma as adjusted information included above gives effect to: . the conversion of Series A and Series B preferred shares into ordinary shares at a conversion rate of 19.7037 ordinary shares for every Series A preferred share and 20 ordinary shares for every Series B preferred share; and . this offering of our ordinary shares. 4 RISK FACTORS Investing in our ordinary shares involves a high degree of risk. Before purchasing our ordinary shares, you should carefully consider the risks described below in addition to the other information in this prospectus. Our business, results of operations and financial condition may be materially and adversely affected by any of the following risks. The trading price of our ordinary shares could decline due to any of these risks, and you could lose all or part of your investment. You should also refer to the other information in this prospectus, including our financial statements and the related notes. Risks Relating to Our Business We have a limited operating history as a provider of billing and customer care software. As a result, it is difficult to evaluate our business and prospects. We first introduced our billing and customer care software for IP telephony in 1997. Until 1999, substantially all of our revenues were derived from sales of our call management software for enterprises. Sales of our billing and customer care software for Voice over IP accounted for 43% of our revenues in 1999 and 75% of our revenues in the three months ended March 31, 2000. This product represents the strategic focus of our business. Because we have a limited operating history as a provider of billing and customer care software for Voice over IP, it is difficult to evaluate our business and prospects. Our quarterly operating results may vary significantly in future periods. We may fail to meet expectations of public market analysts and investors, and the price of our ordinary shares may fall. Our revenues and operating results may vary significantly from quarter to quarter due to a number of factors, including the following: . the timing of orders for our software. Customers typically order our billing and customer care software only after the infrastructure of an IP telephony network has been provided by other vendors. There can be delays in that process. It is therefore difficult for us to predict the timing of orders for our products by customers; . the ability of our customers to expand their Voice over IP operations and increase their subscriber base, including their ability to obtain financing; . changes in our pricing policies or competitive pricing by our competitors; . the timing of releases of new products by manufacturers of IP telecommunications equipment with which our billing and customer care software operates; and . the timing of product introductions by competitors. In future quarters, our operating results may be below the expectations of public market analysts and investors, and as a result, the price of our ordinary shares may fall. If the demand for Voice over IP does not continue to grow, the demand for our billing and customer care software would diminish substantially. Sales of our billing and customer care software for Voice over IP accounted for 43% of our revenues in 1999 and 75% of our revenues in the three months ended March 31, 2000. As a result, our business depends on the continued growth in demand for Voice over IP services. Rapid growth in the demand for Voice over IP services is a recent phenomenon that may not continue. If growth in the demand for Voice over IP does not continue, we will face substantially diminished demand for our billing and customer care software. The failure of the Voice over IP market to continue to grow and develop will have a material and adverse impact on our results of operations and financial condition. 5 In addition, we plan to offer billing and customer care software to providers of other IP-based services. The demand for these other IP-based services is at a very early stage. We cannot be sure that the market for these services will grow. In addition, there may never be significant demand for specialized billing and customer care software for providers of these other IP- based services. This would limit the potential growth of our revenues. If our products fail to achieve widespread market acceptance, our results of operations will be harmed. Our future growth depends on the continued commercial acceptance and success of our products. We first introduced our billing and customer care software for Voice over IP in 1997. Accordingly, we cannot be sure that our products will achieve widespread market acceptance. In addition, the market for billing and customer care software products for Voice over IP is in the early stages of development. As a result, our future performance will depend on the successful development, introduction and consumer acceptance of new and enhanced versions of our products. We are not certain that we will be able to develop new and enhanced products to meet changing market needs. If our new and enhanced products are not well received in the marketplace, our business and results of operations will be harmed. We cannot assure you that we will be successful in developing and marketing new products. We depend on our marketing alliances and reseller arrangements with manufacturers of IP telecommunications equipment to market our products. If we are unable to maintain our existing marketing alliances, or enter into new alliances, our revenues and income will decline. We rely heavily on our marketing alliances and reseller arrangements with major manufacturers of IP telecommunications equipment, including Cisco, Lucent and VocalTec to market our products to the customers of these entities. Our marketing alliances and reseller arrangements with these parties are non- exclusive and do not contain minimum sales or marketing performance requirements. In some instances, there is no formal contractual arrangement. As a result, these entities may terminate these arrangements without notice, cause or penalty. There is also no guarantee that any of these parties will continue to market our products. Our arrangements with our resellers and marketing allies do not prevent them from selling products of other companies, including products that compete with ours. Our marketing allies and resellers also work with some of our competitors, and have invested in these competing companies. For example, Cisco Systems Inc. has invested in Portal Software Inc., one of our competitors. Moreover, our marketing allies and resellers may develop their own internal billing and customer care software products that compete with ours and sell them as part of their equipment. We derive, and anticipate that we will continue to derive, a significant portion of our revenues from customers that have relationships with our marketing allies and resellers. If we are unable to maintain our current marketing alliances and reseller relationships, or if these marketing allies and resellers develop their own competing billing and customer care software products, our revenues and income will decline. If our software does not continue to integrate and operate successfully with the IP telecommunications equipment of the leading manufacturers, we may be unable to maintain our existing customer base and/or generate new sales. The success of our software depends upon the continued successful integration and operation of our software with the IP telecommunications equipment of the leading manufacturers. We currently target a customer base that uses a wide variety of network infrastructure equipment and software platforms, which are constantly changing. In order to succeed, we must continually modify our software as new IP telecommunications equipment is introduced. If our product line fails to satisfy these demanding and rapidly changing technological challenges, our existing customers will be dissatisfied. As a result, we may be unable to generate future sales and our business will be materially adversely affected. 6 If we fail to attract and retain qualified personnel we will not be able to implement our business strategy or operate our business effectively. Our products require sophisticated research and development, sales and marketing, software programming, and technical customer support. Our success depends on our ability to attract, train, motivate and retain highly skilled personnel within each of these areas of expertise. As part of our business strategy, we intend to continue to increase substantially the number of our employees who perform each of these functions. Qualified personnel in these areas are in great demand and are likely to remain a limited resource for the foreseeable future. We cannot assure you that we will be able to attract and retain the skilled employees we require. In addition, the resources required to attract and retain such personnel may adversely affect our operating margins. The failure to attract and retain qualified personnel may have a material adverse effect on our business, results of operations and financial condition. We depend on a limited number of key personnel who would be difficult to replace. If we lose the services of these individuals, our business will be harmed. Because our market is new and evolving, the success of our business depends in large part upon the continuing contributions of our senior management. Specifically, continued growth and success largely depend on the managerial and technical skills of Monica Eisinger, our President and Chief Executive Officer and one of our founders, and other members of senior management. Because the demand for highly qualified senior personnel in Israel exceeds the supply of this type of personnel, it will be difficult to replace members of our senior management if one or more of them were to leave us. If either Ms. Eisinger or other members of the senior management team are unable or unwilling to continue their employment with our company, our business will be harmed. Our success depends on our ability to continually develop and market new and more technologically advanced products and enhancements. The IP-based services market is characterized by: . rapid technological advances like the development of new standards for communications protocols; . frequent new service offerings and enhancements by our customers, such as value-added IP-based services and new rating plans; and . changing customer needs. We believe that our future success will largely depend upon our ability to continue to enhance our existing products and successfully develop and market new products on a cost-effective and timely basis. We cannot assure you that we will be successful in developing and marketing new products that respond adequately to technological change. Our failure to do so would have a material adverse effect on our ability to market our own products. The growth of our business is dependent on the continuation of a favorable regulatory environment, and any change in this environment could harm our business. Federal, state and international regulatory bodies regulate the telecommunications industry and the products that use telecommunications networks. Over the past decade, a variety of new entrants have begun to provide telecommunications services and, in particular, Voice over IP services, intensifying competition in that industry. Future growth in the markets for our products and services will depend in part on the continuation of a favorable regulatory environment for Voice over IP services. However, the growth of Voice over IP has also led to close examination of its regulatory treatment in many jurisdictions. The provision of Voice over IP services is subject to change as a result of future regulatory action, judicial decisions or legislation. The cost of providing Voice over IP services could increase as a result of any regulatory changes that would require providers to pay charges applicable to traditional telephone networks. Any new regulations that increase the cost of providing Voice over IP services could halt the growth of the Voice over IP market. As a result, the market for our billing and customer care software could decline. 7 Any future regulation of the Internet may slow its growth and result in a decreased demand for our products and services. The demand for our products and services depends on the growth in Internet usage since Voice over IP and other IP-based services are delivered mainly over the Internet. The adoption of any laws or regulations that affect the growth of the Internet, or the Voice over IP industry, could result in decreased demand for our products. From time to time, our software and the systems into which it is installed contain undetected errors. This may cause us to experience a significant decrease in market acceptance and use of our software products and we may be subject to warranty and other liability. From time to time, our software, as well as the systems into which they are integrated, contain undetected errors. Because of this integration, it can be difficult to determine the source of the errors. As a result, and regardless of the source of the errors, we could experience one or more of the following adverse results: . diversion of our resources and the attention of our personnel from our research and development efforts to address these errors; . negative publicity and injury to our reputation that may result in loss of existing or future customers; and/or . loss of or delay in revenue. In addition, we may be subject to claims based on errors in our software or mistakes in performing our services. Our licenses generally contain provisions such as disclaimers of warranties and limitations on liability for special, consequential and incidental damages, designed to limit our exposure to potential claims. However, not all of our contracts contain these provisions and we cannot assure you that the provisions that exist will be enforceable. For example, we have an agreement with Cisco relating to our provision of billing and customer care software to China Unicom jointly with voice gateways provided by Cisco. This agreement requires us to indemnify Cisco for claims by China Unicom relating to our software. In addition, while we maintain product liability insurance, we cannot assure you that this insurance will provide sufficient, or any, coverage for these claims. A product liability claim, whether or not successful, could adversely affect our business by damaging our reputation, increasing our costs, and diverting the attention of our management team. If our billing and customer care software for Voice over IP fails to achieve market acceptance among traditional telecommunications service providers, we may suffer a decrease in market share, revenues and profitability. We believe that as the demand for Voice over IP services grow, traditional telecommunications service providers will increasingly offer Voice over IP to remain competitive and these providers will constitute a growing portion of the Voice over IP market. These companies already have relationships with traditional billing and customer care software providers for their telephony services, and may wish to work with their current providers of billing and customer care software to enhance and modify that software for Voice over IP services. If our billing and customer care software for Voice over IP fails to achieve market acceptance among traditional telecommunications service providers, we may suffer a decrease in market share, revenues and profitability. Because some of our customers require a lengthy approval process before they order our products, our sales process is often subject to delays that may decrease our revenues and seriously harm our business. In 1999, we derived 43% of our revenues from the sale of software and related services to providers of Voice over IP services. Before we can sell our software to some of these customers, they must conduct a lengthy and complex approval and purchase process. Prospective customers must make a significant commitment of resources to test and evaluate our products and to integrate them into larger systems. This evaluation process, which takes place before our customers issue purchase orders, typically takes between three and six months. 8 The following factors, among others, affect the length of the approval process: . the time involved for our customers to determine and announce their specifications; . the complexity of the networks being deployed; . the timely delivery by IP telecommunications equipment manufacturers of the hardware comprising the customer's network infrastructure; . the build-up of the customer's network infrastructure; and . the timely release of new versions of products comprising the customer's network infrastructure by the vendors of those products. Delays in product approval may decrease our revenues and could seriously harm our business and results of operations. We may need additional capital to finance our operations in the future and may not be able to obtain additional capital. We intend to continue to enhance our products, develop new product offerings and expand our customer base in order to maintain our competitive position. If our cash flow from operations is not sufficient to meet our capital expenditure and working capital requirements, we will need to raise additional capital from other sources, such as the issuance of additional equity. If we issue additional equity, investors could experience dilution. If we are unable to raise additional capital through the issuance of equity or otherwise, we cannot assure you that any third party will be willing or able to provide additional capital on favorable terms. If we are unable to obtain additional capital, we may be required to reduce the scope of our business or our anticipated growth, which would reduce our revenues. If we are unable to compete effectively in the marketplace, we may suffer a decrease in market share, revenues and profitability. Competition in our industry is intense and we expect competition to increase. We compete primarily with young, emerging billing companies such as Portal Software Inc. and Belle Systems. We also compete with telecommunications equipment companies such as Clarent Corporation, which offers an internally developed billing and customer care software that is integrated into their hardware. Finally, we believe that the more established traditional billing and customer care companies, such as Amdocs Ltd. (which recently acquired Solect Technology Group Inc.) and Saville Systems plc (acquired by ADC Telecommunications Inc.), are beginning to offer billing and customer care software for Voice over IP. Some of our competitors have greater financial, technical, sales, marketing and other resources, and greater name recognition than do we. Current and potential competitors have established, and may establish in the future, cooperative relationships among themselves or with third parties to increase their ability to address the needs of prospective customers. Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share. As a result, our competitors may be able to adapt more quickly than us to new or emerging technologies and changes in customer requirements, and may be able to devote greater resources to the promotion and sale of their products. We cannot guarantee that we will be able to compete effectively against current or future competitors or that competitive pressures will not harm our financial results. If we are unable to manage future expansion, if any, we may experience a significant strain on our financial resources and personnel. Since inception, we have rapidly and substantially increased the scope of our operations and the number of employees domestically and internationally. On March 31, 2000, we had 139 employees, compared to a total of 97 employees on March 31, 1999. We expect to continue to hire new employees at a rapid pace. This expansion has placed, and the anticipated growth of our future operations will place, a significant strain on our internal training capabilities, our management systems and our operational, administrative and financial resources. We expect that we will need to continue to improve our financial and managerial controls and reporting systems 9 and procedures in order to continue to expand and manage our workforce. We cannot assure you that we have made adequate provisions for the costs and risks associated with our growth; that our systems, procedures or controls will be adequate to support our operations as they continue to grow; or that we will be able to market and sell our services successfully as our operations evolve. If we are unable to successfully manage our future expansion, our business will suffer. We may seek to expand our business through acquisitions that could result in diversion of resources and extra expenses, which could disrupt our business and harm our financial condition. Although we have not done so in the past, we may in the future pursue acquisitions of business, products and technologies, or the establishment of joint venture arrangements, that could expand our business. The negotiation of potential acquisitions or joint ventures as well as the integration of an acquired or jointly developed business, technology or product could cause diversion of management's attention from the day-to-day operation of our business. This could impair our relationships with our employees, customers, distributors, re-sellers and marketing allies. Future acquisitions could result in: . potentially dilutive issuances of equity securities; . the incurrence of debt and contingent liabilities; . amortization of goodwill and other tangibles; . research and development write-offs; and . other acquisition-related expenses. Acquired businesses or joint ventures may not be successfully integrated with our operations or with our technology. If any acquisition or joint venture were to occur, we may not receive the intended benefits of the acquisition or joint venture. In addition, we have no experience with respect to negotiating an acquisition and operating an acquired business. If future acquisitions disrupt our operations, our business may suffer. If we are unable to adequately protect our intellectual property or become subject to a claim of infringement, our business may be materially adversely affected. Our success and ability to compete depend substantially upon our internally developed technology. Any misappropriation of our technology could seriously harm our business. In order to protect our technology and products, we rely on a combination of trade secret and trademark law. Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy or otherwise obtain and use our software or technology or to develop software with the same functionality. Policing unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent misappropriation, particularly in foreign countries where the laws may not protect our intellectual property rights as fully as in the United States. Although we have not received any notices from third parties alleging infringement claims, third parties could claim that our current or future products or technology infringe their proprietary rights. We expect that software developers will increasingly be subject to infringement claims as the number of products and competitors providing software and services to the Voice over IP industry increase and overlaps occur. Any claim of infringement by a third party could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract our management from our business. Furthermore, a party making such a claim could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or court order that could prevent us from selling our software. Any of these events could seriously harm our business. If anyone asserts a claim against us relating to proprietary technology or information, we might seek to license their intellectual property or to develop non-infringing technology. We might not be able to obtain a license on commercially reasonable terms or on any terms. Alternatively, our efforts to develop non-infringing technology could be unsuccessful. Our failure to obtain the necessary licenses or other right or to develop non-infringing technology could prevent us from selling our software and could therefore seriously harm our business. 10 Some members of our board of directors may have conflicts of interest with us, and some of these conflicts may be resolved in a manner adverse to us. Mr. Mohan, a member of our board of directors, is a general partner of Summit Partners and a director of Martin and Associates, a company partially owned by Summit Partners. Martin and Associates is a provider of billing and customer care software for local telephony providers, and might compete with us in the future. In addition, Mr. Rosen, who is also a member of our board of directors, is a corporate executive of ADC-Teledata, a subsidiary of ADC Telecommunications Inc. that acquired Saville Systems plc, one of our competitors. Mr. Mohan and Mr. Rosen, as directors of our company, will have fiduciary duties, including duties of loyalty, to our company but may also have conflicts of interest with respect to matters potentially involving or affecting us, such as acquisitions or other corporate opportunities that may be suitable for both us and Summit Partners or ADC-Teledata, as the case may be. Although we believe that these directors will be able to fulfil their fiduciary duties to our shareholders despite their involvement with Summit Partners and ADC-Teledata, there could be potential conflicts of interest when these directors are faced with decisions that could have different implications for our company and either Summit Partners or ADC-Teledata. These conflicts could be resolved in a manner adverse to us which could harm our business. For more information relating to how we handle conflicts of interest, see "Management-- Approval of Specified Related Party Transactions under Israeli Law." Because a substantial majority of our revenues are generated outside of Israel, our results of operations could suffer if we are unable to manage international operations effectively. During 1999, 77.4% of our revenues were generated outside of Israel and during the three months ended March 31, 2000, 87.6% of our revenues were generated outside of Israel. Our sales outside of Israel are made in more than 20 countries. We currently have sales offices located in New Jersey, United States and in Beijing, China, and plan to establish additional facilities in other parts of the world. The expansion of our existing international operations and entry into additional international markets will require significant management attention and financial resources. Our ability to penetrate some international markets may be limited due to different technical standards, protocols and requirements for our products in different markets. We cannot be certain that our investments in establishing facilities in other countries will produce desired levels of revenue. In addition, conducting our business internationally subjects us to a number of risks, including . staffing and managing foreign operations; . increased risk of collection; . potentially adverse tax consequences; . the burden of compliance with a wide variety of foreign laws and regulations; . burdens that may be imposed by tariffs and other trade barriers; and . political and economic instability. Our business may be negatively affected by exchange rate fluctuations. Although most of our revenues are denominated in U.S. Dollars and Euros, approximately 60% of our expenses are incurred in New Israeli Shekels, or NIS. As a result, we may be negatively affected by fluctuations in the exchange rate between the Euro or the NIS and the U.S. dollar. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation of the NIS against the U.S. dollar. If the U.S. dollar cost of our operations in Israel increases, our U.S. dollar-measured results of operations will be adversely affected. In addition, devaluation in the Euro or local currencies of our customers relative to the U.S. dollar could cause customers to decrease or cancel orders or default on payment. We may choose to limit these exposures by entering into hedging transactions. However, hedging transactions may not enable us to avoid exchange-related losses, and our business may be harmed by exchange rate fluctuations. The imposition of price or exchange controls or other restrictions on the conversion of foreign currencies could affect our ability to collect payments, which in turn, could have a material adverse effect on our results of operations and financial condition. 11 Breaches in the security of the data collected by our systems could adversely affect our reputation and hurt our business. Customers rely on third-party security features to protect due privacy and integrity of customer data. Our products may be vulnerable to breaches in security due to failures in the security mechanisms, the operating system, the hardware platform or the networks linked to the platform. MIND-iPhonEX, which provides web access to information, presents additional security issues for our customers. Security vulnerabilities could jeopardize the security of information stored in and transmitted through the computer systems of our customers. A party that is able to circumvent our security mechanisms could misappropriate proprietary information or cause interruptions in the operations of our customers. Security breaches could damage our reputation and product acceptance would be significantly harmed, which would cause our business to suffer. Risks Relating to the Offering Our share price may be volatile, and you may be unable to sell your shares at or above the offering price. The initial public offering price will be determined through negotiations between the underwriters and us and may not be indicative of market prices that will prevail after the offering. Therefore, you may be unable to sell your shares for more than you paid for them. A number of factors, many of which are beyond our control, may cause the market price of our ordinary shares to fluctuate significantly, such as: . fluctuations in our quarterly revenues and earnings and those of our publicly held competitors; . shortfalls in our operating results from the levels forecast by securities analysts; . public announcements concerning us or our competitors; . changes in pricing policies by us or our competitors; . market conditions in our industry; and . the general state of the securities market (particularly the technology sector). We have no control over any of these matters and any of them may adversely affect our business internationally. In addition, trading in shares of companies listed on the Nasdaq National Market in general and trading in shares of technology companies in particular has been subjected to extreme price and volume fluctuations that have been unrelated or disproportionate to operating performance. These broad market and industry factors may depress our share price, regardless of our actual operating results. An active trading market for our ordinary shares may not develop or be sustained after the offering, and it may be difficult for you to sell your shares. Before the offering, our ordinary shares did not trade in the public market. We cannot be certain that an active and liquid trading market for our ordinary shares will develop or be sustained after the offering. If a desirable trading market does not develop, it may be difficult for you to sell your shares. Substantial sales of our ordinary shares could adversely affect our share price. Sales of a substantial number of ordinary shares after the offering could adversely affect the market price of our ordinary shares by introducing a large number of sellers to the market. Given the likely volatility that will exist for our ordinary shares, such sales could cause the market price of the ordinary shares to decline. After this offering, we will have outstanding 21,283,298 ordinary shares. All of the ordinary shares to be sold in this offering will be freely tradable without restriction or further registration under the federal securities laws unless purchased by our "affiliates," as that term is defined in Rule 144 under the Securities Act. The remaining outstanding ordinary shares, representing approximately 80.3% of the outstanding ordinary shares upon completion of this offering (78.0% if the underwriters' over-allotment option is exercised in full) and all ordinary shares issued upon exercise of options, will be "restricted securities" under the Securities Act subject to restrictions on the timing, manner and volume of sales of such shares. Our directors, executive officers, key 12 employees and our current shareholders have agreed, for a period of 180 days after the date of this prospectus and some of the participants in our directed share program will be required to agree as a condition to participation in the program, for a period of up to 90 days after the date of this prospectus, that they will not, without the prior written consent of Lehman Brothers Inc., directly or indirectly, offer to sell, sell or otherwise dispose of any ordinary shares or securities convertible into or exchangeable for ordinary shares, except for: . the exercise of stock options existing on the date of this offering; . transfers to their associates (as defined in the Exchange Act) who agree to the lock-up; and . pledges if the pledgees agree to the lock-up. We have also agreed to an equivalent lock-up, except that we may issue shares, warrants or options in consideration of acquisitions if the recipient agrees to comply with the lock-up. Holders of 16,491,298 ordinary shares have the right to require us to register their shares on two occasions, and have incidental registration rights with respect to those ordinary shares. In addition, as of May 31, 2000 there were outstanding options to purchase a total of 747,820 ordinary shares and we were authorized to grant options to purchase 358,180 additional ordinary shares. We intend to file a registration statement on Form S-8 covering all of the ordinary shares issuable upon the exercise of options under our stock option plans, at which time these shares will be immediately available for sale in the public market, subject to the terms of the related options and any applicable lock-up agreements. After this offering, our current shareholders will continue to be able to control the outcome of matters requiring shareholder approval. After this offering, our current shareholders will beneficially own an aggregate of 17,083,298 ordinary shares representing approximately 80.3% of the ordinary shares then outstanding. Therefore, they will be able to control the outcome of various actions that require shareholder approval. For example, these shareholders could elect all of our directors, delay or prevent a transaction in which shareholders might receive a premium over the prevailing market price for their shares and prevent changes in control or management. This concentration of ownership may adversely affect our share price. Our management will have broad discretion with respect to the use of the proceeds of this offering, and may not apply the proceeds to uses that will benefit shareholders. There is a significant amount of unallocated proceeds and our management will have broad discretion in determining how to allocate the proceeds from this offering. We intend to use a significant portion of the net proceeds from the offering to expand sales and marketing of our products worldwide, to enhance our product development, for potential acquisitions and for working capital and general corporate purposes. There is no specific allocation for a substantial portion of these net proceeds and our management retains the right to utilize the proceeds as it determines. There can be no assurance that management will be able to use the proceeds effectively to continue the growth of our business. Risks Relating to Our Location in Israel Potential political, economic and military instability in Israel may harm our results of operations. We were organized under the laws of the State of Israel and a substantial portion of our assets, and our principal operations, are located in Israel. Consequently, our operations, financial condition and results of operations are directly influenced by economic, political and military conditions in and affecting Israel. We could be adversely affected if major hostilities break out in the Middle East or if trade between Israel and its present trading partners is curtailed. Since the establishment of the State of Israel in 1948, a state of hostility has existed between Israel and the Arab countries in the region. Any future armed conflicts or political instability in the region could negatively affect our business or harm our results of operations. We cannot predict whether a full resolution of these problems will be achieved, the nature of any such resolution or any consequences that any of these factors may have on us. Israeli companies and companies doing business with them have been subject to an economic boycott initiated by the Arab countries. This boycott and policies may seriously harm our operating results or the expansion of our business. 13 We currently participate in or receive tax benefits from government programs. These programs require us to meet certain conditions and these programs and benefits may be terminated or reduced in the future. We receive tax benefits under Israeli law for capital investments that are designated as "Approved Enterprises." To maintain our eligibility for these tax benefits, we must continue to meet several conditions including making required investments in fixed assets. If we fail to comply with these conditions in the future, the tax benefits received could be cancelled. The Israeli government has reduced the benefits available under this program in recent years and has indicated that it may reduce or eliminate these benefits in the future. These tax benefits may not continue in the future at their current levels or at any level. From time to time, we submit requests for expansion of our Approved Enterprise programs or for new programs. These requests might not be approved. The termination or reduction of these tax benefits could seriously harm our business, financial condition and results of operations. For more information about Approved Enterprises, see "Taxation and Government Programs--Law for Encouragement of Capital Investments, 1959," and Note 7 to our financial statements. Because we have received grants from the Office of the Chief Scientist, we are subject to on-going restrictions. We have received grants in the past from the Office of the Chief Scientist of the Israeli Ministry of Industry and Trade. According to Israeli law, any products developed with grants from the Office of the Chief Scientist are required to be manufactured in Israel, unless we obtain prior approval of a governmental committee. As a condition to obtaining this approval, we may be required to pay the Office of the Chief Scientist up to 300% of the grants we received. In addition, we are prohibited from transferring to third parties the technology developed with these grants without the prior approval of a governmental committee. Approval is not required for the export of any products resulting from the funded technology. Our results of operations may be negatively affected by the obligation of some of our key personnel to perform military service. Some of our executive officers and employees in Israel, including the Chief Financial Officer, are obligated to perform up to 36 days of military reserve duty annually. Our operations could be disrupted by the absence for a significant period of one or more of our executive officers or key employees due to military service. Any disruption in our operations would harm our business. It may be difficult to enforce a U.S. judgment against us, our officers and directors and the Israeli experts in this prospectus or to assert U.S. securities laws claims in Israel or serve process on substantially all of our officers and directors and these experts. We are incorporated in the State of Israel. Substantially all of our executive officers and directors and the Israeli experts in this prospectus are nonresidents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult for an investor, or any other person or entity, to collect a judgment obtained in the United States against us or any of these persons, or to effect service of process upon these persons in the United States. For more information regarding enforceability of civil liabilities against us, our executive officers and directors and the Israeli experts named in this prospectus, see "Enforceability of Civil Liabilities." Provisions of Israeli law and our articles of association may delay, prevent or make difficult a change of control and therefore depress the price of our stock. Some of the provisions of our articles of association and Israeli law could, together or separately: . discourage potential acquisition proposals; . delay or prevent a change in control; and . limit the price that investors might be willing to pay in the future for our ordinary shares. 14 In particular, our articles of association provide that our board of directors will be divided into three classes which serve staggered three year terms. In addition, Israeli corporate law regulates mergers and acquisitions of shares through tender offers, requires approvals for transactions involving significant shareholders and regulates other matters that may be relevant to these types of transactions. See "Description of Ordinary Shares--Mergers and Acquisitions under Israeli Law." Furthermore, Israel tax law treats stock-for- stock acquisitions between an Israeli company and a foreign company less favorably than does U.S. tax law. For example, Israeli tax law may subject a shareholder who exchanges his ordinary shares for shares in a foreign corporation to immediate taxation. Finally, the terms of the grants we received in the past from the Office of the Chief Scientist require prior approval of the acquisition of any shares by a non-Israeli acquirer or the acquisition of 25% of our shares by an Israeli acquirer, excluding the shares listed on Nasdaq. 15 FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that address, among other things, our strategy; the anticipated development of our products; our development of additional revenue sources; the market acceptance of our services; and our technological advancement. These statements may be found in the sections of this prospectus entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and in this prospectus generally, including the section of this prospectus entitled "Business--Our Marketing Opportunity" which contains information obtained from independent industry sources. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including all the risks discussed in "Risk Factors" and elsewhere in this prospectus. In addition, statements that use the terms "believe," "do not believe," "expect," "plan," "intend," "estimate," "anticipate" and similar expressions are intended to identify forward-looking statements. All forward-looking statements in this prospectus 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 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. 16 USE OF PROCEEDS We estimate that the net proceeds we will receive from the sale of our ordinary shares will be approximately $41.4 million, after deducting the underwriting discount and the estimated offering expenses. We intend to use approximately $9.0 million of the net proceeds of this offering to continue to increase our sales and marketing capabilities, including to open and acquire sales and marketing centers in additional markets worldwide, and approximately $7.0 million for research and development relating to new products. We expect to invest $6.4 million over a period of two to three years in connection with increasing the size of our facilities pursuant to an Approved Enterprise program under Israeli law. We expect to use approximately $1.5 million of the net proceeds of this offering to purchase property, plant and equipment pursuant to the Approved Enterprise program over the next 12 months. We expect that the balance of the required investment in the Approved Enterprise program will be financed by any proceeds of the offering remaining after this twelve- month period, cash on our balance sheet and our cash flow from operations. We will use the rest of the proceeds for working capital to support the growth of our business and for other general corporate purposes, including potential acquisitions. We currently have no agreements or understandings with respect to any potential acquisition and no specific plan for the use of the rest of these proceeds. Pending our use of the net proceeds as described above, we intend to invest the net proceeds in interest-bearing instruments or bank deposits in Israel or outside of Israel. DIVIDEND POLICY In 1998, we paid a dividend of approximately $266,000, and in 1999 we paid a dividend in the amount of approximately $393,000. In the first quarter of 2000, we declared a dividend of $2,013,000 to shareholders of record on March 30, 2000, which was paid in the second quarter of 2000. We do not expect to make dividend payments on our ordinary shares in the foreseeable future and currently intend to retain all future earnings to finance our operations and to expand our business. In addition, we received certain benefits as an Approved Enterprise under the Law for the Encouragement of Capital Investments, 1959. Payment of cash dividends may subject that portion of our income derived from the Approved Enterprise to Israeli taxes to which such income would not otherwise be subject. Under current Israeli regulations, any dividends or other distributions paid in respect of ordinary shares that were purchased by non-residents of Israel with certain non-Israeli currencies, including U.S. dollars, may be freely repatriated in such non-Israeli currencies at the rate of exchange prevailing at the time of the conversion provided that Israeli income tax has been paid on, or withheld from, such payments. 17 CAPITALIZATION The following table sets forth our capitalization at March 31, 2000: . on an actual basis; . on a pro forma basis to give effect to the conversion of all our Series A and Series B preferred shares at a conversion rate of 19.7037 ordinary shares for each Series A preferred share and 20 ordinary shares for each Series B preferred share, which will take place immediately prior to this offering; . on a pro forma as adjusted basis to give additional effect to the sale by us of 4,200,000 ordinary shares in this offering at an initial public offering price of $11.00 per share and the receipt by us of the estimated net proceeds of the offering, after deducting the underwriting discount and estimated offering expenses payable by us.
As of March 31, 2000 ----------------------------- Pro Pro Forma Actual Forma As Adjusted ------- ------- ----------- (in thousands) Cash and cash equivalents........................ $16,473 $16,473 $57,839 ======= ======= ======= Mandatorily redeemable convertible preferred shares: Series A preferred shares: authorized: 2,222,220 issued and outstanding: actual - 111,111 shares; pro forma and pro forma as adjusted - none............................... $17,778 $ -- $ -- Series B preferred shares: authorized: 555,560, issued and outstanding: actual - 27,778 shares; pro forma and pro forma as adjusted - none......................................... 3,000 -- -- ------- 20,778 -- -- ------- Shareholders' equity (capital deficiency): Ordinary shares, NIS 0.01 par value per share: authorized - 85,222,220 shares; issued and outstanding: actual - 14,336,440 shares; pro forma - 17,081,298 shares; pro forma as adjusted - 21,281,298 shares................... 36 43 53 Additional paid-in capital...................... 1,364 22,135 63,491 Deferred compensation........................... (880) (880) (880) Accumulated deficit............................. (6,426) (6,426) (6,426) ------- ------- ------- Total shareholders' equity (capital deficiency)................................... (5,906) 14,872 56,238 ------- ------- ------- Total capitalization........................... $14,872 $14,872 $56,238 ======= ======= =======
The preceding table excludes from the number of ordinary shares to be outstanding after this offering 1,108,000 shares. 680,820 of the excluded shares are issuable upon the exercise of options outstanding at March 31, 2000, and 427,180 of the excluded shares reserved for issuance at March 31, 2000 under our option plans. Subsequent to March 31, 2000, 2000 shares were issued upon exercise of existing options. 18 DILUTION Our pro forma consolidated net tangible book value as of March 31, 2000 was approximately $14.9 million, or $0.87 per ordinary share. Pro forma consolidated net tangible book value per share represents the total amount of our consolidated tangible assets reduced by the amount of our consolidated liabilities and divided by the number of ordinary shares outstanding on a pro forma basis after giving effect to the conversion of all outstanding preferred shares into ordinary shares. After giving effect to this offering of our ordinary shares and receipt by us of the estimated net proceeds of this offering, after deducting the underwriting discount and estimated offering expenses payable by us, our pro forma consolidated net tangible book value at March 31, 2000 would have been approximately $56.2 million, or $2.64 per ordinary share. This represents an immediate increase in pro forma consolidated net tangible book value of $1.77 per ordinary share to existing shareholders and an immediate dilution of $8.36 per ordinary share to new investors purchasing ordinary shares in this offering. Dilution per share represents the difference between the price per share to be paid by new investors and the pro forma consolidated net tangible book value per share immediately after this offering. The following table illustrates this per share dilution: Assumed initial public offering price per share............... $11.00 Pro forma consolidated net tangible book value per share before this offering....................................... $0.87 Increase in pro forma consolidated net tangible value per share attributable to new investors........................ 1.77 ----- Pro forma consolidated net tangible book value per share after this offering................................................ 2.64 ------ Dilution per share to new investors........................... $ 8.36 ======
The following table sets forth the differences between the total consideration paid and the average price per share paid by existing shareholders and by new investors purchasing ordinary shares in this offering:
Shares Purchased Total Consideration ------------------ ------------------- Average Price Number Percent Amount Percent Per Share ---------- ------- ----------- ------- ------------- Existing shareholders.. 17,083,298 80.3% $15,442,000 25.1% $0.90 New investors.......... 4,200,000 19.7 46,200,000 74.9 11.00 ---------- ----- ----------- ----- Total................ 21,283,298 100.0% $61,642,000 100.0% ========== ===== =========== =====
The foregoing table does not reflect 680,820 ordinary shares issuable upon exercise of options outstanding at March 31, 2000 under our share option plans and 427,180 additional ordinary shares reserved for issuance under these plans at March 31, 2000. To the extent outstanding options are exercised, there will be further dilution to new investors. 19 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA We have derived the selected consolidated statement of operations data presented below for the years ended December 31, 1997, 1998 and 1999 and the consolidated balance sheet data as of December 31, 1998 and 1999 from our audited consolidated financial statements and notes included in this prospectus. We have derived the selected consolidated statement of operations data presented below for the years ended December 31, 1995 and 1996 and the consolidated balance sheet data as of December 31, 1995, 1996 and 1997 from our audited consolidated financial statements that are not included in this prospectus. The selected financial data for the three month period ended March 31, 1999 and 2000 have not been audited and in the opinion of management reflect and include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of such results. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. You should read the selected financial data together with the section of this prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements included elsewhere in this prospectus.
Period From April 6, Three Months (Inception) Ended through Years Ended December 31, March 31, December 31, ---------------------------- -------------- 1995 1996 1997 1998 1999 1999 2000 ------------ ------ ------ ------ ------ ------ ------- (In thousands, except per share data) Consolidated Statement of Operations Data: Revenues: Sales of licenses...... $ 315 $ 584 $1,500 $3,385 $6,791 $1,287 $ 2,642 Services............... 55 316 491 685 1,405 298 529 ------ ------ ------ ------ ------ ------ ------- Total revenues.......... 370 900 1,991 4,070 8,196 1,585 3,171 Cost of revenues........ 207 253 432 631 1,318 288 423 ------ ------ ------ ------ ------ ------ ------- Gross profit............ 163 647 1,559 3,439 6,878 1,297 2,748 Research and development, expenses, net.................... 25 111 397 1,049 1,918 417 894 Selling, general and administrative expenses: Selling expenses....... 37 225 430 1,055 2,110 429 809 General and administrative expenses.............. 77 247 352 591 1,000 219 363 Non-cash compensation... 7 2 1 1 26 -- 78 ------ ------ ------ ------ ------ ------ ------- Operating income........ 17 62 379 743 1,824 232 604 Financial and other income (expenses), net.................... (2) (20) 77 99 137 15 21 ------ ------ ------ ------ ------ ------ ------- Income before taxes on income................. 15 42 456 842 1,961 247 625 Taxes on income......... 4 12 114 201 447 58 144 ------ ------ ------ ------ ------ ------ ------- Net income.............. 11 30 342 641 1,514 189 481 Accretion of mandatorily redeemable A preferred shares to mandatory redemption value....... -- -- -- -- -- -- (6,672) ------ ------ ------ ------ ------ ------ ------- Net income (loss) applicable to ordinary shares................. $ 11 $ 30 $ 342 $ 641 $1,514 $ 189 $(6,191) ====== ====== ====== ====== ====== ====== ======= Earnings (loss) for ordinary share: Basic.................. $ 0.00 $ 0.00 $ 0.03 $ 0.05 $ 0.10 $ 0.01 $ (0.42) ====== ====== ====== ====== ====== ====== ======= Diluted................ $ 0.00 $ 0.00 $ 0.03 $ 0.05 $ 0.10 $ 0.01 $ (0.42) ====== ====== ====== ====== ====== ====== ======= Pro forma loss per ordinary share: Basic.................. $ (0.42) ======= Diluted................ $ (0.42) ======= Weighted average number of ordinary shares used in computation of earnings (loss) per ordinary share: Basic.................. 10,390 10,390 11,163 12,246 14,667 13,928 14,892 ====== ====== ====== ====== ====== ====== ======= Diluted................ 10,390 10,426 11,200 12,283 14,984 14,115 14,892 ====== ====== ====== ====== ====== ====== ======= Dividends per ordinary share.................. $ -- $ -- $ 0.02 $ 0.01 $ 0.03 $ -- $ 0.14 ====== ====== ====== ====== ====== ====== =======
As of As of December 31, March 31, -------------------------------- --------- 1995 1996 1997 1998 1999 2000 ---- ---- ------ ------ ------ --------- (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents.......... $ 4 $ 1 $ 39 $ 803 $2,646 $16,473 Working capital.................... (61) (67) 974 1,181 4,415 14,061 Total assets....................... 217 690 2,087 3,217 7,493 20,663 Mandatorily redeemable convertible preferred shares.................. -- -- -- -- -- 20,778 Total shareholders' equity (capital deficiency)....................... 68 98 1,257 1,760 5,220 (5,906)
20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is based on and should be read in conjunction with our financial statements, including the related notes, and other financial information included in this prospectus. Overview We develop, manufacture and market real-time billing and customer care software for Voice over IP service providers. Our billing and customer care software product, known as MIND-iPhonEX, enables providers of Voice over IP to meet complex, mission-critical needs, such as authentication, authorization, accounting and reporting. Our software is also used by service providers to collect the data needed to initiate service and manage customer accounts. We also provide professional services, primarily to our billing and customer care customers, consisting of customization, installation, customer support, training and maintenance services and project management, which is advice to our customers regarding the deployment of billing and customer care software over their IP networks. In addition, we provide a software product to enterprises, known as PhonEX, which is a call management system used by organizations for call accounting, traffic analysis and fraud detection. We were incorporated in Israel in 1995 and started providing our enterprise software product to large organizations in that year. In 1997, we introduced our billing and customer care software for Voice over IP. We generate revenues from the sales of licenses for our billing and customer care and enterprise software, and from fees for professional services. In 1999, 82.9% of our revenues were derived from license fees and 17.1% were derived from professional services. Of the total license fees in 1999, 43.1% were derived from providing our billing and customer care software and 56.9% were derived from providing our enterprise software. For the three months ended March 31, 2000, 83.3% of our revenues were derived from license fees and 16.7% were derived from professional services. Of the total license fees for the three months ended March 31, 2000, 75.5% were derived from providing our billing and customer care software and 24.5% were derived from providing our enterprise software. In the future, we expect sales of licenses for our billing and customer care software to remain the primary source of our revenues. We also expect sales of professional services to increase as a percentage of total revenues. We do not experience any significant seasonality in our revenues. Sales to a single distributor of our enterprise software represented 32.3% of our revenues in 1998 and 19.2% of our revenues in 1999. Recently, we have changed our strategy to focus our business on our billing and customer care software. In 1999, 33.8% of our revenues were derived from our 10 largest customers, excluding the single distributor. We expect to continue to derive substantial revenues from a small number of changing customers. None of these customers, however, is expected to represent more than 10% of our annual revenues. The currency of the primary economic environment in which we operate is the U.S. dollar. Most of our revenues are derived from sales outside Israel which are denominated primarily in U.S. dollars. To the extent that our revenues are derived in NIS, contract amounts are stated in dollars and paid in NIS linked to changes in the exchange rate of the U.S. dollar to the NIS. In addition, most of our marketing costs are incurred outside Israel, primarily in U.S. dollars. Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Balances in non-dollar currencies are translated into U.S. dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. For non-dollar transactions and other items reflected in our income statements, the following exchange rates are used: . for transactions, exchange rates at the transaction dates or average rates; and . for other items (derived from non-monetary balance sheet items such as depreciation and amortization, changes in inventories or similar items), historical exchange rates. The resulting currency transaction gains or losses are reported as financial income or expenses as appropriate. Our financial statements are prepared in accordance with generally accepted accounting principles in the United States. 21 Revenues. Our revenues from licenses are recognized on the basis set forth in Statement of Position 97-2 (SOP 97-2) of the American Institute of Certified Public Accountants. Our revenues from licenses are recognized when delivery has occurred, persuasive evidence of an agreement exists, the sales price is fixed or determinable and collectibility is probable. Customization of our products, if any, is performed before delivery occurs. In cases where we install our software products, the revenue recognition is deferred until the installation is completed. We do not grant a right of return of products sold to customers, distributors and resellers. Revenues from providing professional services are priced on a fixed price basis and recognized ratably over the period of the agreement, or as services are performed. We are paid a one-time license fee by our customers for the right to use our billing and customer care or our enterprise call management software products, and additional fees to expand the scale of the network supported by our software. We price our licenses for our billing and customer care software based on (1) traffic volume, which is measured by factors such as minutes per month, number of lines used and number of subscribers, and (2) the functionality of the system based on application modules that are added to the software. Licenses for our enterprise software are priced based on the number of extensions in the customer's switchboard, as well as the functionality of the system based on application modules that are added to the software. In relation to our professional services, other than maintenance services, we quote a fixed price based on the type of service offered, estimated direct labor costs and the expenses that we will incur to provide these services. Fees for maintenance services are based on a fixed percentage of the license fee and are paid annually. We provide a revenue breakdown for our customer care and billing Voice over IP software and our enterprise call management software. These products are sold to different customers and serve different markets. We believe that this information provides a better understanding of our performance and allows investors to make a more informed judgment about our business. Cost of Revenues. The cost of revenues relating to providing our billing and customer care and enterprise software consists primarily of direct labor costs and overhead expenses related to software installation. Cost of revenues also include software license fees to Oracle, materials, documentation, packaging and shipping costs. Our cost of professional services revenues consists primarily of direct labor costs and travel expenses. Our revenues from the sale of our licenses have a higher gross margin than that from providing our professional services. We incur variable direct labor costs when we provide professional services. There are no comparable variable labor costs incurred when we license our software. Research and Development Expenses, net. Our research and development expenses consist primarily of compensation and overhead costs for research and development personnel and depreciation of testing and other equipment. Research and development costs related to software products are expensed as incurred until the "technological feasibility" of the product has been established. Because of the relatively short time period between "technological feasibility" and product release, and the insignificant amount of costs incurred during that period, no software development costs have been capitalized. Grants from the Office of the Chief Scientist of the Israeli Ministry of Industry and Trade for development of approved projects are recognized as a reduction of expense as the related cost is incurred. We have in the past used these grants and repaid them. However, we currently do not use nor do we intend to use a material amount of grants from the Office of the Chief Scientist in the future. We expect to continue to make substantial investments in research and development. Selling Expenses. Our selling expenses consist primarily of compensation, overhead and related costs for sales and marketing personnel, the operation of international sales offices, sales commissions, marketing programs, public relations, promotional materials, travel expenses and trade show expenses and exhibition expenses. General and Administrative Expenses. Our general and administrative expenses consist primarily of compensation, overhead and related expenses for executives, accounting and human resources personnel, professional fees, provisions for doubtful accounts and other general corporate expenses. 22 Non-Cash Compensation. Amortization of stock-based compensation results from the granting of options to employees with exercise prices per share determined to be below the fair market value per share of our ordinary shares on the dates of grant. The stock-based compensation is being amortized over the vesting period of the individual options. Financial and Other Income, net. Our financial and other income, net consists primarily of interest earned on bank deposits, gains on trading securities, gains and losses from the conversion of monetary balance sheet items denominated in non-dollar currencies into dollars, net of financing costs and bank charges in real terms as well as the devaluation of monetary assets and monetary liabilities. Conversion and Redemption Feature of Preferred Shares. An amount of $5,778,000 in connection with the issuance of the Series A preferred shares and $1,445,000 in connection with the issuance of the Series B preferred shares, in each case representing a beneficial conversion feature, will be amortized against retained earnings (accumulated deficit) over a period that commenced upon issuance of the preferred shares on March 30, 2000, and ending upon the earlier of 12 months from the date of issuance or the date of an initial public offering. The amount of amortization in the three month period ended March 31, 2000 was nominal and was not recorded. These amounts were calculated as the difference between the per share conversion price and the deemed fair value of an ordinary share, which was estimated by us at $8.00 per ordinary share at the issuance date, multiplied by the applicable number of equivalent ordinary shares. We, our existing shareholders and the investors in the Series A and Series B preferred shares entered into a redemption agreement on March 30, 2000, concurrently with the purchase of the preferred shares. The redemption agreement provides that, if a liquidity event has not occurred by March 30, 2005, the holders of the preferred shares will be entitled to cause a sale of our company or redemption of the preferred shares at an amount equal to the higher of (a) fair market value of the preferred shares or (b) the amount as determined in the case of a liquidity event. However, any amount paid in redemption of the Series B preferred shares is payable only to the extent of profit of the Company. As of March 31, 2000, we have an accumulated deficit. Liquidity events include a number of transactions including those resulting in a change of control of our company or a sale by us of most of our assets and an initial public offering. As a result of the redemption provisions, the Series A preferred shares are classified outside of permanent shareholders' equity at March 31, 2000 at their estimated fair value of $17,778,000. In addition, we recognized a charge to accumulated deficit, which was accreted for the three months ended March 31, 2000 in an amount of $6,672,000. This amount reflects the difference between the redemption value of the Series A preferred shares and the net proceeds we have received for the issuance of those shares. The Series B preferred shares are also classified outside of permanent shareholders' equity at March 31, 2000 at their estimated fair value of $3,000,000 at March 31, 2000. An identical amount was recorded as reduction of additional paid-in capital representing the deemed purchase and cancellation of the ordinary shares which were exchanged for the Series B preferred shares. The Series B preferred shares will be increased by a charge to retained earnings (accumulated deficit) in the future to the extent that our company has net income, up to the redemption amounts as determined in the preceding paragraph. Taxes on Income. Israeli companies are generally subject to income tax at the corporate tax rate of 36%. Our facilities, however, have been granted "approved enterprise" status under the Law for the Encouragement of Capital Investments, 1959. Income derived from the approved enterprise is tax exempt for a period of ten years commencing in the first year in which we earn taxable income from the approved enterprise, since we have elected the "alternative benefits scheme" (involving a waiver of investment grants). In the event of distribution of cash dividends from income that was tax exempt, we would have to pay 25% tax in respect of the amount distributed. As a result of dividends paid by us with respect to 1997, 1998, 1999 and the first quarter of 2000, we were subject to this tax with respect to the amount distributed. We do not expect to make dividend payments in the future. Our effective tax rate after 2005 will continue to be reduced depending upon future capital investments and approved enterprise certifications. These tax benefits may not be applied to reduce the tax rate for any income derived by our foreign subsidiaries. There is a proposal in Israel to replace the ten-year tax exemption available to "approved enterprises" with a 10% tax. For more information on the proposed Israeli tax reform, see the discussion in this prospectus under the heading "Taxation and Government Programs--Proposed Tax Reform." 23 Results of Operations The following discussion of our results of operations for the years ended December 31, 1997, 1998 and 1999 and the three months ended March 31, 1999 and 2000, including the percentage data in the following table, is based upon our statements of operations contained in our financial statements for those periods, and the related notes, included in this prospectus:
Three Months Years Ended Ended March December 31, 31, ------------------- ------------ 1997 1998 1999 1999 2000 ----- ----- ----- ----- ----- Revenues................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues........................... 21.7 15.5 16.1 18.2 13.3 ----- ----- ----- ----- ----- Gross profit............................... 78.3 84.5 83.9 81.8 86.7 Research and development expenses, net..... 19.9 25.8 23.4 26.3 28.2 Selling, general and administrative expenses: Selling expenses......................... 21.7 25.9 25.7 27.1 25.5 General and administrative expenses...... 17.7 14.5 12.2 13.8 11.5 Non-cash compensation...................... 0.0 0.0 0.3 -- 2.5 ----- ----- ----- ----- ----- Operating Income........................... 19.0 18.3 22.3 14.6 19.0 Financial and other income, net............ 3.9 2.4 1.6 0.9 0.7 ----- ----- ----- ----- ----- Income before Taxes on income.............. 22.9 20.7 23.9 15.5 19.7 Taxes on income............................ 5.7 4.9 5.4 3.6 4.5 ----- ----- ----- ----- ----- Net Income................................. 17.2% 15.8% 18.5% 11.9% 15.2% ===== ===== ===== ===== =====
The following table presents the geographic distribution of our sales.
Three Months Years Ended Ended March December 31, 31, ------------------- ------------ 1997 1998 1999 1999 2000 ----- ----- ----- ----- ----- United States and Canada................ 4.2% 17.4% 25.2% 17.7% 36.6% Asia Pacific and other.................. 0.8 2.9 10.9 3.8 29.2 Europe.................................. 42.8 57.4 41.3 57.2 21.8 Israel.................................. 52.2 22.3 22.6 21.3 12.4 ----- ----- ----- ----- ----- Total................................. 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
As shown in the above table, our sales in the United States and Asia Pacific increased over prior periods as a percentage of sales during the years ended December 31, 1998, and 1999 and the three months ended March 31, 2000, while sales of our products in Europe and in Israel decreased as a percentage of sales during those periods. Our revenues from sales in the United States and Asia Pacific, both in absolute dollars and as a percentage of revenues, increased because of the growth of the market for Voice over IP services in these areas. The percentage of our revenues from sales in Europe decreased because Voice over IP services are not universally offered in Europe. The percentage of our revenues from sales in Israel decreased because Voice over IP services are not yet offered in Israel. 24 Comparison of Three Months ended March 31, 1999 and 2000 Revenues. Revenues increased from $1.6 million for the three months ended March 31, 1999 to $3.2 million for the three months ended March 31, 2000, an increase of $1.6 million, or 100.1%. This increase was primarily attributable to an increase of $1.4 million, or 105.3%, in license fees, comprised of an increase of $1.9 million, or 1,227.5%, relating to our billing and customer care software, partially offset by a decrease of $505,000, or 44.5%, relating to our enterprise software. Approximately 51% of the increase in revenues relating to our billing and customer care software was primarily attributable to an increase in the average product price with the balance attributable to an increase in the number of products sold. Our average product price increased primarily as a result of our sale of products that support larger networks. Revenues relating to our enterprise software decreased relative to the prior year as a result of a one- time large purchase by a distributor in 1999. The remainder of the increase in revenues of $231,000, or 77.5%, was related to an increase in revenues from professional services, primarily attributable to the increase in the sales of licenses for our billing and customer care software. Cost of Revenues. Cost of revenues increased from $288,000 for the three months ended March 31, 1999 to $423,000 for the three months ended March 31, 2000, an increase of $135,000, or 46.9%. This increase was due to higher costs associated with our increased revenues, as well as increased compensation to our employees. Gross profit as a percentage of revenues increased from 81.8% for the three months ended March 31, 1999 to 86.7% for the same period in 2000. This increase was due to the increase in our sales of licenses for our billing and customer care software as a percentage of our total revenues. Research and Development, net. Research and development expenses, net increased from $417,000 for the three months ended March 31, 1999 to $894,000 for the three months ended March 31, 2000, an increase of $477,000, or 114.4%. This increase was primarily attributable to an increase in personnel-related expenses resulting from increasing the number of our research and development employees during 1999 and the first quarter of 2000 associated with the development of our billing and customer care software, as well as increased compensation to our employees. Research and development expenses, net increased as a percentage of revenues from 26.3% for the three months ended March 31, 1999 to 28.2% for the same period ended March 31, 2000. Selling Expenses. Selling expenses increased from $429,000 for the three months ended March 31, 1999 to $809,000 for the same period ended March 31, 2000, an increase of $380,000, or 88.6%. This increase was primarily attributable to an increase of $188,000 in personnel and related expenses, an increase of $138,000 in public relations, advertising and other promotional expenses and an increase of $53,000 in expenses related to the expansion of our sales office in the United States and the opening of our marketing office in China. Selling expenses decreased as a percentage of revenues from 27.1% for the three months ended March 31, 1999 to 25.5% for the same period ended March 31, 2000. We expect that these expenses will increase in the future because of our marketing office that was opened in China during the first quarter of 2000, additional offices we expect to open internationally and an increase in personnel to support our sales growth. General and Administrative Expenses. General and administrative expenses increased from $219,000 for the three months ended March 31, 1999 to $363,000 for the same period ended March 31, 2000, an increase of $144,000, or 65.8%. This increase was primarily attributable to an increase of $73,000 in the provision for doubtful accounts and an increase of $61,000 in personnel expenses. General and administrative expenses as a percentage of revenues decreased from 13.8% for the three months ended March 31, 1999 to 11.5% for the same period ended March 31, 2000. We expect that these expenses will increase in the future as we expand our infrastructure as our sales increase. Taxes on Income. Taxes on income increased from $58,000 in the three months ended March 31, 1999 to $144,000 for the same period ended March 31, 2000. This represented an effective tax rate of 23.5% in the three months ended March 31, 1999 and 23.0% in the three months ended March 31, 2000. Through March 31, 2000, we distributed as a dividend to our shareholders all of our earnings from tax exempt income. Under 25 Israeli law, we are required to pay a 25% tax on the amounts distributed. Effective April 1, 2000, we have adopted a policy to retain our earnings to support our growth and do not expect to pay dividends for the foreseeable future. As a result, we expect our effective income tax rate to be significantly reduced as the substantial majority of our income is expected to be exempt from tax. Net Income. Net income increased from $189,000 for the three months ended March 31, 1999 to $481,000 for the same period ended March 31, 2000, an increase of $292,000, or 154.5%. Net income increased as a percentage of revenues from 11.9% for the three months ended March 31, 1999 to 15.2% for the same period ended March 31, 2000. Comparison of Years Ended December 31, 1998 and 1999 Revenues. Revenues increased from $4.1 million for the year ended December 31, 1998 to $8.2 million for the year ended December 31, 1999, an increase of $4.1 million, or 101.4%. This increase was primarily attributable to an increase of $3.4 million, or 100.6%, in license fees, comprised of an increase of $2.0 million, or 279.2%, relating to our billing and customer care software and an increase of $1.4 million, or 51.4%, relating to our enterprise software. Approximately 60% of the increase in revenues relating to our billing and customer care software was attributable to an increase in our average product price, with the balance attributable to an increase in the number of systems sold. Revenues relating to our enterprise software increased primarily due to sales to new customers in Israel. The remainder of the increase in revenues of $720,000, or 105.1%, was related to an increase in revenues from professional services, primarily attributable to the increase in the sales of billing and customer care software. Cost of Revenues. Cost of revenues increased from $631,000 for the year ended December 31, 1998 to $1.3 million for the year ended December 31, 1999, an increase of $687,000, or 108.9%. This increase was attributable to higher costs associated with our increased revenues. Gross profit as a percentage of revenues decreased moderately from 84.5% for the year ended December 31, 1998 to 83.9% for the year ended December 31, 1999. Research and Development, net. Research and development expenses, net increased from $1.0 million for the year ended December 31, 1998 to $1.9 million for the year ended December 31, 1999, an increase of $869,000, or 82.8%. This increase was primarily attributable to an increase in the number of research and development personnel whom we employed. Research and development expenses, net as a percentage of revenues decreased from 25.8% for the year ended December 31, 1998 to 23.4% for the year ended December 31, 1999. Selling Expenses. Selling expenses increased from $1.1 million for the year ended December 31, 1998 to $2.1 million for the year ended December 31, 1999, an increase of $1.0 million, or 100.0%. This increase was primarily attributable to an increase of $420,000 in personnel-related expenses resulting from increasing the number of our sales and marketing employees in 1999, an increase of $427,000 in promotional expenses and an increase of $209,000 because 1999 was the first full year of operation of our marketing office in the United States. This increase of our selling expenses was in response to current and expected growth in the market for our products. Selling expenses, as a percentage of revenues decreased from 25.9% for the year ended December 31, 1998 to 25.7% for the year ended December 31, 1999. General and Administrative Expenses. General and administrative expenses increased from $591,000 for the year ended December 31, 1998 to $1.0 million for the year ended December 31, 1999, an increase of $409,000 or 69.2%. This increase was primarily attributable to an increase of $261,000 in the provision for doubtful accounts, of $87,000 in occupancy costs and $61,000 in personnel expenses. General and administrative expenses as a percentage of revenues decreased from 14.5% for the year ended December 31, 1998 to 12.2% for the year ended December 31, 1999. 26 Taxes on Income. Taxes on income increased from $201,000 for the year ended December 31, 1998 to $447,000 for the year ended December 31, 1999. This represented an effective tax rate of 23.9% for 1998 and 22.8% for 1999. The taxes paid resulted primarily from a 25% tax we are required to pay under Israeli law on dividends paid by us from tax exempt income. Net Income. Net income increased from $641,000 for the year ended December 31, 1998 to $1.5 million for the year ended December 31, 1999, an increase of $873,000, or 136.2%. Net income increased as a percentage of revenues from 15.8% for the year ended December 31, 1998 to 18.5% for the year ended December 31, 1999. Comparison between Years Ended December 31, 1997 and 1998 Revenues. Revenues increased from $2.0 million for the year ended December 31, 1997 to $4.1 million for the year ended December 31, 1998, an increase of $2.1 million, or 104.4%. This increase was primarily attributable to our increases of $1.9 million, or 125.7%, in license fees, comprised of an increase of $1.3 million, or 96.0%, relating to our enterprise software and an increase of $585,000, or 400.7% relating to our billing and customer care software. Revenues relating to our billing and customer care software increased primarily as a result of the market roll-out of our billing and customer care software. Revenues relating to our enterprise software increased primarily as a result of increased marketing efforts in Europe, which resulted in increased sales. The remainder of the increase of $194,000, or 39.5%, was related to an increase in our revenues from professional services. Cost of Revenues. Cost of revenues increased from $432,000 for the year ended December 31, 1997 to $631,000 for the year ended December 31, 1998, an increase of $199,000, or 46.1%. This increase was due to higher costs associated with our increased revenues. Gross profit as a percentage of revenues increased from 78.3% for 1997 to 84.5% for 1998. This increase was due to the increase in our sales of licenses for our enterprise software outside Israel, which generated higher margins. Research and Development, net. Research and development expenses, net increased from $397,000 for the year ended December 31, 1997 to $1.0 million for the year ended December 31, 1998, an increase of $652,000, or 164.2%. This increase was primarily attributable to an increase in personnel-related expenses resulting from increasing the number of our research and development employees in 1998 associated with the development of our billing and customer care software and the new releases of our enterprise software. Research and development expenses, net increased as a percentage of revenues from 19.9% for the year ended December 31, 1997 to 25.8% for the year ended December 31, 1998. Selling Expenses. Selling expenses increased from $430,000 for the year ended December 31, 1997 to $1.1 million for the year ended December 31, 1998, an increase of $625,000, or 145.3%. This increase was primarily attributable to an increase of $347,000 in personnel and related expenses, $146,000 of expenses related to the opening of a sales and support office in the United States and an increase of $132,000 in public relations, advertising and other promotional expenses. Selling expenses increased as a percentage of revenues from 21.7% for the year ended December 31, 1997 to 25.9% for the year ended December 31, 1998. General and Administrative Expenses. General and administrative expenses increased from $352,000 the year ended December 31, 1997 to $591,000 for the year ended December 31, 1998, an increase of $239,000, or 67.9%. This increase was primarily attributable to an increase of $128,000 in personnel expenses and of $111,000 in travel expenses. General and administrative expenses as a percentage of revenues decreased from 17.7% for the year ended December 31, 1997 to 14.5% for the year ended December 31, 1998. Taxes on Income. Taxes on income increased from $114,000 for the year ended December 31, 1997 to $201,000 for the year ended December 1998. This represented an effective tax rate of 25.0% for 1997 and 27 23.9% for 1998. The taxes paid resulted primarily from a 25% tax we were required to pay under Israeli law on dividends paid by us from tax exempt income. Net Income. Net income increased from $342,000 for the year ended December 31, 1997 to $641,000 for the year ended December 31, 1998, an increase of $299,000, or 87.4%. Net profit decreased as a percentage of revenues from 17.2% for the year ended December 31, 1997 to 15.8% for the year ended December 31, 1998. Quarterly Results of Operations The following table presents consolidated statements of operations data for each of the nine fiscal quarters ended March 31, 2000. In management's opinion, this unaudited information has been prepared on the same basis as our audited consolidated financial statements and includes all adjustments, consisting only of normal recurring adjustments, necessary for fair presentation of the unaudited information for the quarters presented. The results of operations for any quarter are not necessarily indicative of results that we might achieve for any subsequent periods.
Three Months Ended ------------------------------------------------------------------------------- Mar. 31 June 30, Sep. 30, Dec. 31, Mar. 31, June 30, Sep. 30, Dec. 31, Mar. 31, 1998 1998 1998 1998 1999 1999 1999 1999 2000 ------- -------- -------- -------- -------- -------- -------- -------- -------- (in thousands) Consolidated Statement of Operations Data: Revenues................ $580 $1,356 $968 $1,166 $1,585 $1,821 $2,035 $2,755 $ 3,171 Cost of revenues........ 116 187 139 189 288 338 265 427 423 ---- ------ ---- ------ ------ ------ ------ ------ ------- Gross profit............ 464 1,169 829 977 1,297 1,483 1,770 2,328 2,748 Research and development expenses, net.......... 156 316 304 273 417 370 574 557 894 Selling, general and administrative expenses: Selling expenses....... 236 223 282 314 429 404 567 711 809 General and administrative expenses.............. 113 116 157 205 219 211 230 339 363 Non-cash compensation... 1 -- -- -- -- -- 10 16 78 ---- ------ ---- ------ ------ ------ ------ ------ ------- Operating income (loss)................. (42) 514 86 185 232 498 389 705 604 Financial and other income (expenses), net.................... 14 23 24 38 15 20 36 66 21 ---- ------ ---- ------ ------ ------ ------ ------ ------- Income (loss) before taxes on income........ (28) 537 110 223 247 518 425 771 625 Taxes on income......... -- 134 28 39 58 110 109 170 144 ---- ------ ---- ------ ------ ------ ------ ------ ------- Net income (loss)....... (28) 403 82 184 189 408 316 601 481 Accretion of mandatorily redeemable convertible A preferred shares to mandatory redemption value.................. -- -- -- -- -- -- -- -- (6,672) ---- ------ ---- ------ ------ ------ ------ ------ ------- Net income (loss) applicable to ordinary shares................. $(28) $ 403 $ 82 $ 184 $ 189 $ 408 $ 316 $ 601 $(6,191) ==== ====== ==== ====== ====== ====== ====== ====== =======
We expect our operating results to fluctuate significantly in the future as a result of various factors, many of which are outside our control. Consequently, we believe that period-to-period comparisons of our operating results may not necessarily be meaningful and, as a result, you should not rely on them as an indication of future performance. Our quarterly results have in the past varied for different reasons. Sales increased significantly in the quarter ended June 30, 1998 because of the receipt of a large order for enterprise software from one of our distributors in Europe. General and administrative expenses in the quarter ended December 31, 1999 were higher because of an increase in our provision for doubtful accounts as a result of the growth of our business. Liquidity and Capital Resources Since our inception, we have financed our operations mainly through cash generated by operations. We have supplemented this source by two rounds of financing in the form of the sale of equity securities. Our first round 28 of financing in an amount of $1.0 million, closed in August 1997. A follow-on exercise of a warrant during the course of January 1999 yielded an additional $2.3 million. Our second round of financing, in an amount of $12.0 million, was completed in the first quarter of 2000. As of March 31, 2000 we had approximately $16.5 million in cash and cash equivalents. As of March 31, 2000, our working capital was $14.1 million. Our operating activities used cash in the amount of $579,000 in 1997 and provided cash in the amount of $1.5 million in 1998 and $1.0 million in 1999. Cash used in operating activities in 1997 was primarily attributable to an increase in trading securities in the amount of $752,000 as a result of investing the excess funds from operations and an increase in trade receivables in the amount of $519,000 as a result of the increase in our revenues, partially offset by our net income of $342,000 and an increase in trade and other payables. Cash provided by operating activities in 1998 was primarily attributable to our net income of $641,000 and non-cash expenses related to depreciation and amortization in the amount of $128,000 and a decrease in trading securities in the amount of $581,000 as a result of the sale of a portion of these securities. Cash provided by operating activities in 1999 was primarily attributable to our net income of $1.5 million and non-cash expenses related to depreciation and amortization in the amount of $196,000, partially offset by an increase in trade receivables. Our operating activities provided cash in the amount of $1.4 million in the three months ended March 31, 2000 compared to $224,000 in the three months ended March 31, 1999. Cash provided by operating activities for the three months ended March 31, 2000 was primarily attributable to our net income of $481,000 and an increase in payables, as a result of the dividend declared in the quarter. We used cash for investing activities of $200,000 in 1997, $422,000 in 1998 and $1.1 million in 1999. Our principal investment activities were the purchase of property and equipment and the investment of cash in short term bank deposits. In the three months ended March 31, 2000, cash provided by investing activities was $473,000. For the year ended December 31, 1997, our financing activities provided $816,000 primarily attributable to proceeds in the amount of $1.0 million from the issuance of ordinary shares, partially offset by a dividend paid in the amount of $101,000. For the year ended December 31, 1998, our financing activities used approximately $338,000, primarily attributable to the payment of a dividend. Our financing activities provided $1.9 million in the year ended December 31, 1999 primarily attributable to the proceeds from the issuance of ordinary shares in the amount of $2.3 million, partially offset by a dividend paid in the amount of $393,000. Our financing activities provided $12.0 million in the three months ended March 31, 2000 from the issuance of preferred shares. During the years ended December 31, 1997, 1998 and 1999, the aggregate amount of our capital expenditures was $1.2 million, and our capital expenditures in the three months ended March 31, 2000 was $159,000. These expenditures were principally for the purchase of testing and other equipment. Although we have no material commitments for capital expenditures, we anticipate an increase in capital expenditures and lease commitments consistent with our anticipated growth in operations, infrastructure and personnel. As of March 31, 2000, we do not have any outstanding loans or lines of credit. In 1998, a dividend in the amount of approximately $266,000 was paid. In 1999, a dividend in the amount of approximately $393,000 was declared and paid. In the first quarter of 2000, we declared a $2,013,000 dividend that was paid in the second quarter of 2000. We do not intend to make dividend payments in the future. We believe that the net proceeds of the offering, together with our existing cash and cash equivalents, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 18 months. Disclosure Regarding Market Risk The dollar cost of our operations is influenced by the extent to which any inflation in Israel is offset, on a lagging basis, or is not offset by the devaluation of the NIS in relation to the dollar. When the rate of inflation 29 in Israel exceeds the rate of devaluation of the NIS against the dollar, companies experience increases in the dollar cost of their operations in Israel. Unless offset by a devaluation of the NIS, inflation in Israel will have a negative effect on our profitability as we receive payment in dollars or dollar-linked NIS for all of our sales while we incur a portion of our expenses, principally salaries and related personnel expenses, in NIS. In addition, a portion of our revenues is denominated in Euro derived from sales to customers in Europe. Devaluation in the local currencies of our customers relative to the U.S. dollar could cause our customers to cancel or decrease orders or default on payment. Further, a strengthening of these currencies versus other currencies could make our products less competitive in foreign markets and collection of receivables more difficult. The following table presents information about the rate of inflation in Israel, the rate of devaluation of the NIS against the U.S. dollar, and the rate of inflation of Israel adjusted for the devaluation:
Israeli Inflation Years Ended Israeli Inflation Israeli Devaluation Adjusted for December 31, Rate Rate Devaluation ------------ ----------------- ------------------- ----------------- 1995................ 8.1% 3.9% 4.1% 1996................ 10.6 3.7 6.6 1997................ 7.0 8.8 (1.7) 1998................ 8.6 17.6 (7.7) 1999................ 1.3 (0.1) 1.4
We cannot assure you that we will not be materially and adversely affected in the future if inflation in Israel exceeds the devaluation of the NIS against the U.S. dollar or if the timing of the devaluation lags behind inflation in Israel. A devaluation of the NIS in relation to the U.S. dollar has the effect of reducing the U.S. dollar amount of any of our expenses or liabilities which are payable in NIS, unless these expenses or payables are linked to the U.S. dollar. This devaluation also has the effect of decreasing the U.S. dollar value of any asset which consists of NIS or receivables payable in NIS, unless the receivables are linked to the U.S. dollar. Conversely, any increase in the value of the NIS in relation to the U.S. dollar has the effect of increasing the U.S. dollar value of any unlinked NIS assets and the U.S. dollar amounts of any unlinked NIS liabilities and expenses. Because exchange rates between the NIS and the U.S. dollar fluctuate continuously, with a historically declining trend in the value of the NIS, exchange rate fluctuations and especially larger periodic devaluations will have an impact on our profitability and period-to-period comparisons of our results. The effects of foreign currency re-measurements are reported in our consolidated financial statements in current operations. We endeavor to limit our balance sheet exposure by attempting to maintain a similar level of assets and liabilities in any given currency, to the extent possible. However, this method of matching levels of assets and liabilities of the same currency is not always possible to achieve. The following table sets forth our consolidated balance sheet exposure as of March 31, 2000.
