-----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, By0rL845uRgJ9OTgGrazqC9Ra0FEwE+DGmRhoqURxOI7EQMCGx9WGABz+0WzrUGu J73WOxq2N8KPT+UCqERgNw== 0001178913-04-000407.txt : 20040331 0001178913-04-000407.hdr.sgml : 20040331 20040331141444 ACCESSION NUMBER: 0001178913-04-000407 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 31 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TECNOMATIX TECHNOLOGIES LTD CENTRAL INDEX KEY: 0000895457 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 000-21222 FILM NUMBER: 04705253 BUSINESS ADDRESS: STREET 1: DELTA HOUSE STREET 2: 16 HAGALIM AVE CITY: HERZILYA 46733 ISRAE STATE: L3 BUSINESS PHONE: 3134716140 MAIL ADDRESS: STREET 1: DELTA HOUSE STREET 2: 16 HAGALIM AVENUE CITY: HERZILYA 46733 ISRAE STATE: L3 ZIP: 00000 20-F 1 d40612.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------------- FORM 20-F [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______ COMMISSION FILE NUMBER 0-21222 TECNOMATIX TECHNOLOGIES LTD. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) N/A ISRAEL (TRANSLATION OF REGISTRANT'S (JURISDICTION OF INCORPORATION OR NAME INTO ENGLISH) ORGANIZATION) DELTA HOUSE, 16 ABBA EBAN AVENUE, HERZLIYA 46120, ISRAEL (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT. TITLE OF EACH CLASS REGISTERED NAME OF EACH EXCHANGE ON WHICH ------------------------------ ------------------------------- None None SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT. ORDINARY SHARES, PAR VALUE NIS 0.01 PER SHARE (TITLE OF CLASS) SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(D) OF THE ACT. NONE ---- (TITLE OF CLASS) Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report - 11,938,827 Ordinary Shares Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 __ Item 18 [X] -1- PRELIMINARY NOTE This annual report contains historical information and forward-looking statements. Statements looking forward in time are included in this annual report pursuant to the "Safe Harbor" provision of the Private Securities Litigation Reform Act of 1995. They involve known and unknown risks and uncertainties that may cause our actual results in future periods to be materially different from any future performance suggested herein. Furthermore, we operate in an industry sector where securities values may be volatile and may be influenced by economic and other factors beyond the company's control. In the context of the forward-looking information provided in this annual report and in other reports, please refer to the discussions of risk factors detailed in, as well as the other information contained in, this annual report and our other filings with the Securities and Exchange Commission. -2- TABLE OF CONTENTS
PART ONE ITEM 1. Identity of Directors, Senior Management and Advisors......................... Not applicable ITEM 2. Offer Statistics and Expected Timetable....................................... Not applicable ITEM 3. Key Information............................................................... 4 ITEM 4. Information on the Company.................................................... 15 ITEM 5. Operating and Financial Review and Prospects.................................. 31 ITEM 6. Directors, Senior Management and Employees.................................... 48 ITEM 7. Major Shareholders and Related Party Transactions............................. 57 ITEM 8. Financial Information......................................................... 61 ITEM 9. The Offer and Listing......................................................... 62 ITEM 10. Additional Information........................................................ 63 ITEM 11. Quantitative and Qualitative Disclosure about Market Risk..................... 76 ITEM 12. Description of Securities Other than Equity Securities........................ Not applicable PART TWO ITEM 13. Defaults, Dividend Arrearages and Delinquencies............................... 79 ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.. 79 ITEM 15. Controls and Procedures....................................................... 80 ITEM 16A. Audit Committee Financial Expert.............................................. 80 ITEM 16B. Code of Ethics................................................................ 80 ITEM 16C. Principal Accountant Fees and Services........................................ 81 ITEM 16D. Exemptions From The Listing Standards for Audit Committees.................. . Not applicable ITEM 16E. Repurchase of Equity Securities by the Issuer and Affiliated Purchasers....... 82 PART THREE ITEM 17. Financial Statements.......................................................... Not applicable ITEM 18. Financial Statements.......................................................... 82 ITEM 19. Exhibits...................................................................... 82 SIGNATURES............................................................................... 85
-3- PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS Not applicable ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable ITEM 3. KEY INFORMATION A. SELECTED FINANCIAL DATA The following selected summary of financial information was derived from our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The selected summary data should be read in conjunction with and are qualified in their entirety by our Consolidated Financial Statements and notes thereto, which are presented elsewhere herein and by reference to "Item 5: Operations and Financial Review and Prospects." -4-
Year Ended December 31, -------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- (In thousands, except share data) ---------------------------------- STATEMENT OF OPERATIONS DATA: Revenues Software license fees $ 36,033 $ 36,385 $ 42,316 $ 51,699 $ 57,444 Services 50,224 45,620 44,584 37,319 30,574 ----------- ----------- ----------- ----------- ----------- Total Revenues 86,257 82,005 86,900 89,018 88,018 ----------- ----------- ----------- ----------- ----------- Cost of software license fees Cost and expenses 10,114 8,062 7,851 5,764 5,003 Impairment of capitalized software development costs 2,180 ---- 316 ---- ---- ----------- ----------- ----------- ----------- ----------- Total cost of software licenses 12,294 8,062 8,167 5,764 5,003 ----------- ----------- ----------- ----------- ----------- Cost of services 15,281 15,005 15,268 13,354 9,251 Amortization of acquired intangibles 136 2,491 7,758 7,801 4,434 Research and development, net 14,960 14,812 19,216 20,748 16,451 Selling and marketing 42,491 36,887 44,624 50,737 39,333 General and administrative 4,673 5,013 4,855 6,037 4,932 Write-off of long-term investment ---- 457 ---- ---- ---- Impairment of software acquired 937 375 ---- ---- ---- Restructuring charges 2,659 651 1,527 ---- ---- In-process research and development and acquisition costs 3,530 ---- ---- 5,250 9,944 ----------- ----------- ----------- ----------- ----------- Total costs and expenses 96,961 83,753 101,415 109,691 89,348 ----------- ----------- ----------- ----------- ----------- Operating income (loss) (10,704) (1,748) (14,515) (20,673) (1,330) Financial income (expense), net 679 (799) 1,191 1,348 3,241 ----------- ----------- ----------- ----------- ----------- Income (loss) before taxes on income (10,025) (2,547) (13,324) (19,325) 1,911 Taxes on income (212) 148 (54) (505) (579) ----------- ----------- ----------- ----------- ----------- Income (loss) after taxes on income (10,237) (2,399) (13,378) (19,830) 1,332 Share in loss of affiliated company (103) (431) (532) (131) ---- Minority interest in net income (loss) of subsidiary ---- ---- ---- 2 22 ----------- ----------- ----------- ----------- ----------- Net income (loss $ (10,340) $ (2,830) $ (13,910) $ (19,959) $ 1,354 =========== =========== =========== =========== =========== Basic earnings (loss) per share Net income (loss $ (0.94) $ (0.27) $ (1.35) $ (1.95) $ 0.14 =========== =========== =========== =========== =========== Diluted earnings (loss) per share Net income (loss $ (0.94) $ (0.27) $ (1.35) $ (1.95) $ 0.13 =========== =========== =========== =========== =========== Weighted average number of shares used for computing basic earnings (loss) per share 11,054,556 10,607,140 10,366,125 10,224,737 9,674,778 =========== =========== =========== =========== =========== Weighted average number of shares used for computing diluted earnings (loss) per share 11,054,556 10,607,140 10,366,125 10,224,737 10,403,719 =========== =========== =========== =========== ===========
-5-
AT DECEMBER 31, --------------------------------------------------------------- BALANCE SHEET DATA 2003 2002 2001 2000 1999 ---------- ---------- --------- ---------- ---------- Working capital................... $ 12,469 $ 26,837 $ 57,341 $ 67,523 $ 78,154 Total assets...................... 117,100 115,817 123,284 149,318 175,443 Short-term credits and current maturities of long-term debt...... 833 ---- 687 784 10,883 Long-term debt.................... 24,167 37,428 43,765 49,250 49,250 Shareholders' equity.............. 58,352 54,917 55,893 69,696 84,691
-6- D. RISK FACTORS CERTAIN STATEMENTS INCLUDED IN THIS ANNUAL REPORT, WHICH USES THE TERMS "ESTIMATE", "PROJECT", "INTEND", "EXPECT" AND SIMILAR EXPRESSIONS, ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS, INCLUDING THE RISK FACTORS SET FORTH BELOW. BECAUSE OF TIME AND OTHER FACTORS AFFECTING OUR OPERATING RESULTS, PAST HISTORICAL PERFORMANCE SHOULD NOT BE USED AS AN INDICATOR OF FUTURE PERFORMANCE, AND INVESTORS SHOULD NOT USE HISTORICAL TRENDS TO ANTICIPATE RESULTS OR TRENDS IN FUTURE PERIODS. RISKS RELATED TO OUR BUSINESS WE HAVE A RECENT HISTORY OF ANNUAL AND QUARTERLY LOSSES AND CANNOT ASSURE YOU THAT WE WILL RETURN TO PROFITABILITY ON AN ANNUAL BASIS OR ON A QUARTERLY BASIS IN THE FUTURE. We incurred net losses of approximately $14 million, $2.8 million and $10.3 million in 2001, 2002 and 2003, respectively. In addition, we incurred net losses during each of the quarters of 2001, each of the four quarters of 2002 and the first quarter, the third quarter and the fourth quarter of 2003, in which we lost $1.4 million, $4.7 million, and $4.4 million, respectively. In the second quarter of 2003 we had net income of $0.2 million. We cannot be certain that we will return to profitability on an annual basis or on a quarterly basis. WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY RESULTS, WHICH MAKES IT DIFFICULT FOR INVESTORS TO MAKE RELIABLE PERIOD-TO-PERIOD COMPARISONS AND MAY CONTRIBUTE TO VOLATILITY IN THE MARKET PRICE FOR OUR ORDINARY SHARES. Our quarterly revenues, gross profits and results of operations have fluctuated significantly in the past and may be subject to continued fluctuation in the future. The following events may cause such fluctuations: o changes in timing of orders, especially large orders, for our products and services; o the U.S. dollar value of orders for our products and services; o adverse economic conditions and international exchange rate and currency fluctuations; o delays in the implementation of our solutions by customers; o changes in the proportion of service and license revenues; o timing of product releases; o changes in the economic conditions of the various industries in which our customers operate; o price and product competition; o increases in selling and marketing expenses, as well as other operating expenses; o technological changes; o political instability in the Middle East; and o consolidation of our clients. A substantial portion of our expenses, including most product development, selling and marketing expenses, must be incurred in advance of when revenue is generated. If our projected revenue does not meet our expectations, we are likely to experience a shortfall in our operating profit relative to our expectations. As a result, we believe that period-to-period comparisons of our historical results of operations are not necessarily meaningful and that you should not rely on them as an indication for future performance. Also, our quarterly results of operations have, on separate occasions, been below the expectations of public market analysts and investors and the price of our ordinary shares subsequently decreased. If this happens in the future, the price of our ordinary shares will likely decrease again. -7- IF WE FAIL TO RETAIN OUR CUSTOMERS, OUR REVENUES MAY INCREASE AT A SLOWER RATE OR MAY DECREASE. CONVERSELY, A SIGNIFICANT INCREASE IN THE NUMBER OF OUR CUSTOMERS OR IN OUR DEVELOPMENT OF NEW PRODUCT OFFERINGS COULD REQUIRE US TO EXPEND SIGNIFICANT AMOUNTS OF MONEY, TIME AND OTHER RESOURCES TO MEET THE DEMAND. We sell our products to major electronics, aerospace and automotive companies and their suppliers and other discrete manufacturing companies worldwide and our business depends on our ability to retain these customers. Approximately 83% of our revenues from software license fees in 2002 and 78% of these revenues in 2003 resulted from repeat sales to existing customers. The decrease in the percentage of repeat sales is attributed to sales made for the first time to customers of USDATA Corporation, from which we acquired substantially all of the assets during 2003 (see Item 4A). We cannot assure you that we will be able to retain our existing customers, including former customers of USDATA, and make repeat sales to those customers. Our inability to retain these customers would also adversely affect our revenues from services. Conversely, a significant increase in the number of our customers or in our development of new product offerings, or both, could require us to expend significant amounts of money, time and other resources to meet the demand. This could strain our personnel and financial resources. OUR SALES CYCLE IS VARIABLE AND SOMETIMES LONG AND INVOLVES SIGNIFICANT RESOURCES ON OUR PART, BUT MAY NEVER RESULT IN ACTUAL SALES. The decision to utilize our solutions and products often entails a significant change in a potential customer's organization, information technology systems, and business processes. Accordingly, sales often require extensive educational, sales and engineering efforts. Specifically, the marketing and sales efforts of our eMPower Enterprise Solutions typically entail the education of, and consulting with, a broad range of individuals and departments within a potential customer's organization. Moreover, provision of these server-based and Web-enabled comprehensive solutions involves our Global Professional Services organization integrating these solutions into the customer's information technology environment, as well as providing training and support. The large number of individuals and departments involved in the decision of a potential customer to purchase our enterprise solutions makes that decision more complex, with a sales cycle of approximately nine to twelve months. We do not expect the sales cycle for our eMPower solutions and products to decrease in the near future or at all. The purchasing decisions of our clients are subject to the uncertainties and delays associated with the budgeting, internal approval and competitive evaluation processes that typically accompany significant capital expenditures and the purchase of mission critical software. Any delays in sales could cause our operating results to vary widely. If our sales cycle lengthens, our quarterly operating results may become less predictable and may fluctuate more widely than in the past. A number of companies decide which products to buy through a request for proposal process. In these situations, we run the risk of investing significant resources in a proposal, only to lose to our competition. RECENTLY, WE HAVE WITNESSED AN INCREASE IN OUR REVENUES FROM SERVICES AND A DECREASE IN OUR REVENUES FROM SOFTWARE. IF THIS TREND CONTINUES, IT MAY ADVERSELY AFFECT OUR GROSS MARGINS AND PROFITABILITY. Our revenues from software decreased from $42,316,000 in 2001 to $36,385,000 in 2002 and to $36,033,000 in 2003. During the same period, our revenues from services increased from $44,584,000 in 2001 to $45,620,000 in 2002 and to $50,224,000 in 2003. The reason for the increase in revenues from services is due to the increase in sales of our eMPower Enterprise Solutions which require integration into the existing environment of our customers, as well as customization and deployment services provided by our Professional Global Services unit. Our gross margin from software is higher than our gross margin from services, since our cost of services includes expenses of salaries and related benefits of the employees engaged in providing the services, whereas the cost of producing software is relatively insignificant. If this trend continues, our gross margins and profitability may be adversely affected. -8- IF WE ARE UNABLE TO ACCURATELY PREDICT AND RESPOND TO MARKET DEVELOPMENTS OR DEMANDS, OR IF OUR PRODUCTS ARE NOT ACCEPTED IN THE MARKETPLACE, OUR BUSINESS WILL BE ADVERSELY AFFECTED. The market for manufacturing process management (MPM) is rapidly evolving. This makes it difficult to predict demand and market acceptance for our solutions and products. We cannot guarantee that the market for our solutions and products will grow or that they will become widely accepted. If the market for our solutions and products does not develop as quickly as we expect, our future revenues and profitability will be adversely affected. Changes in technologies, industry standards, the regulatory environment, client requirements and new product introductions by existing or future competitors could render our existing offerings obsolete and unmarketable, or require us to develop new products. If our solutions and products do not achieve or maintain market acceptance or if our competitors release new products that achieve quicker market acceptance, have more advanced features, offer better performance or are more price competitive, our revenues may not grow and may even decline. WE MAY BE UNABLE TO PARTNER WITH PROVIDERS OF PRODUCT LIFE-CYCLE MANAGEMENT SOLUTIONS, MANUFACTURING SOLUTIONS AND HARDWARE VENDORS, AND FAILURE TO DO SO MAY ADVERSELY AFFECT OUR BUSINESS. Our eMPower solutions and products are part of a broad manufacturing domain and have to tightly integrate with other information technology systems and automation equipment. In addition, our eMPower Enterprise Solutions comprise an integral part of a broad product life-cycle management (PLM) solution. Accordingly, it is important for us to form joint business arrangements with manufacturing software and equipment vendors in order to develop new software products, or to integrate our products with the products of other entities, or market our products together with the products of other entities. If we are unable to partner with some or all of those companies, or if the market does not accept the solutions provided by the companies with which we cooperate, our sales and revenues may decline. WE MAY BE UNABLE TO ACHIEVE THE BENEFITS WE ANTICIPATE FROM JOINT SOFTWARE DEVELOPMENT, MARKETING OR OTHER STRATEGIC ARRANGEMENTS WITH OUR BUSINESS PARTNERS. As part of our strategy, we enter into various development or joint business arrangements to develop new software products, integrate our products with the products of other entities or market our products together with the products of other entities. We may distribute ourselves or jointly sell with our business partners an integrated software product and pay a royalty to the business partner based on end-user license fees under these joint business arrangements. The market may reject these integrated products or these arrangements may not succeed for other reasons. As a result we may not achieve the revenues we anticipated at the time we entered into the joint arrangement. OUR SALES MAY DECREASE AS A RESULT OF EVOLVING INDUSTRY STANDARDS AND RAPID TECHNOLOGICAL CHANGES THAT COULD RESULT IN OUR PRODUCTS BEING NO LONGER IN DEMAND. We operate in an industry that is characterized by evolving industry standards with rapid changes in technology and consumer demand and the continuing introduction of higher performance products with shorter product life cycles. If our products become outdated, our sales will likely decrease. Our operating results will depend on our ability to continue to develop and introduce new and enhanced products on a timely and cost-effective basis to meet evolving customer requirements. Since our products are designed to work with other enterprise-wide programs, they must conform to various technical standards in order to operate efficiently on an enterprise-wide basis. Successful product development and introduction depends on numerous factors, including among others: o our ability to anticipate market requirements and changes in technology and industry standards; o our ability to accurately define new products, and introduce them to the market; and o our ability to develop technology that satisfies industry requirements. We may not be able to meet these challenges, respond successfully to new products introduced by competitors, or recover our substantial research and development expenditures. Our failure to develop and market new products could result in our current products becoming uncompetitive. UNDETECTED DEFECTS MAY INCREASE OUR COSTS AND IMPAIR THE MARKET ACCEPTANCE OF OUR PRODUCTS AND TECHNOLOGY. Our software products are complex and may contain undetected defects, particularly when first introduced or when new versions or enhancements are released. Testing of our products is particularly challenging because it is difficult to simulate the wide variety of client environments into which our products are deployed. Our products are frequently critical to our clients' operations. As a result, our clients and potential clients have a greater sensitivity to product defects than do clients of software products generally. -9- Defects may be found in current or future products and versions after the start of commercial shipment. This could result in: o a delay or failure of our products to achieve market acceptance; o adverse client reaction; o negative publicity and damage to our reputation; o diversion of resources; and o increased services costs. Defects could also subject us to legal claims. Although our license agreements contain limitation of liability provisions, these provisions may not be sufficient to protect us against these legal claims. The sale and support of our products may also expose us to product liability claims. A SIGNIFICANT PERCENTAGE OF OUR REVENUES ARE GENERATED BY SALES TO MANUFACTURERS OPERATING IN A FEW SPECIFIC INDUSTRIES AND IF ECONOMIC ACTIVITY IN ONE OR MORE OF THOSE INDUSTRIES SLOWS, OUR REVENUES WILL MOST LIKELY DECREASE. We sell our products to major electronics, aerospace and automotive companies and their suppliers and other discrete manufacturing companies. Therefore, our success in selling our products and services is dependent upon the level of activity in such industries. If, whether as a result of a general slowing of local or global economies or otherwise, economic activity in one or more of our target industries decreases or fails to grow, our revenues will most likely decrease. For example, since a substantial portion of our revenues is derived from sales to the automotive industry and since the automotive industry is traditionally subject to cyclicality, any adverse change in the level of activity in the automotive industry could materially adversely affect the level of our revenues, as evidenced in the decrease in revenues to $46.9 million, or 54% of total revenues in 2003, from $47.5 million, or 58% of total revenues, in 2002. Another example is the electronics industry: as a result of the continued slowdown in the U.S. electronics industry in 2002 and 2003 and the slowdown in the Asia Pacific electronics industry in 2003, our revenues from the electronics industry decreased to $18.3 million or 21% of our total revenues in 2003, compared to $20.4 million or 25% of our total revenues in 2002. GREATER MARKET ACCEPTANCE OF OUR COMPETITORS' PRODUCTS COULD RESULT IN REDUCED REVENUES OR GROSS MARGINS. We compete with other providers of MPM solutions in the automotive, electronics, aerospace and other manufacturing industries. In addition, as a result of the consolidation in the product life-cycle management solution market, we have begun to compete with providers of product life-cycle management solutions that do not necessarily provide MPM solutions, as we do. A number of our current competitors, including Dassault Systems S.A., have, and our prospective competitors may have, competitive advantages in relation to us. These advantages may include greater technical and financial resources, more developed marketing and service organizations, greater expertise and broader customer bases and name recognition than us. We cannot assure you that competition will not result in price reductions for our products and services, fewer client orders, reduced gross margins or loss of market share, any of which could materially adversely affect our business, financial condition and results of operations. In addition, as the industry consolidates, newly-consolidated entities capable of offering broad product life-cycle management solutions may achieve greater prominence and obtain a competitive advantage in relation to customers seeking broad solutions. Accordingly, it may become increasingly important for us to partner with those consolidated entities. If we are unable to partner with some or all of those companies, or if the market does not accept the solutions provided by the companies with which we cooperate, our sales and revenues may decline. WE RELY ON SOFTWARE FROM THIRD PARTIES. IF WE LOSE THAT SOFTWARE, WE WOULD HAVE TO SPEND ADDITIONAL CAPITAL TO REDESIGN OUR EXISTING SOFTWARE OR DEVELOP NEW SOFTWARE. We integrate various third-party software products as components of our products. Our business would be disrupted if functional versions of this software were either no longer available to us or no longer offered to us on commercially reasonable terms. In either case, we would be required to spend additional capital to either redesign our software to function with alternate third-party software or develop these components ourselves. We might be forced to limit the features available in our current or future product offerings and the commercial release of our products could be delayed. -10- WE MAY BE UNABLE TO MAINTAIN OUR SALES, MARKETING AND SUPPORT ORGANIZATIONS, WHICH MAY HINDER OUR ABILITY TO MEET CUSTOMER DEMANDS. We sell our products primarily through our direct sales force and support our clients through our technical and customer support staff. We need to maintain our direct sales and marketing operations to increase market awareness and sales of our products. Competition for qualified people may lead to increased labor and personnel costs. If we do not succeed in retaining our personnel, in attracting new employees or in replacing employees who leave, our business could suffer significantly. OUR REVENUE GROWTH MAY DEPEND ON OUR ABILITY TO INCREASINGLY MAKE SALES THROUGH THIRD PARTIES. We intend to increase our focus on sales through third parties in 2004 and onward. If we do not succeed in executing our strategy of increasing our sales through indirect sales channels, we may be unable to achieve revenue growth. IF WE ARE UNABLE TO ATTRACT, TRAIN AND RETAIN QUALIFIED PERSONNEL, WE MAY NOT BE ABLE TO ACHIEVE OUR OBJECTIVES AND OUR BUSINESS COULD BE HARMED. Our future success depends on our ability to absorb and retain senior employees and to attract, motivate and retain highly qualified professional employees. Competition for these employees can be intense, especially in a number of our key markets and locations, including the United States, Japan and Germany. The process of locating, training and successfully integrating qualified personnel into our operations can be lengthy and expensive. We may not be able to compete effectively for the personnel we need. Any loss of members of senior management or key technical personnel, or any failure to attract or retain highly qualified employees as needed, could materially adversely affect our ability to carry out our business plan. WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, WHICH MAY LIMIT OUR ABILITY TO COMPETE EFFECTIVELY. Our success and ability to compete are substantially dependent upon our internally developed technology. Other than our trademarks, most of our intellectual property consists of proprietary or confidential information that is not subject to patent or similar protection. In general, we have relied on a combination of internally developed technology, trade secret, copyright and trademark law and nondisclosure agreements to protect our proprietary know-how. Unauthorized third parties may attempt to copy or obtain and use the technology protected by those rights. Any infringement of our intellectual property could have a material adverse effect on our business, financial condition and results of operations. Policing unauthorized use of our products is difficult and costly, particularly in countries where the laws may not protect our proprietary rights as fully as in the United States. Therefore, there can be no assurance that the measures taken by us to protect our proprietary technologies are or will be sufficient to prevent misappropriation of our technologies by unauthorized third parties or independent development of similar products or technologies by others. Substantial litigation over intellectual property rights exists in the software industry. In the past, we have been subject to certain software infringement claims, and we expect that software products may be increasingly subject to third-party infringement claims as the number of products and competitors in our industry grows and the functionality of products in different industry segments overlaps. We believe that many industry participants have filed or intend to file patent and trademark applications covering aspects of their technology. We cannot be certain that they will not make a claim of infringement against us based on our products and technology. Any claims, with or without merit, could: o be expensive and time-consuming to defend; o cause product shipment and installation delays; o divert management's attention and resources; or o require us to enter into royalty or licensing agreements to obtain the right to use a necessary product or component. -11- Royalty or licensing agreements, if required, may not be available on acceptable terms, if at all. A successful claim of product infringement against us and our failure or inability to license the infringed or similar technology could have a material adverse effect on our business, financial condition and results of operations. MARKETING AND DISTRIBUTING OUR PRODUCTS OUTSIDE OF NORTH AMERICA EXPOSES US TO INTERNATIONAL OPERATIONS RISKS THAT WE MAY NOT BE ABLE TO SUCCESSFULLY ADDRESS. We market and sell our products and services in North America, Europe and Asia and derive a significant portion of our revenues from customers in Europe and Asia. We received 71% of our total revenues in 2001, 70% of our total revenues in 2002 and 67% of our total revenues in 2003 in non-U.S. dollar currencies from sales to customers located outside of North America. Since our financial results are reported in dollars, decreases in the rate of exchange of non-U.S. dollar currencies in which we make sales relative to the U.S. dollar will decrease the U.S. dollar-based reported value of those sales. In 2001 and the first quarter of 2002, decreases in Euro-U.S. dollar exchange rates adversely affected our results of operation. In the second, third and fourth quarters of 2002 and in 2003 this trend was reversed as the Euro strengthened compared to the U.S. dollar, which positively affected the results of our operations. However, we cannot be certain that such trend will continue. To the extent that decreases in exchange rates are not offset by a reduction in our costs, they may in the future materially adversely affect our results of operation. In addition, we have sales and support facilities and offices in many locations outside of North America, including in Germany, France, Italy, the United Kingdom, Sweden, the Netherlands, Denmark, Japan, Korea, Singapore, Taiwan and China. These operations and our entry into additional international markets may require significant management attention and financial resources. We are also subject to a number of risks customary for international operations, including: o changing product and service requirements in response to new regulations and requirements in various markets; o economic or political changes in international markets; o greater difficulty in accounts receivable collection and longer collection periods; o unexpected changes in regulatory requirements; o difficulties and costs of staffing and managing foreign operations; o the uncertainty of protection of intellectual property rights in some countries; and o multiple and possibly overlapping tax structures. ANY FUTURE ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY DISTRACT OUR MANAGEMENT AND DISRUPT OUR BUSINESS. IN ADDITION, THE ISSUANCE BY US OF SECURITIES AS CONSIDERATION PAYABLE IN SUCH ACQUISITIONS COULD BE DILUTIVE TO OUR EXISTING SHAREHOLDERS. One of our strategies is to acquire or make investments in complementary businesses, technologies, services or products if appropriate opportunities arise. We have made several acquisitions of companies or the assets of companies in the past. In September 2003, we acquired substantially all of the assets and assumed certain liabilities of USDATA Corporation, a Delaware company. We may in the future engage in discussions and negotiations with companies about our acquiring or investing in those companies' businesses, products, services or technologies. We cannot make assurances that we will be able to identify future suitable acquisition or investment candidates, or if we do identify suitable candidates that we will be able to make the acquisitions or investments on commercially acceptable terms or at all. If we acquire or invest in another company, we could have difficulty assimilating that company's personnel, operations, technology or products and service offerings into our own. The key personnel of the acquired company may decide not to work for us. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations. We may incur indebtedness or issue equity securities, as we have done in the case of USDATA, to pay for any future acquisitions. The issuance of equity securities could be dilutive to our existing shareholders. Currently, we do not have any agreement to enter into any material investment or acquisition transaction. -12- THE MARKET PRICE AND VOLUME OF TRADING OF OUR ORDINARY SHARES MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE PRICE YOU PAID, OR AT ALL. The market prices of securities of information technology companies have been extremely volatile, and have experienced fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market fluctuations could adversely affect the market price and liquidity of our ordinary shares. The market price and volume of trading of our ordinary shares may fluctuate substantially due to a variety of factors, including: o any actual or anticipated fluctuations in our financial condition and operating results; public announcements concerning us or our competitors, or the information technology industry; the introduction or market acceptance of new service offerings by us or our competitors; changes in security analysts' financial estimates; o changes in accounting principles; o sales of our ordinary shares by existing shareholders; o changes in political, military or economic conditions in Israel and the Middle East; and o the loss of any of our key personnel. In the past, securities class action litigation has often been brought against companies following periods of volatility in the market prices of their securities. We may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert our management's attention and resources, which could cause serious harm to our business. OUR EXECUTIVE OFFICERS AND DIRECTORS AND ENTITIES THAT MAY BE DEEMED TO BE AFFILIATED WITH THEM MAY BE ABLE TO INFLUENCE MATTERS REQUIRING SHAREHOLDER APPROVAL AND THEY MAY DISAPPROVE ACTIONS THAT YOU VOTE TO APPROVE. Our executive officers and directors and entities that may be deemed to be affiliated with some of them beneficially owned approximately 25% of our outstanding ordinary shares as of March 24, 2004. Except as otherwise disclosed in Schedules 13D filed by several of our directors and entities affiliated with some of them, there are no voting or similar agreements among such shareholders. However, if such shareholders were to act together, they would be able to significantly influence certain matters requiring approval by our shareholders, such as the election of directors and the approval of mergers or other business combination transactions. RISKS RELATED TO OUR LOCATION IN ISRAEL, OUR TAX STATUS AND LIMITATIONS ON A CHANGE OF CONTROL IT MAY BE DIFFICULT TO EFFECT SERVICE OF PROCESS AND ENFORCE JUDGMENTS AGAINST DIRECTORS, OFFICERS AND EXPERTS IN ISRAEL. We are incorporated in Israel. Many of our executive officers and directors are non-residents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult to enforce a judgment obtained in the United States against us or any of those persons. It may also be difficult to enforce civil liabilities under United States federal securities laws in actions instituted in Israel. POLITICAL, ECONOMIC AND MILITARY CONDITIONS IN ISRAEL COULD NEGATIVELY IMPACT OUR BUSINESS. We are organized under the laws of the State of Israel. Our principal research and development facility is located in Israel. Although all of our sales are currently being made to customers outside Israel, and we believe that we have established additional development and support capabilities in locations outside Israel, we are influenced by the political, economic and military conditions affecting Israel. Since the establishment of the State of Israel in 1948, various armed conflicts have taken place between Israel and its Arab neighbors or, since October 2000, the Palestinians, and a state of hostility, which varies in degree and intensity, has caused security and economic problems in Israel. Any major hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could adversely affect our operations. We cannot assure you that ongoing or revived hostilities or other events related to Israel will not have a material adverse effect on us or our business. Several Arab countries still restrict business with Israeli companies. We could be adversely affected by restrictive laws or policies directed towards Israel and Israeli businesses. -13- Some of our directors, officers and employees are currently obligated to perform annual reserve duty. Additionally, all such reservists are subject to being called to active duty at any time under emergency circumstances. While we have historically operated effectively under these requirements, we cannot assess the full impact of these requirements on our workforce and business if conditions should change, and we cannot predict the effect of any expansion or reduction of these obligations on us. WE MAY BE ADVERSELY AFFECTED IF THE RATE OF INFLATION IN ISRAEL EXCEEDS THE RATE OF DEVALUATION OF THE NEW ISRAELI SHEKEL AGAINST THE U.S. DOLLAR. Our functional currency is the U.S. dollar while a portion of our expenses, principally salaries and the related personnel expenses, are in new Israeli shekels, or NIS. As a result, we are exposed to the risk that the rate of inflation in Israel will exceed the rate of devaluation of the NIS in relation to the U.S. dollar or that the timing of this devaluation lags behind inflation in Israel. This would have the effect of increasing the U.S. dollar cost of our operations. In 1999 and 2000, while the rate of inflation was low, there was a devaluation of the U.S. dollar against the NIS. In 2001 and 2002, the rate of devaluation of the NIS against the U.S. dollar exceeded the rate of inflation. In 2003, there was on one hand a devaluation of the U.S. dollar against the NIS and on the other hand a deflation. We cannot predict any future trends in the rate of inflation/ deflation 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. THE INCENTIVES AVAILABLE TO US FROM THE ISRAEL GOVERNMENT PROGRAMS MAY BE DISCONTINUED OR REDUCED AT ANY TIME, WHICH WOULD LIKELY INCREASE OUR TAXES AND/OR OUR NET RESEARCH AND DEVELOPMENT COSTS. We receive grants from the Government of Israel towards research and development activities. In addition, we receive certain tax benefits from the Government of Israel towards our production facilities in Israel. To maintain our eligibility for these grants and tax benefits we must continue to meet specified conditions. These grants and tax benefits may restrict our ability to manufacture particular products or transfer particular technology outside of Israel. If we fail to comply with these conditions in the future, the grants and tax benefits received could be canceled and we could be required to refund any payments previously received under these grants and tax benefits or pay fines. The Government of Israel has reduced the grants available to us and tax benefits may be discontinued or reduced in the future. If these grants and tax benefits are terminated or reduced, our net research and development costs may increase and we could pay increased taxes in the future, which could decrease our profits. OUR UNITED STATES INVESTORS COULD SUFFER ADVERSE TAX CONSEQUENCES IF WE ARE CHARACTERIZED AS A PASSIVE FOREIGN INVESTMENT COMPANY. Depending on various factors described below in Item 10E, we could be characterized, for United States income tax purposes, as a passive foreign investment company ("PFIC"). Such characterization could result in adverse United States tax consequences to U.S. Holders (as defined in Item 10E), which consequences may be eliminated or ameliorated by a QEF Election (as defined in Item 10E) that is in effect for any year in which we are a PFIC. Each U.S. Holder will be responsible for making this QEF Election on such holder's tax return. Failure to make a QEF Election may cause, among other things, any gain recognized on the sale or disposition of our ordinary shares to be treated as ordinary income for U.S. Holders. U.S. Holders should consult their United States tax advisors with respect to the United States tax consequences of investing in our ordinary shares, and the benefits of a QEF Election, as applied to their circumstances. Although we do not believe that we have been a PFIC for any tax year through and including 2003, we may be deemed to be a PFIC for tax year 2004 as a result of our substantial holdings of cash, cash equivalents and securities combined with a decline in our share price. For further discussion of the consequences of our possible PFIC status, please refer to Item 10E. -14- CERTAIN PROVISIONS OF OUR ARTICLES OF ASSOCIATION AND OF ISRAELI LAW, AS WELL AS AGREEMENTS TO WHICH WE ARE PARTY, COULD DELAY, HINDER OR PREVENT A CHANGE IN OUR CONTROL. Our articles of association contain provisions that could make it more difficult for a third party to acquire control of us, even if that change would be beneficial to our shareholders. Specifically, our articles of association provide that our board of directors is divided into three classes, each serving three-year terms. In addition, certain provisions of the Israeli Companies Law could also delay or otherwise make more difficult a change in our control. The provisions of the Companies Law relating to mergers and acquisitions are discussed in greater detail in "Item 10: Additional Information." In addition, under agreements with certain of our shareholders currently holding in the aggregate approximately 7.21% of our outstanding ordinary shares, standstill provisions restrict the ability of such shareholders to facilitate a change in control without our board's approval. See Item 7 "Major Shareholders and Related Party Transactions" and Item 10C "Additional Information - Material Contracts" for additional information regarding some of our major shareholders and such standstill provisions. ITEM 4. INFORMATION ON THE COMPANY A. HISTORY AND DEVELOPMENT OF THE COMPANY Our commercial and legal name is Tecnomatix Technologies Ltd. We are a company organized under the laws of the State of Israel and are subject to the Israel Companies Law 1999 - 5759. We began operations in 1983. Our principal offices are located at 16 Abba Eban Avenue, Herzliya 46120, Israel and our telephone number is +972-9-959-4777. Our U.S. agent is our subsidiary, Tecnomatix Technologies, Inc., located at 21500 Haggerty Road, Suite 300, Northville, Michigan. In 2000, we first introduced our eMPower Enterprise Solutions to the market through a program based on customer education, pilot and proof-of-concept projects and limited initial implementations. In 2002, we began to see successful results from these efforts as a number of pilot projects converted to initial implementations, and those initial implementations led to broad adoptions and repeat orders. This trend continued in 2003 and by the end of the year 36% of our revenue from