Current Monetary Asset (Liability)-- Currency net -------- ------------- (In thousands) NIS............................................................ $(70) Other non-dollar currencies.................................... 421 ---- $351 ====
30 The balance sheet exposure as of March 31, 2000 is $351,000 in net assets. Our annual expenses in NIS are approximately $4.5 million. An increase of the NIS against the U.S. dollar by 1% may result in an increase in our operating expenses by approximately $45,000. Recently Issued Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued FAS No. 133, Accounting for Derivative Instruments and Hedging Activities. FAS No. 133 established accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet at its fair value. FAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the statement of operations. FAS No. 133 is effective for fiscal years beginning after June 15, 2000. We believe that the adoption of FAS No. 133 will not have a material effect on our financial statements. 31 BUSINESS Overview We develop, manufacture and market real-time billing and customer care software for Voice over IP service providers. Voice over IP, also known as Internet telephony, is the real-time transmission of voice communications over the public Internet and private networks based on Internet Protocol commonly known as IP. Internet Protocol is the process by which data is transmitted from one computer to another on the Internet. Our billing and customer care software, known as MIND-iPhonEX, enables providers of Voice over IP services to meet complex, mission-critical billing and customer care needs such as authentication, authorization, accounting and reporting. Our software is also used by service providers to collect the data needed to initiate service and manage customer accounts. MIND-iPhonEx is scalable, which means that it is easily adapted to changes in the size and configuration of a service provider's network. It operates on the IP telecommunications equipment of major manufacturers, such as Cisco Systems Inc. and Lucent Technologies Inc. We also provide professional services, primarily to our billing and customer care customers, consisting of customization, installation, customer support, training and maintenance services and project management which is advice to our customers regarding the deployment of billing and customer care software over their IP networks, consisting of consulting services relating to our customers' Voice over IP networks in order to deploy billing and customer care software. We have installed MIND-iPhonEX for a large base of customers worldwide, including: . Traditional telecommunications service providers that also offer Voice over IP telephony, such as Bell Atlantic Corp., Deutsche Telekom AG, China Ministry of Post and Telecommunication (China Telecom), China United Telecommunications Corp. (China Unicom), Singapore Telecommunications Ltd.; . Internet telephony service providers that primarily offer Voice over IP services and do not offer traditional telephone services, including, among others, iBasis/VIP Calling; and . Internet service providers that also provide Voice over IP services, such as SouthNet TeleComm Services, Inc. In addition to our billing and customer care software, we offer a call management system used by organizations for call accounting, traffic analysis and fraud detection. This enterprise software which we call PhonEX, has been installed in many locations throughout the world for customers including Credit Suisse First Boston, Deutsche Post and ST Microelectronics. We believe that as providers of Voice over IP and other IP-based services expand their offerings, they will increasingly need billing and customer care software that allows them to monitor and bill their customers based on type and content of the services provided. We have developed and have begun providing billing and customer care software to meet this need to track and account for a variety of IP-based services, including, cable television, Internet dial-up services, IP messaging and other similar services. Our Market Opportunity Voice Over IP Industry Background Traditional telephone communications are transmitted through networks based on circuit switching technology that requires an open connection to be established and maintained between calling parties for the entire path and duration of a call. Voice over IP is transmitted through the public Internet and private networks based on Internet Protocol that were initially developed for transmitting data, such as e-mail. These networks do not require an open circuit for the entire path or duration of the transmission. In a network using IP technology, the data is divided into compressed packets that are sent to a final destination where they are reassembled back to their original order. In this type of network, multiple streams of information can travel through different paths in the network, allowing a more efficient use of the network. In recent years, the improvements in the 32 technologies used in IP networks have led to an increase in the use of this type of network to transmit both voice and data over what are known as convergent networks. The Voice over IP market has emerged from these technological advances. Voice over IP offers a number of advantages to subscribers over traditional telephony. Providers of Voice over IP services can offer their subscribers enhanced voice and data communications services and applications, such as: . unified messaging services permitting single source retrieval of voice mail, e-mail and faxes through the Internet or by phone or any other Internet-capable devices; . personal computer-to-phone services allowing subscribers to place calls through a personal computer and speak to a party who uses a standard telephone; and . web-based services that allow a live voice connection from any web site to any regular telephone over the Internet while continuing to view the web-site. In addition, Voice over IP service providers typically enjoy lower capital costs because the infrastructure for networks based on Internet Protocol is less expensive than that for traditional telecommunications networks. To date, typically Voice over IP providers bypass the international settlement process, which represents a significant portion of international long distance tariffs. As a result, Voice over IP service providers are able to offer their customers lower rates for telephony services. The enhanced services and cost advantages offered by Voice over IP service providers are contributing to the rapid growth in demand for IP telephony services. This demand is being met by Internet service providers, who often have the necessary IP-based infrastructure in place, as well as Internet telephony service providers that primarily offer Voice over IP and do not offer traditional telephony services. In addition, traditional telecommunications service providers are increasingly offering Voice over IP services to remain competitive. International Data Corporation (IDC) estimated that as of mid- 1999, there were 300 IP telephony service providers worldwide, and that more are entering the market every month. IDC estimated that total Voice over IP use is expected to increase from 2.7 billion minutes in 1999 to 135 billion minutes in 2004, representing a compound annual growth rate of 119%. Revenues derived from providing Voice over IP services are expected to increase from $480 million in 1999 to $19 billion in 2004, representing a compound annual growth rate of 109%. IDC estimates that in 2004, half of the total Voice over IP revenues will be generated from enhanced services such as unified messaging, personal computer-to-phone services and web-based services that allow a live connection to a regular telephone while viewing a website. According to Frost and Sullivan, the worldwide market for gateway equipment that allows interconnection between IP-based and traditional telephone networks was $279.2 million in 1998 and is estimated to grow to approximately $9.2 billion in 2004. We believe that the expected growth in the Voice over IP market indicated by this estimated increase in sales of gateway equipment will lead to an increased demand for billing and customer care software that enables providers of Voice over IP services to bill their subscribers for the services used. Billing and Customer Care Industry Billing and customer care software is among the key components of any telephony service provider's systems because they enable the service provider to track and bill for usage, manage revenues and customer relations and devise marketing programs and rate plans. In today's intensely competitive telecommunications market, sophisticated billing and customer care software can provide a competitive advantage as service providers attempt to differentiate themselves by providing superior features, like cross-discounting and a single bill for multiple services. As service providers broaden their service offerings to include Voice over IP, the demand for more sophisticated billing and customer care software suitable for these services is growing. We believe that as providers of IP-based services continue to expand their service offerings, they will increasingly need products that allow them to monitor and bill their subscribers based on the type and content of services provided. As a result, we believe that this trend will increase the demand for sophisticated billing and customer care products for what is known as convergent billing. 33 Many existing billing and customer care software products do not meet the demands of the increasingly competitive and dynamic environment of Voice over IP and other IP-based services. Traditional billing systems are typically designed to support a particular type of service provider--for instance, either wireline or wireless--and a specific size of network. As a result, these billing systems require time and expense to accommodate a growing subscriber base or new products and features. Traditional billing systems are also generally unable to efficiently support multiple services or convergent networks. In addition, traditional billing systems are typically limited to periodic or "batch-oriented" processing, and cannot provide the real-time processing typically required by providers of IP-based services. Providers of Voice over IP and other IP-based services typically require billing and customer care products that can handle authentication, authorization and accounting needs in real-time in order to determine the types of services to which the subscriber is entitled, as well as any applicable limits to the availability of the services. This real-time functionality is particularly important for pre-paid billing plans, which currently constitute a substantial portion of the Voice over IP billing plans. In addition, billing and customer care software products are required to be interoperable with the IP telecommunications equipment of major manufacturers in order to accommodate IP network infrastructures that are composed of equipment of multiple vendors. Finally, billing and customer care software products need to be capable of being easily adaptable to changes in the size and configuration of a Voice over IP provider's system, or scalable, to enable rapid growth in subscriber base, and to permit easy adaptation to emerging products and services. Our Solution We develop, market and support real-time, scalable billing and customer care software for providers of Voice over IP that are designed to meet their complex, mission-critical provisioning, authentication, authorization, accounting and reporting needs. We have installed MIND-iPhonEX for a large base of customers, with over 100 installations worldwide. Our billing and customer care software provides our customers with the following benefits: . Real-Time Solution. Voice over IP providers require a call handling system that enables caller authentication, authorization and accounting and, if needed, cut-off, all in real-time. We believe that MIND-iPhonEX is one of the few billing and customer care products designed for Voice over IP that offers real-time functionality for both prepaid and postpaid billing plans, and that has a real-time rating engine able to support multiple time zones and multi-currency billing. . Scalability. MIND-iPhonEX is designed to be easily adapted to changes in the size and configuration of a service provider's network. Our products can permit the network of a service provider to grow from accommodating a small number of subscribers to a large number of subscribers, primarily through the addition of hardware. This feature allows a service provider to expand its infrastructure and its subscriber base without the need to redesign or replace its billing and customer care software. This scalability of our software is important since many Voice over IP providers begin with a relatively small subscriber base and experience rapid growth. For example, we designed and provided a billing and customer care solution for China Unicom, which started offering Voice over IP services in 1999. When China Unicom first deployed our software in May 1999, it was capable of supporting one million users. Our software was upgraded to five million in November 1999, and 20 million users in June 2000. Increases in the potential number of users have been, and future increases will be, accomplished without the need to modify or replace our installed software. . Interoperability. Currently, there are no industry-accepted standards for the interface between IP telecommunications equipment and Voice over IP billing products. Our Voice over IP billing systems are fully interoperable with the IP telecommunications equipment of most of the leading manufacturers including Cisco, Lucent, Netspeak and VocalTec. This interoperability provides us with a competitive advantage, as it enables our customers to use networks composed of equipment manufactured by multiple vendors. It also allows providers to upgrade an existing network with new and different equipment without changing their billing and customer care products. 34 . Improved Time to Market. MIND-iPhonEX is a modular, extensible software product based on software architecture designed for easy adaptability and implementation. These features allow each of our customers to tailor our products to meet their individual needs in terms of the number of subscribers serviced and the variety of services provided. In addition, due to its adaptable design, MIND-iPhonEX can be customized relatively quickly, enabling our customers to improve their time to market as they initially implement their networks and, later, as they add and modify the services they provide. Our Strategy Our objective is to be a leader in the market for billing and customer care software for Voice over IP. In addition, we intend to offer billing and customer care software for other IP-based services as the market for these products grows. The key elements of our strategy include: . Leverage our brand name recognition and technical expertise. We were one of the first to provide billing and customer care software for IP telephony, introducing MIND-iPhonEX in 1997. We have installed MIND-iPhonEX for a large customer base, including Bell Atlantic Corp., Deutsche Telekom AG, China Ministry of Post and Telecommunications (China Telecom), China United Telecommunications Corp. (China Unicom), Singapore Telecommunications Ltd., iBasis Inc., and Southnet TeleComm Services Inc. We believe that our early position in the market and our reputation for offering high quality, reliable billing and customer care software has provided us with significant brand name recognition among Voice over IP providers. We intend to leverage our reputation, brand name recognition and expertise to be a leader in the market for billing and customer care software for Voice over IP and other IP-based services. . Enhance alliances with industry leaders. We have established cooperative relationships with leading manufacturers of IP telecommunications equipment such as Cisco, Lucent, Netspeak and VocalTec. We team with these industry leaders in marketing activities, as well as in the research and development and implementation stages of product development and enhancement. Our alliances allow us to broaden our marketing capabilities significantly, support new features offered by equipment vendors as these features are introduced to the market, and maintain our technology leadership over our competitors. We intend to continue to leverage these alliances in order to solidify and expand our market presence. . Maintain and expand our technological expertise. We believe that our reputation in the market is due in large part to our technological expertise. We make significant investments in our research and development to continually enhance our products to meet the changing needs in the Voice over IP industry. We intend to continue our commitment to technology, both to enhance our existing products and to develop new products for growing markets. . Offer convergent IP billing products. As providers of IP-based services continue to broaden their service offerings, we believe that they will increasingly need billing and customer care products to monitor and bill their customers based on the type and content of the services provided. For example, instead of the flat fee for access pricing model, Internet service providers may want to bill subscribers based on the type and content of the services used. We intend to leverage our position in the market for billing and customer care software for Voice over IP and our technological expertise to be a leading provider of convergent billing products. . Expand professional services opportunities. As IP-based service offerings become more complex, our customers increasingly require consulting services, especially for customization, as well as for project management, installation and training, technical support and maintenance. This provides us with the opportunity to increase our revenue base from existing customers. We have begun to capitalize on this opportunity and, as a result, fees from providing professional services are expected to increase as a percentage of our revenues. 35 Our Products and Services Billing and Customer Care Products for Voice over IP MIND-iPhonEX is a real-time, fully scalable billing and customer care product for Voice over IP service providers that meets their mission-critical needs and is interoperable with the IP telecommunications equipment of major manufacturers. MIND-iPhonEX was among the recipients of several industry awards, including Computer Telephony 1998 Product of the Year, Communications Solutions 1999 Product of the Year, Internet Telephony 1998 and 1999 Product of the Year, and the Best of the CTI Expo in 1999. Our highly functional and adaptable product enables our customers to quickly deploy Voice over IP networks and to rapidly grow and add new services. MIND-iPhonEX supports both prepaid billing plans, in which customers pre-pay for the services, or postpaid billing plans, in which customers pay for the services after using them, on the basis of either limited or unlimited credit lines. The key functionalities of MIND-iPhonEX are as follows: . Provisioning. Provisioning involves setting up the ability of a subscriber to use IP services. MIND-iPhonEX enables subscribers to register for service quickly and efficiently. The registration process collects the data needed to connect and bill the subscriber for service. Once the data is collected and verified, MIND-iPhonEX creates customer accounts and activates the services in real-time. MIND-iPhonEX features web-enabled registration and payment applications so that customers may register online for the service and start using it immediately. It also allows subscribers to charge their credit cards online and to recharge pre-paid calling cards that have reached their limit. . Authentication. MIND-iPhonEX authenticates subscribers who dial into the network to use the service. Authentication is based on a number of methods, including user codes, passwords and caller line identification. The identification information is passed to the MIND-iPhonEX system, where the subscriber is authenticated and then permitted to use the service. . Authorization. The MIND-iPhonEX system authorizes a particular call by: . reviewing the destination of the call to determine whether a call to this destination is permitted; . reviewing the amount of money remaining on the subscriber's prepaid card and prerating the call that the subscriber desires to make, using the rating engine described below; or . reviewing the balance of a credit limit of a pre-paid plan and calculating the resulting cut off time, if any, of the call. Based on this data, MIND-iPhonEX authorizes the desired call, either for an unlimited or a limited time, and will automatically inform the gateway or gatekeeper to cut-off the call if the limit is reached. . Accounting. When each call is completed, MIND-iPhonEX uses the rating engine described below to determine the amount to be charged to the subscriber and updates the balance of the account in real-time. In addition, the call detail records are stored on the MIND-iPhonEX system for invoicing and reporting. . Interconnect Billing. The networks operated by our customers are typically interconnected with the networks of other telecommunications service providers. Interconnecting providers need to charge other providers for carrying each other's services over their networks. MIND- iPhonEX generates reports that enable providers to bill for traffic and services that are being transported across their networks by other providers. . Rating Engine. MIND-iPhonEX offers a real-time and flexible rating engine that allows service providers to offer subscribers a wide variety of billing plans. This flexibility also allows service providers to set different tariff parameters. For example, our billing and customer care software can support different rates for individual customers and for different customer groups, different rates for different types of data transferred, rates based on the day of the week and time of the day and rates 36 based on the origin and destination of the call. MIND-iPhonEX also allows international service providers to define rates in different currencies using the product's multi-currency and multi-time zone functionality. . Support for Customer Relationship Management. The Customer Relationship Journal is a feature of the MIND-iPhonEX that enables service providers to keep track of all subscriber-related events, including subscriber inquiries, payments and customer information updates. The Journal also stores a history of all interactions between the service provider and the subscriber. This tool helps the service provider identify valued customers and build positive customer relationships. [GRAPHIC OF WEB INTERFACE FOR CUSTOMERS] . Subscriber web interface. MIND-iPhonEX has a user friendly subscriber web interface (shown above) which allows subscribers to resolve billing inquiries themselves. Individual customers can obtain real time information about their account, including details of calls made that have not yet been invoiced, like the time, destination, length and cost of each call. The subscriber can also browse invoices, call details and payment history records. This feature is convenient for subscribers and efficient for service providers as it reduces service costs. 37 [GRAPHIC OFC WEB INTERFACE FOR CSR] . Customer Support Representative web interface. MIND-iPhonEX has a user friendly customer support representative web interface (shown above) which allows operators of the system to perform customer care from any location. The Customer Support Representative web interface is an extension of the management capabilities of the service provider's system. This feature is of particular significance to service providers who have remote operations centers and are required to provide local support of their system in more than one location. . Call Management and Traffic Analysis Reports. MIND-iPhonEX's Call Management and Traffic Analysis features allow service providers to generate reports and graphic analyses of call activity. These reports contain information regarding peak hours, call loads to different destinations, the number of calls per minute for a specific gateway or group of gateways, the duration of calls and other parameters. These features enable service providers to analyze subscriber behavior and use the information to improve their marketing and business development strategies. In addition, the traffic analyses reports assist service providers in planning the growth and development of their networks. This is of particular significance in the Voice over IP market in which many providers begin with a relatively small subscriber base and experience rapid growth. . Fraud Detection. MIND-iPhonEX contains a fraud detection tool that enables detection of "stolen' calls and telephone misuse. MIND-iPhonEX Guard detects, locates and warns of any suspicious activity by activating alarms in real-time. It is easily customized to suit the needs of each service provider and allows a provider to build fraud inquiries based on a defined set of parameters. When these specific parameters are violated, MIND-iPhonEX Guard activates an alarm at four different alarm levels. Different actions may be implemented at each level. For instance, the operator may be alerted to possible fraud via e-mail, fax, pager, audio or visual alarms. 38 Professional Services We provide professional services to our customers, consisting primarily of project management, customization, installations, customer support, training and maintenance services. As IP-based service offerings become more complex, more customers require customization services to add specialized features to their systems. We typically incorporate additional or specialized features developed for a particular customer into future versions of our products. In order to meet the needs of our customers, we created a new professional services division that has grown from 8 to 18 employees since January 1, 2000. Enterprise Software Our enterprise product, known as PhonEX, is used by corporations for call accounting, traffic analysis and fraud detection. PhonEX is a call management system that collects, records and stores all call information in a customized database. The system: . allows customers to generate near real-time reports on the enterprise's telephone use; . produces sophisticated reports and graphics for easy and effective analysis of call activity; and . allows customers to allocate telephone expenses to specific departments, individual clients or projects. These functions allow organizations to more effectively manage their telecommunications resources. PhonEX is easy to install and configure, user- friendly and compatible with any switchboard system. PhonEX also performs call management and traffic analysis as well as fraud management in the same manner as MIND-iPhonEX. In addition, PhonEX is a multi-lingual and multi-currency system, which means that reports can be generated in any currency defined in the system, or in two currencies simultaneously. Products under Development Manufacturers of IP telecommunications equipment have begun to develop and market Voice over IP systems for enterprises. We are developing an enterprise software product that can be used to provide call accounting, traffic analysis and fraud detection for enterprises that use IP telephony, and which provides substantially the same features as PhonEX. We intend to further develop and market this product as the emerging market for Voice over IP systems for enterprises grows. Technology MIND-iPhonEX has an open architecture, which was developed using industry standards-based application programming interfaces that enables it to readily integrate with other software applications. These application program interfaces create an object-oriented, multi-layered architecture that supports a distributed environment. Our object-oriented technology enables the design and implementation of software on the basis of reusable business objects rather than complex procedural code. Our multi-layered architecture organizes these applications in layers of related information that support the top tier interface between the user and the application. We implement our application in a distributed configuration. This allows various modules to be installed on different servers. We believe that our technology allows us to offer products with the following benefits: . fast integration and interoperability with the IP telecommunications equipment of major manufacturers; . modular architecture which allows MIND-iPhonEX to be easily scalable and enables us to customize our software relatively quickly; . reliable products that ensure 24x7 service for mission-critical applications and are designed to support network operating centers of IP telephony service providers to ensure no single point of failure in their networks. In the case of a failure of the network, MIND-iPhonEX has an automatic fail-over mechanism to ensure minimum loss of service; 39 . secured at all levels of the architecture. Each user of the system may be assigned to different security groups. Service providers are therefore able to determine and audit who has access to the system. In addition, firewalls can be installed to prevent unauthorized access to the system; . rapid development of new applications, features and services; and . easy interface with legacy systems and external software. MIND-iPhonEX has a four-tier architecture, consisting of the following tiers: . Client Application Tier: This is the top tier graphic user interface between the user and the application. It includes client applications for customer registration, customer care and billing administration; . Business Object Tier: This tier includes the business logic and rules of the billing system. This tier manages accounts, services, events and tariffs. It includes an object request broker, that facilities the transfer of information requested by the client application tier from the database object tier; . Database Object Tier: This tier brings together data objects that define the accounts, services and tariffs; and . Database Tier: This tier includes the Oracle database server and management software where the actual billing and customer care information is stored. Research and Development We believe that significant investment in research and development is essential to maintaining and expanding our technological expertise in the market for Voice over IP billing and customer care software and to our strategy of being a leading provider of new and innovative convergent Internet billing products. We have invested significant time and resources to create a structured process for undertaking research and product development. We believe that the method that we use for our product development and testing is well suited for identifying market needs, addressing the activities required to release new products, and bringing development projects to market successfully. Our product development activities also include the release of new versions of our products. Our research and development personnel include engineers and software developers with experience in the development and design of billing and customer care software. As of March 31, 2000, our research and development department consisted of 64 employees. Sales and Marketing Sales Billing and Customer Care Software for Voice over IP We conduct our sales and marketing activities primarily through our marketing and co-operative alliances with hardware platform developers and software application developers such as Cisco, Lucent and Vocal Tec, under which we market and sell our software to the customers of those entities. These marketing allies and re-sellers provide us with a global extension of our direct sales force and are a significant source of leads and referrals. We perform co-development with our marketing allies to support new software and product releases to maintain interoperability of our software with their gateways and other equipment. We also engage in joint marketing activities with them including joint responses to requests for proposals, sharing booths in trade shows, distributing each others' marketing information and cross links and references to web sites. We believe these relationships also help validate our technology and facilitate broad market acceptance of our software. Our contracts with our marketing allies, distributors and resellers are non- exclusive and may be terminated at any time with notice. For example, we entered into a non-exclusive agreement with Cisco Systems, Inc. on 40 January 1, 2000 under which we agreed to participate in Cisco's New World Ecosystem Program. The Ecosystem Program was established by Cisco to facilitate the establishment of a network of vendors of complementary products and services that are interoperable with Cisco's equipment and each other. Under the terms of the agreement, we cooperate with Cisco in marketing and distributing products and services that Cisco desires to include in the Ecosystem Program from time to time. The agreement is terminable on 60 days' written notice by either party. As of March 31, 2000, our sales and marketing force consisted of 20 employees who are responsible for sales both directly and through resellers. Our sales organization is managed from our corporate headquarters in Yoqneam, Israel. We currently have sales offices in Yoqneam, Israel, Hasbrouk Heights, New Jersey and in Beijing, China. Enterprise Software In Europe, our enterprise software is sold by our appointed distributors and directly through our sales force. Under an agreement entered into in February 1998, we appointed Telesens AG as an exclusive distributor of our enterprise software in Germany. In addition, we have non-exclusive agreements with Nice Systems, Bosch Telecom (through our distributor, Telesens AG) and Telrad for the sale of our enterprise software. We also sell our enterprise software through resellers in Europe, the United States and Israel. Marketing Our marketing programs are focused on creating awareness, interest and preference for our products and services. We engage in a variety of marketing activities, including: . participating in industry trade shows and special events, including as panelists and presenters at industry conferences; . advertising in industry media; . contributing articles to billing and Voice over IP industry magazines; . conducting ongoing public and press relations programs; and . conducting training seminars for vendors and system integrators. 41 Customers Billing and Customer Care Software for Voice over IP We currently provide over 100 traditional telecommunications service providers, Internet telephony service providers and Internet service providers with our billing and customer care software for Voice over IP. Some key customers are as follows: [3 COLUMN SERVICE PROVIDERS LIST] Case Study -- China Unicom. China Unicom is China's second largest national telecommunications service provider. Traditionally, China Unicom only provided GSM cellular services. China Unicom recently obtained a license from the Chinese government to provide IP telephony services. We believe this case study illustrates our method of doing business with the initial sale of a billing and customer care software license and additional fees from the expansion of the scale of the system as the customer's network grows. However, the large subscriber base of China Unicom is not typical of the current subscriber base of our customers. CHALLENGE: China Unicom needed billing and customer care software for Voice over IP service capable of supporting a large and rapidly growing subscriber base. SOLUTION: We responded to a Request for Proposal from China Unicom in March 1999. China Unicom decided on the combined solution of Cisco voice gateways and the MIND-iPhonEX billing and customer care software to create an integrated Voice over IP solution. We were appointed to design and provide a solution for China Unicom that is interoperable with the Cisco gateways, supports the Chinese language and is scalable to millions of users. China Unicom rolled out the first phase of its IP telephony project in May 1999 in 12 cities. The software we installed for them at that time was capable of supporting one million users. In November 1999, China Unicom advised us that it was expanding its network to support five million users. As the number of users that our software can support can be increased through the addition of hardware without the need to modify or 42 replace our installed software, we were easily able to accommodate this growth. That number was increased again in June 2000 to 20 million users in over 100 cities, again without the need to modify or replace our installed software. China Unicom has announced that it intends to expand its Internet protocol telephony network to cover 200 cities by the end of 2000. Enterprise Software Our enterprise software has been installed in locations throughout the world, for customers including ABN Amro, Bosch Telecom, CellCom, the largest cellular telecommunications provider in Israel, Credit Suisse First Boston, Deutsche Post, the Israeli Defense Forces, the Israel Electric Corp. Limited and STMicroElectronics. Competition Billing and Customer Care Software for Voice over IP Competition in the market for billing and customer care software for Voice over IP is intense and we expect competition to increase. We compete primarily with young, emerging billing companies such as Portal Software Inc. and Belle Systems. We also compete with telecommunications equipment manufacturers such as Clarent Corporation, which offers an internally developed billing and customer care software product integrated into their hardware. Finally, we believe that the more established traditional billing and customer care companies, such as Amdocs Ltd. (which recently acquired Solect Technology Inc.) and Saville Systems plc (acquired by ADC Telecommunications, Inc.) will begin to offer billing and customer care software products for Voice over IP. We believe that our competitive advantage is based on: . our ability to provide a real-time, scalable, interoperable and reliable billing and customer care software; . our ability to rapidly deploy our software; and . our reputation of providing proven, high-quality billing and customer care software. However, we depend on our marketing alliances with manufacturers of IP telecommunications equipment and reseller arrangements to market our billing and customer care software. Some of our marketing allies and resellers also work with some of our competitors. For example, Cisco has invested in Portal Software Inc. Our marketing alliances and reseller arrangements are for the most part non-exclusive and do not contain minimum sales or marketing performance requirements. We may not be able to compete effectively with our competitors under these circumstances. Many of our competitors have greater financial, personnel and other resources, have longer and more established relationships with service providers and may be able to offer more aggressive pricing or devote greater resources to the promotion of their products. In addition, one or more of our competitors could develop superior products and these products could achieve greater market acceptance than our product. Enterprise Software Our main competitors in the market for enterprise software products include Veramark Technologies, Inc., Mer Telemanagement Solutions Inc. and Telco Research Corp. To compete effectively, companies must be able to offer adequate technical support and ongoing product development and customization services. In addition, multinational companies prefer call accounting systems that can be installed at their various offices throughout the world, and therefore require call accounting products that are multilingual and support the local telecommunication requirements. The principal factors upon which we compete are customer support, ease of use, compatibility with any switchboard system and the multi-lingual and multi-currency nature of our system. 43 Facilities Our headquarters are located in Yoqneam, Israel, approximately 50 miles north of Tel Aviv. We lease approximately 22,000 square feet at our Yoqneam headquarters. We recently received approval under the Approved Enterprise program in Israel to expand our facilities in Yoqneam. We expect that construction of a new facility will take from two to three years. We also lease 2,000 square feet of office space in New Jersey, and 1,000 square feet in Beijing, China. The offices in New Jersey and Beijing are used primarily for sales and customer support. Employees As of March 31, 2000 we employed 139 employees, 13 of whom are part-time employees. Of these employees, 125 were employed in Israel, 4 in China and 10 by our U.S. subsidiary. We employed 64 employees in research and development, 36 in professional services and customer support, 20 in sales and marketing, and 19 in general and administration. We are subject to Israeli labor laws and regulations with respect to our Israeli employees. These laws principally concern matters such as paid annual vacation, paid sick days, length of the work day and work week, minimum wages, pay for overtime, insurance for work-related accidents, severance pay and other conditions of employment. Furthermore, by order of the Israeli Ministry of Labor and Welfare, all employers and employees are subject to provisions of collective bargaining agreements between the Histadrut, Federation of Labor, and the Coordination Bureau of Economic Organizations in Israel. These provisions principally concern cost of living increases, recreation pay, commuting expenses and other conditions of employment. We provide our employees with benefits and working conditions above the required minimums. Our employees are not represented by a labor union. To date, we have not experienced any work stoppages and our relationships with our employees are good. Legal Proceedings We are not a party to any material legal proceedings. 44 MANAGEMENT Directors and Executive Officers The following table sets forth certain information regarding our directors and executive officers:
Name Age Position ---- --- -------- Monica Eisinger............ 42 President, Chairman of the Board of Directors and Chief Executive Officer Yaron Amir................. 34 Chief Financial Officer Sagee Aran................. 37 Vice President--Professional Services Zeev Braude................ 35 Vice President--Marketing and Business Development Ilan Melamed............... 36 Vice President--U.S. Operations, MIND C.T.I. Inc. Kevin P. Mohan............. 36 Director Ilan Rosen................. 42 Director Lior Salansky.............. 35 Director
The background of each of our directors and executive officers is as follows: Monica Eisinger. Ms. Eisinger is a founder of our company and has been President, Chairman and Chief Executive Officer of our company since inception. Prior to founding MIND, Ms. Eisinger served as an information systems consultant to Raphael, the Israeli Armaments Industry and directed over 40 projects. Ms. Eisinger holds a B.Sc. in Computer Sciences and a Masters Degree in Telecommunications (with expertise in Voice and Data Integration over the Ethernet) from the Technion, Israel Institute of Technology. Yaron Amir. Mr. Amir joined our company as Chief Financial Officer in April 2000. Prior to that and since 1996, Mr. Amir was the Chief Financial Officer of On Track Innovations, a company engaged in the field of contactless smart cards. From 1993 to 1996, Mr. Amir worked as a controller at Kitan Consolidated, a textile company. Mr. Amir is a Certified Public Accountant and a Certified Information System Auditor. He holds a Bachelor's Degree in Accounting and Economics and a Masters in Business Administration, both from the Hebrew University of Jerusalem. Sagee Aran. Mr. Aran joined our company in March 2000 as Vice President of Professional Services. Prior to joining our company, he worked for seven years at HISH Ltd., a company specializing in process engineering and management, at which he held a number of positions including Operations Manager and International Sales and Marketing Manager. Mr. Aran holds a B.Sc. in Engineering from the Technion, Israel Institute of Technology. Zeev Braude. Mr. Braude has worked at our company since our inception serving in a number of positions, the most recent of which was Vice President of Product Line Management. Mr. Braude has been Vice President of Marketing and Business Development of our company since February 2000. Mr. Braude holds a B.Sc. in Computer Engineering from the Technion, Israel Institute of Technology. Ilan Melamed. Mr. Melamed has served as General Manager of our U.S. office since September 1998 and as Vice President--U.S. Operations of MIND C.T.I. Inc. since May 2000. Prior to joining our company, Mr. Melamed was employed by Israel Aircraft Industries for five years, at which he held a number of positions including the Director of the Israel Aircraft Industries office in Colombia. He holds a Bachelor of Arts degree in Business Administration from Hebrew University. Kevin P. Mohan. Mr. Mohan has served as a director of our company since March 2000. Mr. Mohan is a general partner of Summit Partners, a venture capital firm, where he has been employed since 1994. He received an A.B. in Economics from Harvard College, a J.D. from Harvard Law School, and a Masters in Business Administration from Harvard Business School. Mr. Mohan also serves as a director on the boards of several privately held companies. 45 Ilan Rosen. Mr. Rosen has served as a director of our company since August 1997. Mr. Rosen is Corporate Vice President of ADC Teledata Communications, Ltd., where he has been employed since November 1996. Prior thereto and since 1993, Mr. Rosen was the President of ADASHA, Development & Investments Ltd. which listed on the Tel Aviv Stock Exchange under his direction. He holds a Bachelor of Science in Mechanical Engineering and a Masters in Business Administration, both from Tel Aviv University. Lior Salansky. Mr. Salansky is a founder of our company and has served as a director since our inception. He has served in a number of positions within our company from inception until February 2000, including Vice President of Business Development, R&D Manager and software developer. He holds a Bachelor's Degree in Computer Science from the Technion, Israel Institute of Technology. Board of Directors Our board is divided into three classes of directors, denominated Class I, Class II and Class III. The initial term of each class will expire as follows: Class I in 2001, Class II in 2002 and Class III in 2003. Monica Eisinger is a member of Class I, Lior Salansky is a member of Class II, and Kevin P. Mohan and Ilan Rosen are members of Class III. At each annual general meeting of shareholders beginning in 2001, directors will be elected for a three-year term to succeed the directors whose terms then expire. Our external directors, who will be appointed for three year terms pursuant to Israeli law, will not be members of any class. Stock Option Plans We have established stock option plans to provide for the issuance of options to our directors, officers and employees. Under the plan, options to purchase our ordinary shares may be issued from time to time to our directors, officers and employees at exercise prices and on other terms and conditions as determined by our Board of Directors. Our Board of Directors determines the exercise price and the vesting period of options granted. The option plans permit the issuance of options to acquire up to 1,108,000 ordinary shares. As of May 31, 2000, options to purchase 747,820 ordinary shares have been issued and options for 2,000 ordinary shares have been exercised. The options vest over three to five years (mainly three years), commencing on the date of grant. The weighted average exercise price of these options was $2.75 per share. Any option not exercised by January 1, 2006 will expire, except for 50,000 options which will expire on December 31, 2001. Israeli Companies Law We are subject to the provisions of the new Israeli Companies Law, 5759- 1999, which became effective on February 1, 2000 and regulations adopted thereunder. External Directors Qualifications of External Directors Under the Israeli Companies Law, companies incorporated under the laws of Israel whose shares have been offered to the public in or outside of Israel are required to appoint two external directors. The Companies Law provides that a person may not be appointed as an external director if he or his relative, partner, employer or any entity under his control has or had during the two years preceding the date of appointment any affiliation with: . the company; . any entity controlling the company; or . any entity controlled by the company or by its controlling entity. The term affiliation includes: . an employment relationship; 46 . a business or professional relationship maintained on a regular basis; . control; and . service as an office holder. The Companies Law defines the term "office holder" of a company to include a director, the chief executive officer, the chief financial officer and any officer of the company that reports directly to the chief executive officer. No person can serve as an external director if the person's position or other business creates, or may create, conflict of interests with the person's responsibilities as an external director or may otherwise interfere with the person's ability to serve as an external director. Until the lapse of two years from termination of office, a company may not engage an external director to serve as an office holder and cannot employ or receive services from that person, either directly or indirectly, including through a corporation controlled by that person. Election of External Directors External directors are to be elected by a majority vote at a shareholders' meeting, provided that either: . at least one third of the shares of non-controlling shareholders voted at the meeting vote in favor of this election; or . the total number of shares of non-controlling shareholders voted against the election of the external director does not exceed one percent of the aggregate voting rights in the company. The initial term of an external director is three years and may be extended for an additional three years. External directors may be removed only by the same percentage of shareholders as is required for their election, or by a court, and then only if the external directors cease to meet the statutory qualifications for their appointment or if they violate their duty of loyalty to the company. Each committee of a company's board of directors is required to include at least one external director. Under the provisions of the Companies Law, we are required to designate the initial external directors at a shareholders' meeting to be convened within three months following the offering. We intend to elect two additional directors as external directors within that time period. Audit Committee Nasdaq Requirements Under Nasdaq rules, we are required to have at least two independent directors as defined by Nasdaq rules applicable to non-U.S. companies. Our two external directors required under Israeli law will also be our independent directors as required under Nasdaq rules. A majority of the members of the audit committee must be independent. The responsibilities of the audit committee under Nasdaq rules include, among other things, evaluating the independence of a company's outside auditors. We intend to form an audit committee within 90 days following this offering which will be comprised of directors who meet the qualifications under the Israeli Companies Law. We have applied for a waiver from Nasdaq's new audit committee requirements. See "-- Israeli Companies Law Requirements" below for more information. Israeli Companies Law Requirements Under the Israeli Companies Law, the board of directors of any company that is required to nominate external directors must also appoint an audit committee, comprised of at least three directors including all of the external directors, but excluding: . the chairman of the board of directors; and . a controlling shareholder or a relative of a controlling shareholder and any director employed by the company or who provides services to the company on a regular basis. The role of the audit committee is to examine flaws in the business management of the company, in consultation with the internal auditor and the company's independent accountants, and suggest appropriate course of action. Approval of Related Party Transactions The approval of the audit committee is required to effect actions and transactions with office holders, controlling shareholders and entities in which they have a personal interest. An audit committee may not approve an action or a transaction with an office holder, controlling shareholders or an entity in which they have a personal interest unless at the time of approval the two external directors are serving as members of the audit committee and at least one of whom was present at the meeting in which any approval was granted. Internal Auditor Under the Companies Law, the board of directors must appoint an internal auditor proposed by the audit committee. The role of the internal auditor is to examine whether the company's actions comply with the law, integrity and orderly business procedure. Under the Companies Law, the internal auditor may not be an interested party, an office holder, or an affiliate, or a relative of an interested party, an office holder or affiliate, nor may the internal auditor be the company's independent accountant or its representative. We intend to appoint an internal auditor that complies with the requirements of the Companies Law after this offering. Approval of Specified Related Party Transactions Under Israeli Law Fiduciary Duties of Office Holders The Israeli Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company. The duty of care requires an office holder to act with the level of care with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of care includes a duty to use reasonable means to obtain: . information on the advisability of a given action brought for his approval or performed by him by virtue of his position; and . all other important information pertaining to these actions. The duty of loyalty of an office holder includes a duty to: . refrain from any conflict of interest between the performance of his duties in the company and his personal affairs; . refrain from any activity that is competitive with the company; . refrain from exploiting any business opportunity of the company to receive a personal gain for himself or others; and . disclose to the company any information or documents relating to a company's affairs which the office holder has received due to his position as an office holder. Each person listed in the table under "--Directors and Executive Officers" above is an office holder except Ilan Melamed. 48 Disclosure of Personal Interest of an Office Holder The Israeli Companies Law requires that an office holder of a company disclose to the company any personal interest that he may have and all related material information known to him, in connection with any existing or proposed transaction by the company. The disclosure is required to be made promptly and in any event no later than the board of directors meeting in which the transaction is first discussed. If the transaction is an extraordinary transaction, the office holder must also disclose any personal interest held by: . the office holder's spouse, siblings, parents, grandparents, descendants, spouse's descendants and the spouses of any of these people; or . any corporation in which the office holder is a 5% or greater shareholder, director or general manager or in which he has the right to appoint at least one director or the general manager. Under Israeli law, an extraordinary transaction is a transaction: . other than in the ordinary course of business; . otherwise than on market terms; or . that is likely to have a material impact of the company's profitability, assets or liabilities. Once an office holder complies with the above disclosure requirement, the board of directors may approve a transaction between the company and an office holder, or a third party in which an office holder has a personal interest. A transaction that is adverse to the company's interest may not be approved. If the transaction is an extraordinary transaction, both the audit committee and the board of directors must approve the transaction. A director who has a personal interest in a matter which 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. If a majority of the directors has a personal interest in an extraordinary transaction, these directors are permitted to be present and vote, but shareholder approval is also required. Shareholder approval is also required to approve compensation of a director. Disclosure of Personal Interests of a Controlling Shareholder Under the Israeli Companies Law, the disclosure requirements which apply to an office holder also apply to a controlling shareholder of a public company. A controlling shareholder is a shareholder who has the ability to direct the activities of a company, including a shareholder that owns 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights, but excluding a shareholder whose power derives solely from his or her position on the board of directors or any other position with the company. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and the engagement of a controlling shareholder as an office holder, require the approval of the audit committee, the board of directors and the shareholders of the company. The shareholder approval must be by a majority of the shares voted on the matter, provided that either: . at least one-third of the shares of shareholders who have no personal interest in the transaction and who vote on the matter vote to approve it; or . the shareholders who have no personal interest in the transaction who vote against the transaction do not represent more than one percent of the voting rights in the company. Shareholders generally have the right to examine any document in the company's possession pertaining to any matter that requires shareholder approval. If this information is made public in Israel or elsewhere, we will file the information with the Securities and Exchange Commission in the United States. For information concerning the direct and indirect personal interests of an office holder and principal shareholders in specified transactions with us, see the section of this prospectus entitled "Related Party Transactions." 49 Exculpation, Insurance and Indemnification Exculpation of Office Holders Under the Companies Law, an Israeli company may not exempt an office holder from liability for a breach of his duty of loyalty, but may exempt in advance an office holder from his liability to the company, in whole or in part, for a breach of his duty of care. Officers and Directors Insurance Our articles of association provide that, subject to the provisions of the Companies Law, we may enter into a contract for the insurance of the liability of any of our officers and directors, with respect to an act performed in the capacity of an officer or director for: . a breach of his duty of care to us or to another person; . a breach of his duty of loyalty to us, provided that the officer or director acted in good faith and had reasonable cause to assume that his act would not prejudice our interests; or . a financial liability imposed upon him in favor of another person. Indemnification of Officers and Directors Our articles of association provide that we may indemnify an officer or director against the following obligations and expenses imposed on the officer or director with respect to an act performed in the capacity of an officer or director: . a financial liability imposed on him in favor of another person by any judgment concerning an act performed in his capacity as an officer or director; and . reasonable litigation expenses, including attorneys' fees, expended by the officer or director or charged to him by a court in connection with: . proceedings we institute against him or instituted on our behalf or by another person; . a criminal charge from which he was acquitted; or . a criminal charge in which he was convicted for a criminal offense that does not require proof of criminal intent. Our articles of association also include provisions: . authorizing us to grant in advance an undertaking to indemnify an officer or director, provided that the undertaking is limited to types of events which our board of directors deems to be anticipated and limited to an amount determined by our board of directors to be reasonable under the circumstances; and . authorizing us to retroactively indemnify an officer or director. Limitations on Insurance and Indemnification The Israeli Companies Law provides that a company may not indemnify an office holder nor enter into an insurance contract which would provide coverage for any monetary liability incurred as a result of any of the following: . a breach by the office holder of his duty of loyalty unless the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; . a breach by the office holder of his duty of care if the breach was done intentionally or recklessly; . any act or omission done with the intent to derive an illegal personal benefit; or . any fine levied against the office holder. 50 In addition, under the Companies Law, indemnification of, and procurement of insurance coverage for, our office holders must be approved by our audit committee and our board of directors and, if the beneficiary is a director, by our shareholders. We have agreed to indemnify our officers and directors to the fullest extent permitted under the Companies Law. We have obtained directors and officers liability insurance for the benefit of our office holders. Compensation of Directors and Officers The aggregate direct remuneration paid to all 5 persons who serviced in the capacity of director or executive officer during 1999 was approximately $459,000, including approximately $86,000 which was set aside for pension and retirement benefits. This does not include amounts expended by us for automobiles made available to our officers, expenses, including business, travel, professional and business association dues and expenses, reimbursed to officers and other fringe benefits commonly reimbursed or paid by companies in Israel. Directors have not received cash fees for their services as directors, but were granted options from time to time. As of May 31, 2000, options to purchase 288,220 ordinary shares were granted to our directors and executive officers under our options plans were outstanding. The weighted average exercise price of these options is $3.20 per share. Executive Officers Our executive officers are elected by our board of directors and serve at the discretion of our board of directors. We maintain written employment agreements with our executive officers. Each agreement terminates on between 30 and 60 days' written notice and provides for standard terms and conditions of employment. All of our executive officers have agreed not to compete with us for 12 months (or 24 months in the case of Monica Eisinger) following the termination of their employment with us. Monica Eisinger is entitled to six months' severance pay upon termination of her employment by either her or us, other than for cause. Mr. Salansky is a former executive officer who resigned in March 2000. His employment agreement contained a non-compete agreement prohibiting him from competing with MIND for a period of 24 months. 51 RELATED PARTY TRANSACTIONS Investment by Summit Share Purchase Agreement. In March 2000, we raised approximately $12 million in a private placement of our securities to a group of funds led by Summit Ventures V, L.P. We issued to these investors 111,111 Series A preferred shares. In connection with the same transaction, the investors also purchased 27,778 Series B preferred shares from Lior Salansky, for an aggregate price of $3 million. The Series B preferred shares were issued to Mr. Salansky on March 30, 2000 in exchange for 555,560 existing ordinary shares owned by Mr. Salansky. Mr. Salansky has no relationship to the entities affiliated with Summit Ventures V, L.P. The Series B investors have agreed to transfer Series B preferred shares to Mr. Salansky under specified circumstances because when those shares were purchased from him there was an agreement that if MIND reached certain valuation targets, a portion of the shares purchased from Mr. Salansky would be returned, thereby increasing the effective per share price of the shares initially purchased from him. The Series A and Series B preferred shares may be converted into ordinary shares upon the request of the investors at any point following the first anniversary of the date of their issuance. The Series A and Series B preferred shares will automatically convert upon a liquidity event, which includes the closing of this offering. The number of ordinary shares into which the Series A preferred shares may be converted depends on the initial public offering price of our shares. At the initial public offering price of $11.00 per share, each Series A preferred share will convert into 19.7037 ordinary shares, or an aggregate of 2,189,298 ordinary shares. The maximum number of shares into which each Series A preferred shares is convertible is 20 ordinary shares based on initial public offering price of $10.80 per share and the minimum number of shares into which each Series A preferred share is convertible is 16 ordinary shares based on an initial public offering price of $13.50 per share. Each Series B preferred share converts into 20 ordinary shares, or on aggregate of 555,560 ordinary shares. However, the investors have agreed to transfer to Mr. Salansky for no consideration an amount of ordinary shares equal to the difference between the number of ordinary shares into which their Series B preferred shares were converted and the number of ordinary shares into which an equal amount of Series A preferred shares would have been converted. At the assumed initial offering price of $11.00 per share, 8,231 ordinary shares will be transferred to Mr. Salansky. Simultaneously with the sale of the Series B preferred shares by Mr. Salansky described above, Mr. Salansky also sold an aggregate of 468,240 ordinary shares owned by him for a total purchase price of $2,499,481. The share purchase agreement relating to the sale of those shares provides that if we consummate an initial public offering within a period of 12 months from the date of the agreement at a specified valuation, Mr. Salansky will be deemed to have sold up to an aggregate of 585,300 ordinary shares to the purchasers. At the assumed initial offering price of $11.00 per share, Mr. Salansky will be required to transfer an additional 108,389 ordinary shares to those purchasers. In the event that upon conversion to ordinary shares, the holder of preferred shares would own in excess of 10% of the then outstanding shares, the amount in excess of 10% will be converted into non-voting ordinary shares. These non-voting ordinary shares will be automatically converted into ordinary shares on a one-for-one basis upon transfer to a third party unless that third party would then own in excess of 10% of the then outstanding ordinary shares. Summit Ventures V, L.P. and its related funds have no relationship with us other than their investment in the Series A and Series B preferred shares. Kevin P. Mohan, a member of Summit Partners, LLC, the sole general partner of the sole general partner of Summit Partners V, L.P., is one of our directors. Eleven individuals, including Mr. Mohan, are members of Summit Partners, LLC. Registration Rights Agreement. In connection with the investment, we granted to our principal shareholders, and transferees of their shares, two demand registration rights and unlimited incidental 52 registration rights. These shareholders agreed not to exercise their demand rights for at least six months following the closing of this offering. Shareholders' Agreement. In connection with the investment, we and our principal shareholders entered into a shareholders' agreement. The shareholders granted each other certain co-sale and first refusal rights, accepted certain restrictions on the transfer of their shares and agreed upon the appointment of directors and the formation of committees of the Board of Directors. In addition, we granted the shareholders certain pre-emptive rights relating to the issuance of new securities. The shareholders' agreement between us and our principal shareholders also provides that if Monica Eisinger or Lior Salansky desire to sell all or any part of the shares owned by them, other than in the public market, Summit and ADC and Ms. Eisinger or Mr. Salansky are entitled to sell a pro rata portion of the shares proposed to be sold. Except for these limited co-sale rights, the shareholders agreement will terminate immediately prior to the closing of this offering. Repurchase of Management Shares. In connection with the investment, we repurchased an aggregate of 30 management shares, 10 each from Monica Eisinger, Lior Salansky and ADC Teledata Communications Ltd. The repurchase was at nominal value. Sub-contractor Agreement with MIND Israel Ltd. MIND Israel Ltd. is a company founded in 1992 by Monica Eisinger and Lior Salansky, two of our principal shareholders. MIND Israel Ltd. was involved in the business of providing information technology consulting services. One of MIND Israel Ltd.'s major customers was the Israeli Ministry of Defense. MIND Israel Ltd. wished to assign this contract to us upon our formation. Because Israeli governmental procedures require a long waiting period prior to the assignment of this type of contract, MIND Israel Ltd. entered into an agreement with us under which we performed those services as a sub-contractor of MIND Israel Ltd. As compensation for these services, MIND Israel Ltd. paid to us $58,000 in 1997 and $80,000 in 1998. These amounts represented the total amount that it received from the Israeli Ministry of Defense under this contract. 53 PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of our ordinary shares as of the date of this prospectus, as adjusted to reflect the sale of the ordinary shares in this offering, by: . each person who is known to own beneficially more than 10% of the outstanding ordinary shares; and . all directors and executive officers as a group. Unless otherwise noted below, each shareholder's address is c/o MIND C.T.I. Ltd., Industrial Park, Building 7, Yoqneam 20692, Israel.
Percentage of Ordinary Shares Total Shares ----------------------------------- Name and Address of Beneficially Before After Beneficial Owner Owned(/1/) Offering(/2/) Offering(/3/) - ------------------- ------------ -------------- -------------- Monica Eisinger......... 5,040,000(/4/) 29.5% 23.7% Lior Salansky........... 4,016,200(/4/)(/5/) 23.5% 18.9% Snir Street Yoqneam Illit, Israel ADC Teledata 4,502,000 26.4% 21.2% Communications Ltd.(/6/).............. 10 HaSadnaot Street Herzlia 46120, Israel Summit Partners 2,561,873(/9/) 15.0% 12.0% (/7/)(/8/)............. Kevin Mohan(/10/)....... 2,561,873(/9/) 15.0% 12.0% All directors and 9,243,600 53.8% 43.2% executive officers as a group (8 persons)(/11/).........
- -------- (1) Shares beneficially owned include shares that may be acquired pursuant to options that are exercisable within 60 days of the date of this prospectus. (2) Based on 17,083,298 ordinary shares outstanding prior to this offering. Ordinary shares deemed beneficially owned by virtue of the right of any person or group to acquire such shares within 60 days of the date of this prospectus are treated as outstanding only for purposes of determining the percent owned by such person or group. (3) Based on 21,283,298 ordinary shares outstanding immediately following this offering. (4) The shares owned by Ms. Eisinger and Mr. Salansky include 140,000 shares owned by MIND Israel Ltd. Each of Ms. Eisinger and Mr. Salansky is considered a beneficial owner of these shares. (5) Summit Partners and other shareholders may be required to transfer ordinary shares in our company to Lior Salansky. Based on an estimated initial public offering price of $11.00 per share, the Summit Partners and other shareholders would transfer an aggregate 8,231 ordinary shares to Mr. Salansky. In addition, pursuant to Mr. Salansky's obligation to persons who previously purchased shares from him, Mr. Salansky would transfer an aggregate of 108,389 ordinary shares, including an aggregate of 17,686 ordinary shares to three of our officers. Accordingly, at the assumed initial public offering price, Mr. Salansky's beneficial ownership would decrease by 100,158 ordinary shares. Please see "Related Party Transactions--Investment by Summit Partners" for a description of this arrangement. (6) ADC Teledata Communications Ltd. is a wholly-owned subsidiary of ADC Telecommunications, Inc., a Minnesota company whose shares are publicly traded on the Nasdaq Stock Market. The address of ADC Telecommunications is 12501 Whitewater Drive, Minnetonka, MN 55343. (7) The address of Summit Partners is 600 Atlantic Avenue, Suite 2800, Boston, MA 02210. (8) Summit Partners is the name used to refer to a group of investment partnerships. Shares reflected include 1,710,583 shares held by Summit Ventures, V, L.P., 636,545 shares held by Summit Ventures V Companion Fund, L.P., 134,507 shares held by Summit V Advisors Fund (QP) L.P., 41,107 shares held by Summit V Advisors Fund, L.P. and 39,131 shares held by Summit Investors III, L.P. The general partner for each of Summit Ventures V, L.P., Summit Ventures V Companion Fund, L.P., Summit V Advisors Fund (QP) L.P. and Summit V Advisors Fund, L.P. is Summit Partners V, L.P., the general partner of which is Summit Partners, LLC. Mr. Mohan is a member of Summit Partners, LLC. Based on an estimated initial offering price of $11,00 per share, Summit Partners would transfer 7,682 ordinary shares to Mr. Salansky. Please see "Related Party Transactions--Investment by Summit Partners." (9) After the offering, 500,000 of the shares held by Summit Partners and its affiliates will be non-voting shares. These non-voting shares will be automatically converted into voting shares upon transfer to a third party. 54 (10) Represents shares described in note (8) above, beneficially owned by Summit Partners. Mr Mohan, one of our directors, is a member of Summit Partners LLC, the sole general partner of Summit Partners V, L.P. which is the sole general partner of Summit Ventures V, L.P., Summit Ventures V Companion Fund, L.P., Summit V Advisors Fund (QP), L.P., and Summit V Advisors Fund, L.P. Summit Partners, LLC, through an investment committee, has voting and dispositive authority over the shares held by these entities and Summit Investors III, L.P. Mr. Mohan does not have voting and dispositive authority over these shares and disclaims beneficial ownership except to the extent of his pecuniary interest in these shares. (11) Includes 101,000 shares which may be acquired upon the exercise of options within 60 days. 55 SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial number of ordinary shares after the offering could adversely affect the market price of our ordinary shares by introducing a large number of sellers to the market. Given the likely volatility that will exist for our ordinary shares, such sales could cause the market price of the ordinary shares to decline. After this offering, we will have outstanding 21,283,298 ordinary shares. All of the ordinary shares to be sold in this offering, other than shares sold pursuant to our directed share program, will be freely tradable without restriction or further registration under the federal securities laws unless purchased by our "affiliates," as that term is defined in Rule 144 under the Securities Act. The remaining outstanding ordinary shares, representing approximately 80.3% of the outstanding ordinary shares upon completion of this offering (78.0% if the underwriters' over-allotment option is exercised in full) and all ordinary shares issued upon exercise of options, will be "restricted securities" under the Securities Act subject to restrictions on the timing, manner and volume of sales of such shares. Our directors, executive officers, key employees and our current shareholders have agreed for a period of 180 days after the date of this prospectus, and some of the participants in our directed share program will be required to agree as a condition to their participation in the program, for a period of up to 90 days after the date of this prospectus, that they will not, without the prior written consent of Lehman Brothers Inc., directly or indirectly, offer to sell, sell or otherwise dispose of any ordinary shares or securities convertible into or exchangeable for ordinary shares, except for: . the exercise of stock options or warrants existing on the date of this offering; . transfers to their associates (as defined in the Exchange Act) who agree to the lock-up; and . pledges if the pledgees agree to the lock-up. We have also agreed to an equivalent lock-up, except that we may issue shares, warrants or options in consideration of acquisitions if the recipient agrees to comply with the lock-up. Holders of 16,491,298 ordinary shares have the right to require us to register their shares on two occasions, and have incidental registration rights with respect to those ordinary shares. In addition, as of May 31, 2000, there were outstanding options to purchase a total of 747,820 ordinary shares and we were authorized to grant options to purchase 358,180 additional ordinary shares. We intend to file a registration statement on Form S-8 covering all of the ordinary shares issuable upon the exercise of options under our share option plan, at which time these shares will be immediately available for sale in the public market, subject to the terms of the related options and any applicable lock-up agreements. Rule 144 In general, under Rule 144 as currently in effect, a person who has beneficially owned ordinary shares for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: . 1% of the number of ordinary shares then outstanding, which will equal approximately 212,833 ordinary shares immediately after this offering; or . the average weekly trading volume of the ordinary shares on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us. Rule 144(k) Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. 56 Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately upon the completion of this offering. The Securities and Exchange Commission has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Securities Exchange Act of 1934, along with the shares acquired upon exercise of these options, including exercises after the date of this prospectus. Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning 90 days after the date of this prospectus, may be sold by persons other than affiliates subject only to the manner of sale provisions of Rule 144 and by affiliates under Rule 144 without compliance with its one year minimum holding period requirement. Stock Options Following the completion of this offering we intend to file a registration statement on Form S-8 under the Securities Act covering 1,108,000 shares reserved for issuance under our stock option plans. The registration statement on Form S-8 will become effective automatically upon filing. As of May 31, 2000, options to purchase 747,820 shares were issued and outstanding. Accordingly, ordinary shares registered under the registration statement will, subject to vesting provisions and Rule 144 volume limitations applicable to our affiliates, be available for sale in the open market immediately after the 180- day lock-up agreements expire. 57 DESCRIPTION OF ORDINARY SHARES Upon completion of this offering, we will be authorized to issue 80,000,000 ordinary shares, par value NIS 0.01 per share and 8,000,000 non-voting ordinary shares, par value NIS 0.01 per share. In April 2000, our board of directors declared, and our shareholders approved, a share dividend of 19 ordinary shares for each ordinary share. Prior to this offering, there were 17,083,298 shares issued and outstanding, assuming the conversion of all our outstanding preferred shares. Upon completion of this offering, all outstanding ordinary shares, including the ordinary shares issued in this offering, will be validly issued and fully paid and will not have preemptive rights, rights of first refusal or co-sale rights. The ownership or voting of ordinary shares by non-residents of Israel is not restricted in any way by our memorandum of association, our articles of association or the laws of the State of Israel, except for citizens of countries which are in a state of war with Israel who may not be recognized as owners of ordinary shares. As of May 31, 2000, all of the Series A and Series B preferred shares are held by a shareholder in the United States and another shareholder in the United States owned approximately 1.4% of our ordinary shares. Transfer of Shares and Notices Fully paid ordinary shares are issued in registered form and may be freely transferred pursuant to our articles of association unless such transfer is restricted or prohibited by another instrument. Unless otherwise prescribed by law, each shareholder of record will be provided at least 21 calendar days' prior notice of any general shareholders meeting. Election of Directors The ordinary shares do not have cumulative voting rights in the election of directors. Thus, the holders of ordinary shares conferring more than 50% of the voting power have the power to elect all the directors, to the exclusion of the remaining shareholders. Our board is divided into three classes of directors serving staggered three year terms. Dividend and Liquidation Rights Dividends on our ordinary shares may be paid only out of profits and other surplus, as defined in the Companies Law, as of the end of the most recent fiscal year or as accrued over a period of two years, whichever is higher. Our board of directors is authorized to declare dividends, provided that there is no reasonable concern that the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion to their respective holdings. This liquidation right may be affected by the grant of preferential dividends or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future. Voting, Shareholders' Meetings and Resolutions Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. Non-voting ordinary shares are identical in all respects to the ordinary shares except that they do not carry voting rights. Non-voting ordinary shares would be issued to holders of preferred shares under the circumstances described in this prospectus under the section "Related Party Transactions--Investment by Summit." These voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future. The quorum required for an ordinary meeting of shareholders consists of at least two shareholders present in person or by proxy who hold or represent between them at least 25% of the outstanding voting shares unless otherwise required by applicable rules. A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time and place or any time and place as the Chairman may designate with the consent of the 58 shareholders voting on the matter adjourned. At such reconvened meeting the required quorum consists of any two members present in person or by proxy. Under the new Israeli Companies Law, unless otherwise provided in the articles of association or applicable law, all resolutions of the shareholders require a simple majority of the shares present, in person or by proxy, and voting on the matter. However, our articles of association require approval of 75% of the shares present and voting to remove directors or change the structure of our staggered board of directors. All shareholders meetings require prior notice of at least 21 days. Under the Companies Law, each and every shareholder has a duty to act in good faith towards the company and other shareholders and refrain from abusing his power in the company including, among other things, in voting in the general meeting of shareholders on the following matters: . any amendment to the articles of association; . an increase of the company's authorized share capital; . a merger; or . approval of some of the acts and transactions which require shareholder approval. In addition, each and every shareholder has the general duty to refrain from depriving rights of other shareholders. Furthermore, any controlling shareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder vote and any shareholder that, pursuant to the provisions of the articles of association, has the power to appoint an office holder in the company, is under a duty to act in fairness towards the company. The Companies Law does not describe the substance of this duty of fairness. These various shareholder duties, which typically do not apply to shareholders of U.S. companies, may restrict the ability of a shareholder to act in what the shareholder perceives to be its own best interests. Mergers and Acquisitions under Israeli Law The Companies Law includes provisions that allow a merger transaction and requires that each company that is party to a merger approve the transaction by its board of directors and a vote of the majority of its shares, voting on the proposed merger at a shareholders' meeting called on at least 21 days' prior notice. For purposes of the shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if a majority of the shares held by parties other than the other party to the merger, or by any person who holds 25% or more of the shares or the right to appoint 25% or more of the directors of the other party, vote against the merger. Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be completed unless at least 70 days have passed from the time that a proposal of the merger has been filed with the Israeli Registrar of Companies. The Companies Law also provides that an acquisition of shares of a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% shareholder of the company and there is no 25% or more shareholder in the company. If there already is another 25%, but less than 50%, shareholder in the company, the Companies Law provides that an acquisition of shares of a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% shareholder of the company. This rule does not apply if someone else is already a majority shareholder in the company. If following any acquisition of shares, the acquirer will hold 90% or more of the company's shares, the acquisition may not be made other than through a tender offer to acquire all of the shares of such class. If more than 95% of the outstanding shares are tendered in the tender offer, all the shares that the 59 acquirer offered to purchase will be transferred to it. However, the remaining minority shareholders may seek to alter the consideration by court order. Finally, Israeli tax law treats stock-for-stock acquisitions between an Israeli company and a foreign company less favorably than does U.S. tax law. For example, Israeli tax law may subject a shareholder who exchanges his ordinary shares for shares in a foreign corporation to immediate taxation. Modification of Class Rights Our articles of association provide that the rights attached to any class (unless otherwise provided by the terms of such class), such as voting, rights to dividends and the like, may be varied by written consent of holders of a majority of the issued shares of that class, or by adoption by the holders of a majority of the shares of that class at a separate class meeting. Transfer Agent and Registrar The Transfer Agent and Registrar for our ordinary shares is American Stock Transfer & Trust Company, New York, New York. 60 CONDITIONS IN ISRAEL We are incorporated under the laws of, and our principal offices and manufacturing and research and development facilities are located in, the State of Israel. Accordingly, we are directly affected by political, economic and military conditions in Israel. Political Conditions Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying from time to time in intensity and degree, has led to security and economic problems for Israel. Israel signed a peace treaty with Egypt in 1979 and a peace treaty with Jordan in 1994. Since 1993, a joint Israeli-Palestinian Declaration of Principles and several other agreements have been signed between Israel and the Palestinians. The implementation of these agreements with the Palestinians has been subject to difficulties and delays, and a resolution of all the differences between the parties remains uncertain. As of the date hereof, Israel has not entered into any peace agreement with Syria and Lebanon. Despite the progress towards peace between Israel and its Arab neighbors and the Palestinians, certain countries, companies and organizations continue to participate in a boycott of Israeli firms and others doing business with Israel or with Israeli companies. Although we are precluded from marketing our products to such countries, we believe that in the past, the boycott has not had a material adverse effect on us. However, restrictive laws, policies or practices directed towards Israel or Israeli businesses could have an adverse impact on the expansion of our business. All male adult citizens and permanent residents of Israel under the age of 48 are, unless exempt, obligated to perform up to 36 days of military reserve duty annually. Additionally, all such residents are subject to being called to active duty at any time under emergency circumstances. Many of our officers and employees are currently obligated to perform annual reserve duty. While we have operated effectively under these requirements since we began operations, we cannot assess the full impact of such requirements on our workforce or business if conditions should change, and we cannot predict the effect on us of any expansion or reduction of such obligations. Trade Relations Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development and the International Finance Corporation. Israel is a member of the World Trade Organization and is signatory to the Global Agreement on Trade and Services. In addition, Israel has been granted preferences under the Generalized System of Preferences from the United States, Australia, Canada and Japan. These preferences allow Israel to export the products covered by such programs either duty-free or at reduced tariffs. Israel and the EEC, known now as the "European Union," concluded a Free Trade Agreement in July 1975 which 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. The Free Trade Area has eliminated all tariff and certain non- tariff barriers on most trade between the two countries. On January 1, 1993, an agreement between Israel and the European Free Trade Association, known as the "EFTA," established 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, China, India, Turkey and other nations in Eastern Europe and Asia. 61 Assistance from the United States Israel receives significant amounts of economic and military assistance from the United States, averaging approximately $3 billion annually over the last several years. In addition, in 1992, the United States approved the issuance of up to $10 billion of loan guarantees during U.S. fiscal years 1993 to 1998 to help Israel absorb a large influx of new immigrants, primarily from the republics of the former Soviet Union. Under the loan guarantee program, Israel issued up to $2 billion in principal amount of guaranteed loans each year. We cannot assure you that foreign aide from the United States will continue at or near amounts received in the past. The Clinton Administration has recently announced that it is considering phasing out economic assistance while increasing military assistance to Israel. If the grants of economic and military assistance are eliminated or reduced significantly, the Israeli economy could suffer material adverse consequences. 62 TAXATION AND GOVERNMENT PROGRAMS Israeli Tax Considerations The following is a summary of the current tax structure applicable to companies in Israel, with special reference to its effect on us. The following also contains a discussion of the material Israeli and United States tax consequences to persons purchasing our ordinary shares offered hereby. To the extent that the discussion is based on tax legislation which has not been subject to judicial or administrative interpretation, we cannot assure you that the tax authorities will accept the views expressed in the discussion in question. Prospective purchasers of our ordinary shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of ordinary shares, including, in particular, the effect of any foreign, state or local taxes. General Corporate Tax Structure The regular rate of corporate tax in Israel to which Israeli companies are subject is 36%. As described below, the tax rate payable by a company which derives income from an "Approved Enterprise" may be considerably less. Law for the Encouragement of Industry (Taxes), 1969 Under the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law, a company qualifies as an "Industrial Company" if it is resident in Israel and at least 90% of its income in a given tax year, determined in NIS, exclusive of income from capital gains, interest and dividends, is derived from Industrial Enterprises owned by that company. An "Industrial Enterprise" is defined as an enterprise whose major activity in a particular tax year is industrial activity. Industrial Companies qualify for accelerated depreciation rates for machinery, equipment and buildings used by an Industrial Enterprise. An Industrial Company owning an Approved Enterprise, as described below, may choose between the above depreciation rates and the depreciation rates available to Approved Enterprises. Pursuant to the Industry Encouragement Law, an Industrial Company is also entitled to amortize the purchase price of know-how and patents over a period of eight years beginning with the year in which such rights were first used. Eligibility for the benefits under the law is not subject to receipt of prior approval from any governmental authority. We believe that we currently qualify as an Industrial Company within the definition of the Industry Encouragement Law. However, the definition may be amended from time to time and the Israeli tax authorities, which reassess our qualifications annually may determine that we no longer qualify as an Industrial Company. As a result of either of the foregoing, the benefits described above might not be available in the future. Law for the Encouragement of Capital Investments, 1959 The Law for Encouragement of Capital Investments, 1959, provides that upon application to the Investment Center of the Ministry of Industry and Trade of the Sate of Israel, a proposed capital investment in eligible facilities may 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, such as the equipment to be purchased and utilized pursuant to the program. The tax benefits derived from any such certificate of approval relate only to taxable income derived from growth in manufacturing revenues 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. The benefits under the law are usually not available with respect to income derived from products manufactured outside of Israel. 63 Taxable income of a company derived from an Approved Enterprise is subject to tax at the maximum rate of 25%, rather than the regular rate of 36%, for the benefit period. That income is eligible for further reductions in tax rates depending on the percentage of the foreign investment in the company's share capital (conferring rights to profits, voting and appointment of directors) and the percentage of its combined share and loan capital owned by non-Israeli residents ("foreign investment level"). The tax rate is: . 20% if the foreign investment level is 49% or more but less than 74%; . 15% if the foreign investment level is 74% or more but less than 90%; and . 10% if the foreign investment level is 90% or more. The lowest level of foreign investment during the year will be used to determine the relevant tax rate for that year. These tax benefits are granted for a limited period not exceeding seven years, or ten years for a company whose foreign investment level exceeds 25% from the first year in which the Approved Enterprise has taxable income. The period of benefits may in no event, however, exceed the lesser of 12 years from the year in which production commenced and 14 years from the year of receipt of Approved Enterprise status. A company owning an Approved Enterprise may elect to receive, in lieu of the foregoing, an alternative package of benefits. Under the alternative package, the company's undistributed income derived from an Approval Enterprise will be exempt from 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 the company will be eligible for the tax benefits under the law for the remainder of the benefit period. The Investment Center bases its decision of whether to approve or reject a company's application for designation as an Approved Enterprise on criteria set forth in the law and related regulations, the then prevailing policy of the Investment Center and the specific objectives and financial criteria of the applicant. Accordingly, a company cannot be certain in advance whether its application will be approved. In addition, the benefits available to an Approved Enterprise are conditional upon compliance with the conditions stipulated in the law and related regulations and the criteria set forth in the specific certificate of approval. In the event that a company violates these conditions, in whole or in part, it may be required to refund all or a portion of its tax benefits, linked to the Israeli consumer price index and interest. These conditions include: . adhering to the business plan contained in the application to the Investment Center; . financing at least 30% of the investment in property, plant and equipment with the proceeds of the sale of ordinary shares; . filing regular reports with the Investment Center with respect to the Approved Enterprise; and . obtaining the approval of the Investment Center for changes in the ownership of a company. Most of our manufacturing facilities in Yoqneam have been granted the status of Approved Enterprise. Since our manufacturing facilities are located in "Area A" and since we elected to receive the alternative package of benefits (involving waiver of investment grants), our income derived from each Approved Enterprise is tax exempt for a period of ten years commencing in the first year in which we earn taxable income from each Approved Enterprise. To date, we have two Approved Enterprises, as follows: . the first Approved Enterprise commenced operations in 1995 and income derived from this Approved Enterprise is exempt from tax for a period of ten years through 2004; . the second Approved Enterprise requires that we invest approximately $6.4 million in property, plant and equipment pursuant to an approved investment plan; and . after we have invested 80% of this amount, income from this Approved Enterprise will be exempt from tax for a period of ten years. 64 Dividends paid out of income derived from an Approved Enterprise during the tax exemption period will be subject to corporate tax in respect of the amount distributed, including withholding tax thereon, at the rate that would have been applicable had the company not elected the alternative package of benefits. The dividend recipient is taxed at a reduced rate of 15%, applicable to dividends from an Approved Enterprise, if the dividend is paid during the same benefit period and at any time up to 12 years thereafter. The withholding tax rate will be up to 25% after such period. If the foreign investment level in the company exceeds 25%, the 12-year limitation period does not apply. This tax should be withheld by the company at source, regardless of whether the dividend is converted into foreign currency. When dividends are distributed from the Approved Enterprise, they are generally considered to be attributable to the entire enterprise and their effective tax rate is a result of a weighted combination of the applicable tax rates. In the event that we pay a cash dividend from income that is derived from our Approved Enterprises pursuant to the alternative package of benefits, which income would otherwise be tax-exempt, we would be required to pay tax on the amount of income distributed as dividends at the rate which would have been applicable if we had not elected the alternative package of benefits, that rate is ordinarily up to 25% and to withhold at source on behalf on the recipient of the dividend an additional 15% of the amount distributed. Through May 31, 2000 we distributed most of our income and paid corporate tax at the rate of 25%. We currently intend to reinvest the amount of our income and not to distribute such income as a dividend. The law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved investment program. Taxation Under Inflationary Conditions The Income Tax (Inflationary Adjustment) Law, 1985, commonly referred to as the Inflationary Adjustments Law, attempts to overcome some of the problems presented to a traditional tax system by rapid inflation. The Inflationary Adjustments Law provides tax deductions and adjustments to depreciation deduction and tax loss carry forwards to mitigate the effects resulting from an inflationary economy. Our taxable income is determined under this law. The Israeli Income Tax Ordinance and regulations promulgated thereunder allow "Foreign-Invested Companies," which maintain their accounts in U.S. dollars in compliance with the regulations to adjust their tax returns based on exchange rate fluctuations of the NIS against the U.S. Dollar rather than changes in the Israeli consumer price index, or CPI, in lieu of the principles set forth by the Inflationary Adjustments Law. For these purposes, a Foreign- Invested Company is a company more than 25% of the share capital of which in terms of rights to profits, voting and appointment of directors, and of the combined share capital of which including shareholder loans and capital notes, is held by persons who are not residents of Israel. A company that elects to measure its results for tax purposes based on the dollar exchange rate cannot change the election for a period of three years following the election. We adjust our tax returns based on the changes in the Israeli CPI. Because we qualify as a "Foreign-Invested Company," we are entitled to measure our results for tax purposes on the basis of changes in the exchange rate of the U.S. dollar in future tax years. Withholding and Capital Gains Taxes Applicable to Non-Israeli Shareholders The State of Israel imposes income tax on nonresidents of Israel on income accrued or derived from sources in Israel or received in Israel. These sources of income include passive income such as dividends, royalties and interest, as well as non-passive income from services rendered in Israel. These sources of income include passive income such as dividends, royalties and interest, as well as non-passive income from the services rendered in Israel. We are required to withhold income tax at the rate of 25%, or 15% for dividends of income generated by an Approved Enterprise, on all distributions of dividends other than bonus shares (stock dividends), unless a different tax rate is provided in a treaty between Israel and the shareholder's country of residence. Under the income tax treaty between the United States and Israel, the maximum tax on dividends paid to a holder of ordinary shares who is a U.S. resident (as defined in the treaty) is 25%. 65 Israeli law imposes a capital gains tax on the sale of securities and other capital assets. Under current law, however, sales of the ordinary shares offered by this prospectus are exempt from Israeli capital gains tax, for so long as the shares are quoted on Nasdaq or listed on a stock exchange recognized by the Israeli Ministry of Finance, provided that we continue to qualify as an Industrial Company or Industrial Holding Company. See "--Law for Encouragement of Industry (Taxes), 1969." Under a possible interpretation of the Income Tax (Inflationary Adjustment) Law, 1985, non-Israeli companies may be subject to Israeli taxation on the sale of our shares regardless of whether our shares are traded on a recognized stock exchange. Furthermore, under the income tax treaty between the U.S. and Israel, a holder of ordinary shares who is a U.S. resident will be exempted from Israeli capital gains tax on the sale of ordinary shares unless the holder owned, directly or indirectly, 10% or more of our voting power at any time during the 12-month period before the sale. A non-resident of Israel who receives interest, dividend or royalty income derived from or accrued in Israel, from which tax was withheld at the source, is generally exempted from the duty to file tax returns in Israel with respect to such income, provided such income was not derived from a business conducted in Israel by the taxpayer and the taxpayer has no other taxable sources of income in Israel. Proposed Tax Reform On May 7, 2000, the Israeli government approved the recommendations of the Public Committee on the Reform of Taxes on Income to broaden the categories of taxable income and to reduce the tax rates imposed on employment income. The committee recommended, among other things, to impose a tax upon capital gains at a rate of up to 25% for individuals, including capital gains derived from the sale of shares in publicly traded companies, which are currently exempt from capital gains tax; to impose a tax upon all income of Israeli residents, including individuals and corporations, regardless of the territorial source of income; to increase the tax rate from zero to 10% on the exempt period under the alternative package of benefits for Approved Enterprises under the Law for the Encouragement of Capital Investments, 1959; and to equalize the corporate tax rate applicable to companies that are owned 49% or more by non-Israeli residents (10% to 20%, depending on the foreign investment level) to the corporate tax rate applicable to companies that are owned 49% or more by Israeli residents (25%). In order to be enacted as legislation, the report must be approved by the Israeli Parliament, the Knesset, and published, and the substance of the recommendations could undergo significant revision during that process. If implemented, the recommendation might result in the imposition of Israeli capital gains taxes on non-Israeli residents who are not eligible for an exemption under a relevant tax treaty. For a summary of the treatment of capital gains under the U.S. - Israel tax treaty, see the discussion above under "--Withholding and Capital Gains Taxes Applicable to Non-Israeli Shareholders." United States Federal Income Tax Considerations Subject to the limitations described in the next paragraph, the following discussion describes the material United States federal income tax consequences of the purchase, ownership and disposition of the ordinary shares to a U.S. Holder. A U.S. Holder is: . an individual citizen or resident of the United States; . a corporation or another entity taxable as a corporation created or organized under the laws of the United States or any political subdivision thereof; 66 . an estate, the income of which is includable in gross income for United States federal income tax purposes regardless of its source; or . a trust, if a United States court is able to exercise primary supervision over its administration and one or more United States persons who have the authority to control all substantial decisions of the trust. Unless otherwise specifically indicated, this summary does not consider United States tax consequences to a person that is not a U.S. Holder and considers only U.S. holders that will own the ordinary shares as capital assets. This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended, referred to as the Code, current and proposed Treasury regulations promulgated under the Code, and administrative and judicial interpretations of the Code, all as in effect today and all of which are subject to change, possibly with a retroactive effect. This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular U.S. holder based on the U.S. holder's particular circumstances, like the tax treatment of U.S. holders who are broker-dealers or who own, directly, indirectly or constructively, 10% or more of our outstanding voting shares, U.S. holders holding the ordinary shares as part of a hedging, straddle or conversion transaction, U.S. holders whose functional currency is not the U.S. dollar, insurance companies, tax-exempt organizations, financial institutions and persons subject to the alternative minimum tax, who may be subject to special rules not discussed below. Additionally, the tax treatment of persons who hold the ordinary shares through a partnership or other pass- through entity is not considered, nor are the possible application of U.S. federal estate or gift taxes or any aspect of state, local or non-U.S. tax laws. You are advised to consult your own tax advisor with respect to the specific tax consequences to you of purchasing, holding or disposing of the ordinary shares. Distributions on the Ordinary Shares A distribution paid by us with respect to the ordinary shares to a U.S. holder will be treated as ordinary income to the extent that the distribution does not exceed our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. The amount of any distribution which exceeds these earnings and profits will be treated first as a non-taxable return of capital reducing the U.S. holder's tax basis in its ordinary shares to the extent thereof, and then as capital gain from the deemed disposition of the ordinary shares. Dividends paid by us in NIS will be included in the income of U.S. holders at the dollar amount of the dividend, based upon the spot rate of exchange in effect on the date of the distributions. U.S. holders will have a tax basis in the NIS for U.S. federal income tax purposes equal to that dollar value. Any subsequent gain or loss in respect of the NIS arising from exchange rate fluctuations will be taxable as ordinary income or loss and will be U.S. source income or loss. Subject to the limitations set forth in the Code, U.S. holders may elect to claim as a foreign tax credit against their U.S. federal income tax liability the Israeli income tax withheld from dividends received in respect of the ordinary shares. The limitations on claiming a foreign tax credit include among others, computation rules under which foreign tax credits allowable with respect to specific classes of income cannot exceed the U.S. federal income payable with respect each such class. In this regard, dividends paid by us will generally be foreign source "passive income" for U.S. foreign tax credit purposes or, in the case of a financial services entity, "financial services income." U.S. holders that do not elect to claim a foreign tax credit may instead claim a deduction for the Israeli income tax withheld. The rules relating to foreign tax credits are complex, and you should consult your own tax advisor to determine whether and to what extent you would be entitled to this credit. 67 Disposition of Ordinary Shares Upon the sale or exchange of the ordinary shares, a U.S. holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized on the sale or exchange and the U.S. holder's tax basis in the ordinary shares. The gain or loss recognized on the sale or exchange of the ordinary shares generally will be long-term capital gain or loss if the U.S. holder held the ordinary shares for more than one year at the time of the sale or exchange. Gain or loss recognized by a U.S. holder on a sale, exchange or other disposition of ordinary shares generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes. Passive Foreign Investment Companies We will be a passive foreign investment company if either (1) 75% or more of our gross income in a taxable year is passive income; or (2) 50% or more of the value, determined on the basis of a quarterly average of our assets in a taxable year are held for the production of, or produces, passive income. If we own (directly or indirectly) at least 25% by value of the stock of another corporation, we will be treated for purposes of the foregoing test as owning our proportionate share of the other corporation's assets and directly earning our proportionate share of the other corporation's income. If we are a passive foreign investment company: . a U.S. holder who has held our shares during more than one taxable year during which we were a passive foreign investment company will be required to report any gain on the disposition of the shares as ordinary income rather than capital gain. That U.S. holder will also be required to compute the tax liability on that gain, as well as the dividends and others distributions, as if the income had been earned ratably over each day in the holding period of the shareholder; . a U.S. holder must pay tax on amounts so allocated to prior taxable years at the highest income tax rate for each taxable year during which we were a passive foreign investment company and for which the items are treated as having been earned regardless of the rate otherwise applicable to that U.S. holder during those taxable years; . the taxes attributable to the prior years will be subject to an interest charge at the rate applicable to deficiencies for income tax; and . a U.S. holder who acquires our shares in that corporation from a decedent that will be denied the normally available step-up in tax bases in fair market value for the shares at the date of death and instead will have a tax basis equal to the decedent's tax basis. Our Status as a Passive Foreign Investment Company We currently do not expect that we will be a passive foreign investment company in 2000. However, passive foreign investment company status is determined as of the end of the taxable year and is dependant on a number of factors, including the value of a corporation's assets and the amount and type of its gross income. Therefore, there can be no assurance that we will not become a passive foreign investment company in 2000 or in a future year. We will notify U.S. holders in the event we conclude that we will be treated as a passive foreign investment company for any taxable year to enable U.S. holders to consider whether or not to elect to treat us as a "qualified electing fund" for U.S. federal income tax purposes or to elect to "mark to market" the ordinary shares. If a U.S. holder makes one of these two elections, distributions and gain will not be recognized ratably as ordinary income over the U.S. holder's holding period or be subject to an interest charge as described above. Further, gain on the sale of the ordinary shares will be characterized as capital gain and the denial of basis step-up at death described above will not apply. However, U.S. holders making one of the two elections may be subject to current income recognition, even if we do not distribute any cash. 68 Both of these elections are subject to a number of specific rules and requirements, and you are urged to consult your tax advisor concerning these elections if we become a passive foreign investment company. Backup Withholding A U.S. holder may be subject to backup withholding at rate of 31% with respect to dividend payments and receipt of the proceeds from the disposition of the ordinary shares. Backup withholding will not apply with respect to payments made to certain exempt recipients, such as corporations and tax-exempt organizations, or if a U.S. holder provides a tax payer identification number (or certifies that he has applied for a taxpayer identification number), certifies that such holder is not subject to backup withholding or otherwise establishes an exemption. Backup withholding is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a U.S. holder, or alternatively, the U.S. holder may be eligible for a refund of any excess amounts withheld under the backup withholding rules, in either case, provided that the required information is furnished to the Internal Revenue Service. Non-U.S. Holders of Ordinary Shares Except as provided below, a non-U.S. holder of ordinary shares except certain former U.S. citizens and long-term residents of the United States generally will not be subject to U.S. federal income or withholding tax on the receipt of dividends on, and the proceeds from the disposition of, an ordinary share, unless such item is effectively connected with the conduct by the non- U.S. holder of a trade or business in the United States or, in the case of a resident of a country which has an income tax treaty with the United States, such item is attributable to a permanent establishment in the United States or, in the case of an individual, a fixed place of business in the United States. In addition, gain recognized by an individual non-U.S. holder will be subject to tax in the United States if the non-U.S. holder is present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met. Non-U.S. holders will not be subject to information reporting or backup withholding with respect to the payment of dividends on ordinary shares unless the payment is made through a paying agent, or an office of a paying agent, in the United States. Non-U.S. holders generally will be subject to information reporting and, under regulations generally effective January 1, 2001, to backup withholding at a rate of 31% with respect to the payment within the United States of dividends on the ordinary shares unless the holder provides its taxpayer identification number, certifies to its foreign status, or otherwise establishes an exemption. Non-U.S. holders generally will be subject to information reporting and backup withholding at a rate of 31% on the receipt of the proceeds from the disposition of the ordinary shares to, or through, the United States office of a broker, whether domestic or foreign, unless the holder provides a taxpayer identification number, certifies to its foreign status or otherwise establishes an exemption. Non-U.S. holders will not be subject to information reporting or backup withholding with respect to the receipt of proceeds from the disposition of the ordinary shares by a foreign office of a broker; provided, however, that if the broker is a U.S. person or a "U.S. related person," information reporting (but not backup withholding) will apply unless the broker has documentary evidence in its records of the non-U.S. holder's foreign status or the non-U.S. holder certifies to its foreign status under penalties of perjury or otherwise establishes an exemption. For this purpose, a "U.S. related person" is a broker or other intermediary that maintains one or more enumerated U.S. relationships. Backup withholding is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a U.S. holder, or alternatively, the U.S. holder may be eligible for a refund of any excess amounts withheld under the backup withholding rules, in either case, provided that the required information is furnished to the Internal Revenue Service. 69 UNDERWRITING Under the underwriting agreement, which is filed as an exhibit to the registration statement relating to this prospectus, each of the underwriters named below, for whom Lehman Brothers Inc., U.S. Bancorp Piper Jaffray Inc., CIBC World Markets Corp., and Fidelity Capital Markets, a division of National Financial Services Corporation, are acting as representatives, has agreed to purchase from us the respective number of ordinary shares shown opposite its name below:
Number of Ordinary Underwriters Shares ------------ --------- Lehman Brothers Inc. ......................................... U.S. Bancorp Piper Jaffray Inc. .............................. CIBC World Markets Corp. ..................................... Fidelity Capital Markets, a division of National Financial Services Corporation......................................... --------- Total..................................................... 4,200,000 =========
The underwriting agreement provides that the underwriters' obligations to purchase ordinary shares depend on the satisfaction of the conditions contained in the underwriting agreement, and that if any of the ordinary shares are purchased by the underwriters under the underwriting agreement, then all of the ordinary shares which the underwriters have agreed to purchase under the underwriting agreement must be purchased. The conditions contained in the underwriting agreement include that: . the representations and warranties made by us to the underwriters are true; . there is no material change in the financial markets; and . we deliver customary closing documents to the underwriters. The representatives had advised us that the underwriters propose to offer the ordinary shares directly to the public at the public offering price set forth on the cover page of this prospectus, and to selected dealers, who may include the underwriters, at such public offering price less a selling concession not in excess of $ per share. The underwriters may allow, and the selected dealers may reallow, a concession not in excess of $ per share to brokers and dealers. After the offering, the underwriters may change the offering price and other selling terms. The underwriters have agreed that: . they will not offer the ordinary shares to the public in Israel within the meaning of Section 15 of the Israel Securities Law, 5728-1968; . they will not offer the ordinary shares in Israel to an aggregate of more than 35 investors who are not persons of the type enumerated in Section 15A(b) of the Securities Law, including any such investor who acquired our securities during the past 12 months; and . they will deliver to us the names and addresses of such investors within seven days of the consummation of the offering. The following table summarizes the underwriting discounts and commissions we will pay. The underwriting discounts and commissions are equal to the public offer price per share less the amount paid to us per share. The underwriting discounts and commissions are equal to % of the public offering price
No Paid by us Exercise Full Exercise ---------- -------- ------------- Per share.......................................... $ $ ----- ---- Total............................................ $ $ ===== ====
70 We estimate that the total expenses of the offering, including registration, filing and listing fees, printing fees and legal and accounting expenses but excluding underwriting discounts and commissions, will be approximately $1.6 million. We have granted to the underwriters an option to purchase up to an aggregate of 630,000 additional ordinary shares, exercisable solely to cover over- allotments, if any, at the public offering price less the underwriting discounts and commissions shown on the cover page of this prospectus. The underwriters may exercise this option at any time, and from time to time, until 30 days after the date of the underwriting agreement. To the extent the underwriters exercise this option, each underwriter will be committed, so long as the conditions of the underwriting agreement are satisfied, to purchase a number of additional ordinary shares proportionate to that underwriter's initial commitment as indicated in the preceding table, and we will be obligated, under the over-allotment option, to sell the ordinary shares to the underwriters. We have agreed that, without the prior written consent of Lehman Brothers Inc., we will not, directly or indirectly, offer, sell or otherwise dispose of any shares of capital stock or any securities which may be converted into or exchanged for any shares of capital stock for a period of 180 days from the date of this prospectus. Our principal shareholders and all of our officers and directors have agreed under lock-up agreements that, without the prior written consent of Lehman Brothers Inc., they will not, directly or indirectly, offer, sell or otherwise dispose of any shares of capital stock or any securities which may be converted into or exchanged for any shares of capital stock for a period of 180 days from the date of this prospectus. Without the prior written consent of Lehman Brothers Inc., some of the individuals participating in the directed share program will be prohibited from disposing of shares of common stock for a period of up to 90 days after the date of this prospectus. Prior to the offering, there has been no public market for ordinary shares. The initial public offering price will be negotiated between the representatives and us. In determining the initial public offering price of the ordinary shares, the representatives will consider prevailing market conditions, our historical performance and capital structure, estimates of our business potential and earning prospects, an overall assessment of our management and the consideration of the above factors in relation to market valuation of companies in related businesses. Fidelity Capital Markets, a division of National Financial Services Corporation, is acting as an underwriter of this offering and will be facilitating electronic distribution through the Internet. We have agreed to indemnify the underwriters against liabilities relating to the offering, including liabilities under the Securities Act, liabilities arising from breaches of the representations and warranties contained in the underwriting agreement, and liabilities incurred in connection with the directed share program referred to below, and to contribute to payments that the underwriters may be required to make for these liabilities. Until the distribution of the ordinary shares is completed, rules of the Securities and Exchange Commission may limit the ability of the underwriters and selling group members to bid for and purchase ordinary shares. As an exception to these rules, the representatives are permitted to engage in transactions that stabilize the price of the ordinary shares. These transactions may consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the ordinary shares. The underwriters may purchase and sell ordinary shares in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover short positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. "Covered" short sales are sales made in an amount not greater than the underwriters' option to purchase additional shares from the issuer in the offering. The underwriters may close out any covered short position by either exercising their option to purchase shares or purchasing shares in the open market. In 71 determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. "Naked" short sales are any sales in excess of such option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our ordinary shares in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of ordinary shares made by the underwriters in the open market prior to the completion of the offering. The underwriters have informed us that they do not intend to confirm sales to discretionary accounts that exceed 5% of the total number of ordinary shares offered by them. The representatives also may impose a penalty bid on underwriters and selling group members. This means that if the representatives purchase ordinary shares in the open market to reduce the underwriters' short position or to stabilize the price of the ordinary shares, they may reclaim the amount of the selling concession from the underwriters and selling group members who sold those shares as part of the offering. In general, purchases of a security for the purpose of stabilization or to reduce a syndicate short position could cause the price of the security to be higher than it might otherwise be in the absence of such purchases. The imposition of a penalty bid could have an effect on the price of a security to the extent that it were to discourage resales of the security by purchasers in an offering. Any offers in Canada will be made only under an exemption from the requirements to file a prospectus in the relevant province in Canada in which the sale is made. Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the ordinary shares. In addition, neither we nor any of the underwriters make any representation that the representatives will engage in such transactions or that any such transaction, once commenced, will not be discontinued without notice. Purchasers of the ordinary shares offered in this prospectus may be required to pay stamp taxes and other charges under the laws and practices of the country of purchase, in addition to the offering price listed on the cover of this prospectus. At our request, Lehman Brothers Inc. has reserved up to 210,000 ordinary shares, or 5% of the ordinary shares offered by this prospectus, for sale pursuant to a directed share program to our officers, directors, employees (and their family members), customers, suppliers, and personal friends of our directors and executive officers. All of the persons purchasing the reserved shares must commit to purchase no later than the close of business on the day following the date of this prospectus. Commitments may be withdrawn at any time before they are accepted, which must be after effectiveness of the registration statement. The number of shares available for sale to the general public will be reduced to the extent these persons purchase the reserved shares. Lehman Brothers Inc. acted as the placement agent for the investment in our preferred shares in March 2000 and received customary fees in connection therewith. 72 LEGAL MATTERS The validity of the ordinary shares being offered hereby and certain other legal matters in connection with this offering with respect to Israeli law will be passed upon for us by Goldfarb, Levy, Eran & Co., our Israeli counsel. Partners of Goldfarb, Levy, Eran & Co. beneficially own approximately 13,000 ordinary shares. Certain legal matters in connection with this offering with respect to United States law will be passed upon for us by Fulbright & Jaworski L.L.P., our U.S. counsel. Certain legal matters in connection with this offering with respect to Israeli law will be passed upon for the underwriters by Naschitz, Brandes & Co., Israeli counsel to the underwriters, and by Skadden, Arps, Slate, Meagher & Flom LLP, U.S. counsel to the underwriters with respect to United States law. EXPERTS Our financial statements at December 31, 1998 and 1999 and for the years ended December 31, 1997, 1998 and 1999 appearing in this prospectus have been audited by Kesselman & Kesselman, independent certified public accountants in Israel, and a member of PricewaterhouseCoopers International Limited, whose report thereon appears in this prospectus in reliance on the report of such accountants given on the authority of such firm as experts in auditing and accounting. ENFORCEABILITY OF CIVIL LIABILITIES Service of process upon us and upon our directors and officers and the Israeli experts named in this prospectus, substantially all of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, because substantially all of our assets and substantially all of our directors and officers are located outside the United States, any judgment obtained in the United States against us or any of our directors and officers may not be collectible within the United States. We have been informed by our legal counsel in Israel, Goldfarb, Levy, Eran & Co., that original actions may not be instituted in Israel to enforce civil liabilities under the Securities Act and the Exchange Act. However, Israeli courts are authorized to enforce a United States final executory judgment in a civil matter, including a monetary or compensatory judgment in a non-civil matter provided that: . the application for enforcement was filed within five years after the judgment; . adequate service of process has been effected and the defendant has had a reasonable opportunity to present his arguments and evidence; . the judgment and the enforcement thereof are not contrary to the law, public policy, security or sovereignty of the State of Israel; . the judgment was obtained after due process before a court of competent jurisdiction according to the rules of private international law prevailing in Israel; . the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties; . an action between the same parties in the same matter is not pending in any Israeli court at the time the lawsuit is instituted in the United States court; and . the U.S. court is not prohibited by law from enforcing judgments of Israel courts. Pursuant to the underwriting agreement, we have irrevocably appointed MIND C.T.I. Inc. as our agent to receive service of process in any action against us in any federal court or court of the State of New York arising out of this offering or any purchase or sale of securities in connection therewith. This does not limit the appointment of MIND C.T.I. Inc. in this registration statement as our agent to receive service of process in any action against us in any other federal or state court in the United States. 73 If a foreign judgment is enforced by an Israeli court, it generally will be payable in Israeli currency, which can then be converted into non-Israeli currency and transferred out of Israel. The usual practice in an action before an Israeli court to recover an amount in a non-Israeli currency is for the Israeli court to render judgment for the equivalent amount in Israeli currency at the rate of exchange in force on the date thereof, but the judgment debtor may make payment in foreign currency. Pending collection, the amount of the judgment of an Israeli court stated in Israeli currency ordinarily will be linked to the Israeli consumer price index plus interest at the annual statutory rate set by Israeli regulations prevailing at such time. Judgment creditors must bear the risk of unfavorable exchange rates. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form F-1 under the Securities Act with respect to this offering of our ordinary shares. This prospectus does not contain all of the information contained in the registration statement. Statements made in this prospectus as to the contents of any contract, agreement or other document are necessarily summaries of these documents and are qualified in their entirety by reference to each such contract, agreement or other document which is filed as an exhibit to the registration statement. You may read and copy the registration statement, including the exhibits and schedules thereto, and any document we file with the Securities and Exchange Commission without charge at the Securities and Exchange Commission's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material may be obtained by mail from the Public Reference Branch of the Securities and Exchange Commission at such address, at prescribed rates. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the public reference room. As a result of this offering, we will become subject to the informational requirements of the Exchange Act applicable to foreign private issuers and will fulfill the obligations with respect to such requirements by filing reports with the Securities and Exchange Commission. As a foreign private issuer, we will be exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders will be exempt from the reporting and "short-swing" profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we will not be required under the Exchange Act to file periodic reports and financial statements with the Securities and Exchange Commission as frequently or as promptly as United States companies whose securities are registered under the Exchange Act. A copy of each report submitted in accordance with applicable United States Law will be available for public review at our principal executive offices. 74 MIND C.T.I. LTD. (An Israeli Corporation) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Auditors............................................ F-2 Consolidated Balance Sheets as of December 31, 1998 and 1999 and (Unaudited) March 31, 2000............................................... F-3 Consolidated Statements of Income for the Years Ended December 31, 1997, 1998 and 1999 and the (Unaudited) Three Months Ended March 31, 1999 and 2000..................................................................... F-4 Consolidated Statements of Changes in Shareholders' Equity (Capital Deficiency) for the Years Ended December 31, 1997, 1998 and 1999 and the (Unaudited) Three Months Ended March 31, 2000............................ F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1998 and 1999 and the (Unaudited) Three Months Ended March 31, 1999 and 2000................................................................. F-6 Notes to Consolidated Financial Statements................................ F-7
F-1 [PricewaterhouseCoopers Letterhead] REPORT OF INDEPENDENT AUDITORS To the shareholders of MIND C.T.I. Ltd. We have audited the consolidated balance sheets of MIND C.T.I. Ltd. (the "Company") and its subsidiary as of December 31, 1998 and 1999 and the related consolidated statements of income, changes in shareholders' equity (capital deficiency) and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in Israel, including those prescribed by the Israeli Auditors (Mode of Performance) Regulations, 1973. Those auditing standards are substantially similar to auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company's Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a fair basis for our opinion. In our opinion, the aforementioned financial statements present fairly, in all material respects, the consolidated financial position of the Company and its subsidiary as of December 31, 1998 and 1999 and the results of their operations, changes in shareholders' equity (capital deficiency) and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Kesselman & Kesselman Certified Public Accountants (Isr.) Tel-Aviv, Israel March 30, 2000, except for Notes 5 and 6a(2), for which the date is May 1, 2000 F-2 MIND C.T.I. LTD. CONSOLIDATED BALANCE SHEETS
Pro Forma Information (Note 10) ----------- December 31, ------------- March 31, March 31, 1998 1999 2000 2000 ------ ------ --------- ----------- (Unaudited) (In thousands of U.S. dollars) Assets CURRENT ASSETS (Note 8): Cash and cash equivalents............... $ 803 $2,646 $16,473 $16,473 Short-term investments (Note 9a)........ 203 754 134 134 Accounts receivable (Note 9b): Trade................................. 1,200 2,577 2,550 2,550 Other................................. 123 250 127 127 Inventories............................. 88 37 35 35 ------ ------ ------- ------- Total current assets................ 2,417 6,264 19,319 19,319 ------ ------ ------- ------- PROPERTY AND EQUIPMENT (Note 2): Cost.................................... 953 1,392 1,536 1,536 Less--accumulated depreciation and amortization........................... 284 421 482 482 ------ ------ ------- ------- 669 971 1,054 1,054 ------ ------ ------- ------- OTHER ASSETS (Note 9c).................... 131 258 290 290 ------ ------ ------- ------- Total assets........................ $3,217 $7,493 $20,663 $20,663 ====== ====== ======= ======= Liabilities and shareholders' equity (net of capital deficiency) CURRENT LIABILITIES (Note 8): Accounts payable and accruals: Trade................................. $ 171 $ 201 $ 427 $ 427 Other (Note 9d)....................... 1,065 1,648 2,818 2,818 Declared dividend....................... -- -- 2,013 2,013 ------ ------ ------- ------- Total current liabilities........... 1,236 1,849 5,258 5,258 ACCRUED SEVERANCE PAY (Note 3)............ 221 424 533 533 ------ ------ ------- ------- Total liabilities................... 1,457 2,273 5,791 5,791 ------ ------ ------- ------- COMMITMENTS (Note 4) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SHARES OF NIS 0.01 PAR VALUE (A preferred shares--111,111 shares; B preferred shares--27,778 shares; liquidation value of $15,000,000)(Note 5)....................................... 20,778 ------- SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY) (Note 6): Share capital--ordinary shares of NIS 0.01 par value (authorized 85,222,220 shares; issued and outstanding: December 31, 1998--12,246,000 shares; December 31, 1999--14,892,000 shares; March 31, 2000: actual--14,336,440 shares; pro forma--17,081,298 shares-- unaudited)............................. 36 36 36 43 Additional paid-in capital.............. 1,067 3,680 1,364 22,135 Deferred stock compensation............. -- (274) (880) (880) Retained earnings (accumulated deficit)............................... 657 1,778 (6,426) (6,426) ------ ------ ------- ------- Total shareholders' equity (capital deficiency)........................ 1,760 5,220 (5,906) 14,872 ------ ------ ------- ------- Total liabilities and shareholders' equity (net of capital deficiency)........................ $3,217 $7,493 $20,663 $20,663 ====== ====== ======= =======
The accompanying notes are an integral part of the financial statements. F-3 MIND C.T.I. LTD. CONSOLIDATED STATEMENTS OF INCOME
Three Months Years Ended December Ended March 31, 31, -------------------- -------------- 1997 1998 1999 1999 2000 ------ ------ ------ ------ ------- (Unaudited) (In thousands of U.S. dollars, except per share data) REVENUES (Note 10a): Sales of licenses...................... $1,500 $3,385 $6,791 $1,287 $ 2,642 Services............................... 491 685 1,405 298 529 ------ ------ ------ ------ ------- Total Revenues .......................... 1,991 4,070 8,196 1,585 3,171 COST OF REVENUES......................... 432 631 1,318 288 423 ------ ------ ------ ------ ------- GROSS PROFIT............................. 1,559 3,439 6,878 1,297 2,748 RESEARCH AND DEVELOPMENT EXPENSES--net (excluding $9,000 and $31,000 of non- cash compensation in 1999 and in the three months ended March 31, 2000 (unaudited), respectively) (Note 10b)... 397 1,049 1,918 417 894 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (excluding $1,000, $1,000, $17,000, and $47,000 of non-cash compensation in 1997, 1998, 1999 and in the three months ended March 31, 2000 (unaudited), respectively) (Note 10c): Selling expenses....................... 430 1,055 2,110 429 809 General and administrative expenses.... 352 591 1,000 219 363 NON-CASH COMPENSATION.................... 1 1 26 -- 78 ------ ------ ------ ------ ------- OPERATING INCOME......................... 379 743 1,824 232 604 FINANCIAL AND OTHER INCOME--net (Note 10d).................................... 77 99 137 15 21 ------ ------ ------ ------ ------- INCOME BEFORE TAXES ON INCOME............ 456 842 1,961 247 625 TAXES ON INCOME (Note 7)................. 114 201 447 58 144 ------ ------ ------ ------ ------- NET INCOME............................... 342 641 1,514 189 481 ACCRETION OF MANDATORILY REDEEMABLE CONVERTIBLE A PREFERRED SHARES TO MANDATORY REDEMPTION VALUE (Note 5)..... -- -- -- -- (6,672) ------ ------ ------ ------ ------- NET INCOME (LOSS) APPLICABLE TO ORDINARY SHARES.................................. $ 342 $ 641 $1,514 $ 189 $(6,191) ====== ====== ====== ====== ======= EARNINGS (LOSS) PER ORDINARY SHARE (Note 10e): Basic.................................. $ 0.03 $ 0.05 $ 0.10 $ 0.01 $ (0.42) ====== ====== ====== ====== ======= Diluted................................ $ 0.03 $ 0.05 $ 0.10 $ 0.01 $ (0.42) ====== ====== ====== ====== ======= WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES USED IN COMPUTATION OF EARNING (LOSS) PER ORDINARY SHARE--IN THOUSANDS (Note 10e): Basic.................................. 11,163 12,246 14,667 13,928 14,892 ====== ====== ====== ====== ======= Diluted................................ 11,200 12,283 14,984 14,115 14,892 ====== ====== ====== ====== =======
The accompanying notes are an integral part of the financial statements. F-4 MIND C.T.I. LTD. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Share Capital Retained --------------------- Additional Earnings Number of Paid-In Deferred Stock (Accumulated Shares Amount Capital Compensation Deficit) Total -------------- ------ ---------- -------------- ------------ ------- (In thousands) (In thousands of U.S. dollars) BALANCE AT JANUARY 1, 1997................... 10,390 $36 $ 23 $ (2) $ 41 $ 98 CHANGES DURING 1997: Net income............. -- -- -- -- 342 342 Issuance of ordinary shares in August 1997, net of share issuance costs of $14,000 (Note 6a(4))................ 1,856 * 1,044 -- -- 1,044 Amortization of deferred compensation related to employee stock option grants... -- -- -- 1 -- 1 Dividend declared...... -- -- -- -- (228) (228) ------ --- ------- ----- ------- ------- BALANCE AT DECEMBER 31, 1997................... 12,246 36 1,067 (1) 155 1,257 CHANGES DURING 1998: Net income............. -- -- -- -- 641 641 Amortization of deferred compensation related to employee stock option grants... -- -- -- 1 1 Dividend declared...... -- -- -- -- (139) (139) ------ --- ------- ----- ------- ------- BALANCE AT DECEMBER 31, 1998................... 12,246 36 1,067 -- 657 1,760 CHANGES DURING 1999: Net income............. -- -- -- -- 1,514 1,514 Exercise of warrants to purchase ordinary shares in January 1999, net of issuance costs of $23,000 (Note 6a(4))................ 2,646 * 2,313 -- -- 2,313 Deferred compensation related to employee stock option grants... -- -- 300 (300) -- Amortization of deferred compensation related to employee stock option grants... -- -- -- 26 -- 26 Dividend declared...... -- -- -- -- (393) (393) ------ --- ------- ----- ------- ------- BALANCE AT DECEMBER 31, 1999................... 14,892 36 3,680 (274) 1,778 5,220 CHANGES DURING THE THREE MONTHS PERIOD ENDED MARCH 31, 2000 (unaudited): Net income............. -- -- -- -- 481 481 Dividend declared...... -- -- -- -- (2,013) (2,013) Deemed purchase and cancellation of ordinary shares on March 30, 2000, which were exchanged for mandatorily redeemable convertible B preferred shares (Note 5) ................... (556) * (3,000) -- -- (3,000) Accretion of mandatorily redeemable convertible A preferred shares to mandatory redemption value (Note 5)........ -- -- -- -- (6,672) (6,672) Deferred compensation related to employee stock option grants... -- -- 684 (684) -- -- Amortization of deferred compensation related to employee stock option grants... -- -- -- 78 -- 78 ------ --- ------- ----- ------- ------- BALANCE AT MARCH 31, 2000 (unaudited)....... 14,336 36 1,364 (880) (6,426) (5,906) Conversion of mandatorily redeemable convertible A and B preferred shares into ordinary shares (unaudited)........... 2,745 7 20,771 -- -- 20,778 ------ --- ------- ----- ------- ------- PRO FORMA BALANCE AT MARCH 31, 2000 (unaudited)............ 17,081 $43 $22,135 $(880) $(6,426) $14,872 ====== === ======= ===== ======= =======
- -------- * Represents an amount less than $1,000. The accompanying notes are an integral part of the financial statements. F-5 MIND C.T.I. LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Years Ended Ended December 31, March 31, ----------------------- ---------------- 1997 1998 1999 1999 2000 ------ ------ ------- ------- ------- (Unaudited) (In thousands of U.S. dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net income......................... $ 342 $ 641 $ 1,514 $ 189 $ 481 Adjustments to reconcile net income to net cash provided by or used in operating activities: Depreciation and amortization...... 81 128 196 40 70 Deferred income taxes--net......... 35 131 294 53 (529) Compensation expense resulting from options granted to employees......................... 1 1 26 -- 78 Accrued severance pay--net......... 25 28 89 44 86 Capital loss on sale of property and equipment--net................ -- 3 9 -- 4 Erosion of principal of long-term loans from shareholders denominated in Israeli currency and linked to the Israeli consumer price index.............. (9) (3) -- -- -- Unrealized loss (gain) from trading securities................ (32) 5 (19) (6) (8) Interest accrued on short-term bank deposits..................... -- -- (29) (7) (2) Changes in operating asset and liability items: Purchase of trading securities.... (854) -- -- -- -- Proceeds from sale of trading securities....................... 102 576 96 -- -- Decrease (increase) in accounts receivable: Trade............................ (519) (397) (1,377) (60) 27 Other............................ (9) (65) (127) (3) 152 Increase (decrease) in accounts payable and accruals: Trade............................ 60 61 30 (20) 226 Other............................ 213 478 276 (55) 767 Decrease (increase) in inventories...................... (15) (62) 51 49 2 ------ ------ ------- ------- ------- Net cash provided by (used in) operating activities.............. (579) 1,525 1,029 224 1,354 ------ ------ ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment......................... (210) (425) (526) (49) (159) Investment in short-term bank deposits.......................... -- -- (1,410) (1,410) 630 Withdrawal of short-term bank deposits.......................... -- -- 811 -- -- Proceeds from sale of property and equipment......................... 10 3 19 -- 2 ------ ------ ------- ------- ------- Net cash provided by (used in) investing activities.............. (200) (422) (1,106) (1,459) 473 ------ ------ ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of ordinary shares (net of share issuance costs)............. 1,044 -- 2,313 2,313 -- Issuance of mandatorily redeemable convertible A preferred shares.... -- -- -- -- 12,000 Short-term bank credit--net........ (26) -- -- 5 -- Repayment of long-term bank loans.. (48) (45) -- -- -- Repayment of loans from shareholders...................... (53) (27) -- -- -- Dividends paid..................... (101) (266) (393) -- -- ------ ------ ------- ------- ------- Net cash provided by (used in) financing activities.............. 816 (338) 1,920 2,318 12,000 ------ ------ ------- ------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS........................ 37 765 1,843 1,083 13,827 BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............. 1 38 803 803 2,646 ------ ------ ------- ------- ------- BALANCE OF CASH AND CASH EQUIVALENTS AT END OF PERIOD................... $ 38 $ 803 $ 2,646 $ 1,886 $16,473 ====== ====== ======= ======= ======= SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION-- cash paid during the period for: Interest........................... $ 15 $ 12 $ 5 $ -- $ -- ====== ====== ======= ======= ======= Income tax......................... $ 69 $ 133 $ 210 $ 11 $ 76 ====== ====== ======= ======= =======
The accompanying notes are an integral part of the financial statements. F-6 MIND C.T.I. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies, applied on a consistent basis, are as follows: a. General: 1) Nature of operations MIND C.T.I. Ltd. (the "Company"), an Israeli corporation develops, manufactures and markets real-time billing and customer care software for Voice over Internet Protocol service providers. The Company also provides a call management system used by organizations for call accounting, traffic analysis and fraud detection. 2) Functional currency The currency of the primary economic environment in which the operations of the Company and its wholly-owned subsidiary are conducted is the U.S. dollar ("dollar" or "$"). Most of the Company's revenues are derived from sales outside of Israel which are denominated primarily in dollars. To the extent that the Company's revenues are derived in Israeli currency linked to the dollar, contract amounts are stated in dollars and paid in Israeli currency linked to the changes in the exchange rate of the dollar and Israeli currency. In addition, most marketing costs are incurred outside Israel, primarily in dollars. Thus, the functional currency of the Company and its subsidiary is the dollar. Transactions and balances originally denominated in dollars are presented at their original amounts. Balances in non-dollar currencies are translated into dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. For non-dollar transactions and other items (detailed below) reflected in the statements of income, the following exchange rates are used: (i) for transactions: exchange rates at transaction dates or average rates and (ii) for other items (derived from non-monetary balance sheet items, such as depreciation and amortization, changes in inventories, etc.)-- historical exchange rates. The resulting currency transaction gains or losses are carried to financial income or expenses, as appropriate. 3) Accounting principles The financial statements are prepared in accordance with generally accepted accounting principles ("GAAP") in the United States. 4) Use of estimates in preparation of financial statements The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. b. Principles of consolidation: 1) The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. 2) Intercompany balances and transactions were eliminated in consolidation. F-7 MIND C.T.I. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES--(Continued) c. Cash equivalents and short term bank deposits The Company and its subsidiary consider all highly liquid investments, which include short-term bank deposits (up to three months from date of deposit) that are not restricted as to withdrawal or use, to be cash equivalents. Bank deposits with an original maturity of more than three months but less than one year from date of deposit are presented as "short-term bank deposits" among "short-term investments." d. Marketable securities These securities--participation certificates in mutual funds--classified as "trading securities", are stated at redemption value, which is the fair value. The changes in redemption value of the securities are carried to financial income or expenses. e. Inventories Inventories are valued at the lower of cost or market value. Cost is determined by the "first-in, first-out" method. f. Property and equipment 1) These assets are stated at cost. 2) The assets are depreciated by the straight-line method, on basis of their estimated useful life. Annual rates of depreciation are as follows:
Computers and electronic equipment.............................. 15-33% (mainly 33%) Office furniture and equipment.................................. 6-7% Vehicles........................................................ 15%
3) Leasehold improvements are amortized by the straight line method over the term of the lease, which is shorter than the estimated useful life of the improvements. g. Impairment of long-lived assets Statement of Financial Accounting Standards ("FAS") No. 121 of the Financial Accounting Standards Board of the United States ("FASB"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" requires that long-lived assets, identifiable intangibles and goodwill related to those assets to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Under FAS 121, if indicators of impairment are present, the existence of impairment is identified by comparing the carrying amount of the potentially impaired asset to the undiscounted cash flows from use and eventual disposition of that asset. If the carrying amount of the asset being evaluated is greater than the undiscounted cash flows from use and eventual disposition of that asset, then impairment is measured based on the excess, if any, of the carrying amount over the fair value of the asset. In the reported periods, no impairment loss has been recognized. F-8 MIND C.T.I. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES--(Continued) h. Income taxes: 1) Deferred income taxes are computed for temporary differences between the assets and liabilities as measured in the financial statements and for tax purposes, at the tax rates expected to be in effect when these differences reverse. 2) Taxes which would apply in the event of disposal of investment in subsidiary have not been taken into account in computing the deferred taxes, as it is the Company's policy to hold this investment, not to realize it. i. Revenue recognition: 1) Sales of licenses On October 27, 1997, the American Institute of Certified Public Accountants issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition". SOP 97-2 supersedes SOP 91-1 and provides guidance on when and in what amounts revenues should be recognized for the licensing, selling, leasing or otherwise marketing of computer software. SOP 97-2 is effective for transactions entered into in fiscal years beginning after December 15, 1997. The Company adopted SOP 97-2 as revised in SOP 98-4, "Deferral of the Effective Date of Certain Provisions of SOP 97-2" and SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions." Revenue from sale of products is recognized when delivery has occurred, persuasive evidence of an agreement exists, the sales price is fixed or determinable and collectability is probable. Customization of the product, if any, is performed before delivery occurs. In cases where the Company installs the product, the revenue recognition is deferred until the installation is completed. The Company does not grant a right of return of products sold to customers, distributors and resellers. The Company renders maintenance and support services to its customers mainly for a period of one year from delivery. When revenue on sale of products is recognized, the Company defers a portion of the sales price (which is presented in the balance sheet as "deferred revenues" among "accounts payable and accruals--other,") and recognizes it as maintenance and support service revenue ratably over the above period. The portion of the sales price that is deferred is determined based on the fair value of the service as priced in transactions in which the Company renders solely maintenance and support services 2) Maintenance, support and project management Such revenues are priced on a fixed price basis and are recognized ratably over the service period or as services are performed. See also (1) above. Project management consists of advice to the Company's customers regarding the deployment of billing and customer care software over their IP networks. j. Research and development: Pursuant to FAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," research and development costs related to software products are expensed as incurred until the "technological feasibility" of the product has been established. Because of the relatively short time F-9 MIND C.T.I. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES--(Continued) period between "technological feasibility" and product release, and the insignificant amount of costs incurred during such period, no software development costs have been capitalized. Royalty-bearing grants received from government departments for development of approved projects is recognized as a reduction of expenses as the related cost is incurred, since at the time the grants were received, successful development of the related projects was not assured. k. Allowance for doubtful accounts The allowance is determined for specific debts doubtful of collection. l. Advertising expenses These expenses are charged to income as incurred. Advertising expenses totaled $28,000, $106,000 and $215,000 in the years ended December 31, 1997, 1998 and 1999, respectively, and (unaudited) $47,000 and $77,000 in the three months ended March 31, 1999 and 2000, respectively. m. Comprehensive income The Company has no comprehensive income components other than net income. n. Interim financial information The unaudited consolidated financial statements at March 31, 2000 and for the three month periods ended March 31, 1999 and 2000 have been prepared in accordance with GAAP for interim financial information and with Article 10 of Regulation S-X of the United States Securities and Exchange Commission. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. o. Unaudited pro forma balance sheet Upon the closing of the Company's anticipated initial public offering ("IPO"), each outstanding share of mandatorily redeemable convertible A and B preferred shares will automatically convert into 19.7037 and 20 ordinary shares, respectively, assuming an estimated IPO price of $11.00 per ordinary share. These transactions have been reflected in the unaudited pro forma balance sheet as if they occurred on March 31, 2000. The final conversion ratio will depend on the IPO price per share (see Note 5). F-10 MIND C.T.I. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 2--PROPERTY AND EQUIPMENT a. Composition of assets, grouped by major classification, is as follows:
Accumulated depreciation and Cost amortization ----------------------- --------------------- December December 31, 31, ----------- March 31, --------- March 31, 1998 1999 2000 1998 1999 2000 ---- ------ ----------- ---- ---- ----------- (In thousands of U.S. (In thousands of U.S. dollars) dollars) (Unaudited) (Unaudited) Computers and electronic equipment.................. $290 $ 534 $ 651 $108 $206 $247 Office furniture and equipment.................. 174 266 297 37 53 59 Vehicles.................... 437 592 588 87 162 176 Leasehold improvements...... 52 -- -- 52 -- -- ---- ------ ------ ---- ---- ---- $953 $1,392 $1,536 $284 $421 $482 ==== ====== ====== ==== ==== ====
b. Depreciation and amortization expenses totaled $81,000, $128,000 and $196,000 in the years ended December 31, 1997, 1998 and 1999, respectively, and (unaudited) $40,000 and $70,000 in the three months ended March 31, 1999 and 2000, respectively. NOTE 3--SEVERANCE PAY a. Israeli law generally requires payment of severance pay upon dismissal of an employee or upon termination of employment in certain other circumstances. The severance pay liability of the Company to its Israeli employees, based upon the number of years of service and the latest monthly salary, is partly covered by regular deposits with severance pay funds and pension funds, and by purchase of insurance policies; under labor agreements, the deposits with recognized pension funds and the insurance policies, as above, are in the employees' names and are, subject to certain limitations, the property of the employees. The severance pay liabilities covered by the pension funds are not reflected in the financial statements as the severance pay risks have been irrevocably transferred to the pension funds. The amounts accrued and the portion funded with severance pay funds and by the insurance policies are reflected in the financial statements as follows:
December 31, ------------ March 31, 1998 1999 2000 ----- ----- ----------- (In thousands of U.S. dollars) (Unaudited) Accrued severance pay............................ $ 221 $ 424 $ 533 Less--amounts funded (presented in "other assets")........................................ (126) (240) (263) ----- ----- ----- Unfunded balance................................. $ 95 $ 184 $ 270 ===== ===== =====
The amounts of accrued severance pay as above cover the Company's severance pay liability in accordance with labor agreements in force and based on salary components which, in management's opinion, create entitlement to severance pay. The Company may only make withdrawals from the amounts funded with severance pay and pension funds and by insurance policies for the purpose of paying severance pay. F-11 MIND C.T.I. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 3--SEVERANCE PAY--(Continued) b. The severance pay expenses were $78,000, $83,000 and $201,000 in the years ended December 31, 1997, 1998 and 1999, respectively, and (unaudited) $68,000 and $128,000 in the three months ended March 31, 1999 and 2000, respectively. c. The earnings on the amounts funded were $1,000, $6,000 and $16,000 in the years ended December 31, 1997, 1998 and 1999, respectively, and (unaudited) $4,000 and $11,000 in the three months ended March 31, 1999, and 2000, respectively. NOTE 4--LEASE COMMITMENTS a. Leasing of premises The premises occupied by the Company and its subsidiary are rented under various operating lease agreements. The lease agreements for the premises expire on various dates between 2002 and 2004. Future minimum lease commitments of the Company and its subsidiary under the above leases, at exchange rates in effect on March 31, 2000, are as follows:
(In thousands of U.S. dollars) ---------------- Nine months ending December 31, 2000........................ $ 234 Years Ending December 31: 2001...................................................... 312 2002...................................................... 317 2003...................................................... 260 2004...................................................... 266 ------ $1,389 ======
The rental payments for the premises in Israel, which constitute most of the above amounts, are payable in Israeli currency linked to the Israeli consumer price index (the "Israeli CPI"). Rental expense totaled $51,000, $77,000 and $201,000 in the years ended December 31, 1997,1998 and 1999, respectively, and (unaudited) $50,000 and $76,000 in the three months ended March 31, 1999 and 2000, respectively. b. Leasing of motor vehicles In 2000, the Company has entered into operating lease agreements for use of motor vehicles. The lease agreements expire on various dates between 2002 and 2003. Future minimum lease commitments of the Company under the above leases, at exchange rates in effect on March 31, 2000, are as follows:
(In thousands of U.S. dollars) ---------------- Nine Months Ending December 31, 2000........................ $ 80 Years Ending December 31: 2001...................................................... 107 2002...................................................... 107 2003...................................................... 11 ---- $305 ====
F-12 MIND C.T.I. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 4--LEASE COMMITMENTS--(Continued) The rental payments are payable in Israeli currency linked to the Israeli CPI. Rental expense totaled (unaudited) $8,000 in the three months ended March 31, 2000. NOTE 5--MANDATORILY REDEEMABLE CONVERTIBLE A AND B PREFERRED SHARES a. As of March 31, 2000, the mandatorily redeemable convertible preferred shares are composed as follow:
Original Mandatory Issued and Gross Redemption Outstanding Proceeds Value ----------- -------- ---------- (Number of (In thousands of Shares) U.S. dollars) A preferred shares of NIS 0.01 par value... 111,111 $12,000 $17,778 B preferred shares of NIS 0.01 par value... 27,778 3,000 3,000 ------- ------- ------- 138,889 $15,000 $20,778 ======= ======= =======
The A preferred shares were issued under an investment agreement among new investors, the Company and principal shareholders, dated March 30, 2000, for consideration of $12,000,000. Issuance costs of $894,000, which are included in accounts payable and accruals at March 31, 2000 (see Note 9d), are charged against the recorded amount of the A preferred shares before any accretion. The B preferred shares were issued on March 30, 2000 in exchange for ordinary shares held by one of the Company's principal shareholders. Concurrent with the exchange, this principal shareholder sold the B preferred shares to an investor group which was the same as the investors in the A preferred shares. The Company received no cash as a result of this sale. b. The A and B preferred shares confer upon their holders the same rights as the ordinary shares (see Note 6a(3)), have conversion rights, redemption rights and a preference in liquidation as stipulated in the articles of association of the Company and a mechanism of anti-dilution in the event of issuance of shares at a price per share lower than the price the holders of the preferred shares paid. The A and B preferred shares are convertible into ordinary shares, at the holder's option, at any time after 12 months from the date of issuance. The A and B preferred shares will automatically be converted into ordinary shares upon the occurrence of a liquidity event, including an IPO (see also below). In this case the conversion ratio of the B preferred shares will be one to twenty and the number of ordinary shares into which the B preferred shares will be converted is 555,560 ordinary shares. The conversion ratio of the A preferred shares will be between one to sixteen and one to twenty, depending on the IPO price per ordinary share. If such IPO price per ordinary share is at least $13.50, the number of ordinary shares into which the A preferred shares will be converted will be 1,777,776 shares. If such IPO price per ordinary share is $10.80 or less, the number of ordinary shares into which the A preferred shares will be converted will be 2,222,220 shares. If such IPO price per ordinary share ranges between $10.80 and $13.50, the conversion value shall be adjusted on a straight line basis interpolation. Under the Articles of Association of the Company, in the event of a liquidity event as described below, the holders of the A and B preferred shares will receive an amount in cash before the holders of the ordinary shares receive any distribution, equal to the greater of (a) the sum of $108 per preferred share plus an amount F-13 MIND C.T.I. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 5--MANDATORILY REDEEMABLE CONVERTIBLE A AND B PREFERRED SHARES-- (Continued) equivalent to a dividend of 4.5% compounded annually since March 30, 2000, or (b) an amount such preferred holder would have received had the preferred shares been converted into ordinary shares immediately prior to the liquidity event. These liquidity events include: (i) a liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary; (ii) a sale of shares by the Company or by one or more of its shareholders, merger or similar transaction involving the Company, as the result of which those persons who held 100% of the voting stock of the Company immediately prior to such transaction do not hold more than 50% of the voting stock of the Company (or the surviving or resulting entity) after giving effect to such transaction or (iii) the sale or licensing of all or substantially all of the assets of the Company. The occurrence of such an event is deemed to be liquidation of the Company, as stated above. However, because the redemption in the event of a deemed liquidation is not solely within the control of the Company, the mandatorily redeemable convertible preferred shares have been presented outside of permanent shareholders' equity in the balance sheet. These rights expire upon the conversion of the A and B preferred shares into ordinary shares, which will automatically occur upon an IPO. c. In connection with the issuance of the A and B preferred shares, the amounts of $5,778,000 and $1,445,000, representing the beneficial conversion features will be amortized against retained earnings (accumulated deficit) over a period that commenced upon issuance (March 30, 2000), and ending upon the earlier of 12 months from the date of issuance or the date of an IPO. The amount of amortization in the three months period ended March 31, 2000 was nominal and was not recorded. The amounts of $5,778,000 and $1,445,000 are calculated as the difference between the per share conversion price and the deemed fair value of an ordinary share at the issuance date, multiplied by the applicable number of equivalent ordinary shares. d. The Company, its existing shareholders and the investors in the A and B preferred shares entered into a redemption agreement on March 30, 2000, concurrently with the purchase of the A and B preferred shares. The redemption agreement provides that, if a liquidity event as described in b. above has not occurred by March 30, 2005, the holders of the A and B preferred shares will be entitled to cause a sale of the Company or redemption of the A and B preferred shares at an amount equal to the higher of (a) fair market value of the preferred shares (as determined by appraisal, if requested), or (b) the amount as determined in the case of a liquidity event as described above. However, any amount paid in redemption of the B preferred shares is payable only to the extent of profits of the Company earned since the date of issuance (March 30, 2000), since as of March 31, 2000, the Company has an accumulated deficit. Accordingly, the A preferred shares are classified outside of permanent shareholders' equity at March 31, 2000, at their expected mandatory redemption value of $17,778,000. In addition, as a result of the forgoing, the Company recognized a charge to accumulated deficit, which was accreted for the three months ended March 31, 2000 in the amount of $6,672,000. This amount reflects the difference between the redemption value of the A preferred shares and the net proceeds received by the Company for the issuance of those shares. The B preferred shares are also classified outside of permanent shareholders' equity at their estimated fair value of $3,000,000 at March 31, 2000, with a like amount recorded as a reduction of additional paid-in capital representing the deemed purchase and cancellation of the ordinary shares which were exchanged for the B preferred shares. The B preferred shares will be increased by a charge to retained earnings (accumulated deficit) in the future to the extent that the Company has net income, up to the redemption amounts as determined in the preceding paragraph. F-14 MIND C.T.I. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 6--SHAREHOLDERS' EQUITY a. Share capital: 1) In January 1998, the shareholders of the Company resolved to split every ordinary share of NIS 1 par value into 100 ordinary shares of NIS 0.01 par value. All per share amounts and shares outstanding in these financial statements have been adjusted to give retroactive effect to the stock split. 2) On April 30, 2000, the shareholders of the Company resolved to increase the authorized share capital to 88,000,000 shares of NIS 0.01 par value (85,222,220 ordinary shares, 2,222,220 mandatorily redeemable convertible A preferred shares and 555,560 mandatorily redeemable convertible B preferred shares). On April 30, 2000 the Board of Directors of the Company resolved to allot a stock dividend (bonus shares) at the rate of 19 ordinary shares for each ordinary share. All per ordinary share amounts and ordinary shares outstanding in these financial statements have been adjusted to give retroactive effect to the stock dividend. 3) Each ordinary share of NIS 0.01 par value confers upon its holder the right to receive cash dividends and stock dividends, the right to a share in the Company's assets upon liquidation, based on paid up par value, not taking into account any premium and the right to vote at shareholders' meetings. 4) Under an agreement entered into in August 1997, the Company issued 1,856,000 ordinary shares of NIS 0.01 par value to an investor, in consideration of $1,044,000 ($0.56 per share), net of issuance costs of $14,000. In addition, the Company granted the investor a warrant to increase its holdings up to 30% of the Company's shares at a price of $0.88 per share. In January 1999, the investor exercised the warrant and the Company issued thereto 2,646,000 additional ordinary shares of NIS 0.01 par value, in consideration of $2,313,000, net of issuance costs of $23,000. b. Option plans: 1) In December 1995, an employee was granted an option to purchase 50,000 ordinary shares of NIS 0.01 par value for $7,500 ($0.15 per share). The options are exercisable through December 31, 2001. As of December 31, 1999 and March 31, 2000, all such options are fully vested. The compensation expense that was charged against income in each of the years ended December 31, 1997 and 1998 in respect of such option is $1,000. 2) In December 1998, the Board of Directors approved an employee stock option plan, which was amended in 2000 (the "1998 Plan"). Under the 1998 Plan, options for up to 1,058,000 ordinary shares of NIS 0.01 par value are to be granted to senior employees. Immediately upon issuance, the shares issuable upon the exercise of the options will confer on holders the same rights as the other ordinary shares. The 2000 amendment changed the number of options that can be granted under the 1998 Plan and enabled the Company to grant options to employees of the U.S. subsidiary. The Board of Directors determines the exercise price and the vesting period of the options granted. The options vest over three to five years (mainly three years), commencing on the date of grant (usually 33% each year). Any option not exercised by January 1, 2006 will expire. F-15 MIND C.T.I. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The 1998 Plan, in respect of Israeli employees, is subject to the terms stipulated by Section 102 of the Israeli Income Tax Ordinance. Inter alia, the Ordinance provides that the Company will be allowed to claim as an expense for tax purposes the amounts credited to the employees as a benefit upon sale of shares allotted under the plan at a price exceeding the exercise price, when the related capital gains tax is payable by the employee. The Company has not recorded a tax benefit because it anticipates that the tax benefit will be nominal, as most of its income during the period the options may be exercised will be tax exempt (see Note 7a). NOTE 6--SHAREHOLDERS' EQUITY (Continued) The 1998 Plan supersedes any previous commitments to grant options or shares to employees who were granted options under that plan. The following is a summary of the status of the 1998 Plan as of December 31, 1998 and 1999 and as of March 31, 2000 and changes during the periods then ended:
Years Ended December 31, Three Months ---------------------------------- Ended March 31, 1998 1999 2000 ---------------- ----------------- ----------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Number Price Number Price Number Price ------- -------- ------- -------- ------- -------- (unaudited) Options outstanding at beginning of period.... -- $ -- 221,220 $ 0.57 413,220 $1.16 Changes during period: Granted............... 221,220 0.57 207,000 1.77 312,600 4.93 Forfeited............. -- -- (15,000) 0.98 (45,000) 2.33 ------- ----- ------- ------ ------- ----- Options outstanding at end of period.......... 221,220 $0.57 413,220 $ 1.16 680,820 $2.81 ======= ===== ======= ====== ======= ===== Options exercisable at end of period.......... -- $ -- 53,000 $ 0.57 110,000 $0.69 ======= ===== ======= ====== ======= ===== Weighted average fair value of options granted during the period*................ $ 0.19 $ 1.99 $ 3.78 ======= ======= =======
- -------- * The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions.