software license fees were derived from eMPower Enterprise Solutions and 64% from our eMPower stand-alone products In October 2002, we acquired the CIMBridge software unit of Teradyne, Inc., a leading supplier of printed circuit board assembly equipment. CIMBridge, which provides software for printed circuit board assembly processes, was acquired by Teradyne in 2001 as part of its acquisition of GenRad Inc. Due to its focus on hardware, Teradyne sought a purchaser for the CIMBridge software that would continue to maintain the software for CIMBridge's 350 users. As consideration for this acquisition, we assumed certain liabilities. We also retained some of CIMBridge's employees and agreed to maintain the CIMBridge software as a stand-alone product and to assist CIMBridge's existing users in transitioning to our eMPower Assembly Expert product. In September 2003, we acquired substantially all of the assets and assumed certain liabilities of USDATA Corporation (incorporated in Delaware), a provider of production management products based in Richardson, Texas. As consideration for the acquired assets, we issued to USDATA 945,807 of our ordinary shares, of which 222,319 ordinary shares are held in escrow for up to 18 months following the consummation of the transaction. In connection with the asset purchase transaction, SCP Private Equity Partners II, L.P., the primary stockholder of USDATA, purchased from us 139,764 ordinary shares for an aggregate purchase price of $2,000,000. We have retained most of USDATA's employees and expect to maintain the USDATA products for production management, including FactoryLink(R), a supervisory-level control (SCADA) product, and Xfactory(R), a manufacturing execution systems (MES) product. In February 2004, we finalized a six-year agreement with Hewlett Packard (Israel) Ltd., whereby we outsourced most of our information technology (IT) operations worldwide to Hewlett Packard. Hewlett Packard will be responsible for the IT infrastructure, hardware, IT software (other than various research and development tools), IT services and support at our offices worldwide. Under the agreement, a regional support center will be established at our major offices worldwide which will be manned by permanent on-site personnel. Other offices will be manned by visiting personnel. In addition, a monitoring and control center will be established at Hewlett Packard's offices in Ra'anana, Israel. Hewlett Packard is expected to begin providing the services under the agreement in May 2004. By outsourcing our IT operations, we expect to simplify the process of creating a uniform, improved solution while reducing our IT cost worldwide. -15- In addition, HP Services Europe, Middle East and Africa (EMEA) Managed Services will work together with our sales and global professional services teams to promote our MPM business at customer sites worldwide In December 2003, we redeemed $14,799,000 principal amount of our 5.25% Convertible Subordinated Notes which were issued in August 1997 and were due in August 2004. The redemption price of the notes was 100.75% of the outstanding principal amount of the notes plus accrued and unpaid interest until but excluding the redemption date. In February 2004, our board of directors appointed Jaron Lotan as our chief executive officer. Mr. Lotan joined us in 2002 as president and chief operating officer and will continue to serve also as president. Prior to joining us, Mr. Lotan served as executive vice president for business and strategy at Orbotech Ltd., an Israeli company providing inspection and other manufacturing solutions to the electronics industry. Harel Beit-On, our former chief executive officer, continues to serve as active chairman of the board of directors. B. BUSINESS OVERVIEW We develop and market software solutions for manufacturing process management (MPM). Manufacturers are increasingly required to implement efficient and cost-effective production processes, offer the ability to effect product customization and rely on third-party suppliers in order to stay competitive. Our eMPower solutions enable collaboration between manufacturers and their production plants, external suppliers and other members of their extended enterprise and supply chain throughout the world with respect to the development, execution and management of their manufacturing processes. Our solutions allow manufacturers to accelerate new product introductions, reduce time-to-market for new products, reduce time-to-volume production and introduce greater flexibility into their manufacturing processes. Our eMPower offering provides manufacturers and their extended enterprises with the ability to: o plan, engineer, simulate and optimize manufacturing processes and systems from the factory level down to the level of production lines and work cells; o estimate and analyze performance, cost and throughput of production lines; o create and debug programs for robots, numerical control, testing and other machines; o create manufacturing process documentation and work instructions that can be used on the production floor and re-used on future projects and production lines; o collect, analyze and manage production data from the shop-floor assembly equipment in real time; o monitor, supervise and control manufacturing processes on the shop-floor; o define, predict and manage manufacturing tolerances; and o communicate, review and exchange manufacturing process information over the Internet. The eMPower offering was launched in March 2000. eMPower Enterprise Solutions and the suite of eMPower Products comprise newly developed and Web-based applications as well as some of our historical stand-alone computer-aided production engineering (CAPE) products. The development, marketing and support of CAPE products had been our core business since 1983. CAPE tools are used to model and simulate a computerized representation of a complete manufacturing plant, its production lines and processes. Because MPM addresses a customer's entire manufacturing enterprise and process supply chain, the scope of an MPM project often requires end-to-end solutions that involve seamless integration into the customer's information technology environment, customized software, creation and documentation of the methodology procedures, installation, training, on-site support, hotline support and on-going enhancements throughout the duration of the MPM life cycle. In order to provide this kind of end-to-end enterprise-wide solution, we established our Global Professional Services unit. This unit, which currently contains over 120 professionals located around the world, provides our clients with industry-specific consulting and development services, as well as implementation and engineering support. -16- We target the electronics, aerospace and automotive companies and their suppliers and other discrete manufacturing companies. We sell our products primarily through our direct sales force, although we are seeking to increase our sales through indirect sales channels. Our customers include most of the world's major automotive manufacturers including Audi, BMW, Camau, DaimlerChrysler, Fiat, Ford, General Motors, Kia, Mazda, PSA Peugeot Citroen, Renault, Volkswagen and Volvo; major aerospace manufacturers including Airbus, Boeing, British Aerospace, EADS, General Electric, Korea Aerospace Industries (KAI), Lockheed Martin, McDonnel Douglas, and Pratt & Whitney; heavy machinery manufacturers such as GEC Alsthom, Hyundai, JI Case, Kuka, MAN, Mannesman, Komatsu and Mitsubishi Heavy Industries; and electronics manufacturers such as Alcatel, Canon, Celestica, Delphi, Ericsson, Hewlett Packard, Lucent, Motorola, Nokia, Philips, Sanmina-SCI, Schneider, Solectron, Siemens, Toshiba, Universal and Venture. We have initiated over 300 enterprise projects at different stages of adoption and over 100 companies have adopted our eMPower Enterprise Solution as their standard for at least one manufacturing domain or plant, including multi-million U.S. dollar investments by Airbus, Audi, BMW, EADS, Ford, General Motors, Kia, Korea Aerospace Industries, Kuka , Mazda, PSA Peugeot Citroen, and Schneider. Our strategy is to leverage the success of our eMPower Enterprise Solutions to promote large and small-scale implementations by new customers, and to help our existing customers expand their deployments to other plants and divisions. Our company comprises two divisions, the Mechanical division and the Electronics division. The Mechanical division handles all operations, including research and development, marketing and sales relating to the automotive, and aerospace industries and their suppliers, as well as to other manufacturing companies. The Electronics division handles all operations, including research and development, marketing and sales relating to the electronics assembly industry. We believe that by having two separate divisions we are able to best address the technology requirements, functions and range of shop-floor resources and expertise that are particular to the industries in the two divisions. INDUSTRY BACKGROUND As manufacturing companies strive to keep pace with the rapidly changing and competitive global marketplace, they are faced with the need to: o accommodate shorter product life cycles with increasing product variants and configurations; o manage operations in a global environment; o decrease costs and increase productivity; o improve quality; o reduce the time to introduce new products; and o accelerate the time to produce at full volume. FROM COMPUTER-AIDED PRODUCTION ENGINEERING (CAPE) PRODUCTS TO MPM SOLUTIONS The industrial process generally includes three main phases: (1) product design, (2) production planning and engineering and (3) manufacturing. In the product design phase, a product is conceptualized and the product and its components are designed. The production-engineering phase involves the development, construction and installation of the manufacturing line for the product. The manufacturing phase consists of the orderly production of the product. The product design phase features a high degree of computerization with the wide use of computer-aided design (CAD) systems. As a result, the CAD industry has developed into a multi-billion U.S. dollar industry. The manufacturing phase, due to the increased demand for flexibility in manufacturing systems, is characterized by the proliferation of computer-controlled equipment on the factory floor. This equipment includes robots, coordinate measurement machines commonly known as CMMs, numerical control machines commonly known as NC machines, printed circuit board assembly equipment and other sophisticated machine tools. -17- Despite the increasing acceptance of computer-based automation in the product design and manufacturing phases, the essential link between these phases-the production engineering phase-was traditionally performed with limited use of computers. Instead, production engineers received hard copies of drawings of the product designs from the CAD systems. Using elaborate drawings, mock-ups or models, corporate manufacturing standards, handbooks and drawings of existing production systems, the production engineers then evaluated the feasibility and costs of different manufacturing concepts and planned the sequence of manufacturing activities. After the building of the manufacturing system, robots and other production machines are installed in the manufacturing line and are programmed to perform each movement and operation required to complete a manufacturing cycle. Often, the production line must be shut down during the programming. Programming errors are then corrected and optimization efforts continue on the factory floor during initial production ramp-up until the desired production rates and quality standards are achieved. Production engineering is further complicated by several other factors: o frequent modifications in product design render portions of the previous engineering work useless and require costly and time-consuming redesign; o communication difficulties due to the large number of participants from many disciplines and, in many cases, from different organizations such as subcontractors and suppliers; o manufacturing design errors are generally detected at a late stage in the process and can be corrected only at substantial cost, involving delays in production start-up and line shut-downs, which if not corrected can result in unsatisfactory quality and lower production throughput; and o optimization of the production process may only begin after substantial completion of the installation and programming of equipment, resulting in the need to perform optimization on the shop-floor, which interferes with orderly production. In addition, engineers using traditional methods are often not able to provide early feedback with respect to the manufacturing feasibility and cost implications of the product that is being designed. The limited ability to implement concurrent product design and production engineering can result in product designs that are not optimized for manufacturing, delays in product introduction and increased manufacturing costs. Our computer-aided production engineering (CAPE) technology was designed to address this missing link by allowing production engineers to create an on-screen virtual manufacturing environment that graphically displays and simulates actual manufacturing operations. Our suite of CAPE products enables production engineers to interactively arrange models of machines, production equipment and manufacturing lines and manipulate them to perform on-screen manufacturing activities while accessing and using the design data in its native format and sharing such data with product designers and shop-floor machines and robots. IMPACT OF THE INTERNET ON PRODUCTION ENGINEERING Beyond the complications and limitations inherent in the production engineering process, manufacturers must deal with the pressures of a global marketplace that increasingly relies on the Internet as a primary means of interaction at many levels of operations. The Internet and the globalization of the marketplace have created a significant shift in the standards and priorities of customers and manufacturers. Use of the Internet enables the conduct of business at an accelerated pace which, among other things, results in increasingly shorter product life cycles, decreasing time-to-market constraints and reduced inventories. Through Internet-based links with manufacturers, customers request higher levels of customization. This increase in numbers of product variants has contributed to a de-standardization of the marketplace. In light of these trends, many manufacturers are turning or have turned to an extended enterprise model in which components of the manufacturing process are performed by third-party suppliers and contractors as well as a manufacturer's own production plants. Aside from simply existing as separate corporate entities, these suppliers and contractors often are located in geographically varying locations. However, although manufacturers are willing to outsource part of their operations in order to use the best source for obtaining a competitive advantage, they must enable collaboration between all members of the extended enterprise in order to efficiently manage the manufacturing process while successfully meeting time-to-market expectations and customization requests. Therefore, the ability of manufacturers to outsource and effectively structure flexible supply chains as well as to enable integration and collaboration among all the participants in the manufacturing process chain have become significant factors in their competitive strategy. -18- THE INTRODUCTION OF MANUFACTURING PROCESS MANAGEMENT (MPM) While we experienced wide acceptance of our computer-aided production engineering (CAPE) products, we decided that the shifting priorities and standards that characterize the Internet-oriented global marketplace required a more fully integrated platform and wider use of planning, data management and Web-based technologies in the production engineering phase of the manufacturing process. We called this extended CAPE domain, which encompassed collaborative planning, execution and management of manufacturing processes as well as detailed production engineering, manufacturing process management (MPM). We define MPM as a technology-enabled business strategy for defining, simulating, managing and executing production processes across the extended enterprise of supply chain partners and customers. In March 2000, we launched a suite of eMPower Enterprise Solutions for manufacturing process management (MPM). These solutions are composed of a newly developed platform, new products and Web-based applications as well as some of our historically stand-alone CAPE products. THE EXTENDED MPM SOLUTION In 2003, we took a major step forward in our strategy to broaden the footprint of MPM throughout our customers' manufacturing facilities with the acquisition of substantially all of the assets and the assumption of certain liabilities of USDATA Corporation. USDATA's products for production management include FactoryLink(R), a supervisory-level control (SCADA) product, and Xfactory(R), a manufacturing execution systems (MES) product. FactoryLink and Xfactory offer a suite of production management applications and allow shop-floor personnel in a variety of industries (i) to monitor, supervise and control processes, and (ii) to track all aspects of discrete manufacturing production and maintain historically accurate records as well as real-time information of the production process, thereby enabling companies to analyze the manufacturing process and make better-informed decisions that reduce lead times and manufacturing costs. We intend to integrate Xfactory and FactoryLink into our eMPower platform to address the following customer needs that are currently unmet: o A common platform to manage the complete lifecycle of the production process from process planning to process execution, enabling manufacturing visibility throughout the enterprise, better decision making and implementation of best manufacturing practices; and o Bi-directional communication and collaboration between the shop floor and production engineering departments to accelerate time to volume, accommodate product changes, improve product quality and reduce product support. THE TECNOMATIX OFFERING To compete in the MPM domain and to enable manufacturers to pursue their MPM initiatives, we offer the eMPower family of solutions and products for MPM. The eMPower family comprises two basic approaches to selling into the MPM space that differ based on the complexity of the customer's need: eMPower Enterprise Solutions and eMPower Products. EMPOWER ENTERPRISE SOLUTIONS eMPower Enterprise Solutions consist of bundled applications and services geared to multifaceted customer needs. These bundles are typically customized and fine-tuned to meet an individual customer's specific needs. eMPower Enterprise Solutions consist of three technology components: (a) the electronic bill of processes or eBOP; (b) the Web-enabled server or eMServer; and (c) various eMPower applications. -19- THE EBOP, or electronic bill of processes, integrates and associates product data, as defined by the computer-aided design (CAD) systems, and resources as defined in the enterprise resource planning (ERP) systems. With the use of eMPower planning applications, the eBOP enriches this information with a description of the requisite operations that have to be executed in order to manufacture a product such as a car, airplane or telephone. eBOPs feature an open and scalable structure that allow users to view specific details or combinations of details of the manufacturing process. Because they provide a common way to define, capture and exchange manufacturing processes, eBOPs enable collaboration between different members of the supply chain. For instance, using an eBOP, suppliers may provide feedback or modify a particular part of the manufacturing process that is relevant to them. THE EMSERVER is a Web-based application server that supports the eMPower applications. It is used to manage and communicate eBOPs over the Internet. An eBOP stored on our eMServer is available for collaborative input, review and exchange through a customized Web portal. By centralizing the process data on a Web-based server, eMServer enables manufacturers to control and coordinate the efforts of their extended enterprise. THE EMPOWER APPLICATIONS-many of which were developed from our original computer-aided production engineering (CAPE) software-represent a fundamental shift from traditional production engineering methods. Our planning and engineering applications are based on proprietary technologies, including multiple-tier and Web architecture, kinematics modeling, simulation, data base utilization, data mining and integration technologies. Our technologies allow production engineers to create a computerized integrated representation of a complete manufacturing plant, its production lines and processes, which graphically displays and simulates actual manufacturing operations on-screen. Using these technologies, manufacturing planners and engineers can (a) plan new manufacturing production plants, lines and processes and update and optimize existing ones, (b) estimate cost, performance and throughput of new production lines (c) analyze manufacturing and maintenance implications of newly designed products, (d) design, visualize, simulate and optimize automated and manual manufacturing processes and systems from the factory level down to the level of production lines and work cells, (e) create and debug programs for robots and other machines using virtual machine models, (f) create and deliver documentation including manufacturing reports, analyses, schedules and work instructions to the shop floor and (g) collect information from shop-floor equipment and analyze the results. As part of the extension of our traditional CAPE products to MPM, we developed collaboration applications that utilize Web database, data streaming and Web browser technology. These applications enable the access of multiple users to the design, review and utilization of manufacturing information created and captured by the other components of the eMPower solution. Using our collaboration technology, manufacturers and their external suppliers and contractors can access and work on electronic work instructions and process simulations together with other members of the supply chain. They can also deliver and retrieve reports and feedback in real-time on matters like project progress, costs, resource allocation and manufacturing processes. Our factory execution applications for the electronics industry are based on proprietary algorithms and real-time tracking and monitoring technologies. These products enable real-time collection, sharing, analysis and management of assembly operations across the extended enterprise. This technology creates the link between the various design and engineering activities our customers perform with our products and the actual manufacturing of their products and efficient management of the production floor. In addition, through the acquisition of USDATA's products, FactoryLink and Xfactory, we offer a suite of production management applications. See "The Extended MPM Solution" above for more information about these products. INDUSTRY PROCESS-SPECIFIC SOLUTIONS All of our eMPower Enterprise Solutions incorporate elements of the application groups described above. Our solutions also feature applications designed for the manufacturing process of specific industries and can be customized to fit particular customer needs. Currently, we develop and market solutions for specific industries as follows: o EMPOWER CARBODY is designed for body-in-white processes in the automotive and heavy vehicles industries; o EMPOWER ASSEMBLY is designed for final assembly processes in the automotive, heavy vehicle, and aerospace industries; o EMPOWER MACHINING is designed for machining processes in the powertrain industry; o EMPOWER BOX BUILD is designed for assembly processes in the electronics industry; and o EMPOWER EXECUTION SYSTEM is designed for shop-floor monitoring and management of production lines in the electronics industry. -20- EMPOWER ENTERPRISE SOLUTIONS APPLICATIONS The eMPower applications are based on the eMServer and defined in four groups, namely (a) Planning, (b) Engineering, (c) Collaboration and (d) Factory Execution. PLANNING APPLICATIONS are designed for planning, analyzing and managing new manufacturing processes and updating and optimizing those already running. ENGINEERING APPLICATIONS are designed for designing, analyzing, simulating, optimizing and verifying the assembly of complex products, planning shop-floor layouts and workplaces, simulating robot and human operations, and creating programs off line for robots and other shop-floor machines. WEB-BASED COLLABORATION APPLICATIONS are designed for transferring and accessing manufacturing information over the Internet. FACTORY EXECUTION APPLICATIONS are designed for monitoring the performance of assembly lines, inventory tracking and material control. EMPOWER PRODUCTS eMPower Products are individual, stand-alone applications designed for specific functions. Most eMPower products can be included as applications within an eMPower Enterprise Solution, or they can be purchased and deployed on a stand-alone basis. DESIGN AND SIMULATION PRODUCTS are designed for designing, simulating and off-line programming of manufacturing processes, including spot-welding, arc-welding, painting, drilling and laser cutting. TOLERANCE MANAGEMENT PRODUCTS are designed for defining, analyzing and managing tolerances of product assemblies. PCB ASSEMBLY AND TEST PRODUCTS are designed for programming assembly and test machines, creating production documentation and managing part libraries. PRODUCTION MANAGEMENT PRODUCTS are designed for monitoring, supervising and controlling manufacturing processes on the shop floor. EMPOWER ADVANTAGES We believe that the main benefits of our solutions and products are: o acceleration of time to ramp up production lines and reach full volume production; o reduction of time and costs for bringing new products to market; o collaboration among various participants in the manufacturing process including its planning, production engineering and execution phases; o acceleration of response-time to more complex, personalized customer orders; o optimization of product design for manufacturing and maintenance; o more effective mass customization due to increased flexibility in the manufacturing process; o reduction of costly production line shut-down for programming; o increase in productivity of production line operations; o improvement in product quality; and o visibility and control of shop-floor operations. -21- MARKETING AND SALES Our objective is to build upon our success in the introduction of our eMPower offering and to be the market leader of the MPM industry. Our strategy to achieve this objective includes, among other things, strengthening our global selling and services, leveraging partnerships with other market leaders and extending MPM technology leadership and offerings. While our marketing strategy over the past few years mainly involved direct sales, we intend to increase focus on sales through third parties in 2004. We focus our marketing and sales efforts on the electronics, aerospace and automotive companies and their suppliers and other discrete manufacturing companies as these are primary users of factory automation systems and their components. The addition of our new production management products presents opportunities for us to enter other industries, such as the food and beverage industry and the oil and gas industry, and we intend to approach these industries in 2004. We sell our products to large industrial companies as well as to smaller subcontractors and production engineering firms. Sales of our products to large industrial companies often facilitate the sale of our products to their subcontractors, production-engineering firms and service suppliers. In Europe and Asia, our marketing and sales activities for the automotive, aerospace, and their suppliers and other discrete manufacturing industries are handled by our Mechanical division, and our marketing and sales activities for the electronics industry are handled by our Electronics division. Within the Mechanical division, we maintain industry-focused business units. Each unit is responsible for sales and marketing to a particular target industry. In the USA, the field operations organization for North America handles the marketing and sales activities for the automotive, aerospace, and their suppliers and other discrete manufacturing industries, as well as for the electronics industry. We also maintain a Global Professional Services unit. This unit, which contains over 120 professionals located around the world, provides our clients with consulting and development services, as well as implementation, development and engineering support, in order to allow our clients to more efficiently integrate our solutions within their systems. The decision to utilize our products often entails a significant change in a potential customer's organization and business processes. Accordingly, sales often require extensive educational, sales and engineering efforts. Our eMPower Enterprise Solutions enable collaboration between manufacturers and their production plants, external suppliers and other members of their extended enterprise and supply chain throughout the world with respect to the development, execution and management of their manufacturing processes. Therefore, the marketing and sales efforts of these eMPower Enterprise Solutions typically entail the education of, and consulting with, a broad range of individuals and departments within a potential customer's organization. Typically, the process of educating customers requires significant sales and engineering efforts which we believe are carried out most effectively by a worldwide direct sales and support organization, including members of our industry business units and Global Professional Services unit. Specifically, provision of these server-based and Web-enabled comprehensive solutions involves integrating these solutions into the customer's information technology environment and legacy systems, as well as providing training and support. The large number of individuals and departments involved in the decision of a potential customer to purchase our enterprise solutions makes that decision quite complex, with a sales cycle of approximately nine to twelve months. For example, in 2003 we entered into a global agreement with a major automotive manufacturer for the implementation of our MPM solutions throughout the customer's manufacturing operations worldwide. Prior to the execution of this agreement, we worked with the customer for two years, starting with pilot projects and gradually increasing deployment in a step-by-step process. Under the agreement, the manufacturer agreed to purchase our eMPower solutions, services and maintenance for manufacturing process planning, optimization and management. Total revenues generated under this agreement may exceed $50 million over the four-year period of the agreement. We maintain sales and support offices in the United States, France, Germany, Italy, the United Kingdom, Sweden, the Netherlands, Denmark, Japan and Korea, Singapore, Taiwan and China. Each of these offices is staffed with sales personnel and engineers to provide technical support. As of December 31, 2003, we had 434 employees who were engaged in direct sales and marketing operations, including pre-sale engineering, maintenance and support. -22- Our products are also sold by distributors in Europe and the U.S., as well as Australia, Brazil, China, Hong Kong, Korea, Japan, Mexico, Singapore, South Africa, and Taiwan. From time to time, we also sell our products through vendors of computer-aided design (CAD) products. In addition, we own 49% of Tecnomatix Zuken K.K., a joint venture company with Zuken Corporation, a leading provider of design solutions for Japanese electronics companies.. Tecnomatix Zuken markets, sells and supports our electronics assembly industry products in Japan. Our U.S. subsidiary, Tecnomatix Unicam, Inc. also sells its eMPower products for the electronics industry under a cooperation and reselling agreement with suppliers of surface mounted technology assembly equipment, including Assembleon, Autron Corporation Ltd., Fuji Machine Manufacturing Ltd., and Teradyne, Inc. Similarly, we sell our products under a development, marketing and reselling agreement entered into in August 2002 with UGS PLM Solutions, Inc. (formerly named Unigraphics Solutions, Inc.), a subsidiary of Electronic Data Systems Corp (EDS) that addresses the product life-cycle management (PLM) market. During 2003, both parties invested resources in development, marketing and sales training projects. By the end of 2003, we began to recognize the benefits of our relationship at major North American customers as they progressed in global implementation of our MPM solutions and required tight integration and collaboration between their prime software suppliers. In addition, the UGS PLM sales team began selling our eMPower solutions adding several new customers to our customer base. GOVERNMENT REGULATIONS The transfer of our technology that was developed with participation financing of the Office of the Chief Scientist in the Israel Ministry of Trade and Industry to third parties outside the State of Israel requires the approval of the Office of the Chief Scientist pursuant to the Law for the Encouragement of Research and Development in the Industry - 1984 and the regulations promulgated thereunder. See Item 5C - "Research and Development, Patents, Licenses, etc." Israeli Governmental regulations prohibit trade with an "enemy state" which is in a state of war with the State of Israel, as defined in the regulations. Accordingly, we may not sell, directly or through our subsidiaries, our products and solutions to any customers in a country defined as an enemy state under the regulations. Similarly, our United States subsidiaries are subject to United States export laws, including the Bureau of Industry and Security Regulations, which prohibit the export or re-export of their software products to certain states (currently Cuba, Iran, Libya, and Sudan) or if used in activities related in any way to nuclear, chemical or biological weapons or missiles. We and our subsidiaries use adequate measures to comply with the foregoing requirements. COMPETITION We compete with other providers of MPM solutions in the automotive, electronics, aerospace and other manufacturing industries. Our competitors in one or more of these customer segments include Aegis Industrial Software, Inc., Apriso, Camstar, Dassault Systems (through its Delmia subsidiary and its partnership with IBM), Datasweep, Inc., General Electric, Honeywell, HMS Software, Inc, Invensys, Matrologic Group SA, Polyplan Technologies, Inc., Rockwell Automation, Siemens, Valor Computerized Systems Ltd., and Visiprise It is likely that as the markets we serve continue to evolve, existing competitors may impose increased competitive pressures through acquisitions of complementary products and businesses, and there may be other market entrants. For example, as our MPM solutions comprise an integral part of a broad product life-cycle management solution, companies engaged in the product life-cycle management market, like SAP AG and Parametric Technology Corporation (PTC), that seek to provide full product life-cycle management solutions may choose to develop their own MPM solutions rather than incorporate third-party solutions such as ours. In addition, we expect to face competition from companies offering other platforms for enterprise-wide manufacturing activities. While these platforms may not compete directly with our present and future products, they may compete by offering alternative solutions designed to enhance companies' supply chains and overall performance. Some of our existing competitors have, and prospective competitors may have, technical and financial resources, marketing and service organizations, expertise, customer bases and name recognition substantially greater than ours. In addition, some of our existing competitors have, and prospective competitors, particularly product life-cycle management vendors, may have, strong, established relationships with many of our existing and potential customers and may be able to offer combined product life-cycle management and MPM solutions. Furthermore, should competition intensify, we may have to reduce our prices. If we are unable to compete successfully, our business, financial condition and results of operations would be materially adversely affected. -23- We believe that the main competitive factors affecting our business include: o technological leadership, o product performance, o integration and methodology expertise, o domain expertise, o customer base, o customer support, o price, o distribution channels, and o ability to respond quickly and effectively to emerging opportunities and demand. STRATEGIC ALLIANCES As part of our attempt to expand our market reach and to offer a solution that is completely integrated with our customers' IT environments, we seek to partner, where appropriate, with providers of complementary solutions that augment our MPM solutions. For example, many large companies are now implementing IT infrastructures for product life-cycle management (PLM), or software solutions that support a product from original concept through product retirement. PLM systems therefore address activities such as product ideation, product definition, manufacturing process development, production and service. Accordingly, MPM is an integral part of PLM and forming alliances with PLM providers is a strategic goal for us. This strategy often features the integration of our solutions with the software or hardware of our partners. This integration benefits manufacturers by, among other things, facilitating a flow of information from the design process to the manufacturing planning and execution process. Furthermore, integration of software across disciplines enables the creation of a shared database for use and development by design engineers, planners and production engineers. In August 2002, we entered into a strategic alliance with UGS PLM Solutions, Inc. (formerly named Unigraphics Solutions, Inc.), a subsidiary of Electronic Data Systems Corp. (EDS), under which our eMPower Enterprise Solutions will be incorporated into the UGS PLM Solutions environment. The agreement establishes a joint development strategy, as well as cooperative marketing and distribution rights for both companies. We and UGS PLM Solutions will share revenues for all sales of our MPM products and the UGS planner products made by UGS PLM Solutions and its distributors. In large strategic accounts where we and UGS PLM Solutions are currently engaged, selling will be done jointly. In all other UGS PLM Solutions accounts, UGS PLM Solutions will sell independently of us and will define whether to provide all pre-sales, professional service and hot-line support independently or to recruit our services or help for these activities, on a case by case basis. A team of UGS PLM Solutions' sales personnel has received training on our products and has begun selling them directly to customers. In non-UGS PLM Solutions accounts, we will continue to sell directly to our customers as is currently practiced. During 2003, both companies invested considerable resources in development, marketing and sales training projects. By the end of 2003, we began to recognize the fruits of these investments, as the strategic relationship was instrumental in the addition of several new customers and the progress of global MPM implementations by some of our mutual customers. We continue to invest in sales and research and development projects with UGS PLM Solutions and expect to begin offering strong seamless integration between our MPM applications and the UGS PLM Solutions backbone during 2004. On March 14, 2004, EDS announced that it had entered into a definitive agreement to sell UGS PLM Solutions to a group of three private equity firms. -24- In August 2001, we entered into a global strategic development and marketing agreement with SAP AG to provide integration between our eMPower Enterprise Solution and SAP's product life-cycle management solution. This integration is designed to allow the bi-directional exchange of bill-of-materials and routing information between our and SAP's solutions, enabling, among other things, users of our eMPower solutions to plan and develop manufacturing processes on the basis of accurate and up-to-date Bill-of-Material information. Our agreement with SAP allows for both parties to sell directly to all customers. In April 2002, we announced a joint product development and marketing partnership agreement with Siemens Automation and Drives Group, a world leader in automation and drives and programmable logic controllers (PLC). The agreement was the third in a series of product development agreements Siemens has made with us since 1999 to launch a newly integrated virtual environment that streamlines the engineering process and provides a seamless path from process design to shop-floor automation. The jointly developed eM-PLC product enables engineers to design manufacturing processes in a 3D virtual environment and then introduce control information into that virtual manufacturing cell. GLOBAL PROFESSIONAL SERVICES We believe that customer support is crucial both to the initial marketing of our products and to maintain customer satisfaction, which in turn enhances our reputation and aids in the generation of repeat orders. In addition, we believe that the customer interaction and feedback involved in our ongoing support activities provide us with information on market trends and customer requirements that is critical to future product development efforts. Our Global Professional Services unit, which contains over 120 professionals located around the world, provides our clients with consulting and customization services, as well as deployment, training and on-going support, in order to allow our clients to more efficiently integrate our solutions within their systems. The unit was created as part of our transition from a tools-oriented provider to a provider of enterprise-wide solutions. These solutions require a higher degree of support to deploy and integrate with a customer's existing operations, due to their more comprehensive nature and enterprise-wide reach and impact. Generally, we do not provide a warranty period for our products. Maintenance services, including bug-fixing service, software upgrades, enhancements and "hot-line" support for technical inquiries are provided through a one-year renewable maintenance contract for an annual fee which is generally 14% of the then current product list price. Approximately 22% of our revenues in 2003 were generated by the activities of our Global Professional Services unit. INTELLECTUAL PROPERTY Our success is heavily dependent upon our proprietary manufacturing technologies. In order to protect our proprietary technologies, we rely on a combination of non-disclosure agreements with certain distributors, customers and employees, trade secrets and copyright laws, as well as technical measures, including the use of a certain software of Macrovision Corporation to generate users' licenses and the use of our customer relations management (CRM) application to monitor and control the distribution of our licenses. We have no patents, and recognize that existing copyrights provide only limited protection. Moreover, not all countries provide legal protection of proprietary technology to the same extent as the United States. There can be no assurance that the measures taken by us to protect our proprietary technologies are or will be sufficient to prevent misappropriation of our technologies by unauthorized third parties or independent development of similar products or technologies by others. We do not believe that our products or the technologies embedded in our products infringe upon any proprietary rights of third parties. However, there can be no assurance that third parties will not claim infringement by us with respect to current or future products. We expect that we will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Responding to such claims, regardless of their merit, could be time-consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements to secure the right to use or sell the contested technology or product. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all. This could have a material adverse effect on our business, operating results and financial condition. -25- RESEARCH AND DEVELOPMENT CORE TECHNOLOGIES AND ARCHITECTURE The eMPower solutions and products are based on proprietary technologies that include: (a) multiple-tier (N-tier) architecture; (b) Web architecture; (c) process and kinematics modeling and simulation; (d) data base utilization and data mining; (e) mathematical algorithms for tolerance management and analysis; (f) mathematical algorithms for analysis, real-time tracking and monitoring of production lines; and (g) integration technologies. a) The multiple-tier architecture allows multiple users to work simultaneously on the same project. This architecture supports the eMServer for data management and business logic; the eBOP model and the services required to update and manipulate it; and the MPM applications for creating and populating the eBOP. Because the technology is open to users and third-party software developers, it enables them to develop, in a relatively short time, applications that address specific manufacturing activities utilizing our proprietary manufacturing simulation technology. b) The Web architecture supports a portal for collaborative engineering over the Internet. The portal of Web-based tools allows users to create and access reports, work instructions and analysis. Users can visualize, manipulate and edit manufacturing processes via the Internet. c) Process and kinematics modeling technologies enable the creation of an eBOP. Simulation technologies, including technologies for 3D visualization, motion emulation and collision detection, allow production engineers to create, simulate, verify and then optimize a computerized integrated representation of a complete manufacturing plant, its production lines and manufacturing processes. d) Data base utilization and data mining technologies allow analyses of production line and machine throughput, performance and cost, feasibility studies and ergonomics. e) Mathematical algorithms enable defining tolerances of product assemblies, tolerance stack-up analysis and tolerance management. f) Mathematical algorithms allow analysis, real-time tracking and monitoring of production lines. g) Integration technologies allow the eMPower software to access data in the product life-cycle management (PLM) database, the product model in the computer-aided design (CAD)/ product data management (PDM) system and the resources in the enterprise resource planning (ERP) systems, without the need for data conversion. This integration allows full association of and interaction between product and process design. To further enhance the integration of our products with CAD systems, ERP systems and shop-floor equipment, we pursue strategic alliances with leading providers of such products. Accordingly, we have agreements with software providers such as UGS PLM Solutions, Parametric Technologies Corporation (PTC) and SAP AG. In addition, we have an agreement with RealityWave whereby our eMPower Web-based applications use the RealityWave streaming technology to exchange and visualize large quantities of 3D manufacturing data over the Web, even over low-bandwidth networks. Agreements that we have with shop-floor equipment suppliers such as Assembleon, Carl Zeiss, Fuji, HIOKI, Juki, Mori Seiki, Orbotech, Samsung, Siemens, SPEA, and Teradyne provide for integration with their shop-floor automation machines and capabilities such as off-line programming, execution and analysis of machine-program performance. RESEARCH AND DEVELOPMENT OPERATIONS We believe that our ability to enhance our current products, develop and introduce new products on a timely basis, maintain technological competitiveness and meet customer requirements is essential to our future success. Accordingly, we devote, and intend to continue to devote, a significant portion of our personnel and financial resources to research and development. In addition, in order to successfully develop new and enhanced products, we seek to maintain close relationships with our customers and remain responsive to their needs. We strive to provide our customers with a comprehensive solution to their production engineering needs. We intend to continue to broaden our product offering across a wide range of manufacturing activities throughout the industrial process. -26- As we move from a position of niche product provider to a position of enterprise solution provider, our research and development activities are geared towards developing core product platforms (based on a forward-looking product roadmap), upon which industry-specific solutions can be developed for specific customers. Based on customer demands, we identify - on an ongoing basis - new functions and features that are appropriate to be incorporated in the core products and allocate them to future product versions based on market priorities. In some cases, specific customers require functionality that either does not exist in our product roadmap or is planned for future versions. In such cases, we encourage such customers to cover the cost of the required research and development. Our development efforts towards achieving core product platforms and thereby move closer to an end-to-end enterprise solution platform also include consolidating - both functionality wise and technologically wise - our existing products from various business angles. Our research and development efforts are conducted at our main research and development facility in Israel as well as at our subsidiaries' sites in California, New Hampshire, the Netherlands, France and Germany. We believe that we have established redundant development and support capabilities in locations outside Israel. Our product development teams include experts in advanced mathematical techniques, computer graphics, database and Internet technologies, computer science and mechanical, manufacturing and electronic engineering. Our research and development efforts have been financed through internal resources, programs sponsored by the Office of the Chief Scientist in the Israeli Ministry of Trade and Industry and other funding from third parties. See "Item 5: Operating and Financial Review and Prospects - Research and Development Grants." REVENUES The following chart contains a three-year breakdown of our revenues by geographic area for the periods indicated: 2003 2002 2001 ------- ------- ------- (US$ IN THOUSANDS) ---------------- ISRAEL........................... 100 37 9 UNITED STATES................. 28,754 24,781 24,809 GERMANY...................... 23,008 24,262 22,665 FRANCE......................... 11,466 9,299 10,260 OTHER EUROPEAN COUNTRIES. 7,748 10,687 10,490 ASIA............................ 15,181 12,939 18,667 TOTAL REVENUES.............. 86,257 82,005 86,900 -27- The following chart contains a three-year breakdown of our revenues by segments for the periods indicated: 2003 2002 2001 ------- ------- ------- (US$ IN THOUSANDS) ---------------- Mechanical division......... 71,617 64,670 66,454 Electronics division......... 14,640 17,335 20,446 Total Revenues.............. 86,257 82,005 86,900 SEASONALITY We sell our products primarily to large corporations and our sales are therefore subject to the fiscal and budgeting cycles of these companies. Accordingly, a large percentage of our sales occur in the fourth quarter, while sales in the first and third quarters are relatively slower. CONDITIONS IN ISRAEL POLITICAL AND MILITARY CONDITIONS Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying from time to time in intensity and degree, has led to security and economic problems for Israel. A peace agreement between Israel and Egypt was signed in 1979 and a peace agreement between Israel and Jordan was signed in 1994. However, as of the date hereof, Israel has not entered into any peace agreement with Syria or Lebanon. Despite peace-related developments, certain countries, companies and organizations continue to participate in a boycott of Israeli firms. We do not believe that the boycott has had a material adverse effect on us, but there can be no assurance that restrictive laws, policies or practices directed towards Israel or Israeli businesses will not have an adverse impact on our business or financial condition in the future. ECONOMIC CONDITIONS Israel's economy has been subject to numerous destabilizing factors, including a period of rampant inflation in the early- to mid-1980s, low foreign exchange reserves, fluctuations in world commodity prices and military conflicts. The Israeli Government has, for these and other reasons, intervened in the economy by utilizing, among other means, fiscal and monetary policies, import duties, foreign currency restrictions and control of wages, prices and exchange rates. The Israeli Government has periodically changed its policies in all these areas. Although we derive most of our revenues outside of Israel, a substantial portion of our expenses are incurred in Israel and are affected by economic conditions in the country. ARMY SERVICE Generally, all male adult citizens and permanent residents of Israel under the age of 40 are, unless exempt, required to perform up to 36 days of military reserve duty annually. Some of our officers and employees are currently obligated to perform annual reserve duty. Additionally, all such reservists are subject to being called to active duty at any time under emergency circumstances. While we have historically operated effectively under these requirements, we cannot assess the full impact of these requirements on our workforce and business if conditions should change, and we cannot predict the effect on us of any expansion or reduction of these obligations. -28- C. ORGANIZATIONAL STRUCTURE The following table lists information concerning the companies in our organization. All the entities listed are direct or indirect subsidiaries of ours. The table lists entities by name, country of organization and our equity and voting interest in such entities. NAME COUNTRY OWNERSHIP Tecnomatix Ltd. Israel 100% Robcad Ltd.* Israel 100% Tecnomatix Technologies, Inc. The United States 100% Tecnomatix Unicam, Inc. The United States 100% Nihon Tecnomatix K.K. Japan 100% Zuken Tecnomatix K.K. Japan 49% Tecnomatix Technologies (Gibraltar) Limited Gibraltar 100% Tecnomatix Technologies S.A. Luxembourg 100% Tecnomatix Europe S.A. Belgium 100% Tecnomatix GmbH Germany 100% Tecnomatix Denmark Aps Denmark 100% Tecnomatix S.A.R.L. France 100% Tecnomatix Technologies Italia S.r.l. Italy 100% Tecnomatix Technologies Limited The United Kingdom 100% Tecnomatix Technologies Sweden A.B. Sweden 100% Tecnomatix Machining Automation B.V. The Netherlands 100% Tecnomatix Unicam B.V. The Netherlands 100% Tecnomatix Unicam GmbH Germany 100% Tecnomatix Unicam France S.A.S. France 100% Tecnomatix Unicam U.K. Ltd. The United Kingdom 100% Tecnomatix Unicam (Singapore) Pte. Ltd. Singapore 100% Tecnomatix Unicam Taiwan Co. Ltd. Taiwan 100% Tecnomatix Technologies (Shenzhen) Ltd. China 100% Fabmaster China Limited* Hong-Kong 100% View2Partner Israel Company Ltd.* Israel 100% * Inactive subsidiary -29- D. PROPERTY, PLANTS AND EQUIPMENT We do not own any real property. We currently lease approximately 27,000 square feet of research and development, marketing and administrative facilities in Herzliya, Israel. The lease for this space expires in September 2007. The annual rent for the facility is approximately $480,000. Of such amount the maintenance fees and the rent for the parking space are linked to the changes in the Israeli consumer price index. The annual rent may be increased up to approximately $537,000 if we choose to make certain renovations at the expense of the lessor. Tecnomatix Technologies, Inc. leases approximately 64,000 square feet of research and development, sales, marketing, and administrative facilities in Northville, Michigan; Morgan Hill, California; and Richardson, Texas, United States. The lease for most of these spaces expires on various dates through December 2010. The aggregate annual rent for these facilities is approximately $770,000. Tecnomatix GmbH leases approximately 50,000 square feet of research and development, sales, marketing and administrative facilities in Neu-Isenburg (Frankfurt), Haar (Munich), Stuttgart, and Dusseldorf, Germany. The leases for most of these spaces expire on various dates through October 2005. The aggregate annual rent for these facilities is approximately $890,000. Tecnomatix Unicam, Inc. leases approximately 16,800 square feet of research and development and sales and marketing facilities in Portsmouth, New Hampshire with an annual rent of approximately $371,000. The lease for these facilities expires in April 2004. We are currently negotiating a new lease for approximately 13,560 square feet in Portsmouth, New Hampshire with an annual rent of approximately $134,000. The two-year term of the lease is expected to expire in April 2006. Tecnomatix S.A.R.L. leases approximately 15,500 square feet of sales and marketing facilities in Paris, France. The lease for these facilities expires in January 2010. The annual rent for these facilities is approximately $230,000. Nihon Tecnomatix K.K. leases approximately 9,000 square feet of sales and marketing facilities in Tokyo, Japan and Seoul, South Korea. The leases for these facilities expire on various dates through November 2004. The aggregate annual rent for these facilities is approximately $500,000. Tecnomatix Unicam France S.A.S. leases approximately 7,500 square feet of research and development and sales and marketing facilities in Meylan (Grenoble), France. The lease for these facilities expires in August 2006. The annual rent for these facilities is approximately $80,000. In addition, our sales and support subsidiaries occupy, in the aggregate, approximately 34,000 square feet in Lindau, Germany; Solilhull and Leatherhead, United Kingdom; Brussels and Vilvoorde, Belgium; Gothenburg, Sweden; Milan, Turin and San Felice Segrate, Italy; Enschede and Hertogenbosch, The Netherlands; Stenlose, Denmark; Taipei, Taiwan; Singapore; and Shenzhen and Shanghai, China, under leases expiring through March 2013 with a total annual rent of approximately $650,000. -30- ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS, WHICH INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET FORTH IN THIS ANNUAL REPORT. THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH "ITEM 3A: SELECTED FINANCIAL DATA" AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCORPORATED BY REFERENCE IN THIS ANNUAL REPORT. A. OPERATING RESULTS OVERVIEW We develop and market software solutions for manufacturing process management (MPM). Manufacturers are increasingly required to implement efficient and cost-effective production processes, offer the ability to effect product customization and rely on third-party suppliers in order to stay competitive. Our eMPower solutions enable collaboration between manufacturers and their production plants, external suppliers and other members of their extended enterprise and supply chain throughout the world with respect to the development, execution and management of their manufacturing processes. Our solutions allow manufacturers to accelerate new product introductions, reduce time-to-market for new products, reduce time-to-volume production and introduce greater flexibility into their manufacturing processes. We derive revenues mainly from: (a) software license fees, and (b) services which include maintenance fees from upgrades and the provision of technical support for our software products, and fees from providing engineering, training, consulting, implementation and development services. Annual maintenance fees generally range from 14% to 18% of the then current list price of our software products. It has been our experience that most of our customers elect to receive maintenance services from us on a continuing basis. Our revenues from software decreased to 42% of total revenues in 2003 from 44% of total revenues in 2002 and 49% of total revenues in 2001. During the same period, our revenues from services increased to 58% of total revenues in 2003 from 56% of total revenues in 2002 and 51% of total revenues in 2003. Our revenues from software decreased in each of 2002 and 2003 from the preceding year, and our revenues from services increased in each of such years from the preceding year. If such trend continues, our gross margins and profitability may be adversely affected. Our revenue recognition policies are in conformity with the American Institute of Certified Public Accountants Statement of Position on Software Revenue Recognition (SOP97-2 as amended). Most of our revenues are derived from repeat sales to existing customers. In 2003, approximately 78% of our revenues from software license fees were derived from repeat sales, compared to 83% in 2002 and 82% in 2001. The decrease in the percentage of repeat sales in 2003 is attributed to sales made for the first time to customers of USDATA Corporation. See Item 4A "History and Development of the Company" and Item 5A below. We expect that repeat sales will continue to account for a significant part of our revenues in the future. Cost of software license fees consists principally of (a) amortization of capitalized software development costs; (b) royalties to the Office of the Chief Scientist of the Government of Israel; (c) royalties to third parties for the use of software and technologies and (d) impairment of capitalized software development costs. Cost of services includes primarily the costs of salaries paid and other related benefits provided to engineers involved in the provision of technical support. We capitalize software development costs in accordance with Statement No. 86 of the Financial Accounting Standards Board (FASB) and amortize such costs at the greater of (a) the amount computed using the ratio of current gross revenue for a product to the total of current and anticipated product revenue or (b) the straight-line basis over the remaining economic useful life of the related product, which is not more than five years. Effective April 1, 2002, based on management's periodic review of the useful lives of capitalized software development costs, we changed our estimation of the useful lives of certain software modules whose development costs we capitalized from three years to five years. This change resulted mainly from our increased use of more complex MPM enterprise solutions with longer useful lives than those of the engineering applications that comprised our older products. We believe that this change will more appropriately match amortization of the capitalized software development costs with periods in which the software developed generates income. -31- In 2003, we recorded an impairment of capitalized software development cost related to our Electronics division in the aggregate amount of $2,180,000, out of which the impairment of $888,000 resulted from our determination to discontinue the use of certain of our technologies in connection with the acquisition of substantially all of the assets and the assumption of certain liabilities of USDATA Corporation, and the impairment of the balance of $1,292,000 was made in connection with the adjustment of the unamortized costs of certain of our capitalized software development costs to their net realizable value. We evaluate the fair value of our capitalized software development costs on an annual basis to ensure that all research and development projects for which software development costs have been capitalized are stated at their respective net realizable value. It may be that we will have to write-off capitalized software development costs at significant amounts in the future due to such evaluation if circumstances, market conditions, or estimations change. We are obligated to pay royalties to third parties pursuant to license agreements that allow us to use such parties' products and technologies in our products. Royalty expenses paid or accrued in 2001, 2002 and 2003 were $488,000, $1,070,000 and $869,000, respectively. The decrease in royalty expenses paid or accrued in 2003 is due to our use of a smaller range of third party products and technologies in our MPM Enterprise Solutions. We do not expect royalties payable by us to third parties to change materially during 2004. In light of the severe downturn in the economic environment and the slowdown in investments in information technologies, especially in the U.S. electronics industry, we undertook in 2001 a program aimed at creating a leaner and more agile organization with suitable infrastructure in place to better serve our customers and support long-term revenue growth. As part of this program, we reduced excess personnel and capacity costs in order to align our operating expenses with current revenue levels. Due to the continued slowdown in the economic environment, we also adopted a cost-reduction program in 2002. As a result, our operating expenses in 2001 and 2002 decreased significantly as compared to the level of operating expenses in 2000. In the first and the fourth quarters of 2003 we initiated additional cost reduction plans aimed at reducing excess personnel and capacity costs in order to further reduce the level of operating expenses. We market and sell our products and services in North America, Europe and Asia and derive a significant portion of our revenues from customers in Europe and Asia. We received 71% of our total revenues in 2001, 70% of our total revenues in 2002, and 67% of our total revenues in 2003 in non-U.S. dollar currencies from sales to customers located outside of North America. Since our financial results are reported in U.S. dollars, decreases in the rate of exchange of non-U.S. dollar currencies in which we make sales relative to the U.S. dollar will decrease the U.S. dollar-based reported value of those sales. In 2001 and the first quarter of 2002, decreases in Euro - U.S. dollar exchange rates adversely affected our results of operation. However, during the last three quarters of 2002 and in 2003 our results of operations benefited from the increase in the Euro - U.S. dollar exchange rates during these periods. To the extent that decreases in exchange rates are not offset by a reduction in our costs, they may in the future materially adversely affect our results of operations. During 2001, $5,485,000 in principal amount of our 5.25% convertible subordinated notes were purchased in open market transactions by a wholly owned subsidiary at an aggregate purchase price of $3,986,000. In connection with the repurchase of these notes, we recognized a gain in the amount of $1,393,000. During 2002, $6,337,000 in principal amount of our 5.25% convertible subordinated notes were purchased in open market transactions by a wholly owned subsidiary at an aggregate purchase price of $5,708,000. In connection with the repurchase of these notes, we recognized a gain in the amount of $599,000. During the first three quarters of 2003, $22,629,000 in principal amount of our 5.25% convertible notes at an aggregate purchase price of $22,351,000. In connection with the repurchase of these notes, we recognized a gain in the amount of $156,000. In December 2003 we redeemed an aggregate of $14,799,000 in principal amount of the 5.25% convertible subordinated notes at a redemption price of 100.75% of the outstanding principal amount of the notes plus accrued and unpaid interest until but excluding the redemption date. In March 2002, we acquired the remaining 5% minority share which was not previously owned by us in Nihon Tecnomatix K.K., our Japanese subsidiary, resulting in total ownership of 100%, in exchange for waiving an outstanding loan in the amount of $227,000 (30 million Japanese Yen) given to the minority shareholder in September 2001. The excess of the purchase price over the estimated fair value of the net assets acquired in the amount of $224,000 was attributed to distribution channels and marketing rights, and will be amortized on a straight line basis over its estimated useful life. -32- In October 2002, we purchased the CIMBridge software unit of Teradyne, Inc. for consideration to be paid on a contingent and deferred basis based upon a revenue sharing arrangement. Pursuant to this transaction we acquired certain assets and assumed certain liabilities relating to the CIMBridge software, which includes tools for New Product Introduction (NPI) and machine programming, product and line optimization, and work instruction generation. In connection with the transaction we incurred approximately $111,000 in transaction costs. The purchase was accounted for in accordance with SFAS No. 141 and SFAS No. 142, and the financial results of the CIMBridge software business were included in our consolidated financial statements since the date of purchase. The purchase price was allocated on the basis of the estimated fair value of the assets purchased and the liabilities assumed. The excess of the purchase price over the fair value of the net tangible assets acquired was attributed to goodwill in the amount of $1,120,000. In accordance with accounting standards SFAS No. 141 and SFAS No. 142, we no longer amortize goodwill, but rather subject it to periodic impairment tests. In September 2003, we acquired substantially all of the assets and assumed certain liabilities of USDATA Corporation (incorporated in Delaware), a North American provider of production management products based in Richardson, Texas. As consideration for the acquired assets, we issued to USDATA 945,807 of our ordinary shares, of which 222,319 ordinary shares are being held in escrow for up to 18 months following the consummation of the transaction. In connection with the asset purchase transaction, SCP Private Equity Partners II, L.P., the primary stockholder of USDATA, purchased from us 139,764 ordinary shares for an aggregate purchase price of $2,000,000. The transaction was accounted for in accordance with SFAS No.141 and SFAS No.142, and the financial results of USDATA were included in our consolidated financial statements beginning on the acquisition date. The total purchase price of $11,112,000 (including acquisition costs of $722,000) was allocated on the basis of the estimated fair value of the assets acquired and the liabilities assumed. The excess of the purchase price over the fair value of the net tangible assets acquired was attributed to current technology, software distribution agreement, in-process research and development, and goodwill in the amounts of $1,873,000, $706,000, $3,193,000, and $8,323,000, respectively. The portion of the purchase price attributed to current technology and software distribution agreement is being amortized over their estimated useful lives, which are 5.5 and 3.5 years, respectively. The portion of the purchase price attributed to in-process research and development was expensed immediately as a one-time non-recurring charge. In accordance with SFAS No.141 and SFAS No.142, the portion of the purchase price attributed to goodwill is no longer amortized, and instead is subject to periodic impairment tests. In February 2004, we finalized a six-year agreement with Hewlett Packard (Israel) Ltd., pursuant to which we outsourced most of our information technology (IT) operations worldwide to Hewlett Packard. Hewlett Packard will be responsible for the IT infrastructure, hardware, IT software (other than various research and development tools), IT services and support at our offices worldwide. Hewlett Packard is expected to begin providing the services under the agreement in May 2004. By outsourcing our IT operations, we expect to simplify the process of creating a uniform, improved solution while reducing our IT cost worldwide. CRITICAL ACCOUNTING POLICIES The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which were prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these estimates on an on-going basis. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. -33- We believe that application of the following critical accounting policies entails the more significant judgments and estimates used in the preparation of our consolidated financial statements. REVENUES. Our revenue recognition policy is significant because our revenues are a key component of our results of operations. Revenue results are difficult to predict, and any shortfall in revenues or delay in recognizing revenues could cause our results of operations to vary significantly from quarter to quarter and could result in future operating losses. In addition, our revenue recognition determines the timing of certain expenses, such as commissions and royalties. We follow very specific and detailed guidelines in measuring revenues; however, certain judgments affect the application of our revenue policy. Our revenues are principally derived from the licensing of our software and the provision of related services. We recognize revenues in accordance with SOP97-2. Revenues from software license fees are recognized when persuasive evidence of an arrangement exists, either by written agreement or a purchase order signed by the customer, and where the software product was delivered, the license fees are fixed and determinable, and collection of the license fees is considered probable. License fees from software arrangements which involve multiple elements, such as post-contract customer support, consulting and training, are allocated to each element of the arrangement based on the relative fair values of the elements. We determine the fair value of each element in multiple-element arrangements based on vendor specific objective evidence ("VSOE"). We determine the VSOE for each element according to the price charged when the element is sold separately. In judging the probability of collection of software license fees we continuously monitor collection and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. In connection with customers with whom we have no previous experience, we may utilize independent resources to evaluate the creditworthiness of those customers. For some customers, typically those with whom we have long-term relationships, we may grant extended payment terms. We perform on-going credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current creditworthiness, as determined by our review of such customer's current credit information. If the financial situation of any of our customers were to deteriorate, resulting in an impairment of their ability to pay the indebtedness they incur with us, an additional provision for estimated credit loss might be required. Our software products generally do not require significant customization or modification; however, when such customization or modification is necessary, the revenue generated by those activities is deferred and recognized using the percentage of completion method, based on the relationship of actual labor costs incurred, to total labor costs estimated to be incurred over the duration of the contract. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first incurred in the amount of the estimated loss on the entire contract. Services revenues include post-contract customer support, consulting and training. Post-contract customer support arrangements provide for technical support and the right to unspecified upgrades on an if-and-when-available basis. Revenues from those arrangements are recognized ratably over the term of the arrangement, usually one year. Consulting services are recognized on a time and material base, or in a fixed price contract, on a percentage of completion base. Revenues from training are recognized as the services are provided. In recognizing revenues based on the rate of completion method, we estimate time to completion with revisions to estimates reflected in the period in which changes become known. If we do not accurately estimate the resources required or the scope of work to be performed, or do not manage our projects properly within the planned periods of time or satisfy our obligations under the contracts, then future services margins may be significantly and negatively affected or losses on existing contracts may need to be recognized. CAPITALIZED SOFTWARE DEVELOPMENT COSTS. We capitalize software development costs in accordance with SFAS No. 86, subsequent to the establishment of technological feasibility and up to the time the software is available for general release to customers. Our policy on capitalized software development costs determines the timing of our recognition of certain development costs. In addition, this policy determines whether the cost is classified as a development expense or cost of license fees. We are required to use professional judgment in determining whether development costs meet the criteria for immediate expense or capitalization. Our judgment refers primarily to the establishment of technological feasibility and to on-going assessment of the recoverability of cost capitalized. We do that by considering certain external factors such as anticipated future gross product revenue, estimated economic life and changes in software and hardware technology. -34- LONG-LIVED ASSETS. We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following: o significant decrease in the market price of a long-lived asset (asset group); o significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition; o significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator; o accumulation of costs significantly in excess of the amount originally expected for the acquisition of a long-lived asset (asset group); o current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group); and o current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. We determine the recoverability of long-lived assets based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Such estimation process is highly subjective and involves significant management judgment. Determination of impairment loss from long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. During 2003 and 2002, we recorded a charge in the amount of $937,000 and $375,000, respectively, for the impairment of a certain product, acquired from a third-party, which will no longer be used in our products. VALUATION OF GOODWILL. We assess the impairment of goodwill on an annual basis, and potentially more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following: o significant underperformance relative to expected historical or projected future operating results; o significant changes in the manner of our use of the acquired assets or the strategy for our overall business; o significant negative industry or economic trends; o significant decline in our stock price for a sustained period; and o our market capitalization relative to the net book value of assets. When we determine that the carrying value of goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure this impairment based on a projected discounted cash flow. We completed the preliminary assessment during the first quarter of 2002 and performed an annual impairment review during the fourth quarter of 2002 and 2003. We did not record an impairment charge based on our reviews. If our estimates or the related assumptions change in the future, we may be required to record impairment charge on goodwill to reduce its carrying amount to its estimated fair value. -35- YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002 REVENUES. In 2003, revenues increased by 5% to $86,257,000 from $82,005,000 in 2002. Revenues from our Mechanical division increased by 11% to $71,617,000 from $64,670,000 and accounted for 83% of total revenues, compared to 79% of total revenues in 2002. The increase in revenues from this division is mainly attributable to the acquisition of substantially all of the assets and the assumption of certain liabilities of USDATA and to an increase in revenues from the U.S. and Asia, where our eMPower Enterprise Solutions were adopted by new customers and where we received repeat orders from existing customers. The increase in revenues was partially offset by a decrease in revenues from Europe, especially from Germany and the United Kingdom, where the sales cycle of our eMPower Enterprise Solutions proved to be longer than in the U.S. and in Asia. Accordingly, revenues from Europe decreased by 6% and accounted for 52% of total revenues from the Mechanical division, compared to 61% in 2002. Revenues from the U.S. increased by 40% and accounted for 30% of total revenues from the Mechanical division, compared to 24% in 2002. Revenues from Asia increased by 34% and accounted for 18% of total revenues from the Mechanical division, compared to 15% in 2002. Revenues from our Electronics division decreased by 16% to $14,640,000 from $17,335,000 in 2002 and accounted for 17% of total revenues, compared to 21% of total revenues in 2002. The decrease in revenues from this division is mainly attributable to the continuing downturn in the electronics industry, especially in the U.S and in Asia. The decrease in revenues from the U.S. and Asia was partially offset by an increase in revenues from Europe. Revenues from Europe increased by 10% and accounted for 34% of total revenues from the Electronics division, compared to 26% in 2002. Revenues from the U.S. decreased by 22% and accounted for 51% of total revenues from the Electronics division, compared to 55% in 2002. Revenues from Asia decreased by 32% and accounted for 15% of total revenues from the Electronics division, compared to 19% in 2002. In 2003, revenues generated from software license fees decreased by 1% to $36,033,000, or 42% of total revenues, from $36,385,000, or 44% of total revenues in 2002. Services revenues increased by 10% in 2003 to $50,224,000 or 58% of total revenues, from $45,620,000, or 56% of total revenues in 2002. The increase in services revenues reflects growth in services fees relating to our increased maintenance fees arising from the increase in the number of installed software products, as well as increasing demand for consulting services in connection with our eMPower Enterprise Solutions. The decrease in software license fees, both on an absolute and a percentage basis, reflects the increased demand for eMPower Enterprise Solutions in which the services portion of the revenues is relatively high compared to that of the software license fees. The decrease in software license fees was partially offset by the acquisition of substantially all of the assets and the assumption of certain liabilities of USDATA, which obtains most of its revenues from software license fees. COST OF SOFTWARE LICENSE FEES. In 2003, cost of software license fees increased by 52% to $12,294,000, or 14% of total revenues, from $8,062,000, or 10% of total revenues in 2002. Cost of software license fees consists of costs and expenses associated with licensing software and impairment of capitalized software development cost. In 2003, costs and expenses associated with licensing software increased by 25% to $10,114,000, or 12% of total revenues, from $8,062,000, or 10% of total revenues in 2002. This increase resulted primarily from royalties payable to UGS PLM Solutions, Inc., a subsidiary of Electronic Data Systems Corp (EDS), in connection with sales made to customers under the development, marketing, and reselling agreement we signed with UGS PLM Solutions in August 2002. The amount of $12,294,000 in 2003 includes a charge in the amount of $2,180,000 for the impairment of capitalized software development costs. The charge includes the impairment of capitalized software development costs in the amount of $888,000 resulting from our determination to discontinue the use of certain of our technologies in connection with the acquisition of substantially all of the assets and the assumption of certain liabilities of USDATA, and the impairment of capitalized software development costs in the amount of $1,292,000 in connection with the adjustment of the unamortized costs of certain of our capitalized software development costs to their net realizable value. COST OF SERVICES. In 2003, cost of services increased by 2% to $15,281,000, or 18% of total revenues, from $15,005,000 or 18% of total revenues in 2002. This increase was primarily related to the increase in the cost of providing maintenance and technical support services. AMORTIZATION OF ACQUIRED INTANGIBLES. In 2003, amortization of acquired intangibles, primarily developed software products, decreased to $136,000 from $2,491,000 in 2002. The decrease in amortization was due to our completion of the amortization of acquired intangibles at the end of 2002. Amortization of acquired intangibles in 2003 incurred only in connection with the acquisition of substantially all of the assets and the assumption of certain liabilities of USDATA in the third quarter. We expect amortization of acquired intangibles incurred in connection with the USDATA acquisition to continue until and including the fourth quarter of 2008. -36- RESEARCH AND DEVELOPMENT, NET. In 2003, gross research and development costs decreased by 4% to $22,525,000, or 26% of total revenues, from $23,491,000 or 29% of total revenues in 2002. This decrease was attributable mainly to the discharge of research and development personnel as part of the two cost reduction plans effected by us in 2003, which resulted in lower payroll and related benefits expenses. These plans included reducing research and development costs by focusing more on the continued development of our core MPM Enterprise Solutions as opposed to the engineering applications that comprised our older products and other projects that we view as less critical to our customers' current and anticipated needs. We expect such focus to continue in the foreseeable future. Capitalized software development costs decreased in 2003 by 4% to $3,937,000, or 5% of total revenues, from $4,097,000, or 5% of total revenues in 2002, primarily in connection with the reduction of research and development costs. Capitalized software development costs, as a percentage of gross research and development costs, were 17% in both 2002 and 2003. Third-party participation in research and development costs decreased to $3,628,000 in 2003 from $4,582,000 in 2002, a decrease of 21%. Third party participation in research and development costs, as a percentage of gross research and development costs, decreased to 16% in 2003 from 20% in 2002, reflecting the decrease in participation financing in research and development activities in Israel (resulting from lower budgets approved by the OCS, deriving from broad-based cuts in the OCS's budget), which decrease was partially offset by a decrease in gross research and development costs. If such third party participation in research and development costs is terminated or reduced, our net research and development costs may increase. Net research and development costs increased by 1% to $14,960,000, or 17% of total revenues, in 2003 from $14,812,000, or 18% of total revenues in 2002, mainly due to the reduction in capitalized software development costs and in third-party participation financing in research and development activities, which was partially offset by a decrease in gross research and development costs, resulting from the discharge of research and development personnel. SELLING AND MARKETING. In 2003, selling and marketing expenses increased by 15% to $42,491,000, or 49% of total revenues, compared to $36,887,000, or 45% of total revenues in 2002. This increase mainly reflects the acquisition of the business of USDATA, including the addition of the sales force of USDATA and our efforts to increase our focus on the market industries and territories we target, mainly in Europe where the sales cycle of our eMPower Enterprise Solutions proved to be longer than in the U.S. and in Asia. GENERAL AND ADMINISTRATIVE. In 2003, general and administrative expenses decreased by 7% to $4,673,000, or 5% of total revenues, from $5,013,000, or 6% of total revenues in 2002. The decrease in 2003 was primarily due to our continuous efforts to reduce the level of our general and administrative expenses. IMPAIRMENT OF SOFTWARE ACQUIRED. In 2003, we recorded a charge in the amount of $937,000, or 1% of total revenues, for the impairment of a certain product acquired from a third-party which will no longer be used in our products, compared to a charge of $375,000 in 2002 for the impairment of another product. RESTRUCTURING CHARGES. In 2003, we recorded a charge of $2,659,000, or 3% of total revenues, related to cost reduction plans involving the termination of employees and the reduction in leased office space and equipment in certain offices, pursuant to a program aimed at reducing our operating expenses, compared to a charge of $651,000, or 1% of total revenues in 2002 related to a cost reduction program implemented in 2002. IN-PROCESS RESEARCH & DEVELOPMENT AND ACQUISITION COSTS. In 2003, we recorded a one-time non-recurring charge of $3,530,000 related to the acquisition of substantially all of the assets and the assumption of certain liabilities of USDATA. The charge includes the write-off in the amount of $3,193,000 of acquired in-process research and development that has not reached technological feasibility and severance expense in the amount of $337,000, in connection with the termination of personnel who were employed by us prior to the USDATA asset acquisition and who were laid-off as a result of the acquisition in order to reduce overlapping activities. -37- OPERATING INCOME (LOSS). In 2003, our operating loss increased by 512% to $(10,704,000) from $(1,748,000) in 