Years Ended Three Months December 31, Ended --------------- March 31, 1998 1999 2000 ------ ------ ------------ (Unaudited) Dividend yield................................... 0% 0% 0% Expected volatility.............................. 50% 53% 53% Risk-free interest rate.......................... 5% 5% 5% Expected lives--in years......................... 2 2 2
F-16 MIND C.T.I. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 6--SHAREHOLDERS' EQUITY--(Continued) 3) The following table summarizes information about options outstanding and exercisable at December 31, 1999 and March 31, 2000 (unaudited):
Options outstanding Options exercisable - --------------------------------------------- --------------------------------- Number Weighted Number Weighted Outstanding Average Weighted Exercisable Average Weighted Range of at Remaining Average at Remaining Average Exercise December 31, Contractual Exercise December 31, Contractual Exercise prices 1999 Life Price 1999 Life Price -------- ------------ ----------- -------- ------------ ----------- -------- Years Years $0.57 227,220 6 $0.57 53,000 6 $0.57 $0.60-2.50 168,000 6 $1.54 -- -- -- $2.55-5.00 18,000 6 $5.00 -- -- -- ------- ------- 413,220 6 $1.16 53,000 6 $0.57 ======= ======= Options outstanding Options exercisable - --------------------------------------------- --------------------------------- Weighted Weighted Number Average Weighted Number Average Weighted Range of Outstanding Remaining Average Exercisable Remaining Average Exercise at March 31, Contractual Exercise at March 31, Contractual Exercise prices 2000 Life Price 2000 Life Price -------- ------------ ----------- -------- ------------ ----------- -------- Years Years $0.57 227,220 5 $0.57 89,000 5 $0.57 $0.60-2.50 129,000 5 $1.25 21,000 5 $1.18 $2.55-5.00 324,600 5 $5.00 -- -- -- ------- ------- 680,820 5 $2.81 110,000 5 $0.69 ======= =======
4) Accounting treatment of the 1998 Plan As permitted by FAS No. 123, "Accounting for Stock-Based Compensation," the Company accounts, for the 1998 Plan using the treatment prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, compensation cost for employee stock option plans is measured using the intrinsic value based method of accounting. Accordingly, the difference, if any, between the fair value of the shares on the date of the grant of the options, and the exercise price of such options, is recorded as a compensation expense over the vesting period. In the year ended December 31, 1999 and in the three months ended March 31, 2000, the Company recorded $300,000 and (unaudited) $684,000, respectively, of deferred stock compensation for the excess of the deemed fair value of the ordinary shares over the exercise price at the date of grant of options to employees. The compensation expense is being amortized by the straight line method over the vesting period of the options. The compensation expense that has been charged against income in the year ended December 31, 1999 and in the three months ended March 31, 2000 is $26,000 and (unaudited) $78,000, respectively. F-17 MIND C.T.I. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 6--SHAREHOLDERS' EQUITY--(Continued) Had compensation cost for the 1998 Plan been determined based on the fair value at the grant dates for awards granted under the 1998 Plan, consistent with the method of FAS 123, the Company's net income (loss) applicable to ordinary shares and earnings (loss) per ordinary share would have been reduced to the pro-forma amounts indicated below:
Years Ended December 31, Three Months Ended March 31 ------------------------------ -------------------------------- 1998 1999 1999 2000 -------------- --------------- -------------- ----------------- (unaudited) As Pro As Pro As Pro As Pro reported forma reported forma reported forma reported forma -------- ----- -------- ------ -------- ----- -------- ------- Net income (loss) applicable to ordinary shares--in thousands of U.S. dollars........... $ 641 $ 626 $1,514 $1,424 $ 189 $ 158 $(6,191) $(6,222) ===== ===== ====== ====== ===== ===== ======= ======= Earnings per ordinary share--in U.S. dollars: Basic................... $0.05 $0.05 $ 0.10 $ 0.10 $0.01 $0.01 $ (0.42) $ (0.42) ===== ===== ====== ====== ===== ===== ======= ======= Diluted................. $0.05 $0.05 $ 0.10 $ 0.10 $0.01 $0.01 $ (0.42) $ (0.42) ===== ===== ====== ====== ===== ===== ======= =======
c. Dividends In the event cash dividends are declared by the Company, such dividends will be paid in Israeli currency. Under current Israeli regulations, any cash dividend in Israeli currency paid in respect of ordinary shares purchased by non-residents of Israel with non-Israeli currency may be freely repatriated in such non-Israeli currency, at the rate of exchange prevailing at the time of conversion. NOTE 7--TAXES ON INCOME a. Tax benefits under the Law for the Encouragement of Capital Investments, 1959 The Company's production facilities have been granted "approved enterprise" status under the above law. Income derived from the approved enterprises is tax exempt for a period of ten years commencing in the first year in which the Company earns taxable income from the approved enterprise, since the Company has elected the "alternative benefits" scheme (involving waiver of investment grants). The period of tax benefits of the first approved enterprise, which commenced operation in 1995, will expire in 2004. The period of benefits of the second approved enterprise has not yet commenced. In the event of distribution of cash dividends from income which was tax exempt as above, the Company would have to pay 25% tax in respect of the amount distributed. Through March 31, 2000, the Company distributed as a dividend most of the retained earnings derived from tax exempt income. Therefore, the Company recorded deferred and current taxes at the rate of 25% in respect of the amounts distributed. Most of such dividends was declared in March 2000. As from April 1, 2000, the Company intends to reinvest all of its income and not to distribute such income as dividends. The entitlement to the above benefits is conditional upon the Company's fulfilling the conditions stipulated by the above law, regulations published thereunder and the certificate 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 may be required to refund the amount of the benefits, in whole or in part, with the addition of linkage differences to the Israeli CPI and interest. F-18 MIND C.T.I. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 7--TAXES ON INCOME--(Continued) b. Measurement of results for tax purposes under the Income Tax (Inflationary Adjustments) Law, 1985 (the "Inflationary Adjustments Law") Under the Inflationary Adjustments Law, results for tax purposes are measured in real terms, in accordance with the changes in the Israeli CPI. The Company is taxed under this law. As explained in Note 1a(2), the financial statements are measured in dollars. The difference between the changes in the Israeli CPI and in the exchange rate of the dollar relative to Israeli currency--both on annual and cumulative bases--causes a difference between taxable income and income reflected in these financial statements. c. Tax benefits under the Law for the Encouragement of Industry (Taxes), 1969 The Company is an "industrial company" as defined by this law and as such is entitled to certain tax benefits, consisting mainly of accelerated depreciation as prescribed by regulations published under the Inflationary Adjustments Law, and amortization of patents and certain other intangible property rights. d. Other applicable tax rates: 1) Income from other sources in Israel Income not eligible for Approved Enterprise benefits is taxes at the regular rate of 36%. 2) Income of the U.S. subsidiary The U.S. subsidiary is taxed according to tax laws in the United States. e. Deferred income taxes:
December 31, ------------ March 31, 1998 1999 2000 ----- ----- ----------- (Unaudited) (In thousands of U.S. dollars) 1) Provided in respect of the following: Accrued vacation pay........................... $ 2 $ 2 $ 2 Accrued severance pay.......................... 5 4 6 Research and development expenses.............. 36 48 Dividend distributable from tax exempt income, see a. above................................. (186) (515) ----- ----- --- $(179) $(473) $56 ===== ===== === 2) The deferred taxes are presented in the balance sheets as follows: Among current assets (liabilities)............. $(184) $(491) $29 As non-current assets.......................... 5 18 27 ----- ----- --- $(179) $(473) $56 ===== ===== ===
3) Paragraph 9(f) of FAS 109 creates an exception which prohibits the recognition of deferred tax liabilities or assets that arise from differences between the financial reporting and tax bases of assets and liabilities that are remeasured from the local currency into dollars using historical exchange rates, and that result from (i) changes in exchange rates, and (ii) indexing for tax purposes. F-19 MIND C.T.I. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 7--TAXES ON INCOME--(Continued) f. Taxes on income included in the income statements: 1) As follows:
Three Months Years Ended Ended December 31, March 31, -------------- ------------- 1997 1998 1999 1999 2000 ---- ---- ---- ----- ------ (Unaudited) (In thousands of U.S. dollars) Current: Israeli....................................... $ 79 $ 70 $153 $ 5 $ 645 United States................................. -- -- -- -- 28 ---- ---- ---- ----- ------ 79 70 153 5 673 Deferred, see e. above.......................... 35 131 294 53 (529) ---- ---- ---- ----- ------ $114 $201 $447 $ 58 $ 144 ==== ==== ==== ===== ======
2) Following is a reconciliation of the theoretical tax expense, assuming all income is taxed at the regular tax rates applicable to companies in Israel (see d. above), and the actual tax expense:
Three Months Ended Years Ended December 31, March 31, --------------------------------- -------------------- 1997 1998 1999 1999 2000 --------- --------- ----------- --------- --------- (Unaudited) (In thousands of U.S. dollars) Income (loss) before taxes on income, as reported in the statements of income*.. $456 100% $842 100% $1,961 100% $247 100% $625 100% ==== === ==== === ====== === ==== === ==== === Theoretical tax expense (benefit).............. $164 36% $303 36% $ 706 36% $ 89 36% $225 36% Less--tax benefits arising from approved enterprise status, see a. above............... (50) (11) (93) (11) (216) (11) (27) (11) (69) (11) ---- --- ---- --- ------ --- ---- --- ---- --- 114 25 210 25 490 25 62 25 156 25 Increase (decrease) in taxes resulting from permanent differences: Disallowable deductions............ 21 5 30 4 33 2 9 3 15 2 Differences between the basis of measurement of income reported for tax purposes and the basis of measurement of income for income for financial reporting purposes-- net, see b. and e(3) above................. (17) (4) (30) (4) (57) (3) (10) (4) (17) (3) Other.................. (4) (1) (9) (1) (19) (1) (3) (1) (10) (1) ---- --- ---- --- ------ --- ---- --- ---- --- Taxes on income......... $114 25% $201 24% $ 447 23% $ 58 23% $144 23% ==== === ==== === ====== === ==== === ==== === * As follows: Taxable in Israel..... $519 $837 $1,951 $244 $624 Taxable in the United States............... (63) 5 10 3 1 ---- ---- ------ ---- ---- $456 $842 $1,961 $247 $625 ==== ==== ====== ==== ====
F-20 MIND C.T.I. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 7--TAXES ON INCOME--(Continued) g. Tax assessments The Company has received final assessments from the tax authorities, following their audit through the year ended December 31, 1998. The U.S. subsidiary has not been assessed since incorporation in 1997. Any resulting taxes are recorded in the period the assessments are received. NOTE 8--MONETARY BALANCES IN NON-DOLLAR CURRENCIES
March 31, 2000 ----------------------------------- Israeli Currency Other ----------------------- Non-Dollar Linked* Unlinked Currencies ----------- ----------- ----------- (Unaudited) (Unaudited) (Unaudited) (In thousands of U.S. dollars) Assets--current: Cash and cash equivalents.............. $-- $ 328 $341 Short-term investments................. -- 134 -- Accounts receivable: Trade................................ -- 999 120 Other................................ 22 -- -- ---- ------ ---- $ 22 1,461 $461 ==== ====== ==== Liabilities--current: Accounts payable and accruals: Trade................................ $-- $ 327 $ 40 Other................................ -- 1,226 -- ---- ------ ---- $-- $1,553 $ 40 ==== ====== ====
-------- * To the Israeli CPI. F-21 MIND C.T.I. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 9--SUPPLEMENTARY BALANCE SHEET INFORMATION
December 31, -------------- March 31, 1998 1999 2000 ------ ------ ----------- (Unaudited) (In thousands of U.S. dollars) a. Short-term investments: Marketable securities*......................... $ 203 $ 126 $ 134 Bank deposits**................................ -- 628 -- ------ ------ ------ $ 203 $ 754 $ 134 ====== ====== ====== * Including unrealized gain................... $ 27 $ 25 $ 33 ====== ====== ====== ** The deposits were denominated in dollars and bore annual interest of 5.125%. b. Accounts receivable: 1) Trade: Open accounts................................ $1,248 $2,807 $2,880 Less--allowance for doubtful accounts........ (48) (230) (330) ------ ------ ------ $1,200 $2,577 $2,550 ====== ====== ====== 2) Other: Government of Israel......................... $ 45 $ 141 $ -- Employees.................................... 12 21 19 Deferred income taxes, see Note 7e........... -- -- 29 Related parties.............................. 27 14 16 Sundry....................................... 39 74 63 ------ ------ ------ $ 123 $ 250 $ 127 ====== ====== ====== c. Other assets: Amounts funded with severance pay funds and by insurance policies in respect of employee severance pay, see Note 3..................... $ 126 $ 240 $ 263 Deferred income taxes, see Note 7e............. 5 18 27 ------ ------ ------ $ 131 $ 258 $ 290 ====== ====== ====== d. Accounts payable and accruals--other: Payroll and related expenses................... $ 227 $ 287 $ 456 Accrued vacation pay........................... 46 100 103 Deferred revenues, see Note 1i................. 473 617 748 Government of Israel (March 31, 2000, mainly in respect of tax and dividend distributed from tax exempt income, see Note 7a)............... -- 35 478 Deferred income taxes, see Note 7e............. 184 491 -- Shareholders................................... 5 -- 3 Accrued costs in respect of preferred shares issuance, see Note 5.......................... -- -- 894 Accrued expenses and sundry.................... 130 118 136 ------ ------ ------ $1,065 $1,648 $2,818 ====== ====== ======
e. Concentration of credit risks Most of the Company's cash, cash equivalents, short-term bank deposits and marketable securities at December 31, 1998 and 1999 and March 31, 2000 were deposited with Israeli and U.S. banks. The Company is of the opinion that the credit risk in respect of those balances is remote. F-22 MIND C.T.I. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 9--SUPPLEMENTARY BALANCE SHEET INFORMATION--(Continued) Most of the Company's revenue has historically been from a large number of customers. Consequently, the exposure to credit risks relating to trade receivables is limited. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. An appropriate allowance for doubtful accounts is included in the accounts. f. Fair value of financial instruments The financial instruments of the Company and its subsidiary consist mainly of non-derivative assets and liabilities (items included in working capital). In view of their nature, the fair value of the financial instruments included in the working capital of the Company and its subsidiary is identical or close to their carrying value. NOTE 10--SELECTED INCOME STATEMENT DATA a. Revenues: 1) The Company has two product lines: (i) product line "A"--real-time billing and customer care software for Voice over IP service providers and (ii) product line "B"--software product to enterprises which is a call management system used by organizations for call accountancy, traffic analysis and fraud detection. Following are data regarding revenues classified by product lines:
Three Months Years Ended December Ended 31, March 31, -------------------- ------------- 1997 1998 1999 1999 2000 ------ ------ ------ ------ ------ (Unaudited) (In thousands of U.S. dollars) Product line "A".......................... $ 183 $ 914 $3,529 $ 208 $2,393 Product line "B".......................... 1,808 3,156 4,667 1,377 778 ------ ------ ------ ------ ------ $1,991 $4,070 $8,196 $1,585 $3,171 ====== ====== ====== ====== ======
2) Following are data regarding geographical revenues classified by geographical location of the customers:
Three Months Years Ended December Ended 31, March 31, -------------------- ------------- 1997 1998 1999 1999 2000 ------ ------ ------ ------ ------ (Unaudited) (In thousands of U.S. dollars) United States and Canada................. $ 83 $ 707 $2,068 $ 281 $1,162 Asia Pacific and other................... 15 117 894 60 927 Europe (mainly--Germany)................. 853 2,336 3,385 906 690 Israel................................... 1,040 910 1,849 338 392 ------ ------ ------ ------ ------ $1,991 $4,070 $8,196 $1,585 $3,171 ====== ====== ====== ====== ======
Most of the Company's assets are located in Israel. F-23 MIND C.T.I. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 10--SELECTED INCOME STATEMENT DATA--(Continued) 3) The Company has one customer the revenue from which exceeds 10% of total revenues. The amount of revenues from that customer was $381,000, $1,316,000 and $1,574,000 in 1997, 1998 and 1999, respectively. 4) In 1997 and 1998 the Company had revenues from a related party in the amount of $158,000 and $80,000, respectively. b. Research and development expenses--net:
Three Months Years Ended Ended December 31, March 31, -------------------- ----------- 1997 1998 1999 1999 2000 ----- ------ ------ ----- ----- (Unaudited) (In thousands of U.S. dollars) Expenses incurred: Payroll and related expenses........... $ 513 $ 993 $1,702 $ 354 $ 757 Depreciation and amortization.......... 22 38 96 12 32 Other.................................. 8 18 148 51 105 ----- ------ ------ ----- ----- 543 1,049 1,946 417 894 Less--royalty bearing participations from the Government of Israel*............... (146) -- (28) -- -- ----- ------ ------ ----- ----- $ 397 $1,049 $1,918 $ 417 $ 894 ===== ====== ====== ===== =====
- -------- * The Company was committed to pay royalties to the Israeli Government on proceeds from sales of products in the research and development of which the Government participated by way of grants. Under the terms of the Company's funding from the Israeli Government, royalties of 4% were payable on sales of products developed from a project so funded, up to 100% of the amount of the grant received by the Company. Through March 31, 2000, the Company paid the entire amount of royalties in respect of such participations. F-24 MIND C.T.I. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 10--SELECTED INCOME STATEMENT DATA--(Continued)
Three Months Years Ended Ended December 31, March 31, --------------- ------------- 1997 1998 1999 1999 2000 ---- ---- ----- ----- ------ (Unaudited) (In thousands of U.S. dollars) c. Selling, general and administrative expenses: 1) Selling expenses Including royalties in respect of participation in research and development, see b. above................................ $ 83 $192 $ 161 $34 $ -- ==== ==== ===== ===== ====== 2) General and administrative expenses The changes in allowance for doubtful accounts is composed as follows: Balance at beginning of period............. $-- $ 24 $ 48 $48 $230 Increase during the period................. 24 24 285 27 100 Bad debt written off....................... -- -- (103) -- -- ---- ---- ----- ----- ------ Balance at end of period................... $ 24 $ 48 $ 230 $75 $330 ==== ==== ===== ===== ====== d. Financial and other income (expenses)--net: Income: Gain on sale of, and unrealized gain on, trading securities.......................... $ 32 $-- $ 20 $37 $ 4 Interest on bank deposits.................... 4 10 139 6 30 Non-dollar currency gains--net............... 60 104 -- -- -- ---- ---- ----- ----- ------ 96 114 159 43 34 ---- ---- ----- ----- ------ Expenses: Financial expenses in respect of long-term loan........................................ 15 5 -- -- -- Financial expenses in respect of short-term credit...................................... 4 7 14 13 -- Non-dollar currency losses--net.............. -- -- 1 15 9 Capital loss on sale of property and equipment................................... -- 3 9 -- 4 ---- ---- ----- ----- ------ 19 15 24 28 13 ---- ---- ----- ----- ------ $ 77 $ 99 $ 135 $15 $ 21 ==== ==== ===== ===== ======
e. Earnings (loss) per ordinary share ("EPS") Basic EPS are computed based on the net income less the accretion relating to the mandatorily redeemable A preferred shares divided by the weighted average number of shares outstanding during each period. In computing diluted EPS, account was taken of the dilutive effect of the outstanding stock options using the treasury stock method. Basic and diluted EPS for the three month period ended March 31, 2000 include the ordinary shares which were repurchased by the Company in exchange for the issuance of B preferred shares (see Note 5), since the ordinary shares were outstanding during the entirety of the period. Diluted EPS for the three month period ended March 31, 2000 does not include 680,280 options, because of their anti-dilutive effect, since the Company had net loss applicable to ordinary shares. F-25 MIND C.T.I. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 10--SELECTED INCOME STATEMENT DATA--(Continued) Following are data relating to the weighted average number of shares for the purpose of computing EPS:
Years Ended December Three Months Ended 31, March 31, -------------------- ------------------ 1997 1998 1999 1999 2000 ------ ------ ------ ------ ----------- (Unaudited) (In thousands) Weighted average number of shares issued and outstanding--used in computation of basic EPS.......... 11,163 12,246 14,667 13,928 14,892 Add--incremental shares from assumed exercise of options....... 37 37 317 187 -- ------ ------ ------ ------ ------ Weighted average number of shares used in computation of diluted EPS............................... 11,200 12,283 14,984 14,115 14,892 ====== ====== ====== ====== ======
The pro forma basic and diluted loss per ordinary share for the three months ended March 31, 2000 is $0.42 and is similar to the actual loss per ordinary share for such period since the mandatorily redeemable preferred convertible A shares were issued on March 30, 2000. F-26 4,200,000 Shares [MIND LOGO] Ordinary Shares ------------- PROSPECTUS , 2000 ------------- Lehman Brothers U.S. Bancorp Piper Jaffray CIBC World Markets Fidelity Capital Markets a division of National Financial Services Corporation PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The Registrant estimates that expenses payable by the Registrant in connection with the offering described in this registration statement (other than the underwriting discount) will be as follows: Securities and Exchange Commission Registration Fee................. $ 15,302 NASD Filing Fee..................................................... 6,296 Nasdaq Listing Fee.................................................. 95,000 Israel Stamp Duty................................................... 430,000 Fees of Transfer Agent and Registrar................................ 10,000 Accounting Fees..................................................... 250,000 Legal Fees.......................................................... 425,000 Printing and Engraving Fees......................................... 200,000 Miscellaneous....................................................... 168,402 ---------- Total............................................................. $1,600,000 ==========
Item 14. Indemnification of Directors and Officers Sections 260 and 261 of the Companies Law, 5759-1999 (the "Companies Law") permit a company's articles of association to provide that: (i) the company may prospectively exculpate an office holder from liability for damage resulting from such office holder's breach of duty of care to the company (ii) the company may insure an office holder for the breach of his duty of care or, to the extent he acted in good faith and had a reasonable basis to believe that the act would not prejudice the company, for the breach of his duty of loyalty, as well as for monetary liabilities charged against him as a result of an act or omission he committed in connection with his service as an office holder of the company and (iii) the company may indemnify an office holder in connection with his service as an office holder, for monetary liability incurred pursuant to a judgment, including a settlement or arbitration decision approved by a court, in an action brought against him by a third party as well as for reasonable legal expenses incurred in an action brought against him by or on behalf of the company or others, or as a result of a criminal charge of which he was acquitted, or as a result of a conviction for a crime which does not require proof of criminal intent. These provisions are specifically limited in their scope by Section 263 of the Companies Law, which provides that a company may not indemnify an office holder nor enter into an insurance contract which would provide coverage for any monetary liability incurred as a result of the following: (a) a breach by the office holder of his duty of loyalty unless he acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; (b) a breach by the office holder of his duty of care if such breach was done intentionally or recklessly; (c) any act or omission done with the intent to derive an illegal personal benefit; or (d) any fine levied against the office holder as a result of a criminal offense. The Registrant has agreed to indemnify its officers and directors to the fullest extent permitted under the Companies Law and has obtained liability insurance for the benefit of its officers and directors. The Amended and Restated Articles of Association of the Registrant provides as follows: "Exculpation, Indemnity and Insurance (a) For purposes of these Articles, the term "Office Holder" shall mean every Director and every officer of the Company, including, without limitation, each of the persons defined as "Nosei Misra" in the Companies Law. II-1 (b) Subject to the provisions of the Companies Law, the Company may prospectively exculpate an Office Holder from all or some of the Office Holder's responsibility for damage resulting from the Office Holder's breach of the Office Holder's duty of care to the Company. (c) Subject to the provisions of the Companies Law, the Company may indemnify an Office Holder in respect of an obligation or expense specified below imposed on the Office Holder in respect of an act performed in his capacity as an Officer Holder, as follows: (i) a financial obligation imposed on him in favor of another person by a court judgment, including a compromise judgment or an arbitrator's award approved by court; (ii) reasonable litigation expenses, including attorneys' fees, expended by an Officer Holder or charged to the Office Holder by a court, in a proceeding instituted against the Office Holder by the Company or on its behalf or by another person, or in a criminal charge from which the Office Holder was acquitted, or in a criminal proceeding in which the Office Holder was convicted of an offense that does not require proof of criminal intent. The Company may undertake to indemnify an Officer Holder as aforesaid, (aa) prospectively, provided that the undertaking is limited to categories of events which in the opinion of the Board of Directors can be foreseen when the undertaking to indemnify is given, and to an amount set by the Board of Directors as reasonable under the circumstances and (bb) retroactively. (b) Subject to the provisions of the Companies Law, the Company may enter into a contract for the insurance of all or part of the liability of any Office Holder imposed on the Office Holder in respect of an act performed in his capacity as an Office Holder, in respect of each of the following: (i) a breach of his duty of care to the Company or to another person; (ii) a breach of his duty of loyalty to the Company, provided that the Office Holder acted in good faith and had reasonable cause to assume that such act would not prejudice the interests of the Company; (iii) a financial obligation imposed on him in favor of another person. (e) The provisions above are not intended, and shall not be interpreted, to restrict the Company in any manner in respect of the procurement of insurance and/or in respect of indemnification (i) in connection with any person who is not an Office Holder, including, without limitation, any employee, agent, consultant or contractor of the Company who is not an Office Holder, and/or (ii) in connection with any Office Holder to the extent that such insurance and/or indemnification is not specifically prohibited under law; provided that the procurement of any such insurance and/or the provision of any such indemnification shall be approved by the Audit Committee of the Company." Item 15. Recent Sales of Unregistered Securities. In August of 1997, we raised $1.0 million from ADC Teledata Communications Ltd. in a private placement of 1,856,000 ordinary shares. We also granted ADC Teledata Communications a warrant to purchase an additional 2,640,000 ordinary shares which was exercised in January 1999 yielding us with additional proceeds of $2.3 million. In March 2000, we raised $12.0 million from Summit Ventures V L.P., Summit V Companion Fund, L.P., Summit V Advisors, L.P., Summit V Advisors (QP), L.P., Summit Investors III, L.P. and Oscar Gruss & Son Incorporated, in a private placement of 111,111 Series A Preferred Shares. In March 2000, we issued 27,778 Series B preferred shares to Lior Salansky in exchange for 555,560 ordinary shares owned by Mr. Salansky. The foregoing transactions were exempt from registration requirements under Section 4(2) of the Securities Act of 1933, as amended. II-2 Item 16. Exhibits and Financial Statement Schedules. (a) Exhibits
Exhibit No. Description Page ------- ----------- ---- 1 Form of Underwriting Agreement 3.1 Memorandum of Association of Registrant(1) 3.2 Form of Articles of Association of Registrant 4.1 Specimen of Certificate for Ordinary Shares 5 Opinion of Goldfarb, Levy, Eran & Co. 10.1 1998 Option Plan 10.2 Share Purchase Agreement by and among MIND C.T.I. Ltd., Lior Salansky, Monica Eisinger, ADC Teledata Communications Ltd. and the Purchasers listed therein, dated March 30, 2000 10.3 Registration Rights Agreement by and among MIND C.T.I. Ltd., Lior Salansky, Monica Eisinger, ADC Teledata Communications Ltd. and the Investors listed therein, dated as of March 30, 2000 among Mind Software and the investors 10.4 Shareholders Agreement by and among MIND C.T.I. Ltd., Lior Salansky, Monica Eisinger, ADC Teledata Communications Ltd. and the Purchasers listed therein, dated March 30, 2000 10.5 Escrow Agreement by and among Lior Salansky, Oscar Gruss & Son Inc., Yaron Amir, Ilan Melamed, the Purchasers listed herein and Ravillan, Volovelsky, Dinstein, Sneh & Co. as Trustees, dated April 6, 2000 10.6 Share Purchase Agreement by and among Lior Salansky, Oscar Gruss & Son Inc., Yaron Amir, Ilan Melamed and the Purchasers listed therein, dated April 6, 2000 10.7 2000 Share Option Plan 10.8 Waiver between Summit, ADC Teledata Communications Ltd., Monica Eisinger and Lior Salansky dated August 1, 2000 10.9 Amendment Agreement to Shareholders' Agreement by and among MIND C.T.I. Ltd., Lior Salansky, Monica Eisinger, ADC Teledata Communications Ltd. and the Purchasers listed therein, dated July 10, 2000 21 Subsidiaries of the Registrant 23.1 Consent of Kesselman & Kesselman 23.2 Consent of Goldfarb, Levy, Eran & Co. (to be included in Exhibit 5 hereto) 24 Power of Attorney (included in the signature pages to the Registration Statement)
- -------- (1) English translation from Hebrew original (b) Financial Statement Schedules Not applicable. Item 17. Undertakings. (a) The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under Item 14 above, or otherwise, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. II-3 In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and this offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Tel Aviv, Israel, on the 31 day of July, 2000. /s/ Monica Eisinger By: _________________________________ Name: Monica Eisinger Title: President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Monica Eisinger and Yaron Amir, and each of them, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to (i) act on, sign and file with the Securities and Exchange Commission any and all amendment (including post-effective amendments) to this registration statement together with all schedules and exhibits thereto and any subsequent registration statement field pursuant to Rule 462(b) under the Securities Act of 1933, as amended, together with all schedules and exhibits thereto, (ii) act on, sign and file such certificates, instruments, agreements and other documents as may be necessary or appropriate in connection therewith, (iii) act on and file any supplement to any prospectus included in this registration statement or any such amendment or any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and (iv) take any and all actions which may be necessary or appropriate to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in- fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Monica Eisinger President and Chief July 31, 2000 ______________________________________ Executive Officer Monica Eisinger /s/ Yaron Amir Chief Financial Officer July 31, 2000 ______________________________________ (principal financial and Yaron Amir accounting officer) /s/ Lior Salansky Director July 31, 2000 ______________________________________ Lior Salansky /s/ Ilan Rosen Director July 31, 2000 ______________________________________ Ilan Rosen /s/ Kevin Mohan Director July 31, 2000 ______________________________________ Kevin Mohan
Authorized Representative in the United States: Mind C.T.I. Inc. By: /s/ Ilan Melamed Vice President, U.S. Operations ------------------------------- July 31, Ilan Melamed 2000 II-5 EX-1 2 0002.txt FORM OF UNDERWRITING AGREEMENT EXHIBIT 1 MIND C.T.I. LTD. 4,200,000 Ordinary Shares UNDERWRITING AGREEMENT ---------------------- ______ __, 2000 LEHMAN BROTHERS, INC., U.S. BANCORP PIPER JAFFRAY INC., CIBC WORLD MARKETS CORP., FIDELITY CAPITAL MARKETS, a division of National Financial Services Corporation As Representatives of the several Underwriters named in Schedule 1 attached hereto c/o Lehman Brothers Inc. Three World Financial Center New York, New York 10285 Dear Sirs: Mind C.T.I. Ltd., a company organized under the laws of the State of Israel (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to the underwriters named in Schedule I hereto (the "Underwriters") an aggregate of 4,200,000 shares (the "Firm Shares") of the Company's ordinary shares, nominal value, NIS 0.01 per share (the "Ordinary Shares"). In addition, the Company proposes to grant to the Underwriters an option to purchase up to an additional 630,000 Ordinary Shares (the "Option Shares") on the terms and for the purposes set forth in Section 2 of this Agreement. The Firm Shares and the Option Shares, if purchased, are hereinafter collectively called the "Shares." This serves to confirm the agreement concerning the purchase of the Shares from the Company by the Underwriters. 1. Representations, Warranties and Agreements of the Company. The Company represents, warrants and agrees that: (a) A registration statement on Form F-1 (File No. 333-______), and amendments thereto, with respect to the Shares has (i) been prepared by the Company in con- formity with the requirements of the United States Securities Act of 1933, as amended (the "Securities Act") and the rules and regulations (the "Rules and Regulations") of the United States Securities and Exchange Commission (the "Commission") thereunder, (ii) been filed with the Commission under the Securities Act and (iii) become effective under the Securities Act. The registration statement contains a prospectus to be used in connection with the offering and sale of the Shares. Copies of the registration statement including all amendments thereto have been delivered by the Company to you as the representatives (the "Representitives") of the Underwriters. As used in this Agreement, "Effective Time" means the date and the time as of which such registration statement, or the most recent post-effective amendment thereto, if any, was declared effective by the Commission; "Effective Date" means the date of the Effective Time; "Preliminary Prospectus" means the prospectus included in such registration statement, or amendments thereof, before it became effective under the Securities Act and any prospectus filed with the Commission by the Company with the consent of the Representatives pursuant to Rule 424(a) of the Rules and Regulations; "Registration Statement" means such registration statement, as amended at the Effective Time, including all information contained in the final prospectus filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations in accordance with Section 5(a) hereof and deemed to be a part of the Registration Statement as of the Effective Time pursuant to paragraph (b) of Rule 430A of the Rules and Regulations; and "Prospectus" means the prospectus in the form first used to confirm sales of Shares. The Company is not required to publish a prospectus in Israel under the laws of the State of Israel. (b) The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus will, when declared effective or is filed with the Commission, as the case may be, conform in all material respects to the requirements of the Securities Act and the Rules and Regulations and does not and will not, as of the applicable Effective Date (as to the Registration Statement and any amendment thereto) and as of the date thereof (as to the Prospectus and any amendment or supplement thereto) contain 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, in light of the circumstances under which they were made, not misleading; provided that no representation or warranty is made as to information contained in or omitted from the Registration Statement or the Prospectus in reliance upon and in conformity with written information furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein. (c) No stop order preventing or suspending the use of the Preliminary Prospectus has been issued by the Commission or the Israeli Securities Authority ("ISA"), and no proceeding for that purpose has been initiated or, to the Company's knowledge, threatened by such entity. 2 (d) The Company has been duly incorporated and is validly existing as a corporation under the laws of the State of Israel, is duly qualified to do business and is in good standing as a foreign corporation in any jurisdiction in which its ownership or lease of property or the conduct of its business requires such qualification except for such jurisdictions where the failure to so qualify would not have a material adverse effect on the assets or properties, business, results of operations or financial condition of the Company (a "Material Adverse Effect"). The Company has full corporate power and authority necessary to own, lease and license its properties and to conduct the business in which it is engaged; Mind C.T.I. Inc. is the only subsidiary of the Company and is neither a "significant subsidiary" as that term is defined in Rule 405 of the Rules and Regulations nor has it conducted any material business operations. (e) The Company has an authorized capitalization as set forth in the Prospectus under "Capitalization," and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and conform to the description thereof contained in the Prospectus under "Description of Ordinary Shares." (f) The Ordinary Shares to be issued and sold by the Company to the Underwriters hereunder have been duly and validly authorized; and, when such Ordinary Shares are issued and delivered against payment therefor as provided herein, such Ordinary Shares will be duly and validly issued, fully paid and non-assessable. (g) The description of the Shares will conform in all material respects to the description thereof contained in the Prospectus under "Description of Ordinary Shares"; and at the time of issuance and sale pursuant hereto, no further approval or authority of the shareholders or the Board of Directors of the Company will be required for the issuance and sale of the Shares as contemplated herein. (h) This Agreement has been duly authorized, executed and delivered by the Company. (i) The execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby, will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company is a party or by which the Company is bound or to which any of the property or assets of the Company is subject, except for any such conflicts or breaches which, individually or in the aggregate, would not have a Material Adverse Effect, or result in any violation of the memorandum or articles of association of the Company or any statute or any order, rule or regulation of any court or governmental agency or body having ju- 3 risdiction over the Company or any of its properties or assets; and except for the registration of the Shares under the Securities Act and the Rules and Regulations and such consents, approvals, authorizations, registrations or qualifications as may be required under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the regulations promulgated thereunder and applicable state securities and the "blue sky" laws and foreign securities laws or The National Association of Securities Dealers in connection with the purchase and distribution of the Shares by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby, except such as have been obtained and made or with respect to those that are not required to have been made prior to the closing. (j) Except as described in the Prospectus, there are no contracts or agreements between the Company and any person, granting such person the right (other than rights which have been waived or satisfied) to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Securities Act. (k) Except as described in the Registration Statement and the Prospectus, the Company has not sold or issued any Ordinary Shares during the six-month period preceding the date of the Prospectus, including any sales pursuant to Rule 144, or under Regulations D or S, of the Securities Act, other than Ordinary Shares issued pursuant to employee benefit plans, qualified stock options plans or other employee compensation plans or pursuant to outstanding options, rights or warrants. (l) The Company has not sustained, since the date of the latest audited financial statements included in the Prospectus, any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth in or contemplated by the Prospectus; and, since such date, there has not been any change in the capital stock or long-term debt of the Company or, to the knowledge of the Company, any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, financial position, shareholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth in or contemplated by the Prospectus. 4 (m) The consolidated financial statements (including the related notes and supporting schedules) filed as part of the Registration Statement or included in the Prospectus present fairly the financial condition and results of operations of the Company, at the dates and for the periods indicated, and have been prepared in conformity with U.S. generally accepted accounting principles applied on a consistent basis throughout the periods involved. (n) Kesselman & Kesselman, a member of PricewaterhouseCoopers International Limited, who have certified certain financial statements of the Company, whose report appears in the Prospectus and who have delivered the initial letter referred to in Section 7(g) hereof, are independent public accountants as required by the Securities Act and the Rules and Regulations. (o) The Company does not own any real property; the Company holds all personal property owned by it free and clear of all liens, encumbrances and defects in title, except such as are described in the Prospectus or such as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company; and all real property and buildings in Israel held under lease by the Company are held by it under valid, subsisting and enforceable leases, with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company. (p) The Company carries, or is covered by, insurance in such amounts and covering such risks as is adequate for the conduct of its business and the value of its properties and as is customary for companies engaged in similar businesses in similar industries. (q) Except as described in the Prospectus, the Company owns or possesses sufficient rights to use all material trademarks, service marks, trade names, including applications therefor and common law rights thereto, copyrights and licenses necessary for the conduct of its business as presently conducted and has no reason to believe that the conduct of its business as presently conducted will conflict with, and has not received any notice of any claim of conflict with, any such rights of others. (r) There are no legal or governmental proceedings pending to which the Company is a party or of which any property or assets of the Company is the subject (including, but not limited to, proceedings or investigations by the Israeli tax authorities, VAT authorities, customs authorities or environmental authorities, or by the Israeli National Insurance Institute) which, if determined adversely to the Company, would have a Material Adverse Effect; and except as described in the Prospectus, no such proceedings are, to the Company's knowledge, threatened or contemplated by governmental authorities or others. 5 (s) There are no contracts or other documents which are required to be described in the Prospectus or filed as exhibits to the Registration Statement by the Securities Act or by the Rules and Regulations which have not been described in the Prospectus or filed as exhibits to the Registration Statement as so required. (t) No relationship, direct or indirect, exists between or among the Company on the one hand, and the directors, officers, shareholders, customers or suppliers of the Company on the other hand, which is required to be described in the Prospectus and which is not so described. (u) No labor disturbance by the employees of the Company exists or, to the knowledge of the Company, is imminent, which is expected to have a Material Adverse Effect. (v) The Company has complied and is in compliance, in all material respects, with all applicable foreign, provincial and municipal laws, rules and regulations relating to employees and employment practices, terms and conditions of employment, employee relations, wages and hours, civil rights and equal employment opportunities, including, without limitation, the Hours of Work and Rest Law of the State is Israel, except where lack of such compliance would not have a Material Adverse Effect; and the Company (i) has performed in all material respects all obligations required to be performed by it under any of its employee benefit plans (including the making when due of all contributions required by applicable law, governmental rule or regulation or by an agreement to which the Company is a party), (ii) is not in default under or in violation of any such employee benefit plan and (iii) is in compliance with the requirements prescribed by statutes, orders or governmental rules or regulations applicable to such employee benefit plans. (w) The Company has filed with the appropriate taxing authorities all Tax Returns (as defined below) required to be filed through the date hereof and has paid all taxes due thereon, and such Tax Returns are each true, correct and complete in all material respects and no tax deficiency has been determined adversely to the Company which has had (nor does the Company have any knowledge of any tax deficiency which, if determined adversely to the Company, would have) a Material Adverse Effect (the term "Tax Returns" means any return or report supplied by the Company to a taxing authority in Israel, the United States or elsewhere). (x) The issuance, delivery and sale to the Underwriters of the Ordinary Shares are not subject to any tax imposed on the Company by Israel or any political subdivision thereof except the Israeli stamp taxes applicable to the issuance of the Ordinary Shares (which will be paid by the Company promptly after each Delivery Date in accordance with Israeli law). 6 (y) Since the date as of which information is given in the Prospectus through the date hereof, and except as may otherwise be disclosed in the Prospectus, the Company has not (i) issued or granted any securities other than (A) shares issued pursuant to employee benefit plans, stock option plans or other employee compensation plans as described in the Prospectus or (B) pursuant to options, rights or warrants outstanding as of the date such information is given, (ii) incurred any material liability or obligation, direct or contingent, other than liabilities and obligations which were incurred in the ordinary course of business, (iii) entered into any transaction not in the ordinary course of business or (iv) declared or paid any dividend on its capital stock. (z) The Company (i) makes and keeps accurate books and records and (ii) maintains internal accounting controls which provide reasonable assurance that (A) transactions are executed in accordance with management's authorization, (B) transactions are recorded as necessary to permit preparation of its financial statements and to maintain accountability for its assets, (C) access to its assets is permitted only in accordance with management's authorization and (D) the reported accountability for its assets is compared with existing assets at reasonable intervals. (aa) The Company is not (i) in violation of its memorandum or articles of association, (ii) in default, and no event has occurred which, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any material term, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which a party or by which it is bound or to which any of its properties or assets is subject or (iii) in violation of any law, ordinance (including, but not limited to, the Israeli Companies Law, 1999), governmental rule, regulation or court decree to which it or its property or assets is subject, nor has the Company failed to obtain any license, permit, certificate, franchise or other governmental authorization or permit (the "Permits") necessary to the ownership of its property or to the conduct of its business. The Company has not received any formal notice of proceedings relating to the revocation or modification of any such Permit that, if determined adversely to the Company, would individually or in the aggregate have a Material Adverse Effect. (bb) Neither the Company nor any of its subsidiaries, nor, to the knowledge of the Company, any director, officer, agent, employee or other person associated with or acting on behalf of the Company or any of its subsidiaries, has used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the Foreign Corrupt Practices Act of 7 1977; or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment. (cc) The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not become a "passive foreign investment company" within the meaning of the U.S. Internal Revenue Code of 1986, as amended (the "Code"). (dd) The Company is not an "investment company" within the meaning of such term under the Investment Company Act of 1940, as amended, and the rules and regulations of the Commission thereunder. (ee) The Company has not taken and will not knowingly take, directly or indirectly, any action in the United States or Israel designed to cause or result in the stabilization or manipulation of the price of Ordinary Shares to facilitate the sale or resale of the Shares in violation of the Securities Act or the Rules and Regulations. (ff) The Ordinary Shares have been approved for quotation on the Nasdaq National Market, subject to notice of issuance and evidence of satisfactory distribution. (gg) Except for any agreement with the Underwriters and this Agreement, there are no contracts, agreements or understandings between the Company and any person that would give rise to a valid claim against the Company or any Underwriter for a brokerage commission, finder's fee or other like payment in connection with this offering. (hh) The Registration Statement and its filing with the Commission, and the Prospectus have been duly authorized by and on behalf of the Company, and the Registration Statement has been duly executed pursuant to such authorization by and on behalf of the Company. (ii) Neither the Company nor any of its subsidiaries has (i) violated any material environmental statute, rule, regulation, order, judgment, decree or permit in any jurisdiction in which the Company or such subsidiary conducts any business or owns or holds any properties or assets or (ii) received actual notice of any actual or potential liability for the investigation or remediation of any disposal or release of hazardous or toxic substance or wastes, pollutants or contaminants, except where such violation or liability could not reasonably be expected to have a Material Adverse Effect on Company and its subsidiaries. 8 (jj) The Company has validly appointed Mind C.T.I. Inc. as its authorized agent for service of process pursuant to this Agreement and in connection with the Registration Statement. 2. Purchase of the Shares by the Underwriters. On the basis of the representations and warranties contained in, and subject to the terms and conditions of, this Agreement, the Company agrees to sell 4,200,000 Firm Shares to the several Underwriters and each of the Underwriters, severally and not jointly, agrees to purchase the number of Firm Shares set opposite that Underwriter's name in Schedule 1 hereto. The respective purchase obligations of the Underwriters with respect to the Firm Shares shall be rounded among the Underwriters to avoid fractional shares, as the Representatives may determine. In addition, the Company grants to the Underwriters an option to purchase up to 630,000 Option Shares. Such option is granted for the purpose of covering over-allotments in the sale of Firm Shares and is exercisable as provided in Section 4 hereof. Option Shares shall be purchased severally for the account of the Underwriters in proportion to the number of Firm Shares set opposite the name of such Underwriters in Schedule 1 hereto. The respective purchase obligations of such Underwriter with respect to the Option Shares shall be adjusted by the Representatives so that no Underwriter shall be obligated to purchase Option Shares other than in 100 share amounts. The price of both the Firm Shares and any Option Shares shall be $_____ per share. The Company shall not be obligated to deliver any of the Shares to be delivered on any Delivery Date (as hereinafter defined), except upon payment for all the Shares to be purchased on such Delivery Date as provided herein. 3. Offering of Shares by the Underwriters. Upon authorization by the Representatives of the release of the Firm Shares, the several Underwriters propose to offer the Firm Shares for sale upon the terms and conditions set forth in the Prospectus. It is understood that approximately _______________ shares of the Firm Shares ("Directed Shares") will initially be reserved by the Underwriters for offer and sale to employees and persons having business relationships with the Company and its subsidiaries ("Directed Share Participants") upon the terms and conditions set forth in the Prospectus and in accordance with the rules and regulations of the National Association of Securities Dealers, Inc. Under no circumstances will Lehman Brothers or any Underwriter be liable to the Company or to any Directed Share Participant for any action taken or omitted to be taken in good faith in connection with such Directed Share Program. To the extent that any Directed Shares are not affirmatively reconfirmed for purchase by any Directed Share Participant on or immediately after the date of this 9 Agreement, such Directed Shares may be offered to the public as part of the public offering contemplated hereby. In connection with the offer and sale of the Directed Shares, the Company agrees, promptly upon a request in writing, to indemnify and hold harmless Lehman Brothers and the other Underwriters from and against any loss, claim, damage, expense, liability or action which (i) arises out of, or is based upon, any untrue statement or alleged untrue statement of a material fact contained in any material prepared by or with the approval of the Company for distribution to Directed Share Participants in connection with the Directed Share Program or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) arises out of the failure of any Directed Share Program participant to pay for and accept delivery of Directed Shares that the Participant agreed to purchase or (iii) is otherwise related to the Directed Share Program, other than losses, claims, damages or liabilities (or expenses relating thereto) that are finally judicially determined to have resulted directly from the bad faith or gross negligence of Lehman Brothers. The Underwriters agree that (i) they will not offer the Shares to the public in Israel within the meaning of Section 15 of the Israeli Securities Law, 5728-1968, (ii) they will not offer the Shares in Israel to an aggregate of more than 35 investors who are not persons of the type enumerated in Section 15A(b) of said Securities Law, including any investor who acquired securities from the Company during the past 12 months, and (iii) they will deliver to the Company the names and addresses of such investors within seven days of the applicable Delivery Date. 4. Delivery of and Payment for the Shares. Delivery of and payment of the Firm Shares shall be made at the office of Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New York, New York 10036, at 10:00 A.M., New York City time, on the fourth full business day following the date of this Agreement or at such other date or place as shall be determined by agreement between the Representatives and the Company. This date and time are sometimes referred to as the "First Delivery Date." On the First Delivery Date, the Company shall deliver or cause to be delivered certificates representing the Firm Shares to the Representatives for the account of each Underwriter against payment to or upon the order of the Company of the purchase price by wire transfer in immediately available funds. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligation of each Underwriter hereunder. Upon delivery, the Firm Shares shall be registered in such names and in such denominations as the Representatives shall request in writing not less than two full business days prior to the First Delivery Date. For the purpose of expediting the checking and packaging of the certificates for the Firm Shares, the Company shall make the certificates representing the Firm Shares available for inspection by the Representatives in New York, New York, not later than 2:00 P.M., New York City time, on the business day prior to the First Delivery Date. 10 The option granted in Section 2 will expire 30 days after the date of this Agreement and may be exercised in whole or in part from time to time by written notice being given to the Company by the Representatives. Such notice shall set forth the aggregate number of Option Shares as to which the option is being exercised, the names in which the Option shares are to be registered, the denominations in which the Option Shares are to be issued and the date and time, as determined by the Representatives, when the Option Shares are to be delivered; provided, however, that this date and time shall not be earlier than the First Delivery Date nor earlier than the second business day after the date on which the option shall have been exercised nor later than the fifth business day after the date on which the option shall have been exercised. The date and time the Option Shares are delivered are sometimes referred to as a "Second Delivery Date" and the First Delivery Date and any Second Delivery Date are sometimes each referred to as a "Delivery Date." Delivery of and payment for the Option Shares shall be made at the place specified in the first sentence of the first paragraph of this Section 4 (or at such other place as shall be determined by agreement between the Representatives and the Company) at 10:00 A.M., New York City time, on such Second Delivery Date. On such Second Delivery Date, the Company shall deliver or cause to be delivered the certificates representing the Option Shares to the Representatives for the account of each Underwriter against payment to or upon the order of the Company of the purchase price by wire transfer in immediately available funds. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligation of each Underwriter hereunder. Upon delivery, the Option Shares shall be registered in such names and in such denominations as the Representatives shall request in the aforesaid written notice. For the purpose of expediting the checking and packaging of the certificates for the Option Shares, the Company shall make the certificates representing the Option Shares available for inspection by the Representatives in New York, New York, not later than 2:00 P.M., New York City time, on the business day prior to such Second Delivery Date. 5. Further Agreements of the Company. The Company agrees: (a) To prepare the Prospectus in a form approved by the Representatives and to file such Prospectus pursuant to Rule 424(b) under the Securities Act not later than the Commission's close of business on the second business day following the execution and delivery of this Agreement or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Securities Act; to cause the Registration Statement to become effective; to make no further amendment or any supplement to the Registration Statement or to the Prospectus except as permitted herein; to advise the Representatives, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish the Representatives with copies thereof; to advise the 11 Representatives promptly after it receives notice thereof, of (1) the issuance by the Commission, the ISA or any other foreign or Israeli regulatory body of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, (2) the initiation or threatening of any proceeding for any such purpose, or (3) any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or suspending any such qualification, to use promptly its best efforts to obtain its withdrawal. (b) To furnish promptly to the Representatives and to counsel for the Underwriters a signed copy of the Registration Statement as originally filed with the Commission, and each amendment thereto filed with the Commission, including all consents and exhibits filed therewith. (c) To deliver promptly to the Representatives such number of the following documents as the Representatives shall reasonably request: (i) conformed copies of the Registration Statement as originally filed with the Commission and each amendment thereto (in each case excluding exhibits other than this Agreement and the computation of per share earnings, if applicable) and (ii) the Preliminary Prospectus, the Prospectus and any amended or supplemented Prospectus; and, if the delivery of a prospectus is required at any time after the Effective Time in connection with the offering or sale of the Shares by the Underwriters and if at such time any events shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading when such Prospectus is delivered or, if for any other reason it shall be necessary to amend or supplement the Prospectus in order to comply with the Securities Act, to notify the Representatives and, upon its request, to file such document and to prepare and furnish without charge to each Underwriter and to any dealer of securities as many copies as the Representatives may from time to time reasonably request of an amended or supplemented Prospectus which will correct such statement or omission or effect such compliance. (d) To file promptly with the Commission any amendment to the Registration Statement or the Prospectus or any supplement to the Prospectus that may, in the judgment of the Company or the Representatives, be required by the Securities Act or requested by the Commission. (e) Prior to filing with the Commission of any amendment to the Registration Statement or supplement to the Prospectus or any Prospectus pursuant to Rule 424 12 of the Rules and Regulations, to furnish a copy thereof to the Representatives and counsel for the Underwriters and obtain the consent of the Representatives to the filing. (f) As soon as practicable after the Effective Date, to make generally available to the Company's shareholders and to deliver to the Representatives an earnings statement of the Company (which need not be audited) complying with Section 11(a) of the Securities Act and the Rules and Regulations (including, at the option of the Company, Rule 158). (g) For a period of five years following the Effective Date, to furnish to the Representatives copies of all materials furnished by the Company to its shareholders and all public reports and public financial statements furnished by the Company to the Commission, the Nasdaq National Market, the ISA or to any national securities exchange upon which the Ordinary Shares may be listed pursuant to requirements of or agreements with such exchange, the ISA or the Commission pursuant to the Exchange Act or any rule or regulation of the Commission thereunder. (h) Promptly from time to time to take such action as the Representatives may reasonably request to qualify the Shares for offering and sale under the securities laws of such jurisdictions as the Representatives request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Shares, provided, that, nothing herein shall require the Company to file any general consent to service of process or to qualify as a foreign corporation or a dealer in securities in any jurisdiction in which it is not so qualified. (i) For a period of 180 days from the date of the Prospectus, not to, directly or indirectly, (1) offer for sale, sell or otherwise dispose of (or enter into any transaction or device which is designed to, or reasonably likely and expected to, result in the disposition by any person at any time in the future of) any Ordinary Shares or securities convertible into or exchangeable for Ordinary Shares (other than (A) the exercise of stock options existing on the date of the offering;(B) transfers to associates (as defined in the Exchange Act) who agree to the lock-up; (C) pledges if the pledgees agree to the lock-up or (D) the issuance of securities issued in connection with the acquisition of another entity by the Company or in connection with a strategic relationship with another entity; provided, that, such securities may only be resold pursuant to Rule 144 or Rule 145 of the Securities Act), or sell or grant options, rights or warrants with respect to any Ordinary Shares or securities convertible into or exchangeable for Ordinary Shares (other than the grant of options pursuant to any such plans existing on the date hereof), or (2) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of such Ordinary Shares, 13 whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Ordinary Shares or other securities, in cash or otherwise, in each case for a period of 180 days from the date of the Prospectus, without the prior written consent of Lehman Brothers Inc. In addition, without the prior written consent of Lehman Brothers Inc., individuals participating in the directed share program will be prohibited from disposing of such Ordinary Shares for a period of 90 days after the date of the Prospectus. (j) To the extent that, and for as long as, the laws of Israel require any permit for approval by, or exemption by the ISA of the transactions contemplated hereby to be legally permitted and to remain effective, the Company will obtain and maintain each such permit, approval or exemption valid and in full force and effect. (k) In any suit in a court of competent jurisdiction (whether in the United States or any other jurisdiction) seeking enforcement of this Agreement or provisions of this Agreement, (i) no defense (other than a procedural defense) given or allowed by the laws of any other state or country shall be interposed in any suit, action or proceeding hereon unless such defense is also given or allowed by the laws of the State of New York or of the United States, (ii) if the plaintiffs therein seek a judgment in United States dollars, the Company will not interpose any defense or objection to or otherwise oppose judgment, if any, being awarded in such currency, and (iii) if the plaintiffs therein seek to have any judgment (or any aspect thereof) awarded in foreign currency linked, for the period from entry of such judgment until actual payment thereof in full has been made, to the changes in the foreign currency-United States dollar exchange rate, the Company will not interpose any defense or objection to or otherwise oppose inclusion of such linkage in any such judgment (except to comply with any applicable law); and the Company agrees that it will not initiate or seek to initiate any action, suit or proceeding, in Israel or in any other jurisdiction other than the United States, seeking damages or for the purpose of obtaining any injunction or declaratory judgment against the enforcement of, or a declaratory judgment concerning any alleged breach by the Company of or other claim by you in respect of, this Agreement or any of your rights under this Agreement, including without limitation any action, suit or proceeding challenging the enforceability of or seeking to invalidate in any respect the submission by the Company hereunder to the jurisdiction of federal or New York state courts or the designation of the laws of the State of New York as the law applicable to this Agreement. (l) If any payment of any sum due under this Agreement from the Company is made to or received by the Underwriters or any controlling person of any Underwriter in a currency other than freely transferable United States dollars, whether by judicial judgment or otherwise, the obligations of the Company under this Agreement shall be discharged only to the extent of the net amount of freely transferable United States dollars that the Underwriters or such controlling per- 14 sons, as the case may be, in accordance with normal bank procedures, are able to lawfully purchase with such amount of such other currency; and to the extent that the Underwriters or such controlling persons are not able to purchase sufficient United States dollars with such amount of such other currency to discharge the obligations of the Company to the Underwriters or such controlling persons, as the case may be, the Company shall not be discharged with respect to such difference, and any such undischarged amount will be due as a separate obligation and shall not be affected by payment of or judgment being obtained for any other sums due under or in respect of this Agreement. (m) To apply the net proceeds from the sale of the Shares being sold by the Company as set forth in the Prospectus. (n) To take such steps as shall be necessary to ensure that the Company shall not become an "investment company" within the meaning of such term under the Investment Company Act of 1940, as amended, and the rules and regulations of the Commission thereunder. (o) To take such steps as shall be necessary to ensure that the Company shall not become a "passive foreign investment company" within the meaning of the Code. 6. Expenses. The Company agrees to pay (a) the costs incident to the authorization, issuance, sale and delivery to the Underwriters of the Shares and any taxes payable by the Company in that connection; (b) the costs incident to the preparation, printing and filing under the Securities Act of the Registration Statement and any amendments and exhibits thereto; (c) the costs of distributing the Registration Statement as originally filed and each amendment thereto and any post-effective amendments thereof (including, in each case, exhibits), any Preliminary Prospectus, the Prospectus and any amendment or supplement to the Prospectus, all as provided in this Agreement; (d) the costs of reproducing and distributing this Agreement, any supplemental agreement among Underwriters and any other related documents in connection with the offering, purchase, sale and delivery of the Shares; (e) the filing fees incident to securing any required review by the National Association of Securities Dealers, Inc. of the terms of sale of the Shares; (f) any applicable listing or other fees, including the fees for quotation of the Ordinary Shares on the Nasdaq National Market or any fees relating to registration under the Exchange Act; (g) the fees and expenses of qualifying the Shares under the securities laws of the several jurisdictions as provided in Section 5(h); and (h) all other costs and expenses incident to the performance of the obligations of the Company under this Agreement not otherwise specifically provided for in this Section 6; provided that, except as provided in this Section 6 and in Section 11, the Underwriters shall pay their own costs and expenses, including the costs and expenses of their counsel, any transfer taxes on the Shares which they may sell and the expenses of advertising any offering of the Shares made by the Underwriters. 15 7. Conditions of Underwriters' Obligations. The respective obligations of the Underwriters hereunder are subject to the accuracy, when made and on each Delivery Date, of the representations and warranties of the Company, contained herein, to the performance by the Company of its obligations hereunder, and to each of the following additional terms and conditions: (a) The Prospectus shall have been timely filed with the Commission in accordance with Section 5(a); no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and any request of the Commission for inclusion of additional information in the Registration Statement or the Prospectus or otherwise shall have been complied with. (b) No Underwriter shall have discovered and disclosed to the Company on or prior to such Delivery Date that the Registration Statement or the Prospectus or any amendment or supplement thereto contains an untrue statement of a fact which, in the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Underwriters, is material or omits to state a fact which in the opinion of such counsel, is material and is required to be stated therein or is necessary to make the statements therein, in light of the circumstances under which such statements were made, not misleading. (c) All corporate proceedings and other legal matters incident to the authorization, form and validity of this Agreement, the Shares, the Registration Statement and the Prospectus, and all other legal matters relating to this Agreement and the transactions contemplated hereby shall be reasonably satisfactory in all material respects to counsel for the Underwriters, and the Company shall have furnished to such counsel all documents and information that they may reasonably request to enable them to pass upon such matters. (d) Goldfarb, Levy, Eran & Co. shall have furnished to the Representatives its written opinion, as Israeli counsel to the Company, addressed to the Underwriters and dated such Delivery Date, substantially in the form attached hereto as Exhibit 2. (e) Fulbright & Jaworski LLP shall have furnished to the Representatives its written opinion, as U.S. counsel to the Company, addressed to the Underwriters and dated such Delivery Date, substantially in the form attached hereto as Exhibit 3. (f) The Representatives shall have received from Skadden, Arps, Slate, Meagher & Flom LLP and Naschitz, Brandes & Co., counsel for the Underwriters, such opinion or opinions, dated such Delivery Date, with respect to the issuance and sale of the Shares, the Registration Statement, the Prospectus and other related matters as the Representatives may reasonably require, and the Company shall 16 have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass upon such matters. (g) At the time of execution of this Agreement, the Representatives have received from Kesselman & Kesselman, a member of PricewaterhouseCoopers International Limited, a letter, in form and substance satisfactory to the Representatives, addressed to the Underwriters and dated the date hereof (i) confirming that they are independent public accountants within the meaning of the Securities Act and are in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the date hereof (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five days prior to the date hereof), the conclusions and findings of such firm with respect to the financial information and other matters ordinarily covered by accountants' "comfort letters" to underwriters in connection with registered public offerings. (h) With respect to the letter of Kesselman & Kesselman referred to in the preceding paragraph and delivered to the Representatives concurrently with the execution of this Agreement (the "initial letter"), the Company shall have furnished to the Representatives a letter (the "bring-down letter") of such accountants, addressed to the Underwriters and dated such Delivery Date (i) confirming that they are independent public accountants within the meaning of the Securities Act and are in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the date of the bring-down letter (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five days prior to the date of the bring-down letter), the conclusions and findings of such firm with respect to the financial information and other matters covered by the initial letter and (iii) confirming in all material respects the conclusions and findings set forth in the initial letter. (i) The Company shall have furnished to the Representatives a certificate, dated such Delivery Date, of its Chairman of the Board, its Chief Executive Officer or a Vice President and its chief financial officer, on behalf of the Company, stating that: (i) The representations, warranties and agreements of the Company in Section 1 are true and correct as of such Delivery Date; the Company has complied in all material respects with all its agreements contained herein; and the conditions set forth in Sections 8(a) have been fulfilled; and 17 (ii) They have examined the Registration Statement and the Prospectus and, to their knowledge (A) as of the Effective Date, the Registration Statement and Prospectus did not include any untrue statement of a material fact and did not omit 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, and (B) since the Effective Date no event has occurred which should have been set forth in a supplement or amendment to the Registration Statement or the Prospectus; (iii) The Company shall not have sustained since the date of the latest audited financial statements included in the Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth in or contemplated by the Prospectus or (ii) since such date there shall not have been any change in the capital stock or long-term debt of the Company or any change, or any development, involving a prospective change, in or affecting the general affairs, management, financial position, shareholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth in or contemplated by the Prospectus, the effect of which, in any such case described in clause (i) or (ii), is, in the judgment of the Representatives, so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered on such Delivery Date on the terms and in the manner contemplated in the Prospectus. (j) Subsequent to the execution and delivery of this Agreement there shall not have occurred any of the following: (i) trading in securities generally on the New York Stock Exchange or the Nasdaq National Market or in the over-the-counter market, or trading in any securities of the Company on any exchange or in the over-the-counter market, shall have been suspended or minimum prices shall have been established on any such exchange or such market by the Commission, by such exchange or by any other regulatory body or governmental authority having jurisdiction, (ii) a banking moratorium shall have been declared by Federal or state authorities of the United States or by Israeli authorities, (iii) the United States or Israel shall have become engaged in significant hostilities, there shall have been a significant escalation in hostilities involving the United States or Israel or there shall have been a declaration of a national emergency or war by the United States or Israel or (iv) there shall have occurred such a material adverse change in general economic, political or financial conditions (or the effect of international conditions on the financial markets in the United States or Israel shall be such) as to make it, in the case of (iii) or (iv), in the reasonable judgment of a majority in interest of the several Underwriters, impracticable or inadvisable to proceed with the public offering or delivery of the Shares being delivered on such Delivery Date on the terms and in the manner contemplated in the Prospectus. 18 (k) The Nasdaq National Market shall have approved the Shares for quotation, subject only to official notice of issuance and evidence of satisfactory distribution. (l) The Representatives shall have received "lock-up" letters, substantially in the form of Exhibit 1-A and 1-B hereto, as applicable, signed by each of the directors, officers and principal shareholders of the Company and each person who will receive Directed Shares from the Underwriters as directed by the Company. All opinions, letters, evidence and certificates mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to counsel for the Underwriters. 8. Indemnification and Contribution. 19 (a) (The Company shall indemnify and hold harmless each Underwriter, its officers, directors and employees and each person, if any, who controls any Underwriter within the meaning of the Securities Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof (including, but not limited to, any loss, claim, damage, liability or action relating to purchases and sales of Shares), to which that Underwriter, or its officers, directors, employees or controlling persons may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any Preliminary Prospectus, the Registration Statement or the Prospectus or in any amendment or supplement thereto, or (B) in any materials or information provided to investors by, or with the approval of, the Company in connection with the marketing of the offering of the Shares ("Marketing Materials"), including any roadshow or investor presentations made to investors by the Company (whether in person or electronically), (ii) the omission or alleged omission to state in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any amendment or supplement thereto, any material fact required to be stated therein or necessary to make the statements therein not misleading or (iii) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Shares or the offering or contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon matters covered by clause (i) or (ii) above (provided that the Company shall not be liable under this clause (iii) to the extent that it is determined in a final judgment by a court of competent jurisdiction that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its gross negligence or willful misconduct), and shall reimburse each Underwriter and each of its officers, directors, employees or controlling persons promptly upon demand for any legal or other expenses reasonably incurred by that Underwriter or its officers, directors, employees or controlling persons in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any such amendment or supplement in reliance upon and in conformity with written information concerning any Underwriter furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein. The foregoing indemnity agreement is in addition to any liability which the Company may otherwise have to any Underwriter or to any officer, employee or controlling person of that Underwriter; provided further, however, that the foregoing indemnity agreement with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the per- 20 son asserting such losses, claims, damages or liabilities purchased Shares, or any person controlling such Underwriter, if a copy of the Propspectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability. (b) Each Underwriter, severally and not jointly, shall indemnify and hold harmless the Company and its officers, directors and employees, and each person, if any, who controls the Company within the meaning of the Securities Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof, to which the Company or any of their officers, directors, employees or controlling persons may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus or in any amendment or supplement thereto or (ii) the omission or alleged omission to state in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any amendment or supplement thereto, any material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information concerning such Underwriter furnished to the Company through the Representatives by or on behalf of that Underwriter specifically for inclusion therein, and shall reimburse the Company and any of their officers, directors, employees or controlling person, for any legal or other expenses reasonably incurred by the Company or any of its officers, directors, employees or controlling person, in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred. The foregoing indemnity agreement is in addition to any liability which any Underwriter may otherwise have to the Company or any of its officers, directors, employees or controlling persons. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this Section 8 notify the indemnifying party in writing of the claim or the commencement of that action; provided, however, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have under this Section 8 except to the extent it has been materially prejudiced by such failure and, provided further, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under 21 this Section 8. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 8 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that the Representatives shall have the right to employ counsel to represent jointly the Representatives and those other Underwriters and their officers, directors, employees and controlling persons who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the Underwriters against the Company under this Section 8 if, in the reasonable judgment of the Representatives, it is advisable for the Representatives and those Underwriters, officers, directors, employees and controlling persons to be jointly represented by separate counsel, and in that event the fees and expenses of such separate counsel shall be paid by the Company. No indemnifying party shall (i) without the prior written consent of the indemnified parties (which consent shall not be unreasonably withheld), settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding, or (ii) be liable for any settlement of any such action effected without its written consent (which consent shall not be unreasonably withheld), but if settled with the consent of the indemnifying party or if there be a final judgment of the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss or liability by reason of such settlement or judgment. (d) If the indemnification provided for in this Section 8 shall for any reason be unavailable to or insufficient to hold harmless an indemnified party under Sections 8(a), 8(b) or 8(c) in respect of any loss, claim, damage or liability, or any action in respect thereof referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereto (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Underwriters on 22 the other with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other, with respect to such offering shall be deemed to be in the same proportion as the total net proceeds from the offering of the Shares purchased under this Agreement (before deducting expenses) received by the Company, on the one hand, and the total underwriting discounts and commissions received by the Underwriters with respect to the Shares purchased under this Agreement, on the other hand, bear to the total gross proceeds from the offering of the Shares under this Agreement, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8 were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 8 shall be deemed to include, for purposes of this Section 8(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8(d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public was offered to the public exceeds the amount of any damages which such Underwriter has otherwise paid or become liable to pay by reason of any untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute as provided it, this Section 10(d) are several in proportion to their respective underwriting obligations and not joint. (e) The Underwriters severally confirm and the Company acknowledges that the statements with respect to the public offering of the Shares by the Underwriters set forth on the cover page of the Prospectus and the information set forth in the first, second, third, fourth, fifth, ninth, tenth, twelfth, thirteenth, fourteenth, fifteenth, sixteenth, seventeenth and twentieth paragraphs under the caption "Underwriting" in the Prospectus are correct and constitute the only information concerning such Underwriters furnished in writing to the Company by or on behalf of 23 the Underwriters specifically for inclusion in the Registration Statement and the Prospectus. 9. Defaulting Underwriters. If, on either Delivery Date, any Underwriter defaults in the performance of its obligations under this Agreement, the remaining non-defaulting Underwriters shall be obligated to purchase the Shares which the defaulting Underwriter agreed but failed to purchase on such Delivery Date in the respective proportions which the number of the Firm Shares set opposite the name of each remaining non-defaulting Underwriter in Schedule 1 hereto bears to the total number of Firm Shares set opposite the names of all the remaining non-defaulting Underwriters in Schedule 1 hereto; provided, however, that the remaining non-defaulting Underwriters shall not be obligated to purchase any of the Shares on such Delivery Date if the total number of Shares which the defaulting Underwriter or Underwriters agreed but failed to purchase on such date exceeds 9.09% of the total number of Shares to be purchased on such Delivery Date, and any remaining non-defaulting Underwriter shall not be obligated to purchase more than 110% of the number of Shares which it agreed to purchase on such Delivery Date pursuant to the terms of Section 2. If the foregoing maximums are exceeded, the remaining non-defaulting Underwriters, or those other underwriters satisfactory to the Representatives who so agree, shall have the right, but shall not be obligated, to purchase, in such proportion as may be agreed upon among them, all the Shares to be purchased on such Delivery Date. If the remaining Underwriters or other underwriters satisfactory to the Representatives do not elect to purchase the Shares which the defaulting Underwriter or Underwriters agreed but failed to purchase on such Delivery Date, this Agreement (or, with respect to the Second Delivery Date, the obligation of the Underwriters to purchase, and of the Company to sell, the Option Shares) shall terminate without liability on the part of any non- defaulting Underwriter or the Company, except that the Company will continue to be liable for the payment of expenses to the extent set forth in Sections 6 and 11. As used in this Agreement, the term "Underwriter" includes, for all purposes of this Agreement unless the context requires otherwise, any party not listed in Schedule 1 hereto who, pursuant to this Section 9, purchases Firm Shares which a defaulting Underwriter agreed but failed to purchase. Nothing contained herein shall relieve a defaulting Underwriter of any liability it may have to the Company for damages caused by its default. If other underwriters are obligated or agree to purchase the Shares of a defaulting or withdrawing Underwriter, either the Representatives or the Company may postpone the Delivery Date for up to seven full business days in order to effect any changes that in the opinion of counsel for the Company or counsel for the Underwriters may be necessary in the Registration Statement, the Prospectus or in any other document or arrangement. 24 10. Termination. The obligations of the Underwriters hereunder may be terminated by the Representatives by notice given to and received by the Company prior to delivery of and payment for the Firm Shares if, prior to that time, any of the events described in Section 7(j) or 7(k), shall have occurred or if the Underwriters shall decline to purchase the Shares for any reason permitted under this Agreement. 11. Reimbursement of Underwriters' Expenses. If the Company shall fail to tender the Shares for delivery to the Underwriters by reason of any failure, refusal or inability on the part of the Company to perform any agreement on its part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled by the Company is not fulfilled, the Company, will reimburse the Underwriters for all reasonable out-of-pocket expenses (including fees and disbursements of counsel) incurred by the Underwriters in connection with this Agreement and the proposed purchase of the Shares, and upon demand the Company shall pay the full amount thereof to the Representatives. If this Agreement is terminated pursuant to Section 9 by reason of the default of one or more Underwriters, the Company shall not be obligated to reimburse any defaulting Underwriter on account of those expenses. 12. Notices, etc. All statements, requests, notices and agreements hereunder shall be in writing, and: (a) If to the Underwriters, shall be delivered or sent by mail, telex or facsimile transmission to Lehman Brothers Inc., Three World Financial Center, New York, New York 10285, Attention: Syndicate Department (Fax: 212-526-6588), with a copy, in the case of any notice pursuant to Section 8(c), to the Director of Litigation, Office of the General Counsel, Lehman Brothers Inc., 3 World Financial Center, 10th Floor, New York, NY 10285; (b) If to the Company, shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: Monica Eisinger with copies to Fulbright & Jaworski LLP, 666 Fifth Avenue, New York, NY 10103, Attention: Neil Gold and Goldfarb, Levy, Eran & Co., Eliahu House, 2 lbn Gvirol Street, Tel Aviv 64077, Israel, Attention: Yehuda M. Levy; and provided, however, that any notice to an Underwriter pursuant to Section 8(c) shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its acceptance telex to the Representatives, which address will be supplied to any other party hereto by the Representatives immediately upon request. Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof. The Company shall be entitled to act and rely upon any request, consent, notice or agreement given or made on behalf of the Underwriters by Lehman Brothers Inc. 25 13. Persons Entitled to Benefit of Agreement. This Agreement shall inure to the benefit of and be binding upon the Underwriters and the Company and its personal representatives and successors. This Agreement and the terms and provisions hereof are for the sole benefit of only those persons, except that (A) the representations, warranties, indemnities and agreements of the Company contained in this Agreement shall also be deemed to be for the benefit of the person or persons, if any, who control any Underwriter within the meaning of Section 15 of the Securities Act and (B) the representations and agreements and the indemnities of the Underwriters contained in Section 8 of this Agreement shall be deemed to be for the benefit of the officers, employees and directors of the Company and any person controlling the Company within the meaning of Section 15 of the Securities Act. Nothing in this Agreement is intended or shall be construed to give any person, other than the persons referred to in this Section 13, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. 14. Survival. The respective indemnities, representations, warranties and agreements of the Company and the Underwriters contained in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall survive the delivery of and payment for the Shares and shall remain in full force and effect regardless of any investigation made by or on behalf of any of them or any person controlling any of them. 15. Definition of the Terms "Business Day" and "Subsidiary." For purposes of this Agreement, (a) "business day" means each Monday, Tuesday, Wednesday, Thursday or Friday which is not a day on which banking institutions in New York are generally authorized or obligated by law or executive order to close and (b) "subsidiary" has the meaning set forth in Rule 405 of the Rules and Regulations. 16. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of New York applicable to agreements made and performed in the State of New York without regard to the conflict of laws provision. 17. Consent to Jurisdiction. Each party irrevocably agrees that any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby ("Related Proceedings") may be instituted in the federal courts of the United States of America located in the City of New York or the courts of the State of New York in each case located in the Borough of Manhattan in the City of New York (collectively, the "Specified Courts"), and irrevocably submits to the exclusive jurisdiction (except for proceedings instituted in regard to the enforcement of a judgment of any such court (a "Related Judgment"), as to which such jurisdiction is non-exclusive) of such courts in any such suit, action or proceeding. The parties further agree that service of any process, summons, notice or document by mail to such party's address set forth above shall be effective service of process for any lawsuit, action or other proceeding brought in any such court. The parties hereby irrevocably and unconditionally waive 26 any objection to the laying of venue of any lawsuit, action or other proceeding in the Specified Courts, and hereby further irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such lawsuit, action or other proceeding brought in any such court has been brought in an inconvenient forum. Each party not located in the United States hereby irrevocably appoints Mind C.T.I. Inc., which currently maintains an office at 333 Sylvan Avenue, Englewood Cliffs, NJ 07632, United States of America, as its agent to receive service of process or other legal summons for purposes of any such action or proceeding that may be instituted in any state or federal court in the City and State of New York. 18. Waiver of Immunity. With respect to any Related Proceeding, each party irrevocably waives, to the fullest extent permitted by applicable law, all immunity (whether on the basis of sovereignty or otherwise) from jurisdiction, service of process, attachment (both before and after judgment) and execution to which it might otherwise be entitled in the Specified Courts, and with respect to any related judgment of any Specified Court (a "Related Judgment"), each party waives any such immunity in the Specified Courts or any other court of competent jurisdiction, and will not raise or claim or cause to be pleaded any such immunity at or in respect of any such Related Proceeding or Related Judgment, including, without limitation, any immunity pursuant to the United States Foreign Sovereign Immunities Act of 1976, as amended. 19. Counterparts. This Agreement may be executed in one or more counterparts and, if executed in more than one counterpart, the executed counterparts shall each be deemed to be an original but all such counterparts shall together constitute one and the same instrument. 20. Headings. The headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement. 27 Accepted: Lehman Brothers, Inc., U.S. Bancorp Piper Jaffray Inc., CIBC World Markets Corp., Fidelity Capital Markets, a division of National Financial Services Corporation For themselves and as Representatives of the several Underwriters named in Schedule I hereto By: Lehman Brothers Inc. By:___________________________________ Authorized Representative If the foregoing correctly sets forth the agreement among the Company and the Underwriters, please indicate your acceptance in the space provided for that purpose below. Very truly yours, Mind C.T.I. Ltd. By: _______________________________________________________________ Title: SCHEDULE 1 Number of Underwriters Firm Shares ------------ ----------- Lehman Brothers Inc..................................... U.S. Bancorp Piper Jaffray Inc.......................... CIBC World Markets Corp................................. Fidelity Capital Markets, a division of National Financial Services Corporation....................................... ................................................. 4,200,000 EXHIBIT 1-A LOCK-UP LETTER AGREEMENT Principal Shareholders, Officers and Directors Lehman Brothers Inc. Cibc World Markets Corp U.s. Bancorp Piper Jaffray Inc. Fidelity Capital Markets, a division of National Financial Services Corporation As Representatives of the several underwriters c/o Lehman Brothers Inc. Three World Financial Center New York, NY 10285 Dear Sirs: The undersigned understands that you and certain other firms propose to enter into an Underwriting Agreement (the "Underwriting Agreement") providing for the purchase by you and such other firms (the "Underwriters") of ordinary shares (the "Shares"), par value NIS 0.01 per share (the "Ordinary Shares"), of Mind C.T.I. Ltd. (the "Company") and that the Underwriters propose to reoffer the Shares to the public (the "Offering"). In consideration of the execution of the Underwriting Agreement by the Underwriters, and for other good and valuable consideration, the undersigned hereby irrevocably agrees that, without the prior written consent of Lehman Brothers Inc., the undersigned will not, directly or indirectly, (1) offer for sale, sell, pledge, or otherwise dispose of (or enter into any transaction or device that is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any Ordinary Shares (including, without limitation, Ordinary Shares that may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the Securities and Exchange Commission and Ordinary Shares that may be issued upon exercise of any option or warrant) or securities convertible into or exchangeable for Ordinary Shares (other than the Shares) owned by the undersigned on the date of execution of this Lock-Up Letter Agreement or on the date of the completion of the Offering, or (2) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of such Ordinary Shares, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Ordinary Shares or other securities, in cash or otherwise, for a period of 180 days after the date of the final Prospectus relating to the Offering; provided that the undersigned 1 may transfer any ordinary shares to affiliates or relatives of the undersigned if the transferee has signed and delivered a copy of this letter to you. In furtherance of the foregoing, the Company and its Transfer Agent are hereby authorized to decline to make any transfer of securities if such transfer would constitute a violation or breach of this Lock-Up Letter Agreement. It is understood that, if the Company notifies you that it does not intend to proceed with the Offering, if the Underwriting Agreement does not become effective, or if the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the Shares, we will be released from our obligations under this Lock-Up Letter Agreement. The undersigned understands that the Company and the Underwriters will proceed with the Offering in reliance on this Lock-Up Letter Agreement. If the undersigned has registration rights, then, with respect to the Offering only, the undersigned waives any registration rights relating to any Ordinary Shares owned either of record or beneficially by the undersigned, including any rights to receive notice of the Offering, and agrees not to exercise demand registration rights for at least six months following the consummation of the Offering. The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Lock-Up Letter Agreement and that, upon request, the undersigned will execute any additional documents necessary in connection with the enforcement hereof. Any obligations of the undersigned shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Very truly yours, By: _________________________________ Name: Title: Dated: _______________ EXHIBIT 1-B LOCK-UP LETTER AGREEMENT 2 Directed Share Program Participants Lehman Brothers Inc. Cibc World Markets Corp U.s. Bancorp Piper Jaffray Inc. Fidelity Capital Markets, a division of National Financial Services Corporation As Representatives of the several underwriters c/o Lehman Brothers Inc. Three World Financial Center New York, NY 10285 Dear Sirs: The undersigned understands that you and certain other firms propose to enter into an Underwriting Agreement (the "Underwriting Agreement") providing for the purchase by you and such other firms (the "Underwriters") of ordinary shares (the "Shares"), par value NIS 0.01 per share (the "Ordinary Shares"), of Mind C.T.I. Ltd. (the "Company") and that the Underwriters propose to reoffer the Shares to the public (the "Offering"). In consideration of the execution of the Underwriting Agreement by the Underwriters, and for other good and valuable consideration, the undersigned hereby irrevocably agrees that, without the prior written consent of Lehman Brothers Inc., the undersigned will not, directly or indirectly, (1) offer for sale, sell, pledge, or otherwise dispose of (or enter into any transaction or device that is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any Ordinary Shares (including, without limitation, Ordinary Shares that may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the Securities and Exchange Commission and Ordinary Shares that may be issued upon exercise of any option or warrant) or securities convertible into or exchangeable for Ordinary Shares (other than the Shares) owned by the undersigned on the date of execution of this Lock-Up Letter Agreement or on the date of the completion of the Offering, or (2) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of such Ordinary Shares, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Ordinary Shares or other securities, in cash or otherwise, for a period of 30 days after the date of the final Prospectus relating to the Offering; provided that the undersigned may transfer any ordinary shares to affiliates or relatives of the undersigned if the transferee has signed and delivered a copy of this letter to you. 2 In furtherance of the foregoing, the Company and its Transfer Agent are hereby authorized to decline to make any transfer of securities if such transfer would constitute a violation or breach of this Lock-Up Letter Agreement. It is understood that, if the Company notifies you that it does not intend to proceed with the Offering, if the Underwriting Agreement does not become effective, if the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the Shares or if the undersigned does not purchase shares in the Offering, the undersigned will be released from all obligations under this Lock-Up Letter Agreement. The undersigned understands that the Company and the Underwriters will proceed with the Offering in reliance on this Lock-Up Letter Agreement however, this agreement does not obligate or commit the undersigned to purchase shares in the offering. If the undersigned has registration rights, then, with respect to the Offering only, the undersigned waives any registration rights relating to any Ordinary Shares owned either of record or beneficially by the undersigned, including any rights to receive notice of the Offering, and agrees not to exercise demand registration rights for at least six months following the consummation of the Offering. The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Lock-Up Letter Agreement and that, upon request, the undersigned will execute any additional documents necessary in connection with the enforcement hereof. Any obligations of the undersigned shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Very truly yours, By: _________________________________ Name: Dated: _______________ EXHIBIT 2 Opinion of Goldfarb, Levy, Eran & Co. Israeli counsel to the Company 1. The Company has been duly incorporated and is validly existing as a company under the laws of the State of Israel, is duly qualified to do business in Israel 3 and has all corporate power and authority necessary to own or hold its respective properties and conduct the businesses in which it is engaged as described in the Prospectus. 2. Ordinary Shares: (a) The Company has the authorized capitalization as set forth under the caption "Capitalization" in the Prospectus, and all of the issued shares of the Company outstanding prior to the issuance of the Shares, including all shares issued to directors of the Company, have been duly and validly authorized and issued, are fully paid and non- assessable and conform to the description thereof contained in the Prospectus and the share split, issuance of bonus shares, and conversion of all outstanding preferred shares have been duly and validly authorized and completed by the Company in accordance with its Articles of Association and all applicable Israeli corporate law. (b) The ordinary shares of the Company conform in all material respects to the description thereof contained in the Prospectus. The Shares are duly and validly authorized by the Company, and when the Shares are issued and delivered against payment therefor as contemplated by the Underwriting Agreement they will be outstanding, fully paid and non-assessable, and, to our knowledge, free and clear of all liens, encumbrances, preemptive rights and other claims. (c) No further approval or authority of the shareholders or the Board of Directors of the Company is required for the issuance and sale of the Shares. (d) There are no preemptive or other rights to subscribe for or to purchase, nor any restriction upon the voting or transfer of, any of the Shares pursuant to the Company's articles or memorandum of association or other governing documents or to the best of our knowledge, any agreement or other instrument to which the Company is a party or by which it may be bound. (e) The form of share certificates for the Shares, delivered on such Delivery Date, are in due and proper form under the Applicable Laws. (f) To the best of our knowledge, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Securities Act; and neither the filing of the Registration Statement, nor the offering or sale of the Shares as contemplated by the Underwriting Agreement gives rise to any rights 2 under the Applicable Laws for or relating to the registration of any Ordinary Shares or other securities of the Company. 3. The Transaction and the Underwriting Agreement: (a) The Company has full power and authority to enter into this Underwriting Agreement under applicable Israeli law, and the Underwriting Agreement has been duly authorized, executed and delivered by the Company. All corporate action required by the Applicable Laws, the articles of association and the memorandum of association of the Company, to be taken by the Company for the due and proper authorization, issuance, offering, sale and delivery of the Shares, has been validly and sufficiently taken. (b) The filing of the Registration Statement and the Prospectus with the Securities and Exchange Commission has been duly authorized by and on behalf of the Company and the Registration Statement has been duly executed pursuant to such authorization in accordance with the Applicable Laws. (c) The issuance, delivery and sale to the Underwriters of the Shares to be issued and sold by the Company to the Underwriters are not subject to any tax imposed on the Company by Governmental Authorities, except the Israeli stamp duty. (d) To the best of our knowledge, there are no legal or governmental proceedings pending or threatened to which the Company is a party or of which any property or assets of the Company is the subject, which seek to restrain, enjoin or prevent the execution and delivery of the Underwriting Agreement or the consummation of the transactions contemplated by the Underwriting Agreement. (e) Neither the execution and delivery of the Underwriting Agreement, nor the consummation of the transactions contemplated by the Underwriting Agreement, will conflict with or result in a material violation of or constitute a default under: (i) the Company's articles or memorandum of association, or (ii) any material agreement, indenture or other instrument known to us to which the Company is a party or by which it is bound, or to which any of its material properties is subject. (f) The performance by the Company of its obligations under the Underwriting Agreement will not violate the Applicable Laws where such violation will have a material adverse effect on the financial position, shareholders' equity, or the results of operations of the Company or the business of the Company as described in the Prospectus (collectively hereinafter, "Material Adverse Effect"). The statements in the Registration Statement and the Prospectus, insofar as statements 3 refer to the Company's articles or memorandum of association or resolutions of the shareholders and board of directors of the Company or to material contracts, indentures, mortgages, loan agreements, notes, leases, plans pertaining to option arrangements, employment agreements and other agreements, arrangements or instruments to which the Company is a party, are accurate and adequate in all material respects insofar as such statements refer to statements of the Applicable Laws or legal conclusions relating to matters of the Applicable Laws. (g) To the best of our knowledge, no Governmental Approval or consent of any financial institution is required in connection with the consummation of the transactions contemplated by the Underwriting Agreement, except for any of the foregoing that have been obtained and are in full force and effect. (h) Under the laws of Israel, the submission by the Company to the jurisdiction of any federal or state court sitting in the county of New York and the designation of the law of the State of New York to apply to the Underwriting Agreement is binding upon the Company and, if properly brought to the attention of the court in accordance with the laws of Israel, would be enforceable in any judicial proceedings in Israel subject to the exercise of judicial discretion or the existence of special circumstances or considerations, such as differences in the provision of the statutes of limitation in the two jurisdictions, or enforcement of such submission clause would be contrary to the interest of justice; (i) Subject to certain time limitations, Israeli courts may enforce final U.S. executory judgments for liquidated amounts in civil matters including judgments based upon the civil liability provisions of the Securities Act and the Exchange Act, provided that: (i) the judgments are obtained after due process before a court of competent jurisdiction (according to the rules of private international law currently prevailing in Israel) which recognizes and enforces Israeli judgments; (ii) adequate service of process has been effected and the defendant has had a reasonable opportunity to be heard; (iii) the judgments or the enforcement of the civil liabilities are not contrary to the law, public policy, security or sovereignty of the State of Israel; (iv) the judgments were not obtained by fraud and do not conflict with any other valid judgment in the same matter between the same parties; and (v) an action between the same parties in the same matter is not pending in any Israeli court at the time the lawsuit is instituted in the U.S. court. 4 4. The Affairs of the Company: (a) To the best of our knowledge, the Company does not own any real property, and the Company holds all personal property owned by it free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property or do not materially interfere with the use made and proposed to be made of such property by the Company; and all real property and buildings in Israel held under lease by the Company are held by it under valid, subsisting and enforceable leases, with such exceptions that would not have a Material Adverse Effect. (b) To the best of our knowledge, there are no legal or governmental proceedings pending or threatened to which the Company is a party or of which any property or assets of the Company is the subject, which if determined adversely to the Company, would have a Material Adverse Effect. (c) To the best of our knowledge, the Company is not in violation of its articles or memorandum of association. (d) To the best of our knowledge, the Company is not in violation in respect of any of the Applicable Laws to which it or its property or assets are subject or has failed to obtain or violated any Governmental Approvals necessary in the State of Israel to the ownership of its property or to the conduct of its business as described in the Prospectus, except for such defaults, violations or failures that, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. (e) To the best of our knowledge, the Company has not received any notice of proceedings relating to the revocation or modification of any such Governmental Approvals that, if determined adversely to the Company, would individually or in the aggregate have a Material Adverse Effect. (f) To the best of our knowledge, the Company has not received any notice that the conduct of its business conflicts with the intellectual property rights of third parties except for any conflict that would not have a Material Adverse Effect. To the best of our knowledge, the Company does not own patents or patent applications. (g) To the best of our knowledge, no Governmental Authority has asserted a tax deficiency against the Company and no Governmental Authority has given notice to the Company of a tax deficiency that would have a Material Adverse Effect. 5. The statements made in the Prospectus under the captions "Risk Factors," "Dividend Policy," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business," "Management," "Description of 5 Ordinary Shares," "Taxation and Government Programs," and "Enforceability of Civil Liabilities" to the extent that such statements constitute Israeli legal matters or relate to the provisions of the Company's articles and memorandum of association and share option plans therein described, have been reviewed by us and fairly reflect the matters purported to be summarized and are correct in all material respects. Representatives of our firm participated in conferences with officers and other representatives of the Company, representatives of the Selling Shareholders, representatives of the independent public accountants for the Company, representatives of the Underwriters and representatives of counsel for the Underwriters, at which conferences the contents of the Registration Statement and the Prospectus and related matters were discussed and, although we are not passing upon, and do not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus and have made no independent check or verification thereof (except to the extent expressly stated in paragraph 5 above) and we have relied as to materiality upon statements made by the officers and representatives of the Company and have made no independent check or verification thereof, on the basis of the foregoing, no facts have come to our attention that have led us to believe that the Registration Statement, at the time it became effective, contained an untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, as of its date and as of the date hereof, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except that we do not express any opinion or belief with respect to the financial statements and the notes thereto, pro forma financial information, schedules and other financial data included or excluded therefrom or the exhibits to the Registration Statement. 6 EXHIBIT 3 Fulbright & Jaworski LLP U.S. Counsel to the Company 1. No consent, approval, authorization or order of or qualification with any court, government or governmental agency of the United States having jurisdiction over the Company or any of its subsidiaries, or over any of their properties or operations is necessary in connection with the consummation by the Company of the transactions contemplated herein, except (i) where the failure to obtain such consent, approval, authorization, filing or order would not have a Material Adverse Effect on the Company, (ii) such as have been obtained or made under the Securities Act, (iii) such as may be required under U.S. state securities blue sky laws or securities laws of any foreign jurisdiction in connection with the purchase and distribution of the Shares by the Underwriters in the manner contemplated herein and in the Prospectus, and (iv) such as may be required by the National Association of Securities Dealers, Inc. 2. The statements set forth in the Prospectus under the caption "Taxation and Government Programs - United States Federal Income Tax Considerations," insofar as such statements constitute summaries of the legal matters referred to therein, fairly summarize the matters referred to therein in all material respects. 3. The Registration Statement, at the time it became effective, and the Prospectus, as of its date, complied as to form in all material respects with the requirements of the Act and the Rules and Regulations, except that, in each case, we express no opinion as to the financial statements, schedules and other financial data included therein or excluded therefrom, and, except to the extent expressly stated in paragraph 4 above, we do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or each Prospectus. 4. The Company is not, and will not become, as a result of the consummation of the transactions contemplated by this Agreement, and application of the net proceeds therefrom as described in the Prospectus, required to register as an investment company under the 1940 Act. 5. To our actual knowledge (but without making any independent investigation), there is no litigation or governmental proceeding pending in any state or federal court located in the County of New York, State of New York, to which the Company is a party or to which any property of the Company is subject, which seeks to restrain, enjoin or prevent the execution and delivery of the Underwriting Agreement or the consummation of the transactions contemplated thereby. Our opinion in this paragraph 8 is based solely on our discussions with the officers of the Company responsible for the matters discussed herein and our review of documents furnished to us 1 by the Company, and we have made no search of the public docket records of any court, governmental agency or body or administrative agency. In addition, such counsel shall state that they have participated in conferences with officers and other representatives of the Company, Israeli counsel for the Company, representatives of the independent accountants of the Company, representatives of the Underwriters and representatives of Israeli and United States counsel for the Underwriters, at which the contents of the Registration Statement and the Prospectus and related matters were discussed and, although such counsel need not pass upon, and need not assume any responsibility for, the accuracy, completeness or fairness of any statement contained in the Registration Statement or the Prospectus, has relied as to materiality to a large extent upon statements made by the officers and representatives of the Company and has made no independent check or verification thereof, such counsel shall state that on the basis of the foregoing, no facts have come to such counsel's attention that has led them to believe that the Registration Statement, as of the First Delivery Date or the Second Delivery Date contained an untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading or that the Prospectus, as of the First Delivery Date or the Second Delivery Date, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except that such counsel need express no belief with respect to the financial statements, financial statement schedules and other financial, accounting and statistical data included therein or excluded therefrom or the exhibits to the Registration Statement. 2 EX-3.1 3 0003.txt MEMORANDUM OF ASSOCIATION OF REGISTRANT Exhibit 3.1 [UNOFFICIAL CONVENIENCE TRANSLATION] [STAMP OF ISRAELI REGISTRAR OF COMPANIES] The Companies Ordinance (New Version) ------------------------------------- Memorandum of Association of a Company Limited by Shares -------------------------------------------------------- 1. Name of the Company: MIND C.T.I. LTD. 2. The aims for which incorporated: A. To engage in any kind of commercial business and/or productive business and/or business of providing services of any type or form. To engage in any action or endeavor which the Company's managers consider to be beneficial to the Company. B. To engage in all the branches of the economy, trade, finance, personal services, industry, textile, wood, food, chemicals, computers, medicine, office supplies, agriculture, electricity, research, art, metal-works, transportation, construction and tourism. C. To set up factories, shops and marketing chains so as to serve the aims of the Company. D. To engage in industry, to market, sell and trade, import and export any product. To engage in market research, advertising, filing of patents and designs. E. To engage in any matter so as to further the aims of the Company, to engage in general brokering and manage financing for the benefit of the aims of the Company. F. To change the name of the Company in accordance with the needs of the owners and the aims of the Company's business. 3. The liability of the members of the Company is limited. 4. The share capital of the Company is NIS 27,100 divided into 27,100 ordinary shares of NIS 1.00 each. We the undersigned wish to be incorporated as a company in accordance with this Memorandum of Association and agree to each take the number of shares of the share capital as set forth next to our names.
Name of Member: I.D. Number: Address: No. of Shares: Signature: - --------------- ------------ -------- -------------- ---------- Monica Eisinger 1664162 Mitzpeh Hoshaaya 50 ordinary shs. /s/ M. Eisinger Lior Salansky 5888825 Leiv Yafeh 30 50 ordinary shs. /s/ Lior Salansky Jerusalem
6.4.95 Witnessed by: /s/ Avikam David Avikam David - CPA Memorandum of Association - Amendment - ------------------------------------- Section 4 to the Memorandum of Association was replaced in its entirety with the following wording: "The share capital of the Company is NIS 880,000 divided into 77,222,220 Ordinary Voting Shares of a nominal value of NIS 0.01 each (the "Ordinary Voting Shares"), 8,000,000 Ordinary Non-Voting Shares of a nominal value of NIS 0.01 each (the "Ordinary Non-Voting Shares"), 2,222,220 Preferred A Shares of a nominal value of NIS 0.01 each (the "Preferred A Shares") and 555,560 Preferred B Shares of a nominal value of NIS 0.01 each (the "Preferred B Shares"). The rights attached to the shares shall be specified in the Articles of Association of the Company." Memorandum of Association - Amendment effective as of IPO Closing Date - ---------------------------------------------------------------------- Section 4 to the amended Memorandum of Association will be replaced in its entirety with the following wording: "The share capital of the Company is NIS 880,000 divided into 88,000,000 Ordinary Shares of a nominal value of NIS 0.01 each (the "Ordinary Shares"), of which at the beginning 80,000,000 shares shall be Ordinary Voting Shares of a nominal value of NIS 0.01 each (the "Ordinary Voting Shares") and 8,000,000 shares shall be Ordinary Non-Voting Shares of a nominal value of NIS 0.01 each (the "Ordinary Non-Voting Shares"). The rights attached to the shares shall be specified in the Articles of Association of the Company." EX-3.2 4 0004.txt FORM OF ARTICLES OF ASSOCIATION OF REGISTRANT EXHIBIT 3.2 THE COMPANIES LAW, 5759 - 1999 ------------------------------ A COMPANY LIMITED BY SHARES --------------------------- AMENDED AND RESTATED ARTICLES OF ASSOCIATION OF MIND C.T.I. LTD. ____________________ GENERAL PROVISIONS 1. Object and Purpose of the Company --------------------------------- The object and purpose of the Company shall be as set forth in the Company's Memorandum of Association, as the same shall be amended from time to time in accordance with applicable law. 2. Limitation of Liability ----------------------- The liability of the shareholders is limited to the payment of the nominal value of the shares in the Company allotted to them and which remains unpaid, and only to that amount. If the Company's share capital shall include at any time shares without a nominal value, the shareholders' liability in respect of such shares shall be limited to the payment of up to NIS 0.01 for each such share allotted to them and which remains unpaid, and only to that amount. 3. Interpretation -------------- (a) Unless the subject or the context otherwise requires: words and expressions defined in the Companies Law, 5759-1999 (the "Companies Law"), and in those sections of the Companies Ordinance [New Version], 5743-1983 that are still in force (with respect to such sections), in force on the date when these Articles or any amendment thereto, as the case may be, first became effective shall have the same meanings herein; words and expressions importing the singular shall include the plural and vice versa; words and expressions importing the masculine gender shall include the feminine gender; and words and expressions importing persons shall include bodies corporate. (b) The captions in these Articles are for convenience only and shall not be deemed a part hereof or affect the construction of any provision hereof. SHARE CAPITAL 4. Share Capital ------------- (a) The share capital of the Company shall be eight hundred eighty thousand New Israeli Shekels (NIS 880,000) divided into eighty-eight million (88,000,000) ordinary shares of a nominal value of one Agora (NIS 0.01) each, of which eighty million (80,000,000) initially shall be designated "Ordinary Shares" and eight million (8,000,000) initially shall be shall be designated "Non-Voting Ordinary Shares." (b) Rights of Ordinary Shares. The Ordinary Shares confer upon the holders ------------------------- thereof all rights accruing to a shareholder of the Company, as provided in these Articles, including, inter alia, the right to receive notices of, and to attend, meetings of the shareholders; for each share held - the right to one vote at all shareholders' meetings for all purposes, and to share equally, on a per share basis, in such dividends as may be declared by the Board of Directors in accordance with the terms of these Articles and the Companies Law, and upon liquidation or dissolution - in the assets of the Company legally available for distribution to shareholders after payment of all debts and other liabilities of the Company, in accordance with the terms of these Articles and applicable law. All Ordinary Shares rank pari passu in all respects with each other. (c) Rights of Non-Voting Ordinary Shares. The Non-Voting Ordinary Shares ------------------------------------ shall have rights equal to the Ordinary Shares, except that the holders of the Non-Voting Ordinary Shares shall not be entitled to receive notices of, and to attend, shareholder meetings of the shareholders and shall not be entitled to any voting rights at meetings of the shareholders, except as provided by applicable law. If the Company shall subdivide (by share split, bonus shares or otherwise) or combine (by reverse share split or otherwise) the Ordinary Shares, the Non-Voting Ordinary Shares shall be subdivided or combined, as the case may be, to the same extent. (d) Conversion Right of the Non-Voting Ordinary Shares. At the option of -------------------------------------------------- the holder of any Non-Voting Ordinary Shares, any Non-Voting Ordinary Shares held by such holder may be converted into an equal number of fully-paid and non- assessable Ordinary Shares, except to the extent that, after giving effect to the conversion of all the Non-Voting Ordinary Shares proposed by a holder to be so converted, such holder and its affiliates would own ten percent (10%) or more of the outstanding voting shares of the Company. The term "affiliate" when used in respect to any person shall mean a person controlled by, controlling or under common control with, such person. (e) Exercise of Conversion Right. To exercise its conversion right, a ---------------------------- holder of Non-Voting Ordinary Shares shall surrender the certificate or certificates representing the shares being converted to the Company at its principal office, and shall give written notice to the Company at that office that such holder elects to convert such shares. Such notice shall also state the name or names (with address or addresses) in which the certificate or certificates for Ordinary Shares shall be issued. The certificate or certificates for Non-Voting Ordinary Shares surrendered for conversion shall be accompanied by proper assignment thereof to the Company or in blank. The date when such written notice is received by the Company, together with the certificate or certificates representing the Non-Voting Ordinary Shares being converted, shall be the "Conversion Date." As promptly as practicable after the Conversion Date, the Company shall issue and shall deliver to the holder of the Non-Voting Ordinary Shares being converted, or on its written order, such certificate or certificates as it may request for the number of Ordinary Shares into which such Non-Voting Ordinary Shares shall have been converted in accordance with the provisions of this Article 4. Such conversion shall be deemed to have been effected immediately prior to the close of business on the Conversion Date, and at such time the rights of the holder as holder of the converted Non-Voting Ordinary Shares shall cease and the person or persons in whose name or names any certificate or certificates for Ordinary Shares shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the Ordinary Shares represented thereby. For the avoidance of doubt, upon conversion of any Non-Voting Ordinary Shares into Ordinary Shares pursuant to this Article 4, such Non-Voting Ordinary Shares in the Company's registered share capital shall be deemed to have been converted into an equivalent number of Ordinary Shares without the issuance by the Company of Ordinary Shares. (f) Automatic Conversion of Non-Voting Ordinary Shares. Upon transfer of -------------------------------------------------- any Non-Voting Ordinary Shares to a non-affiliate, such Non-Voting Ordinary Shares shall automatically be converted into an equal number of fully-paid and non-assessable Ordinary Shares, except to the extent that, after giving effect to the conversion of all the Ordinary Shares so transferred, the transferee and its affiliates would own ten percent (10%) or more of the outstanding voting shares of the Company. (g) Procedure upon Automatic Conversion. As promptly as practicable ----------------------------------- following such transfer, the certificate or certificates representing such shares shall be surrendered to the Company at its principal office, along with notice of the transfer of such shares. Such notice shall also state the name or names (with address or addresses) in which the certificate or certificates for Ordinary Shares shall be issued. The certificate or certificates for Non-Voting Ordinary Shares surrendered for conversion shall be accompanied by proper assignment thereof reflecting such transfer. The date of such transfer shall be the "Conversion Date." As promptly as practicable after receipt of such notice of transfer, the Company shall issue and shall deliver to the transferee, or on its written order, such certificate or certificates as it may request for the number of Ordinary Shares into which such Non-Voting Ordinary Shares shall have been converted in accordance with the provisions of this Article 4. Such conversion shall be deemed to have been effected immediately prior to the close of business on the Conversion Date, and at such time the rights of the holder as holder of the converted Non-Voting Ordinary Shares shall cease and the person or persons in whose name or names any certificate or certificates for Ordinary Shares shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the Ordinary Shares represented thereby. For the avoidance of doubt, upon conversion of any Non-Voting Ordinary Shares into Ordinary Shares pursuant to this Article 4, such Non-Voting Ordinary Shares in the Company's registered share capital shall be deemed to have been converted into an equivalent number of Ordinary Shares without the issuance by the Company of Ordinary Shares. 5. Increase of Share Capital ------------------------- (a) The Company may, from time to time, by resolution of the shareholders ("Shareholders Resolution"), whether or not all the shares then authorized have been issued, and whether or not all the shares theretofore issued have been called up for payment, increase its share capital by the creation of new shares. Any such increase shall be in such amount and shall be divided into shares of such nominal amounts, and such shares shall confer such rights and preferences, and shall be subject to such restrictions, as such resolution shall provide. (b) Except to the extent otherwise provided in such resolution, such new shares shall be subject to all the provisions applicable to the shares of the original capital. 6. Special Rights; Modifications of Rights --------------------------------------- (a) Without prejudice to any special rights previously conferred upon the holders of existing shares in the Company, the Company may, from time to time, by Shareholders Resolution, provide for shares with such preferred or deferred rights or rights of redemption or other special rights and/or such restrictions, whether in regard to dividends, voting, repayment of share capital or otherwise, as may be stipulated in such resolution. (b) (i) If at any time the share capital is divided into different classes of shares, the rights attached to any class, unless otherwise provided by these Articles, may be modified or abrogated by the Company, by Shareholders Resolution, subject to the sanction of a resolution passed by the holders of a majority of the shares of such class by written consent or at a separate General Meeting of the holders of the shares of such class. (ii) The provisions of these Articles relating to General Meetings shall, mutatis mutandis, apply to any separate General Meeting of the holders of the shares of a particular class. (iii) Unless otherwise provided by these Articles, the enlargement of an existing class of shares, or the issuance of additional shares thereof, shall not be deemed, for purposes of this Article 6(b), to modify or abrogate the rights attached to the previously issued shares of such class or of any other class. 7. Consolidation, Subdivision, Cancellation and Reduction of Share Capital ----------------------------------------------------------------------- (a) The Company may, from time to time, by Shareholders Resolution (subject, however, to the provisions of Article 6(b) hereof and to applicable law): (i) consolidate and divide all or any of its issued or unissued share capital into shares of larger nominal value than its existing shares, (ii) subdivide its shares (issued or unissued) or any of them, into shares of smaller nominal value than is fixed by these Articles of Association (subject, however, to the provisions of the Companies Law), and the Shareholders Resolution whereby any share is subdivided may determine that, as among the holders of the shares resulting from such subdivision, one or more of the shares may, as compared with the others, have any such preferred or deferred rights or rights of redemption or other special rights, or be subject to any such restrictions, as the Company has power to attach to unissued or new shares. (iii) cancel any shares which, at the date of the adoption of such resolution, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so canceled, or (iv) reduce its share capital in any manner, and with and subject to any incident authorized, and consent required, by law. (b) With respect to any consolidation of issued shares into shares of larger nominal value, and with respect to any other action which may result in fractional shares, the Board of Directors may settle any difficulty which may arise with regard thereto, as it deems fit, including, inter alia, resort to one ---------- or more of the following actions: (i) determine, as to the holder of shares so consolidated, which issued shares shall be consolidated into each share of larger nominal value; (ii) allot, in contemplation of or subsequent to such consolidation or other action, such shares or fractional shares sufficient to preclude or remove fractional share holdings; (iii) redeem, in the case of redeemable preference shares, and subject to applicable law, such shares or fractional shares sufficient to preclude or remove fractional share holdings; (iv) cause the transfer of fractional shares by certain shareholders of the Company to other shareholders thereof so as to most expediently preclude or remove any fractional shareholdings, and cause the transferees to pay the transferors the fair value of fractional shares so transferred, and the Board of Directors is hereby authorized to act as agent for the transferors and transferees with power of substitution for purposes of implementing the provisions of this sub-Article 7(b)(iv). SHARES 8. Issuance of Share Certificates; Replacement of Lost Certificates ---------------------------------------------------------------- (a) Share certificates shall be issued under the seal or stamp of the Company and shall bear the signatures of the Company's chief executive officer and chief financial officer, or of any other person or persons authorized thereto by the Board of Directors. (b) Each shareholder shall be entitled to one numbered certificate for all the shares of any class registered in his name, and if reasonably requested by such shareholder, to several certificates, each for one or more of such shares. (c) A share certificate registered in the names of two or more persons shall be delivered to the person first named in the Registrar of Shareholders in respect of such co-ownership. (d) If a share certificate is defaced, lost or destroyed, it may be replaced, upon payment of such fee, and upon the furnishing of such evidence of ownership and such indemnity, as the Board of Directors may think fit. (e) The Company may issue bearer shares. 9. Registered Holder ----------------- Except as otherwise provided in these Articles, the Company shall be entitled to treat the registered holder of any share as the absolute owner thereof, and, accordingly, shall not, except as ordered by a court of competent jurisdiction, or as required by statute, be bound to recognize any equitable or other claim to, or interest in such share on the part of any other person. 10. Allotment of Shares ------------------- The unissued shares from time to time shall be under the control of the Board of Directors, who shall have the power to allot shares or otherwise dispose of them to such persons, on such terms and conditions (including inter alia terms relating to calls as set forth in Article 12(f) hereof), and either at par or at a premium, or, subject to the provisions of the Companies Law, at a discount, and at such times, as the Board of Directors may think fit, and the power to give to any person the option to acquire from the Company any shares, either at par or at a premium, or, subject as aforesaid, at a discount, during such time and for such consideration as the Board of Directors may think fit. 11. Payment in Installments ----------------------- If by the terms of allotment of any share, the whole or any part of the price thereof shall be payable in installments, every such installment shall, when due, be paid to the Company by the then registered holder(s) of the share of the person(s) entitled thereto. 12. Calls on Shares --------------- (a) The Board of Directors may, from time to time, make such calls as it may think fit upon shareholders in respect of any sum unpaid in respect of shares held by such shareholders which is not, by the terms of allotment thereof or otherwise, payable at a fixed time, and each shareholder shall pay the amount of every call so made upon him (and of each installment thereof if the same is payable in installments), to the person(s) and at the time(s) and place(s) designated by the Board of Directors, as any such time(s) may be thereafter extended and/or such person(s) or place(s) changed. Unless otherwise stipulated in the resolution of the Board of Directors (and in the notice hereafter referred to), each payment in response to a call shall be deemed to constitute a pro rata payment on account of all shares in respect of which such call was made. (b) Notice of any call shall be given in writing to the shareholder(s) in question not less than fourteen (14) days prior to the time of payment, specifying the time and place of payment, and designating the person to whom such payment shall be made, provided, however, that before the time for any such payment, the Board of Directors may, by notice in writing to such shareholder(s), revoke such call in whole or in part, extend such time, or alter such person and/or place. In the event of a call payable in installments, only one notice thereof need be given. (c) If, by the terms of allotment of any share or otherwise, any amount is made payable at any fixed time, every such amount shall be payable at such time as if it were a call duly made by the Board of Directors and of which due notice had been given, and all the provisions herein contained with respect to such calls shall apply to each such amount. (d) The joint holders of a share shall be jointly and severally liable to pay all calls in respect thereof and all interest payable thereon. (e) Any amount unpaid in respect of a call shall bear interest from the date on which it is payable until actual payment thereof, at such rate (not exceeding the then prevailing debitory rate charged by leading commercial banks in Israel), and at such time(s) as the Board of Directors may prescribe. (f) Upon the allotment of shares, the Board of Directors may provide for differences among the allottees of such shares as to the amount of calls and/or the times of payment thereof. 13. Prepayment ---------- With the approval of the Board of Directors, any shareholder may pay to the Company any amount not yet payable in respect of his shares, and the Board of Directors may approve the payment of interest on any such amount until the same would be payable if it had not been paid in advance, at such rate and time(s) as may be approved by the Board of Directors. The Board of Directors may at any time cause the Company to repay all or any part of the money so advanced, without premium or penalty. Nothing in this Article 13 shall derogate from the right of the Board of Directors to make any call before or after receipt by the Company of any such advance. 14. Forfeiture and Surrender ------------------------ (a) If any shareholder fails to pay any amount payable in respect of a call, or interest thereon as provided for herein, on or before the day fixed for payment of the same, the Company, by resolution of the Board of Directors, may at any time thereafter, so long as the said amount or interest remains unpaid, forfeit all or any of the shares in respect of which said call had been made. Any expense incurred by the Company in attempting to collect any such amount or interest, including, inter alia, attorneys' fees and costs of suit, shall be added to, and shall, for all purposes (including the accrual of interest thereon), constitute a part of the amount payable to the Company in respect of such call. (b) Upon the adoption of a resolution of forfeiture, the Board of Directors shall cause notice thereof to be given to such shareholder, which notice shall state that, in the event of the failure to pay the entire amount so payable within a period stipulated in the notice (which period shall not be less than fourteen (14) days and which may be extended by the Board of Directors), such shares shall be ipso facto forfeited, provided, however, that, prior to the expiration of such period, the Board of Directors may nullify such resolution of forfeiture, but no such nullification shall estop the Board of Directors from adopting a further resolution of forfeiture in respect of the non-payment of the same amount. (c) Whenever shares are forfeited as herein provided, all dividends theretofore declared in respect thereof and not actually paid shall be deemed to have been forfeited at the same time. (d) The Company, by resolution of the Board of Directors, may accept the voluntary surrender of any share. (e) Any share forfeited or surrendered as provided herein shall become the property of the Company, and the same, subject to the provisions of these Articles, may be sold, re-allotted or otherwise disposed of as the Board of Directors thinks fit. (f) Any shareholder whose shares have been forfeited or surrendered shall cease to be a shareholder in respect of the forfeited or surrendered shares, but shall, notwithstanding, be liable to pay, and shall forthwith pay, to the Company, all calls, interest and expenses owing upon or in respect of such shares at the time of forfeiture or surrender, together with interest thereon from the time of forfeiture or surrender until actual payment, at the rate prescribed in Article 12(e) above, and the Board of Directors, in its discretion, may enforce the payment of such moneys, or any part thereof, but shall not be under any obligation to do so. In the event of such forfeiture or surrender, the Company, by resolution of the Board of Directors, may accelerate the date(s) of payment of any or all amounts then owing by the shareholder in question (but not yet due) in respect of all shares owned by such shareholder, solely or jointly with another, and in respect of any other matter or transaction whatsoever. (g) The Board of Directors may at any time, before any share so forfeited or surrendered shall have been sold, re-allotted or otherwise disposed of, nullify the forfeiture or surrender on such conditions as it thinks fit, but no such nullification shall estop the Board of Directors from re-exercising its powers of forfeiture pursuant to this Article 14. 15. Lien ---- (a) Except to the extent the same may be waived or subordinated in writing, the Company shall have a first and paramount lien upon all the shares registered in the name of each shareholder (without regard to any equitable or other claim or interest in such shares on the part of any other person), and upon the proceeds of the sale thereof, for his debts, liabilities and engagements arising from any cause whatsoever, solely or jointly with another, to or with the Company, whether the period for the payment, fulfillment or discharge thereof shall have actually arrived or not. Such lien shall extend to all dividends from time to time declared in respect of such share. Unless otherwise provided, the registration by the Company of a transfer of shares shall be deemed to be a waiver on the part of the Company of the lien (if any) existing on such shares immediately prior to such transfer. (b) The Board of Directors may cause the Company to sell any shares subject to such lien when any such debt, liability or engagement has matured, in such manner as the Board of Directors may think fit, but no such sale shall be made unless such debt, liability or engagement has not been satisfied within seven (7) days after written notice of the intention to sell shall have been served on such shareholder, his executors or administrators. (c) The net proceeds of any such sale, after payment of the costs thereof, shall be applied in or toward satisfaction of the debts, liabilities or engagements of such shareholder (whether or not the same have matured), or any specific part of the same (as the Company may determine), and the residue (if any) shall be paid to the shareholder, his executors, administrators or assigns. 16. Sale after Forfeiture or Surrender or in Enforcement of Lien ------------------------------------------------------------ Upon any sale of shares after forfeiture or surrender or for enforcing a lien, the Board of Directors may appoint some person to execute an instrument of transfer of the shares so sold and cause the purchaser's name to be entered in the Register of Shareholders in respect of such shares, and the purchaser shall not be bound to see to the regularity of the proceedings, or to the application of the purchase money, and after his name has been entered in the Register of Shareholders in respect of such shares, the validity of the sale shall not be impeached by any person, and the remedy of any person aggrieved by the sale shall be in damages only and against the Company exclusively. 17. Redeemable Shares ----------------- The Company may, subject to applicable law, issue redeemable shares and redeem the same. 18. [reserved] TRANSFER OF SHARES 19. Effectiveness and Registration ------------------------------ (a) No transfer of shares shall be registered unless a proper instrument of transfer (in form and substance satisfactory to the Board of Directors) has been submitted to the Company or its agent, together with any share certificate(s) and such other evidence of title as the Board of Directors may reasonably require. Until the transferee has been registered in the Register of Shareholders in respect of the shares so transferred, the Company may continue to regard the transferor as the owner thereof. The Board of Directors, may, from time to time, prescribe a fee for the registration of a transfer. (b) The Board of Directors may, in its discretion and to the extent that it deems necessary, close the Register of Shareholders for the registration of transfer of shares for such periods as may be determined by the Board of Directors, and no transfers of shares shall be registered during any period in which the Register of Shareholders is so closed. 20. Record Date for General Meetings -------------------------------- Notwithstanding any provision to the contrary in these Articles, for the determination of the shareholders entitled to receive notice of and to participate in and vote at a General Meeting, or to express consent to or dissent from any corporate action in writing, or to receive payment of any dividend or other distribution or allotment of any rights or to exercise any rights in respect of shares of the Company, the Board of Directors may fix, in advance, a record date, which, subject to applicable law, shall not be earlier than ninety (90) days prior to the General Meeting or other action, as the case may be. No persons other than holders of record of shares as of such record date shall be entitled to notice of and to participate in and vote at such General Meeting, or to exercise such other right or receive such other benefit, as the case may be. A determination of shareholders of record with respect to a General Meeting shall apply to any adjournment of such meeting, provided that the Board of Directors may fix a new record date for an adjourned meeting. TRANSMISSION OF SHARES 21. Decedents' Shares ----------------- (a) In case of a share registered in the names of two or more holders, the Company may recognize the survivor(s) as the sole owner(s) thereof unless and until the provisions of Article 21(b) have been effectively invoked. (b) Any person becoming entitled to a share in consequence of the death of any person, upon producing evidence of the grant of probate or letters of administration or declaration of succession (or such other evidence as the Board of Directors may reasonably deem sufficient that he sustains the character in respect of which he proposes to act under this Article or of his title), shall be registered as a shareholder in respect of such share, or may, subject to the regulations as to transfer herein contained, transfer such share. 22. Receivers and Liquidators ------------------------- (a) The Company may recognize the receiver or liquidator of any corporate shareholder in winding-up or dissolution, or the receiver or trustee in bankruptcy of any shareholder, as being entitled to the shares registered in the name of such shareholder. (b) The receiver or liquidator of a corporate shareholder in winding-up or dissolution, or the receiver or trustee in bankruptcy of any shareholder, upon producing such evidence as the Board of Directors may deem sufficient that he sustains the character in respect of which he proposes to act under this Article or of his title, shall with the consent of the Board of Directors (which the Board of Directors may grant or refuse in its absolute discretion), be registered as a shareholder in respect of such shares, or may, subject to the regulations as to transfer herein contained, transfer such shares. GENERAL MEETINGS 23. Annual General Meeting ---------------------- An Annual General Meeting shall be held once in every calendar year at such time (within a period of not more than fifteen (15) months after the last preceding Annual General Meeting) and at such place either within or without the State of Israel as may be determined by the Board of Directors. 24. Extraordinary General Meetings ------------------------------ All General Meetings other than Annual General Meetings shall be called "Extraordinary General Meetings." The Board of Directors may, whenever it thinks fit, convene an Extraordinary General Meeting at such time and place, within or without the State of Israel, as may be determined by the Board of Directors, and shall be obliged to do so upon a requisition in writing in accordance with Sections 63(b)(1) or (2) of the Companies Law. 25. Notice of General Meetings -------------------------- The Company is not required to give notice under Section 69(b) of the Companies Law. PROCEEDINGS AT GENERAL MEETINGS 26. Quorum ------ (a) Two or more shareholders (not in default in payment of any sum referred to in Article 32(a) hereof), present in person or by proxy and holding shares conferring in the aggregate at least twenty-five percent (25%) of the voting power of the Company (subject to rules and regulations, if any, applicable to the Company), shall constitute a quorum at General Meetings. No business shall be transacted at a General Meeting, or at any adjournment thereof, unless the requisite quorum is present when the meeting proceeds to business. (b) If within an hour from the time appointed for the meeting a quorum is not present, the meeting, if convened upon requisition under Sections 63(b)(1) or (2), 64 or 65 of the Companies Law, shall be dissolved, but in any other case it shall stand adjourned to the same day in the next week, at the same time and place, or to such day and at such time and place as the Chairman may determine with the consent of the holders of a majority of the voting power represented at the meeting in person or by proxy and voting on the question of adjournment. No business shall be transacted at any adjourned meeting except business which might lawfully have been transacted at the meeting as originally called. At such adjourned meeting, any two (2) shareholders (not in default as aforesaid) present in person or by proxy, shall constitute a quorum (subject to rules and regulations, if any, applicable to the Company). (c) The Board of Directors may determine, in its discretion, the matters that may be voted upon at the meeting by proxy in addition to the matters listed in Section 87(a) to the Companies Law. 27. Chairman -------- The Chairman, if any, of the Board of Directors shall preside as Chairman at every General Meeting of the Company. If there is no such Chairman, or if at any meeting he is not present within fifteen (15) minutes after the time fixed for holding the meeting or is unwilling to act as Chairman, the shareholders present shall choose someone of their number to be Chairman. The office of Chairman shall not, by itself, entitle the holder thereof to vote at any General Meeting nor shall it entitle such holder to a second or casting vote (without derogating, however, from the rights of such Chairman to vote as a shareholder or proxy of a shareholder if, in fact, he is also a shareholder or such proxy). 28. Adoption of Resolutions at General Meetings ------------------------------------------- (a) Unless other provided herein, a Shareholders Resolution shall be deemed adopted if approved by the holders of a majority of the voting power represented at the meeting in person or by proxy and voting thereon. (b) A Shareholders Resolution approving a merger (as defined in the Companies Law) of the Company shall be deemed adopted if approved by the holders of a majority of the voting power represented at the meeting in person or by proxy and voting thereon. (c) Every question submitted to a General Meeting shall be decided by a show of hands, but if a written ballot is demanded by any shareholder present in person or by proxy and entitled to vote at the meeting, the same shall be decided by such ballot. A written ballot may be demanded before the proposed resolution is voted upon or immediately after the declaration by the Chairman of the results of the vote by a show of hands. If a vote by written ballot is taken after such declaration, the results of the vote by a show of hands shall be of no effect, and the proposed resolution shall be decided by such written ballot. The demand for a written ballot may be withdrawn at any time before the same is conducted, in which event another shareholder may then demand such written ballot. The demand for a written ballot shall not prevent the continuance of the meeting for the transaction of business other than the question on which the written ballot has been demanded. (d) A declaration by the Chairman of the meeting that a resolution has been carried unanimously, or carried by a particular majority, or lost, and an entry to that effect in the minute book of the Company, shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favor of or against such resolution. 29. Resolutions in Writing ---------------------- A resolution in writing signed by all shareholders of the Company then entitled to attend and vote at General Meetings or to which all such shareholders have given their written consent (by letter, facsimile [telecopier], telegram, telex or otherwise), or their oral consent by telephone (provided that a written summary thereof has been approved and signed by the Chairman of the Board of Directors of the Company) shall be deemed to have been unanimously adopted by a General Meeting duly convened and held. 30. Power to Adjourn ---------------- (a) The Chairman of a General Meeting at which a quorum is present may, with the consent of the holders of a majority of the voting power represented in person or by proxy and voting on the question of adjournment (and shall if so directed by the meeting), adjourn the meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting except business which might lawfully have been transacted at the meeting as originally called. (b) It shall not be necessary to give any notice of an adjournment, whether pursuant to Article 26(b) or Article 30(a), unless the meeting is adjourned for thirty (30) days or more in which event notice thereof shall be given in the manner required for the meeting as originally called. 31. Voting Power ------------ Subject to the provisions of Article 32(a) and subject to any provision hereof conferring special rights as to voting, or restricting the right to vote, every shareholder shall have one vote for each share held by him of record, on every resolution, without regard to whether the vote hereon is conducted by a show of hands, by written ballot or by any other means. 32. Voting Rights ------------- (a) No shareholder shall be entitled to vote at any General Meeting (or be counted as a part of the quorum thereat), unless all calls and other sums then payable by him in respect of his shares in the Company have been paid, but this Article shall not apply to separate General Meetings of the holders of a particular class of shares pursuant to Article 6(b). (b) A company or other corporate body being a shareholder of the Company may, by resolution of its directors or any other managing body thereof, authorize any person to be its representative at any meeting of the Company. Any person so authorized shall be entitled to exercise on behalf of such shareholder all the power which the latter could have exercised if it were an individual shareholder. Upon the request of the Chairman of the meeting, written evidence of such authorization (in form acceptable to the Chairman) shall be delivered to him prior to the conclusion of the meeting. (c) Any shareholder entitled to vote may vote either personally or by proxy (who need not be a shareholder of the Company), or, if the shareholder is a company or other corporate body, by a representative authorized pursuant to Article 32(b). (d) If two or more persons are registered as joint holders of any share, the vote of the senior who tenders a vote, in person or by proxy, shall be accepted to the exclusion of the vote(s) of the other joint holder(s); and for this purpose seniority shall be determined by the order in which the names stand in the Register of Shareholders. PROXIES 33. Instrument of Appointment ------------------------- (a) The instrument appointing a proxy shall be in writing and shall be substantially in the following form: "I _____________________ of __________________________________ (Name of Shareholder) (Address of Shareholder) being a shareholder of ___________________________ hereby appoint (Name of the Company) ________________________of _____________________________ (Name of Proxy) (Address of Proxy) as my proxy to vote for me and on my behalf at the General Meeting of the Company to be held on the _____ day of ___________, 19__ and at any adjournment(s) thereof. Signed this ______ day of ____________, 19__. _________________________ (Signature of Appointer)" or in any usual or common form or in such other form as may be approved by the Board of Directors. It shall be duly signed by the appointer or his duly authorized attorney or, if such appointer is a company or other corporate body, under its common seal or stamp or the hand of its duly authorized agent(s) or attorney(s). Upon the request of the Company, written evidence of such authorization (in form acceptable to the Company) shall be delivered to the Company prior to the conclusion of the meeting. (b) The instrument appointing a proxy (and the power of attorney or other authority, if any, under which such instrument has been signed) shall either be delivered to the Company (at its Registered Office, or at its principal place of business or at the offices of its registrar and/or transfer agent or at such place as the Board of Directors may specify) not less than seventy two (72) hours (or such shorter period as determined by the Board of Directors) before the time fixed for the meeting at which the person named in the instrument proposes to vote. (c) For as long as any of the Company's securities are publicly traded on a U.S. market or exchange, all proxy solicitations by persons other than the Board of Directors shall be undertaken pursuant to the U.S. Proxy Rules, whether or not applicable to the Company under U.S. law. 34. Effect of Death of Appointor or Revocation of Appointment --------------------------------------------------------- A vote cast pursuant to an instrument appointing a proxy shall be valid notwithstanding the previous death of the appointing shareholder (or of his attorney-in-fact, if any, who signed such instrument), or the revocation of the appointment or the transfer of the share in respect of which the vote is cast, provided no written intimation of such death, revocation or transfer shall have been received by the Company or by the Chairman of the meeting before such vote is cast and provided, further, that the appointing shareholder, if present in person at said meeting, may revoke the appointment by means of a writing, oral notification to the Chairman, or otherwise. BOARD OF DIRECTORS 35. Powers of Board of Directors ---------------------------- (a) In General ---------- The management of the business of the Company shall be vested in the Board of Directors, which may exercise all such powers and do all such acts and things as the Company is authorized to exercise and do, and are not hereby or by law required to be exercised or done by the Company in General Meeting. The authority conferred on the Board of Directors by this Article 35 shall be subject to the provisions of the Companies Law, of these Articles and any regulation or resolution consistent with these Articles adopted from time to time by the Company in General Meeting, provided, however, that no such regulation or resolution shall invalidate any prior act done by or pursuant to a decision of the Board of Directors which would have been valid if such regulation or resolution had not been adopted. (b) Borrowing Power --------------- The Board of Directors may from time to time, in its discretion, cause the Company to borrow or secure the payment of any sum or sums of money for the purposes of the Company, and may secure or provide for the repayment of such sum or sums in such manner, at such times and upon such terms and conditions in all respects as it thinks fit, and, in particular, by the issuance of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages, charges, or other securities on the undertaking or the whole or any part of the property of the Company, both present and future, including its uncalled or called but unpaid capital for the time being. (c) Reserves -------- The Board of Directors may, from time to time, set aside any amount(s) out of the profits of the Company as a reserve or reserves for any purpose(s) which the Board of Directors, in its absolute discretion, shall think fit, and may invest any sum so set aside in any manner and from time to time deal with and vary such investments, and dispose of all or any part thereof, and employ any such reserve or any part thereof in the business of the Company without being bound to keep the same separate from other assets of the Company, and may subdivide or redesignate any reserve or cancel the same or apply the funds therein for another purpose, all as the Board of Directors may from time to time think fit. (d) Protective Measures ------------------- The Board of Directors may, at any time in its sole discretion, adopt protective measures to prevent or delay a coercive takeover of the Company, including without limitation the adoption of a "Shareholder Rights Plan." 36. Exercise of Powers of Directors ------------------------------- (a) A meeting of the Board of Directors at which a quorum is present (whether in person, by conference call or by any other device allowing the participating Directors to hear each other simultaneously) shall be competent to exercise all the authorities, powers and discretions vested in or exercisable by the Board of Directors, (b) A resolution proposed at any meeting of the Board of Directors shall be deemed adopted if approved by a majority of the Directors present when such resolution is put to a vote and voting thereon. (c) A resolution in writing signed by all Directors then in office and lawfully entitled to vote thereon (as conclusively determined by the Chairman of the Audit Committee or, in the absence of such determination, by the Chairman of the Board of Directors) or to which all such Directors have given their consent (by letter, telegram, telex, facsimile, telecopier or otherwise), or their oral consent by telephone (provided that a written summary thereof has been approved and signed by the Chairman of the Board of Directors of the Company) shall be deemed to have been unanimously adopted by a meeting of the Board of Directors duly convened and held. 37. Delegation of Powers -------------------- (a) The Board of Directors may, subject to the provisions of the Companies Law, delegate any or all of its powers to committees, each consisting of two or more persons (all of whose members must be Directors), and it may from time to time revoke such delegation or alter the composition of any such committee. Any Committee so formed (in these Articles referred to as a "Committee of the Board of Directors"), shall, in the exercise of the powers so delegated, conform to any regulations imposed on it by the Board of Directors. The meetings and proceedings of any such Committee of the Board of Directors shall, mutatis mutandis, be governed by the provisions herein contained for regulating the meetings of the Board of Directors, so far as not superseded by any regulations adopted by the Board of Directors under this Article. Unless otherwise expressly provided by the Board of Directors in delegating powers to a Committee of the Board of Directors, such Committee shall not be empowered to further delegate such powers. (b) Without derogating from the provisions of Article 50, the Board of Directors may, subject to the provisions of the Companies Law, from time to time appoint a Secretary to the Company, as well as officers, agents, employees and independent contractors, as the Board of Directors may think fit, and may terminate the service of any such person. The Board of Directors may, subject to the provisions of the Companies Law, determine the powers and duties, as well as the salaries and emoluments, of all such persons, and may require security in such cases and in such amounts as it thinks fit. (c) The Board of Directors may from time to time, by power of attorney or otherwise, appoint any person, company, firm or body of persons to be the attorney or attorneys of the Company at law or in fact for such purpose(s) and with such powers, authorities and discretions, and for such period and subject to such conditions, as it thinks fit, and any such power of attorney or other appointment may contain such provisions for the protection and convenience of persons dealing with any such attorney as the Board of Directors may think fit, and may also authorize any such attorney to delegate all or any of the powers, authorities and discretions vested in him. 38. Number of Directors ------------------- Until otherwise determined by Shareholders Resolution of the Company, the Board of Directors shall consist of not less than three (3) nor more than nine (9) Directors, at least two (2) of which shall be External Directors in accordance with the Companies Law (the "External Directors"). 