2002. Operating loss from the Mechanical division in 2003 was $(6,908,000) compared to an operating loss of $(180,000) in 2002, reflecting a significant increase in operating expenses (caused by one time charges related to the acquisition of USDATA's business, as well as restructuring and impairment costs), which was partially offset by an increase in revenues. Operating loss from the Electronics division in 2003 increased by 142% to $(3,796,000) from $(1,568,000) in 2002, reflecting a significant decrease in revenues, which was partially offset by a decrease in operating expenses. FINANCIAL INCOME (EXPENSE), NET. In 2003, financial income, net was $679,000 compared to financial expense, net of $(799,000) in 2002. This change was attributable mainly to gains from the realization of NIS-U.S. dollar options, gains from the devaluation of the U.S. dollar against the Euro, and the decrease in interest expense on long-term loans due to additional repurchases of our 5.25% convertible subordinated notes which we redeemed in the fourth quarter of 2003 and the credit line we received from Bank Hapoalim that bears interest at lower rates than the notes. TAXES ON INCOME. In 2003, we recorded a provision for income tax in the amount of $212,000 compared to $(148,000) in 2002. In 2003, provision for current taxes amounted to $212,000 and provision for deferred taxes amounted to $0. In 2002, provision for current income taxes amounted to $(458,000) and provision for deferred taxes amounted to $310,000. SHARE IN LOSS OF AFFILIATED COMPANY. In 2003, we recorded a loss of $103,000 from our equity share in an affiliated company, compared to a loss of $431,000 in 2002. NET LOSS. In 2003, our net loss was $10,340,000, or 12% of total revenues, compared to net loss of $2,830,000, or 3% of total revenues in 2002. In 2003, diluted loss per share was $0.94 based on an average number of shares outstanding of 11,054,556, compared to diluted loss per share of $0.27 in 2002, based on an average number of shares outstanding of 10,607,140. YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 REVENUES. In 2002, revenues decreased by 6% to $82,005,000 from $86,900,000 in 2001. Revenues from the Mechanical division decreased by 3% to $64,670,000 from $66,454,000 and accounted for 79% of total revenues compared to 76% of total revenues in 2001. The decrease in revenues from this division was mainly attributable to the decrease in revenues from Asia, where the sales cycle of our eMPower Enterprise Solutions proved to be longer than in the U.S. and in Europe. The decrease in revenues from Asia was partially offset by an increase in revenues from the U.S. and Europe, where our eMPower Enterprise solutions were adopted by new customers and where we received repeat orders from existing customers. Accordingly, revenues from Europe increased by 6% and accounted for 61% of total revenues of the Mechanical division, compared to 57% in 2001. Revenues from the U.S. increased by 22% and accounted for 24% of total revenues from the Mechanical division compared to 19% in 2001. Revenues from Asia decreased by 41% and accounted for 15% of total revenues of the Mechanical division, compared to 25% in 2001. Revenues from our Electronics division decreased by 15% to $17,335,000 from $20,446,000 in 2001 and accounted for 21% of total revenues, compared to 24% of total revenues in 2001. The decrease in revenues from this division was mainly attributable to the continuing downturn in the electronics industry, especially in the U.S. The decrease in revenues from the U.S. and Europe was partially offset by an increase in revenues from Asia. Revenues from Europe decreased by 21% and accounted for 26% of total revenues of the Electronics division, compared to 29% in 2001. Revenues from the U.S. decreased by 23% and accounted for 55% of total revenues of the Electronics division, compared to 60% in 2001. Revenues from Asia increased by 43% and accounted for 19% of total revenues of the Electronics division, compared to 11% in 2001. The increase in revenues from Asia was attributable, in part, to the growth in that market caused by U.S. and European manufacturers moving production to Asia. In 2002, revenues generated from software license fees decreased by 14% to $36,385,000, or 44% of total revenues, from $42,316,000, or 49% of total revenues in 2001. Services revenues increased by 2% in 2002 to $45,620,000 or 56% of total revenues, from $44,584,000, or 51% of total revenues in 2001. The increase in services revenues reflected growth in maintenance fees relating to our increased number of installed software products, as well as an increasing demand for consulting services in connection with our eMPower Enterprise Solutions. The decrease in software license fees, both on an absolute and a percentage basis, reflected the increased demand for eMPower Enterprise Solutions in which the services portion of the revenues is relatively high compared to that of the software license fees. -38- COST OF SOFTWARE LICENSE FEES. In 2002, cost of software license fees decreased by 1% to $8,062,000, or 10% of total revenues, from $8,167,000 or 10% of total revenues in 2001. This decrease resulted primarily from an increase in royalties paid to certain third parties (pursuant to license agreements that allow us to use such parties' products and technologies in our products), and to the Office of the Chief Scientist of the Israel Ministry of Trade and Industry, or the OCS, with respect to proceeds from sales of products developed using grants from the Office of the Chief Scientist. Royalties to such third parties and to the Office of the Chief Scientist totaled $2,306,000 in 2002, compared to $1,542,000 in 2001. The increase in royalty expenses paid or accrued in 2002 is due to our use of a broader range of third party products and technologies in our MPM Enterprise Solutions. However, effective April 1, 2002, based on management's periodic review of the useful lives of capitalized software development costs, we changed our estimation of the useful lives of certain software modules, whose development costs we capitalized, from three years to five years. This change mitigated the increase in the cost of software license fees in 2002 as amortization of capitalized software development costs was $1,569,000 less than what it would have been had we not changed the amortization period of these software modules. COST OF SERVICES. In 2002, cost of services decreased by 2% to $15,005,000, or 18% of total revenues, from $15,268,000 or 18% of total revenues in 2001. This decrease was primarily related to the decrease in payroll payments resulting from the decrease in personnel. AMORTIZATION OF ACQUIRED INTANGIBLES. In 2002, amortization of acquired intangibles, primarily developed software products, decreased to $2,491,000 from $7,758,000 in 2001. The decrease in amortization was primarily due to the effect of SFAS 142, pursuant to which we no longer amortize goodwill, and to our completion of the amortization of other acquired intangibles prior to 2002. RESEARCH AND DEVELOPMENT, NET. In 2002, gross research and development costs decreased by 17% to $23,491,000, or 29% of total revenues, from $28,333,000 or 33% of total revenues in 2001. This decrease was attributable to the reduction in research and development personnel that resulted in lower payroll and related benefits expenses. The reduction in research and development personnel was part of the plans we adopted and implemented in 2001 and 2002 to reduce expenses. These plans included reducing research and development costs by focusing more on the continued development of our core MPM Enterprise Solutions as opposed to the engineering applications that comprised our older products and other projects that we viewed as less critical to our customers' needs. Capitalized software development costs decreased by 20% to $4,097,000, or 5% of total revenues, from $5,103,000, or 6% of total revenues in 2001, primarily in connection with the reduction of research and development costs. Capitalized software development costs, as a percentage of gross research and development costs, decreased to 17% in 2002 from 18% in 2001. Third-party participation in research and development costs increased to $4,582,000 in 2002 from $4,014,000 in 2001. Third party participation in research and development costs, as a percentage of gross research and development costs, increased to 20% in 2002 from 14% in 2001, reflecting the decrease in gross research and development costs, and the increase in participation in research and development activities in Israel and from a third party. Net research and development costs decreased in 2002 by 23% to $14,812,000, or 18% of total revenues, in 2002 from $19,216,000, or 22% of total revenues in 2001, mainly due to the reduction in research and development personnel. SELLING AND MARKETING. In 2002, selling and marketing expenses decreased by 17% to $36,887,000, or 45% of total revenues, compared to $44,624,000, or 51% of total revenues in 2001. This decrease mainly reflects the plans we implemented in 2001 and 2002 aimed at creating a leaner and more agile organization with suitable infrastructure in place to better serve our customers and support long-term revenue growth. As part of these plans, we reduced excess personnel and capacity costs in order to align our operating expenses with current revenue levels. As a result, we focused on our target market industries and territories, thereby facilitating the reduction in selling and marketing personnel, which resulted in lower payroll expenses, commissions and related benefits. -39- GENERAL AND ADMINISTRATIVE. In 2002, general and administrative expenses increased by 3% to $5,013,000, or 6% of total revenues, from $4,855,000, or 6% of total revenues in 2001. The increase in 2002 was attributable primarily to certain management bonuses in the amount of $100,000. WRITE-OFF OF LONG-TERM INVESTMENT. In 2002, we wrote-off an investment in the shares of a privately held company in the amount of $457,000. IMPAIRMENT OF SOFTWARE ACQUIRED. In 2002, we recorded a charge in the amount of $375,000 for the impairment of a certain product acquired from a third party which will no longer be used in our products. RESTRUCTURING CHARGES. In 2002, we recorded a charge of $651,000, or 1% of total revenues, related to a cost reduction program involving the termination of employees and the reduction in leased office space and equipment in certain offices, pursuant to a program aimed at reducing our operating expenses, compared to a charge of $1,527,000, or 2% of total revenues in 2001 related to a cost reduction program implemented in 2001. OPERATING INCOME (LOSS). In 2002, operating loss decreased by 88% to $(1,748,000) from $(14,515,000) in 2001. Operating loss from the Mechanical division was $(180,000) in 2002 compared to operating loss of $(1,530,000) in 2001, reflecting a significant decrease in operating expenses. Operating loss from the Electronics division decreased by 88% to $(1,568,000) in 2002 from $(12,985,000) in 2001, reflecting a significant decrease in operating expenses. The decrease in operating expenses was due to the cost reduction plan we initiated in the fourth quarter of 2001. In addition, operating loss also decreased by $1,569,000 as a result of the reduction in amounts of capitalized software development costs that were amortized in 2002 due to the change in the estimate of the useful lives of capitalized software development costs. FINANCIAL INCOME (EXPENSE), NET. In 2002, financial expense, net was $799,000 compared to financial income, net of $1,191,000 in 2001. This change was attributable mainly to: the capital loss from realization of marketable securities and the decrease in the value of certain marketable securities held by us resulting from the decrease in the rating of such marketable securities; expenses incurred by us in connection with devaluation of the NIS against the U.S. dollar and related transactions effected by us to hedge foreign currencies, mainly Euro and Japanese Yen, against the U.S. dollar; and the decrease in the amount of capital gain we had from the repurchase of our 5.25% convertible subordinated notes as opposed to the amount of such capital gain in 2001. TAXES ON INCOME. In 2002, we recorded a provision for income tax in the amount of $(148,000) compared to $54,000 in 2001. In 2002, provision for current taxes in Israel and in non-Israeli subsidiaries amounted to $(458,000) and provision for deferred taxes amounted to $310,000. In 2001, provision for current income taxes in Israel and in non-Israeli subsidiaries amounted to $(133,000) and provision for deferred taxes amounted to $187,000. SHARE IN LOSS OF AFFILIATED COMPANY. In 2002, we recorded a loss in the amount of $431,000 from our equity share in an affiliated company, compared to a loss of $532,000 in 2001. NET LOSS. In 2002, our net loss was $2,830,000, or 3% of total revenues, compared to net loss of $13,910,000, or 16% of total revenues in 2001. In 2002, diluted loss per share was $0.27 based on an average number of shares outstanding of 10,607,140, compared to diluted loss per share of $1.35 in 2001, based on an average number of shares outstanding of 10,366,125. -40- IMPACT OF INFLATION AND FOREIGN CURRENCY FLUCTUATION Although a majority of our sales is made (and a substantial amount of our expenses is incurred) outside of Israel in local currencies, a portion of our expenses is incurred in Israel in transactions denominated in New Israeli Shekels (NIS). The U.S. dollar cost of our operations in Israel is impacted by several factors including (a) the rate of inflation in Israel, (b) the devaluation of the NIS relative to the U.S. dollar in comparison to the rate of inflation, and (c) the timing of such devaluation. Consequently, we may experience a material adverse effect should the rate of the devaluation of the NIS relative to the U.S. dollar significantly lag behind the rate of inflation in Israel. In 1999 and 2000, while the rate of inflation was low, there was a devaluation of the U.S. dollar against the NIS. In 2001 and 2002, the rate of devaluation of the NIS against the U.S. dollar exceeded the rate of inflation. In 2003, there was on one hand a devaluation of the U.S. dollar against the NIS and on the other hand a deflation. In addition, as our revenues and costs outside the U.S. are generally denominated in local non-U.S. dollar currencies, fluctuations in the rates of exchange between the U.S. dollar and non-U.S. dollar currencies may have a material effect on our results of operations. Thus, an increase in the value of a particular currency relative to the U.S. dollar will increase the U.S. dollar reporting value for transactions in such currency, and a decrease in the value of such currency relative to the U.S. dollar will decrease the U.S. dollar reporting value for such transactions. This effect on the U.S. dollar reporting value for transactions is only partially offset by the impact that such fluctuations may have on our costs. See "Overview" above and "Item 11- Disclosure about Market Risk." EFFECTIVE CORPORATE TAX RATE We and each of our subsidiaries are subject to corporate taxes in various countries in which we and they operate. We are currently most significantly affected by corporate taxes in Israel where we received a final tax assessment through the tax year ended December 31, 1999. We believe that our effective tax rate in Israel would have been approximately 15% for the year ended December 31, 2003, had we not incurred tax losses in Israel. We believe that we had tax loss carryforwards in Israel in the aggregate amount of $2,043,000 as of the end of 2003. In addition, as of December 31, 2003, we had approximately $14,800,000 in net operating loss carryforwards in the U.S. We expect that as our profits increase and our subsidiaries utilize their respective loss carryforwards, particularly in countries with relatively high corporate tax rates, our consolidated effective tax rate will increase. We currently have eleven Approved Enterprise plans, under the Israeli Law for the Encouragement of Capital Investments, 1959, which plans commenced operations between 1993 and 1998. Consequently, we are eligible for certain Israeli tax benefits. Income derived from our Approved Enterprise plans is exempt from tax for a period of either two or four years, commencing in the first year in which we generate taxable income from such Approved Enterprise, and is subject to a reduced tax rate of 15% for a further eight or six years, respectively. See Note 14 of the notes to our consolidated financial statements included elsewhere in this annual report. B. LIQUIDITY AND CAPITAL RESOURCES We have met our financial obligations primarily through funds provided by operations, research and development grants (which are discuss in Item 5C below) and the line of credit with Bank Hapolaim B.M. described below. Additional cash resources were generated from the issuance in August 1997 of our 5.25% convertible subordinated notes in an aggregate principal amount of $97,750,000. In connection with the August 1997 convertible subordinated notes offering, we incurred related issuance expenses of $3,104,000. These expenses were recorded as deferred expenses and were amortized using the straight-line method over the life of the notes. The notes bore interest at 5.25% per annum, were payable semi-annually and were to mature on August 15, 2004. The notes were convertible into ordinary shares at any time at or before maturity, unless previously redeemed, at a conversion price of $42.39 per share, subject to adjustment in certain events. In 1998, 1999, 2001, 2002, and the first three quarters of 2003, $42,500,000, $6,000,000, $5,485,000, $6,337,000, and $22,629,000 aggregate principal amounts of these notes, respectively, were repurchased by a wholly-owned subsidiary of ours at aggregate purchase prices of approximately $29,203,000, $4,200,000, $3,986,000, $5,708,000, and $22,351,000, respectively. Following refinancing of our debt as detailed below, in December 2003, we elected to redeem an aggregate $14,799,000 outstanding principal amount of the notes at a redemption price of 100.75% of the outstanding principal amount of the notes plus accrued and unpaid interest until but excluding the redemption date. -41- In April 2003, we obtained from Bank Hapoalim B.M. a credit line in an aggregate principal amount of $25,000,0000. As of December 31, 2003 we drew the full amount of the credit line. Loans under this credit line bear interest at a rate of 3.325%, which is equal to the three month LIBOR rate at the time of the draw (1.25%) plus a spread of 2.075%. We used this credit line to fund the repurchase of additional 5.25% convertible subordinated notes in the third quarter of 2003 and to redeem the notes in the fourth quarter of 2003. The credit line matures four years after withdrawal. Unless we take advantage of our right of prepayment of the credit, the repayment of a principal amount of $10,000,000 under the line of credit is required to be made in equal quarterly payments, commencing 15 months after withdrawal, and repayment of the remaining principal amounts under the line of credit is required to be made upon the maturity of the line of credit or the earlier maturity of certain bonds deposited with, and pledged to, Bank Hapoalim in a specific pledge to secure repayment. In connection with the credit line we agreed to create a floating charge over our assets in favor of Hapoalim and to maintain certain financial ratios which include (a) a covenant to maintain certain levels of cash, cash equivalents, bonds and deposits, as long as the credit line is outstanding with such level being initially $30 million and gradually decreasing as we progress with repayment of the credit line; (b) commencing with the third quarter of 2004, an average quarterly EBITDA of at least $1 million in the preceding three quarters; (c) a ratio of shareholders equity to total assets of not less than 40% and an amount of shareholders equity of not less than $33 million, and (d) a ratio of current assets to current liabilities (excluding amounts due under our convertible subordinated notes and excluding then current maturities under the credit line) of at least 1:1.5. Additional details regarding the credit line are described below in "Item 10.C - Material Contracts." As of December 31, 2003, our cash and cash equivalents, short-term investments and long-term investments totaled $33,569,000 compared to $41,919,000 as of December 31, 2002. This decrease was primarily the result of the use of cash to repurchase and redeem our convertible notes. As of December 31, 2003, our working capital was $12,469,000 and our total assets were $117,100,000 compared to $26,837,000 and $115,817,000, respectively, as of December 31, 2002. The change in working capital resulted from the investment by us of proceeds from sales of short-term investments in long-term investments and the assumption by us of significant liabilities as part of the acquisition of USDATA's business, mainly restructuring expense. We believe that our cash, short-term investments, long-term investments and funds generated from operations and research and development grants will be sufficient to finance our operations for at least the next twelve months. However, because we depend mostly on our revenues to fund our operating activities, if our revenues were to decrease, whether due to a continued slowdown in the industries in which we operate, our sales decreasing as a result of evolving industry standards and rapid technological changes that could result in our products being no longer in demand, competitive pressures, our failure to retain our customers or for any other reason, we may need to reduce our operating expenses, including possibly through additional reductions in personnel, or use more of our cash reserves to fund operating expenses. Similarly, in the event that the amounts we receive from research and development grants decline, we may need to reduce operating expenses or utilize more of our cash reserves. Our trade receivables, net of allowance for doubtful accounts on December 31, 2003 totaled $29,190,000 compared to $27,671,000 on December 31, 2002. The collection cycle has lengthened slightly during 2003 compared to 2002 due to the request of certain customers to extend the payment due dates. We believe that generally, the quality of receivables remained unchanged and we will continue our efforts to shorten the collection cycle. In addition, since the fourth quarter of 2002, we have entered into factoring agreements with a financial institution under which we assigned by way of sale certain amounts of our account receivables, subject to inspection and acceptance by the financial institution. The financial institution is responsible for collecting the receivables from our customers with no recourse to us. Upon the assignment by us of the receivables to the financial institution, the financial institution pays us 90% of the aggregate amounts underlying the receivables, less applicable interest and service fees. Upon the full payment to the financial institution of the amounts underlying the receivables, the financial institution is obligated to pay us the remaining 10% of the aggregate amounts underlying the receivables, less applicable fees. In 2003 and 2002, we assigned by way of sale receivables in aggregate amounts of $6,482,000 and $1,071,000, respectively, and incurred related expenses in the amounts of $85,000 and $32,000, respectively. CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject us to concentration of credit risk consist principally of cash and cash equivalents, short-term investments and accounts receivable. Our cash and cash equivalents, short-term investments and long-term investments are invested in deposits with major banks in the United States, Europe and Israel. We believe that the financial institutions holding our cash funds are financially sound, and that minimal credit risk exists with respect to our marketable securities, which consist of debt securities of the Government of Israel and highly rated corporate bonds. Our accounts receivable are generated from a large number of customers, mainly large industrial corporations and their suppliers, located in Europe, the United States and Asia. We perform ongoing evaluations of our accounts receivable and maintain an allowance for doubtful accounts which we believe is adequate to cover all anticipated losses with respect to our accounts. -42- DERIVATIVE FINANCIAL INSTRUMENTS. In 2001, we adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities (collectively referred to as SFAS No. 133). The initial adoption did not have an impact on our shareholders' equity. SFAS133 requires that all derivatives be recorded in the balance sheet at fair value. If certain conditions are met, a derivative may be designated as a hedge of exposures to changes in fair value, cash flows or foreign currency exchange rates. The accounting for changes in the fair value of such derivative instruments depends on the intended use of the derivative and the nature of any hedge designation thereon. We generally use derivatives to reduce our exposure to foreign currency risks (stemming from various assets, liabilities and cash flows) and interest rate risks (stemming from fluctuations in the exchange rates of the NIS against the U.S. dollar and other foreign currencies). In 2001, 2002 and 2003, 71%, 70% and 67% of our revenues, respectively, were denominated in non-U.S. dollar currencies. Since our financial results are reported in U.S. dollars, fluctuations in the rates of exchange between the U.S. dollar and non-U.S. dollar currencies may have a material effect on our results of operations. We therefore use currency exchange forward contracts and options to hedge the impact of the variability in the exchange rates on accounts receivable and future cash flows denominated in non-U.S. dollar currencies. The counter-parties to our forward contracts and options are major financial institutions with high credit ratings. We believe the risk of incurring losses on such forward contracts and options related to credit risks is remote and that any losses would be immaterial. As of December 31, 2003, we had entered into a (i) forward transaction to sell $3,168,000 for a total amount of NIS 14,000,000 that matured on several dates ending on April 15, 2004, and (ii) "cylinder" foreign currency transactions pursuant to which we entered into currency put option contracts to sell up to $2,749,000 for a total amount of NIS 12,000,000 in exchange for writing currency call option contracts to buy up to $2,655,000 for a total amount of NIS 12,000,000. These "cylinder" and forward transactions did not have a material effect on our financial results in 2003. For more information about the derivative financial instruments that we use, see "Item 11 - Quantitative and Qualitative Disclosure about Market Risk". SECURITIES ISSUANCES. In connection with the USDATA asset purchase transaction, SCP Private Equity Partners II, L.P., the primary stockholder of USDATA, purchased from us in September 2003 139,764 ordinary shares for an aggregate purchase price of $2,000,000. In 2002 and 2003 our employees purchased an aggregate of 219,448 and 237,550 of our ordinary shares, respectively. Such shares were sold to our employees under our employee share purchase plan and upon the exercise of options under our stock option plans. The aggregate purchase price for these ordinary shares paid to us in 2002 and 2003 was $1,638,000 and $1,543,000, respectively. As of March 15, 2004 there are options outstanding to purchase an aggregate of 4,233,652 of our ordinary shares, at a weighted average price per share of $11.91. Such options are exercisable through various dates from January 1996 until March 2014. C. RESEARCH AND DEVELOPMENT, PATENTS, LICENSES, ETC. We conduct our research and development operations primarily in Israel, U.S., Germany and France. Our research and development efforts have been financed through internal resources, through plans sponsored by the Chief Scientist of the Government of Israel and through grants from other third parties. In the years ended December 31, 2001, 2002 and 2003, our gross research and development expenditures were $28,333,000, $23,491,000 and $22,525,000, respectively (33%, 29% and 26% of total revenues, respectively). In 2001, 2002 and 2003, the Chief Scientist of the Government of Israel provided to us royalty-bearing grants for research and development efforts of $1,244,000, $1,918,000 and $1,576,000, respectively (1%, 2% and 2%, respectively of total revenues). Under the provisions of Israeli law in effect until 1996, royalties of 2%-3% of the revenues derived in connection with products developed according to, or as a result of, a research and development program funded by the Chief Scientist must be paid to the State of Israel. Pursuant to an amendment effected in 1996 effective with respect to Chief Scientist plans funded in or after 1994, royalties generally at the rate of 3% during the first three years, 4% over the following three years and 5% in or after the seventh year of the revenues derived in connection with products developed according to such plans are payable to the State of Israel. The maximum aggregate royalties will not exceed 100% (for funding prior to 1994, 100% to 150%) of the U.S. dollar-linked value of the total grants received. Pursuant to an amendment effected in 2000, effective with respect to Chief Scientist plans funded in or after 2000, the royalty rates described above were updated to 3% during the first three years and 3.5% in or after the fourth year, of the revenues derived in connection with products developed under such plans. Pursuant to an amendment effected on January 1, 1999, effective with respect to Chief Scientist plans approved in or after 1999, funds received from the Chief Scientist shall bear annual interest at a rate equal to LIBOR for twelve months. -43- The Government of Israel does not own proprietary rights in the technology developed using its funding and there is no restriction on the export of the products manufactured using the technology. Certain restrictions with respect to the technology do apply, however, including the obligation to manufacture the product based on such technology in Israel and to obtain the Chief Scientist's consent for the transfer of the technology to a third party. If the Chief Scientist consents to the manufacture of the products outside Israel, applicable regulations would require the payment of increased royalties, ranging from 120% up to 300% of the amount of the Chief Scientist grant, depending on the percentage of foreign manufacture. These restrictions continue even if we have paid the full amount of royalties payable in respect of the grants. In 2002, the law relating to the Chief Scientist was amended to, among other things, enable companies applying for grants from the Chief Scientist to seek prior approval for conducting manufacturing activities outside of Israel without being subject to increased royalties. However, this amendment will not apply to any of our existing grants. In addition, the amendment provides that one of the factors to be taken into consideration by the Chief Scientist in deciding whether to approve a grant application is the percentage of the manufacturing of the relevant product that will be conducted outside of Israel. Accordingly, should we seek additional grants from the Chief Scientist in connection with which we also seek prior approval for manufacturing products outside of Israel, we may not receive such grant or may receive a grant in an amount that is less than the amount we sought. Based upon the aggregate participation payments received to date, we expect that we will continue to pay royalties to the Chief Scientist on sales of our products and related services for the foreseeable future. In the years ended December 31, 2001, 2002 and 2003, we paid or accrued royalties to the Chief Scientist in the amount of $1,504,000, $1,627,000 and $1,443,000, respectively. From time to time provisions of Israeli law relating to the terms of the Chief Scientist participation were amended and may be further amended in the future. In addition, the Chief Scientist budget was subject to reductions and such reductions may affect the availability of funds for chief scientist participation in the future. Such amendments or reductions in budgets could have a material adverse effect on our business, financial condition and results of operations. In addition to royalty-bearing grants from the Office of the Chief Scientist we participated in a program sponsored by the Office of the Chief Scientist that was intended to develop generic technologies for use by Israeli high-technology companies. As part of this program, we are a member of a research consortium comprised of several Israeli high-technology companies that were engaged in the development of software tools for industrial processes. The Office of the Chief Scientist contributed 66% of the approved research and development budget for the research consortium and the members of the research consortium contributed the remaining 34%. No royalties are payable to the Israeli government in relation to products or other developments attributable to this funding. Expenses in excess of the approved budget were borne by the consortium members. In general, any consortium member that developed technology in the framework of the consortium retained the intellectual property rights to the technology developed by this member, and all the members of the consortium have the right to utilize and implement such technology without having to pay royalties to the developing consortium member. As of December 31, 2003, we have recognized $7,754,000 in grants from the Office of the Chief Scientist in connection with the consortium. In January 2002, we entered into an agreement with Binational Industrial Research and Development Fund, or BIRD-F, for a development project conducted by us and our wholly owned U.S. subsidiary, Tecnomatix Unicam, Inc. We are eligible, subject to certain conditions, to receive grants from BIRD-F upon progress of such development project. Under the terms of the BIRD-F grant, we are obligated to pay royalties of 5% of the revenues derived from sales of products developed in this project, up to 150% of the amount granted. The total amount received for this project, net of royalties paid or accrued as of December 31, 2003, was $500,000. -44- D. TREND INFORMATION We are subject to various trends and uncertainties in the manufacturing product management business, including changing customer demands, new products developed by competitors, consolidation of operations and the use of cost-cutting measures. Following is a summary of the material trends and uncertainties influencing our operations: DEVELOPMENT OF ENTERPRISE SOLUTIONS: In recent years, manufacturers have attempted to replace stand-alone desktop applications with enterprise solutions based on a common platform that supports a wide range of applications and user types, thereby enabling a customized solution that is tailored to the specific needs of each customer. In addition, such solutions may include centralized control and remote monitoring capabilities that allow easier maintenance, control and error-correction. Access and use of these enterprise solutions must also be available to hundreds and in some cases thousands of employees, suppliers and other users involved in the manufacturing process. Therefore, these solutions must contain integral security protections as well as 24/7, 365-days a year availability and support. We constantly review our products in an attempt to comply with the foregoing, as well as other, market requirements. WEB-BASED APPLICATIONS: In the past, our products had to be installed on the personal computer of each employee of a customer that needed to access and use such products. In recent years, we have met customer requirements by migrating various applications and consolidating them into a web-based solution installed on a customer's intranet, enabling easier and more efficient access and use of our product (from the customer's standpoint) and maintenance (from our standpoint) of such product. RETIREMENT OF LEGACY SYSTEMS: As technology develops, there is a tendency among manufacturers to retire and replace, or consolidate, old, obsolete technologies and a multitude of standalone systems with similar functionalities. Instead, such manufacturers seek the support of multiple technologies and multiple functionalities in single new, modern products. Although we have not yet developed the full capability to meet such requirements, we have revised our business model in an attempt to reach such capability. EXPANSION OF APPLICATIONS OFFERED: Typically, a manufacturing process consists of three phases - product design, manufacturing planning and execution. In an attempt to cut their costs and reach higher cost effectiveness, various manufacturers have in recent years expressed their desire that MPM developers cover more than only one of the manufacturing phases. Until September 2003, we were engaged primarily in the manufacturing-planning phase and to a lesser extent in the execution phase. Following our acquisition of the business of USDATA, we have expanded our activity in the execution phase. Accordingly, we are focusing on the integration of manufacturing planning and execution applications, which are intended to be available on one platform that will serve organizations engaged in both the manufacturing planning and execution phases. GLOBALIZATION: As a result of globalization, manufacturers have started deploying certain of their manufacturing facilities to countries where low-cost labor is available. In order to retain control over the manufacturing process and ensure full compliance by the various facilities involved in the manufacturing process with the manufacturer's procedures, MPM products are required to be usable throughout the manufacturing process in all applicable locations. In addition, our products have to be tailored to assist customers in the assessment and determination of the most cost-effective manufacturing location for each project and each component therein, considering, among other factors, available capacity, proximity to market, cost of labor, cost of transportation and cost of maintaining quality assurance in each potential manufacturing location. RE-USABILITY OF MANUFACTURING LINES: In the past, it was customary, particularly in the automotive industry, to demolish a manufacturing line upon completion of the manufacturing process and build a new manufacturing line for a new process. In order to cut costs, in recent years various manufacturers have sought to change this trend by developing manufacturing lines consisting of multiple, modular components, each of which can be removed upon completion of a certain manufacturing process and replaced with a new component suitable for the new manufacturing line. We will have to adjust our applications to make them compatible with such developments in the manufacturing line. -45- ENVIRONMENT PROTECTION: A developing trend impacting manufacturers is the growing awareness to environmental issues and the increasing demands in many countries to comply with environment-protection laws. Among other environment protection steps introduced in recent years are low energy manufacturing; manufacturing without the use of coolers; the collection of manufacturing parts following completion of a manufacturing project; and end-of-life disposal measures. In addition, various countries require, as a condition to the grant of certain manufacturing approvals and permits, that such environment protection measures be introduced and used prior to commencement of the manufacturing process. As a developer of MPM products, in the future we may be required to include in our applications measures intended to achieve compliance with such environment protection requirements. MAINTENANCE, REPAIR AND OVERALL: A recent trend among manufacturers is the demand that we supply not only a "manual" for the manufacturing of an end-product, but also an electronic maintenance, repair and overall manual that can be distributed by manufacturers to dealers and other parties around the world. Such manual is intended to provide an immediate trouble-shooting mechanism, especially in the case of very sophisticated end-products, with respect to which the maintenance, repair and overall process is more time consuming and complex. Such maintenance, repair and overall manual is intended to enable dealers around the world to obtain standard maintenance procedures in a user-friendly format. PROCESS DRIVEN PRODUCT DESIGN: Traditionally, a planning engineer would prescribe to manufacturers the end-product requirements, without considering the manufacturing capabilities of such manufacturer. In recent years, some manufacturers have sought to move towards a manufacturing process that is based on their capabilities, at least with respect to the mechanical rather than the aesthetic aspects of the end product. Such approach is intended to provide a more cost-effective manufacturing process, which will be based on the use of existing manufacturing capabilities and capacities of the manufacturer rather than creating new capabilities and capacities. To achieve the foregoing, manufacturers are requesting that MPM solutions enable them to asses and define their manufacturing capabilities and capacities in any given moment and assist them in determining whether any changes are required in such manufacturing capabilities and capacities in order to comply with the manufacturing requirements of a new end product. In acquiring the business of USDATA, which relates to the execution phase of the manufacturing process, we have attempted to expand our assessment capabilities beyond the manufacturing planning phase. DEPLOYMENT OF FACILITIES: In recent years, many software companies and other high-tech businesses have been relocating some of their research and development, manufacturing and customer service facilities to countries where low-cost labor is available. We have been considering such step but have not yet determined the possible implications of such a step on our business. FLUCTUATION OF QUARTERLY RESULTS: Our quarterly results of operations may be subject to significant fluctuations due to several factors, primarily the timing of large orders, which represent a significant percentage of our revenues, and other factors, including customer budget cycles, competitive pressures, the low level of business activity during the summer months in the European market, the timing of new product announcements, the release of new products by us and our competitors and the effective provision by us of customer support. RISK FACTORS: In addition, our results of operations and financial condition may be affected by various other factors discussed in "Item 3D: Risk Factors", including the length of our sales cycle, market acceptance of our eMPower offering for MPM, changes in political, military or economic conditions in Israel and in the Middle East, general slowing of local or global economies and decreased economic activity in one or more of our target industries. E. OFF-BALANCE SHEET ARRANGEMENTS For information about off-balance sheet arrangements into which we entered following December 31, 2003, see "Item 11: Quantitative and Qualitative Disclosure about Market Risk". -46- F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS The following table summarizes our contractual obligations and commercial commitments as of December 31, 2003:
Contractual Obligations as of Payments due by Period December 31, 2003 (US$ in thousands) ----------------------------------- ------------------------------------------------------------- Less than 1 Total Year 1-3 Years 4-5 Years After 5 Years --------- ----------- ---------- ----------- ------------ Long-Term Debt(1) $ 25,000 $ 833 $ 13,167 $ 11,000 -- --------- ----------- ---------- ----------- ------------ Operating Leases $ 16,638 $ 6,161 $ 6,145 $ 2,561 $ 1,771 --------- ----------- ---------- ----------- ------------- Purchase Obligations and Commitments -- -- -- -- -- --------- ----------- ---------- ----------- ------------- Total Contractual Cash Obligations $ 41,638 $ 6,994 $ 19,312 $ 13,561 $ 1,771 --------- ----------- ---------- ----------- -------------
(1) In April 2003, we obtained from Bank Hapoalim B.M. a credit line in an aggregate principal amount of $25,000,000. As of December 31, 2003 we drew the full amount available to us under the credit line. For more details regarding this credit line see "Liquidity and Capital Resources" above and "Item 10.C - Material Contracts." Long-term debt includes principal and interest payments in accordance with the terms of the credit line, as well as the impact of our hedging transactions. -47- ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. DIRECTORS AND SENIOR MANAGEMENT Our directors and executive officers are listed below, together with brief accounts of their business experience and certain other information.