39. Election and Removal of Directors --------------------------------- (a) The Board of Directors of the Company shall be divided into three (3) classes of Directors, designated as Class I, Class II, and Class III, which shall be differentiated by the dates of commencement and expiration of the terms of office of their respective Directors. The number of Directors in each class shall be divided equally, so far as practicable, among the classes. The initial terms of office of the Directors of the respective classes shall be as follows: (1st) Class I Directors shall serve until the Annual General Meeting to be convened in 2001; (2nd) Class II Directors shall serve until the Annual General Meeting to be convened in 2002; and (3rd) Class III Directors shall serve until the Annual General Meeting to be convened in 2003, until their respective successors shall be duly elected. At each Annual General Meeting, beginning with the Annual General Meeting to be convened in 2001, the Directors elected or re-elected to the class whose term expires at such meeting shall serve until the Annual General Meeting to be convened in the third year following such election or re-election. (b) Directors shall be elected at General Meetings by the vote of the holders of a majority of the voting power represented at such meeting in person or by proxy and voting on the election of directors. (c) Notwithstanding anything to the contrary in these Articles of Association, the affirmative vote of at least 75% of the shares present, in person or by proxy, and voting on the matter shall be required to amend or repeal this Article 39 or to remove any Director prior to the expiration of his or her term. (d) Notwithstanding anything to the contrary in this Article 39, the provisions of this Article 39 shall not apply to the Company's External Directors, who shall not be members of any class and shall serve pursuant to the provisions of the Companies Law. 40. Qualification of Directors -------------------------- No person shall be disqualified to serve as a Director by reason of his not holding shares in the Company or by reason of his having served as a Director in the past. 41. Continuing Directors in the Event of Vacancies ---------------------------------------------- In the event of one or more vacancies in any class of Directors, the continuing Directors may continue to act in every matter and may temporarily fill any such vacancy in such class, provided, however, that if the continuing Directors number less than a majority of the number provided for pursuant to Article 38 hereof, they may only act in an emergency, and may call a General Meeting of the Company for the purpose of electing Directors to fill any or all vacancies, so that at least a majority of the number of Directors provided for pursuant to Article 38 hereof are in office as a result of said meeting. 42. Vacation of Office ------------------ (a) The office of a Director shall be vacated, ipso facto, upon his death, or if he be found lunatic or become of unsound mind, or if he become bankrupt, or, if the Director is a company, upon its winding-up. (b) The office of a Director shall be vacated by his written resignation. Such resignation shall become effective on the date fixed therein, or upon the delivery thereof to the Company, whichever is later. 43. Remuneration of Directors ------------------------- No Director shall be paid any remuneration by the Company for his services as Director except as may be approved by a Shareholders Resolution, except for reimbursement of expenses incurred in connection with fulfilling his duties as a Director. 44. Conflict of Interests --------------------- Subject to the provisions of the Companies Law, the Company may enter into any contract or otherwise transact any business with any Director in which contract or business such Director has a personal interest, directly or indirectly; and may enter into any contract of otherwise transact any business with any third party in which contract or business a Director has a personal interest, directly or indirectly. Any Director who has such a personal interest shall notify the other Directors with respect thereto prior to any discussion or vote on the matter by the Board of Directors. 45. [reserved] PROCEEDINGS OF THE BOARD OF DIRECTORS 46. Meetings -------- The Board of Directors may meet and adjourn its meetings and otherwise regulate such meetings and proceedings as the Board of Directors think fit. Notice of the meetings of the Board of Directors shall be sent to each Director at the last address that the Director provided to the Company. 47. Quorum ------ Until otherwise unanimously decided by the Board of Directors, a quorum at a meeting of the Board of Directors shall be constituted by the presence of a majority of the Directors then in office who are lawfully entitled to participate in the meeting (as conclusively determined by the Chairman of the Audit Committee and in the absence of such determination - by the Chairman of the Board of Directors), but shall not be less than two. 48. Chairman of the Board of Directors ---------------------------------- The Board of Directors may from time to time elect one of its members to be the Chairman of the Board of Directors, remove such Chairman from office and appoint another in its place. The Chairman of the Board of Directors shall preside at every meeting of the Board of Directors, but if there is no such Chairman, or if at any meeting he is not present within fifteen (15) minutes of the time fixed for the meeting, or if he is unwilling to take the chair, the Directors present shall choose one of their number to be the chairman of such meeting. The Chairman shall not have a casting vote. 49. Validity of Acts Despite Defects -------------------------------- Subject to the provisions of the Companies Law, all acts done bona fide at any meeting of the Board of Directors, or of a Committee of the Board of Directors, or by any person(s) acting as Director(s), shall, notwithstanding that it may afterwards be discovered that there was some defect in the appointment of the participants in such meetings or any of them or any person(s) acting as aforesaid, or that they or any of them were disqualified, be as valid as if there were no such defect or disqualification. GENERAL MANAGER 50. General Manager --------------- The Board of Directors may from time to time appoint one or more persons, whether or not Directors, as General Manager(s) of the Company and may confer upon such person(s), and from time to time modify or revoke, such title(s) (including Managing Director, Director General or any similar or dissimilar title) and such duties and authorities of the Board of Directors as the Board of Directors may deem fit, subject to such limitations and restrictions as the Board of Directors may from time to time prescribe. Such appointment(s) may be either for a fixed term or without any limitation of time, and the Board of Directors may from time to time (subject to the provisions of the Companies Law and of any contract between any such person and the Company) fix his or their salaries and emoluments, remove or dismiss him or them from office and appoint another or others in his or their place or places. MINUTES 51. Minutes ------- (a) Minutes of each General Meeting and of each meeting of the Board of Directors shall be recorded and duly entered in books provided for that purpose. Such minutes shall, in all events, set forth the names of the persons present at the meeting and all resolutions adopted thereat. (b) Any minutes as aforesaid, if purporting to be signed by the chairman of the meeting or by the chairman of the next succeeding meeting, shall constitute prima facia evidence of the matters recorded therein. DIVIDENDS 52. Declaration and Payment of Dividends ------------------------------------ The Board of Directors may from time to time declare, and cause the Company to pay, such dividend as may appear to the Board of Directors to be justified. The Board of Directors shall determine the time for payment of such dividends, and the record date for determining the shareholders entitled thereto. 53. [reserved] 54. Amount Payable by Way of Dividends ---------------------------------- Subject to the rights of the holders of shares with special rights as to dividends and without derogating from the provisions of Article 35(d) above, any dividend paid by the Company shall be allocated among the shareholders entitled thereto in proportion to their respective holdings of the shares in respect of which such dividend is being paid. 55. Interest -------- No dividend shall carry interest as against the Company. 56. Payment in Specie ----------------- Upon the declaration of the Board of Directors, a dividend may be paid, wholly or partly, by the distribution of specific assets of the Company or by distribution of paid up shares, debentures or debenture stock of the Company or of any other companies, or in any one or more of such ways. 57. Capitalization of Profits, Reserves etc. ---------------------------------------- Upon the resolution of the Board of Directors, the Company - (a) may cause any moneys, investments, or other assets forming part of the undivided profits of the Company, standing to the credit of a reserve fund, or to the credit of a reserve fund for the redemption of capital, or in the hands of the Company and available for dividends, or representing premiums received on the issuance of shares and standing to the credit of the share premium account, to be capitalized and distributed among such of the shareholders as would be entitled to receive the same if distributed by way of dividend and in the same proportion, on the footing that they become entitled thereto as capital, or may cause any part of such capitalized fund to be applied on behalf of such shareholders in paying up in full, either at par or at such premium as the resolution may provide, any unissued shares or debentures or debenture stock of the Company which shall be distributed accordingly, in payment, in full or in part, of the uncalled liability on any issued shares or debentures or debenture stock; and (b) may cause such distribution or payment to be accepted by such shareholders in full satisfaction of their interest in the said capitalized sum. 58. Implementation of Powers under Articles 56 and 57 ------------------------------------------------- For the purpose of giving full effect to any resolution under Articles 56 or 57, and without derogating from the provisions of Article 7(b) hereof, and subject to applicable law, the Board of Directors may settle any difficulty which may arise in regard to the distribution as it thinks expedient, and, in particular, may issue fractional certificates, and may fix the value for distribution of any specific assets, and may determine that cash payments shall be made to any shareholders upon the footing of the value so fixed, or that fractions of less value than the nominal value of one share may be disregarded in order to adjust the rights of all parties, and may vest any such cash, shares, debentures, debenture stock or specific assets in trustees upon such trusts for the persons entitled to the dividend or capitalized fund as may seem expedient to the Board of Directors. 59. Deductions from Dividends ------------------------- The Board of Directors may deduct from any dividend or other moneys payable to any shareholder in respect of a share any and all sums of money then payable by him to the Company on account of calls or otherwise in respect of shares of the Company and/or on account of any other matter of transaction whatsoever. 60. Retention of Dividends ---------------------- (a) The Board of Directors may retain any dividend or other moneys payable or property distributable in respect of a share on which the Company has a lien, and may apply the same in or toward satisfaction of the debts, liabilities, or engagements in respect of which the lien exists. (b) The Board of Directors may retain any dividend or other moneys payable or property distributable in respect of a share in respect of which any person is, under Articles 21 or 22, entitled to become a shareholder, or which any person is, under said Articles, entitled to transfer, until such person shall become a shareholder in respect of such share or shall transfer the same. 61. Unclaimed Dividends ------------------- All unclaimed dividends or other moneys payable in respect of a share may be invested or otherwise made use of by the Board of Directors for the benefit of the Company until claimed. The payment by the Directors of any unclaimed dividend or such other moneys into a separate account shall not constitute the Company a trustee in respect thereof, and any dividend unclaimed after a period of seven (7) years from the date of declaration of such dividend, and any such other moneys unclaimed after a like period from the date the same were payable, shall be forfeited and shall revert to the Company, provided, however, that the Board of Directors may, at its discretion, cause the Company to pay any such dividend or such other moneys, or any part thereof, to a person who would have been entitled thereto had the same not reverted to the Company. 62. Mechanics of Payment -------------------- Any dividend or other moneys payable in cash in respect of a share may be paid by check or warrant sent through the post to, or left at, the registered address of the person entitled thereto or by transfer to a bank account specified by such person (or, if two or more persons are registered as joint holders of such share or are entitled jointly thereto in consequence of the death or bankruptcy of the holder or otherwise, to any one of such persons or to his bank account), or to such person and at such address as the person entitled thereto may by writing direct. Every such check or warrant shall be made payable to the order of the person to whom it is sent, or to such person as the person entitled thereto as aforesaid may direct, and payment of the check or warrant by the banker upon whom it is drawn shall be a good discharge to the Company. Every such check or warrant shall be sent at the risk of the person entitled to the money represented thereby. 63. Receipt from a Joint Holder --------------------------- If two or more persons are registered as joint holders of any share, or are entitled jointly thereto in consequence of the death or bankruptcy of the holder or otherwise, any one of them may give effectual receipts for any dividend or other moneys payable or property distributable in respect of such share. ACCOUNTS 64. Books of Account ---------------- The Board of Directors shall cause accurate books of account to be kept in accordance with the provisions of the Companies Law and of any other applicable law. Such books of account shall be kept at the Registered Office of the Company, or at such other place or places as the Board of Directors may think fit, and they shall always be open to inspection by all Directors. No shareholder, not being a Director, shall have any right to inspect any account or book or other similar document of the Company, except as conferred by law or authorized by the Board of Directors or by a Shareholders Resolution. 65. Audit ----- At least once in every fiscal year the accounts of the Company shall be audited and the correctness of the profit and loss account and balance sheet certified by one or more duly qualified auditors. 66. Auditors -------- The appointment, authorities, rights and duties of the auditor(s) of the Company, shall be regulated by applicable law. The Audit Committee of the Company shall have the authority to fix, in its discretion, the remuneration of the auditor(s) for the auditing services. BRANCH REGISTERS 67. Branch Registers ---------------- Subject to and in accordance with the provisions of the Companies Law and to all orders and regulations issued thereunder, the Company may cause branch registers to be kept in any place outside Israel as the Board of Directors may think fit, and, subject to all applicable requirements of law, the Board of Directors may from time to time adopt such rules and procedures as it may think fit in connection with the keeping of such branch registers. RIGHTS OF SIGNATURE, STAMP AND SEAL 68. Rights of Signature, Stamp and Seal ----------------------------------- (a) The Board of Directors shall be entitled to authorize any person or persons (who need not be Directors) to act and sign on behalf of the Company, and the acts and signature of such person(s) on behalf of the Company shall bind the Company insofar as such person(s) acted and signed within the scope of his or their authority. (b) The Company shall have at least one official stamp. (c) The Board of Directors may provide for a seal. If the Board of Directors so provides, it shall also provide for the safe custody thereof. Such seal shall not be used except by the authority of the Board of Directors and in the presence of the person(s) authorized to sign on behalf of the Company, who shall sign every instrument to which such seal is affixed. NOTICES 69. Notices ------- (a) Any written notice or other document may be served by the Company upon any shareholder either personally or by sending it by prepaid mail addressed to such shareholder at his address as described in the Register of Shareholders or such other address as he may have designated in writing for the receipt of notices and other documents. Any written notice or other document may be served by any shareholder upon the Company by tendering the same in person to the Secretary or the General Manager of the Company at the principal office of the Company or by sending it by prepaid registered mail (airmail if posted outside Israel) to the Company at its Registered Address. Any such notice or other document shall be deemed to have been served (i) in the case of mailing, two (2) business days after it has been posted (seven (7) business days if sent internationally), or when actually received by the addressee if sooner than two (2) days or seven (7) days, as the case may be, after it has been posted; (ii) in the case of overnight air courier, on the third (3rd) business day following the day sent, with receipt confirmed by the courier, or when actually received by the addressee if sooner than three (3) business days after it has been sent; (iii) in the case of personal delivery, on the date such notice was actually tendered in person to such shareholder (or to the Secretary or the General Manager); (iv) in the case of facsimile transmission, on the date on which the sender receives automatic electronic confirmation by the recipient's facsimile machine that such notice was received by the addressee. The mailing date or publication date and the date of the meeting shall be counted as part of the days comprising any notice period. Notice may be sent by cablegram, telex, telecopier (facsimile) or other electronic means and confirmed by registered mail as aforesaid. If a notice is, in fact, received by the addressee, it shall be deemed to have been duly served, when received, notwithstanding that it was defectively addressed or failed, in some respect, to comply with the provisions of this Article 69(a). (b) All notices to be given to the shareholders shall, with respect to any share to which persons are jointly entitled, be given to whichever of such persons is named first in the Register of Shareholders, and any notice so given shall be sufficient notice to the holders of such share. (c) Any shareholder whose address is not described in the Register of Shareholders, and who shall not have designated in writing an address for the receipt of notices, shall not be entitled to receive any notice from the Company. (d) Notwithstanding anything to the contrary herein: notice by the Company of a General Meeting which is published in two daily newspapers in Israel, if at all, shall be deemed to have been duly given on the date of such publication to any shareholder whose address as registered in the Register of Shareholders (or as designated in writing for the receipt of notices and other documents) is located in the State of Israel, and notice by the Company of a General Meeting which is published in one daily newspaper in New York, New York, U.S.A. or in one international wire service shall be deemed to have been duly given on the date of such publication to any shareholder whose address as registered in the Register of Shareholders (or as designated in writing for the receipt of notices and other documents) is located outside Israel. INSURANCE AND INDEMNITY 70. Exculpation, Indemnity and Insurance ------------------------------------ (a) For purposes of these Articles, the term "Office Holder" shall mean every Director and every officer of the Company, including, without limitation, each of the persons defined as "Nosei Misra" in the Companies Law. (b) Subject to the provisions of the Companies Law, the Company may prospectively exculpate an Office Holder from all or some of the Office Holder's responsibility for damage resulting from the Office Holder's breach of the Office Holder's duty of care to the Company. (c) Subject to the provisions of the Companies Law, the Company may indemnify an Office Holder in respect of an obligation or expense specified below imposed on the Office Holder in respect of an act performed in his capacity as an Office Holder, as follows: (i) a financial obligation imposed on him in favor of another person by a court judgment, including a compromise judgment or an arbitrator's award approved by court; (ii) reasonable litigation expenses, including attorneys' fees, expended by an Office Holder or charged to the Office Holder by a court, in a proceeding instituted against the Office Holder by the Company or on its behalf or by another person, or in a criminal charge from which the Office Holder was acquitted, or in a criminal proceeding in which the Office Holder was convicted of an offense that does not require proof of criminal intent. The Company may undertake to indemnify an Office Holder as aforesaid, (aa) prospectively, provided that the undertaking is limited to categories of events which in the opinion of the Board of Directors can be foreseen when the undertaking to indemnify is given, and to an amount set by the Board of Directors as reasonable under the circumstances and (bb) retroactively. (d) Subject to the provisions of the Companies Law, the Company may enter into a contract for the insurance of all or part of the liability of any Office Holder imposed on the Office Holder in respect of an act performed in his capacity as an Office Holder, in respect of each of the following: (i) a breach of his duty of care to the Company or to another person; (ii) a breach of his duty of loyalty to the Company, provided that the Office Holder acted in good faith and had reasonable cause to assume that such act would not prejudice the interests of the Company; (iii) a financial obligation imposed on him in favor of another person. (e) The provisions of Articles 70(a), 70(b) and 70(c) above are not intended, and shall not be interpreted, to restrict the Company in any manner in respect of the procurement of insurance and/or in respect of indemnification (i) in connection with any person who is not an Office Holder, including, without limitation, any employee, agent, consultant or contractor of the Company who is not an Office Holder, and/or (ii) in connection with any Office Holder to the extent that such insurance and/or indemnification is not specifically prohibited under law; provided that the procurement of any such insurance and/or the provision of any such indemnification shall be approved by the Audit Committee of the Company. WINDING UP 71. Winding Up ---------- If the Company be wound up, then, subject to applicable law and to the rights of the holders of shares with special rights upon winding up, the assets of the Company available for distribution among the shareholders shall be distributed to them in proportion to the nominal value of their respective holdings of the shares in respect of which such distribution is being made. * * * * * EX-4.1 5 0005.txt SPECIMEN OF CERTIFICATE FOR ORDINARY SHARES EXHIBIT 4.1 MIND NextGen Billing Solutions MIND C.T.I. Ltd. NUMBER SHARES M INCORPORATED UNDER THE LAWS OF THE STATE OF ISRAEL CUSIP M70240 10 2 THIS CERTIFIES THAT IS THE OWNER OF FULLY PAID AND NON-ASSESSABLE ORDINARY SHARES, PAR VALUE NIS 0.01 PER SHARE, OF MIND C.T.I. LTD. CERTIFICATE OF STOCK transferable only on the books of the corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile stamp of the Corporation and the facsimile signature of its duly authorized director. Dated: SEAL: [MIND C.T.I. Ltd. 1995 ISRAEL] CHAIRPERSON OF THE BOARD, CEO & PRESIDENT COUNTERSIGNED AND REGISTERED: AMERICAN STOCK TRANSFER & TRUST COMPANY (NEW YORK, N.Y.) TRANSFER AGENT AND REGISTRAR AUTHORIZED SIGNATURE The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: [CAPTION] TEN COM -- as tenants in common UNIF GIFT MIN ACT-________________CUSTODIAN________________ TEN ENT -- as tenants by the entireties (Cust) (Minor) JT TEN -- as joint tenants with right of under Uniforms to Minors survivorship and not as tenants Act______________________________________ in common (State)
Additional abbreviations may also be used though not in the above list For value received,__________________________________hereby sell, assign and transfer unto - ---------------------------------- PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - ---------------------------------- ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ of the Ordinary Shares represented by the within Certificate, and do hereby irrevocably constitute and appoint ______________________________________________________________________ Attorney to transfer the said stock on the books of the within named Company with full power of substitution in the premises. Dated________________________________________________ ___________________________________________________ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WITHIN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER Signature(s) Guaranteed: _______________________________________________________ THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLON PROGRAM). PURSUANT TO S.E.C. RULE 17Ad-15. EX-5 6 0006.txt OPINION OF GOLDFARB, LEVY, ERAN & CO. Exhibit 5 [LETTERHEAD OF GOLDFARB, LEVY, ERAN & CO.] August 2, 2000 MIND C.T.I. Ltd. Industrial Park, Building 7 Yoqneam 20692, Israel Ladies and Gentlemen: We refer to the registration statement on Form F-1, No. 333-12266 (the "Registration Statement"), filed by MIND C.T.I. Ltd., an Israeli company (the "Company"), with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"), relating to an aggregate of 4,830,000 Ordinary Shares of the Company, NIS 0.01 nominal value each, to be issued and sold by the Company (the "Shares"). As counsel for the Company, we have examined such corporate records and documents as we have considered necessary or appropriate for the purposes of this opinion and, upon the basis of such examination, advise you that in our opinion, the Shares have been duly authorized and, when issued and sold pursuant to the terms of the Registration Statement, will be validly issued, fully paid and non-assessable. We consent to the filing of this opinion as an exhibit to the Registration Statement and the references to this firm in the sections of the prospectus titled "Legal Matters" and "Enforceability of Civil Liabilities." This consent is not to be construed as an admission that we are a party whose consent is required to be filed with the Registration Statement under the provisions of the Act. Very truly yours, /s/ Goldfarb, Levy, Eran & Co. Goldfarb, Levy, Eran & Co. EX-10.1 7 0007.txt 1998 OPTION PLAN EXHIBIT 10.1 MIND C.T.I. LTD. 1998 SHARE OPTION PLAN MIND C.T.I. LTD. 1998 SHARE OPTION PLAN 1. NAME This Plan, as amended from time to time, shall be known as the Mind 1998 Share Option Plan (the "Option Plan"). 2. PURPOSE OF THE OPTION PLAN The Option Plan is intended as an incentive to retain, in the employ of Mind C.T.I. Ltd. (the "Company") and its subsidiaries, persons of training, experience, and ability, to attract new employees, whose services are considered valuable, to encourage the sense of proprietorship of such persons, and to stimulate the active interest of such persons in the development and financial success of the Company by providing them with opportunities to purchase shares in the Company, pursuant to the Option Plan approved by the board of directors of the company (the "Board"), which is designed to benefit from, and is made pursuant to, the provisions of Section 102 of the Israeli Income Tax Ordinance (New Version) 1961 and any regulations, rules, orders of procedures promulgated thereunder ("Section 102") with respect to Options granted to employees of the Company pursuant to the Option Plan (the "Options"). The Option Plan is also intended to fulfill certain previous obligations of the Company to certain employees. 3. ADMINISTRATION OF THE OPTION PLAN The Board or a share option committee appointed and maintained by the Board for such purpose (the "Committee") shall have the power to administer the Option Plan. Notwithstanding the above, the Board shall automatically have a residual authority if no Committee shall be constituted or if such Committee shall cease to operate for any reason whatsoever. The Committee shall consist of such number of members (not less than two (2) in number) as may be fixed by the Board. The Committee shall select one of its members as its chairman (the "Chairman") and shall hold its meetings at such times and places as the Chairman shall determine. The Committee shall keep records of its meetings and shall make such rules and regulations for the conduct of its business as it shall deem advisable. Any member of such Committee shall not be eligible to receive Options under the Option Plan while serving on the Committee, unless otherwise specified herein. The Committee shall have full power and authority (i) to designate participants; (ii) to determine the terms and provisions of respective Option agreements (which need not be identical) including, but not limited to, the number of shares in the Company to be covered by each Option, provisions concerning the time or times when and the extent to which the Options may be exercised and the nature and duration of restrictions as to transferability or restrictions constituting substantial risk of forfeiture; (iii) to accelerate the right of an Optionee to exercise, in whole or in part, any previously granted Option; (iv) to interpret the provisions and supervise the administration of the Option Plan; and - (v) to determine any other matter which is necessary or desirable for, or incidental to administration of the Option Plan. All decisions and selections made by the Board or the Committee pursuant to the provisions of the Option Plan shall be made by a majority of its members except that no member of the Board or the Committee shall vote on, or be counted for quorum purposes, with respect to any proposed action of the Board or the Committee relating to any Option to be granted to that member. Any decision reduced to writing and signed by a majority of the members who are authorized to make such decision shall be fully effective as if it had been made by a majority at a meeting duly held. The interpretation and construction by the Committee of any provision of the Option Plan or of any Option thereunder shall be final and conclusive unless otherwise determined by the Board. Subject to the Company decision, each member of the Board or the Committee shall be indemnified and held harmless by the Company against any cost or expense (including counsel fees) reasonably incurred by him, or any liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act in connection with the Option Plan unless arising out of such member's own fraud or bad faith, to the extent permitted by applicable law. Such indemnification shall be in addition to any rights of indemnification the member may have as a director or otherwise under the Company's Articles of Association, any agreement, any vote of shareholders or disinterested directors, insurance policy or otherwise. 4. DESIGNATION OF PARTICIPANTS The persons eligible for participation in the Option Plan as recipients of Options shall include any employees of the Company or of any subsidiary of the Company. The grant of an Option hereunder shall neither entitle the recipient thereof to participate nor disqualify him from participating in, any other grant of Options pursuant to this Option Plan or any other option or stock plan of the Company or any of its affiliates. The Company reserves its right to issue an additional option plan for non-Israeli employees, that the Company may employ in the future. Anything in the Option Plan to the contrary notwithstanding, all grants of Options to directors and office holders ("Nosei Misra" - as such term is defined in the Companies Ordinance (New Version), 1983 - the "Companies Ordinance") shall be authorized and implemented only in accordance with the provisions of the Companies Ordinance, as in effect from time to time. 5. TRUSTEE The Options which shall be granted to employees of the Company (and/or any subsidiary thereof) and/or any Shares (as defined below) issued upon exercise of such Options and/or other shares received subsequently following any realization of rights, shall be issued to a Trustee nominated by the Committee, and approved in accordance with the provisions of Section 102 - (the "Trustee") and held for the benefit of the Optionees for a period of not less than two years (24 months) from the date of grant, or such other period as shall be required in order to comply with the provisions of Section 102 as amended from time to time,. Anything to the contrary notwithstanding, the Trustee shall not release any Options and/or any Shares issued upon exercise of Options, prior to the full payment of the Optionee's tax liabilities arising from Options which were granted to him and/or any Shares issued upon exercise of such Options. Upon receipt of the Option, the Optionee will sign an undertaking to exempt the Trustee from any liability in respect of any action or decision duly taken and bona fide executed in relation with the Option Plan, or any Option or Share granted to him thereunder. 6. SHARES RESERVED FOR THE OPTION PLAN Subject to adjustments as set forth in Section 8 below, a total of 30,000 (thirty thousand) Ordinary Shares, of NIS 0.01 par value (the "Shares") shall be subject to the Option Plan. The Shares subject to the Option Plan are hereby reserved for such purpose in the authorized share capital of the Company and may only be issued in accordance with the terms hereof. Any of such Shares which may remain unissued and which are not subject to outstanding Options at the termination of the Option Plan shall cease to be reserved for the purpose of the Option Plan, but until termination of the Option Plan the Company shall at all times reserve a sufficient number of Shares to meet the requirements of the Option Plan. Should any Option for any reason expire or be canceled prior to its exercise or relinquishment in full, the Shares therefore subject to such Option may again be subjected to an Option under the Option Plan. 7. OPTION PRICE 7.1. The purchase price of each Share subject to an Option or any portion thereof shall be determined by the Committee in its sole and absolute discretion in accordance with applicable law, subject to any guidelines as may be determined by the Board from time to time. As of the date of adoption of the Option Plan, the Board has instructed the Committee to determine the purchase price of each Share, at a price which is not less then the price per share, according to the most recent evaluation of the Company in any investment or other capital transaction. 7.2. The Option price shall be payable upon the exercise of the Option in a form satisfactory to the Committee and conforming to Section 102, including without limitation, by cash or cheque. The Committee shall have the authority to postpone the date of payment on such terms as it may determine. 8. ADJUSTMENTS Upon the occurrence of any of the following described events, Optionee's rights to purchase Shares under the Option Plan shall be adjusted as hereafter provided: 8.1. If the outstanding shares of the Company shall at anytime be changed or exchanged by declaration of a stock dividend, stock split, combination or exchange of shares, recapitalization, or any other like event by or of the Company, and as often as the same shall occur, then the number, class and kind of Shares subject to this Option Plan or subject to any Options therefore granted, and the Option prices, shall be appropriately and equitably adjusted so as to maintain the proportionate number of Shares without changing the aggregate Option price, provided, however, that no adjustment shall be made by reason of the distribution of subscription rights on outstanding stock or by reason of conversion of any Management Shares of the Company into Ordinary Shares (regardless of the ratio of such conversion). Upon occurrence of any of the foregoing, the class and aggregate number of Shares issuable pursuant to the Option Plan (as set forth in paragraph 6 hereof), in respect of which Options have not yet been exercised, shall be appropriately adjusted, all as will be determined by the Board who's determination shall be final. Anything herein to the contrary notwithstanding, if prior to the completion of an initial public offering of the Company's securities ("IPO"), all or substantially all of the shares of the Company are to be sold, or upon a merger or reorganization or the like, the shares of the Company, or any class thereof, are to be exchanged for securities of another Company, then in such event, each Optionee shall be obliged to sell or exchange, as the case may be, the shares such Optionee purchased under the Option Plan, in accordance with the instructions then issued by the Board whose determination shall be final. Upon the occurrence of any such transactions, all unexersized Options shall be immediately and completely terminated. 9. TERM AND EXERCISE OF OPTIONS 9.1. Options shall be exercised by the Optionee by giving written notice to the Company, in such form and method as may be determined by the Company and the Trustee and conforming Section 102, which exercise shall be effective upon receipt of such notice by the Company at its principal office. The notice shall specify the number of Shares with respect to which the Option is being exercised. 9.2. Each Option granted under this Option Plan shall be exercisable only following the vesting dates and for the number of Shares as shall be provided in Exhibit B to the Option agreement (the "Expiration Date"). However no Option shall be exercisable after the Expiration Date, as defined for each Optionee in his Option agreement. 9.3. Options granted under the Option Plan shall not be transferable by Optionees other than by will or laws of descent and distribution, and during an Optionee's lifetime shall be exercisable only by that Optionee. 9.4. The Options may be exercised by the Optionee in whole at any time or in part from time to time, to the extent that the Options become vested, prior to the Expiration Date, and provided that, subject to the provisions of Section 9.6 below, the Optionee is an employee of the Company or any of its subsidiaries, at all times during the period beginning with the granting of the Option and ending upon the date of exercise of the relevant Options. 9.5. Subject to the provisions of Section 9.6 below, in the event of termination of the Optionee's employment with the Company or any of its subsidiaries, all Options granted to him, which have not yet been exercised, will immediately expire. A notice of termination of employment by either the Company or the Optionee shall be deemed to constitute termination of employment. 9.6. Notwithstanding anything to the contrary hereinabove, an Option may be exercised after the date of termination of Optionee's employment with the Company or any subsidiary of the Company during an additional period of time beyond the date of such termination, but only with respect to the number of Options vested at the time of such termination, according to the vesting periods of the Options, set forth in Section 10 below, if: (i) termination is without Cause (as defined below), for a period of six months from the termination of Employment, (ii) termination is the result of death or disability of the Optionee, in which event any Options still in force and unexpired may be exercised within a period of one year from the date of termination, but only with respect to the number of Options already vested at the time of such termination according to the vesting periods of the Options. The term "Cause" shall mean any action, omission or state of affairs related to the Optionee which the Board decides, in its sole discretion, is against the interests of the Company. 9.7. The holders of Options shall not have any of the rights or privileges of shareholders of the Company in respect of any Shares purchasable upon the exercise of any part of an Option unless and until, following exercise but subject always to the provisions of Section 5 above, registration of the Optionee as holder of such Shares in the Company's register of members. 9.8. Any form of Option agreement authorized by the Option Plan may contain such other provisions as the Committee may, from time to time, deem advisable. 10. VESTING OF OPTIONS Notwithstanding anything to the contrary, any Option may be exercised only to the extent that such Option was vested. Each option granted hereunder shall be vested, in whole or in part, as determined by the Committee in its sole and absolute discretion, provided that the Optionee is an employee of the Company or any of its subsidiaries, at all times during the period beginning with the granting of the Option and ending upon the date of vesting of any portion of the Option. 11. DIVIDENDS With respect to all Shares (in contrary to unexercised Options) issued upon the exercise of Options purchased by the Optionee and held by the Trustee, the Optionee shall be entitled to receive dividends in accordance with the quantity of such Shares, and subject to any applicable taxation on distribution of dividends. During the period in which Shares issued to the Trustee on behalf of an Optionee are held by the Trustee, the cash dividends paid with respect thereto shall be paid directly to the Optionee. 12. ASSIGNABILITY AND SALE OF OPTIONS No Option, purchasable hereunder, whether fully paid or not, shall be assignable, transferable or given as collateral or any right with respect to them given to any third party whatsoever, and during the lifetime of the Optionee each and all of such Optionee's rights to purchase Shares hereunder shall be exercisable only by the Optionee. As long as the Shares are held by the Trustee in favor of the Optionee, then all rights of the optionee possessed in the Shares are personal, can not be transferred, assigned, pledged or mortgaged, other than by will or laws of descent and distribution. 13. TERM OF THE OPTION PLAN The Option Plan shall be effective as of the day it was adopted by the Board and shall terminate at the end of ____ months from such day of adoption. 14. AMENDMENTS OR TERMINATION The Board may, at any time and from time to time, subject to the written consent of the Trustee, amend, alter or discontinue the Option Plan, except that no amendment or alteration shall be made which would impair the rights of the holder of any Option therefore granted, without his consent. 15. GOVERNMENT REGULATIONS The Option Plan, and the granting and exercise of Options hereunder, and the obligation of the Company to sell and deliver Shares under such Options, shall be subject to all applicable laws, rules, and regulations, whether of the State of Israel or of the United States or any other State having jurisdiction over the Company and the Optionee, including the registration of the Shares under the United States Securities Act of 1933, and to such approvals by any governmental agencies or national securities exchanges as may be required. 16. CONTINUANCE OF EMPLOYMENT Neither the Option Plan nor the Option agreement with the Optionee shall impose any obligation on the Company or a subsidiary thereof, to continue any Optionee in its employ, and nothing in the Option Plan or in any Option granted pursuant thereto shall confer upon any Optionee any right to continue in the employ of the Company or a subsidiary thereof or restrict the right of the Company or a subsidiary thereof to terminate such employment at any time. 17. GOVERNING LAW AND JURISDICTION This Option Plan shall be governed by and construed and enforced in accordance with the laws of the State of Israel applicable to contracts made and to be performed therein, without giving effect to the principles of conflict of laws. The competent courts of Tel-Aviv, Israel shall have sole jurisdiction in any matters pertaining to this Option Plan. 18. ARBITRATION Any dispute in relation with this Option Plan and the exercise of rights thereunder, shall be brought to arbitration of the legal counsel to the Company (the "Arbitrator"), who shall decide on such dispute in accordance with the provisions of the Arbitration Law - 1968 and its supplement. The decision of the Arbitrator shall be final and shall bind the Company and the Optionee. 19. TAX CONSEQUENCES Any tax consequences arising from the grant or exercise of any Option, from the payment for Shares covered thereby or from any other event or act (of the Company, the Trustee or the Optionee), hereunder, shall be borne solely by the Optionee. The Company and/or the Trustee shall withhold taxes according to the requirements under the applicable laws, rules, and regulations, including withholding taxes at source. Furthermore, the Optionee shall agree to indemnify the Company and the Trustee and hold them harmless against and from any and all liability for any such tax or interest or penalty thereon, including without limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax from any payment made to the Optionee. The Committee and/or the Trustee shall not be required to release any Share certificate to an Optionee until all required payments have been fully made. 20. NON-EXCLUSIVITY OF THE OPTION PLAN The adoption of the Option Plan by the Board shall not be construed as amending, modifying or rescinding any previously approved incentive arrangements or as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock Options otherwise then under the Option Plan, and such arrangements may be either applicable generally or only in specific cases. For the avoidance of doubt, prior grants of options to employees of the Company under their employment agreements, and not in the framework of any previous option plan, shall not be deemed an approved incentive arrangement for the purpose of this Section. 21. MULTIPLE AGREEMENTS The terms of each Option may differ from other Options granted under the Option Plan at the same time, or at any other time. The Committee may also grant more than one Option to a given Optionee during the term of the Option Plan, either in addition to, or in substitution for, one or more Options previously granted to that Optionee. EX-10.2 8 0008.txt SHARE PURCHASE AGREEMENT BY AND AMONG MIND C.T.I. EXECUTION COPY -------------- EXHIBIT 10.2 MIND C.T.I. LTD. SHARE PURCHASE AGREEMENT Dated as of March 30, 2000 MIND C.T.I. LTD. SHARE PURCHASE AGREEMENT Dated as of March 30, 2000 TABLE OF CONTENTS -----------------
Page ---- 1. PURCHASE AND SALE OF SHARES........................................................... 1 1.1 Purchase and Sale of Shares........................................................... 1 --------------------------- 1.2 The Conversion Shares................................................................. 1 --------------------- 1.3 Use of Proceeds....................................................................... 2 --------------- 1.4 Closing............................................................................... 2 ------- 1.5 Options............................................................................... 2 ------- 1.6 Ordinary Course of Business........................................................... 2 --------------------------- 1.7 Conversion of Salansky Shares......................................................... 3 ----------------------------- ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL SHAREHOLDERS...... 3 2.1 Organization and Corporate Power...................................................... 4 -------------------------------- 2.2 Authorization......................................................................... 4 ------------- 2.3 Government Approvals.................................................................. 4 -------------------- 2.4 Authorized and Outstanding Stock...................................................... 5 -------------------------------- 2.5 Subsidiaries.......................................................................... 5 ------------ 2.6 Financial Information................................................................. 5 --------------------- 2.7 Events Subsequent to the Date of the Financial Statements............................. 6 --------------------------------------------------------- 2.8 Litigation............................................................................ 6 ---------- 2.9 Compliance with Laws.................................................................. 6 -------------------- 2.10 Taxes................................................................................. 7 ----- 2.11 Real Property; Environmental Matters.................................................. 7 ------------------------------------ 2.12 Personal Property..................................................................... 9 ----------------- 2.13 Patents, Trademarks, etc.............................................................. 9 ------------------------ 2.14 Agreements of Directors, Officers and Employees....................................... 10 ----------------------------------------------- 2.15 Governmental Approvals................................................................ 10 ---------------------- 2.16 Contracts and Commitments............................................................. 10 ------------------------- 2.17 Registration Rights................................................................... 11 ------------------- 2.18 Insurance Coverage.................................................................... 11 ------------------ 2.19 Employee Matters...................................................................... 11 ---------------- 2.20 No Brokers or Finders................................................................. 11 --------------------- 2.21 Transactions with Affiliates.......................................................... 12 ---------------------------- 2.22 Assumptions, Guarantees, etc. of Other Persons........................................ 12 ---------------------------------------------- 2.23 Disclosures........................................................................... 12 -----------
i ARTICLE III AFFIRMATIVE COVENANTS OF THE COMPANY....................................... 12 3.1 Accounts and Reports............................................................ 12 -------------------- 3.2 Payment of Taxes................................................................ 14 ---------------- 3.3 Maintenance of Key Man Insurance................................................ 14 -------------------------------- 3.4 Compliance with Laws, etc....................................................... 14 ------------------------- 3.5 Inspection...................................................................... 14 ---------- 3.6 Corporate Existence; Ownership of Subsidiaries.................................. 15 ---------------------------------------------- 3.8 Board Approval.................................................................. 15 -------------- 3.9 Financings...................................................................... 15 ---------- 3.10 Meetings of the Board of Directors.............................................. 15 ---------------------------------- ARTICLE IV NEGATIVE COVENANTS OF THE COMPANY........................................... 15 4.1 Investments in Other Persons.................................................... 16 ---------------------------- 4.3 Dealings with Affiliates........................................................ 16 ------------------------ 4.5 Limitation on Options........................................................... 17 --------------------- 4.6 Limitation on Restrictions on Subsidiary Dividends and Other Distributions...... 17 -------------------------------------------------------------------------- 4.7 No Conflicting Agreements....................................................... 17 ------------------------- 4.9 Indebtedness.................................................................... 17 ------------ 4.10 Liens........................................................................... 17 ----- ARTICLE V INVESTMENT REPRESENTATIONS................................................... 18 5.1 Representations and Warranties.................................................. 18 ------------------------------ 5.2 Permitted Transfers; Legends.................................................... 19 ---------------------------- ARTICLE VI CONDITIONS OF PURCHASERS' OBLIGATIONS..................................... 20 6.1 Effect of Conditions............................................................ 20 -------------------- 6.2 Representations and Warranties.................................................. 20 ------------------------------ 6.3 Performance..................................................................... 20 ----------- 6.4 No Material Adverse Change...................................................... 20 -------------------------- 6.5 Opinion of Counsel.............................................................. 20 ------------------ 6.6 Completion of Due Diligence..................................................... 20 --------------------------- 6.7 Completion of Audit............................................................. 20 ------------------- 6.8 Cash............................................................................ 20 ---- 6.9 Articles of Association......................................................... 21 ----------------------- 6.10 Consents and Waivers............................................................ 21 -------------------- 6.11 Certificates and Notices........................................................ 22 ------------------------ 6.12 Registration Rights Agreement................................................... 23 ----------------------------- 6.13 Shareholders' Agreement......................................................... 23 ----------------------- 6.13 Non-Competition, Non Solicitation and Non Disclosure Agreements................. 23 --------------------------------------------------------------- 6.15 Redemption Agreement............................................................ 23 -------------------- 6.16 Consent of ADC Teledata Holdings................................................ 23 -------------------------------- ARTICLE VII CONDITIONS OF THE COMPANY'S OBLIGATIONS................................... 23 7.1 Effect of Conditions............................................................ 23 -------------------- 7.2 Representations and Warranties.................................................. 23 ------------------------------ 7.3 Shareholders' Agreement......................................................... 23 ----------------------- 7.4 Registration Rights Agreement................................................... 23 -----------------------------
ii 7.5 Performance........................................................... 23 ----------- 7.6 Consents and Waivers.................................................. 24 -------------------- 7.7 Redemption Agreement.................................................. 24 -------------------- ARTICLE VIII CERTAIN DEFINITIONS............................................. 24 ARTICLE IX INDEMINIFICATION.................................................. 26 9.1 Survival of Representations and Warranties............................ 26 ------------------------------------------ 9.2 Indemnification of Purchasers......................................... 26 ----------------------------- 9.3 Indemnification of the Company........................................ 26 ------------------------------ 9.4 Indemnification Procedures............................................ 27 -------------------------- 9.5 Limitations........................................................... 28 ----------- ARTICLE X - MISCELLANEOUS................................................... 28 10.1 Parties in Interest................................................... 28 ------------------- 10.2 Amendments and Waivers................................................ 28 ---------------------- 10.3 Notices............................................................... 28 ------- 10.4 Expenses.............................................................. 29 -------- 10.5 Counterparts.......................................................... 29 ------------ 10.6 Effect of Headings.................................................... 30 ------------------ 10.7 Governing Law......................................................... 30 -------------
iii SHARE PURCHASE AGREEMENT ------------------------ This Share Purchase Agreement (the "Agreement") is made and entered into as of this 30th day of March, 2000, by and among MIND C.T.I. LTD., an Israeli Company # 51-213448-7, with offices at the Industrial Park, Yokne'am Elit, 20692, Israel (the "Company"), LIOR SALANSKY of Yafe St., Jerusalem, Israel ("Salansky"), MONICA EISINGER of Mitzpe Ho'shaya, Israel ("Eisinger" and together with Salanksy, the "Principal Shareholders"), ADC TELEDATA COMMUNICATIONS LTD., with offices at 10 Ha'shSadnaot St., Hertzelia, 46120, Israel ("ADC"), and the entities listed in Exhibit A attached hereto (the --------- "Purchasers"). IN CONSIDERATION of the premises and the representations, warranties, covenants and conditions set forth hereinafter, and intending to be legally bound, the parties hereby agree as follows: ARTICLE I 1. PURCHASE AND SALE OF SHARES --------------------------- 1.1 Purchase and Sale of Shares. ---------------------------- (a) At the Closing (as such term and other terms are defined in Article XI), the Company will sell to the Purchasers 111,111 Series A Convertible Preferred Shares, par value NIS 0.01 per share of the Company (the "Series A Preferred Shares"), at a price of $108 per Series A Preferred Shares for a total purchase price for the Series A Preferred Shares of $11,999,988. The Series A Preferred Shares shall have the rights, terms, preferences and privileges set forth in the Company's Amended Articles of Association in the form attached as Exhibit B, to be adopted effective as of the Closing. The Series A Preferred - --------- Shares to be sold to the Purchasers by the Company hereunder shall be referred herein to as the "Company Shares." (b) At the Closing, Salansky will sell to the Purchasers 27,778 Series B Convertible Preferred Shares, par value NIS 0.01 per share (the "Series B Preferred Shares"), at a price of $108 per share, for a total purchase price for the Series B Preferred Shares to be sold by Salansky of $3,000,024. The Series B Preferred Shares to be sold to the Purchasers by Salansky shall be referred to herein as the "Salansky Shares" and together with the Company Shares, as the "Purchased Shares." 1.2 The Conversion Shares. The Company has authorized and reserved and --------------------- hereby covenants that it will continue to reserve, free of any preemptive rights or encumbrances, a sufficient number of its authorized but previously unissued Voting Ordinary Shares, NIS 0.01 par value per share (the "Voting Ordinary Shares") and Non-Voting Ordinary Shares, NIS 0.01 par value per share (the "Non- Voting Ordinary Shares", and together with the Voting Ordinary Shares, the "Ordinary Shares"), to satisfy the rights of conversion of the holders of the Purchased Shares. The Ordinary Shares issued or issuable upon conversion of the Purchased Shares are referred to herein as the "Conversion Shares." ----------------- 1.3 Use of Proceeds. The proceeds from the sale of the Company Shares at --------------- the Closing shall be used for working capital purposes, including, without limitation, funding the growth of the Company, and to pay any fees, costs and expenses incurred by the Company in connection with the transactions contemplated by this Agreement. The parties acknowledge that a fee (the "Fee") of $1,000,000 is due and payable to Lehman Brothers in connection with the sale of the Purchased Shares to the Purchasers and the proposed sale (the "Proposed Sale") of Ordinary Shares held by Salansky for a purchase price up to $2,000,000. Each of the Company and Salansky shall be responsible for the payment of their "pro-rata" amount of the Fee. The "pro-rata" amount of the Fee for each of the Company and Salansky shall equal the amount of the Fee multiplied by a fraction, the numerator of which shall be the purchase price received by either Company or Salansky in connection with the sale of the Purchased Shares or with the Proposed Sale and the denominator of which shall equal the total purchase price received by the Company and Salansky in connection with the sale of the Purchased Sale or any Proposed Sale. 1.4 Closing. Subject to the satisfaction or waiver of the conditions set ------- forth in Articles VI and VII hereof, the purchase of the Purchased Shares shall be made at a closing (the "Closing") to be held at the offices of Hutchins, Wheeler & Dittmar, A Professional Corporation, 101 Federal Street, Boston, Massachusetts or by facsimile without requiring the physical presence of the parties, at 10:00 A.M. on March 30, 2000, or, if later, a date specified by the Purchasers (the "Closing Date"). Payment at the Closing for the Purchased Shares shall be by wire transfer payable in immediately available funds. Each Purchaser shall pay that amount for the Purchased Shares being acquired by it at the Closing to the Company and Salansky as described on Schedule 1.4 hereof. At ------------ the Closing, the Company will deliver to the Purchasers, one or more certificates representing the Company Shares purchased by each Purchaser, issued in such names as may be requested by each Purchaser, and Salansky shall deliver to the Purchasers, one or more certificates representing the Salansky Shares, together with a share transfer deed executed in blank, such that the Purchasers may present such certificates to the Company for issuance of the shares represented by such certificates in the names of the Purchasers as may be requested by the Purchasers. 1.5 Options. Prior to the Closing, the Company shall increase the option ------- pool under the current option plan (the "Plan") adopted by the Company such that there shall be reserved for issuance pursuant to the Plan a total of 55,400 shares of Ordinary Shares (the "Options") which include options granted prior to the date hereof and options to be granted to future members of senior management. The Options to be granted after the date hereof shall have an initial exercise price of not less than the greater of (i) fair market value or (ii) the price per Share paid by the Purchasers hereunder, and shall be issued to such Persons (other than the Principal Shareholders), and upon such terms, including vesting, as shall be determined from time to time by the Board of Directors. 1.6 Ordinary Course of Business. Between the date of execution and --------------------------- delivery of this Agreement and the Closing Date (i) the Company shall, and the Principal Shareholders shall cause the Company to, conduct its business and operations only in the ordinary course of 2 business consistent with past practice, (ii) the Company shall not, and the Principal Shareholders shall cause the Company not to do, or to become obligated to do, any of the following, directly or indirectly: (a) purchase or redeem any shares of its capital shares or other securities; (b) pay compensation to either of the Principal Shareholders in excess of the amounts currently payable to them; or (c) enter into, continue or maintain any transaction with the Principal Shareholders, any of their family members, or any entity affiliated with either of them, other than transactions on terms which are no less favorable to the Company than are otherwise available on arm's-length terms, and (iii) the Company shall, and the Principal Shareholders shall cause the Company to, conduct its [business] consistent with past practice, which shall include, without limitation, conducting the business in such a manner that does not delay the payments of payables, defer expenditures, or accelerate receivables; provided, however that the Purchasers hereby acknowledge that the Company shall, prior to the Closing, distribute cash dividends of no more than $3,000,000 in the aggregate to its shareholders provided that the Company shall retain at least $1,000,000 in Cash or Cash Equivalents following such distributions. 1.7 Conversion of Salansky Shares. Prior to the Closing, the Company ----------------------------- shall convert 27,778 shares of the Ordinary Shares held by Salansky into 27,778 Series B Preferred Shares for sale to the Purchasers. 1.8 Support of Public Offering. The Investors, the Principal Shareholders -------------------------- and ADC acknowledge that it is their intent to cause the Company to pursue as soon as practicable an offering of equity securities under a registration statement filed under the Securities Act of 1933, as amended (the "Act"). Each of the Investors, the Principal Shareholders and ADC agrees that it will take such action and execute such documents, including without limitation, director and officer questionnaires and hold back agreements, as the Company may reasonably request and as are consistent with the terms of this Agreement and the exhibits hereto in order to cause such registration to become effective as soon as practicable. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL SHAREHOLDERS In order to induce the Purchasers to purchase the Purchased Shares, the Company and the Principal Shareholders, acting jointly and severally, make the following representations and warranties which shall be true, correct and complete in all respects on the date hereof and shall be true, correct and complete in all material respects as of the Closing; except for those representations and warranties that address matters only as of a particular date or only with respect to a specific period of time. The representations and warranties made by the Principal Shareholders shall be made as to their knowledge, except with respect to the representations and warranties set forth in Sections 2.1, 2.2, 2.3, 2.4 and 2.13 hereof. 3 2.1 Organization and Corporate Power. Both the Company and Mind CTI Inc., -------------------------------- a wholly owned subsidiary of the Company (the "Mind Subsidiary"), are corporations duly organized, validly existing and in good standing (in respect of the Mind Subsidiary) under the laws of their respective jurisdictions of incorporation and have all requisite corporate power and authority to own their properties and to carry on their business as presently conducted. Except as set forth on Schedule 2.1 attached hereto, each of the Company and the Mind ------------ Subsidiary is qualified as a foreign corporation in good standing (in respect of the Mind Subsidiary) in each jurisdiction in which it owns or leases real property or maintains employees. 2.2 Authorization. (a) The Company has all necessary corporate power and ------------- has taken all necessary corporate action required for the due authorization, execution, delivery and performance by the Company of this Agreement and the Related Agreements, and any other agreements or instruments executed by the Company in connection herewith or therewith and the consummation of the transactions contemplated herein or therein, and for the due authorization, issuance and delivery of the Company Shares and the conversion of the shares held by Salansky as contemplated in Section 1.7 hereof. The issuance of the Company Shares does not require any further corporate action and is not and will not be subject to any veto right, preemptive right, right of first refusal or the like. This Agreement, the Related Agreements (as defined in Section 8 below) and the other agreements and instruments executed by the Company in connection herewith or therewith will each be a valid and binding obligation of the Company enforceable in accordance with its respective terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization or other similar laws relating to or affecting enforcement of creditors' rights generally and except as enforcement thereof is subject to general principles of equity. (b) Each Principal Shareholder has full legal capacity and unrestricted power to execute and deliver this Agreement and the Related Agreements to which he is a party, and any other agreements or instruments executed by him in connection herewith or therewith and to consummate the transactions contemplated herein or therein. The sale of the Salansky Shares does not require any further action by Salansky or the Company and is not and will not be subject to any preemptive right, right of first refusal or the like. This Agreement, the Related Agreements and the other agreements and instruments executed by the Principal Shareholders in connection herewith or therewith, each will be a valid and binding obligation of each Principal Shareholder enforceable in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization or other similar laws relating to or affecting enforcement of creditors' rights generally and except as enforcement thereof is subject to general principles of equity. 2.3 Government Approvals. Except as set forth on Schedule 2.3 attached -------------------- ------------ hereto, no consent, approval, license or authorization of, or designation, declaration or filing with, any court or governmental authority is or will be required on the part of the Company or the Principal Shareholders in connection with the execution, delivery and performance by the Company or the Principal Shareholders of this Agreement, any of the Related Agreements and any other 4 agreements or instruments executed by the Company or the Principal Shareholders in connection herewith or therewith, or in connection with the issuance of the Purchased Shares, except for (i) those which have already been made or granted, and (ii) the filing of registration and transference statements with the Israeli Registrar of Companies (the "Registrar") and any applicable state securities commission in the United States as specifically provided for in the Registration Rights Agreement. 2.4 Authorized and Outstanding Shares. The authorized capital shares of --------------------------------- the Company consists of (i) 2,700,000 Ordinary Shares of which 744,600 shares are validly issued and outstanding and held of record and owned beneficially by the Persons set forth on Schedule 2.4(a) (the "Capitalization Table") attached --------------- hereto and (ii) 100 Management Shares, of which 30 are validly issued and outstanding and held of record and owned beneficially by the Persons further set forth in the Capitalization Table, all free and clear of all liens, security interests, restrictions on transfer, and other encumbrances. Immediately after the Closing, the authorized capital shares of the Company will consist of (a) 2,571,111 Ordinary Shares, 716,822 of which will be issued and outstanding and held of record by the Persons set forth under the applicable column of the Capitalization Table; (b) 111,111 Series A Preferred Shares with the rights, terms and privileges set forth in the Amended Articles and of which 111,111 shares will be issued and outstanding and held of record by the Purchasers as set forth under the applicable column of the Capitalization Table; and 27,778 Series B Preferred Shares, with the rights, terms and privileges set forth in the Amended Articles, and of which 27,778 shares will be issued and outstanding and held of record by the Purchasers set forth under the applicable column of the Capitalization Table. All issued and outstanding shares are, and when issued in accordance with the terms hereof, all Purchased Shares will be, duly and validly authorized, validly issued and fully paid and non-assessable and free from any restrictions on transfer, except for those imposed under the Amended Articles or pursuant to any Related Agreement. Except as set forth on Schedule 2.4(b), there are no outstanding warrants, options, commitments, - --------------- preemptive rights, rights to acquire or purchase, conversion rights or any other rights relating to the shares or other securities of the Company. 2.5 Subsidiaries. Except for the Mind Subsidiary and except as set forth ------------ on Schedule 2.5 attached hereto, the Company does not have any Subsidiaries or ------------ other equity investment in any other Person. 2.6 Financial Information. The Company has previously delivered to the --------------------- Purchasers the audited consolidated financial statements of the Company and the Mind Subsidiary for the year ended December 31, 1999 (collectively the "Audited Financial Statements") and the unaudited consolidated financial statements as of February 29, 2000, and the two (2) months then ended (the "Unaudited Financial Statements" together with the Audited Financial Statements the "Financial Statements"). The Financial Statements are in accordance with the books and records of the Company and present fairly in accordance with generally accepted accounting principles as applied in the United States ("US GAAP") and generally accepted accounting principles applied in Israel ("Israeli GAAP"), applied on a basis consistent with prior periods the 5 financial condition and results of operations of the Company as of the dates and for the periods shown; provided, however, that the Unaudited Financial -------- ------- Statements do not have footnotes required by generally accepted accounting principles, and are subject to normal and customary year end adjustments, none of which will be material. The Company has no liability or obligation, contingent or otherwise, which is required to be reserved against or reflected and is not adequately reserved against or reflected in the Financial Statements, except for liabilities and obligations incurred in the ordinary course of business since February 29, 2000. Except as set forth on Schedule 2.6, since ------------ February 29, 2000, there has been no change in the business, assets, prospects, liabilities, condition (financial or otherwise) or operations of the Company or the Mind Subsidiary, except for changes which, individually or in the aggregate, would not have a Material Adverse Effect, whether or not insured against. 2.7 Events Subsequent to the Date of the Financial Statements. Except as --------------------------------------------------------- set forth on Schedule 2.7, since February 29, 2000, the Company has not, except ------------ in the ordinary course of business, (i) issued any shares, share options, warrants or other securities convertible into or exchangeable for capital shares, or any bond or other corporate security, (ii) borrowed any money or mortgaged, pledged or subjected to any lien any of its assets, tangible or intangible, (iii) sold, assigned or transferred any of its tangible assets, or cancelled any debt or claim, or (iv) suffered any loss of property or waived any right of substantial value. Except as set forth on Schedule 2.7, since February ------------ 29, 2000, the Company has not declared or made any payment or distribution to stockholders in any capacity or purchased or redeemed any of its capital shares or other securities. 2.8 Litigation. Except as otherwise set forth on Schedule 2.8, there is ---------- ------------ no litigation, arbitration or governmental proceeding or investigation pending or, to the knowledge of the Company threatened, against the Company or the Mind Subsidiary or affecting any of its properties or assets, or against any officer, key employee or shareholder of the Company or the Mind Subsidiary in his capacity as such, and, to the knowledge of the Company, no event has occurred nor does there exist any condition on the basis of which any litigation, proceeding or investigation is reasonably likely to be instituted with any substantial likelihood of recovery where such recovery would have a Material Adverse Effect. Neither the Company nor any officer, key employee or shareholder of the Company or the Mind Subsidiary in his capacity as such is, to the knowledge of the Company, in material default with respect to any order, writ, injunction, decree, ruling or decision of any court, commission, board or other government agency. 2.9 Compliance with Laws. Neither (i) the execution, delivery or -------------------- performance of this Agreement and the Related Agreements nor (ii) the consummation of the transactions contemplated hereby and thereby, nor (iii) the offer, issuance, sale or delivery of the Purchased Shares, will, with or without the giving of notice or passage of time, or both, (a) violate, or result in any breach of, or constitute a default under, or result in the imposition of any encumbrance upon any asset of the Company pursuant to any provision of the Company's Memorandum of Association or Articles of Association, or any statute, rule or regulation, contract, lease, 6 judgment, decree or other document or instrument by which the Company is bound or to which it or any of its properties are subject, or (b) cause the Company to lose the benefit of any right or privilege it presently enjoys, or (c) cause any Person who is expected to normally do business with the Company to discontinue to do so on the same basis, except in each case for violations, breaches, defaults, encumbrances or losses which would not have a Material Adverse Effect. The Company has at all times carried on its business and affairs in all material respects in accordance with its Memorandum and Articles of Association and all laws, regulations and by-laws applying thereto. The Company has at all times duly filed with the Registrar of Companies and all other governmental agencies all reports and notices as required under law. 2.10 Taxes. The Company and the Mind Subsidiary have each filed all tax ----- returns, reports and forms (including statements of estimated taxes owed) required to be filed within the applicable periods for such filings and have paid all taxes required to be paid, and have established adequate reserves (net of estimated tax payments already made) for the payment of all taxes payable in respect to the period subsequent to the last periods covered by such returns. All such tax returns, reports and forms are true, correct and complete. The Company and the Mind Subsidiary have each properly classified for tax purposes all employees, consultants and independent contractors, and have made all filings and has withheld and paid all taxes, required to have been filed, withheld or paid in connection with services provided by such persons. Adequate amounts have been withheld by the Company and the Mind Subsidiary from their employees for all periods in compliance with the tax, social security and unemployment withholding provisions of all federal (as applicable to the Mind Subsidiary), state, local and foreign laws. No deficiencies for any tax are currently assessed against the Company or the Mind Subsidiary, and no tax returns of the Company or the Mind Subsidiary have ever been audited, and, to the knowledge of the Company, there is no such audit pending and neither the Company nor the Mind Subsidiary have received any notice from any taxing authority that it is contemplating such an audit. There is no tax lien, whether imposed by any federal (as applicable to the Mind Subsidiary), state, local or foreign taxing authority, outstanding against the assets, properties or business of the Company or the Mind Subsidiary, other than any lien for taxes not yet due and payable. For the purposes of this Agreement, the term "tax" shall include all federal, state, local and foreign taxes, including income, franchise, property, sales, use, gross receipts, excise, withholding, payroll and employment taxes or other similar assessments of any kind whatsoever, including all interest, penalties and additions imposed with respect to such amounts. The Company has obtained the status of "Approved Enterprise Tax" from the Investment Center of the Ministry of Trade and Industry and such accommodation is in full force and effect as of the date hereof. To the knowledge of the Company, such "Approved Enterprise Tax" shall continue to be made available to the Company upon the consummation of the transactions contemplated herein or in the Related Agreements. 2.11 Real Property; Environmental Matters. ------------------------------------ (a) Schedule 2.11 sets forth the addresses and uses of all real ------------- property that the Company or the Mind Subsidiary owns or leases or sublease and any lien or encumbrance for 7 which the Company or the Mind Subsidiary is liable and which the Company or the Mind Subsidiary has secured with any such owned real property or leasehold interest, specifying in the case of each such lease or sublease, the name of the lessor or sublessor, as the case may be, the lease term and the obligations of the lessee thereunder (or in lieu thereof, attaching a copy of such lease or sublease). There are no defaults by the Company or by the Mind Subsidiary, or to the knowledge of the Company, by any other party thereto, which might curtail in any material respect the present use by the Company or the Mind Subsidiary of the property listed on Schedule 2.11. The performance by the Company of this ------------- Agreement and the Related Agreements will not result in the termination of, or in any increase of any amounts payable under, any lease listed on Schedule 2.11. ------------- (b) Neither the Company nor the Mind Subsidiary is in material violation of any law, regulation or ordinance (including, without limitation, laws, regulations or ordinances relating to zoning, environmental, city planning or similar matters) relating to any real property or part thereof, as the case may be, owned, leased or subleased by the Company. (c) All real property, owned or leased by the Company complies, in all material respects, with all applicable laws, rules, regulations, order, ordinances, judgments and decrees of any governmental authorities with respect to all environmental statutes, rules and regulations. The Company has not received notice of, nor does the Company have knowledge of, any past or present events, conditions, circumstances, activities, practices, incidents, actions or plans of the Company which may cause noncompliance with, or which may give rise to any liability for any claim, action, suit, proceeding, hearing, or investigation, based on or related to the disposal, storage, handling, manufacture, processing, distribution, use, treatment or transport, or the emission, discharge, release or threatened release into the environment, of any Substance (as defined herein). As used in this Section 2.11, the term "Substance" or "Substances" shall mean any pollutant, hazardous substance, hazardous material, hazardous waste or toxic waste, as defined in any presently enacted state or municipal statute or by-law or any regulation that has been promulgated pursuant thereto. (d) No event has occurred and no condition exists or operating practice is being employed, which event, condition or practice is or was caused by or is under the control of the Company, or to the knowledge of the Company, was caused by any third party including a prior owner, that could give rise to liability on the part of the Company, either at the present time or in the future, for any losses, liabilities, damages (whether consequential or otherwise), settlements, penalties, interest, expenses and costs of responses, including any such liability on account of the right of any governmental or private entity or person, and including closure expenses, costs of assessment, containment, removal, or response (other than monitoring or transportation or disposal of materials required to be transported or disposed of in the ordinary course of business consistent with past practice) arising under any rule or state or municipal statute or by-law, or any regulation that has been promulgated pursuant thereto, as a result of or in connection with, or alleged to be as a result of or in connection with, the following: 8 (i) the handling, storage, use, transportation or disposal by the Company of any Substances in or near or from the real property owned or leased by the Company; (ii) the handling, storage, use, transportation or disposal of any Substances by the Company which Substances were a product, by-product or otherwise resulted from the operations conducted by or on behalf of the Company; (iii) any intentional or unintentional emission, discharge or release of any Substances by or on behalf of the Company in or near or from any real property owned or leased by the Company into or upon the air, surface water, ground water or land or any disposal, handling, manufacturing, processing, distribution, use, treatment, or transport of such Substances in or near or from facilities by or on behalf of the Company; or (iv) the presence of any friable asbestos-containing materials on any real property owned or leased by the Company, including, but not limited to, the inclusion of such materials in the interior walls, floors, ceilings, tile or insulation of the real property owned or leased by the Company; provided that the parties acknowledge that no testing has been done at any of the Company's real properties relating to asbestos. (e) The Company has all registrations, permits, licenses, and approvals issued by or on behalf of any municipal or governmental body or agency if any ("Environmental Permits") that are required in connection with the operation by the Company of its business, the discharge or emission of Substances by the Company from real property owned or leased by the Company or the generation, treatment, storage, transportation, or disposal of any such Substances by the Company. 