NAME AGE POSITION ----- --- --------- Harel Beit-On(1)......... 44 Chairman of the board of directors Shlomo Dovrat(1)(2)...... 44 Vice chairman of the board of directors Kenneth J. Bialkin...... 74 Director Gerald B. Cramer(3)...... 73 Director Aharon Dovrat(1)(2)(3)... 72 Director Avi Zeevi(1)............. 52 Director Talia Livni(1)(2)(3)..... 60 Director Yaron Eitan.............. 47 Director Jaron Lotan.............. 46 President and chief executive officer Oren Steinberg........... 35 Executive vice president and chief financial officer Ziyon Amram.............. 45 Executive vice president of product operations Amir Livne............... 42 Executive vice president of business development and strategy Olivier Leteurtre........ 41 Executive vice president of sales and field operations
(1) Member of our investment and finance committee. (2) Member of our compensation committee. (3) Member of our audit committee. HAREL BEIT-ON has served as our chairman of the board of directors since December 2001 and as a director since 1999. From 1996 until February 2004 Mr. Beit-On served as our chief executive officer. Mr. Beit-On also served as our president from 1995 until October 2002. >From 1994 to 1996, Mr. Beit-On served as our chief operating officer. Between 1991 and 1994, Mr. Beit-On served as our executive vice president of sales and engineering. From 1988 to 1991, Mr. Beit-On served as president of our United States sales and support subsidiary. From 1985 to 1988, Mr. Beit-On served in various marketing positions with us. Mr. Beit-On holds a B.A. degree in Economics from the Hebrew University and an M.B.A. degree from MIT. SHLOMO DOVRAT is our founder and has served as our director since our inception and as our vice chairman of the board of directors since December 2001. Mr. Dovrat served as our chairman of the board of directors from 1995 to 2001. Mr. Dovrat served as our chief executive officer and president from our inception to 1996 and 1995, respectively. Mr. Dovrat served as a director, president and chief executive officer of Oshap Technologies Ltd. from 1983 until 1999. Mr. Dovrat is a founding partner in several high-tech venture capital funds including Carmel Software Fund and Dor Ventures Fund, and he is also a partner in Dovrat & Co., a privately held investment group. Shlomo Dovrat is Aharon Dovrat's son. -48- KENNETH J. BIALKIN has served as our director since 1993. Mr. Bialkin has been a partner of the law firm of Skadden, Arps, Slate, Meagher & Flom LLP, our United States counsel, since 1993. Mr. Bialkin is a director of Municipal Assistance Corporation for the City of New York, CitiGroup, Inc. and Sapiens International Corporation N.V. GERALD B. CRAMER has served as our director since 1996. Mr. Cramer is a co-founder and has been chairman of CRM LLC since 1973. Prior to co-founding CRM LLC, Mr. Cramer was a senior partner at Oppenheimer & Company. Mr. Cramer serves on the board of directors of Teatown Lake Reservation, the board of trustees at Syracuse University and serves on its investment committee. Mr. Cramer is a former trustee of St. Joseph's Medical Center. Mr. Cramer earned a B.Sc. degree from Syracuse and attended the University of Pennsylvania Wharton Graduate School of Finance. Mr. Cramer served as a Lieutenant in the United States Navy. AHARON DOVRAT has served as our director since 1989 and served as our chairman of the board of directors from 1989 to February 1995. From 1991 until 1998, Mr. Dovrat was the founder, principal shareholder and chairman of Dovrat, Shrem & Co., an investment-banking firm established in 1991. Until 1991, Mr. Dovrat served as Managing Director of Clal (Israel) Ltd., one of Israel's largest public investment companies. Mr. Dovrat currently serves as chairman of Dovrat & Co., a private investment company, chairman of Isal Amlat Ltd., a public investment company traded on the Tel Aviv Stock Exchange, and as a director of Delta Galil Industries Ltd., a public company engaged in textile manufacturing traded on the New York Stock Exchange. Mr. Dovrat is also the chairman of the board of directors of several privately held companies. Aharon Dovrat is Shlomo Dovrat's father. AVI ZEEVI has served as our director since 1995. Mr. Zeevi served as chief financial officer of Oshap from 1994 until 1999 and he is now a founding partner in several high-tech venture capital funds including Carmel Software Fund and Dor Ventures Fund. From 1983 to 1994, Mr. Zeevi served as chief executive officer of Oshap's subsidiary MINT Software Technologies Ltd. TALIA LIVNI has served as our director since August 2000. Ms. Livni has served as president of Naamat since 1997. From 1992 until 1996, she served as Head of the Human Resources Division of the Israeli Ministry of Defense. From 1975 until 1992, Ms. Livni served as Senior Deputy Legal Advisor to the Israeli Ministry of Defense. From 1973 until 1975, Ms. Livni served as Legal Adviser to RAFAEL Israel Armament Development Authority Ltd. YARON EITAN has served as our director since December 2003. Mr. Eitan is the representative of SCP Private Equity Partners II L.P. on our board of directors and was nominated as a director pursuant to the provisions of the Share Purchase Agreement described in greater detail below. Mr. Eitan is a partner at SCP Private Equity Partners II L.P., a private equity firm with approximately $1 billion under management. Mr. Eitan is also the founder, president and chief executive officer of Selway Partners LLC, a technology holding company with holdings in five different companies. Mr. Eitan has over 15 years of experience in building and managing a number of high-tech companies. His activities at Selway include the founding of Test University, Inc., DVTel Inc., and Econium Inc. Mr. Eitan is also the chairman of INSCI Corp., a public company traded on the OTCBB, Software Technologies, Inc., Techonline, Inc., Magnolia Broadband and The Q Group. Between 1989 and 1998, Mr. Eitan was the founder, chairman and chief executive officer of Geotek Communications, Inc. and served as chairman of the board of Bogen Communications, Inc. and National Band Three of the United Kingdom. Earlier, he was the co-founder of Reshef Technologies of Israel. Mr. Eitan holds an M.B.A. degree from the Wharton School of Business of the University of Pennsylvania. JARON LOTAN was appointed as our chief executive officer in February 2004. Mr. Lotan joined us in October 2002 as our president and chief operating officer and currently continues to serve as our president. Prior to joining us, Mr. Lotan served as corporate executive vice president for business and strategy at Orbotech Ltd., a leading supplier of automated optical inspection and other productivity solutions for the electronics industry. At Orbotech, he was responsible for worldwide sales, marketing and support organization, corporate marketing activities and strategy and business development. Prior to serving as corporate executive vice president, Mr. Lotan served as president of the Orbotech PCB Division and president of Orbotech Europe. Before joining Orbotech in 1992, Mr. Lotan co-founded and served as general manager, North America for Rosh Intelligent Systems, a software company offering knowledge-based solutions to customer support organizations. Mr. Lotan holds a B.A. degree in Economics and Mathematics, and an M.A. degree in Economics, both from the Hebrew University in Jerusalem. -49- OREN STEINBERG has served as our chief financial officer and executive vice president since June 2001. Mr. Steinberg joined us in August 2000 as chief financial officer and vice president of Tecnomatix Unicam, Inc., our New Hampshire, U.S. based subsidiary. Prior to joining us, Mr. Steinberg served as chief financial officer and vice president at Lucent Technologies Israel - Wireless Networking Group, where he was responsible for the financial operations of the firm and its American subsidiaries located in New Jersey, Boston and Chicago. From 1995 to 1997, Mr. Steinberg served as Financial Manager and Controller of Sapiens. Prior to 1995, Mr. Steinberg was a certified public accountant at Price Waterhouse, LLP and at Somech Cheikin and Assoc. CPA, Israel. Mr. Steinberg holds a B.A. degree in Accounting and Economics and an L.L.B. degree. AMIR LIVNE has served as our executive vice president of business development and strategy since January 2003. Mr. Livne served as executive vice president industry marketing from February 1999 until January 2003. Mr. Livne served as our vice president of marketing from January 1998 until February 1999, and prior to that he served as Director of Strategic Accounts. Before joining us, Mr. Livne worked as a senior associate at Booz, Allen & Hamilton, a leading management consulting firm, for a period of three years. Prior to his employment with Booz, Allen & Hamilton, Mr. Livne served in various software research and development positions for a period of six years. Mr. Livne holds B.A. and B.M. degrees in Computer Science from the Tel Aviv University. ZIYON AMRAM has served as our executive vice president of global product operations since November 2003. Prior to joining us, Mr. Amram served as vice president of the delivery organization at Amdocs Ltd., a leading provider of enterprise solutions to the global communication industry. During his career at Amdocs, Mr. Amram managed the development of state-of-the-art software products as well as the delivery and deployment of large-scale enterprise solutions. Mr. Amram also spent several years in Europe and the United States establishing and managing local development and support sites serving major worldwide communication companies. Mr. Amram holds B.Sc. and M.Sc. degrees in Mathematics and Computer Sciences from the Tel Aviv University. OLIVIER LETEURTRE has served as our executive vice president of sales since January 2002. Previously, Mr. Leteurtre managed our operations in Japan and Korea. Prior to his service in Japan, Mr. Leteurtre managed our operations in Western Europe. Prior to joining us in 1993, Mr. Leteurtre was a regional manager at Computervision, France. Mr. Leteurtre holds a B.S. degree in Mechanical Science from Ecole Nationale d'Ingenieur en Mecanique et Microtechnique and an M.B.A. degree from Ecole de Management de Lyon. AN ARRANGEMENT FOR THE ELECTION OF A DIRECTOR ON BEHALF OF SCP PRIVATE EQUITY PARTNERS II L.P. Under the terms of a Share Purchase Agreement, dated July 29, 2003 (as amended on September 19, 2003), between SCP Private Equity Partners II L.P., or SCP Partnership, and us, SCP Partnership has the right to nominate one director to serve on our board of directors for as long as it beneficially owns ordinary shares and any of our other securities having the power to vote on the election of members of our board of directors constituting at least 5% of the total number of votes which may be cast in the election of members of our board of directors if all securities entitled to vote in the election of such directors are present and voted. The execution of the Share Purchase Agreement was made in connection with our entering into the Asset Purchase Agreement with USDATA Corporation. See "Item 4A Information on the Company - History and Development of the Company" and "Item 10C: Additional Information - Material Contracts". Mr. Yaron Eitan was nominated by SCP Partnership as its representative on our board of directors pursuant to the provisions of the Share Purchase Agreement and elected by our shareholders as a director on December 22, 2003. -50- B. COMPENSATION The aggregate compensation paid to, or accrued on behalf of, all our directors and executive officers as a group (13 persons) during the year ended December 31, 2003, was $1,639,057 in salary, management fees, bonuses, directors' fees and expenses and approximately $149,244 in amounts set aside or accrued to provide for pension, retirement or similar benefits (including annual compensation and compensation for each board or committee meeting attended paid to each of our external directors pursuant to the Israeli Companies Regulations (Regulations Regarding the Compensation and Expenses Reimbursement for External Directors) promulgated under the Companies Law). Such amounts do not include amounts expended by us for automobiles made available to our directors and executive officers, expenses (including business travel and professional and business association dues and expenses) reimbursed to directors and officers and other fringe benefits commonly provided by Israeli companies to their executives. In October 2003 we issued to each of our external directors options to purchase 20,000 of our ordinary shares, at an exercise price of $10.25 per share. The options expire ten years after the date of grant on October 21, 2013. See "Item 6E: Share Ownership" and "Item 7: Major Shareholders and Related Party Transactions" for a description of entities affiliated with certain of our directors. As of March 15, 2004, options granted to our officers and directors to purchase up to 1,922,750 of our ordinary shares were outstanding. The exercise price of these options ranges between $4.75-$25.75 per share. The expiration date of these options ranges from January 2006 to November 2013. C. BOARD PRACTICES TERMS OF OFFICE Our articles of association provide that directors are elected by an ordinary resolution of a general meeting of our shareholders. However, our directors (other than external directors, who are appointed pursuant to the provisions of the Companies Law) are elected to three classes: (a) one class, consisting of Aharon Dovrat and Avi Zeevi, to hold office until the annual meeting of our shareholders to be held in 2004, (b) a second class, consisting of Harel Beit-On and Shlomo Dovrat, to hold office until the annual meeting of our shareholders to be held in 2005and (c) a third class, consisting of Kenneth J. Bialkin and Yaron Eitan, to hold office until the annual meeting of our shareholders to be held in 2006. Pursuant to the Companies Law, Talia Livni and Gerald B. Cramer were elected by our shareholders to serve as our external directors for a second term of three years expiring on December 21, 2006. See "--External Directors; Audit Committee; Internal Auditor." The periods during which each of our directors has served in office are set forth in Section 6A above. We do not currently have service contracts with any of our directors providing for benefits upon termination of their service to us. INVESTMENT AND FINANCE COMMITTEE Our board of directors has appointed an investment and finance committee. The members of our investment and finance committee are Harel Beit-On (chairman), Shlomo Dovrat, Aharon Dovrat, Avi Zeevi and Talia Livni. The responsibilities of our investment and finance committee include reviewing and, as required, approving our financial investments and cash management policies, corporate tax status and corporate structure. COMPENSATION COMMITTEE Our board of directors has appointed a compensation committee. The members of our compensation committee are Shlomo Dovrat (chairman), Aharon Dovrat and Talia Livni. The responsibilities of our compensation committee include reviewing and, as required, approving the compensation of our executive officers and overseeing the administration of our stock option plans. EXTERNAL DIRECTORS; AUDIT COMMITTEE; INTERNAL AUDITOR EXTERNAL DIRECTORS We are currently subject to the provisions of the Companies Law. Under the Companies Law, companies incorporated under the laws of the State of Israel whose shares have been offered to the public in or outside Israel are required to appoint two external directors. The Companies Law provides that a person may not be appointed as an external director of a company if the person's relative, partner, employer or any entity under the person's control, has, or had during the two years preceding the date of appointment, any affiliation with such company, any entity controlled by such entity or by any entity controlling such entity. The term "affiliation" includes: (a) an employment relationship; (b) a business or professional relationship maintained on a regular basis; (c) control; and (d) service as an office holder. In addition, no person may serve as an external director if the person's other business creates, or may create, a 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 may not employ or receive services from that person, either directly or indirectly, including through a corporation controlled by that person. -51- External directors are to be elected by a majority vote at a shareholders' meeting, provided that either: (1) the majority of shares voted at the meeting, include at least one third of the shares of non-controlling shareholders voted at the meeting; or (2) 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 exercising powers of the board of directors is required to include at least one external director. Gerald B. Cramer and Talia Livni currently serve as our external directors pursuant to the Companies Law. An external director is entitled to compensation as provided in regulations adopted under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with service provided as an external director. See "-- Compensation." AUDIT COMMITTEE Under the Companies Law, the board of directors of any company that is required to appoint external directors must also appoint an audit committee, comprised of at least three directors including all of the external directors but excluding: (a) the chairman of the board of directors; (b) a controlling shareholder or a relative of a controlling shareholder; or (c) any director employed by the company or who provides services to the company on a regular basis. Pursuant to current requirements of the Nasdaq National Market, we are required to have two independent directors on the audit committee. We have appointed such audit committee. Pursuant to the Nasdaq rules, which will be applicable to us as of July 2005, we will be required to have an audit committee consisting of at least three members, each of whom must meet the definition of "independence" and the criteria for independence set forth in the Securities and Exchange Commission's rules regarding audit committee independence under Section 301 of the Sarbanes-Oxley Act of 2002. The audit committee members may not have participated in the preparation of our or any of our current subsidiaries' financial statements at any time during the three years preceding the date of such financial statements. In addition, under the Nasdaq rules each member of the audit committee must be able to read and understand fundamental financial statements, including a company's balance sheet, income statement and cash flow statement; and the audit committee must have at least one member with past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual's financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. The members of our audit committee comply with such requirements. The responsibilities of our audit committee under the Companies Law include identifying irregularities in the management of the company's business and approving related party transactions as required by law. Under the Nasdaq rules and the Sarbanes-Oxley Act, the audit committee (i) has the sole authority and responsibility to select, evaluate, and, where appropriate, replace the company's independent auditors, (ii) is directly responsible for the appointment, compensation and oversight of the work of the independent auditors for the purpose of preparing its audit report or related work, and (iii) is responsible for establishing procedures for (A) the receipt, retention and treatment of complaints received by the company regarding accounting, internal accounting controls or auditing matters, and (B) the confidential, anonymous submission by employees of the company of concerns regarding questionable accounting or auditing matters. The audit committee is required to consult with management but may not delegate these responsibilities. In addition, under the Sarbanes-Oxley Act, the audit committee is responsible, among other things, for the following: -52- o Have the sole authority to review in advance, and grant any appropriate pre-approvals of, (i) all audit and non-audit services to be provided by the independent auditors and (ii) all fees and other terms of engagement; o Review and discuss with management and the independent auditors the company's quarterly financial statements (including the independent auditors' review of the quarterly financial statements) prior to any required submission to shareholders, the Securities and Exchange Commission, any stock exchange or the public; o Review and discuss with management and the independent auditors the company's annual audited financial statements prior to any required submission to shareholders, the Securities and Exchange Commission, any stock exchange or the public; o Recommend to the board of directors, if appropriate, that the company's annual audited financial statements be included in the company's annual report; o Review and discuss with management all disclosures made by the company concerning any material changes in the financial condition or operations of the company; o Review disclosures made to the audit committee by the company's chief executive officer and chief financial officer during their certification process for the company's annual report about any significant deficiencies in the design or operation of internal controls or material weaknesses therein and any fraud involving management or other employees who have a significant role in the company's internal controls; and o Review and approve all related-party transactions. The responsibilities of our audit committee, which comply with the above requirements of the Companies Law and the rules of the Securities and Exchange Commission and Nasdaq, are detailed in the audit committee charter adopted by our board of directors on March 4, 2004. Our audit committee currently consists of Aharon Dovrat (chairman and financial expert), Gerald B. Cramer and Talia Livni. See also "Item 16A - Audit Committee Financial Expert." INTERNAL AUDITOR The Companies Law provides that public companies must appoint an internal auditor that will be appointed by the board of directors, in accordance with proposal of the audit committee. An internal auditor may not be an interested party, an office holder or an affiliate, or a relative of an interested party, nor may the internal auditor be the company's independent accountant or its representative. The role of the internal auditor is to examine, among other things, the compliance of the company's conduct with applicable law and orderly business procedures. We currently have an internal auditor who meets the independence requirements of the Companies Law. D. EMPLOYEES As of December 31, 2003, we employed 680 employees, 522 of whom were employed outside Israel. Out of the total number of our employees, 222 were engaged in research and development, 174 were engaged in global professional services, including hotline and support services, 265 were engaged in sales and marketing and 19 were engaged in corporate management, finance and general administration. As of March 31, 2003, we employed 658 employees, 502 of whom were employed outside Israel. Out of the total number of our employees, 239 were engaged in research and development, 211 were engaged in global professional services, including hotline and support services, 190 were engaged in sales and marketing and 18 were engaged in corporate management, finance and general administration. As of March 31, 2002, we employed 696 employees, 527 of whom were employed outside Israel. Out of the total number of our employees, 238 were engaged in research and development, 234 were engaged in global professional services, including hotline and support services, 201 were engaged in sales and marketing and 23 were engaged in corporate management, finance and general administration. -53- The increase in the number of employees between March 31, 2003 and December 31, 2003 was mainly due to the addition of 60 employees who joined us in September 2003 following the USDATA Corporation asset acquisition, which was partially offset by the termination of employment of certain employees pursuant to the cost-reduction plans we implemented in the fourth quarter of 2003. The decrease in the number of our employees between March 31, 2002 and March 31, 2003 was due to the effect of the cost-reduction plans we implemented in each of the fourth quarters of 2001 and 2002 and the first quarter of 2003, which was partially offset by our recruitment of new employees as part of our increased research and development, marketing and selling efforts of our new MPM offering. Our Israeli employees are not party to any collective bargaining agreement. However, we are subject to certain labor related statutes, and to certain provisions of collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordinating Bureau of Economic Organizations (including the Industrialists' Association) which are applicable to our Israeli employees by virtue of expansion orders of the Israeli Ministry of Labor and Welfare. These statutes and provisions principally concern the length of the workday, minimum daily wages for professional workers, contributions to a pension fund, insurance for work-related accidents, procedures for dismissing employees, determination of severance pay, annual and other vacations, sick pay and other conditions of employment. We generally provide our employees with benefits and working conditions beyond the required minimum. An additional significant provision applicable to all employees in Israel under collective bargaining agreements and expansion orders is the automatic adjustment of wages in relation to increases in the consumer price index. The amount and frequency of these adjustments are modified from time to time. We consider our relationship with our employees to be good and we have never experienced a labor dispute, strike or work stoppage. E. SHARE OWNERSHIP The following table sets forth, as of March 24, 2004, certain information with respect to the beneficial ownership of our ordinary shares held by our directors and officers. Other directors and officers that do not appear in the table below beneficially own less than one percent of our ordinary shares.
NUMBER OF ORDINARY SHARES NAME BENEFICIALLY OWNED (1) PERCENT OF CLASS (2) ---- ---------------------- -------------------- Shlomo Dovrat(3).......... 1,030,508 8.35% Harel Beit-On(4).......... 986,829 7.92% Avi Zeevi(5).............. 203,443 1.69% Aharon Dovrat(6).......... 102,000 0.85% Kenneth J. Bialkin(7)..... 39,968 0.33% Gerald B. Cramer(8)....... 458,162 3.81%
(1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Ordinary shares relating to options currently exercisable or exercisable within 60 days of the date of this annual report are deemed outstanding for purposes of computing the beneficial ownership percentage of the person holding such securities but are not deemed outstanding for the purpose of computing the beneficial ownership percentage of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them. -54- (2) All percentages are calculated based on 11,982,227 of our issued and outstanding ordinary shares as of March 24 2004. Such number excludes 1,956,853 of our ordinary shares held by one of our wholly owned subsidiaries. (3) The number of ordinary shares beneficially held by Shlomo Dovrat includes options to acquire 344,963 of our ordinary shares that are currently exercisable or which will first become exercisable within 60 days of the date of this annual report. Mr. Dovrat also holds additional options to acquire 102,038 of our ordinary shares that are not scheduled to become exercisable within 60 days of the date of this annual report. The exercise price of the options ranges between $6.875-$25.75 per share. The expiration dates of the options are between May 2007 and March 2013. Please refer also to "Item 7A: Major Shareholders" for additional information regarding ordinary shares which may be deemed to be beneficially owned by Mr. Dovrat. (4) The number of ordinary shares beneficially held by Harel Beit-On includes options to acquire 474,213 of our ordinary shares that are currently exercisable or which will first become exercisable within 60 days of the date of this annual report. Mr. Beit-On also holds additional options to acquire 109,538 of our ordinary shares that are not scheduled to become exercisable within 60 days of the date of this annual report. The exercise price of the options ranges between $6.875-$25.75 per share. The expiration dates of the options are between January 2006 and March 2013. Please refer also to "Item 7A: Major Shareholders" for additional information regarding ordinary shares which may be deemed to be beneficially owned by Mr. Beit-On. (5) The number of ordinary shares beneficially held by Avi Zeevi includes options to acquire 65,325 of our ordinary shares that are currently exercisable or which will first become exercisable within 60 days of the date of this annual report. Mr. Zeevi also holds additional options to acquire 30,675 of our ordinary shares. The exercise price of the options ranges between $6.875-$20.75 per share. The expiration dates of the options are between July 2009 and March 2013. Please refer also to "Item 7A: Major Shareholders" for additional information regarding ordinary shares which may be deemed to be beneficially owned by Mr. Zeevi. (6) The number of ordinary shares beneficially held by Aharon Dovrat includes options to acquire 32,000 of our ordinary shares that are currently exercisable or which will first become exercisable within 60 days of the date of this annual report. Mr. Dovrat also holds additional options to acquire 8,000 of our ordinary shares that are not scheduled to become exercisable within 60 days of the date of this annual report. The exercise price of the options ranges between $6.875-$18.375 per share. The expiration dates of the options are between July 2006 and January 2011. Please refer also to "Item 7A: Major Shareholders" for additional information regarding ordinary shares which may be deemed to be beneficially owned by Mr. Dovrat. (7) The number of ordinary shares beneficially held by Kenneth J. Bialkin includes options to acquire 32,000 of our ordinary shares that are currently exercisable or which will first become exercisable within 60 days of the date of this annual report. Mr. Bialkin also holds additional options to acquire 8,000 of our ordinary shares that are not scheduled to become exercisable within 60 days of the date of this annual report. All such options are held by Mr. Bialkin for the benefit of Skadden, Arps, Slate, Meagher & Flom LLP, a law firm that serves as our U.S. counsel, of which Mr. Bialkin is a partner. The exercise price of the options ranges between $6.875-$18.375 per share. The expiration dates of the options are between July 2006 and January 2011. The number of ordinary shares excludes 2,000 of our ordinary shares held by the Bialkin Family Foundation for which Mr. Bialkin disclaims beneficial ownership. In addition, Mr. Bialkin is an investor in D Partners (BVI) L.P., an investment fund in which Mr. Bialkin and the Bialkin Family Foundation hold an aggregate interest of 2.99%. D Partners (BVI) L.P. holds 167,936 of our ordinary shares. Mr. Bialkin expressly disclaims beneficial ownership of such shares. (8) The number of ordinary shares beneficially held by Gerald B. Cramer also includes options to acquire 32,000 of our ordinary shares that are currently exercisable or which will first become exercisable within 60 days of the date of this annual report. The shares listed on the table include shares held by a number of trusts for the benefit of members of Mr. Cramer's family and other related entities. Mr. Cramer also holds additional options to acquire 28,000 of our ordinary shares that are not scheduled to become exercisable within 60 days of the date of this annual report. The exercise price of the options ranges between $6.875-$18.375 per share. The expiration dates of the options are between July 2006 and October 2013. In addition, Mr. Cramer is involved with D Partners (BVI) L.P., an investment fund that holds 167,936 of our ordinary shares. Mr. Cramer expressly disclaims beneficial ownership of such shares. -55- STOCK OPTION PLANS AND EMPLOYEE SHARE PURCHASE PLAN We have granted to our employees and officers options to purchase our ordinary shares pursuant to our stock option plans. As of March 15, 2004, options to purchase 4,233,652 of our ordinary shares were outstanding and 138,881 of our ordinary shares were available for future grants of options. The following is a description of certain provisions of our stock option plans. In August 1994, we adopted the Tecnomatix Technologies Ltd. 1994 Stock Option Plan, or the 1994 Plan. The 1994 Plan currently authorizes the grant of options to acquire up to 864,250 of our ordinary shares to our employees, officers and directors. Options granted pursuant to the 1994 Plan are exercisable at an exercise price equal to the fair market value of our ordinary shares on the date of grant. Pursuant to the 1994 Plan, an optionee is entitled to exercise 40% of the options granted to him or her after the second anniversary of the date of grant and an additional 30% after each of the third and fourth anniversaries of the date of grant. As of March 15, 2004 options to purchase 45,700 of our ordinary shares were outstanding pursuant to the 1994 Plan and no ordinary shares were available for future grants of options. In July 1996, we adopted the Tecnomatix Technologies Ltd. 1996 Stock Option Plan, or the 1996 Plan. The 1996 Plan currently authorizes the grant of options to acquire up to 3,672,325 of our ordinary shares to our employees, officers and directors, at a purchase price of 100% of the fair market value of our ordinary shares on the date of grant. Pursuant to the 1996 Plan, the vesting of options granted to an optionee is determined by our compensation committee, and in the absence of such determination, an optionee is entitled to exercise 40% of the options granted to him or her after the second anniversary of the date of grant and an additional 30% after each of the third and fourth anniversaries of the date of grant. As of March 15, 2004, options to purchase 3,067,960 of our ordinary shares were outstanding pursuant to the 1996 Plan, and no ordinary shares were available for future grants of options. In July 1996, we adopted the 1996 Directors Stock Option Plan, or the Directors Plan. The Directors Plan currently authorizes the grant to our directors of options to acquire up to 364,000 of our ordinary shares. Under the Directors Plan, an optionee is entitled to exercise 20% of the options granted to him or her after the second anniversary of the date of grant, and an additional 20% of the options after each of the third through the sixth anniversaries of the date of grant. Options granted pursuant to the Directors Plan expire on the earlier of the termination of the service of the director or the tenth anniversary of the date of grant. Our compensation committee may change the vesting provisions of the Directors Plan. As of March 15, 2004, options to purchase 248,000 of our ordinary shares were outstanding pursuant to the Directors Plan and 88,000 of our ordinary shares were available for future grants of options. In October 1998, our subsidiary, Tecnomatix Ltd. (previously named Robcad Technologies (1980) Ltd.) adopted the Robcad Technologies (1980) Ltd. Stock Option Plan, or the Robcad Plan. The Robcad Plan currently authorizes the grant to employees, officers and directors of Tecnomatix Ltd., its subsidiaries and affiliated companies of options to acquire up to 47,675 of our ordinary shares. The vesting and expiration provisions of the Robcad Plan are similar to those of the 1996 Plan. As of March 15, 2004 options to purchase 33,325 of our ordinary shares were outstanding under the Robcad Plan and no ordinary shares were available for future grants of options. In March 1999, we adopted the Performance Based Stock Option Plan, referred to as the Performance Plan, in connection with the acquisition of our U.S. subsidiary, Tecnomatix Unicam, Inc. The Performance Plan provides for the grant of options to employees, officers and consultants to acquire up to 171,499 of our ordinary shares. Of such options, one third vested in March 2000, based on certain revenue and operating goals that were achieved in 1999, and the remaining two thirds will vest on the seventh anniversary of the date of grant. Although the Performance Plan was designed for employees of Unicam and Exaline and only such employees were granted option pursuant to it, the Performance Plan may be used for other employees of our company and its subsidiaries. As of March 15, 2004, options to purchase 148,417 of our ordinary shares were outstanding under the Performance Plan and 500 ordinary shares were available for future grants of options. -56- In December 2002 we adopted the Tecnomatix Technologies Ltd. 2003 Global Share Option Plan, or the 2003 Plan. Our board of directors also authorized reductions in the number of shares available for future grants under the 1994 Plan, the 1996 Plan, the Directors Plan, the Robcad Plan and the Performance Plan and concurrent increases in the number of shares available for future grants under the 2003 Plan. Pursuant to these resolutions, the number of our ordinary shares subject to the Directors Plan, the 1996 Plan, the Robcad Plan and the Performance Plan was decreased by an aggregate of 644,381 of our ordinary shares. In September 2003, our board of directors approved the increase of the number of our ordinary shares authorized for grant under the 2003 Plan by 100,000 shares. Accordingly, the number of our ordinary shares subject to the 2003 Plan is currently 744,381. Our board of directors may make additional reductions and increases in the number of authorized shares under our stock option plans from time to time. Our Officers, directors, employees and consultants and those of our subsidiaries are eligible to participate in the 2003 Plan. Our board of directors and compensation committee have broad discretion to determine the terms of grants of options under the 2003 Plan, including type, amount of shares subject to the options, exercise price and vesting schedule. As of March 15, 2004, options to purchase 690,250 of our ordinary shares were outstanding under the 2003 Plan and 50,381 of our ordinary shares were available for future grants of options. Currently, we utilize only the 2003 Plan to grant options to our employees, officers and directors. In December 2000, we adopted the Tecnomatix Technologies Ltd. 2000 Employee Share Purchase Plan, or the Share Purchase Plan, pursuant to which our employees and employees of certain of our subsidiaries were able to purchase up to 500,000 of our ordinary shares. Every six months, each employee was entitled to purchase ordinary shares for an amount of up to 10% of his or her salary at that period, but no more than 750 of our ordinary shares. The purchase price under the Share Purchase Plan was the lower of 85% of the price of our ordinary shares on the Nasdaq National Market at the beginning of such six-month period or 85% of the price of our ordinary shares on the Nasdaq National Market at the end of such six-month period. The Share Purchase Plan terminated on November 30, 2003. As of such date, our employees purchased 475,318 of our ordinary shares under the Share Purchase Plan. ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. MAJOR SHAREHOLDERS The following table sets forth, as of March 24, 2004, certain information with respect to the beneficial ownership of our ordinary shares held by each person known to us to beneficially own more than 5% of our outstanding ordinary shares. With respect to the holdings of SCP Private Equity II, LLC, Shlomo Dovrat, Harel Beit-On and Avi Zeevi, we have relied both on reports filed by this entity and these persons with the Securities and Exchange Commission and on our records. With respect to the holdings of Yozma Venture Capital Ltd., we have relied on reports filed by this entity with the Securities and Exchange Commission and on information provided to us supplementally by this entity.
IDENTITY OF PERSON OR GROUP NUMBER OF ORDINARY SHARES PERCENT OF CLASS(2) --------------------------- ------------------------- ------------------- BENEFICIALLY OWNED(1) --------------------- Shlomo Dovrat(3)................... 1,030,508 8.35% Harel Beit-On(4)................... 986,829 7.92% SCP Private Equity II, LLC.(5) .... 863,252 7.20% Yozma Venture Capital Ltd.(6)...... 670,524 5.60% Avi Zeevi(7)....................... 203,443 1.69% Aharon Dovrat(8)................... 102,000 0.85%
-57- (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Ordinary shares relating to options currently exercisable or exercisable within 60 days of the date of this annual report are deemed outstanding for computing the beneficial ownership percentage of the person holding such securities but are not deemed outstanding for computing the beneficial ownership percentage of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them. (2) All percentages are calculated based on 11,982,227 of our issued and outstanding ordinary shares as of March 24, 2004. Such number excludes 1,956,853 of our ordinary shares that are held by one of our wholly owned subsidiaries. (3) Shlomo Dovrat is a party to certain understandings with Avi Zeevi and Harel Beit-On and therefore may be deemed to beneficially own the ordinary shares held by such persons included on this table. Mr. Dovrat expressly disclaims beneficial ownership of such shares. In addition, Mr. Dovrat is a major shareholder and director of A. S. Dovrat Management Ltd., which provides advisory services to D. Partners (Israel) L.P. and D. Partners (BVI) L.P., investment funds which hold 90,427 and 167,936 of our ordinary shares, respectively. Mr. Dovrat is also a major shareholder of Dovrat & Co. Ltd., the parent company of the general partner of D. Partners (Israel) L.P. Mr. Dovrat expressly disclaims beneficial ownership of the 258,363 of our ordinary shares held by these investment funds. For additional information about the beneficial ownership of ordinary shares by Mr. Dovrat, see "Item 6: Directors, Senior Management and Employees - Share Ownership". (4) Harel Beit-On is a party to certain understandings with Shlomo Dovrat and Avi Zeevi and therefore may be deemed to beneficially own the ordinary shares held by such persons included on this table. Mr. Beit-On expressly disclaims beneficial ownership of such shares. For additional information about the beneficial ownership of ordinary shares by Mr. Beit-On, see "Item 6: Directors, Senior Management and Employees - Share Ownership". (5) The ordinary shares beneficially held by SCP Private Equity II, LLC, or SCP Management, consist of 723,488 ordinary shares held directly by USDATA Corporation (all of which USDATA has agreed to vote in the same manner as recommended by our board of directors) and 139,764 ordinary shares held directly by SCP Private Equity Partners II, L.P., or SCP Partnership (all of which SCP Partnership has agreed to vote in the same manner as recommended by our board of directors). The aggregate of 863,252 ordinary shares was purchased from us in September 2003 by USDATA and SCP Partnership as part of the asset acquisition transaction described in Item 4 and Item 10C of this annual report. SCP Partnership is the primary stockholder of USDATA. SCP Management is the manager of SCP Private Equity II General Partner, L.P., which in turn is the general partner of SCP Partnership. Pursuant to a certain management agreement, SCP Management exercises voting and investment powers on behalf of SCP Partnership, which include the power to make voting and investment decisions regarding the securities held by SCP Partnership. Accordingly, SCP Management may be deemed to beneficially own the 723,488 shares held by USDATA and the 139,764 ordinary shares held by SCP Partnership. In addition, Wachovia Bank National Association currently holds 222,319 of our ordinary shares as an escrow agent pursuant to the provisions of a certain escrow agreement dated September 19, 2003 entered into by USDATA, SCP Partnership, Wachovia Bank and us in connection with the USDATA asset acquisition transaction. Under the escrow agreement, such 222,319 shares will be held in escrow by Wachovia Bank for a period of up to 18 months following the consummation of the asset acquisition transaction, and may be used to indemnify us in the event of a breach of the representations and warranties made by USDATA in the asset purchase agreement. Upon certain dates until the expiration of the 18-month period, and assuming no claim for indemnification will be submitted by us to the escrow agent by such dates, all such 222,319 shares will be gradually released by Wachovia Bank to USDATA. If all of such shares are released to USDATA, SCP Management will beneficially hold (directly and through its control over USDATA) an aggregate of 1,085,571 of our ordinary shares, representing 9.07% of our currently issued and outstanding ordinary shares. In March 2004, we agreed to provide a loan in the amount of $400,000 to USTADA Corporation. Upon consummation of the loan will be granted asecurity interest in such 222,319 shares in connection with the extension by us of a loan in the amount of $400,000 to USDATA. Pursuant to the terms of such loan, if USDATA does not repay the loan in full in accordance with the terms of such loan, we will have the right to receive from Wachovia Bank, at the time of release of such shares from escrow as provided above, such number of shares that will have, as of the date of such release, an aggregate fair market value equal to the amount of the foregoing loan not repaid to us by USDATA. See also "Item 10C Additional Information - Material Contracts" for information regarding arrangement with respect to voting and standstill provisions with respect to the ordinary shares beneficially held by SCP Management. -58- (6) Yozma Venture Capital Ltd. purchased 594,595 of these shares from SunGard Data Systems, Inc. in June 2001, as part of the sale of shares by SunGard described below. (7) Avi Zeevi is a party to certain understandings with Shlomo Dovrat and Harel Beit-On and therefore may be deemed to beneficially own the ordinary shares held by such persons included on this table. Mr. Zeevi expressly disclaims beneficial ownership of such shares. For additional information about the beneficial ownership of ordinary shares by Mr. Zeevi, see "Item 6: Directors, Senior Management and Employees - Share Ownership". (8) Aharon Dovrat is a major shareholder and director of A. S. Dovrat Management Ltd., which provides advisory services, among others, to D. Partners (Israel) L.P. and D. Partners (BVI) L.P., investment funds which hold 90,427and 167,936 of our ordinary shares, respectively. Mr. Dovrat is also a major shareholder of Dovrat & Co. Ltd., the parent company of the general partner of D. Partners (Israel) L.P. Mr. Dovrat expressly disclaims beneficial ownership of such 258,363 ordinary shares held by these investment funds. Pursuant to a power of attorney granted to Mr. Dovrat, he may exercise certain rights with respect to 110,528 of our ordinary shares held by Aldon Holding Ltd., and as a result he may be deemed to beneficially own such ordinary shares. Mr. Dovrat expressly disclaims beneficial ownership of such shares. For additional information about the beneficial ownership of ordinary shares by Mr. Dovrat, see "Item 6: Directors, Senior Management and Employees - Share Ownership". RECORD HOLDERS As of March 24, 2004, there were 81 record holders of our ordinary shares, of which 57 represented United States record holders owning an aggregate of approximately 70.4% of our outstanding ordinary shares. SIGNIFICANT CHANGES IN PERCENTAGE OWNERSHIP BY MAJOR SHAREHOLDERS SunGard Data Systems, Inc., which was our largest shareholder (approximately 17%), sold, in a series of separate private transactions that closed on June 29, 2001, all of our shares that it held at a price per share of $9.25. Among the purchasers were Harel Beit-On, our chairman of the board, Shlomo Dovrat, our vice chairman of the board, other members of our board of directors, Yozma Venture Capital Ltd. and other affiliated parties, which in the aggregate purchased approximately 10.5% of our share capital at such time. On January 1, 2003 we repurchased from Harel Beit-On, our chairman of the board who also served at such time as our chief executive officer, 110,000 of our ordinary shares, representing approximately 1% of our issued and outstanding ordinary shares at such time. The shares were purchased for consideration of $843,700, representing a price per share of $7.67. See Item 7B "Related Party Transactions" for additional information regarding this transaction. On September 19, 2003, we acquired substantially all of the assets and assumed certain liabilities of USDATA Corporation pursuant to an Asset Purchase Agreement dated July 29, 2003, as amended on September 19, 2003. In consideration of the acquired assets we issued 945,807 of our ordinary shares, of which 723,488 ordinary shares were issued and delivered to USDATA and 222,319 ordinary shares were issued to Wachovia Bank National Association, as escrow agent, which shares will be held in escrow for up to 18 months following the consummation of the transaction. In connection with this asset purchase transaction, SCP Private Equity Partners II, L.P., the primary stockholder of USDATA, purchased from us 139,764 ordinary shares for an aggregate purchase price of $2,000,000 pursuant to a Share Purchase Agreement dated July 29, 2003, as amended on September 19, 2003. See Item 4A "- History and Development of the Company", Item 5 "Operating and Financial Review and Prospects" and Item 10C "Material Contracts" for additional information regarding this transaction. The ordinary shares held by the shareholders described in this Section have the same voting rights as all of our other ordinary shares. -59- B. RELATED PARTY TRANSACTIONS In July of 1999 we entered into an agreement with A.T.L. Management Services Ltd., or A.T.L., a company in which Shlomo Dovrat, our vice chairman of the board, Harel Beit-On, our chairman of the board, and Avi Zeevi, a member of our board, each have beneficial interests. Until December 31, 2002 the agreement with A.T.L. provided for an annual management fee of $400,000 in consideration for strategic management and business and financial consulting services to be provided by A.T.L. As of January 1, 2003 the annual management fees were reduced to $300,000. We paid to A.T.L. under this agreement management fees in the amount of $400,000 in each of 2001 and 2002 and $300,000 in 2003. In October 1998 and June 1999, we granted to Harel Beit-On, our chairman of the board, loans in an aggregate principal amount of $1,020,000. The loans, which bore interest at a rate of 6.8% per annum, matured as of December 31, 2002 and the outstanding amount of the loans including all accrued interest as of December 31, 2002 was $1,257,629. On December 31, 2002 and January 1, 2003 Mr. Beit-On repaid in cash $100,000 and $300,000, respectively, of the outstanding amount of these loans to us. In addition, as of January 1, 2003, we repurchased 110,000 of our ordinary shares from Mr. Beit-On for a total amount of $843,700, representing a price per share of $7.67, equal to the average closing price of our ordinary shares as quoted on the Nasdaq National Market during the three-month period prior to the date of the repurchase. The consideration was used to offset the outstanding balance of the loans. Due to the lower than anticipated price per share for the repurchase transaction, there was an outstanding balance left in the amount of $13,929 that was repaid to us by Mr. Beit-On. The cash repayment of the loan was funded also by using the net proceeds of a compensatory retention bonus in the gross amount of $300,000 paid to Mr. Beit-On in connection with his commitment to continue serving us as either our chief executive officer or chairman of our board of directors until December 31, 2005. In the event that Mr. Beit-On terminates his service to us, he shall be required to return to us one third of the compensatory retention bonus for each year in which he failed to provide a full year of service. In March and April 2001 we provided to Amir Livne, our executive vice president of business development and strategy, loans denominated in NIS aggregating $100,000. The loans were provided to Mr. Livne pursuant to a Letter of Agreement entered into in January 2001, as subsequently amended. The loans were linked to the Israeli consumer price index and bore interest at the rate provided in regulations promulgated from time to time under the Israeli Tax Ordinance. Two thirds of the loans (principal and accrued interest thereon) were forgiven after two years of Mr. Livne's employment on December 31, 2002 and one third of the loans (principal and accrued interest thereon) were repaid to us by Mr. Livne upon the expiration of three years of his employment on December 31, 2003. Any taxes applicable to the forgiven loans were borne by Mr. Livne. In March 2004, we agreed to provide a loan in the amount of $400,000 to USTADA Corporation from which we acquired substantially all of the assets and assumed certain liabilities in September 2003. The principal amount of the loan will be payable 90 days after the first day on which a certain registration statement to be filed by us with the Securities and Exchange Commission for the registration of the ordinary shares issued by us to USDATA and SCP Private Equity Partners II, L.P. (see "Major Shareholders" above) is declared effective by the Securities and Exchange Commission. The principal of the loan shall bear interest at a rate of three-month LIBOR plus 2.075%, beginning on the effective date of the foregoing registration statement, and such interest will be due on the maturity date of the principal. To secure the loan, USDATA will grant us a continuing lien on and security interest in all of its rights and interests in the 222,319 ordinary shares that are subject to the escrow agreement referred to under "Major Shareholders" above. Pursuant to the terms of the loan, if USDATA does not repay the loan in full in accordance with its terms, we will have the right to receive from Wachovia Bank, at the time of release of such shares from escrow, such number of shares that will have, as of the date of such release, an aggregate fair market value equal to the amount of the loan not repaid to us by USDATA. C. INTEREST OF EXPERT AND COUNSEL Not applicable. -60- ITEM 8. FINANCIAL INFORMATION A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION FINANCIAL STATEMENTS: Our consolidated audited financial statements are included in this annual report in "Item 18: Financial Statements" and incorporated herein by this reference. LEGAL PROCEEDINGS: We are not a party to any material litigation and are not aware of any pending or threatened litigation that would have a material adverse effect on us or our business. DIVIDENDS: We have never paid dividends on our ordinary shares. We intend to retain future earning for use in our business and do not presently anticipate paying dividends in the foreseeable future. Our future dividend policy will be determined by our board of directors and will be based upon conditions then existing including our results of operations, financial conditions, current and anticipated cash needs, contractual restrictions and other conditions as our board of directors may deem relevant. B. SIGNIFICANT CHANGES Since the date of the annual consolidated financial statements included in this annual report, no significant change has occurred. -61- ITEM 9. THE OFFER AND LISTING A. OFFER AND LISTING DETAILS The following table lists the high and low reported closing prices of our ordinary shares on the Nasdaq National Market for the periods indicated: PERIOD HIGH LOW - ------ ---- --- FIVE MOST RECENT YEARS: 1999.............................. $32.25 $11.62 2000.............................. $48.62 $ 4.06 2001.............................. $14.30 $ 3.56 2002.............................. $15.44 $ 7.10 2003.............................. $13.36 $ 6.30 EIGHT MOST RECENT QUARTERS AND SUBSEQUENT PERIOD: First Quarter 2002....................... $15.44 $13.00 Second Quarter 2002...................... $13.45 $ 8.40 Third Quarter 2002....................... $ 9.68 $ 7.20 Fourth Quarter 2002...................... $ 8.83 $ 7.10 First Quarter 2003....................... $ 8.47 $ 6.69 Second Quarter 2003...................... $11.20 $ 6.30 Third Quarter 2003....................... $11.33 $ 7.77 Fourth Quarter 2003...................... $13.36 $ 8.72 First Quarter 2004 (until March 24).... $14.48 $12.48 MOST RECENT SIX MONTHS: September 2003........................... $ 9.65 $ 8.35 October 2003........................... $10.85 $ 8.72 November 2003........................... $11.55 $10.59 December 2003............................ $13.36 $10.70 January 2004............................. $14.48 $13.54 February 2004............................ $13.90 $12.76 March 2004 (until 24).................. $13.50 $12.48 On March 24, 2004, the last reported closing price of our ordinary shares on the Nasdaq National Market was $12.48 per share. Our $97,750,000 principal amount of 5.25% convertible subordinated notes initially due in August 2004 were registered under the Securities Act of 1933, as amended, and have been designated for trading in Nasdaq's Private Offerings, Resale and Trading through Automated Linkage Market. The notes were not otherwise listed on any securities exchange and were not included in any automated inter-dealer quotation system. As of December 31, 2003, we redeemed an outstanding principal amount of $14,799,000 of these notes. See Item 4A "History and Development of the Company" and Item 5 "Operating and Financial Review and Prospects" for additional information regarding the redemption of our notes. -62- C. MARKETS Our ordinary shares are quoted on the Nasdaq National Market under the symbol "TCNO". ITEM 10. ADDITIONAL INFORMATION A. SHARE CAPITAL - NOT APPLICABLE B. MEMORANDUM AND ARTICLES OF ASSOCIATION OBJECTS AND PURPOSES The objects and purposes of our company appear in our Memorandum of Association and include taking all actions permissible under applicable laws; developing, marketing and manufacturing products for computer-aided design and manufacturing in the electronics industry; developing business opportunities in various technological industries and acquiring companies and products in such industries; and effecting any transaction which will assist us, in the view of our management, in relation to our operations. APPROVAL OF SPECIFIED RELATED PARTY TRANSACTIONS The Companies Law imposes a duty of care and a duty of loyalty on all our office holders as defined below, including our directors and executive officers. The duty of care requires an office holder to act with the level of care, which a reasonable office holder in the same position would have acted under the same circumstances. The duty of loyalty generally requires an office holder to act in good faith and for the good of our company. An "office holder" as defined in the Companies Law is a director, a general manager, a chief executive officer, a deputy general manager, a vice general manager, other managers directly subordinate to the general manager and any person who fills one of the above positions without regard to title. The Companies Law and our articles of association require that our office holders promptly disclose any personal interest that they may have and all related material information known to them, in connection with any existing or proposed transaction by us. Once the office holder complies with these disclosure requirements, our board of directors may approve a transaction between us and the office holder, or a third party in which the office holder has a personal interest. A transaction that is adverse to our interest cannot be approved. If the transaction is an extraordinary transaction as defined under the Companies Law, then, in addition to the approval of our board of directors, it also requires the approval of our audit committee before our board approval and, in specified circumstances, subsequent shareholder approval. Any transaction between us and one of our directors relating to the conditions of the director's service, including in relation to exculpation, insurance or indemnification, or in relation to the terms of the director's service in any other capacity requires our audit committee approval before our board approval and subsequent shareholder approval. The Companies Law also provides that a director with an interest in an extraordinary transaction brought before our board of directors or the audit committee for its approval may not vote on the approval and may not be present in the quorum of our board or audit committee discussing the issue. However, this rule would not apply if a majority of our directors or a majority of the members of our audit committee also had an interest in the transaction. Under our articles of association, our board can, among other things, determine our plans of activity and the principles of financing such plans, examine our financial situation and set the framework of credit which we may take and decide to issue a series of debentures. Our directors are not subject to any age limit requirement, nor are they disqualified from serving on our board of directors because of a failure to own our shares. -63- RIGHTS, PREFERENCES AND RESTRICTIONS UPON SHARES Our articles of association authorize one class of shares, which are our ordinary shares. We may declare a dividend to be paid to the holders of our ordinary shares and allocated among them in proportion to the sums paid up or credited as paid up on account of the nominal value of their respective shareholdings, without taking into account any premium paid for the shares. Our board may declare dividends only out of retained earnings, or earnings derived over the two most recent fiscal years, whichever is higher. Our articles provide that our board may declare and pay dividends without any future action by our shareholders. All unclaimed dividends may be invested or otherwise used by the board for our benefit until those dividends are claimed. In the event an unclaimed dividend is claimed, only the principal amount of the dividend will be paid to the person entitled to the dividend. If we liquidate, after satisfying liabilities to creditors and subject to the rights of holders of shares, if any, with any special rights upon winding up, our assets will be distributed to the holders of our ordinary shares in proportion to their holdings. Holders of our ordinary shares have one vote for each paid-up ordinary share held of record on all matters submitted to a vote of our shareholders. These voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future. Our articles provide that our directors are elected by an ordinary resolution of a general meeting of our shareholders. Our ordinary shares do not have cumulative voting rights in the election of directors. Accordingly, the holders of our ordinary shares representing more than 50% of our voting power have the power to elect all directors. However, our directors (other than external directors, who are appointed pursuant to the provisions of the Companies Law) are apportioned into three classes: (a) one class to hold office until our annual meeting of shareholders to be held in 2004, (b) a second class to hold office until our annual meeting of shareholders to be held in 2005 and (c) a third class to hold office until our annual meeting of shareholders to be held in 2006. We may, subject to the applicable provisions of the Companies Law, issue redeemable shares and subsequently redeem them. In addition, our board may make calls upon shareholders in respect of any sum that has not been paid up in respect of any shares held by those shareholders. Under the Companies Law, the disclosure requirements that apply to our office holders also apply to a controlling shareholder of a public company and, therefore, apply to us. A controlling shareholder includes a shareholder that holds 25% or more of our voting rights if no other shareholder own more than 50% of our voting rights. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and the terms of compensation of a controlling shareholder who is an office holder, require the approval of our audit committee, our board of directors and our shareholders. The shareholder approval requires that: (a) the majority of shares voted at the meeting, including at least one third of the shares of disinterested shareholders voted at the meeting, vote in favor of the transaction; or (b) the total number of shares of disinterested shareholders voted against the transaction does not exceed one percent of the aggregate voting rights in our company. The Companies Law also requires a shareholder to act in good faith towards us and towards our other shareholders and to refrain from abusing his power in our company, including in connection with voting at a shareholders' meeting on: o Any amendment to our articles of association; o An increase in our authorized capital; o A merger; or o Approval of some of the acts and transactions that require shareholder approval. A shareholder has the general duty to refrain from depriving our other shareholders of their rights. Any controlling shareholder, any shareholder that knows that it possesses the power to determine the outcome of a shareholder vote and any shareholder that, under the provisions of our articles of associations, has the power to appoint any of our office holders, is under a duty to act in fairness towards us. The Companies Law does not describe the substance of this duty. -64- MODIFICATIONS OF SHARE RIGHTS Under our articles of association, the rights attached to any class may be varied by adoption of the necessary amendment of our articles of association, provided that the holders of shares of the affected class approve the change by a class meeting in which the holders of at least 75% of the shareholders present at the meeting, in person or by proxy, with the right to vote on the issue approve the change. Our articles of association differ from the Companies Law in this respect, as under the law changes in the rights of shareholders require the consent of a majority of the voting power of the affected class represented at the meeting and voting on the change. In addition, our articles of association require for quorum at a meeting of a particular class of shares, the presence of one shareholder holding at least 75% of the shares of that class. However, the Companies Law requires for quorum the presence of two shareholders holding at least 25% of the voting power in the specific class. Our articles of association also require, in order to amend them, the approval of the holders of at least 75% of the shareholders present at a meeting, in person or by proxy, with the right to vote on the issue. However, the Companies Law requires only the consent of a majority of the voting power of the company represented at a meeting and voting on the change for amendment of articles of association. SHAREHOLDERS MEETINGS AND RESOLUTIONS We are required to hold an annual general meeting of our shareholders once every calendar year, but no later than 15 months after the date of the previous annual general meeting. All meetings other than the annual general meeting of shareholders are referred to as extraordinary general meetings. Our board may call extraordinary general meetings whenever it sees fit, at such time and place, within or without the State of Israel, as it may be determined. In addition, the Companies Law provides that the board of a public company, such as ours, is required to convene an extraordinary meeting upon the request of (a) any two directors of the company or one quarter of the company's board of directors or (b) one or more shareholders holding, in the aggregate, (i) five percent of the outstanding shares of the company and one percent of the voting power in the company, or (ii) five percent of the voting power in the company. We received from Nasdaq an exemption from the requirement under Nasdaq rule 4350(g) to solicit proxies and provide proxy statements of all meetings of shareholders and provide copies of such proxy solicitation material to Nasdaq. However, we provide to our record shareholders a letter informing them of the shareholders meeting together with a notice that includes a brief description of the matters to be considered at the meeting and a proxy card. We furnish such materials to the Securities and Exchange Commission through the submission of a report on Form 6-K. The quorum required by our articles of association for a meeting of shareholders consists of at least two shareholders present in person or by proxy who hold or represent between them at least 33.3% of our voting power. A meeting adjourned for lack of quorum is adjourned to the same day in the following week at the same time and place or any time and place as the chairman of the meeting decides with the consent of the holders of a majority of the voting power represented at such meeting. At such reconvened meeting, the required quorum consists of any shareholders present in person or represented by proxy holding at least 25% of our voting rights. In connection with the quorum required for a reconvened meeting, we received from Nasdaq an exemption from the requirement under Nasdaq rule 4350(f), pursuant to which a listed company has to provide in its by-laws that the quorum for any meeting of the holders of common stock shall not be less than 33 1/3% of the outstanding shares of the company's common voting stock. Notwithstanding the foregoing, our articles of association provide that a resolution in writing signed by all our shareholders then entitled to attend and vote at general meetings or to which all such shareholders have given their written consent (by letter, telegram, facsimile or otherwise) shall be deemed to have been unanimously adopted by a duly convened general meeting of shareholders. Our articles of association enable our board to fix a record date to allow us to determine the shareholders who are entitled to notice of, or to vote at, any general meeting of our shareholders. The record date may not be more than 40 days before the date of the meeting. Each shareholder of record as of the record date determined by our board may vote the shares then held by that shareholder unless all calls and other sums then payable by the shareholder in respect of his or her shares have not been paid. LIMITATION ON OWNERSHIP OF SECURITIES The ownership and voting of our ordinary shares by non-residents of Israel are not restricted in any way by our articles of association or by the laws of the State of Israel, except for shareholders who are subjects of countries which are in a state of war with Israel. -65- MERGERS AND ACQUISITIONS; ANTI-TAKEOVER PROVISIONS The Companies Law includes provisions with respect to the approval of corporate mergers that are applicable to us. These provisions require that the board of directors of each company that is party to the merger approve the transaction. In addition, the shareholders of each company must approve the merger by a vote of 75% of the company's shares, present and voting on the proposed merger at a shareholders' meeting. In determining whether the requisite majority has approved the merger, shares held by the other party to the merger or any person holding at least 25% of such other party or otherwise affiliated with such other party are excluded from the vote. The Companies Law does not require court approval of a merger other than in specified situations. However, upon the request of a creditor of either party to the proposed merger, a court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties of the merger to their creditors. A merger may not be completed unless at least 70 days have passed from the time that a request for the approval of the merger has been filed with the Israeli registrar of companies. This request may be filed once a shareholder meeting has been called to approve the merger. The Companies Law also provides that the acquisition of shares in a public company on the open market must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become a 25% shareholder of the company. The rule does not apply if there already is another 25% shareholder of the company. Similarly, the law provides that an acquisition of shares in a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become a 45% shareholder of the company, unless there already is a 50% shareholder of the company. If, following any acquisition of shares, the purchaser would hold 90% or more of the shares of the company that acquisition must be made by means of a tender offer for all of the target company's shares. An acquirer who wishes to eliminate all minority shareholders must do so by means of a tender offer and acquire 95% of all shares not held by or for the benefit of the acquirer prior to the acquisition. However, in the event that the tender offer to acquire that 95% is not successful, the acquirer may not acquire tendered shares if by doing so the acquirer would own more than 90% of the shares of the target company. Our articles of association contain provisions which could delay, defer or prevent a change in our control. These provisions include the staggered board provisions described above under the caption "Rights, Preferences and Restrictions upon Shares." Our articles of association provide that the staggered board provision cannot be amended without approval of the greater of (a) holders of at least 75% of the voting power represented at a shareholders meeting and voting on any such amendment, or (b) holders of a majority of the outstanding voting power of all our shares. OWNERSHIP THRESHOLD Our articles of association do not include any provision with respect to the ownership threshold above which shareholder ownership must be disclosed. CHANGES IN CAPITAL Our articles of association enable us to increase or reduce our share capital. Any such changes are subject to the provisions of the Companies Law and must be approved by a resolution passed by a majority of at least 75% of our shareholders present, in person or by proxy, at a general meeting voting on such change in the capital. Our articles of association differ from the Companies Law in this respect, as under the law changes in capital require approval only of a majority of the voting power of a company represented at the relevant shareholders meeting and voting thereon. In addition, certain transactions which have the effect of reducing capital, such as the declaration and payment of dividends and the issuance of shares for less than their nominal value, require a board resolution and court approval. -66- C. MATERIAL CONTRACTS LEASE AGREEMENT On June 1, 2003, Tecnomatix Ltd., our wholly owned Israeli subsidiary, entered into a lease agreement with Intergama Assets (1961) Ltd. pursuant to which it leased approximately 30,000 square feet in an office building located in Herzliya, Israel. We use the space in this building for our corporate headquarters, research and development, marketing and administrative facilities. The term of the lease is for five years expiring on September 30, 2007. The annual rent (including maintenance fees) for the premises is $480,000. Of this amount, the maintenance fees for the premises and the rent for the parking space are linked to the Israeli consumer price index. Under the agreement, Tecnomatix Ltd. has an option, effective from January 1, 2004 and expiring on December 31, 2004, to lease additional space in the building and a right of first refusal with respect to certain other space in the building. The parties agreed that the lessor will make certain improvements in the premises on its own expense. In addition, Tecnomatix Ltd. may make certain agreed upon renovations of the premises at the expense of the lessor, in which case the rent for the office space will be adjusted and the total annual rent may be increased up to $537,102. Tecnomatix Ltd. may not transfer its rights under the agreement or sublease the premises in whole or in part to any third parties without the prior written consent of the lessor except that it may sublease the premises to us or one of our subsidiaries in which our holdings exceed 50%. CREDIT LINE In April 2003, we obtained a credit line from Bank Hapolaim in an aggregate principal amount of $25,000,000. As of December 31, 2003 we drew the full amount under the credit line and used a portion of the credit line to refinance our 5.25% convertible subordinated notes, thereby reducing our payable interest and generating capital gains from repurchase of the notes. Loans under this credit line bear interest at a rate equal to the three-month LIBOR rate at the time of a draw plus 2.075%. The credit line matures full four years after withdrawal. Unless we take advantage of our right of prepayment of the credit, the repayment of a principal amount of $10,000,000 under the line of credit is required to be made in equal quarterly payments, commencing 15 months after withdrawal, and repayment of the remaining amounts under the line of credit is required to be made upon the maturity of the line of credit or the earlier maturity of certain bonds deposited with Bank Hapoalim to secure repayment. In connection with the credit line we created a floating charge over our assets and the assets of our Israeli subsidiary, Tecnomatix Ltd., in favor of Bank Hapoalim, to create a fixed charge over certain bonds and cash deposits, and to maintain certain financial ratios which include (a) a covenant to maintain certain levels of cash, cash equivalents, bonds and deposits, as long as the credit line is outstanding with such level being initially $30,000,000 and gradually decreasing as we progress with repayment of the credit line; (b) commencing with the third quarter of 2004, an average quarterly EBITDA of at least $1,000,000 in the preceding three quarters; (c) a ratio of shareholders equity to total assets of not less than 40% and an amount of shareholders equity of not less than $33,000,000, and (d) a ratio of current assets to current liabilities (excluding amounts which were due under our convertible notes and excluding then current maturities under the credit line) of at least 1:1.5. Our 5.25% convertible notes were effectively subordinated to any obligations arising under the credit line to the extent of the value of the assets that may from time to time be subject to the floating charge and the fixed charge. The credit line documentation contains representations and warranties, covenants, conditions and events of default that are customary for similar financings in Israel. Those covenants include the financial covenants described above, covenants regarding the use, maintenance and transfer of the assets that may from time to time be subject to the floating charge, restrictions on repayment of shareholder indebtedness (excluding payments made pursuant to the repurchase or repayment of our 5.25% convertible notes), future pledges, mergers, acquisitions, consolidations and other reorganizations. -67- Events of default under the debenture include (a) failure to pay principal, interest, fees or other amounts under the credit line when due; (b) violation of covenants that is not cured within 30 days; (c) failure of any representation or warranty to be true and that is not cured within 30 days; (d) appointment of a receiver or the occurrence of other enforcement actions in respect of any of the assets that may from time to time be subject to the floating charge, provided that such assets are equal in value to at least $500,000; (e) certain events of bankruptcy; (f) cessation of our business for at least 60 days; (g) other material events that may materially impair our financial status in relation to our status prior to any such events; or (h) a change of control. The debenture defines a change of control as the acquisition by any person who does not hold 5% or more of our outstanding ordinary shares as of the date of the debenture (other than a shareholder that is a member of our board of directors as of such date or is a direct or indirect affiliate of any such director) of more than 30% of our outstanding ordinary shares. However, such event would not be a change of control if, at the time that any such person acquires 30% or more of our outstanding ordinary shares, the aggregate amount of our outstanding ordinary shares held by all persons that are either members of our board of directors at such time, were members of our board of directors as of the date of the debenture or are entities affiliated directly or indirectly with any such persons, exceeds the number of our ordinary shares held by the person who acquired 30% or more of our outstanding ordinary shares. SHARE REPURCHASE AND BUY-BACK AGREEMENT On January 1, 2003 we entered into a Repurchase and Buy-Back Agreement with Harel Beit-On, our chairman of the board who also served as our chief executive officer at such time, pursuant to which we repurchased from Mr. Beit-On 110,000 of our ordinary shares, representing approximately 1% of our then issued and outstanding ordinary shares. The shares were purchased for consideration of $843,700, representing a price per share of $7.67, equal to the average closing price of our ordinary shares as quoted on the Nasdaq National Market during the three-month period prior to the date of the repurchase. The consideration was used to offset the portions of the outstanding balance of the loans provided by us to Mr. Beit-On. LOAN AGREEMENT In March and April 2001 we provided to Amir Livne, our executive vice president of business development and strategy, loans denominated in NIS aggregating $100,000. The loans were provided to Mr. Livne pursuant to a Letter of Agreement entered into in January 2001, as subsequently amended. The loans were linked to the Israeli consumer price index and bore interest at the rate provided for pursuant to the regulations promulgated under the Israeli Tax Ordinance, from time to time. Two thirds of the loans (principal and accrued interest thereon) were forgiven after two years of Mr. Livne's employment on December 31, 2002 and one third of the loans (principal and accrued interest thereon) was repaid to us by Mr. Livne upon the expiration of three years of his employment on December 31, 2003. Any taxes applicable to the forgiven loans were borne by Mr. Livne. ASSET PURCHASE AGREEMENT AND SHARE PURCHASE AGREEMENT On July 29, 2003, we and Tecnomatix Technologies, Inc., our U.S. wholly owned subsidiary, entered into an asset purchase agreement, as amended, with USDATA Corporation (incorporated in Delaware), a North American developer of production management products based in Richardson, Texas, and certain of its subsidiaries pursuant to which we acquired substantially all of the assets and assumed certain liabilities of USDATA. The acquisition was consummated on September 19, 2003. As consideration for the acquired assets, we issued to USDATA 945,807 of our ordinary shares, of which 222,319 ordinary shares are held in escrow by Wachovia Bank National Association until the 18-month anniversary of the consummation of the transaction. In connection with this transaction, USDATA and we entered into a standstill agreement dated October 19, 2003 under which USDATA agreed that until September 18, 2010, it shall not (i) make, or offer to make, certain additional acquisitions of our securities, (ii) solicit or participate in the solicitation of proxies with respect to our voting securities, or seek to influence any person with respect to the voting of such voting securities, (iii) enter into any voting agreements with respect to any of our securities; (iv) seek control of our board of directors or management; or (v) exercise any voting rights with respect to our ordinary shares against the taking of the foregoing actions. USDATA also agreed, under the terms of the standstill agreement, that (i) until September 18, 2010, it shall not transfer any voting securities, or securities convertible into voting securities, to certain holders of 5% or greater of the total voting securities at the time of transfer; (ii) until September 18, 2004, it shall not directly or indirectly transfer any voting securities or securities convertible into voting securities (with the exception of certain limited transactions); (iii) in any 90-day period during the four-year period beginning on September 19, 2004 and ending on September 18, 2008, it shall not make certain transfers of ordinary shares in excess of 2% of the total voting securities at the time of such transfer; and (iv) it will agree, upon our request and the request of our underwriters, to enter into a market stand-off agreement restricting the transfer of any of our securities for a period of 90 days after the effective date of a registration statement relating to an underwritten public offering of our securities. In addition, USDATA agreed to certain voting obligations regarding our ordinary shares, including its agreement to vote all of the ordinary shares held by it in the same manner as recommended by our board of directors. -68- Concurrently with the execution of the asset purchase agreement, we entered into a share purchase agreement, as amended, with SCP Private Equity Partners II, L.P., the primary stockholder of USDATA, pursuant to which SCP purchased from us on September 19, 2003 139,764 ordinary shares for an aggregate purchase price of $2,000,000. Under the terms of the share purchase agreement, SCP assumed, with respect to such shares, the same restrictions and limitations that were assumed by USDATA as described above. In addition, SCP has the right to appoint one director to serve on our board of directors for as long as SCP beneficially owns voting securities constituting at least 5% of our total voting power. See also Item 6A, " Directors and Senior Management" and Item 19, "Exhibits". INFORMATION TECHNOLOGY SERVICES AGREEMENT On February 25, 2004, Tecnomatix Ltd., our wholly owned Israeli subsidiary, finalized a Services Agreement for HP Operations Services with Hewlett Packard (Israel) Ltd., pursuant to which we outsourced most of our worldwide information technology, or IT, operations to Hewlett Packard. Beginning May 1, 2004, or the Commencement Date, Hewlett Packard will be responsible for our IT infrastructure, hardware, IT software (other than various research and development tools), IT services and support at our offices worldwide for six years, which term may be extended by Tecnomatix Ltd., at its option, for an additional two years. In addition, the parties initiated a strategic relationship pursuant to which Hewlett Packard agreed to use best efforts to assist us in the development of our MPM business at customer sites worldwide. Pursuant to the terms of the Services Agreement: o Upon the completion of a ten-month transition and stabilization period during which Hewlett Packard will provide the services under the Services Agreement "as is", the services will be provided according to service level measurements set out in the Services Agreement and Hewlett Packard will be subject to a penalty credit mechanism, tied to the level of services delivered as against the agreed service levels. o Hewlett Packard will establish regional support centers at our major offices worldwide, which will be manned by permanent on-site personnel. Such centers will provide first level support, hardware fixing and installation, on site technical support, backup operations, software installation and support. Other offices will be manned by visiting personnel. o A monitoring and control center will be established at Hewlett Packard's offices in Ra'anana, Israel, which will operate six days a week / 24 hours a day and provide worldwide support after office hours; o All of our IT employees worldwide, except three employees, will be transferred and employed by Hewlett Packard or its subcontractors; o Hewlett Packard was granted a right to use all of the hardware and IT related software owned by Tecnomatix Ltd. and its affiliates prior to the Commencement Date solely for the purpose of providing the services under the Services Agreement in consideration of a one-time payment to Tecnomatix Ltd., which will be paid on the Commencement Date; the right of use will terminate in the event of early termination or expiration of