2.12 Personal Property. Except as set forth on Schedule 2.12 and except ----------------- ------------- for property sold or otherwise disposed of in the ordinary course of business since February 29, 2000, the Company owns free and clear of any liens or encumbrances, all of the personal property reflected as owned by the Company in the Last Balance Sheet, and all other material items of personal property acquired by the Company through the date hereof. All material items of such personal property are in normal operating condition, wear and tear excepted. 2.13 Patents, Trademarks, etc. Set forth on Schedule 2.13 is a list and ------------------------- ------------- brief description of all material patents, patent rights, patent applications, trademarks, trademark applications, service marks, service mark applications trade names and copyrights and all applications for such that are in the process of being prepared, owned by or registered in the name of the Company, or 9 of which the Company is a licensor or licensee or in which the Company has any right, and in each case a brief description of the nature of such right. The Company owns or possesses adequate licenses or other rights to use all patents, patent applications, trademarks, trademark applications, service marks, service mark applications, trade names, copyrights, manufacturing processes, formulae, trade secrets, source code, object code and know-how (collectively, "Intellectual Property") necessary to the conduct of its business as conducted and as proposed to be conducted, and no claim is pending or, to the knowledge of the Company and the Principal Shareholders, threatened to the effect that the operations of the Company infringe upon or conflict with the asserted rights of any other person under any Intellectual Property, and there is no known basis for any such claim (whether or not pending or threatened). Except as set forth on Schedule 2.13, no claim is pending or, to the knowledge of the Company and ------------- the Principal Shareholders, threatened to the effect that any such Intellectual Property owned or licensed by the Company, or which the Company otherwise has the right to use, is invalid or unenforceable by the Company, and there is no known basis for any such claim (whether or not pending or threatened). 2.14 Agreements of Directors, Officers and Employees. To the knowledge of ----------------------------------------------- the Company, no director, officer or employee of, or consultant to the Company is in violation of any terms of any employment contract, non-competition agreement, non-disclosure agreement, patent disclosure or assignment agreement or other contract or agreement containing restrictive covenants relating to the right of any such director, officer, employee or consultant to be employed or engaged by the Company because of the nature of the business conducted or proposed to be conducted by the Company, or relating to the use of trade secrets or proprietary information of others. 2.15 Governmental Approvals. The Company has all the material permits, ---------------------- licenses, orders, franchises and other rights and privileges of all federal, state, local or foreign governmental or regulatory bodies necessary for the conduct of its business as presently conducted. All such permits, licenses, orders, franchises and other rights and privileges are in full force and effect and, to the knowledge of the Company, no suspension or cancellation of any of them is threatened. None of such permits, licenses, orders, franchises or other rights and privileges will be affected by the consummation of the transactions contemplated in this Agreement and the Related Agreements. 2.16 Contracts and Commitments. Except as set forth on Schedule 2.16 ------------------------- ------------- attached hereto, the Company has no contract, obligation or commitment which is material or which involves a potential material commitment, or any shares redemption or share purchase agreement, share option plan, shareholders' agreement, financing agreement, license or real property lease. For purposes of this Section 2.16, a contract, obligation or commitment shall be deemed material if it requires future expenditures by the Company in excess of $100,000 or requires payment to the Company in excess of $100,000 or is not cancelable by the Company without penalty within 30 days. 10 2.17 Registration Rights. Except as set forth on Schedule 2.17 attached ------------------- ------------- hereto, the Company has not granted any rights relating to registration of its capital shares other than those contained in the Registration Rights Agreement. 2.18 Insurance Coverage. Schedule 2.18 hereto contains an accurate list ------------------ ------------- of the insurance policies currently maintained by the Company and the Mind Subsidiary. Except as described on Schedule 2.18, there are currently no claims ------------- pending against the Company or the Mind Subsidiary under any insurance policies currently in effect and covering the property, business or employees of the Company, and all premiums due and payable with respect to the policies maintained by the Company have been paid to date. All such policies are in full force and effect and provide insurance, including without limitation, liability insurance, in such amounts and against such risks as is customary for companies engaged in similar businesses to the Company to protect employees, properties, assets, businesses and operations of the Company. 2.19 Employee Matters. Except as set forth on Schedule 2.19, the Company ---------------- ------------- does not have in effect any consulting agreements or labor or collective bargaining agreements, written or oral. The Company has no knowledge that any of the officers or other key employees of the Company presently intends to terminate his employment. The Company is in compliance in all material respects with all applicable laws and regulations relating to labor, employment, fair employment practices, terms and conditions of employment, and wages and hours. Schedule 2.19 lists and identifies each employee's salary options (broken down - ------------- to the aggregate number of options granted, the number of options already vested and the remaining options' vesting schedule and the number of vested options already exercised and converted into shares), bonuses, deferred compensation, accrued severance pay, incentive compensation, accrued vacation pay, sick pay, disability plan, policy, or arrangement, entitlement to automobile and mobile phone, entitlement to repayment of expenses, each material fringe benefit plan, policy, arrangement, or practice; and each employment, separation, termination, stay-with-bonus, change-of-control, retention, or similar contract, agreement, policy, or understanding, which is maintained or contributed to by the Company or any insurance company, fund or scheme on behalf of, or with respect to, any current or former employee, officer, director, or dependent thereof, to which the Company is a party, or for which the Company has any liability or contingent liability. All contributions required with respect to any policy, fund or scheme for all periods ending prior to the Closing (including periods from the first day of the current plan year to the Closing) will be completely and timely made prior to the Closing by the Company. The consummation of the transactions contemplated hereby will not entitle any employee of the Company to receive any bonus, severance or other payment. The Company has set aside funds or has otherwise made adequate reserves for all amounts owed to employees with respect to any severance obligations of the Company as a matter of law and with respect to all other benefits paid to its employees. 2.20 No Brokers or Finders. Except as set forth on Schedule 2.20, no --------------------- ------------- person has or will have, as a result of the transactions contemplated by this Agreement, any right, interest or 11 claim against or upon the Company for any commission, fee or other compensation as a finder or broker because of any act or omission by the Company. 2.21 Transactions with Affiliates. Except as set forth on Schedule 2.21, ---------------------------- ------------- there are no loans, leases or other continuing transactions between the Company on the one hand, and any officer or director of the Company or any person owning five percent (5%) or more of the issued and outstanding shares capital of the Company or any respective family member or affiliate of such officer, director or shareholder on the other hand. 2.22 Assumptions, Guarantees, etc. of Indebtedness of Other Persons. -------------------------------------------------------------- Except as set forth on Schedule 2.22, the Company has not assumed, guaranteed, ------------- endorsed or otherwise become directly or contingently liable on or for any indebtedness for borrowed money of any other Person, except guarantees by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business. 2.23 Disclosures. To the knowledge of the Company, the representations ----------- and warranties contained in this Agreement, together with the Schedules to this Agreement, taken as a whole, do not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements contained herein or therein, in light of the circumstances in which they were made, not misleading. ARTICLE III AFFIRMATIVE COVENANTS OF THE COMPANY ------------------------------------ Without limiting any other covenants and provisions hereof, the Company covenants and agrees that, unless waived by Purchasers holding a majority of the Purchased Shares on behalf of all Purchasers and Salansky, if applicable, and with respect to Sections 3.1 and 3.5, by ADC, it will observe the following covenants on and after the Closing Date and until the consummation of first Qualified Initial Public Offering; provided, however, that the provisions of this Article III shall no longer exist for the benefit of the Purchasers at such time as they shall no longer own, or have the right to acquire 20% of that number of Conversion Shares which they own, or have the right to acquire, or the date hereof. 3.1 Accounts and Reports. The Company will, and will cause each of its -------------------- Subsidiaries to, maintain a system of accounts in accordance with US GAAP and Israeli GAAP consistently applied and the Company will, and will cause each of its Subsidiaries to, keep full and complete financial records. The Company will furnish to each Purchaser, Salansky and ADC, the information set forth in this Section 3.1. (a) Within ninety (90) days after the end of each fiscal year, a copy of the consolidated and consolidating balance sheet of the Company and its Subsidiaries as at the end of such year, together with consolidated and consolidating statements of income, shareholders' equity and cash flow of the Company and its Subsidiaries for such year, setting forth in each case 12 in comparative form the corresponding figures for the preceding fiscal year, all in reasonable detail and accompanied by the unqualified report of one of the five largest public accountant firms (measured by total revenues) or a firm which is an affiliate of one of the five largest accountant firms (including, Kessleman & Kesselman), which firm shall be selected by the Board of Directors of the Company. (b) Within thirty (30) days after each month, a preliminary consolidated and consolidating balance sheet of the Company and its Subsidiaries as of the end of such month and preliminary consolidated and consolidating statements of income, shareholders' equity and cash flow for such month and for the period commencing at the end of the previous fiscal year and ending with the end of such month, setting forth in each case in comparative form the corresponding figures for the corresponding period of the preceding fiscal year, all in reasonable detail. (c) At the time of delivery of each quarterly and annual statement, a certificate, executed by either the president, chief executive officer or chief financial officer of the Company in his or capacity as an officer of the Company stating that such officer has caused the provisions of Articles III and IV of this Agreement to be reviewed and has no knowledge of any default by the Company or any Subsidiary in the performance or observance of any of the provisions thereof or, if such officer has such knowledge, specifying such default. (d) Not later than thirty (30) days prior to the end of each fiscal year, a copy of the operating plan and budget for the next fiscal year required under Section 3.8. (e) Promptly upon receipt thereof, any written report, so called "management letter", and any other reports submitted to the Company or any Subsidiary by its independent public accountants relating to the business, prospects or financial condition of the Company and its Subsidiaries; (f) Promptly after the commencement thereof, notice of (i) all actions, suits and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting the Company (or any Subsidiary) which, if successful, would have a Material Adverse Effect; and (ii) all material defaults by the Company or any Subsidiary (whether or not declared) under any agreement for money borrowed (unless waived or cured within applicable grace periods); (g) Promptly upon sending, making available, or filing the same, all reports and financial statements as the Company or any Subsidiary shall send or make available generally to the shareholders of the Company as such or to the Commission; and (h) Such other information with regard to the business, properties or the condition or operations, financial or otherwise, of the Company or its Subsidiaries as the Purchasers may from time to time reasonably request. 13 3.2 Payment of Taxes. The Company shall pay and discharge (and cause any ---------------- Subsidiary to pay and discharge) all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which penalties attach thereto, and all lawful claims which, if unpaid, might become a lien or charge upon any properties of the Company or any Subsidiary, provided that neither the Company nor any Subsidiary shall be required to pay any such tax, assessment, charge, levy or claim which (i) has not been asserted or is not owed, or (ii) is being contested in good faith and by proper proceedings if the Company or such Subsidiary shall have set aside on its books adequate reserves in the opinion of management and the Company's independent accountants with respect thereto. 3.3 Maintenance of Key Man Insurance. The Company will use its best -------------------------------- efforts to obtain within sixty (60) days after the Closing, at its expense, a life insurance policy in the face amount of $1,000,000 with a responsible and reputable insurance company payable to the Company on the life of Monica Eisinger. The Company will use its best efforts to maintain such policies and will not cause or permit any assignment of the proceeds of such policies and will not borrow against such policies. The Company will add one designee of the Purchasers as a notice party to such policies, and will request that the issuer of each policy provide such designee with ten (10) days' notice before such policy is terminated (for failure to pay premium or otherwise) or assigned, or before any change is made in the designation of the beneficiary thereof. Monica Eisinger hereby represents and warrants that she has not in the past been denied insurance on usual and customary rates available for an insured without a pre- existing condition, and that she has no knowledge of any fact or circumstance which would prevent the Company from obtaining life insurance on her life at such usual and customary rates. 3.4 Compliance with Laws, etc. The Company will comply (and cause each of -------------------------- its Subsidiaries to comply) with all applicable laws, rules, regulations and orders of any governmental authority, the noncompliance with which would have a Material Adverse Effect on the business, condition or results of operations of the Company and its Subsidiaries, taken as a whole. 3.5 Inspection. At any reasonable time during normal business hours and ---------- from time to time, but not more frequently than once per calendar quarter, respectively, for all Purchasers and transferees of Purchasers as a group and for Salansky and ADC, the Company (and each of its Subsidiaries) will permit (i) any one or more of the Purchasers, Salanksy and ADC so long as he or it shall own any securities and (ii) any of the agents or representatives of the foregoing Persons, to examine and make copies of and extracts from the records and books of account of and visit the properties of the Company (and any of its Subsidiaries) and to discuss the Company's affairs, finances and accounts with any of its officers or directors; provided that any Person or Persons exercising rights under this Section 3.5 shall (i) use all reasonable efforts to ensure that any such examination or visit results in a minimum of disruption to the operations of the Company and (ii) shall agree in writing to keep any proprietary information of the Company disclosed to him in the course of such inspection confidential in a manner consistent with 14 prudent business practices and treatment of such Person's or Persons' own confidential information and not use such proprietary information for any purpose in competition with the Company's business. The rights granted under this Section 3.5 shall be in addition to any rights which any Purchaser may have under applicable law. 3.6 Corporate Existence; Ownership of Subsidiaries. The Company will, and ---------------------------------------------- will cause its Subsidiaries to, at all times preserve and keep in full force and effect their corporate existence, and rights and franchises material to the business of the Company and its Subsidiaries, taken as a whole, and will qualify, and will cause each of its Subsidiaries to qualify, to do business as a foreign corporation in any jurisdiction where the failure to do so would have a Material Adverse Effect. The Company shall at all times own of record and beneficially, free and clear of all liens, charges, restrictions, claims and encumbrances of any nature, all of the issued and outstanding capital stock of each of its Subsidiaries. 3.7 Intentionally Omitted. 3.8 Board Approval. Not later than thirty (30) days prior to the end of -------------- each fiscal year, the Company will prepare and submit to its Board of Directors for its approval prior to such year end an operating plan and budget, cash flow projections and profit and loss projections, all itemized in reasonable detail for the immediately following year. 3.9 Financings. The Company will promptly provide to the Board of ---------- Directors the details and terms of, and any brochures or investment memoranda prepared by the Company related to, any possible financing of any nature for the Company (or any of its Subsidiaries), whether initiated by the Company or any other Person. 3.10 Meetings of the Board of Directors. The Directors shall schedule ---------------------------------- regular meetings not less frequently than once every fiscal quarter and at least one such meeting in every calendar year shall be held in the United States. 3.11 Option Plan. The Company shall promptly make all requisite ----------- adjustments to its Employees' Option Plan in order to give effect to the grant of options of the Company to employees of the Mind Subsidiary. ARTICLE IV NEGATIVE COVENANTS OF THE COMPANY --------------------------------- Without limiting any other covenants and provisions hereof, the Company covenants and agrees that it will comply (and will cause each Subsidiary to comply) for the benefit of the Purchasers with each of the provisions of this Article IV on and after the Closing Date and until the earlier of (i) the date on which no Purchased Shares remain outstanding; or (ii) the date of consummation of a Qualified Initial Public Offering. In each instance where this Article IV provides for action to be taken only with the approval of the Purchasers, such approval may be 15 evidenced either (i) by the prior written consent or waiver of each of the Purchasers, or (ii) by the prior written consent or waiver of each of the members of the Company's Board of Directors designated by the Purchasers, provided in each case that the document evidencing such consent or waiver accurately describes the action to be taken and clearly references the section or sections of this Agreement affected thereby. 4.1 Investments in Other Persons. The Company will not make or permit any ---------------------------- Subsidiary to make any loan or advance to any Person, or purchase, otherwise acquire, or permit any Subsidiary to purchase or otherwise acquire, the capital shares or assets of any Person without the prior approval of the Purchasers, except: - ------ (i) investments by the Company or a Subsidiary in evidences of indebtedness issued or fully guaranteed by the State of Israel and having a maturity of not more than one year from the date of acquisition; (ii) investments by the Company or a Subsidiary in certificates of deposit, notes, acceptances and repurchase agreements having a maturity of not more than one year from the date of acquisition issued by a bank organized in Israel having a combined capital and surplus of at least $50,000,000; (iii) loans or advances from the Company to any Subsidiary, a Subsidiary to the Company or from a Subsidiary to another Subsidiary; (iv) investments by the Company or a Subsidiary in A-rated or better commercial paper having a maturity of not more than one year from the date of acquisition; and (v) one or more investments or acquisitions by the Company or a Subsidiary which do not exceed or require expenditures in excess of, in the aggregate, $500,000, in any twelve-month period. 4.2 Intentionally Omitted. 4.3 Dealings with Affiliates. The Company will not enter into any ------------------------ transaction with any officer or director of the Company or any Subsidiary or holder of any class of capital shares of the Company, or any member of their respective immediate families or any corporation or other entity directly or indirectly controlling, controlled by or under common control with one or more of such officers, directors or shareholders or members of their immediate families, unless (i) the interest of such person is disclosed in advance to the Board of Directors, (ii) such transaction is on arm's-length terms which are no less favorable to the Company or any Subsidiary as those which could have been obtained from an unaffiliated third party, (iii) such transaction is approved by a disinterested majority of the Board of Directors of the Company or such Subsidiary and (iv) the Company had complied with all other requirements set forth in chapter V of the Companies Laws, 5759-1999 regarding transactions with interested parties. 16 4.4 Intentionally Omitted. 4.5 Limitation on Options. Unless approved by the Purchasers in any manner --------------------- provided under this Article IV, the Company shall not grant any options, warrants or other rights to acquire Ordinary Shares, Series A Preferred Shares, Series B Preferred Shares or any other securities of the Company, except up to an aggregate of 55,400 Ordinary Shares may be issued to employees of the Company pursuant to the Plan as described in Section 1.5 hereof, which grants may be recommended by the Compensation Committee and shall be approved by the Company's Board of Directors. 4.6 Limitation on Restrictions on Subsidiary Dividends and Other ------------------------------------------------------------ Distributions. The Company shall not permit any of its Subsidiaries, directly - ------------- or indirectly, to create or suffer to exist or become effective any encumbrances or restrictions on the ability of any of its Subsidiaries to (i) pay dividends or make any other distributions on its share capital or any other interest or participation in its profit owned by any of the Company or any of its Subsidiaries, or pay any indebtedness owed by any of the Subsidiaries, (ii) make loans or advances to the Company, or (iii) transfer any of its properties or assets to the Company. 4.7 No Conflicting Agreements. The Company agrees that neither it nor any ------------------------- Subsidiary will, without the consent of the Purchasers, enter into or amend any agreement, contract, commitment or understanding which would restrict or prohibit the exercise by the Purchasers of any of their rights under this Agreement or any of the Related Agreements. 4.8 Intentionally Omitted. 4.9 Indebtedness. Neither the Company nor any of its Subsidiaries will ------------ create, incur, guarantee, assume or otherwise become directly or indirectly liable for any Indebtedness (as defined in Section 8 below) from any bank, insurance company or other financial institution, unless approved by the Purchasers. 4.10 Liens. Neither the Company nor any of its Subsidiaries will create or ----- suffer to exist any Lien (as defined in Section 8 below) upon any of its assets, now owned or hereafter acquired, securing any indebtedness or other obligation except Permitted Liens (as further defined in Section 8 below). 4.11 Executive Compensation. The executive compensation to be paid to ---------------------- Monica Eisinger for so long as she remains the chief executive officer of the Company shall not exceed, without the approval of the Board of Directors, which approval shall include the consent of the director designated by the Purchasers, (i) an annual base pay of $144,000 (in United States Dollars) and (ii) a bonus to be determined by the Company's Board of Directors. The employment agreement executed by Monica Eisinger shall be amended to reflect such change and all other provisions therein shall remain in full force and effect upon the consummation of the transactions contemplated herein. 17 ARTICLE V INVESTMENT REPRESENTATIONS -------------------------- 5.1 Representations and Warranties. Each Purchaser hereby represents and ------------------------------ warrants to the Company as follows: (a) Such Purchaser is an entity duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or formation and has all requisite partnership or corporate power and authority and has taken all necessary partnership or corporate action required for the due authorization, execution, delivery and performance by such Purchaser of this Agreement and the Related Agreements, and any other agreements or instruments executed by such Purchaser in connection herewith or therewith and the consummation of the transactions contemplated herein or therein; (b) This Agreement, the Related Agreements and the other agreements and instruments executed by such Purchaser in connection herewith or therewith will each be a legal, valid and binding obligation of such Purchaser, enforceable against such Purchaser in accordance with its terms; (c) No consent, approval, license or authorization of, or designation, declaration or filing with, any court or governmental authority is or will be required on the part of such Purchaser in connection with the execution, delivery and performance by such Purchaser of this Agreement, any Related Agreements and any other agreements or instruments executed by such Purchaser in connection herewith or therewith; (d) Such Purchaser is in compliance with all the provisions of this Agreement and its organizational and/or partnership documents, and, to such Purchaser's knowledge, in all material respects with the material provisions of each other agreement or instrument, judgment, decree, judicial order, statute and regulation by which it is bound or to which it is subject. Neither the execution, delivery or performance of this Agreement and the Related Agreements nor the consummation of the transactions contemplated hereby and thereby, will materially violate, or result in any material breach of, or constitute a default under any provision of such Purchaser's organization or partnership documents, or any statute, rule or regulation, contract, lease, judgment, decree or other document or instrument by which such Purchaser is bound; (e) Such Purchaser is acquiring the Purchased Shares solely for its own account as an investment or on behalf of accredited investors and not with a view to any distribution or resale thereof in violation of the Securities Act, 5728-1968; (f) Such Purchaser can afford to suffer the complete loss of its investment in the Company. The knowledge and experience of such Purchaser in financial and business matters is such that it is capable of evaluating the risk of the investment in the Company. Such Purchaser acknowledges that it has had access to such financial and other information, and has 18 been afforded the opportunity to ask such questions of representatives of the Company and receive answers thereto, as such Purchaser has deemed necessary in connection with its decision to purchase the Purchased Shares, and that no representation or warranty, express or implied, is being made by the Company with respect to the Company or the Purchased Shares, other than those expressly set forth herein; (g) Such Purchaser has been advised and understands that no public market now exists for any of the securities issued by the Company and that a public market may never exist for the Purchased Shares or for the Ordinary Shares to be received upon conversion of the Purchased Shares; (h) Such Purchaser is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Purchased Shares; provided, however, that nothing in this Section 5.1 shall be deemed to vitiate - -------- ------- or limit the representations, warranties and covenants of the Company or the Principal Shareholders contained in this Agreement; and (j) No person has or will have, as a result of the transaction contemplated by this Agreement, any right, interest or claim against or upon the Purchasers or the Company or any of its Subsidiaries for any commission, fee or other compensation as a finder or broker because of any act or omission by such Purchaser. (k) Oscar Gruss & Son Incorporated ("Oscar Gruss") represents that the Purchased Shares purchased thereby are purchased on behalf, and shall inure to the benefit of, itself and certain individuals and entities. Oscar Gruss further represents that itself and each such individual or entity is an "accredited investor" within the meaning of SEC Rule 501 of Regulation D as presently in effect. 5.2 Permitted Transfers; Legends. The Company agrees that it will permit ---------------------------- (i) a transfer of the Purchased Shares (and the Ordinary Shares receivable upon conversion thereof) by a partnership to one or more of its partners, where no consideration is exchanged therefor by such partners, or to a retired or withdrawn partner who retires or withdraws after the date hereof in full or partial distribution of his interest in such partnership, or to the estate of any such partner or the transfer by gift will or intestate succession of any partner to his spouse or to his siblings, lineal descendants or ancestors of such partner of his spouse, or to a trust created for the benefit of one or more of the foregoing; (ii) a sale or other transfer of any of the Purchased Shares (and any Ordinary Shares receivable upon conversion thereof), if the transferee agrees in writing to be subject to the terms hereof to the same extent as if it were an original Purchaser hereunder; and (iii) transfer by Oscar Gruss to certain individuals and entities. 19 ARTICLE VI CONDITIONS OF PURCHASERS' OBLIGATIONS ------------------------------------- 6.1 Effect of Conditions. The obligations of the Purchaser to purchase -------------------- and pay for the Purchased Shares at the Closing shall be subject at its election to the satisfaction of each of the conditions stated in the following Sections of this Article. 6.2 Representations and Warranties. The representations and warranties of ------------------------------ the Company and the Principal Shareholders contained in this Agreement shall be true and correct in all material respects on the Closing Date with the same effect as though made on and as of that date, and the Purchasers shall have received a certificate dated as of such Closing Date and signed on behalf of the Company and the Principal Shareholders to that effect. 6.3 Performance. The Company and the Principal Shareholders shall have ----------- performed and complied in all material respects with all of the agreements, covenants and conditions contained in this Agreement and the Related Agreements required to be performed or complied with by it and them at or prior to such Closing Date, and the Purchasers shall have received a certificate dated as of such Closing Date and signed on behalf of the Company and the Principal Shareholders to that effect. 6.4 No Material Adverse Change. The business, properties, assets or -------------------------- condition (financial or otherwise) of the Company shall not have been materially adversely affected since the date of this Agreement, whether by fire, casualty, act of God or otherwise, and there shall have been no other changes in the business, properties, assets, condition (financial or otherwise), management or prospects of the Company or the Mind Subsidiary that would have a Material Adverse Effect. 6.5 Opinion of Counsel. The Purchasers shall have received opinions, ------------------ dated the Closing Date, from Herzog, Fox & Neeman, counsel to the Company, the Mind Subsidiary, and the Principal Shareholders, in the form attached as Exhibits C. - ---------- 6.6 Completion of Due Diligence. The Purchasers shall have satisfactorily --------------------------- completed their due diligence review with respect to the financial condition, results of operations, business and prospects of the Company. 6.7 Completion of Audit. The Company shall have provided to the ------------------- Purchasers audited financial statements, audited by Kesselmen & Kesselmen, for the fiscal year of the Company ended December 31, 1999, which financial statements shall have corroborated the information previously furnished by the Company to the Purchasers with respect to its financial condition and results of operation during such period. 6.8 Cash. At the Closing the Company shall deliver to the Purchasers a ---- balance sheet as of the Closing Date showing not less than $1,000,000 of Cash and Cash Equivalents. 20 6.9 Articles of Association. The Articles of Association of the Company ----------------------- shall have been amended to provide for the authorization of the Preferred Shares and all other rights, privileges and preferences conferred upon the Purchasers in connection with the transactions contemplated herein, in the form attached as Exhibit B hereto. - --------- 6.10 Consents and Waivers. The Company shall have obtained all consents -------------------- or waivers necessary to execute this Agreement and the other agreements and documents contemplated herein, to issue the Purchased Shares, and to carry out the transactions contemplated hereby and thereby. All corporate and other action and governmental filings necessary to effectuate the terms of this Agreement and the Related Agreements and other agreements and instruments executed and delivered by the Company in connection herewith shall have been made or taken, including, without limitation: (a) Waiver letters, duly executed by the Principal Shareholders, irrevocably abdicating all rights, preferences and privileges granted thereto under the agreement between the Company and the Principal Shareholders dated August 15, 1997, and further irrevocably waiving any veto rights, preemptive rights or rights of first refusal, whether granted under such agreement or under the Company's Articles of Association in connection with the issuance of the Company Shares or the transfer of the Salansky Shares (as applicable), in the form attached as Exhibit 6.10 (a) hereto. ---------------- (b) Waiver letters, duly executed by all the remaining shareholders of the Company (other than the Principal Shareholders), irrevocably waiving their right of first refusal in connection with the transfer of the Salansky Shares, in the form attached as Exhibit 6.10 (b) ---------------- hereto. (c) A letter of consent, duly executed by Mivnay Ta'asiya Ltd., approving the issuance of the Company Shares and transfer of the Salansky Shares as required under the lease agreement dated March 23, 1995; (d) A letter of consent, duly executed by the Investment Center of the Ministry of Industry and Commerce, approving the transactions contemplated herein. (e) A Resolution of the Company's general meeting, substantially in the form attached hereto as Exhibit 6.10 (e), by which: ---------------- (i) the Amended Articles have been adopted instead of the current Articles of Association; (ii) this Agreement and the Related Agreements, and the transactions contemplated herein and therein respectively, if and to the extent necessary, had been approved; 21 (iii) intentionally omitted; (iv) 27,778 Ordinary Shares owned by Salansky had been converted from Ordinary Shares into 27,778 shares of Series B Preferred Shares; (v) voting the Management Shares, par value NIS 1.00 per share, have been converted into Ordinary Shares of NIS 0.01 per share; (f) A Resolution of the Company's Board of Directors substantially in the form attached hereto as Exhibit 6.10 (f); ---------------- (i) approving this Agreement and the Related Agreements and the transactions contemplated herein and therein, (ii) Issuing and allotting the Company shares and approving the transfer of the Salansky Shares to the Purchasers. (i) Letter of resignation of Robert E. Switz from the Company's Board of Directors; (j) Employment Agreements, duly executed by key employees currently having no such written agreement with the Company, as specified in the list attached hereto as Schedule 6.10 (j) , in forms satisfactory to -------------------- the Purchasers; (k) A letter, in the form attached hereto as Exhibit 6.10(k), duly --------------- executed by all shareholders of Mind Israel Ltd., irrevocably and unconditionally assigning to the Company all the technology and know- how and all other proprietary information relating to telephone management and analysis software and voice-over-IP billing software, developed and owned by Mind Israel Ltd. 6.11 Certificates and Notices. The Company or Salansky (as the case may ------------------------ be) shall have delivered to the Purchasers: (a) A duly completed notice of the increase and changes in the share capital and adoption of the Amended Articles to the Israeli Registrar of Companies, in the form attached hereto as Exhibit 6.11 (a). ---------------- (b) Validly executed certificates representing, and issuance statements in respect of the Company Shares issued in the name of the Purchasers. (c) Validly executed and stamped certificates representing, and transfer statements and transfer deeds in respect of the Salansky Shares, in the name of the Purchasers. 22 6.12 Registration Rights Agreement. The Company, the Purchasers, the ----------------------------- Principal Shareholders and ADC shall have entered into a registration rights agreement (the "Registration Rights Agreement") in the form of Exhibit D --------- attached hereto. 6.13 Shareholders' Agreement. The Company, the Purchasers, the Principal ------------------------ Shareholders and ADC shall have entered into a Shareholders' Agreement in the form of Exhibit E attached hereto. --------- 6.14 Non-Competition, Non Solicitation and Non Disclosure Agreements. ---------------------------------------------------------------- The Company shall have entered into a Non-Competition, Non-Solicitation and Non- Disclosure Agreements with the Principal Shareholders and key employees in the form of Exhibit 6.14 attached hereto. ------------ 6.15 Redemption Agreement. The Company, the Purchasers and the Principal -------------------- Shareholders shall have entered into a Redemption Agreement in the form of Exhibit F attached hereto. - --------- 6.16 Board Resolutions. The Board of Directors of the Company shall have ----------------- adopted a resolution declaring the dividend described in Section 1.6 hereof and setting forth the terms of the distribution of the same in a manner which is acceptable to the Purchasers. ARTICLE VII CONDITIONS OF THE COMPANY'S OBLIGATIONS --------------------------------------- 7.1 Effect of Conditions. The obligation of the Company to sell the -------------------- Company Shares at the Closing and Salansky to sell the Salansky Shares shall be subject at his or its election to the satisfaction of each of the conditions stated in the following Sections of this Article. 7.2 Representations and Warranties. The representations and warranties ------------------------------ of the Purchasers contained in this Agreement shall be true and correct in all material respects on the Closing Date with the same effect as though made on and as of that date and the Company shall have received a certificate on the Closing Date and signed on behalf of each Purchaser to that effect. 7.3 Shareholders' Agreement. The Shareholders' Agreement shall have ------------------------ been executed and delivered by the Purchasers and ADC. 7.4 Registration Rights Agreement. The Registration Rights Agreement ----------------------------- shall have been executed and delivered by the Purchasers and ADC. 7.5 Performance. The Purchasers shall have performed and complied in all ----------- material respects with all of the agreements, covenants and conditions contained in the Agreement required to be performed or complied with by them at or prior to such Closing, and the Company 23 shall have received a certificate dated as of such Closing and signed on behalf of the Purchasers to that effect. 7.6 Consents and Waivers. The Purchasers shall have obtained all consents -------------------- or waivers necessary to execute this Agreement and the other agreements and documents contemplated herein, and to carry out the transactions contemplated hereby and thereby. 7.7 Redemption Agreement. The Redemption Agreement shall have been -------------------- executed and delivered by the Purchasers and ADC. ARTICLE VIII CERTAIN DEFINITIONS ------------------- As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Act" shall have the meaning ascribed to it in Section 1.8. "Agreement" means this Share Purchase Agreement as from time to time amended and in effect between the parties. "Bankruptcy Law" shall mean the Bankruptcy Act, 5740 - 1980 and Chapters 11-17 of the Companies Ordinance [New Version], 5743 - 1983. "Business Day" shall mean a day which is not a legal holiday in the Israel. "Cash and Cash Equivalents" means cash and investments in certificates of deposit, money market funds and obligations issued or guaranteed by the Israeli Government or any instrumentality thereof, in each case only if due and payable on demand or within thirty (30) days after the date of purchase. "Closing" shall have the meaning set forth in Section 1.4. "Closing Date" shall have the meaning set forth in Section 1.4. "Company" means and shall include MIND C.T.I. Ltd., an Israeli corporation, and its successors and assigns. "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. "Indebtedness" means all obligations, contingent or otherwise, whether current or long-term, which in accordance with generally accepted accounting principles would be classified upon the obligor's balance sheet as indebtedness (other than deferred taxes) and shall 24 also include capitalized leases, guarantees, endorsements (other than for collection in the ordinary course of business) or other arrangements whereby responsibility is assumed for the obligations of others, including any agreement to purchase or otherwise acquire the obligations of others or any agreement, contingent or otherwise, to furnish funds for the purchase of goods, supplies or services for the purpose of payment of the obligations of others, excluding accounts payable incurred in the ordinary course of business. "Last Balance Sheet" shall mean the balance sheet of the Company as of February 29, 2000. "Lien" shall mean any mortgage, deed of trust, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement. "Material Adverse Effect" means a material and adverse effect on the assets, liabilities, properties, business, results of operation, prospects or condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole. "Mind Subsidiary" shall have the meaning set forth in Section 2.1. "Permitted Liens" shall mean: (i) Liens for taxes not yet due or payable under law or being contested in good faith by appropriate proceedings and for which adequate reserves have been provided; (ii) easements, rights of way and similar encumbrances incurred in the ordinary course of business which do not, individually or in the aggregate, materially detract from the value of the property subject thereto or interfere with the ordinary course of business of the Company or any Subsidiary; (iii) Liens on goods to secure the payment of the purchase price of such goods; and (iv) Liens existing on the date hereof on equipment used in the ordinary course of business to secure the payment of the cost of acquisition or leasing thereof. "Person" means an individual, corporation, partnership, joint venture, trust or unincorporated organization or a government or agency or political subdivision thereof. "Purchasers" shall have the meaning set forth in Section 1.1. "Qualified Initial Public Offering" shall mean a public offering of equity securities of the Company pursuant to a registration statement filed under the Act underwritten by an internationally recognized underwriter with net proceeds to the Company of at least $30,000,000. "Related Agreements" shall mean the Registration Rights Agreement and the Shareholders' Agreement. "Subsidiary" or "Subsidiaries" means any corporation, association or other business entity of which the Company and/or any of its other Subsidiaries (as herein defined) directly or indirectly owns at the time more than fifty percent (50%) of the outstanding voting shares of 25 every class of such corporation, or the right to appoint a majority of such corporation's directors, or such corporation's chief executive officer or managing director. ARTICLE IX INDEMNIFICATION 9.1 Survival of Representations and Warranties. The representations and ------------------------------------------ warranties contained in this Agreement shall survive the Closing until the earlier of (i) ninety (90) days after receipt by the Purchasers of audited financial statements for the Company for its year ending December 31, 2001, or (ii) the consummation of an initial public offering of the securities of the Company pursuant to a registration statement filed under the Securities Act of 1933, as amended. 9.2 Indemnification of Purchasers._ The Company and the Principal ----------------------------- Shareholders hereby agree, jointly and severally, to indemnify and hold the Purchasers and their respective directors, officers, employees, agents, successors and assigns (collectively, the "Purchaser Indemnified Parties") harmless from and against (i) any and all losses, liabilities, obligations and damages, including any interest thereon (collectively, "Losses") based upon, attributable to or resulting from any inaccuracy in or breach of any representation or warranty of the Company or the Principal Shareholders set forth in Articles II hereof, or any representation or warranty contained in any other agreement or certificate delivered by or on behalf of the Company pursuant to this Agreement, to be true and correct; (ii) any and all Losses based upon, attributable to or resulting from the breach of the covenant contained in Section 1.6; and (iii) any and all costs, penalties and expenses (including attorneys' and other professionals' fees and disbursements), including any interest thereon (collectively, "Expenses"), incident to any Losses, with respect to which indemnification is provided under clauses (i) and (ii) above. In addition, the Company hereby agrees to indemnify and hold the Purchaser Indemnified Parties harmless from and against (i) all Losses resulting from any inaccuracy in or breach of any representation or warranty of the Company set forth in Articles III or IV hereof, except with respect to those arising out of or upon breach of the covenant set forth in Section 4.9; provided, however, that the Purchasers shall retain all equitable remedies for a breach thereof; (ii) any and all losses based upon, attributable to or resulting from breach of any covenant or other agreement on the part of the Company under this Agreement; and (iii) any and all Expenses, incident to any Losses, with respect to any indemnification provided in clauses (i) and (ii) above. 9.3 Indemnification of the Company._ The Purchasers hereby agree to ------------------------------ indemnify and hold the Company harmless from and against (i) any and all Losses based upon, attributable to or resulting from any inaccuracy or breach of any representation or warranty of the Purchasers set forth in Article V hereof, or any representation or warranty contained in any other agreement or certificate delivered by or on behalf of the Purchasers pursuant to this Agreement, to be true and correct; and (ii) any and all Expenses incident to any Losses for which indemnification is sought hereunder. 26 9.4 Indemnification Procedures -------------------------- (a) In the event that any Legal Proceedings shall be instituted or that any claim or demand ("Claim") shall be asserted by any person in respect of which payment may be sought under Section 9.2 or 9.3 hereof, the indemnified party shall reasonably and promptly cause written notice of the assertion of any Claim of which it has knowledge which is covered by this indemnity to be forwarded to the indemnifying party. The indemnifying party shall have the right, at its sole option and expense, to be represented by counsel of its choice, which must be reasonably satisfactory to the indemnified party, and to defend against, negotiate, settle or otherwise deal with any Claim which relates to any Losses indemnified against hereunder. If the indemnifying party elects to defend against, negotiate, settle or otherwise deal with any Claim which relates to any Losses indemnified against hereunder, it shall within five (5) days (or sooner, if the nature of the Claim so requires) notify the indemnified party of its intent to do so. If the indemnifying party elects not to defend against, negotiate, settle or otherwise deal with any Claim which relates to any Losses indemnified against hereunder, fails to notify the indemnified party of its election as herein provided or contests its obligation to indemnify the indemnified party for such Losses under this Agreement, the indemnified party may defend against, negotiate, settle or otherwise deal with such Claim. If the indemnified party defends any Claim, then the indemnifying party shall reimburse the indemnified party for the Expenses of defending such Claim upon submission of periodic bills. If the indemnifying party shall assume the defense of any Claim, the indemnified party may participate, at his or its own expense, in the defense of such Claim; provided, however, that such indemnified party shall be -------- ------- entitled to participate in any such defense with separate counsel at the expense of the indemnifying party if, (i) so requested by the indemnifying party to participate or (ii) in the reasonable opinion of counsel to the indemnified party, a conflict or potential conflict exists between the indemnified party and the indemnifying party that would make such separate representation advisable; and provided, further, that the indemnifying party shall not be required to pay -------- ------- for more than one such counsel for all indemnified parties in connection with any Claim. The parties hereto agree to cooperate fully with each other in connection with the defense, negotiation or settlement of any such Claim. After any final judgment or award shall have been rendered by a court, arbitration board or administrative agency of competent jurisdiction and the expiration of the time in which to appeal therefrom, or a settlement shall have been consummated, or the indemnified party and the indemnifying party shall have arrived at a mutually binding agreement with respect to a Claim hereunder, the indemnified party shall forward to the indemnifying party notice of any sums due and owing by the indemnifying party pursuant to this Agreement with respect to such matter and the indemnifying party shall be required to pay all of the sums so due and owing to the indemnified party by wire transfer of immediately available funds within ten (10) business days after the date of such notice. (b) The failure of the indemnified party to give reasonably prompt notice of any Claim shall not release, waive or otherwise affect the indemnifying party's obligations with respect thereto except to the extent that the indemnifying party can demonstrate actual and material loss and prejudice as a result of such failure. 27 9.5 Limitations. Notwithstanding the foregoing provisions, no amounts ----------- shall be payable as a result of a Claim under Section 9.2 or 9.3 in respect of a misrepresentation or a breach of a warranty unless or until the indemnified party shall have suffered, incurred, sustained, or become subject to Losses and Expenses in excess of $500,000 in the aggregate (other than for a Claim for breach of representations set forth in Section 2.4 hereof), in which case the indemnified party shall be entitled to seek indemnity for all Losses and Expenses incurred irrespective of amount. ARTICLE X MISCELLANEOUS 10.1 Parties in Interest. Except as otherwise set forth herein, all ------------------- covenants, agreements, representations, warranties and undertakings contained in this Agreement shall be binding on and shall inure to the benefit of the parties hereto and the respective successors and assigns of the parties hereto. 10.2 Amendments and Waivers. Amendments or additions to this Agreement ---------------------- may be made, and compliance with any term, covenant, agreement, condition or provision set forth herein may be omitted or waived (either generally or in a particular instance and either retroactively or prospectively) upon the written consent of the Company and the Purchasers holding a majority of the Purchased Shares; provided, however that any amendment or waiver of the terms set forth in Sections 3.1 or 3.5 hereof shall require the consent of ADC. Prompt notice of any such amendment or waiver shall be given to any Person who did not consent thereto. This Agreement (including the Schedules and Exhibits annexed hereto, which are an integral part of this Agreement), the Related Agreements and the other agreements executed in connection herewith together constitute the full and complete agreement of the parties with respect to the subject matter hereof and thereof. 10.3 Notices. All notices, requests, consents, reports and demands shall ------- be in writing and shall be hand delivered, sent by facsimile or other electronic medium, or mailed, postage prepaid, to the Company or to the Purchasers at the address set forth below or to such other address as may be furnished in writing to the other parties hereto: 28 The Company: MIND C.T.I. Ltd. POB 144 Industrial Park Yokne'am Elit, 20692, Israel Attention: President Fax: (972)-(4)-993-7776 with copy to: Herzog, Fox & Neeman Asia House 4 Weizmann St. Tel-Aviv 64239, Israel Attention: Clifford M. J. Felig, Advocate Fax: (972) (3) 696-6464 The Purchasers: The address set forth opposite the Purchaser's name on Schedule 1.1 attached hereto. ------------ with copy to: Hutchins, Wheeler & Dittmar, A Professional Corporation 101 Federal Street Boston, Massachusetts 02110 Attention: James Westra, Esquire Fax: (617) 951-1295 and to: Ravillan, Volovelsky, Dinstein, Sneh & Co. 76 Rothschild Blvd. Mozes House, 6/th/ Floor Tel-Aviv, 65785 Israel Facsimile: (972)-(3)-5664630 Attn: Dr. Eddo Dinstein, Attorney-at-Law 10.4 Expenses. Immediately upon consummation of the Closing, the Company -------- shall pay all reasonable documented costs and expenses of the Purchasers, in an amount up to $88,000, in connection with the investigation, preparation, execution and delivery of this Agreement (and due diligence related thereto) and the other instruments and documents to be delivered hereunder and the transactions contemplated hereby and thereby, including the reasonable fees and disbursements of Hutchins, Wheeler & Dittmar, A Professional Corporation, special counsel to the Purchasers. If the purchase of the Purchased Shares is not consummated in accordance with the terms of this Agreement, the Company shall not be required under this Agreement to pay any of the Purchasers' costs or expenses. 10.5 Counterparts. This Agreement and any exhibit hereto may be executed ------------ in multiple counterparts, each of which shall constitute an original but all of which shall constitute but one and the same instrument. One or more counterparts of this Agreement or any exhibit 29 hereto may be delivered via telecopier, with the intention that they shall have the same effect as an original counterpart hereof. 10.6 Effect of Headings. The article and section headings herein are for ------------------ convenience only and shall not affect the construction hereof. 10.7 Governing Law. This Agreement shall be deemed a contract made under ------------- the laws of the State of Israel and together with the rights and obligations of the parties hereunder, shall be construed under and governed by the laws of such State. 10.8 Dollar Amounts. All dollar amounts referenced, incorporated, or set -------------- forth in this Agreement or the Related Agreements shall refer to and mean such amounts as expressed in United States Dollars. * * * * * 30 MIND C.T.I. LTD. SHARE PURCHASE AGREEMENT Counterpart Signature Page -------------------------- MIND C.T.I. LTD. /s/ Monica Eisinger By: _______________________________ Name: Title: President PRINCIPAL SHAREHOLDERS: ---------------------- /s/ Monica Eisinger ___________________________________ Monica Eisinger /s/ Lior Salansky ___________________________________ Lior Salansky ADC TELEDATA COMMUNICATIONS LTD. /s/ Ilan Melamed By: _______________________________ Name: Ilan Melamed Title: Chief Executive Officer 31 MIND C.T.I. LTD. SHARE PURCHASE AGREEMENT Counterpart Signature Page -------------------------- PURCHASERS: ---------- SUMMIT VENTURES V, L.P. By: Summit Partners V, L.P., its General Partner By: Summit Partners, LLC, its General Partner /s/ Kevin Mohan By: ______________________________ Member SUMMIT V COMPANION FUND, L.P. By: Summit Partners V, L.P., its General Partner By: Summit Partners, LLC, its General Partner /s/ Kevin Mohan By: ______________________________ Member 32 MIND C.T.I. LTD. SHARE PURCHASE AGREEMENT Counterpart Signature Page -------------------------- IN WITNESS WHEREOF, this Agreement has been executed as an instrument under SEAL as of the date and year first above written. Summit V Advisors Fund, L.P. By: Summit Partners, LLC its General Partner /s/ Kevin Mohan By: _______________________________ Member SUMMIT V ADVISORS FUND (QP), L..P. By: Summit Partners, LLC, its General Partner /s/ Kevin Mohan By: _______________________________ Member SUMMIT INVESTORS III, L.P. /s/ Kevin Mohan By: _______________________________ General Partner OSCAR GRUSS & SON INCORPORATED /s/ Michael Shaoul By: _______________________________ Name: Michael Shaoul Title: Executive Vice President 33 EX-10.3 9 0009.txt REGISTRATION RIGHTS AGREEMENT BY AND AMONG MIND EXHIBIT 10.3 EXECUTION COPY -------------- REGISTRATION RIGHTS AGREEMENT AGREEMENT, made as of the 30/th/ day of March, 2000, by and among MIND C.T.I. Ltd., an Israeli corporation (the "Company"), those persons set forth on Schedule 1 as Investors (each an "Investor" and collectively the "Investors"), - ---------- and those persons set forth on Schedule 2 as Principal Shareholders (each, a ---------- "Principal Shareholder" and collectively, the "Principal Shareholders"). WHEREAS, the Investors are acquiring an aggregate of 111,111 Series A Convertible Preferred Shares, par value NIS 0.01 per share, of the Company (the "Series A Preferred Shares") and 27,778 Series B Convertible Preferred Shares, par value NIS 0.01 per share, of the Company (the "Series B Preferred Shares"), pursuant to the terms of a Share Purchase Agreement dated as of the date hereof among the Company, the Investors, and certain other parties named therein (the "Purchase Agreement"); and WHEREAS, it is a condition to the obligations of the Investors under the Purchase Agreement that this Agreement be executed by the parties hereto in order to provide the Investors with certain registration rights, and the parties are willing to execute this Agreement and to be bound by the provisions hereof; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, the parties hereto 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. "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 the person who is then the record owner of Registrable Securities which have not been sold to the public. "Initiating Holders" means any Investor and its assignees. -1- "Registrable Securities" means (i) all Ordinary Shares, par value NIS 0.01 per share, of the Company (the "Common Stock"), now owned or hereafter acquired by any Investor, (ii) all shares of Common Stock now owned or hereafter acquired by the Principal Shareholders, (iii) all shares of Common Stock issued or issuable with respect to securities of the Company convertible into or exercisable for shares of Common Stock now owned or hereafter acquired by any Investor, and (iv) any Common Stock issued in respect of the shares described in clauses (i), (ii) and (iii) upon any stock split, stock dividend, recapitalization or other similar event. The term "register" means to register under the Act and applicable state securities laws for the purpose of effecting a public sale of securities. "Registration Expenses" means all expenses incurred by the Company in compliance with Sections 2, 3 or 5 hereof, including, without limitation, all registration and filing fees, printing expenses, transfer taxes, fees and disbursements of counsel for the Company, blue-sky fees and expenses, fees of transfer agents and registrars, reasonable fees and disbursements of one counsel for all the selling Holders, and the expense of any special audits incident to or required by any such registration. "Selling Expenses" means all underwriting discounts and selling commissions applicable to the sale of Registrable Securities. 2. Requested Registrations ----------------------- (a) Subject to Section 2(c), if the Company shall receive from one or more Initiating Holders a written request that the Company effect the registration of Registrable Securities representing at least twenty-five percent (25%) of the Registrable Securities held by or issuable to all the Investors and their assigns (or, after the Company has effected a public offering of its Common Stock, any lesser percentage if the reasonably anticipated aggregate price to the public of the Registrable Securities to be included in such registration would exceed $2,000,000), in connection with a firm commitment underwriting, the Company will: (i) promptly give written notice of the proposed registration to all other Holders; and (ii) as soon as practicable, use all commercially reasonable efforts to effect such registration as may be so requested and as would permit or facilitate the sale and distribution of such portion of such Registrable Securities as are specified in such request, together with such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request given within thirty (30) days after receipt of such written notice from the Company. If the underwriter managing the offering advises the Holders who have requested inclusion of their Registrable Securities in such registration that marketing considerations require a limitation on the number of shares offered, such limitation or cut-back shall be imposed as follows: first, there shall be excluded shares of the Principal ----- Shareholders who requested inclusion of Registrable Securities in such registration pursuant to Section 3 hereof, pro rata on the basis of the --- ---- shares -2- requested to be included by each; provided, however, that until October 6, 2001, any such exclusion of Registrable Securities of Monica Eisinger, Lior Salanksy and ADC Teledata Communications Ltd. ("ADC") shall be affected such that ADC shall be entitled to include Registrable Securities such that ADC shall be entitled to participate in any such registration at twice the rate of Monica Eisinger and Lior Salansky (by way of example, exclusions of Registrable Securities could occur such that Monica Eisinger and Lior Salansky would be entitled to include 10% of the Registrable Securities held by them and ADC would be entitled to include 20% of the Registrable Securities held by it), provided, further, that in no event, shall any such adjustment as between Monica Eisinger, Lior Salanksy and ADC entitle any of the same to any inclusion not otherwise permitted hereunder or which would result in exclusion of any other Registrable Securities not otherwise provided hereunder; and next, there shall be excluded shares of the ---- Investors who requested inclusion of Registrable Securities in such registration, pro rata on the basis of the shares requested to be --- ---- included by each. The Investors may initiate two (2) registrations pursuant to this Section 2(a). No registration initiated by the Initiating Holders hereunder shall count as a registration under this Section 2(a) unless and until it shall have been declared effective (an "Effective Registration") and the Initiating Holders shall have sold all of the Registrable Securities included by them in such registration, unless such registration is withdrawn at the request of the Initiating Holders and such request is not due to an adverse change in the business or financial condition of the Company. (b) The underwriter of any underwriting requested under this Section 2 shall be selected by the Holders holding a majority of the Registrable Securities to be included therein; provided that such underwriter must be reasonably acceptable to the Company. (c) Notwithstanding anything to the contrary contained herein, the Company shall not be required to register any securities pursuant to Section 2(a) hereof during the 180 days following the effective date of a registration statement filed by the Company covering a firm commitment underwritten public offering in which the Initiating Holders have been entitled to join pursuant to Section 3 or Section 5 hereof and in which there shall have been effectively registered all shares of Registrable Shares as to which registration shall have been requested. 3. "Piggy Back" Registrations. ------------------------- (a) If the Company shall determine to register any of its securities, either for its own account or the account of a security holder or holders exercising their registration rights (subject to the provisions of Section 2), other than a registration relating solely to employee benefit plans or a registration on any registration form which does not permit secondary sales or does not include substantially the same information as would be required to be included in a registration statement covering the sale of Registrable Securities or pursuant to Form S-4, the Company will: (i) Promptly give to each Holder of Registrable Securities written notice thereof (which shall include the number of shares the Company or other security -3- holder proposes to register and, if known, the name of the proposed underwriter); and (ii) Use its best efforts to include in such registration all the Registrable Securities specified in a written request or requests, made by any Holder within twenty (20) days after the date of delivery of the written notice from the Company described in clause (i) above. If the underwriter advises the Company that marketing considerations require a limitation on the number of shares offered pursuant to any registration statement, then the Company may offer all of the securities it proposes to register for its own account and such limitation on any remaining securities that may, in the opinion of the underwriter, be sold will be imposed pro rata among such Holders who requested inclusions of --- ---- Registrable Securities in such registration according to the number of Registrable Securities then held by such Holders; provided, however, that until October 6, 2001, any such exclusion of Registrable Securities of Monica Eisinger, Lior Salanksy and ADC shall be affected such that ADC shall be entitled to include Registrable Securities such that ADC shall be entitled to participate in any such registration at twice the rate of Monica Eisinger and Lior Salansky (by way of example, exclusions of Registrable Securities could occur such that Monica Eisinger and Lior Salansky would be entitled to include 10% of the Registrable Securities held by them and ADC would be entitled to include 20% of the Registrable Securities held by it), provided, further, that in no event, shall any such adjustment as between Monica Eisinger, Lior Salanksy and ADC entitle any of the same to any inclusion not otherwise permitted hereunder or which would result in exclusion of any other Registrable Securities not otherwise provided hereunder. (b) The Company shall select the underwriter for an offering made pursuant to this Section 3; provided that such underwriter must be reasonably -------- acceptable to the Holders of a majority of the Registrable Securities being registered in such offering. 4. Expenses of Registration. All Registration Expenses incurred in ------------------------ connection with any registration, qualification or compliance pursuant to Section 2, 3, or 5 shall be paid by the Company. All Selling Expenses incurred in connection with any such registration, qualification or compliance shall be borne by the holders of the securities registered, pro rata on the basis of the --- ---- number of their shares so registered. 5. Registration on Form S-3. The Company shall use its best efforts to ------------------------ qualify for registration on Form S-3 or any comparable or successor form; and to that end the Company shall register (whether or not required by law to do so) the Common Stock under the Exchange Act in accordance with the provisions of the Exchange Act following the effective date of the first registration of any securities of the Company on Form S-1 or any comparable or successor form. After the Company has qualified for the use of Form S-3, in addition to the rights contained in the foregoing provisions of this Agreement, the Investors and ADC Teledata Communications Ltd. shall have the right to request registrations on Form S-3 (such requests -4- shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended methods of disposition of such shares by such Holder or Holders). 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 120 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; (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 from time to time may reasonably request; (d) In connection with any underwritten offering pursuant to a registration statement filed pursuant to Section 2 hereof, the Company will enter into any underwriting agreement reasonably necessary to effect the offer and sale of Common Stock, provided 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 such matters of the type customarily covered 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; and (f) Permit the counsel to the selling Holders whose expenses are being paid pursuant to Section 4 hereof to inspect and copy such corporate documents as he may reasonably request. -5- 7. Indemnification. --------------- (a) The Company will, and hereby does, indemnify 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 contained in any prospectus, offering circular or other document (including any related registration statement, notification 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 and relating to action or inaction required of 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 based on any untrue statement (or alleged untrue statement) or omission (or alleged omission) based upon written information furnished to the Company by such Holder or underwriter and stated to be specifically for use therein. (b) Each Holder will, if Registrable Securities held by it or him are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers and each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of the Act and the rules and regulations thereunder, each other such Holder and each of their officers, directors and partners, and each person controlling such Holder, 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 contained in any such registration statement, prospectus, offering circular or other document, or 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, and will reimburse the Company, each person controlling the Company, each underwriter and each person who controls any such underwriter, each Holder and each person controlling such Holder, and their respective directors, officers, partners, persons, underwriters and control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, whether or not resulting in liability, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by such Holder and stated to be specifically for use therein; provided, however, that the -6- obligations of each Holder hereunder shall be limited to an amount equal to the net proceeds received by such Holder upon sale of his securities. (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, but 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). 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 expense to assume, the defense of any such claim or any litigation resulting therefrom, with counsel reasonably satisfactory to 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 from 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 or 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 claim 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. (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 the 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 subsection (d). 8. 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 proposed 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. -7- 9. Limitations on Registration Rights. From and after the date of this ---------------------------------- Agreement, the Company shall not, without the prior written consent of the Investors, enter into any agreement with any holder or prospective holder of any securities of the Company which would give any such holder or prospective holder (a) 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 or reduce the offering price thereof; or (b) the right to require the Company to initiate any registration of any securities of the Company. 10. 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 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 10 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. Notwithstanding the foregoing, in no event shall the provisions of this Section 10 be construed to preclude a Holder of Registrable Securities from exercising rights under Section 3 for a period of three years after the effective date of the Company's initial registration of shares under the Act. 11. 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 (90) days following the effective date of the first registration under the Act filed by the Company for an offering of its securities to the general 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 -8- 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 a Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing an Investor to sell any such securities without registration. 12. Listing Application. If shares 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 Investor and any Principal Shareholder. 13. Damages. The Company recognizes and agrees that the Holder of ------- Registrable Securities shall not have an adequate remedy if the Company fails to comply with the provisions of this Agreement, and that damages will not be readily ascertainable, and the Company expressly agrees that in the event of such failure any Holder of Registrable Securities shall be entitled to seek specific performance of the Company's obligations hereunder and that the Company will not oppose an application seeking such specific performance. 14. Representations and Warranties of the Company. The Company represents --------------------------------------------- and warrants to the Investors as follows: (a) The execution, delivery and performance of this Agreement by the Company have been duly authorized by all requisite corporate action and will not violate any provision of law, any order of any court or other agency or government by which the Company or any of its properties or assets is bound, the Articles of Association or By-laws of the Company or any provision of any indenture, agreement or other instrument to which the Company or any of its properties or assets is bound, conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of the Company. (b) This Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. 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) If requested in writing by the underwriters, and approved by the Company's Board of Directors, for the initial underwritten public offering of securities of the Company, each holder of Registrable Securities who is a party to this Agreement shall agree not to sell publicly any shares of Common Stock (other than shares of Common Stock being registered in such offering), without the consent of such underwriters, for a period of not more -9- than 180 days following the effective date of the registration statement relating to such offering; provided, however, that all other persons selling -------- ------- shares of Common Stock in such offering and all executive officers and directors of the Company shall also have agreed to similar restrictions with respect to their Common Stock. If requested in writing by the underwriters, and approved by the Company's Board of Directors, upon the consummation of an underwritten public offering of securities of the Company within eighteen (18) months after the initial underwritten public offering, each holder of Registrable Securities who is a party to this Agreement shall agree not to sell publicly any shares of Common Stock (other than shares of Common Stock being registered in such offering), without the consent of such underwriters, for a period equal to the lesser of (i) 90 days following the effective date of the registration statement relating to such offering; or (ii) the period of time that all executive officers and directors of the Company shall have agreed to such restrictions with respect to their Common Stock; provided that such restrictions apply only to the first underwritten public offering consummated by the Company following the initial underwritten public offering. (c) All notices, requests, consents and other communications hereunder shall be in writing and shall be (i) mailed by certified or registered mail, return receipt requested, postage prepaid (ii) sent by hand delivery, (iii) sent by facsimile, or (iv) sent by overnight courier addressed as follows: If to the Company, any Principal Shareholder or any Investor, at the address of such party set forth on Schedule I hereto 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 Holder; or, in any 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. (d) This Agreement shall be governed by and construed in accordance with the laws of the State of Israel. (e) This Agreement may not be amended or modified, and no provision hereof may be waived, without the written consent of the Company and the Investors holding at least 51% of the outstanding Registrable Securities held by the Investors; provided that any such action that adversely affects the rights of the Principal Shareholders must similarly affect the rights of the Investors, and provided, further that any such action which adversely affects the rights of ADC shall require the consent of ADC. (f) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (g) 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 -10- 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. * * * * * * * * * * -11- REGISTRATION RIGHTS AGREEMENT Counterpart Signature Page -------------------------- IN WITNESS WHEREOF, this Agreement has been executed as an instrument under SEAL as of the date and year first above written. COMPANY: MIND C.T.I. LTD. /s/ Monica Eisinger By: ____________________________ Name: Monica Eisinger Title: President INVESTORS: Summit Ventures V, L.P. By: Summit Partners V, L.P., Its General Partner By: Summit Partners, LLC Its General Partner /s/ Kevin Mohan By: ____________________________ Member Summit V Companion Fund, L.P. By: Summit Partners V, L.P., Its General Partner By: Summit Partners, LLC Its General Partner /s/ Kevin Mohan By: ____________________________ Member -12- REGISTRATION RIGHTS AGREEMENT Counterpart Signature Page Summit V Advisors Fund, L.P. By: Summit Partners, LLC Its General Partner /s/ Kevin Mohan By: ___________________________ Member Summit V Advisors Fund (QP), L.P. By: Summit Partners, LLC Its General Partner /s/ Kevin Mohan By: ___________________________ Member Summit Investors III, L.P. /s/ Kevin Mohan By: ___________________________ General Partner Oscar Gruss & Son Incorporated /s/ Michael Shaoul By: ___________________________ Name: Michael Shaoul Title: Executive Vice President -13- REGISTRATION RIGHTS AGREEMENT Counterpart Signature Page -------------------------- PRINCIPAL SHAREHOLDERS: /s/ Monica Eisinger ___________________________________ Monica Eisinger, individually /s/ Lior Salansky ___________________________________ Lior Salansky, individually ADC Teledata Communications Ltd. /s/ Ilan Melamed By: _______________________________ Name: Ilan Melamed Title: Chief Executive Officer -14- SCHEDULE I - ---------- Name and Address - ---------------- Company - ------- MIND C.T.I. Ltd. POB 144 Industrial Park Yokne'am Elit, 20692 Israel Attention: President Investors - --------- Summit Ventures V, L.P. Summit V Companion Fund, L.P. Summit V Advisors Fund, L.P. Summit V Advisors Fund (QP), L.P. Summit Investors III, L.P. c/o Summit Partners 600 Atlantic Avenue, Suite 2800 Boston, MA 02210-2227 Attn: Kevin Mohan Oscar Gruss & Son Incorporated 30 Kalisher Street Tel Aviv, Israel 65257 Attention: Jed Arkin Principal Shareholders - ---------------------- Monica Eisinger Mitzpe Ho'shaya Israel Lior Salansky 19 Snir Street Yokne'am Elit, 20692 Israel ADC Teledata Communications Ltd. c/o ADC Telecommunications, Inc. 12501 Whitewater Drive Minnetonka, MN 55343 Attention: General Counsel -15- EX-10.4 10 0010.txt SHAREHOLDERS AGREEMENT BY AND AMONG MIND C.T.I. EXECUTION COPY -------------- Exhibit 10.4 SHAREHOLDERS' AGREEMENT AGREEMENT, made as of the 30/th/ day of March, 2000, by and among MIND C.T.I. Ltd., an Israeli corporation (the "Company"), those persons identified on the signature page hereof who own beneficially, and those persons who are employees of the Company who hereafter acquires, Ordinary Shares (as defined herein) and become parties to this Agreement (collectively, the "Non-Investor Shareholders"), and the Investors listed on the signature pages hereto as an investor shareholder, (each individually an "Investor" and collectively, the "Investors" and, together with the Non-Investor Shareholders, the "Shareholders"). WHEREAS, the Investors are acquiring an aggregate of 111,111 Series A Convertible Preferred Shares ,par value NIS 0.01 per share, of the Company (the "Series A Preferred Shares") and an aggregate of 27,778 Series B Convertible Preferred Shares, par value NIS 0.01 per share, of the Company (the "Series B Preferred Shares"), pursuant to the terms of a Share Purchase Agreement dated as of the date hereof among the Company, the Investors and the parties thereto (as defined therein) (the "Purchase Agreement"); WHEREAS, the Non-Investor Shareholders own an aggregate of 716,822 Voting Ordinary Shares, par value NIS 0.01 per share (the "Voting Ordinary Shares"); and WHEREAS, it is a condition to the obligations of the parties under the Purchase Agreement that this Agreement be executed by the parties hereto, and the parties are willing to execute this Agreement and to be bound by the provisions hereof. NOW, THEREFORE, in consideration of the foregoing, the agreements set forth below, and the parties' desire to provide for continuity of ownership of the Company to further the interests of the Company and its present and future shareholders, the parties hereby agree with each other as follows: 1. Definition of Shares. As used in this Agreement, "Shares" shall mean -------------------- and include all Voting Ordinary Shares, Non-Voting Ordinary Shares, par value NIS 0.01 per share (the "Non-Voting Ordinary Shares") and together with the Voting Ordinary Shares, the "Ordinary Shares") the Series A Preferred Shares, the Series B Preferred Shares and other equity securities of the Company now owned or hereafter acquired by a Shareholder including, without limitation, shares of Common Stock issued upon exercise of options now owned or hereafter acquired. 