the Services Agreement; o Hewlett Packard will replace our hardware and software assets at a rate specified in the technology refresh program agreed by the parties; Hewlett Packard will purchase hardware and software for our new employees pursuant to their work definition and will include such assets in the refresh program subsequent to their purchase; o Tecnomatix Ltd. may purchase additional services, other than the services defined under the Services Agreement, by utilizing hours from the "bank of hours" set by the parties at reduced rates if such service may be provided by Hewlett Packard within 50 hours or at special rates which are lower than the Hewlett Packard list price; Tecnomatix Ltd. is also entitled to purchase or lease from Hewlett Packard new assets which are not included in the Services Agreement at specified discounted rates off the Hewlett Packard Internet price list; -69- o Tecnomatix Ltd. may terminate the Services Agreement (i) in the event of a material breach by Hewlett Packard that was not timely cured, (iii) in the event of change of control of Hewlett Packard, and (iii) for convenience after eighteen months from the Commencement Date upon providing Hewlett Packard with a six-month prior notice; Hewlett Packard may terminate the Services Agreement (i) for convenience after three years from the Commencement Date upon providing Tecnomatix Ltd. with a one-year prior notice, and (ii) at any time if Tecnomatix Ltd. fails to pay any undisputed sums equal to or greater than 20% of the quarterly target price on an accumulated basis, due to Hewlett Packard for more than 45 days after the due date. o In the event of early termination of the Services Agreement all the IT assets will be transferred back to Tecnomatix Ltd. in consideration for the payment to Hewlett Packard of the net book value of such assets. In addition, Tecnomatix Ltd. will pay to Hewlett Packard certain termination fees decreasing gradually over the term of the Services Agreement. o In the event of expiration or termination of the Services Agreement, Hewlett Packard will provide to Tecnomatix Ltd. termination assistance services in order to ensure smooth transition of the services and the IT assets to Tecnomatix Ltd. or a new outsourcer. For additional information about the services agreement see exhibit 4(a)(5) to this annual report. D. EXCHANGE CONTROLS In 1998, the Israeli currency control regulations were liberalized significantly, as a result of which Israeli residents generally may freely deal in foreign currency and non-residents of Israel currency and assets. There are currently no Israeli currency control restrictions on remittances of dividends on our ordinary shares or the proceeds from the sale of our shares provided all taxes were paid or withheld; however, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time. Non-residents of Israel may freely hold and trade our securities. Neither our memorandum of association nor our articles of association nor the laws of the State of Israel restrict in any way the ownership or voting of our ordinary shares by non-residents, except that such restrictions may exist with respect to citizens of countries that are in a state of war with Israel. E. TAXATION ISRAELI TAXATION AND INVESTMENT PROGRAMS The following is a summary of some current tax laws of the State of Israel and certain material Israeli tax considerations as they apply to our shareholders and us. The following also includes a discussion of certain Israeli government programs benefiting various Israeli businesses, including us. We derive significant tax and other benefits from various programs and laws in Israel. If such programs or laws are eliminated or reduced, with or without notice, or if we cease to meet the conditions for such programs or laws, we may be materially adversely affected. To the extent that the discussion is based on legislation yet to be subject to judicial or administrative interpretation, there can be no assurance that the views expressed herein will accord with any such interpretation in the future. This discussion is not intended and should not be construed as legal or professional tax advice and does not cover all possible tax considerations applicable to investment in or holding of our ordinary shares. CORPORATE TAX The general corporate tax rate in Israel is currently 36%, although the tax rate on capital gains was lowered to 25% on January 1, 2003. However, the effective tax rate payable by a company, which like us derives income from an "approved enterprise", may be considerably less. See "-Law for the Encouragement of Capital Investments, 1959" below. -70- Dividends received by an Israeli company from foreign entities are generally subject to Israeli tax of up to 25%. LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969 Under the Law for the Encouragement of Industry (Taxes), 5729-1969, referred to as the Industry Law, a company qualifies as an "industrial company" if it is a resident of Israel and at least 90% of its income in a given tax year, determined in NIS (exclusive of income from marketable securities, 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 manufacturing. We believe that we currently qualify as an industrial company. See Note 14 of the notes to our consolidated financial statements. Pursuant to the Industry Law, an industrial company is entitled to deduct a portion of the purchase price of patents or certain other tangible property rights used for the development of the company (other than goodwill) over a period of eight years beginning with the year in which such rights were first used. Additionally, under certain income tax regulations, industrial companies qualify for special depreciation rates for machinery, equipment and buildings used by an industrial enterprise. These rates vary based on factors such as the date of commencement of operation and the number of work shifts. An industrial company owning an approved enterprise (see "Law for the Encouragement of Capital Investments, 1959" below) may choose between the above depreciation rates and the depreciation rates available to approved enterprises. Qualification as an industrial company under the Industry Law is not conditioned upon the receipt of prior approval from any Israeli Government authority. No assurance can be given that we will continue to qualify as an industrial company or that we will be able to use tax benefits available to companies so qualifying. LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959 The Law for the Encouragement of Capital Investments, 1959, referred to as the Investment Law, provides that a capital investment in a production facility (or other eligible assets) may, upon approval by the Israeli investment center, be designated as an "approved enterprise." Each certificate of approval for an approved enterprise relates to a specific investment program in the approved enterprise, delineated both by the financial scope of the investment and by the physical characteristics of the facility or the asset. An approved enterprise is entitled to certain benefits, including Israeli government cash grants or tax benefits. The tax benefits from any such certificate of approval relate only to taxable profit attributable to the specific Approved Enterprise. An approved enterprise approved after April 1, 1986, may elect to forego any entitlement to the grants otherwise available under the Investment Law and, in lieu of the foregoing, participate in an alternative benefits plan, under which the undistributed income from the approved enterprise is fully exempt from corporate tax for a defined period of time. The period of tax exemption ranges between two and ten years, depending upon the location within Israel of the approved enterprise and the type of approved enterprise. Upon expiration of the exemption period, the approved enterprise would be eligible for the otherwise applicable reduced tax rates under the Investment Law for the remainder, if any, of the otherwise applicable benefits period. The reduced corporate tax rate is generally 25%. However, further reductions in tax rates depending on the percentage of the foreign investment in a 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, would apply. 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 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 the production commenced or 14 years from the year of receipt of approved enterprise status. -71- We have eleven approved enterprises. We elected to participate in the alternative benefits plan. Since April 1993, following our initial public offering in the United States, we have been a "foreign investors' company", as defined by the Investment Law and we are therefore entitled to a ten year period of benefits (instead of a seven-year period), for enterprises approved after April 1993. The period of benefits of our approved enterprises will expire during the period 2000 through 2010, and is conditioned upon maintaining our approved enterprise status. There can be no assurance that the current benefit plan will continue to be available or that we will continue to qualify for such benefits. A company that has elected to participate in the alternative benefits plan and that subsequently pays a dividend out of the income derived from the 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 benefits plan (generally 10% - 25%). The dividend recipient is taxed at the reduced withholding tax rate of 15%, applicable to dividends from the approved enterprises if the dividend is distributed within 12 years after the benefits period or other rate provided under a treaty. The withholding tax rate will be 25% after such period. In the case of a company with a foreign investment level (as defined by the Investment Law) of 25% or more, the 12-year limitation on reduced withholding tax on dividends does not apply. Tax should be withheld by the company at source, regardless of whether the dividend is converted into foreign currency. TAXATION UNDER INFLATIONARY CONDITIONS The Income Tax (Inflationary Adjustments) Law, 1985, attempts to overcome some of the problems presented to a traditional tax system by an economy experiencing rapid inflation, which was the case in Israel at the time the law was enacted. Generally, the Inflationary Adjustments law provides significant tax deductions and adjustments to depreciation methods and tax loss carry forwards to compensate for loss of value resulting from an inflationary economy. Our and our Israeli subsidiaries' taxable income is determined under this law. CAPITAL GAINS TAX Pursuant to recent changes in Israeli tax law, capital gain from the sale of our ordinary shares will generally be subject to 15% Israeli capital gains tax effective January 1, 2003, as long as our ordinary shares are quoted on Nasdaq. Although we intend to maintain our status as an Industrial Company and the quotation of our ordinary shares on Nasdaq, there can be no assurance that our intention will be carried out and, consequently, that the 15% Israeli capital gains tax will continue to apply. However, as of January 1, 2003 nonresidents of Israel will be exempt from capital gains tax in relation to the sale of our ordinary shares for so long as (a) our ordinary shares are listed for trading on a stock exchange outside of Israel, (b) the capital gains are not accrued or derived by the nonresident shareholder's permanent enterprise in Israel, (c) the ordinary shares in relation to which the capital gains are accrued or derived were acquired by the nonresident shareholder after the initial listing of the ordinary shares on a stock exchange outside of Israel and (d) neither the shareholder nor the particular capital gain is otherwise subject to certain sections of the Israeli Income Tax Ordinance. In addition, pursuant to the Convention between the Government of the State of Israel and the Government of the United States of America with Respect to Taxes on Income (the "Tax Treaty"), gains derived from the sale, exchange or disposition of our ordinary shares by a person who qualifies as a resident of the United States within the meaning of the Tax Treaty and who is entitled to claim the benefits afforded to United States residents under the Tax Treaty ("Treaty U.S. Resident"), would not be subject to Israeli capital gains tax, unless such Treaty U.S. Resident owned, directly or indirectly, shares representing 10% or more of the voting power of our company at any time during the 12-month period preceding such sale, exchange or disposition. -72- DIVIDENDS PAID TO NON-RESIDENTS Non-residents of Israel are subject to income tax on income derived from sources in Israel. On distributions of dividends, other than bonus shares (stock dividends), tax at the rate of 25% generally will be withheld at source, unless a different rate is provided in a treaty between Israel and the shareholder's country of residence. Under the Tax Treaty, the maximum tax on dividends paid to a holder of shares who is a Treaty U.S. Resident is 25%. However, as mentioned above (see "--Law for the Encouragement of Capital Investments, 1959"), dividends paid out of income derived from an Approved Enterprise during the benefit period are subject to a reduced rate of tax of 15%. The Tax Treaty further provides that a 12.5% Israeli withholding tax would apply to dividends paid to a United States corporation owning 10% or more of an Israeli company's voting stock during, in general, the current and preceding tax years of the Israeli company. The lower 12.5% rate applies only to dividends from income not derived from an Approved Enterprise in the applicable period and does not apply if the company has certain amounts of passive income. A non-resident of Israel who receives dividends from which tax was withheld at source, generally is exempt from the duty to file returns in Israel in respect of such income, provided such income was not derived from a business conducted in Israel by the taxpayer, and, thus, the tax withheld is also the final tax in Israel on the dividend paid. UNITED STATES FEDERAL TAX CONSIDERATIONS The following discussion of United States federal income tax considerations is based on the United States Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations promulgated thereunder , judicial decisions and published positions of the United States Internal Revenue Service (the "IRS"), all as in effect on the date hereof and which are subject to change at any time, possibly with retroactive effect. This discussion does not address all aspects of United States federal income taxation (including potential application of the alternative minimum tax) that may be relevant to a particular shareholder based on such shareholder's particular circumstances. In particular, the following discussion does not address the United States federal income tax consequences of purchasing, holding or disposing of ordinary shares to shareholders that own (directly, indirectly or through attribution) 10% or more of our outstanding voting stock or that are broker-dealers, insurance companies, tax-exempt organizations, financial institutions, non-resident aliens of the United States or taxpayers whose functional currency is not the U.S. dollar. The following discussion also does not address any aspect of state, local or non-U.S. tax laws. Further, this summary generally considers only a U.S. Holder (as defined below) that will own our ordinary shares as capital assets (generally, assets held for investment) and does not consider the tax treatment of persons that will hold our ordinary shares through a partnership or other pass-through entity. Each prospective investor is advised to consult such person's tax advisor with respect to the specific United States federal, state and local tax consequences to such person of purchasing, holding or disposing of our ordinary shares. TAXATION OF U.S. HOLDERS For purposes of this discussion, a "U.S. Holder" is any holder of our ordinary shares that is: (i) a citizen or resident of the United States: (ii) a corporation, or other entity treated as a corporation for United States federal income tax purposes, created or organized under the laws of the United States or any state thereof or the District of Columbia; (iii) an estate the income of which is included in gross income for United States federal income tax purposes regardless of its source; (iv) a trust (a) if a United States court is able to exercise primary supervision over its administration and one or more United States persons have the authority to control all of its substantial decisions, or (b) the trust has on effect a valid election to be treated as a United States trust for United States federal income tax purposes, and a "Non-U.S. Holder" is any holder of our ordinary shares that is an individual, corporation, estate or trust and that is not a U.S. Holder. DIVIDEND DISTRIBUTIONS To the extent paid out of our current or accumulated earnings and profits as determined under Untied States federal income tax principles, a distribution made with respect to our ordinary shares (including the amount of any Israeli withholding tax thereon) will be includible for United States federal income tax purposes in the income of a U.S. Holder as a taxable dividend. To the extent that such distribution exceeds our earnings and profits and provided that we were not a PFIC as to such U.S. Holder, such distribution will be treated as a non-taxable return of capital to the extent of the U.S. Holder's adjusted basis in our ordinary shares and thereafter as taxable capital gain. Dividends paid by us will not generally be eligible for the dividends-received deduction allowed to corporations under the Code. Dividends paid in a currency other than the U.S. dollar will be includible in income of a U.S. Holder in a U.S. dollar amount based on the spot rate of exchange on the date of receipt. A U.S. Holder that receives a foreign currency distribution and converts the foreign currency into U.S. dollars subsequent to receipt will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally be United States source ordinary income or loss. -73- Subject to certain conditions and limitations set forth in the Code, U.S. Holders will generally be able to elect to claim a credit against their United States federal income tax liability for an Israeli withholding tax deducted from dividends received in respect of our ordinary shares. For purposes of calculating the foreign tax credit, dividends paid on our ordinary shares will be treated as income from sources outside the United States and generally will constitute foreign source "passive income" or, in the case of certain holders, "financial services income." In lieu of claiming a tax credit, U.S. Holders may instead claim a deduction for foreign taxes withheld, subject to certain limitations. THE RULES RELATING TO THE DETERMINATION OF THE AMOUNT OF FOREIGN INCOME TAXES WHICH MAY BE CLAIMED AS FOREIGN TAX CREDITS ARE COMPLEX AND U.S. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS TO DETERMINE WHETHER AND TO WHAT EXTENT A CREDIT WOULD BE AVAILABLE. SALE, EXCHANGE OR OTHER DISPOSITION Upon the sale or other disposition of our ordinary shares, a U.S. Holder will generally recognize gain or loss for United States federal income tax purposes in an amount equal to the difference between the U.S. dollar value of the amount realized in consideration for the disposition of our ordinary shares and the U.S. Holder's adjusted tax basis in our ordinary shares. Provided we were not a passive foreign investment company, or PFIC, as to such U.S. Holder, such gain or loss will generally be long-term capital gain or loss if the ordinary shares have been held for more than one year on the date of the disposition. Any gain or loss will generally be treated as United States source income or loss for United States federal income tax purposes. In addition, a U.S. Holder that receives foreign currency upon disposition of the ordinary shares and converts the foreign currency into U.S. dollars subsequent to receipt will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally be United States source ordinary income or loss. PASSIVE FOREIGN INVESTMENT COMPANY STATUS Generally a foreign corporation is treated as a PFIC for United States federal income tax purposes if either (i) 75% or more of its gross income (including the pro rata gross income of any company (United States or foreign) in which such corporation is considered to own 25% or more of our ordinary shares by value) for the taxable year is passive income, generally referred to as the "income test," or (ii) 50% or more of the average value of its assets (including the pro rata fair market value of the assets of any company in which such corporation is considered to own 25% or more of our ordinary shares by value) during the taxable year produce or are held for the production of passive income in the taxable year, generally referred to as the "asset test". Although we do not believe that we have been PFIC for any tax year through and including 2001, there can be no assurances that we will not become a PFIC in the future. If we were deemed to be a PFIC for any taxable year during which a U.S. Holder held our ordinary shares and such holder failed to make either a "QEF election" or a "mark-to-market election" (as described below): o gain recognized by the U.S. Holder upon the disposition of, as well as income recognized upon receiving certain dividends on, ordinary shares would be taxable as ordinary income; o the U.S. Holder would be required to allocate such dividend income and/or disposition gain ratably over such holder's entire holding period for such ordinary shares; o the amount allocated to each year other than the year of the dividend payment or disposition would be subject to tax at the highest individual or corporate tax rate, as applicable, and an interest charge would be imposed with respect to the resulting tax liability; o the U.S. Holder would be required to file an annual return on IRS Form 8621 regarding distributions received on, and gain recognized on dispositions of, ordinary shares; and -74- o any U.S. Holder that acquired ordinary shares upon the death of a U.S. Holder would not receive a step-up of the income tax basis to fair market value of such shares. Instead, such U.S. Holder beneficiary would have a tax basis equal to the decedent's tax basis, if lower. Although a determination as to a corporation's PFIC status is made annually, an initial determination that a corporation is a PFIC for any taxable year will generally cause the above described consequences to apply for all future years to U.S. Holders that held shares in the corporation at any time during a year when the corporation was a PFIC and that made neither a QEF election nor mark-to-market election (as discussed below) with respect to such shares on their tax return that included the last day of the corporation's first taxable year as a PFIC. This will be true even if the corporation ceases to be a PFIC in later years. However, with respect to a PFIC that does not make any distributions or deemed distributions, the above tax treatment would apply only to U.S. Holders that realize gain on their disposition of shares in the PFIC. In the event that we are deemed to be a PFIC for any taxable year, if a U.S. Holder makes a valid QEF election with respect to ordinary shares: o the U.S. Holder would be required for each taxable year for which we are a PFIC to include in income such holder's pro rata share of our (i) net ordinary earnings as ordinary income and (ii) net capital gain as long-term capital gain, in each case computed under United States federal income tax principles, even if such earnings or gains have not been distributed, unless the shareholder makes an election to defer this tax liability and pays an interest charge; o the U.S. Holder would not be required under these rules to include any amount in income for any taxable year during which we do not have net ordinary earnings or capital gain; and o the U.S. Holder would not be required under these rules to include any amount in income for any taxable year for which we are not a PFIC. The QEF election is made on a shareholder-by-shareholder basis. Thus, any U.S. Holder of our ordinary shares can make its own decision whether to make a QEF election. A QEF election applies to all shares of the PFIC held or subsequently acquired by an electing U.S. Holder and can be revoked only with the consent of the IRS. A shareholder makes a QEF election by attaching a completed IRS Form 8621 including the information provided in the PFIC annual information statement, to a timely filed United States federal income tax return. The shareholder must receive certain information from us in order to make the election. If we are unable to provide the information, the election will not be available. It should be noted that U.S. Holders may not make a QEF election with respect to warrants or rights to acquire ordinary shares, and that certain classes of investors (for example, consolidated groups and grantor trusts) are subject to special rules regarding the QEF election. Under certain circumstances, a U.S. Holder may also obtain treatment similar to that afforded a shareholder that has made a timely QEF election by making an election in a year subsequent to the first year during the U.S. Holder's holding period that we are classified as a PFIC to treat such holder's interest as subject to a deemed sale and recognizing gain, but not loss, on such deemed sale in accordance with the general PFIC rules, including the interest charge provisions, described above and thereafter treating such interest as an interest in a QEF. Alternatively, a U.S. Holder of shares in a PFIC can elect to mark the shares to market annually, recognizing as ordinary income or loss each year the shares are held, as well as on the disposition of the shares, an amount equal to the difference between the shareholder's adjusted tax basis in the PFIC stock and its fair market value. Losses are allowed only to the extent of net mark-to-market gains previously included in income by the U.S. Holder under the election in prior taxable years. As with the QEF election, a U.S. Holder that makes a mark-to-market election would not be subject to deemed ratable allocations of gain, the interest charge, and the denial of basis step-up at death described above. Subject to our ordinary shares ever ceasing to be marketable, a mark-to-market election is irrevocable without obtaining the consent of the IRS and would continue to apply even in years that we are no longer a PFIC. U.S. Holders of our ordinary shares are urged to consult their tax advisors about PFIC rules, including the advisability, procedure and timing of making a QEF election, in connection with their holding of ordinary shares, including warrants or rights to acquire our ordinary shares. -75- TAXATION OF NON-U.S. HOLDERS Subject to the discussion below with respect to the United States backup withholding tax, a non-U.S. Holder will not generally be subject to United States federal income tax on dividends from our company, if any, or gain from the sale or other disposition of our ordinary shares, unless (i) such income is effectively connected with the conduct by the non-U.S. Holder of a United States trade or business, or in the case of a resident of a country which has an income tax treaty with the United States, such income is attributable to a permanent establishment (or in the case of an individual, a fixed place of business) in the United States; or (ii) with respect to any gain on the sale or other disposition of our ordinary shares realized by an individual non-U.S. Holder, such individual non-U.S. Holder is present in the United States for 183 days or more in the taxable year of the sale or other disposition and certain other conditions are satisfied. BACKUP WITHHOLDING AND INFORMATION REPORTING Under the Code, under certain circumstances, United States tax information reporting and "backup withholding" of United States federal income tax on dividends on, and the proceeds of dispositions of, ordinary shares may apply to both U.S. Holders and non-U.S. Holders. Backup withholding will not apply, however, to a holder that furnishes a correct taxpayer identification number or certificate of foreign status and makes any other required certification or that is otherwise exempt from backup withholding. Generally, a U.S. Holder will provide such certification on IRS Form W-9 and a non-U.S. Holder will provide such certification on IRS Form W-8. Any amounts withheld under the U.S. backup withholding rules will be allowed as a refund or credit against the U.S. Holder's or non-U.S. Holder's United States federal income tax liability, provided the required information is furnished to the IRS. F. DIVIDENDS AND PAYING AGENTS - NOT APPLICABLE. G. STATEMENT BY EXPERTS - NOT APPLICABLE. H. DOCUMENTS ON DISPLAY This annual report and the exhibits thereto, are available for inspection and copying at the public reference facilities of the Securities and Exchange Commission located a Room 1024, 450 Fifth Street, NW, Washington, D.C. 20549, and the Commission's regional offices located in New York, New York and Chicago, Illinois. Copies of all or any part of the annual report or other filings may be obtained from these offices after payment of fees required by the Commission. Please call the Commission at 1-800-SEC-0330 for further information. The Exchange Act file number for our Securities and Exchange Commission filing is 0-21222. The Commission also maintains a website at http://www.sec.gov from which certain filings may be accessed. All documents referenced herein concerning us are archived and may also be inspected at our head offices located at 16 Abba Eban Avenue, Herzliya 46120, Israel. Information about us is also available on our website at http://www.tecnomatix.com. Such information is not part of this annual report. I. SUBSIDIARY INFORMATION - NOT APPLICABLE. ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks from changes in foreign currency exchange rates and interest rates, which could impact our results of operations and financial condition. We seek to manage the exposure to these market risks through our regular operating and financing activities and through the use of foreign currency exchange contracts and other financial instruments. All of such financial instruments are managed and controlled under a program of risk management in accordance with established policies. These policies are reviewed and approved by our board of directors. Our treasury operations are subject to an internal audit on a regular basis. -76- FOREIGN CURRENCY RISK Revenues generated and costs incurred outside the U.S. are generally denominated in local non-U.S. dollar currencies. In 2001, 2002 and 2003, 71%, 70% and 67% of our revenues, respectively, were denominated in non-U.S. dollar currencies. Since our financial results are reported in U.S. dollars, fluctuations in the rates of exchange between the U.S. dollar and non-U.S. dollar currencies may have a material effect on our results of operations. Thus, an increase in the value of a particular currency relative to the U.S. dollar will increase the U.S. dollar reporting value for transactions in such currency, and a decrease in the value of such currency relative to the U.S. dollar will decrease the U.S. dollar reporting value for such transactions. This effect on the U.S. dollar reporting value for transactions is only partially offset by the impact that such fluctuations may have on our costs. In addition, since our revenues are generated in U.S. dollars and currencies other than the NIS, and a portion of our expenses is incurred and will continue to be incurred in NIS, we are exposed to risks resulting from the rate of inflation in Israel exceeding the rate of devaluation of the NIS against the U.S. dollar and other currencies or from such devaluation lagging behind inflation in Israel. We are a party to certain inter-company balances denominated in the following foreign currencies: Euro, Japanese Yen, British Pound, Singapore dollar, Swedish Krone and Danish Krona. We are exposed to fluctuations in our finance expenses that would result from certain changes in the exchange rate of such currencies against the U.S. dollar. To protect against such fluctuations, and due to the difficulties in foreseeing changes in the exchange rates between the U.S. dollar and such currencies, we entered during 2003 into forward transactions for consecutive three-month periods. As of December 31, 2003, we had entered into a (i) forward transaction to sell $3,168,000 for a total amount of NIS 14,000,000 that matured on several dates ending on April 15, 2004, and (ii) "cylinder" foreign currency transactions pursuant to which we entered into currency put option contracts to sell up to $2,749,000 for a total amount of NIS 12,000,000 in exchange for writing currency call option contracts to buy up to $2,655,000 for a total amount of NIS 12,000,000. These "cylinder" and forward transactions did not have a material effect on our financial results in 2003. During 2003, we entered into (i) "cylinder" foreign currency transactions pursuant to which we entered into currency put option contracts to sell up to $12,068,000 for a total amount of NIS 57,000,000 in exchange for writing currency call option contracts to buy up to $11,263,000 for a total amount of NIS 57,000,000 and (ii) a put option to sell up to an aggregate amount of $6,551,000 for a total amount of NIS 19,950,000. Following December 31, 2003, we entered into "cylinder" foreign currency transactions pursuant to which we entered into currency put option contracts to sell up to approximately $2,300,000 for an approximate total amount of NIS 10,000,000 in exchange for writing currency call option contracts to buy up to approximately $2,100,000 for an approximate total amount of NIS 10,000,000. These "cylinder" transactions were not reflected on our December 31, 2003 balance sheet. Until October 2002, we hedged against exposure arising from devaluation of the U.S. dollar against the NIS by maintaining NIS denominated bond portfolio. In October 2002, our investment committee resolved to sell all of our NIS denominated bond portfolio. To hedge against a possible exposure arising from devaluation of the U.S. dollar against the NIS, our investment committee resolved to purchase certain derivative instruments, including currency options and forward transactions. In April 2003, in light of the devaluation of the U.S. dollar against the NIS, our investment committee authorized management to sell all of the open derivative positions that were open as of that date. INTEREST RATE RISK Our exposure to market risk with respect to changes in interest rates relates primarily to our long-term investments and our line of credit with Bank Hapoalim. -77- STRUCTURE NOTES: Our long-term investments consist of Israeli Government, U.S. Governmental agencies and corporate marketable debt securities. In addition, part of our long-term investments consists of structure notes. During 2003, we increased the amount of structure notes held by us from approximately $3,000,000 in December 2002 to approximately $10,000,000 in December 2003. Such structure notes involve certain risks, including interest rate fluctuations, limited liquidity and market value decreases. However, structure notes typically enjoy a high rating and the risk with respect to the actual payment of the principal of such notes is relatively low. The interest rate on $9,000,000 of our structure note investments during the term of the bonds depends on the three-month, six-month or twelve-month LIBOR interest rate. The interest on $500,000 of our structure notes is not payable in the event the twelve-month LIBOR interest rate is less than 0% or above 3%, increasing annually to 6% over the maturity period. The interest on $7,500,000 of our structure notes is not payable in the event the six-month LIBOR interest rate is less then 0% or above 3%, increasing annually to 7.5% over the maturity period. The interest on $1,000,000 of our structure notes is not payable in the event the three-month LIBOR interest rate is less then 0% or above 7%. The table below presents the interest amounts payable to us in the event that the twelve-month, six-month or three-month LIBOR interest rate is between 3%-7% during the years 2004 through 2008 and thereafter:
INTEREST PAYABLE TO US ON STRUCTURE NOTES(1) (U.S DOLLARS IN THOUSANDS) Three-month, six-month or twelve- 2004 2005 2006 2007 2008 THEREAFTER(2) TOTAL month LIBOR ---- ---- ---- ---- ---- ------------- ----- INTEREST-RATE 3% ................................ $ 456 $ 483 $ 512 $ 512 $ 476 $ 1,196 $ 3,635 4% ................................ $ 371 $ 391 $ 447 $ 476 $ 476 $ 1,196 $ 3,356 5% ................................ $ 212 $ 291 $ 357 $ 413 $ 476 $ 1,196 $ 2,945 6% ................................ $ 75 $ 68 $ 132 $ 337 $ 415 $ 1,196 $ 2,222 7% ................................ $ 75 $ 46 $ 46 $ 72 $ 106 $ 469 $ 814
(1) The issuer of the U.S. dollar structure notes may call the structure notes prior to maturity. (2) Aggregate payable interest until maturity. The long-term investments are presented in our consolidated financial statements as "held to maturity" securities according to SFAS 115. The table below presents the book value amounts and related weighted average rates by date of maturity for our long-term investments:
-78- MATURITY DATE ------------- (U.S DOLLARS IN THOUSANDS) -------------------------- HELD TO MATURITY DEBT SECURITIES: 2004 2005 2006 2007 2008 THEREAFTER TOTAL - --------------------------------- ---- ---- ---- ---- ---- ---------- ----- U.S. dollar debt securities Fixed Interest Rate $ 1,004 $ 11,729 $ 1,538 - - - $ 14,267 Weighted Average Interest Rate 5.50% 5.30% 5.23% - - - 5.31% U.S. dollar debt securities Structure Notes (1) $ 1,500 $ 9,000 $ 10,000 Weighted Average Interest Rate (2) 4.33% 5.94% 5.71%
(1) The issuer of the U.S. dollar structure notes may call the structure notes prior to their maturity date. (2) Based upon the principal yield to maturity of the debt securities. LINE OF CREDIT WITH BANK HAPOALIM In March 2003, we entered into an agreement with Bank Hapoalim B.M. for the extension to us of a four-year $25,000,000 line of credit. Between July and September of 2003, we withdrew the full amount under the line of credit and began paying interest on such amount. Of such amount, $15,000,000 are repayable back-to-back with the redemption of our pledged bonds portfolio but not later than four years from the date on which the line of credit was first used. The amount of the pledged bonds, together with certain security ratios required by the bank, is approximately $16,000,000. Of this amount, $10,000,000 of the principal is repayable over a three-year period, commencing in October 2004. The securities for the loan include a fixed pledge in the amount of $16 million on our bonds portfolio and a floating charge on our assets. The interest rate on the loan is three-month LIBOR plus 2.075%. To protect against an increase in the interest rate payable under the line of credit, we entered into the following interest rate swap transactions, or IRS, with Bank Hapoalim: (i) An IRS to hedge against the $10,000,000 portion that is repayable commencing in October 2004, with an interest rate of 4.635%; and (ii) An IRS to hedge against $8,500,000 out of the $15,000,000 portion that is repayable back-to-back with the redemption of our pledged bonds portfolio, with an interest rate of 5.335%. ITEM 12 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES - Not applicable. PART II ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES There was no material default in the payment of any principal, interest, sinking fund installment or any of our indebtness or the indebtness of our subsidiaries. To date, we have not paid any dividends. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS Our memorandum of association or articles of association defining the rights of holders of our ordinary shares were not materially modified. -79- A. We have not materially modified or qualified the rights evidenced by our ordinary shares by issuing or modifying any other class of securities. B. Our ordinary shares are not secured by our assets. The assets, which secured our 5.25% convertible subordinated notes until their redemption in December 2003, were not withdrawn or substituted. C. The stock transfer agent of our ordinary shares and the trustee under our 5.25% convertible subordinated notes were not changed during 2003. D. Not applicable. ITEM 15. CONTROLS AND PROCEDURES (a) DISCLOSURE CONTROLS AND PROCEDURES - our management evaluated, with the participation of our principal executive and principal financial officers, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of December 31, 2003. Based on their evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures were effective as of December 31, 2003. (b) Not applicable. (c) Not applicable. (d) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING - There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during 2003, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT Our board of directors has determined that Aharon Dovrat, chairman of our audit committee, qualifies to serve as our audit committee financial expert in its resolutions of March 4, 2004. ITEM 16B. CODE OF ETHICS We adopted a code of business conduct and ethics that applies to all our employees, officers and directors, including our chief executive officer, chief financial officer, controller and persons performing similar functions. The code complies with the rules promulgated by the Securities and Exchange Commission and the rules of the Nasdaq National Market. We will provide to any person, without charge, upon request, a copy of the code of ethics and respond to any questions concerning the code. Requests to receive a copy of the code should be sent to us at our corporate headquarters located at 16 Abba Eban Avenue, Herzliya 46120, Israel, Attention: general counsel. The chairman of our audit committee may approve a request by our chief executive officer, chief financial officer, principal accounting officer, controller or any person performing similar functions for a waiver from the requirements of the code of ethics pertaining to (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationship; (ii) full, fair, accurate, timely and understandable disclosure in reports and documents that we must file with, or submit to, the Securities and Exchange Commission and in other public communications made by us; (iii) compliance with applicable governmental laws, rules and regulations; (iv) the prompt internal reporting of violation of the code to the chairman of our audit committee; and (v) accountability for adherence to the code; provided in each case that the person requesting such waiver provides to our audit committee a full disclosure of the particular circumstances relating to such request. The chairman of our audit committee will first determine whether a waiver of the relevant requirements of the code of ethics is required and, if such waiver is required, whether a waiver will be granted. The person requesting such waiver may be required to agree to certain conditions before a waiver or a continuing waiver is granted. -80- Any amendments to the code of ethics and all waivers from compliance with the code of ethics granted to the persons subject thereto have to be publicly disclosed by us as, and to the extent, required by any applicable law, rule and regulations. ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES AUDIT FEES The aggregate fees billed for professional services rendered to us by our principal accountants for the audit of our financial statements in 2002 and 2003 were $100,000 and $120,000, respectively. AUDIT-RELATED FEES We did not receive from our principal accountants any assurance or services related to the audit and review of our financial statements in 2002 and 2003. TAX FEES The aggregate fees billed for professional services rendered to us by our principal accountants for tax compliance, tax advice and tax planning in each of 2002 and 2003 was $10,000. The services provided to us by our principal accountants in both 2002 and 2003 related to the preparation and filing of our tax returns with the Israeli income tax authorities. ALL OTHER FEES We did not receive from our principal accountants any other products or services, other than the services disclosed above, in 2002 and 2003. AUDIT COMMITTEE APPROVAL On December 1, 2003 our audit committee approved the engagement of Brightman Almagor & Co., a member of Deloitte Touche Tohmatsu, as our independent auditors for the fiscal year ended December 31, 2003. In accordance with the provisions of the Companies Law, such engagement was approved by our board of directors on December 8, 2003 and ratified by our shareholders on December 22, 2003. The tax fees in the aggregate amount not to exceed $10,000 for 2003 were not pre-approved by our audit committee. Such amount was approved by our audit committee on March 30, 2004. ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES - Not applicable -81- ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
PERIOD (A) TOTAL (B) AVERAGE (C) TOTAL NUMBER (D) MAXIMUM NUMBER NUMBER OF PRICE PAID PER OF SHARES (OR (OR APPROXIMATE DOLLAR SHARES (OR SHARE (OR UNITS) UNITS) PURCHASED VALUE) OF SHARES (OR UNITS) AS PART OF PUBLICLY UNITS) THAT MAY YET BE PURCHASED ANNOUNCED PLANS PURCHASED UNDER THE OR PROGRAMS PLANS OR PROGRAMS - ------------------------ ----------------- ----------------- ------------------- ---------------------- January 2003 110,000 shares(1) $ 7.67 _ _ December 2003 850,000 shares $ 12.649 _ _ Total 960,000 shares _ _