2. Prohibited Transfers and Other Matters. -------------------------------------- (a) No Non-Investor Shareholder shall sell, assign, transfer, pledge, hypothecate, mortgage, encumber or dispose of all or any of his, her or its Shares except in compliance with the terms of this Agreement. Notwithstanding anything to the contrary contained in this Agreement, (i) a Non-Investor Shareholder may transfer without the necessity of prior approval all or any of his or her Shares by way of gift to his or her spouse, to any of his or her lineal descendants or ancestors, to any trust for the benefit of any one or more of such Non-Investor Shareholders, or to his or her spouse or his or her lineal descendants or ancestors, or to any entity in which the Non-Investor Shareholder retains voting control, provided that the Non-Investor Shareholder also retains control over the disposition of any such Shares, (ii) a Non-Investor Shareholder may transfer all or any of his or her Shares by will or the laws of descent and distribution, and (iii) Lior Salansky may transfer Ordinary Shares held by him to one or more of the Investors or Yaron Amir, (iv) ADC Teledata Communications Ltd. ("ADC") may transfer any of its Shares to an affiliate of ADC and (v) Oscar Gruss & Son Incorporated may transfer its Shares to certain individuals and entities, all of which are accredited investors; provided that any such -------- ---- transferee under clause (i), (ii), (iii), (iv) and (v) of this Section 2(e) (referred to herein as "Permitted Transferees") shall agree in writing with the Company and the other Shareholders, as a condition to such transfer, to be bound by all of the provisions of this Agreement to the same extent as if such transferee were the Shareholder transferring such Shares. (b) No Investor shall sell, assign or transfer any Shares owned by it to Portal Software, Inc. or Amdocs Ltd. without the prior consent of the Company. 3. Right of First Refusal on Dispositions. -------------------------------------- (a) If at any time a Non-Investor Shareholder (a "Selling Non-Investor Shareholder") desires to sell or otherwise transfer all or any part of his or her Shares pursuant to a bona fide offer from a third party (the "Proposed Transferee"), the Selling Non-Investor Shareholder shall submit a written offer (the "Offer") by delivering the Offer to the other Shareholders (the "Participating Shareholders") to sell such Shares (the "Offered Shares") to the Participating Shareholders on the terms and conditions, including price, that the Selling Non-Investor Shareholder proposes to sell such Offered Shares to the Proposed Transferee. The Offer shall disclose the identity of the Proposed Transferee, the number of Offered Shares proposed to be sold, the total number of Shares owned by the Selling Non-Investor Shareholder, the terms and conditions, including price, of the proposed sale, and any other material facts relating to the proposed sale. The Offer shall further state (i) that the Participating Shareholders may acquire in accordance with the provisions of this Agreement, any of the Offered Shares for the price and upon the other terms and conditions set forth therein and (ii) if all such Offered Shares are not purchased by the Participating Shareholders, the Participating Shareholders who have not purchased any such Offered Shares pursuant to this Section 3 may exercise their rights provided pursuant to Section 4 hereof. (b) Each Participating Shareholder shall have the right to purchase that number of Offered Shares as shall be equal to the number of Offered Shares multiplied by a fraction, the numerator of which shall be the number of Shares which any such Participating Shareholder owns and the denominator of which shall be the aggregate number of Shares owned by the Participating Shareholders who elect to purchase the Offered Shares . The amount of such Offered Shares that each Participating Shareholder is entitled to purchase under this Section 3 shall be referred to as its "Pro Rata Fraction." (c) The Participating Shareholders shall have a right of oversubscription such that if any party fails to accept the Offer as to his or its full Pro Rata Fraction, the remaining Participating Shareholders shall, among them, have the right to purchase up to the balance of the -2- remaining Offered Shares not so purchased. The Participating Shareholders may exercise such right of oversubscription by accepting the Offer for the remaining Offered Shares as to more than their Pro Rata Fraction. If, as a result thereof, such oversubscriptions exceed the total number of the Offered Shares available in respect of such oversubscription privilege, the oversubscribing Participating Shareholders shall be cut back with respect to over- subscriptions on a pro rata basis in accordance with their respective Pro Rata Fractions or as they may otherwise agree among themselves. (d) Those Participating Shareholders who desire to purchase all or any part of the Offered Shares shall communicate in writing their election to purchase to the Selling Non-Investor Shareholder, which communication shall state the number of remaining Offered Shares such parties desire to purchase and shall be provided to the Selling Non-Investor Shareholder within 10 days of the date the Offer was made. Such communication shall, when taken in conjunction with the Offer, be deemed to constitute a valid, legally binding and enforceable agreement for the sale and purchase of such Offered Shares (subject to the aforesaid limitations as to the right of the Participating Shareholders to purchase more than their Pro Rata Fraction). Sales of such Offered Shares to be sold to the Participating Shareholders pursuant to this Section 3 shall be made at the offices of the Company within 60 days following the date the Offer was made. (e) If the Participating Shareholders do not purchase all of the Offered Shares, all, but not fewer than all, of the Offered Shares may be sold by the Selling Non-Investor Shareholder at any time within 60 days after the date the Offer was made, subject to the provisions of Section 4. Any such sale shall be to the Proposed Transferee, at not less than the price and upon other terms and conditions, if any, not more favorable to the Proposed Transferee than those specified in the Offer. If the Offered Shares are not sold within such 60-day period, they shall continue to be subject to the requirements of a prior offer pursuant to this Section 3, and may not be transferred except in compliance with the provisions of this Section 3. If Offered Shares are sold pursuant to this Section 3 to any purchaser who is not a party to this Agreement, the purchaser of such Offered Shares shall execute a counterpart of this Agreement as a precondition of the purchase of such Offered Shares and any Offered Shares sold to such purchaser shall continue to be subject to the provisions of this Agreement. (f) If Offered Shares are sold pursuant to this Section 3 to any purchaser who is not a party to this Agreement, the purchaser of such Offered Shares shall execute a counterpart of this Agreement as a precondition of the purchase of such Offered Shares and any Offered Shares sold to such purchaser shall continue to be subject to the provisions of this Agreement. 4. Right of Participation in Sales. ------------------------------- (a) If at any time any Non-Investor Shareholder, other than ADC, desires to sell all or any part of the Shares owned by him, her or it to any third party and those Shares to be transferred have not been purchased by the Investors under Section 3, each Investor, ADC, Monica Eisinger and Lior Salansky (collectively, for the purposes of this Agreement, the "Principal Shareholders") shall have the right to sell to the third party, as a condition to such sale by the Selling Non-Investor Shareholder, at the same price per share and on the same terms and conditions as involved in such sale by the Selling Non-Investor Shareholder, a pro rata portion of --- ---- -3- the amount of Shares proposed to be sold to the third party. The "pro rata --- ---- portion" of Shares which any Principal Shareholder shall be entitled to sell to the third party shall be that number of Shares as shall equal the number of Shares proposed to be sold to the third party multiplied by a fraction, the numerator of which is the aggregate of all Ordinary Shares which the Principal Shareholder wishing to participate in the sale then holds or has the right to acquire upon conversion of the Series A Preferred Shares or the Series B Preferred Shares then held by such Principal Shareholder, and the denominator of which is the aggregate of all Ordinary Shares which are held by, or issuable to, upon conversion of the Series A Preferred Shares or the Series B Preferred Shares held by, all Principal Shareholders wishing to participate in any sale under this Section 4, including the Selling Non-Investor Shareholder; provided, however that until October 6, 2001, the number of Shares that Monica Eisinger and Lior Salansky shall be entitled to sell to such third party shall be subject to reduction by the same amount of the increase in the number of Shares that ADC may sell to such third party such that upon any such sale, ADC shall have the right, but not the obligation, to sell twice the proportional amount being sold by Monica Eisinger and Lior Salansky (by way of example, if Monica Eisinger and Lior Salansky are entitled to sell up to 10% of their Shares, ADC will be permitted to sell up to 20% of the Shares held by it); provided, further, that in no event shall the pro rata portion of Shares of any Principal Shareholder, other than of Monica Eisinger and Lior Salansky, be subject to any such reduction. (b) If the Selling Non-Investor Shareholder wishes to make a sale to a third party which is subject to this Section 4, the Selling Non-Investor Shareholder shall, after complying with the provisions of Section 3, give to each Principal Shareholder notice of such proposed sale, and stating that all Shares were not purchased pursuant to the Offer as discussed in Section 3. Such notice shall be given at least 20 days prior to the date of the proposed sale to the third party. Each Principal Shareholder wishing to so participate in any sale under this Section 4 shall notify the Selling Non-Investor Shareholder in writing of such intention within 15 days after such Investor's receipt of the notice described in the preceding sentence. (c) The Selling Non-Investor Shareholder and each participating Principal Shareholder shall sell to the third party all, or at the option of the third party, any part of the Shares proposed to be sold by them at not less than the price and upon other terms and conditions, if any, not more favorable to the third party than those in the notice provided by the Selling Non-Investor Shareholder under subparagraph (b) above; provided, however, that any purchase -------- ------- of less than all of such Shares by the third party shall be made from the Selling Non-Investor Shareholder and each participating Principal Shareholder pro rata based upon the relative number of the Shares that the Selling Non- - --- ---- Investor Shareholder and each participating Principal Shareholder is otherwise entitled to sell pursuant to Section 4(a). (d) If any Shares are sold pursuant to this Section 4 to any purchaser who is not a party to this Agreement, the purchaser of such Shares shall execute a counterpart of this Agreement as a precondition to the purchase of such Shares and such Shares shall continue to be subject to the provisions of this Agreement, with the exception of this Section 4. 5. Right of Purchase. ----------------- -4- (a) The Company hereby grants to the Investors and ADC so long as such Investor or ADC shall own any Shares, of record or beneficially, the right to purchase all or part of such Investor's or ADC's pro rata share of New Securities (as defined below) which the Company, from time to time, proposes to sell and issue. Such Investor's or ADC's pro rata share, for purposes of this purchase right, is the ratio of the number of Ordinary Shares which such Investor or ADC owns or has the right to acquire from the Company upon conversion of the Series A Preferred Shares and the Series B Preferred Shares to the total number of Ordinary Shares then owned by all Investors and ADC and all Ordinary Shares issuable to Investors upon the conversion of the Series A Preferred Shares or Series B Preferred Shares held by all Investors. Each Investor and ADC shall have a right of over-allotment pursuant to this Section 5 such that to the extent any Investor or ADC does not exercise his or its purchase right in full hereunder, such additional shares of New Securities which such Investor or ADC did not purchase may be purchased by the other Investors or ADC, if applicable. (b) For purposes of this Agreement, "New Securities" shall mean any share capital of the Company whether now authorized or not, and rights, options or warrants to purchase share capital, and securities of any type whatsoever that are, or may become convertible into or exchangeable for share capital, issued on or after the date hereof; provided that the term "New Securities" does -------- not include (i) Ordinary Shares issued as a stock dividend to holders of Ordinary Shares or upon any stock split, subdivision or combination of Ordinary Shares, (ii) Series A Preferred Shares or Series B Preferred Shares issued as a dividend to holders of Series A Preferred Shares or Series B Preferred Shares or upon any stock split, subdivision or combination of Series A Preferred Shares tock or Series B Preferred Shares, (iii) options or warrants (or Ordinary Shares issuable upon exercise thereof) issued pursuant to the Company's Employee Share Option Plan in accordance with the terms of the Purchase Agreement, (iv) share capital, options or warrants to purchase share capital issued in connection with any acquisition approved by the Board of Directors of the Company, (v) any options, warrants or share capital approved by the Board of Directors for issuance in connection with senior financing extended to the Corporation and (vi) share capital issued pursuant to a registration statement filed under the Securities Act of 1933, as amended. (c) In the event the Company proposes to undertake an issuance of New Securities, it shall give the Investors and ADC written notice of its intention, describing the type of New Securities and the price and the terms upon which the Company proposes to issue the same. The Investors and ADC shall have 20 business days from the date of receipt of any such notice to agree to purchase up to each Investor's pro rata share of such New Securities (and any over- allotment amount pursuant to the operation of Section 5(a) hereof) for the price and upon the terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. (d) In the event any Investor or ADC fails to exercise in full his or its purchase right under this Section 5 (after giving effect to the over- allotment provision of Section 5(a) hereof), the Company shall have 120 days thereafter to sell the New Securities with respect to which such purchase right was not exercised, at a price and upon terms no more favorable to the purchasers thereof than specified in the Company's notice. To the extent the Company does not sell all the New Securities offered within said 120 day period, the Company shall not -5- thereafter issue or sell such New Securities without first again offering such securities to the Investors in the manner provided above. (e) The rights granted to the Investors and ADC under this Section 5 shall expire immediately prior to, and shall not apply in connection with, the consummation of the first Qualified Public Offering (as defined in Section 10 hereof). 6. Election of Directors. --------------------- (a) At each annual meeting of the shareholders of the Company, and at each special meeting of the shareholders of the Company called for the purpose of electing directors of the Company, and at any time at which shareholders of the Company shall have the right to, or shall, vote for directors of the Company, then, and in each event, the Shareholders shall vote all Shares owned by them for the election of a Board of Directors consisting of five directors, designated in the manner designated below (subject to adjustment in accordance with the provisions of this Section 6): (i) one (1) director shall be designated by a majority of the Shares held by Monica Eisinger, which designee shall initially be Monica Eisinger; (ii) one (1) director shall be designated by a majority of the Shares held by Lior Salanksy, which designee shall initially be Lior Salanksy; (iii) one (1) director shall be designated by ADC, which designee shall initially be Ilan Rosen; (iv) one (1) director shall be designated by Summit Ventures V, L.P., which designee shall initially be Kevin Mohan; (v) one (1) director shall be an individual who is not an employee, director, consultant or an affiliate of the Company or any of its shareholders to be designated by (A) Monica Eisinger, for so long as she is chief executive officer of the Company, subject to the reasonable approval of each of the other directors, or (B) if Monica Eisinger is not the chief executive officer of the Company, by unanimous approval of the remaining directors; and (vi) any director designated pursuant to Sections 6(i), (ii), (iii) and (iv) shall not be subject to removal without the consent of the party or parties appointing such director(s) and upon any removal of such director (including due to the death or disability of such director), the director shall be replaced by the party or parties electing the removed director. (b) In addition to the persons designated as set forth in Section 6(a) above Summit Ventures V, L.P. shall be entitled to designate two (2) representatives, ADC shall be entitled to designate one (1) representative, and Lior Salansky shall be entitled to designate one (1) representative, who shall be entitled to attend and observe all meetings of the Company's Board of Directors and shall be entitled to receive all notices and information furnished by the Company to its Directors and copies of the minutes of all meetings, but who shall not have voting rights. -6- (c) The Company shall reimburse all reasonable direct costs and expenses incurred by directors and the representatives entitled to attend the meetings of the Company's Board of Directors pursuant to Section 6(b) above in attending meetings of the Board of Directors of the Company. 7. Board Committees. The Shareholders shall take all actions, including ---------------- without limitation, the voting of all their Shares, to cause the provisions of this Section 7 to be satisfied. (a) Compensation Committee. There shall be established at all times ---------------------- during the term of this Agreement a Compensation Committee of the Board of Directors (the "Compensation Committee") which shall be comprised of four directors as follows: one of whom shall be the director designated under Section 6(a)(i); one of whom shall be the director designated under Section 6(a)(ii); one of whom shall be the director designated under Section 6(a)(iii) and one of whom shall be the director designated under Section 6(a)(iv). The Compensation Committee will determine the compensation of all senior employees and consultants of the Company (including salary, bonus, and benefits) and provide recommendations to the Board of Directors with respect to the equity participation of all senior employees and consultants of the Company consistent with compensation of companies similar to the Company; provided that no member of the Compensation Committee may vote on his or her own compensation. The compensation of senior employees and consultants shall be reviewed by the Compensation Committee on an annual basis, and the decision by a majority of the members of the Compensation Committee (which majority shall include the consent of the director designated as under Section 6(a)(iv)) will control the Committee's actions. (b) Audit Committee. There shall be established at all times during --------------- the term of this Agreement an Audit Committee of the Board of Directors (the "Audit Committee") which shall be comprised of three directors as follows: one of whom shall be one of the directors designated under Section 6(a)(i); one of whom shall be the director designated under Section 6(a)(iii); and one of whom shall be the director designated under Section 6(a)(iv). The Audit Committee shall, among other things, select, from time to time, the Company's auditors and monitor review of the audit process. 8. Insurance. The Company shall at all times uses its best efforts to --------- maintain for the benefit of its officers and directors liability insurance in scope and amount, and from an insurer, reasonably acceptable to the Investors. 9. Term and Effect. This Agreement shall terminate on the earlier to --------------- occur of (a) immediately prior to consummation of a Qualified Public Offering (as defined below), (b) such date as all Shares owned by the Investors and their transferees have been repurchased or redeemed by the Company, or (c) the tenth anniversary of the date of this Agreement; provided, however that the provisions of Section 4 hereof shall survive upon the consummation of a Qualified Public Offering, for any sale of securities resulting in proceeds in excess of $1,000,000 in any calendar year undertaken by a Non-Investor Shareholder (other than ADC) for liquidity purposes and; provided, further that upon redemption of the Series A Preferred Shares and the Series B Preferred Shares, the provisions of this Agreement shall continue for the benefit of the parties holding Ordinary Shares. A "Qualified Public Offering" means an underwritten public offering by the Company of its equity securities pursuant to a registration statement filed and -7- declared effective under the Securities Act of 1933, as amended (the "Act"), in which the aggregate proceeds to the Company equal at least $30,000,000. The parties hereby agree to amend the provisions of Section 6 to conform to the laws of Israel upon consummation of an initial underwritten public offering by the Company of its equity securities pursuant to a registration statement filed and declared effective under the Act which is not a Qualified Public Offering. 10. Failure to Deliver Shares. If any Shareholder becomes obligated to ------------------------- sell any Shares to another Shareholder under this Agreement and fails to deliver such Shares in accordance with the terms of this Agreement, such other Shareholder may, at its option, in addition to all other remedies it may have, send to the defaulting Shareholder the purchase price for such Shares as is herein specified. Thereupon, the Company, upon written notice to the defaulting Shareholder, (a) shall cancel on its books the certificate or certificates representing the Shares to be sold and (b) shall issue, in lieu thereof, in the name of such other Shareholder, a new certificate or certificates representing such Shares, and thereupon all of the defaulting Shareholder's rights in and to such Shares shall terminate. 11. Specific Enforcement. Each Shareholder expressly agrees that the other -------------------- Shareholders and the Company may be irreparably damaged if this Agreement is not specifically enforced. Upon a breach or threatened breach of the terms, covenants and/or conditions of this Agreement by any Shareholder, the other Shareholders and the Company shall, in addition to all other remedies, each be entitled to apply for a temporary or permanent injunction, and/or a decree for specific performance, in accordance with the provisions hereof. 12. Legend. Each certificate evidencing any of the Shares now owned or ------ hereafter acquired by the Shareholders shall bear in addition to any other legends required by other agreements or by law a legend substantially as follows: "Any sale, assignment, transfer or other disposition of the shares represented by this certificate is restricted by, and subject to, the terms and provisions of a certain Shareholders' Agreement dated as of March 30, 2000. A copy of said Agreement is on file with the Secretary of the Corporation." 13. Notices. Notices given hereunder shall be deemed to have been duly ------- given (i) on the date of personal delivery, (ii) one day after deposit with federal express or other overnight courier, or (iii) on the date of postmark if mailed by certified or registered mail, return receipt requested, to the party being notified at his or its address specified on Schedule I hereto or such ---------- other address as the addressee may subsequently notify the other parties of in writing. 14. Entire Agreement and Amendments. This Agreement constitutes the entire ------------------------------- agreement of the parties with respect to the subject matter hereof and neither this Agreement nor any provision hereof may be waived, modified, amended or terminated except by a written agreement signed by the parties hereto; provided, -------- however, that Investors owning at least a majority of the Shares owned by all - ------- Investors may effect any such waiver, modification, amendment or termination on behalf of all of the Shareholders; provided that any such action that adversely effects the Non-Investor Shareholders must similarly affect the rights of the Investors and; provided, further, that any such amendment or waiver which adversely affects the -8- rights of ADC hereunder shall require the consent or approval of ADC. Each of the Shareholders represents that he, she or it is not a party to any other agreement which would prevent him, her or it from performing his, her or its obligations hereunder. No waiver of any breach or default hereunder shall be considered valid unless in writing, and no such waiver shall be deemed a waiver of any subsequent breach or default of the same or similar nature. 15. Governing Law; Successors and Assigns. This Agreement shall be ------------------------------------- governed by the internal laws of the State of Israel without giving effect to the conflicts of laws principles thereof and, except as otherwise provided herein, shall be binding upon the heirs, personal representatives, executors, administrators, successors and assigns of the parties, provided that no Non- Investor Shareholder shall be permitted to assign its rights to designate a director under Section 6 hereof. 16. Severability. 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. 17. Captions. Captions are for convenience only and are not deemed to be -------- part of this Agreement. 18. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 19. Termination. The Company, ADC, Monica Eisinger, Lior Salansky, and ----------- Mind Israel Ltd. hereby terminate that certain Investment Agreement dated August 15, 1997 (the "Investment Agreement") and the Letter Agreement dated as October 6, 1999 between the Company, Monica Eisinger and ADC (the "Letter Agreement") as the terms contained therein are replaced in their entirety by the rights granted hereunder. Upon execution of this Agreement, ADC shall have no further rights under the Investment Agreement and the Letter Agreement. * * * -9- SHAREHOLDERS' AGREEMENT Counterpart Signature Page -------------------------- IN WITNESS WHEREOF, this Agreement has been executed as an instrument under SEAL as of the date and year first above written. COMPANY: MIND C.T.I. LTD. /s/ Monica Eisinger By: ______________________________ Name: Monica Eisinger Title: President NON-INVESTOR SHAREHOLDERS: /s/ Monica Eisinger _________________________________ Monica Eisinger /s/ Lior Salansky _________________________________ Lior Salansky ADC TELEDATA COMMUNICATIONS LTD. /s/ Ilan Melamed By: ______________________________ Name: Ilan Melamed Title: Chief Executive Officer /s/ Zeev Braude _________________________________ Zeev Braude -10- MIND ISRAEL LTD. /s/ Monica Eisinger By: ______________________________ Name: Title: /s/ Avshalom Radzinsky _________________________________ Avshalom Radzinsky /s/ Rafael Newman _________________________________ Rafael Newman /s/ Izik Ben Zaken _________________________________ Izik Ben Zaken /s/ Idit Maor _________________________________ Idit Maor /s/ Shai Wesberg _________________________________ Shai Wesberg INVESTORS: SUMMIT VENTURES V, L.P. By: Summit Partners V, L.P., its General Partner By: Summit Partners, LLC, its General Partner /s/ Kevin Mohan By: ________________________________ Member -11- SUMMIT V COMPANION FUND, L.P. By: Summit Partners V, L.P., its General Partner By: Summit Partners, LLC, its General Partner /s/ Kevin Mohan By: _________________________________ Member -12- SHAREHOLDERS' AGREEMENT Counterpart Signature Page -------------------------- IN WITNESS WHEREOF, this Agreement has been executed as an instrument under SEAL as of the date and year first above written. Summit V Advisors Fund, L.P. By: Summit Partners, LLC its General Partner /s/ Kevin Mohan By: ___________________________ Member Summit V Advisors Fund (QP), L..P. By: Summit Partners, LLC, its General Partner /s/ Kevin Mohan By: ___________________________ Member Summit Investors III, L.P. /s/ Kevin Mohan By: ___________________________ General Partner OSCAR GRUSS & SON INCORPORATED /s/ Michael Shaoul By: _________________________________ Name: Michael Shaoul Title: Executive Vice President -13- SCHEDULE 1 ---------- Company - ------- MIND C.T.I. Ltd. POB 144 Yokne'am 20692, Israel Attention: President Non-Investor Shareholders - ------------------------- Monica Eisinger _____________________ _____________________ Lior Salansky 19 Snir Street Yokne-am Elit 20692, Israel ADC Teledata Communications Ltd. c/o ADC Telecommunications, Inc. 12501 Whitewater Drive Minnetonka, MN 55343 Attention: General Counsel Zeev Braud _____________________ _____________________ MIND Israel Ltd. _____________________ _____________________ Avshalom Radzinsky _____________________ _____________________ Rafael Newman _____________________ _____________________ -14- Izik Ben Zaken _____________________ _____________________ Idit Maor _____________________ _____________________ Shai Weisberg _____________________ _____________________ -15- Investors - --------- Summit Ventures V, L.P. Summit V Companion Fund, L.P. Summit V Advisors Fund, L.P. Summit V Advisors Fund (QP), L.P. Summit Investors III, L.P. c/o Summit Partners 600 Atlantic Avenue, Suite 2800 Boston, MA 02210-2227 Attn: Kevin Mohan Oscar Gruss & Son Incorporated 30 Kalisher Street Tel Aviv, Israel 65257 Attention: Jed Arkin -16- EX-10.5 11 0011.txt ESCROW AGREEMENT Exhibit 10.5 EXECUTION COPY ESCROW AGREEMENT This Escrow Agreement (the "AGREEMENT") is made and entered into as of this 5th day of April, 2000, by and among LIOR SALANSKY of 19 Snir St. Yokne-am Elit 20692, Israel ("SALANSKY"), OSCAR GRUSS & SON INCORPORATED, with offices at 74 Broad St., New York, NY 10004-2247, YARON AMIR of 73 Kalaniot St., Givat Avni, ILAN MELAMED, and the individuals listed in Schedule 3.2 attached hereto (collectively the "PURCHASERS", and each of them individually a "PURCHASER"), and RAVILLAN, VOLOVELSKY, DINSTEIN, SNEH & CO. Attorneys-at-Law, 76 Rothschild Blvd., Mozes House, Tel-Aviv, Israel (the "TRUSTEE"). NOW THEREFORE in consideration of their mutual representations and obligations, the parties hereto have hereby agreed as follows: 1. DEFENITIONS Unless otherwise determined, all capitalized terms used herein shall bear the meaning ascribed to them in the Share Purchase Agreement executed between the parties hereto and concurrently herewith (the "SHARE PURCHASE AGREEMENT"). 2. APPOINTMENT Trustee is hereby appointed as a trustee for and on behalf of both Salansky and the Purchasers. 3. SALANSKY'S OBLIGATIONS 3.1. Upon executing this Agreement, Salansky shall deliver to the Trustee, on behalf of the Purchasers, validly executed blank (i) transfer deeds, (ii) transfer statements to the Registrar of Companies and (iii) share certificates, representing a total of up to 5,853 Ordinary Shares. 3.2. If the Trustee receives from any party hereto adequate evidence, to Trustee's satisfaction (after notifying all other parties of such evidence and allowing them to bring forth any additional or contrasting evidence), that, within twelve (12) months of the date hereof, the Applicable Conversion Value, as defined in the Amended Articles, had been adjusted in accordance with the terms of Article 21.4 thereof, and is further sufficiently advised by such party of the new value of the Applicable Conversion Value subsequent to such adjustment, then the Trustee shall complete the transfer deeds, transfer statements and share certificates to reflect the transfer from Salansky to the Purchasers, for no additional consideration, of Ordinary Shares (to be distributed among the Purchasers proportionally to their respective maximum portion of additional shares specified in Schedule 3.2) in a number equal to the product of (i) 5,853 and (ii) a fraction, the numerator of which is the difference between (X) $104.625 and (Y) the Applicable Conversion Value after giving effect to the adjustment under Article 21.4, decreased by 22.5% (the "RETROSPECTIVE PRICE PER SHARE") (down to a minimal Retrospective Price Per Share of $83.700 in the event that no adjustment had taken place), and the denominator of which is the difference between $104.625 and $83.700. For illustration purposes only, if Salansky provides evidence that within the twelve-month period following the date hereof, the Applicable Conversion Price had been increased, for example, from $108 to $121.5, then the Trustee shall be authorized to take all actions and complete all documents held by it in escrow as shall be required to perfect the transfer, from Salansky to the Purchasers, of 2,927 shares, in accordance with the following computation: 5,853* [$104.625 - ($121.5*0.775) = 2,927 --------------------------------- ($104.625 - $83.700) If any of the parties shall demonstrate that, within the twelve-month period commencing on the date hereof, the Applicable Conversion Price had been increased to $135 (or above), the Trustee shall not transfer any additional shares to the Purchasers, and shall return all deeds, statements and certificates bestowed therewith back to Salansky upon Salansky's first demand. If, however, none of the parties shall apply to the Trustee in respect of the adjustment of the Applicable Conversion Price within the twelve-month period designated above, or shall not attach to such application sufficient evidence of both the occurrence and the degree of such adjustment in a manner satisfactory to the Trustee (or if the Applicable Conversion Price had in fact remained unchanged (or had been decreased) under the provisions of the Articles of Association of Mind C.T.I. Ltd. (the "COMPANY")), then the Trustee shall, upon the expiration of the twelve-month period, transfer all additional 5,853 to the Purchasers. 4. REPRESENTATIONS, WARRANTIES AND OBLIGATIONS OF TRUSTEE 4.1. The Trustee represents and warrants to Salansky and the Purchasers that it has full power and authority to execute, deliver and perform this Agreement. 4.2. The Trustee shall not be entitled to any compensation hereunder, other than reimbursement of any expenses, including legal expenses, incurred in connection with the performance of its duties hereunder. 4.3. Trustee shall not assign, sub-contract or otherwise transfer this Agreement without the prior written consent of Principal Shareholders. 4.4 Trustee represents, and Salansky hereby acknowledges and recognizes, that the Trustee has been involved with the purchase of the Purchased Shares and represented several of the Purchasers in relation therewith, and has a certain interest in the Purchased Shares and the shares in escrow hereunder. 5. TRUSTEE'S LIABILITY AND INDEMNIFCATION 5.1. Liability of Trustee. In performing any of its duties under this Agreement, the Trustee shall not be liable to any party for damages, losses or expenses, except in the event of gross negligence or willful misconduct on its part. Trustee shall not incur any such liability for (i) any act or failure to act made or omitted in good faith, or (ii) any action taken or omitted in reliance upon any instrument that the Trustee shall in good faith believe to be genuine; nor will the Trustee be liable or responsible for forgeries, fraud, impersonations, or determining the scope of any agent's authority. The Trustee is not responsible for determining and verifying the authority of any person acting or purporting to act on behalf of the Company or any party to this Agreement. 5.2. Indemnification of Trustee. Both Salansky and each of the Purchasers (and their respective successors and assigns) agree jointly and severally to indemnify and hold the Trustee harmless against any and all losses, claims, damages, liabilities and expenses, including reasonable costs of investigation and disbursements that may be imposed on the Trustee or incurred by it in connection with the performance of its duties under this Agreement, including but not limited to any arbitration or litigation arising from this Agreement or involving its subject matter. 6. NOTICES All notices or other communications hereunder shall be in writing and shall be given in person, by registered mail (registered air mail if mailed internationally), by an overnight courier service which obtains a receipt to evidence delivery, or by facsimile transmission (provided that written confirmation of receipt is provided), addressed as set forth in the preamble above, or such other address as any party may designate to the other in accordance with the aforesaid procedure. All notices and other communications delivered in person or by courier service shall be deemed to have been given as of three business days after sending thereof, those given by facsimile transmission shall be deemed given twenty-four hours following transmission, provided a confirmation copy is sent by registered mail, and all notices and other communications sent by registered mail shall be deemed given five (5) days after posting. 7. GENERAL 7.1. The entire agreement between the parties with respect to the subject matter hereof is contained in this Agreement. This Agreement supersedes all prior oral and written proposals and communications related to this Agreement between the parties. 7.2. No provision of this Agreement shall be deemed waived, amended or modified by either party unless such waiver, amendment or modification is expressly claimed. 7.3 Any provision of this Agreement which is unenforceable under the laws of any jurisdiction which are applicable hereto shall be ineffective to the extent such laws apply without invalidating the remaining provisions of the Agreement. 7.4. 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. 7.5. Governing Law. This Agreement shall be governed by and construed in accordance with the laws, and subject to the jurisdiction of the Courts of the State of Israel. IN WITNESS WHEREOF, the authorized representatives of the parties hereto have executed this agreement on the dates set first above: /s/ Ravillan, Volovelsky, Dinstein, Sneh & Co. ______________________________________________ RAVILLAN, VOLOVELSKY, DINSTEIN, SNEH & CO. ATTORNEYS-AT-LAW SCHEDULE 3.2 ------------ (Page 1 of 2) of the Escrow Agreement dated April 6th 2000 Signature Page and Allocation Table ----------------------------------- Maximum Number of Name of Purchaser Additional Shares Signature - -------------------- --------------------- --------------------- Rochelle Sivan 48 /s/ Rochelle Sivan - ------------------------------------------- --------------------- Gabi Bar Haim 48 /s/ Gabi Bar Haim - ------------------------------------------- --------------------- Zadok Eyal 72 /s/ Zadok Eyal - ------------------------------------------- --------------------- Ami Arel 119 /s/ Ami Arel - ------------------------------------------- --------------------- Gal Miara 119 /s/ Gal Miara - ------------------------------------------- --------------------- Sagee Aran 119 /s/ Sagee Aran - ------------------------------------------- --------------------- Shako Eli 119 /s/ Shako Eli - ------------------------------------------- --------------------- Eyal Oren 119 /s/ Eyal Oren - ------------------------------------------- --------------------- Sharli Bencherit 191 /s/ Sharli Bendrerit - ------------------------------------------- --------------------- Yuval Sarig 239 /s/ Yuval Sarig - ------------------------------------------- --------------------- Arie Ganot 239 /s/ Arie Ganot - ------------------------------------------- --------------------- Tudor Group Inc. 239 /s/ Eitan Lombard - ------------------------------------------- --------------------- SCHEDULE 3.2 ------------ (Page 2 of 2) of the Escrow Agreement dated April 6th 2000 Signature Page and Allocation Table ----------------------------------- Yossi Azmon 239 /s/ Yossi Azmon - ------------------------------------------- ------------------ David Shemla 239 /s/ David Shemla - ------------------------------------------- ------------------ Gadi Lidror 239 /s/ Gadi Lidror - ------------------------------------------- ------------------ Ilan Melamed 358 /s/ Ilan Melamed - ------------------------------------------- ------------------ Yaron Amir 478 /s/ Yaron Amir - ------------------------------------------- ------------------ Oscar Gruss & Son 2,629 Incorporated /s/ Michael Shaoul - ------------------------------------------- ------------------ Total 5,853 - ------------------------------------------------------------------ EX-10.6 12 0012.txt SHARE PURCHASE AGREEMENT Exhibit 10.6 EXECUTION COPY SHARE PURCHASE AGREEMENT This Share Purchase Agreement (the "AGREEMENT") is made and entered into as of this 6th day of April, 2000, by and among LIOR SALANSKY of 19 Snir St. Yokne-am Elit 20692, Israel ("SALANSKY"), OSCAR GRUSS & SON INCORPORATED, with offices at 74 Broad St., New York, NY 10004-2247, YARON AMIR of 73 Kalaniot St., Givat Avni, ILAN MELAMED, and the individuals listed in Schedule 1.3 attached hereto (collectively the "PURCHASERS", and each of them individually a "PURCHASER"). IN CONSIDERATION of the premises and the representations, warranties, covenants and conditions set forth hereinafter, and intending to be legally bound, the parties hereby agree as follows: ARTICLE I 1. PURCHASE AND SALE OF SHARES 1.1 Purchase and Sale of Shares. At the Closing (as such term and other terms are defined in Article 1.3 below), Salansky will sell to the Purchasers 23,412 Voting Ordinary Shares of the Mind CTI Ltd. ("COMPANY"), par value NIS 0.01 per share, free and clear of any liens, charges, pledges, encumbrances or third party interests of any kind (the "PURCHASED SHARES"), at a price of $104.625 per share, for a total purchase price for the Purchased Shares of $2,449,481. The Purchased Shares shall have the rights, terms, preferences and privileges set forth in the Company's Amended Articles of Association as recently adopted. 1.2. Adjustment. The terms of Article 21.4 of the Company's Amended Articles of Association (the "AMENDED ARTICLES") shall (inversely) apply to the Purchased Shares, so that if the Company consummates a QIPO or Corporate Sale (as such terms are defined in the Amended Articles) within twelve (12) months of the date hereof, at a specified valuation, the price per share of the Purchased Shares will be retrospectively adjusted (in a manner exactly inverse to the adjustment of the Applicable Conversion Value under Article 21.4, hereinafter: the "RETROSPECTIVE PRICE PER SHARE") so that, pursuant to the computation set forth below, as many as 29,265 Ordinary Shares shall be deemed to have been sold to the Purchasers by Salansky under this Agreement. For the purpose of implementing the arrangement contemplated herein, the parties hereto shall enter into an escrow agreement concurrently with the execution of this Agreement (the "ESCROW AGREEMENT"), by which an aggregate number of 5,853 Ordinary Shares (in addition to the Purchased Shares) will be bestowed by Salansky with the trustee, designated under the Escrow Agreement (the "TRUSTEE"), and transferred to the Purchasers for no additional consideration in a number equal to the product of (i) 5,853 and (ii) a fraction, the numerator of which is the difference between $104.625 and the Retrospective Price Per Share after giving effect to such adjustment upon a QIPO or a Corporate Sale in accordance with (and inverse to) the computation set forth in Article 21.4 of the Amended Articles (down to a minimal Retrospective Price Per Share of $83.700), and the denominator of which is the difference between $104.625 and $83.700. 1.3. Closing. Subject to the satisfaction or waiver of the conditions set forth in Articles 5 and 6 hereof, the purchase of the Purchased Shares shall be made at a closing (the "CLOSING") to be held at the offices of Ravillan, Volovelsky, Dinstein, Sneh & Co. at 76 Rothschild Blvd., Mozes House, Tel-Aviv, Israel, or by facsimile without requiring the physical presence of the parties, at 10:00 A.M. on April 6th, 2000, or, if later, a date specified by the Purchasers (the "CLOSING DATE"). Payment for the Purchased Shares shall be by wire transfer payable in immediately available funds within 72 hours of the Closing (either in U.S. Dollars or their NIS equivalent, computed according to the representative exchange rate promulgated by the Bank of Israel immediately prior to such transfer, and made to either a US or Israeli bank account, at each Purchaser's discretion, and as further coordinated with Salansky). Each Purchaser shall pay that amount for the Purchased Shares being acquired by it at the Closing to Salansky as described on Schedule 1.3 hereof. At the Closing, Salansky will deliver to the Purchasers duly executed transfer deeds representing the Purchased Shares purchased by each Purchaser, issued in such names as may be requested by each Purchaser together with share certificates executed in blank, such that the Purchasers may present such certificates to the Company for issuance of the shares represented by such certificates in the names of the Purchasers as may be requested by the Purchasers. 1.4. Ordinary Course of Business. Between the date of execution and delivery of this Agreement and the Closing Date, Salansky undertakes to make his best effort to cause the Company to comply with all the obligations set forth in Article 1.6 of the Share Purchase Agreement between the Company, Salansky, other principal shareholders of the Company and a group of investors dated March 30, 2000 (the "SUMMIT INVESTMENT AGREEMENT"). ARTICLE II 2. REPRESENTATIONS AND WARRANTIES OF SALANSKY 2.1. Correctness of Previous Representations. In order to induce the Purchasers to purchase the Purchased Shares, Salansky represents and warrants that, as a principal shareholder of the Company, he has no reason to believe that any of the representations and warranties made by the Company under Article 2 of the Summit Investment Agreement (and any representation or warranty made by any of the Principal Shareholders, as defined therein) (i) has been rendered untrue, incorrect or incomplete in any respects since the closing of the transaction contemplated therein or (ii) shall not remain true, correct and complete in all material respects as of the Closing; except in each case for those representations and warranties that address matters only as of a particular date or only with respect to a specific period of time. 2.2. Authorization. Salansky has full legal capacity and unrestricted power to execute and deliver this Agreement, and any other agreements or instruments executed by him in connection herewith or therewith and to consummate the transactions contemplated herein or therein. The sale of the Purchased Shares does not require any further action by Salansky or the Company and is not and will not be subject to any veto right, preemptive right, right of first refusal, tag-along right or the like. This Agreement and any other agreements and instruments executed by Salansky in connection herewith or therewith, will each be a valid and binding obligation of Salansky, enforceable in accordance with its terms, except as enforcement thereof may be limited by bankruptcy or other similar laws relating to or affecting enforcement of creditors' rights generally and except as enforcement thereof is subject to general principles of equity. ARTICLE III 3. PURCHASERS' REPRESENTATIONS Each Purchaser hereby represents and warrants to Salansky as follows: 3.1. This Agreement and any other agreements and instruments executed by such Purchaser in connection herewith or therewith will each be a legal, valid and binding obligation of such Purchaser, enforceable against such Purchaser in accordance with its terms; 3.2. Oscar Gruss & Son Incorporated ("OSCAR GRUSS") represents that it is acquiring the Purchased Shares solely for its own account as an investment or on behalf of certain individuals and entities. Each of the other Purchasers represents that he is purchasing the Purchased Shares for his own account as an investment, and does not intend to distribute such shares to any third party. ARTICLE IV 4. CONDITIONS OF PURCHASERS' OBLIGATIONS 4.1. Effect of Conditions. The obligations of the Purchaser to purchase and pay for the Purchased Shares at the Closing shall be subject at its election to the satisfaction of each of the conditions stated in the following Sections of this Article. 4.2. Representations and Warranties. The representations and warranties contained in this Agreement shall be true and correct in all material respects on the Closing Date with the same effect as though made on and as of that date. 4.3. Performance. All parties to the Summit Investment Agreement shall have performed and complied in all material respects with all of the agreements, covenants and conditions contained in such agreement and the related agreements required to be performed or complied with by them at or prior to such agreement's closing date. 4.4. No Material Adverse Changes. The business, properties, assets or condition (financial or otherwise) of the Company shall not have been materially adversely affected since the date of this Agreement, whether by fire, casualty, act of God or otherwise, and there shall have been no other changes in the business, properties, assets, condition (financial or otherwise), management or prospects of the Company or the Mind Subsidiary that would have a material adverse effect. 4.5. Consents and Waivers. Salansky shall have obtained all consents or waivers (if any) necessary to execute this Agreement and the other agreements and documents contemplated herein, to issue the Purchased Shares, and to carry out the transactions contemplated hereby and thereby. All corporate and other action and governmental filings necessary to effectuate the terms of this Agreement and other agreements and instruments executed and delivered by Salansky in connection herewith shall have been made or taken, including, without limitation: 4.5.1. Validly executed certificates representing the Purchased Shares, issued in the name of the Purchasers in accordance with the allocation set forth in Schedule 1.3. 4.5.2. Validly executed transfer statements and transfer deeds of the Purchased Shares in the name of the Purchasers, in accordance with the allocation set forth in Schedule 1.3. ARTICLE V 5. CONDITIONS OF SALANSKY'S OBLIGATIONS 5.1. Effect of Conditions. The obligation of Salansky to sell the Purchased Shares shall be subject at his election to the satisfaction of each of the conditions stated in the following Sections of this Article. 5.2. Representations and Warranties. The representations and warranties of the Purchasers contained in this Agreement shall be true and correct in all material respects on the Closing Date with the same effect as though made on and as of that date 5.3. Performance. The parties that had purchased shares under the Summit Investment Agreement shall have performed and complied in all material respects with all of the agreements, covenants and conditions contained in such agreement required to be performed or complied with by them at or prior to the closing thereof. ARTICLE VI INDEMNIFICATION 6.1. Survival of Representations and Warranties. The representations and warranties contained in this Agreement shall survive the Closing until the earlier of (i) ninety (90) days after receipt by the Purchasers of audited financial statements for the Company for its year ending December 31, 2001, or (ii) the consummation of an initial public offering of the securities of the Company pursuant to a registration statement filed under the Securities Act of 1933, as amended. 6.2. Indemnification of Purchasers. Salansky hereby agrees to indemnify and hold the Purchasers and their respective directors, officers, employees, agents, successors and assigns (collectively, the "PURCHASER INDEMNIFIED PARTIES") harmless from and against (i) any and all losses, liabilities, obligations and damages, including any interest thereon (collectively, "LOSSES") based upon, attributable to or resulting from any inaccuracy in or breach of any representation or warranty of Salansky set forth in Articles 2 hereof, or any representation or warranty contained in any other agreement or certificate delivered by or on behalf of the Salansky pursuant to this Agreement, to be true and correct; (ii) any and all Losses based upon, attributable to or resulting from the breach of the covenant contained in Section 1.4; and (iii) any and all costs, penalties and expenses (including attorneys' and other professionals' fees and disbursements), including any interest thereon (collectively, "EXPENSES"), incident to any Losses, with respect to which indemnification is provided under clauses (i) and (ii) above. . 6.3. Indemnification of Salansky. The Purchasers hereby agree that each Purchaser shall indemnify and hold Salansky harmless from and against (i) any and all Losses based upon, attributable to or resulting from any inaccuracy or breach by such Purchaser of any representation or warranty of such Purchaser set forth in Article 3 hereof, or any representation or warranty contained in any other agreement or certificate delivered by or on behalf of such Purchaser pursuant to this Agreement, to be true and correct; and (ii) any and all Expenses incident to any Losses for which indemnification is sought hereunder. 6.4. Indemnification Procedure. The indemnification procedure in the even that any legal proceedings shall be instituted or that any claim or demand shall be asserted by any person in respect of which payment may be sought under Section 6.2 or 6.3 hereof shall be identical to the procedure set forth in Article 9.4 of the Summit Investment Agreement, hereby incorporated by reference with such changes in the context as are necessary to substitute the Company and the Principal Shareholders by Salansky and the Purchasers thereunder by the Purchasers hereunder. 6.5. Limitations. Notwithstanding the foregoing provisions, no amounts shall be payable as a result of a claim under Section 6.2 or 6.3 in respect of a misrepresentation or a breach of a warranty unless or until the indemnified party shall have suffered, incurred, sustained, or become subject to Losses and Expenses in excess of $500,000 in the aggregate (whereas, for the purpose of examining whether the total Loss of any indemnified party had exceeded $500,000, any Losses and Expenses incurred by any indemnified party under the Summit Investment Agreement shall be added to Losses and Expenses incurred under this Agreement), in which case the indemnified party shall be entitled to seek indemnity for all Losses and Expenses incurred irrespective of amount. ARTICLE VII 7. MISCELLANEOUS 7.1. Parties in Interest. Except as otherwise set forth herein, all covenants, agreements, representations, warranties and undertakings contained in this Agreement shall be binding on and shall inure to the benefit of the parties hereto and the respective successors and assigns of the parties hereto. 7.2. Amendments and Waivers. Amendments or additions to this Agreement may be made, and compliance with any term, covenant, agreement, condition or provision set forth herein may be omitted or waived (either generally or in a particular instance and either retroactively or prospectively) upon the written consent of the Company and the Purchasers holding a majority of the Purchased Shares. Prompt notice of any such amendment or waiver shall be given to any party who did not consent thereto. This Agreement (including the Schedules and Exhibits annexed hereto, which are an integral part of this Agreement), and the other agreements executed in connection herewith together constitute the full and complete agreement of the parties with respect to the subject matter hereof and thereof. 7.3. Notices. All notices, requests, consents, reports and demands shall be in writing and shall be hand delivered, sent by facsimile or other electronic medium, or mailed (postage prepaid) to Salansky and the Purchasers at the address set forth below or to such other address as may be furnished in writing to the other parties hereto: Salansky: Lior Salansky 19 Snir St. Yokne-am Elit 20692, Israel The Purchasers: The address set forth in the preamble above; With a copy to: Ravillan, Volovelsky, Dinstein, Sneh & Co. 76 Rothschild Blvd. Mozes House, 6th Floor Tel-Aviv, 65785 Israel Facsimile: (972)-(3)-5664630 Attn: Dr. Eddo Dinstein, Attorney-at-Law 7.4. Expenses. Each party shall bear the expenses incurred thereby in connection with this Agreement. 7.5. Counterparts. This Agreement and any exhibit hereto may be executed in multiple counterparts, each of which shall constitute an original but all of which shall constitute but one and the same instrument. One or more counterparts of this Agreement or any exhibit hereto may be delivered via facsimile, with the intention that they shall have the same effect as an original counterpart hereof. 7.6. Effect of Headings. The article and section headings herein are for convenience only and shall not affect the construction hereof. 7.7. Governing Law. This Agreement shall be deemed a contract made under the laws of the State of Israel and together with the rights and obligations of the parties hereunder, shall be construed under and governed by the laws of such State. 7.8. Dollar Amounts. All dollar amounts referenced, incorporated, or set forth in this Agreement shall refer to and mean such amounts as expressed in United States Dollars, payable in their NIS equivalent according to the representative exchange rate promulgated by the Bank of Israel immediately prior to the applicable payment. remainder of the page intentionally left blank SCHEDULE 1.3 ------------ (Page 1 of 2) of the Share Purchase Agreement dated April 6th 2000 Signature Page and Allocation Table -----------------------------------
Name of Purchaser Dollar Amount Number of Shares Signature - -------------------- --------------------- --------------------- --------------------- - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Rochelle Sivan $ 20,088.00 192 /s/ Rochelle Sivan - ------------------------------------------------------------------ -------------------- Gabi Bar Haim $ 20,088.00 192 /s/ Gabi Bar Haim - ------------------------------------------------------------------ -------------------- Zadok Eyal $ 30,132.00 288 /s/ Zadok Eyal - ------------------------------------------------------------------ -------------------- Ami Arel $ 49,801.50 476 /s/ Ami Arel - ------------------------------------------------------------------ -------------------- Gal Miara $ 49,801.50 476 /s/ Gal Miara - ------------------------------------------------------------------ -------------------- Sagee Aran $ 49,801.50 476 /s/ Sagee Aran - ------------------------------------------------------------------ -------------------- Shako Eli $ 49,801.50 476 /s/ Shako Eli - ------------------------------------------------------------------ -------------------- Eyal Oren $ 49,801.50 476 /s/ Eyal Oren - ------------------------------------------------------------------ -------------------- Sharli Bencherit $ 79,933.50 764 /s/ Sharli Bencherit - ------------------------------------------------------------------ -------------------- Yuval Sarig $100,021.50 956 /s/ Yuval Sarig - ------------------------------------------------------------------ -------------------- Arie Ganot $100,021.50 956 /s/ Arie Ganot - ------------------------------------------------------------------ -------------------- Tudor Group Inc. $100,021.50 956 /s/ Eitan Lombard - ----------------------------------------------------------------------------------------
SCHEDULE 1.3 ------------ (Page 2 of 2) of the Share Purchase Agreement dated April 6th 2000 Signature Page and Allocation Table ----------------------------------- Yossi Azmon $ 100,021.50 956 /s/ Yossi Azmon - ------------------------------------------------------------------ ------------------ David Shemla $ 100,021.50 956 /s/ David Shemla - ------------------------------------------------------------------ ------------------ Gadi Lidror $ 100,021.50 956 /s/ Gadi Lidror - ------------------------------------------------------------------ ------------------ Ilan Melamed $ 149,823.00 1,432 /s/ Ilan Melamed - ------------------------------------------------------------------ ------------------ Yaron Amir $ 200,043.00 1,912 /s/ Yaron Amir - ------------------------------------------------------------------ ------------------ Oscar Gruss & Son $1,100,236.50 10,516 Incorporated /s/ Michael Shaoul - ------------------------------------------------------------------ ------------------ Total $2,449,481.00 23,412 - -----------------------------------------------------------------------------------------
EX-10.7 13 0013.txt 2000 SHARE OPTION PLAN Exhibit 10.7 MIND C.T.I. LTD. 2000 SHARE OPTION PLAN 1 NAME This Plan, as amended from time to time, shall be known as the Mind 2000 Share Option Plan (the "OPTION PLAN"). This plan is consequential to the Mind 1998 Stock Option Plan (the "1998 OPTION PLAN"). 2 PURPOSE OF THE OPTION PLAN The Option Plan is intended as an incentive to retain, in the employ or in the service of Mind C.T.I. Ltd. (the "COMPANY") and its subsidiaries, persons of training, experience, and ability, to attract new employees and key officers (including non-Israeli employees and key officers), whose services are considered valuable, to encourage the sense of proprietorship of such persons, and to stimulate the active interest of such persons in the development and financial success of the Company by providing them with opportunities to purchase shares in the Company, pursuant to the Option Plan approved by the board of directors of the Company (the "BOARD") The Option Plan is also intended to fulfill certain previous obligations of the Company to certain employees, directors and key officers. 3 ADMINISTRATION OF THE OPTION PLAN The Board or a share option committee appointed and maintained by the Board for such purpose (the "COMMITTEE") shall have the power to administer the Option Plan. Notwithstanding the above, the Board shall automatically have a residual authority if no Committee shall be constituted or if such Committee shall cease to operate for any reason whatsoever. The Committee shall consist of such number of members (not less than two (2) in number) as may be fixed by the Board. The Committee shall select one of its members as its chairman (the "CHAIRMAN") and shall hold its meetings at such times and places as the Chairman shall determine. The Committee shall keep records of its meetings and shall make such rules and regulations for the conduct of its business as it shall deem advisable. The Committee shall have full power and authority (i) to designate participants; (ii) to determine the terms and provisions of respective Option agreements (which need not be identical) including, but not limited to, the number of shares in the Company to be covered by each Option, provisions concerning the time or times when and the extent to which the Options may be exercised and the nature and duration of restrictions as to transferability or restrictions constituting substantial risk of forfeiture; (iii) to accelerate the right of an Optionee to exercise, in whole or in part, any previously granted Option; (iv) to interpret the provisions and supervise the administration of the Option Plan; and - (v) to determine any other matter which is necessary or desirable for, or incidental to administration of the Option Plan. All decisions and selections made by the Board or the Committee pursuant to the provisions of the Option Plan shall be made by a majority of its members except that no member of the Board or the Committee shall vote on, or be counted for quorum purposes, with respect to any proposed action of the Board or the Committee relating to any Option to be granted to that member. Any decision reduced to writing and signed by a majority of the members who are authorized to make such decision shall be fully effective as if it had been made by a majority at a meeting duly held. The interpretation and construction by the Committee of any provision of the Option Plan or of any Option thereunder shall be final and conclusive unless otherwise determined by the Board. Subject to the Company decision, each member of the Board or the Committee shall be indemnified and held harmless by the Company against any cost or expense (including counsel fees) reasonably MIND CTI Ltd. Option Plan 1 incurred by him, or any liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act in connection with the Option Plan unless arising out of such member's own fraud or bad faith, to the extent permitted by applicable law. Such indemnification shall be in addition to any rights of indemnification the member may have as a director or otherwise under the Company's Articles of Association, any agreement, any vote of shareholders or disinterested directors, insurance policy or otherwise. 4 DESIGNATION OF PARTICIPANTS The persons eligible for participation in the Option Plan as recipients of Options shall include any employees, directors or key officers of the Company or of any subsidiary of the Company. The grant of an Option hereunder shall neither entitle the recipient thereof to participate nor disqualify him from participating in, any other grant of Options pursuant to this Option Plan or any other option or stock plan of the Company or any of its affiliates. Anything in the Option Plan to the contrary notwithstanding, all grants of Options to directors and office holders ("Nosei Misra" - as such term is defined in the Companies Act, 1999 - the "COMPANIES ACT") shall be authorized and implemented only in accordance with the provisions of the Companies Act, as in effect from time to time. 5 SHARES RESERVED FOR THE OPTION PLAN Subject to adjustments as set forth in Section 7 below, a total of 55,400 (fifty five thousands and four hundreds) Ordinary Shares, of NIS 0.01 par value (the "SHARES") shall be subject to the Option Plan and the 1998 Option Plan. The Shares subject to the Option Plan are hereby reserved for such purpose in the authorized share capital of the Company and may only be issued in accordance with the terms hereof. Any of such Shares which may remain unissued and which are not subject to outstanding Options at the termination of the Option Plan shall cease to be reserved for the purpose of the Option Plan, but until termination of the Option Plan the Company shall at all times reserve a sufficient number of Shares to meet the requirements of the Option Plan. Should any Option for any reason expire or be canceled prior to its exercise or relinquishment in full, the Shares therefore subject to such Option may again be subjected to an Option under the Option Plan. 6 OPTION PRICE 6.1 The purchase price of each Share subject to an Option or any portion thereof shall be determined by the Committee in its sole and absolute discretion in accordance with applicable law, subject to any guidelines as may be determined by the Board from time to time. As of the date of adoption of the Option Plan, the Board has instructed the Committee to determine the purchase price of each Share, at a price which is not less then the price per share, according to the most recent evaluation of the Company in any investment or other capital transaction. 6.2 The Option price shall be payable upon the exercise of the Option in a form satisfactory to the Committee , including without limitation, by cash or cheque. The Committee shall have the authority to postpone the date of payment on such terms as it may determine. 7 ADJUSTMENTS Upon the occurrence of any of the following described events, Optionee's rights to purchase Shares under the Option Plan shall be adjusted as hereafter provided: MIND CTI Ltd. Option Plan 2 7.1 If the outstanding shares of the Company shall at anytime be changed or exchanged by declaration of a stock dividend, stock split, combination or exchange of shares, recapitalization, or any other like event by or of the Company, and as often as the same shall occur, then the number, class and kind of Shares subject to this Option Plan or subject to any Options therefore granted, and the Option prices, shall be appropriately and equitably adjusted so as to maintain the proportionate number of Shares without changing the aggregate Option price, provided, however, that no adjustment shall be made by reason of the distribution of subscription rights on outstanding stock or by reason of conversion of any Management Shares of the Company into Ordinary Shares (regardless of the ratio of such conversion). Upon occurrence of any of the foregoing, the class and aggregate number of Shares issuable pursuant to the Option Plan (as set forth in paragraph 6 hereof), in respect of which Options have not yet been exercised, shall be appropriately adjusted, all as will be determined by the Board who's determination shall be final. 7.2 Anything herein to the contrary notwithstanding, if prior to the completion of an initial public offering of the Company's securities ("IPO"), all or substantially all of the shares of the Company are to be sold, or upon a merger or reorganization or the like, the shares of the Company, or any class thereof, are to be exchanged for securities of another Company, then in such event, each Optionee shall be obliged to sell or exchange, as the case may be, the shares such Optionee purchased under the Option Plan, in accordance with the instructions then issued by the Board whose determination shall be final. Upon the occurrence of any such transactions, all unexercized Options shall be immediately and completely terminated. 8 TERM AND EXERCISE OF OPTIONS 8.1 Options shall be exercised by the Optionee by giving written notice to the Company, in such form and method as may be determined by the Company, which exercise shall be effective upon receipt of such notice by the Company at its principal office. The notice shall specify the number of Shares with respect to which the Option is being exercised. 8.2 Each Option granted under this Option Plan shall be exercisable only following the vesting dates and for the number of Shares as shall be provided in Exhibit B to the Option agreement (the "Expiration Date"). However no Option shall be exercisable after the Expiration Date, as defined for each Optionee in his Option agreement. 8.3 Options granted under the Option Plan shall not be transferable by Optionees other than by will or laws of descent and distribution, and during an Optionee's lifetime shall be exercisable only by that Optionee. 8.4 The Options may be exercised by the Optionee in whole at any time or in part from time to time, to the extent that the Options become vested, prior to the Expiration Date, and provided that, subject to the provisions of Section 8.6 below, the Optionee is an employee, director or key officer of the Company or any of its subsidiaries, at all times during the period beginning with the granting of the Option and ending upon the date of exercise of the relevant Options. MIND CTI Ltd. Option Plan 3 8.5 Subject to the provisions of Section 8.6 below, in the event of termination of the Optionee's employment or relationship with the Company or any of its subsidiaries, all Options granted to him, which have not yet been exercised, will immediately expire. A notice of termination of employment or relationship by either the Company or the Optionee shall be deemed to constitute termination of employment or relationship, as the case may be. 8.6 Notwithstanding anything to the contrary hereinabove, an Option may be exercised after the date of termination of Optionee's employment or relationship with the Company or any subsidiary of the Company during an additional period of time beyond the date of such termination, but only with respect to the number of Options vested at the time of such termination, according to the vesting periods of the Options, set forth in Section 9 below, if: (i) termination is without Cause (as defined below), for a period of six months from the termination of Employment, (ii) termination is the result of death or disability of the Optionee, in which event any Options still in force and unexpired may be exercised within a period of one year from the date of termination, but only with respect to the number of Options already vested at the time of such termination according to the vesting periods of the Options. The term "Cause" shall mean any action, omission or state of affairs related to the Optionee which the Board decides, in its sole discretion, is against the interests of the Company. 8.7 The holders of Options shall not have any of the rights or privileges of shareholders of the Company in respect of any Shares purchasable upon the exercise of any part of an Option unless and until, following exercise , registration of the Optionee as holder of such Shares in the Company's register of members. 8.8 Any form of Option agreement authorized by the Option Plan may contain such other provisions as the Committee may, from time to time, deem advisable. 9 VESTING OF OPTIONS Notwithstanding anything to the contrary, any Option may be exercised only to the extent that such Option was vested. Each option granted hereunder shall be vested, in whole or in part, as determined by the Committee in its sole and absolute discretion, provided that the Optionee is an employee, director or key officer of the Company or any of its subsidiaries, at all times during the period beginning with the granting of the Option and ending upon the date of vesting of any portion of the Option. 10 DIVIDENDS With respect to all Shares (in contrary to unexercised Options) issued upon the exercise of Options purchased by the Optionee , the Optionee shall be entitled to receive dividends in accordance with the quantity of such Shares, and subject to any applicable taxation on distribution of dividends. 11 ASSIGNABILITY AND SALE OF OPTIONS No Option, purchasable hereunder, whether fully paid or not, shall be assignable, transferable or given as collateral or any right with respect to them given to any third party whatsoever, and during the lifetime of the Optionee each and all of such Optionee's rights to purchase Shares hereunder shall be exercisable only by the Optionee. MIND CTI Ltd. Option Plan 4 12 TERM OF THE OPTION PLAN The Option Plan shall be effective as of the day it was adopted by the Board and shall terminate at the end of 36 (thirty six) months from such day of adoption. 13 AMENDMENTS OR TERMINATION The Board may, at any time and from time to time, amend, alter or discontinue the Option Plan, except that no amendment or alteration shall be made which would impair the rights of the holder of any Option therefore granted, without his consent. 14 GOVERNMENT REGULATIONS The Option Plan, and the granting and exercise of Options hereunder, and the obligation of the Company to sell and deliver Shares under such Options, shall be subject to all applicable laws, rules, and regulations, whether of the State of Israel or of the United States or any other State having jurisdiction over the Company and the Optionee, including the registration of the Shares under the United States Securities Act of 1933, and to such approvals by any governmental agencies or national securities exchanges as may be required. 15 CONTINUANCE OF EMPLOYMENT Neither the Option Plan nor the Option agreement with the Optionee shall impose any obligation on the Company or a subsidiary thereof, to continue any Optionee in its employ or service, and nothing in the Option Plan or in any Option granted pursuant thereto shall confer upon any Optionee any right to continue in the employ or service of the Company or a subsidiary thereof or restrict the right of the Company or a subsidiary thereof to terminate such employment at any time. 16 GOVERNING LAW AND JURISDICTION This Option Plan shall be governed by and construed and enforced in accordance with the laws of the State of Israel applicable to contracts made and to be performed therein, without giving effect to the principles of conflict of laws. The competent courts of Tel-Aviv, Israel shall have sole jurisdiction in any matters pertaining to this Option Plan. 17 ARBITRATION Any dispute in relation with this Option Plan and the exercise of rights thereunder, shall be brought to arbitration of the legal counsel to the Company (the "ARBITRATOR"), who shall decide on such dispute in accordance with the provisions of the Arbitration Law - 1968 and its supplement. The decision of the Arbitrator shall be final and shall bind the Company and the Optionee. 18 TAX CONSEQUENCES Any tax consequences arising from the grant or exercise of any Option, from the payment for Shares covered thereby or from any other event or act (of the Company or the Optionee), hereunder, shall be borne solely by the Optionee. The Company shall withhold taxes according to the requirements under the applicable laws, rules, and regulations, including withholding taxes at source. Furthermore, the Optionee shall agree to indemnify the Company and hold them harmless against and from any and all liability for any such tax or interest or penalty thereon, including without limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax from any payment made to the Optionee. The Committee shall not be required to release any Share certificate to an Optionee until all required payments have been fully made. 19 NON-EXCLUSIVITY OF THE OPTION PLAN The adoption of the Option Plan by the Board shall not be construed as amending, modifying or MIND CTI Ltd. Option Plan 5 rescinding any previously approved incentive arrangements or as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock Options otherwise than under the Option Plan, and such arrangements may be either applicable generally or only in specific cases. For the avoidance of doubt, prior grants of options to employees of the Company under their employment agreements, and not in the framework of any previous option plan, shall not be deemed an approved incentive arrangement for the purpose of this Section. 20 MULTIPLE AGREEMENTS The terms of each Option may differ from other Options granted under the Option Plan at the same time, or at any other time. The Committee may also grant more than one Option to a given Optionee during the term of the Option Plan, either in addition to, or in substitution for, one or more Options previously granted to that Optionee. MIND CTI Ltd. Option Plan 6 EX-10.8 14 0014.txt WAIVER DATED 8/1/2000 EXHIBIT 10.8 August 1, 2000 The Persons Listed on Exhibit A Hereto Re: Shareholders' Agreement, Dated as of March 30, 2000, (as amended to date), by and among MIND C.T.I. Ltd. (the "Company") and the "Shareholders" as defined therein (the "Shareholders' ----------------------------------------- Agreement") ------------------------------------------------------------------- Ladies and Gentlemen: This will confirm that, from and after the closing of the proposed initial public offering of the ordinary shares of the Company, the undersigned hereby waive any rights they have under Section 4 of the Shareholders' Agreement with respect to any sales of ordinary shares by Non-Investor Shareholders, other than sales by Monica Eisinger, Lior Salansky, and their respective Permitted Transferees. Nothing herein shall affect the rights of any of the undersigned contained in Section 4 of the Shareholders' Agreement with respect to sales of ordinary shares by Monica Eisinger, Lior Salansky or their respective Permitted Transferees. Capitalized words used as defined terms herein and not otherwise defined shall have the meanings ascribed thereto in the Shareholders' Agreement. /s/ Monica Eisinger ____________________________ Monica Eisinger /s/ Lior Salansky ____________________________ Lior Salansky ADC Teledata Communications Ltd. /s/ Ilan Melamed By: __________________________ Name: Ilan Melamed Title: Chief Executive Officer Summit Ventures V, L.P. By: Summit Partners V, L.P., its General Partner By: Summit Partners, LLC, its General Partner /s/ Kevin Mohan By: --------------------------- Member Summit V Companion Fund, L.P. By: Summit Partners V, L.P., its General Partner By: Summit Partners, LLC, its General Partner /s/ Kevin Mohan By: --------------------------- Member Summit V Advisors Fund, L.P. By: Summit Partners, LLC, its General Partner /s/ Kevin Mohan By: --------------------------- Member Summit V Advisors Fund (QP), L.P. By: Summit Partners, LLC, its General Partner /s/ Kevin Mohan By: --------------------------- Member Summit Investors III, L.P. /s/ Kevin Mohan By: __________________________ Name: Kevin Mohan Title: General Partner Oscar Gruss & Son Incorporated /s/ Michael Shaoul By: __________________________ Name: Michael Shaoul Title: Executive Vice President Exhibit A --------- MIND C.T.I. Ltd. Summit Ventures V, L.P. Summit V Companion Fund, L.P. Summit V Advisors Fund, L.P. Summit V Advisors Fund (QP), L.P. Summit Investors III, L.P. Oscar Gruss & Son Incorporated Monica Eisinger Lior Salansky ADC Teledata Communications Ltd. Zeev Braude MIND Israel Ltd. Avshalom Radzinsky Rafael Newman Izik Ben Zaken Idit Maor Shai Weisberg EX-10.9 15 0015.txt AMENDMENT AGREEMENT EXHIBIT 10.9 MIND C.T.I. LTD. Amendment Agreement ------------------- This Amendment Agreement, dated as of July 10, 2000, among MIND C.T.I. Ltd. (the "Company") and the shareholders named on the signature pages hereof. W I T N E S S E T H: WHEREAS, the Company is party to a Shareholders' Agreement, dated as of March 30, 2000, with the shareholders named therein (the "Shareholders' Agreement"); WHEREAS, the Company is party to a Registration Rights Agreement, dated as of March 30, 2000, with the shareholders named therein (the "Registration Rights Agreement"); and WHEREAS, in light of the Company's proposed initial public offering of shares on The Nasdaq Stock Market, the Company and the undersigned desire to amend the Shareholders' Agreement and the Registration Rights Agreements as set forth herein. NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Defined Terms ------------- Capitalized terms used but not defined herein shall have the respective meanings assigned thereto in the Shareholders' Agreement or the Registration Rights Agreement, as the case may be. 2. Amendment to Shareholders Agreement ----------------------------------- The first proviso of Section 9 of the Shareholders' Agreement is hereby amended and replaced in its entirety with the following: "provided, however, that the provisions of Section 4 hereof shall survive the consummation of a Qualified Public Offering only with respect to any sales of securities undertaken by a Non-Investor Shareholder (other than ADC) which are not consummated utilizing a public market". For the avoidance of doubt, it is hereby acknowledged that the provisions of Sections 3 and 4(d) of the Shareholders' Agreement shall terminate upon the consummation of a Qualified Public Offering. 3. Amendment to Registration Rights Agreement ------------------------------------------ Section 15(a) of the Registration Rights Agreement is hereby amended by deleting the parenthetical clause contained therein and by adding the following to the end thereof: Any of the Holders may assign its rights and obligations pursuant to this Agreement to a transferee of all or any part of its Registrable Securities, provided that the transferor shall, within fourteen (14) days after such transfer (or fourteen (14) days after the date hereof, with respect to transfers that have occurred prior to the date hereof), furnish the Company with written notice of the name and address of such transferee and the securities with respect to which such registration rights are being assigned and the transferee's written agreement to be bound by this Agreement. [SIGNATURES BEGIN ON NEXT PAGE] 2 IN WITNESS WHEREOF, this Agreement has been executed as of the date and year first above written. MIND C.T.I. LTD. /s/ Monica Eisinger By: _____________________ Name: Monica Eisinger Title: President /s/ Monica Eisinger ________________________ Monica Eisinger /s/ Lior Salansky ________________________ Lior Salansky ADC TELEDATA COMMUNICATIONS LTD. /s/ Ilan Melamed By: ______________________ Name: Ilan Melamed Title: Chief Executive Officer /s/ Zeev Braude _________________________ Zeev Braude 3 MIND ISRAEL LTD. /s/ Monica Eisinger By: _____________________ Name: Monica Eisinger Title: President /s/ Avshalon Radzinsky ________________________ Avshalon Radzinsky /s/ Rafael Newman ________________________ Rafael Newman /s/ Izik Ben Zaken ________________________ Izik Ben Zaken /s/ Idit Maor ________________________ Idit Maor /s/ Shai Wesberg ________________________ Shai Wesberg SUMMIT VENTURES V, L.P. By: Summit Partners V, L.P., its General Partner By: Summit Partners, LLC, its General Partner /s/ Kevin Mohan By: ____________________ Member 4 SUMMIT COMPANION FUND, L.P. By: Summit Partners V, L.P., its General Partner By: Summit Partners, LLC, its General Partner /s/ Kevin Mohan By: ______________________ Member 5 SUMMIT V ADVISORS FUND, L.P. By: Summit Partners, LLC its General Partner /s/ Kevin Mohan By: ______________________ Member SUMMIT V ADVISORS FUND (QP), L.P. By: Summit Partners, LLC, its General Partner /s/ Kevin Mohan By: ______________________ Member SUMMIT INVESTORS III, L.P. /s/ Kevin Mohan By: ______________________ General Partner OSCAR GRUSS & SON INCORPORATED /s/ Michael Shaoul By: ______________________ Name: Michael Shaoul Title: Executive Vice President 6 EX-21 16 0016.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF MIND C.T.I. LTD. MIND C.T.I. Inc. (NJ) 1 EX-23.1 17 0017.txt CONSENT OF KESSELMAN & KESSELMAN Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form F-1 of our report dated March 30, 2000 (except Notes 5 and 6a (2), for which the date is May 1, 2000) relating to the consolidated financial statements of MIND C.T.I. Ltd., which appears in such Registration Statement. We also consent to the references to our firm under the heading "Experts" in such Registration Statement. Tel Aviv, Israel Kesselman & Kesselman August 1 , 2000 Certified Public Accountants (Isr.) -----END PRIVACY-ENHANCED MESSAGE-----