(1) The shares were purchased by us from an affiliated person. (2) These shares were purchased by one of our subsidiaries from another subsidiary on December 22, 2003 and were subsequently purchased by us. PART III ITEM 17. FINANCIAL STATEMENTS Not applicable ITEM 18. FINANCIAL STATEMENTS Financial Statements of the Company. Report of Independent Public Accountants of Tecnomatix Technologies, Inc. Report of Independent Public Accountants of USDATA Corporation. Financial Statements of USDATA Corporation. ITEM 19. EXHIBITS 1 (1) Articles of Association (incorporated by reference to Exhibit 1 to the Annual Report on Form 20-F for the year ended December 31, 2000). (2) An English translation of the Hebrew original which is the official version of the Memorandum of Association (incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the registration statement on Form F-1 (File No. 33-56152) filed on February 25, 1993). 4(a) (1) An English translation of the Hebrew original, which is the official version of the Letter of Intent dated April 27, 2003 among Bank Hapoalim, Tecnomatix Technologies Ltd. and Tecnomatix Ltd. (incorporated by reference to Exhibit 4(b)(1) to the Annual Report on Form 20-F for the year ended December 31, 2002). (2) An English translation of the Hebrew original which is the official version of the Debenture between Tecnomatix Technologies Ltd. and Bank Hapoalim B.M. (incorporated by reference to Exhibit 4(b)(2) to the Annual Report on Form 20-F for the year ended December 31, 2002). -82- (3) Asset Purchase Agreement dated July 29, 2003 by and between USDATA Corporation, Tecnomatix Technologies Ltd. and certain other parties specified therein (incorporated by reference to Exhibit A to Schedule 13D of Tecnomatix Technologies Ltd. describing certain holding in the securities of USDATA Corporation, filed with the Securities and Exchange Commission on August 7, 2003). (4) Share Purchase Agreement dated July 29, 2003, by and between SCP Private Equity Partners II, L.P. and Tecnomatix Technologies Ltd. (incorporated by reference to Exhibit C to the Schedule 13D of Tecnomatix Technologies Ltd. describing certain holding in the securities of USDATA Corporation, filed with the Securities and Exchange Commission on August 7, 2003). (5) Services Agreement between Tecnomatix Ltd. and Hewlett Packard (Israel) Ltd. dated October 30, 2003, as amended by Amendment No. 1 thereto dated December 29, 2003 and Amendment No. 2 thereto dated February 25, 2004. (Portions of this exhibit have been omitted pursuant to a request for confidential treatment). 4(b) (1) Share Purchase and Buy Back Agreement dated January 1, 2003 between Tecnomatix Technologies Ltd. and Harel Beit-On, our chairman of the board of directors (incorporated by reference to Exhibit 4(b)(3) to the Annual Report on Form 20-F for the year ended December 31, 2002). (2) First Amendment dated January 26, 2003 to Letter of Agreement dated January 16, 2001 between Tecnomatix Technologies Ltd. and Amir Livne, executive vice president of business development and strategy (incorporated by reference to Exhibit 4(b)(4) to the Annual Report on Form 20-F for the year ended December 31, 2002). (3) Second Amendment dated December 1, 2003 to Letter of Agreement dated January 16, 2001 between Tecnomatix Technologies Ltd. and Amir Livne, executive vice president of business development and strategy. (4) An English translation of the Hebrew original, which is the official version of the Lease Agreement dated June1, 2003 between Tecnomatix Technologies Ltd. and Intergama Assets (1961) Ltd. and exhibits thereto (incorporated by reference to Exhibit 4(b)(5) to the Annual Report on Form 20-F for the year ended December 31, 2002). 4(c) (1) Tecnomatix Technologies Ltd. 1994 Stock Option Plan (incorporated by reference to Exhibit 10.8 to the registration statement on Form F-1 (File No. 333-3540)). (2) Tecnomatix Technologies Ltd. 1996 Stock Option Plan (incorporated by reference to Exhibit 4(c) to the Annual Report on Form 20-F for the year ended December 31, 2000). (3) 1996 Directors Stock Option Plan (incorporated by reference to Exhibit 4(c) to the Annual Report on Form 20-F for the year ended December 31, 2000). (4). Robcad Technologies (1980) Ltd. Stock Option Plan (incorporated by reference to Exhibit 4(c) to the Annual Report on Form 20-F for the year ended December 31, 2000). (5) Performance Based Stock Option Plan (incorporated by reference to Exhibit 4(c) to the Annual Report on Form 20-F for the year ended December 31, 2000). (6) Tecnomatix Technologies Ltd. 2000 Employee Share Purchase Plan (incorporated by reference to Exhibit 4(c) to the Annual Report on Form 20-F for the year ended December 31, 2000). (7) Tecnomatix Technologies Ltd. 2003 Global Share Option Plan and United States and Israel Appendixes (incorporated by reference to Exhibit 4(c) to the Annual Report on Form 20-F for the year ended December 31, 2003). 8. List of subsidiaries. -83- 12.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) 12.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) 13.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 13.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 14.1 Consent of Independent Public Accountants of Tecnomatix Technologies Ltd. 14.2 Consent of Independent Public Accountants of Tecnomatix Technologies, Inc. 14.3 Consent of Independent Public Accountants of USDATA Corporation. -84- SIGNATURES The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. TECNOMATIX TECHNOLOGIES LTD. By: /S/ JARON LOTAN --------------- Jaron Lotan President and chief executive officer Date: March 31, 2004 -85- TECNOMATIX TECHNOLOGIES LTD. CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 TECNOMATIX TECHNOLOGIES LTD. CONSOLIDATED FINANCIAL STATEMENTS CONTENTS -------- PAGE ---- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 2 CONSOLIDATED FINANCIAL STATEMENTS: BALANCE SHEETS as of December 31, 2003 and 2002 3-4 STATEMENTS OF OPERATIONS for the years ended December 31, 2003, 2002 and 2001 5 STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY for the years ended December 31, 2003, 2002 and 2001 6 STATEMENTS OF CASH FLOWS for the years ended December 31, 2003, 2002 and 2001 7-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9-37 -F 1- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE SHAREHOLDERS OF TECNOMATIX TECHNOLOGIES LTD. We have audited the accompanying consolidated balance sheets of Tecnomatix Technologies Ltd. ("the Company") and its subsidiaries at December 31, 2003 and 2002 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of certain subsidiaries, whose assets constitute approximately 27% and 20% of total consolidated assets at December 31, 2003 and 2002, respectively, and whose revenues constitute approximately 33%, 33%, and 32% of consolidated total revenues for the years ended December 31, 2003, 2002 and 2001, respectively. Those statements were audited by other auditors, whose reports have been furnished to us and our opinion, insofar as it relates to the amounts included for the abovementioned subsidiaries, is based solely on the report of those other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors referred to above provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries at December 31, 2003 and 2002 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/ BRIGHTMAN ALMAGOR & CO. CERTIFIED PUBLIC ACCOUNTANTS A MEMBER FIRM OF DELOITTE TOUCHE TOHMATSU Tel Aviv, Israel February 9, 2004 -F 2- TECNOMATIX TECHNOLOGIES LTD. CONSOLIDATED BALANCE SHEETS (U.S. DOLLARS IN THOUSANDS) DECEMBER 31, --------------------- 2 0 0 3 2 0 0 2 --------- --------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 9,232 $ 10,466 Short-term investments (Note 4) 70 5,981 Accounts receivable, net of allowance for doubtful accounts of $ 4,072 and $ 2,091, respectively 29,190 27,671 Other receivables and prepaid expenses (Note 16) 5,747 5,284 --------- --------- Total current assets 44,239 49,402 --------- --------- NON-CURRENT RECEIVABLES (Note 16) 1,108 915 --------- --------- LONG-TERM INVESTMENTS (Note 5) 24,556 25,569 --------- --------- PROPERTY AND EQUIPMENT (Note 6) Cost 31,710 29,203 Less - accumulated depreciation 26,082 23,095 --------- --------- 5,628 6,108 --------- --------- GOODWILL, NET (Note 7a) 25,829 17,210 --------- --------- OTHER ACQUIRED INTANGIBLES, NET (Note 7b) 2,444 -- --------- --------- OTHER ASSETS, NET (Note 8) 13,296 16,613 --------- --------- Total assets $ 117,100 $ 115,817 ========= ========= The accompanying notes are an integral part of the consolidated financial statements. -F 3- TECNOMATIX TECHNOLOGIES LTD. CONSOLIDATED BALANCE SHEETS (CONTD.) (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------------ 2 0 0 3 2 0 0 2 ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term bank loan (Note 10) $ 833 $ -- Accounts payable 4,644 2,950 Other payables and accrued expenses (Note 16) 19,163 14,956 Deferred revenue 7,130 4,659 ---------- ---------- Total current liabilities 31,770 22,565 ---------- ---------- LONG-TERM LIABILITIES Accrued restructuring expense (Note 3) 1,716 -- 5 1/4% convertible subordinated notes (Note 9) -- 37,428 Long-term bank loan, less current maturities (Note 10) 24,167 -- Accrued severance pay, net (Note 11) 1,095 907 ---------- ---------- Total long-term liabilities 26,978 38,335 ---------- ---------- COMMITMENTS AND CONTINGENT LIABILITIES (Note 12) SHAREHOLDERS' EQUITY (Note 13) Share capital: Ordinary shares of NIS 0.01 par value (Authorized - 20,000,000 shares, issued - 12,898,827 and 11,575,706 at December 31, 2003 and 2002, respectively, outstanding - 11,938,827 and 10,725,706 at December 31, 2003 and 2002, respectively) 44 40 Additional paid-in capital 83,876 71,948 Loans granted to purchase shares -- (1,158) Accumulated other comprehensive loss: Foreign currency translation adjustment (2,533) (4,083) Unrealized losses on marketable securities (131) (263) Unrealized losses on derivatives (153) -- Retained earnings (accumulated deficit) (8,707) 1,633 ---------- ---------- 72,396 68,117 Treasury shares, at cost (960,000 and 850,000 shares at December 31, 2003 and 2002, respectively) (14,044) (13,200) ---------- ---------- 58,352 54,917 ---------- ---------- Total liabilities and shareholders' equity $ 117,100 $ 115,817 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. -F 4- TECNOMATIX TECHNOLOGIES LTD. CONSOLIDATED STATEMENTS OF OPERATIONS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31, ----------------------------------------------- 2 0 0 3 2 0 0 2 2 0 0 1 ------------- ------------- ------------- REVENUES (Notes 2 and 17a): Software license fees $ 36,033 $ 36,385 $ 42,316 Services 50,224 45,620 44,584 ------------- ------------- ------------- Total revenues 86,257 82,005 86,900 COSTS AND EXPENSES: Cost of software license fees (Note 17b): Cost and expenses 10,114 8,062 7,851 Impairment of capitalized software development costs 2,180 -- 316 ------------- ------------- ------------- Total cost of software license fees 12,294 8,062 8,167 Cost of services 15,281 15,005 15,268 Amortization of acquired intangibles 136 2,491 7,758 Research and development, net (Note 17c) 14,960 14,812 19,216 Selling and marketing (Note 17f) 42,491 36,887 44,624 General and administrative 4,673 5,013 4,855 Write-off of long-term investment (Note 5) -- 457 -- Restructuring charges (Note 17d) 2,659 651 1,527 Impairment of software acquired (Note 17e) 937 375 -- In-process research and development and acquisition related costs (Note 3 and 17d) 3,530 -- -- ------------- ------------- ------------- TOTAL COSTS AND EXPENSES 96,961 83,753 101,415 ------------- ------------- ------------- OPERATING LOSS (10,704) (1,748) (14,515) Financial income (expense), net (Note 17g) 679 (799) 1,191 ------------- ------------- ------------- LOSS BEFORE TAXES ON INCOME (10,025) (2,547) (13,324) Taxes on income (Note 14) (212) 148 (54) ------------- ------------- ------------- LOSS AFTER TAXES ON INCOME (10,237) (2,399) (13,378) Company's share in loss of affiliated company (103) (431) (532) ------------- ------------- ------------- NET LOSS $ (10,340) $ (2,830) $ (13,910) ============= ============= ============= Basic and diluted loss per ordinary share $ (0.94) $ (0.27) $ (1.35) ============= ============= ============= Shares used in computing basic and diluted loss per ordinary share 11,054,556 10,607,140 10,366,125 ============= ============= =============
The accompanying notes are an integral part of the consolidated financial statements. -F 5- TECNOMATIX TECHNOLOGIES LTD. STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NUMBER OF ORDINARY NUMBER LOANS SHARES OF ADDITIONAL GRANTED TO NIS 0.01 TREASURY SHARE PAID-IN PURCHASE PAR VALUE SHARES CAPITAL CAPITAL SHARES ------------ -------- ------- ---------- ---------- Balance at January 1, 2001 11,136,023 (850,000) $ 38 $ 69,011 $ (1,136) Exercise of employees' options 20,056 (*) 169 Share purchases under ESPP 200,179 1 1,131 Loans granted to purchase shares (77) Comprehensive loss - Net loss for the year Other comprehensive loss - Unrealized loss on marketable securities Foreign currency translation adjustment Comprehensive loss ------------ -------- ------- ---------- ---------- Balance at December 31, 2001 11,356,258 (850,000) 39 70,311 (1,213) Exercise of employees' options 69,269 (*) 474 Share purchases under ESPP 150,179 1 1,163 Loans granted to purchase shares 55 Comprehensive loss - Net loss for the year Other comprehensive income - Unrealized income on marketable securities Foreign currency translation adjustment Comprehensive loss ------------ -------- ------- ---------- ---------- Balance at December 31, 2002 11,575,706 (850,000) 40 71,948 (1,158) Issuance of ordinary shares 1,085,571 3 10,387 Exercise of employees' options 112,590 (*) 656 Share purchases under ESPP 124,960 1 885 Loans granted to purchase shares (110,000) 1,158 Comprehensive loss - Net loss for the year Other comprehensive income - Unrealized loss on marketable securities Foreign currency translation adjustment Changes in net unrealized holding loss on derivative instruments Comprehensive loss ------------ -------- ------- ---------- ---------- Balance at December 31, 2003 12,898,827 (960,000) $ 44 $ 83,876 $ -- ============ ======== ======= ========== ==========
ACCUMULATED TOTAL OTHER RETAINED TREASURY SHARE- COMPREHENSIVE EARNINGS SHARES COMPREHENSIVE HOLDERS' INCOME (LOSS) (DEFICIT) AT COST LOSS EQUITY ------------- --------- --------- ------------- --------- Balance at January 1, 2001 $ (3,390) $ 18,373 $(13,200) $ 69,696 Exercise of employees' options 169 Share purchases under ESPP 1,132 Loans granted to purchase shares (77) Comprehensive loss - Net loss for the year (13,910) (13,910) (13,910) Other comprehensive loss - Unrealized loss on marketable securities (161) (161) (161) Foreign currency translation adjustment (956) (956) (956) ------------- Comprehensive loss $ (15,027) ------------- --------- --------- ============= --------- Balance at December 31, 2001 (4,507) 4,463 (13,200) 55,893 Exercise of employees' options 474 Share purchases under ESPP 1,164 Loans granted to purchase shares 55 Comprehensive loss - Net loss for the year (2,830) (2,830) (2,830) Other comprehensive income - Unrealized income on marketable 7 7 7 securities Foreign currency translation adjustment 154 154 154 ------------- Comprehensive loss $ (2,669) ------------- --------- --------- ============= --------- Balance at December 31, 2002 (4,346) 1,633 (13,200) 54,917 Issuance of ordinary shares 10,390 Exercise of employees' options 656 Share purchases under ESPP 886 Loans granted to purchase shares (844) 314 Comprehensive loss - Net loss for the year (10,340) (10,340) (10,340) Other comprehensive income - Unrealized loss on marketable 132 132 132 securities Foreign currency translation adjustment 1,550 1,550 1,550 Changes in net unrealized holding loss (153) on derivative instruments (153) (153) ------------- Comprehensive loss $ (8,811) ------------- --------- --------- ============= --------- Balance at December 31, 2003 $ (2,817) $ (8,707) $(14,044) $ 58,352 ============= ========= ========= =========
(*) Less than 1 thousand. The accompanying notes are an integral part of the financial statements. -F 6- TECNOMATIX TECHNOLOGIES LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------------------- 2 0 0 3 2 0 0 2 2 0 0 1 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (10,340) $ (2,830) $ (13,910) Adjustments to reconcile net loss to net cash provided by operating activities (Appendix A) 21,486 9,685 18,672 --------- --------- --------- Net cash provided by operating activities 11,146 6,855 4,762 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Long-term investments (295) (206) (874) Purchase of marketable securities (10,222) (18,484) (26,922) Proceeds from realization of marketable securities 11,746 11,914 29,519 Realization of (investment in) non-current receivables (29) (23) 18 Purchase of property and equipment and other assets (2,169) (3,088) (2,592) Capitalization of software development costs (3,937) (4,097) (5,103) Proceeds from sale of property and equipment 45 5 119 Acquisition of subsidiaries, net of cash acquired (Appendix B) 2,000 (111) -- --------- --------- --------- Net cash used in investing activities (2,861) (14,090) (5,835) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Repurchase of convertible notes (22,351) (5,709) (3,986) Redemption of convertible notes (14,910) -- -- Long-term Bank loan 25,000 -- -- Repayment of loans granted to purchase shares 314 100 -- Exercise of employees' options 656 474 169 Purchase of shares under Employee Share Purchase Plan (ESPP) 886 1,164 1,132 Short-term credit, net -- (720) 2 --------- --------- --------- Net cash used in financing activities (10,405) (4,691) (2,683) --------- --------- --------- Effect of exchange rate changes on cash 886 722 (403) --------- --------- --------- Net change in cash and cash equivalents (1,234) (11,204) (4,159) Cash and cash equivalents at beginning of year 10,466 21,670 25,829 --------- --------- --------- Cash and cash equivalents at end of year $ 9,232 $ 10,466 $ 21,670 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. -F 7- TECNOMATIX TECHNOLOGIES LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTD.) (U.S. DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------------------- 2 0 0 3 2 0 0 2 2 0 0 1 --------- --------- --------- APPENDIX A ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: In-process research and development $ 3,193 $ -- $ -- Company's share in loss of affiliated company 103 431 532 Minority interest in net loss of subsidiary -- (3) -- Depreciation and amortization 7,533 10,180 16,435 Impairment of software assets 3,117 -- 316 Write-off of investment in Visopt B.V -- 457 -- Gain from repurchase of the Company's convertible notes (156) (599) (1,393) Other (43) (298) 492 CHANGES IN ASSETS AND LIABILITIES, NET OF EFFECT OF PURCHASE OF SUBSIDIARY: Decrease (increase) in assets: Accounts receivable 1,002 (3,951) 6,512 Changes in trading marketable securities, net 5,984 4,828 -- Deferred income taxes -- 246 246 Other receivables and prepaid expenses 145 985 1,734 Increase (decrease) in liabilities: Accounts payable 781 (198) (862) Other payables and accrued expenses (105) (2,595) (4,914) Accrued severance pay, net (68) 202 (426) --------- --------- --------- $ 21,486 $ 9,685 $ 18,672 ========= ========= ========= APPENDIX B ACQUISITION OF SUBSIDIARIES, NET OF CASH ACQUIRED (Note 3) Working capital - excluding cash $ 3,894 $ 1,146 $ -- Property and equipment (168) (137) -- Other assets (54) -- -- In-process research and development (3,193) -- -- Goodwill and other intangible assets (10,902) (1,120) -- Long term liabilities 2,033 -- -- Share capital 10,390 -- -- --------- --------- --------- $ 2,000 $ (111) $ -- ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 1,208 $ 5,166 $ 5,191 ========= ========= ========= Taxes $ 272 $ 260 $ 252 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. -F 8- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 1 - GENERAL Tecnomatix Technologies Ltd. (the "Company") is an Israeli corporation engaged in the development, selling, marketing and support of Manufacturing Process Management ("MPM") software tools for the collaborative development and optimization of manufacturing processes across the extended enterprise. The Company's products are used by world-leading automotive, electrionics and aerospace companies and their suppliers and other discrete manufacturing companies. The Company's software solutions enable the optimization of the manufacturing process chain, increased throughput, and reduced time-to-market, time-to-volume and product costs. The Company operates in two business segments, Mechanical and Electronics. The Company sells and supports its products mainly in Europe, the United States and Asia. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS The preparation of the financial statements in conformity with generally accepted accounting principles 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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FINANCIAL STATEMENTS IN U.S. DOLLARS The reporting currency of the Company is the U.S. dollar ("dollar"). The dollar is the functional currency of the Company and its subsidiaries in Israel and in the United States. Transactions and balances originally denominated in dollars are presented at their original amounts. Non-dollar transactions and balances are remeasured into dollars in accordance with the principles set forth in Statement of Financial Accounting Standards ("SFAS") No. 52 "Foreign Currency Translation" ("SFAS No. 52"). All exchange gains and losses from remeasurement of monetary balance sheet items resulting from transactions in non-dollar currencies are recorded in the statement of operations as they arise. The financial statements of certain of the Company's subsidiaries whose functional currency is other than the dollar are translated into dollars in accordance with the principles set forth in SFAS No. 52. Assets and liabilities have been translated at year-end exchange rates; results of operations have been translated at average exchange rates. The translation adjustments have been reported as a separate component of shareholders' equity. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant inter-company transactions and balances have been eliminated. CASH EQUIVALENTS Cash equivalents consist of short-term, highly liquid investments that are readily convertible into cash with original maturities of three months or less. MARKETABLE SECURITIES The Company accounts for its investments in marketable securities using SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). Management determines the appropriate classification of its investments in marketable debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date. Held-to-maturity -F 9- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (contd.) MARKETABLE SECURITIES (contd.) securities include debt securities for which the Company has the intent and ability to hold to maturity. Investments in marketable debt securities that are classified as held to maturity are stated at amortized cost. Investments in marketable debt securities that are classified as "trading securities" are stated at market value. Net realized and unrealized gains losses on these securities are included in other income (expense). Debt securities for which the Company does not have the intent or ability to hold to maturity are classified as available-for-sale. Available-for-sale debt and equity securities are stated at fair value, with the unrealized gains and losses reported as a separate component of shareholders' equity under accumulated other comprehensive loss. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is calculated based on the straight-line method over the estimated useful lives of the assets, as follows: Computers and software 3-5 years Office furniture and equipment 3-16 years Motor vehicles 4-7 years Leasehold improvements are amortized based on the straight-line method over the shorter of the term of the lease, or the estimated useful life of the improvements. IMPAIRMENT OF LONG- LIVED ASSETS The Company regularly reviews whether facts and circumstances exist which indicate that the carrying amount of assets may not be recoverable. The Company assesses the recoverability of the carrying amount of its long lived assets based on expected undiscounted cash flows. If an asset's carrying amount is determined to be not recoverable, the Company recognizes an impairment loss based upon the difference between the carrying amount and the fair value of such assets, in accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SOFTWARE DEVELOPMENT COSTS The Company capitalizes software development costs in accordance with SFAS No. 86 "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed" ("SFAS No. 86"). Capitalization of software development costs begins upon the establishment of technological feasibility, and continues up to the time the software is available for general release to customers. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs requires considerable judgment by management with respect to certain external factors including, but not limited to, anticipated future gross product revenue, estimated economic life and changes in software and hardware technology. Amortization of capitalized software development costs is provided on a product-by-product basis and begins when the product is available for general release to customers. Annual amortization is the greater of the amount computed using the ratio of current gross revenue for a product to the total of current and anticipated product revenue or the straight-line basis over the remaining economic useful life of the software, which is not more than five years. The actual lives of the Company's capitalized software maybe less than management's initial estimates. Amortization of capitalized software development costs is reflected in cost of software license fees. -F 10- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (contd.) SOFTWARE DEVELOPMENT COSTS (contd.) In 2002, based upon management's periodic review of the useful lives of its various assets, the Company's estimate of the useful life of various modules of its capitalized software changed from 3 years to 5 years, effective April 1, 2002. The change related, mainly, to the software capitalized as part of the Company's shift in focus to MPM related solutions. Management believed that this change will more appropriately match the amortization expense of the software with the periods in which the software will be utilized. This change in estimate resulted in a decrease in net loss for 2002 of approximately $1.6 million and a decrease of $0.15 per share basic and diluted for 2002. ACQUISITION- RELATED INTANGIBLE ASSETS In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS No. 141"), and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Identifiable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The Company adopted SFAS No.142 effective January 1, 2002. As a result of SFAS No. 141 an assembled workforce no longer qualifies as a separately identifiable intangible and has been reclassified as goodwill. A reconciliation of previously reported net loss and loss per share to the amounts adjusted for the exclusion of goodwill amortization is as follows: YEAR ENDED DECEMBER 31, ------------ 2 0 0 1 ------------ Net loss $ (13,910) Goodwill amortization 3,942 ------------ Adjusted net loss $ (9,968) ============ Reported basic and diluted loss per share $ (1.35) Goodwill amortization 0.38 ------------ Adjusted basic and diluted loss per share $ (0.97) ============ Acquisition-related intangible assets result from the Company's acquisitions of businesses accounted for under the purchase method and consist of the values of identifiable intangible assets including developed software products, distribution rights and trade names, as well as goodwill. Goodwill is the amount by which the acquisition cost exceeds the fair values of identifiable acquired net assets on the date of purchase. Acquisition-related intangible assets are reported at cost, net of accumulated amortization. Identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives of three to five years for developed software products and distribution rights, and seven years for trade-names. STOCK-BASED COMPENSATION The Company accounts for employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25), and in accordance with FASB Interpretation No. 44 . Pursuant to these accounting pronouncements, the Company records compensation for stock options granted to employees over the vesting period of the options based on the difference, if any, between the exercise price of the options and the market price of the underlying shares at that date. -F 11- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (contd.) STOCK-BASED COMPENSATION (contd.) Deferred compensation is amortized to compensation expense over the vesting period of the options. Had compensation cost for the Company's option plans been determined on the basis of the fair value at the grant dates in accordance with the provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"), as amended by SFAS No. 148 "Accounting for Stock-Based Compensation" ("SFAS No. 148"), the Company's pro forma net loss and pro forma basic and diluted net loss per share would have been as follows:
YEAR ENDED DECEMBER 31, ------------------------------------- 2 0 0 3 2 0 0 2 2 0 0 1 --------- --------- ----------- Pro forma net loss: Net loss for the year, as reported $ (10,340) $ (2,830) $ (13,910) Deduct - stock-based compensation determined under APB 25 -- -- -- Add - stock-based compensation determined under SFAS 123 (4,867) (5,452) (5,975) --------- --------- ----------- $ (15,207) $ (8,282) $ (19,885) ========= ========= =========== PRO FORMA BASIC AND DILUTED LOSS PER SHARE: As reported $ (0.94) $ (0.27) $ (1.35) Pro forma $ (1.38) $ (0.78) $ (1.92) ========= ========= ===========
DATA IN RESPECT OF THE STOCK OPTION PLANS For purposes of estimating fair value in accordance with SFAS 123, the Company utilized the Black - Scholes option-pricing model. The following assumptions were utilized in such calculations for the years 2003, 2002 and 2001 (all in weighted averages): 2003 2002 2001 ------ ------ ------- Risk-free interest rate 3.0% 3.6% 4.7% Expected life of options 5 year 5 year 5 years Expected volatility 61% 70% 72% Expected dividend yield none none none Because additional option grants are expected to be made each year, and due to the factors described in the preceding paragraph, the above pro forma disclosures are not necessarily representative of pro forma effects of reported net income for future years. REVENUE RECOGNITION The Company recognizes revenues in accordance with the American Institute of Certified Public Accountants ("AICPA") Statement of Position 97-2, Software Revenue Recognition, as amended. Revenues from software license fees are recognized when persuasive evidence of an arrangement exists, the software product covered by written agreement or a purchase order signed by the customer has been delivered, the license fees are fixed and determinable and collection of the license fees is considered probable. When software arrangements involve multiple elements the Company allocates revenue to each element based on the relative fair values of the elements. The Company's determination of fair value of each element in multiple element -F 12- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (contd.) REVENUE RECOGNITION (contd.) arrangements is based on vendor-specific objective evidence ("VSOE"). The Company limits its assessment of VSOE for each element to the price charged when the same element is sold separately. The Company's products generally do not require significant customization. Revenues from software product license agreements, which require significant customization and modification of the software product are recognized using the percentage-of-completion method, based on the relationship of actual labor costs incurred, to total labor costs estimated to be incurred over the duration of the contract. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first determined, in the amount of the estimated loss on the entire contract. Service revenues include consulting services, post-contract customer support and training. Consulting revenues are generally recognized on a time and material basis. However, revenues from certain fixed-price contracts are recognized on the percentage of completion basis. Software maintenance agreements provide technical support and the right to unspecified upgrades on an if-and-when-available basis. Post-contract customer support revenues are recognized ratably over the term of the support period (generally one year) and training and other service revenues are recognized as the related services are provided. RESEARCH AND DEVELOPMENT COSTS Research and development costs (net of third-party grants) that are not capitalized to software and development costs are expensed as incurred. The Company has no obligation to repay the grants if sufficient sales are not generated. ALLOWANCE FOR DOUBTFUL ACCOUNTS The allowance for doubtful accounts has been made on the basis of specific accounts receivable. DEFERRED INCOME TAXES Deferred income taxes are provided 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, in accordance with SFAS No. 109 "Accounting for Income Taxes" ("SFAS No. 109"). PROVISION FOR WARRANTY The Company warrants its products in certain countries in Europe. The warranty period is generally between six to twelve months. As of December 31, 2003 and 2002, the provision for warranty cost was immaterial. LOSS PER ORDINARY SHARE Basic and diluted loss per share are computed in accordance with SFAS No. 128 "Earnings per Share" ("SFAS No. 128"), using the weighted average number of ordinary shares outstanding. Loss per share exclude any dilutive effect of options, warrants and convertible securities. A total of 412,321, 558,179 and 428,683 incremental shares were excluded from the calculation of diluted net loss per ordinary share for 2003, 2002 and 2001 respectively due to the anti-dilutive effect. -F 13- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (contd.) DERIVATIVE FINANCIAL INSTRUMENTS The company's primary objective for holding derivative financial instruments is to manage currency and interest rate exposures. The company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" (collectively referred to as SFAS 133). SFAS 133 requires that all derivatives be recorded in the balance sheet at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge of exposures to changes in fair value, cash flows or foreign currency exchange rates. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the nature of any hedge designation thereon. Currency Risk - As the company transacts business in various currencies other than the U.S. dollar, foreign exchange rate risk arises from the possibility that changes in foreign currency exchange rates will impact the fair value or the cash flows of financial instruments denominated in a foreign currency. The Company uses derivatives in the normal course of business, primarily to reduce its exposure to foreign currency risk stemming from various assets, liabilities and cash flows. Principally, the Company uses currency forwards, options and cylinders as hedging instruments to hedge the impact of the variability in exchange rates on accounts receivable and future cash flows denominated in certain foreign currencies. Although such contracts may qualify as cash flow hedges or fair value hedges the Company did not designate them as hedges against specific assets or liabilities. Derivatives credit risk - Counter parties to currency exchange forward contracts are major financial institutions with credit ratings of investment grade or better and no collateral is required. There are no significant risk concentrations. Management believes the risk of incurring losses on derivative contracts related to credit risk, if any, is remote and any losses would be immaterial. As of December 31, 2003, the Company had entered into a (i) forward transaction to sell $3,168,000 for a total amount of NIS 14,000,000 that will mature on several dates ending on April 15, 2004, and (ii) "cylinder" foreign currency transactions pursuant to which the company have entered into currency put option contracts to sell up to $2,749,000 for a total amount of NIS 12,000,000 in exchange for writing currency call option contracts to buy up to $2,655,000 for a total amount of NIS 12,000,000. Interest Rate risk -During 2003, the company entered into an interest rate swap to effectively convert the interest rate from floating to fixed on $18.5 million of the $25 million credit facility. Under the interest rate swap agreement, the Company receives LIBOR plus a margin every three months and pays 5.335% on $8.5 million and 4.635% on $10 million every three months until July 31, 2007. The Company's interest rate swap agreement qualifies and is designated as a cash flows hedge thus, changes in the fair value of the swap are recorded in other comprehensive income and reclassified from other comprehensive income into earnings to offset the hedged item effects on earnings. In addition, the interest rate swap agreement qualifies for the "shortcut" method of accounting for hedges, as defined by SFAS 133. Under the "shortcut" method, the hedges are assumed to be perfectly effective, and thus, there is no ineffectiveness to be recorded in earnings. At December 31, 2003, the fair value of the company's interest rate swap agreement was a liability of $153 and is reflected in other liabilities in the accompanying consolidated balance sheet. -F 14- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (contd.) RECENTLY ISSUED ACCOUNTING STANDARDS In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an interpretation of ARB 51". The primary objectives of this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities") and how to determine when and which business enterprise (the "primary beneficiary") should consolidate the variable interest entity. This new model for consolidation applies to an entity in which either (i) the equity investors (if any) do not have a controlling financial interest; or (ii) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that the primary beneficiary, as well as all other enterprises with a significant variable interest in a variable interest entity, make additional disclosures. Certain disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003. In December 2003, the FASB issued FIN 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are as follows: (i) Special-purpose entities ("SPEs") created prior to February 1, 2003. The company must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the first interim or annual reporting period ending after December 15, 2003. (ii) Non-SPEs created prior to February 1, 2003. The company is required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. (iii) All entities, regardless of whether an SPE, that were created subsequent to January 31, 2003. The provisions of FIN 46 were applicable for variable interests in entities obtained after January 31, 2003. The adoption of the provisions applicable to SPEs and all other variable interests obtained after January 31, 2003 did not have a material impact on the company's consolidated financial position, consolidated results of operations, or liquidity. In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative. It also clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and did not have a material impact on the Company's financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify certain financial instruments as a liability (or as an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have an impact on the Company's financial statements. RECLASSIFICATION Certain figures from prior years have been reclassified in order to conform to the 2003 presentation. -F 15- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 3 - SIGNIFICANT ACQUISITIONS A. ACQUISITION OF USDATA CORPORATION NET ASSETS In September 2003, the Company acquired substantially all the assets and certain liabilities of USDATA Corporation ("USDATA"), a North American developer of production management products based in Richardson, Texas, in consideration for 945,807 ordinary shares issued to USDATA of which 222,319 shares are held in escrow for up to 18 months following the acquisition. As part of the asset purchase transaction, SCP Private Equity Partners II, L.P. ("SCP"), the primary shareholder of USDATA, purchased from the Company 139,764 ordinary shares for an aggregate purchase price of $2,000. The two share issuances to USDATA and to SCP, are accounted for as one transaction as if SCP invested in USDATA and immediately thereafter the Company issued to USDATA the aggregate amount of 1,085,571 ordinary shares in consideration of the acquired assets which included the cash invested by SCP. The fair value of the ordinary shares issued -$9.57 per share, was determined in accordance with EITF 99-12 based on the average market price of the shares during the period of two days before and ending two days after the date the terms of the acquisition were agreed to and announced -July 30,2003. Accordingly, the total value of 1,085,571 ordinary shares is $10,390. The acquisition will allow the Company to realize its vision to provide a Manufacturing Process Management (MPM) solution that spans the entire manufacturing process life cycle, from planning through its execution till its retirement. The transaction was accounted for in accordance with SFAS No. 141 and SFAS No. 142, and the financial results of USDATA have been included in the Company's financial statements beginning on the acquisition date. The total purchase price of $11,112 (including acquisition costs of $722) has been allocated on the basis of the estimated fair value of the assets acquired and the liabilities assumed. Values assigned to acquired in-process research and development, and developed software product were determined by the Company using a discounted cash flow analysis (the Excess Earnings Method). To determine the value of the in-process research and development, the Company considered, among other factors, the state of development of the project, the time and cost needed to complete the project, expected income, and associated risks, which included the inherent difficulties and uncertainties in completing the project and thereby achieving technological feasibility and risks related to the viability of and potential changes to future target markets. This analysis resulted in amounts assigned to in-process research and development project that had not reached technological feasibility and did not have alternative future uses. To determine the value of the developed software product, the expected future cash flows of the existing technology product were discounted taking into account risks related to the characteristics and applications of the product, existing and future markets, and assessments of the life cycle stage of the product. Based on this analysis, the existing technology that had reached technological feasibility was capitalized. As a result of the acquisition of USDATA, the Company incurred incremental costs to exit and consolidate activities at USDATA locations, and involuntarily terminate USDATA employees. These expenses that are not associated with the generation of future revenue and have no future economic benefit are assumed liabilities in the allocation of the purchase price to the net assets acquired. These restructuring costs, primarily relating to abandonment of leased facilities and severance, were recorded in the purchase price allocation and amounted to $2,950. The excess of the purchase price over the fair value of the net tangible assets acquired has been attributed to current technology, software distribution rights, in-process research and development, and goodwill in the amounts of $1,873, $706, $3,193 and $8,323, respectively. The purchase price attributed to current technology and software distribution agreement is being amortized over their estimated useful lives, which are 5.5 and 3.5 years, respectively. -F 16- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 3 - SIGNIFICANT ACQUISITIONS (contd.) A. ACQUISITION OF USDATA CORPORATION NET ASSETS (contd.) The $8,323 of goodwill, was assigned to the Mechanical Segment of the Company. In accordance with SFAS No. 141 and SFAS No. 142, the purchase price attributed to goodwill is no longer amortized, but rather is subject to periodic impairment test. The allocation of fair value is as follows: Cash received from SCP $ 2,000 Intangible assets 2,579 In-process research and development 3,193 Goodwill 8,323 Liabilities acquired (2,033) Liabilities to exit activities (2,950) -------- Total purchase price $ 11,112 ======== The following unaudited pro forma summary presents information as if the acquisition of USDATA occurred at the beginning of the periods presented. In-process research and development charges and acquisition costs are considered nonrecurring charges related directly to the acquisition and have therefore been excluded from pro forma net income and pro forma earnings per share. The pro forma information, which is provided for information purposes only, is based on historical information and does not necessarily reflect the results that would have occurred, nor is it necessarily indicative of future results of operations of the consolidated entities. YEAR ENDED DECEMBER 31, ----------------------- 2003 2002 --------- --------- Revenues $ 93,728 $ 92,349 Net loss $ (9,778) $ (3,890) Loss per share: Basic and diluted $ (0.88) $ (0.37) B. ACQUISITION OF CIMBRIDGE SOFTWARE BUSINESS In October 2002 Tecnomatix Unicam, Inc. ("TUI"), an indirect wholly owned subsidiary of the Company, acquired certain assets and assumed certain liabilities relating to the CIMBridge software business ("CIMBridge") from Teradyne, Inc. ("Teradyne"). The transaction was accounted for in accordance with SFAS No.141 and SFAS No. 142, and the financial results of CIMBridge have been included in the Company's financial statements beginning on the acquisition date. The purchase price is to be paid on a contingent and deferred basis based upon a revenue sharing arrangement. Under the revenue sharing arrangement, the total cash paid by TUI to Teradyne shall be the sum of Teradyne's software license and maintenance revenue share plus a certain finders fee during a four-year period commencing on the acquisition date, in excess of $514, whereby Teradyne's software license revenue share shall be equal to 40% of revenue recognized by TUI from software licensing, and Teradyne's maintenance revenue share shall be equal to 40% of revenue recognized by TUI from maintenance agreements in excess of an annual threshold amounting to $1,800, $1,700, $1,500, and $1,400 for the years ended September 30, 2003, 2004, 2005, and 2006, respectively. As of December 31, 2003, no milestones have been achieved and the Company has not paid any amount on account of the purchase. The purchase price has been allocated on the basis of the estimated fair value of the assets purchased and the liabilities assumed. The excess of the purchase price over the fair value of the net tangible assets acquired has been attributed to goodwill. -F 17- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 3 - SIGNIFICANT ACQUISITIONS (contd.) B. ACQUISITION OF CIMBRIDGE SOFTWARE BUSINESS (contd.) The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition: Equipment $ 137 Deposits 18 Goodwill 1,120 ------- Total assets $ 1,275 ======= Liabilities assumed $ 721 Deferred revenue 443 Acquisition costs 111 ------- Total liabilities assumed $ 1,275 ======= NOTE 4 - SHORT-TERM INVESTMENTS Comprised as follows: DECEMBER 31, ------------------ 2 0 0 3 2 0 0 2 ------- ------- Trading marketable securities - Corporate bonds $ 70 $ 5,981 ======= ======= NOTE 5 - LONG-TERM INVESTMENTS Comprised as follows: DECEMBER 31, ------------------- 2 0 0 3 2 0 0 2 -------- -------- Held-to-maturity marketable securities (1): Government of Israel bonds $ 6,923 $ 2,766 Corporate bonds 17,344 22,706 -------- -------- 24,267 25,472 -------- -------- Investment in affiliated company: Zuken Tecnomatix (2) 289 97 -------- -------- $ 24,556 $ 25,569 ======== ======== (1) Includes structured notes in the amount of $10,000 and $3,106 as of December 31, 2003 and 2002, respectively. Such structured notes are debt instruments whose cash flows are linked to the movement in interest rates. The structured notes are issued by U.S. government-sponsored enterprises and financial institutions. The notes typically contain embedded option components such as caps, calls, and floors. Contractual cash flows for principal from such structured notes can vary in timing throughout the life of the structured notes Interest income resulting from investment in structured notes is accounted for based on the guidance provided in EITF No. 96-12, "Recognition of Interest Income and Balance Sheet Classification of Structured Notes". Under this guidance the retrospective interest method is used for recognizing interest income. -F 18- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 5 - LONG-TERM INVESTMENTS (contd.) Aggregate maturities of marketable securities are as follows: DECEMBER 31, ------------ 2 0 0 3 ------------ Within one year $ 1,003 Two years 11,717 Three years 1,538 Five years 1,509 Six to ten years 8,500 ------------ $ 24,267 ============ Market value $ 25,353 ============ (2) In December 2000, the Company and Zuken Inc., a Japanese-based corporation, established Zuken Tecnomatix K.K. ("Zuken Tecnomatix"), a Japanese-based joint venture, for the purpose of selling and marketing the Electronics division's software products in Japan. Upon its establishment, the Company invested $437 (49,000 Japanese Yen) in Zuken Tecnomatix in exchange for 49% of its share capital. The Company's investment consisting of: DECEMBER 31, -------------------- 2 0 0 3 2 0 0 2 -------- -------- Investment in equity $ 437 $ 437 Loans 918 623 -------- -------- 1,355 1,060 Less: accumulated losses (1,066) (963) -------- -------- $ 289 $ 97 ======== ======== NOTE 6 - PROPERTY AND EQUIPMENT Comprised as follows: DECEMBER 31, ------------------- 2 0 0 3 2 0 0 2 -------- -------- Cost: Computers and software $ 23,192 $ 21,551 Office furniture and equipment 5,218 4,888 Motor vehicles 730 519 Leasehold improvements 2,570 2,245 -------- -------- 31,710 29,203 -------- -------- Accumulated depreciation: Computers and software 20,388 18,265 Office furniture and equipment 3,692 3,096 Motor vehicles 330 312 Leasehold improvements 1,672 1,422 -------- -------- 26,082 23,095 -------- -------- Property and equipment ,net $ 5,628 $ 6,108 ======== ======== -F 19- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 7 - ACQUIRED INTANGIBLES, NET Comprised as follows: DECEMBER 31, ------------------- 2 0 0 3 2 0 0 2 -------- -------- A. GOODWILL, NET Cost $ 36,855 $ 28,236 -------- -------- Accumulated amortization 11,026 11,026 -------- -------- $ 25,829 $ 17,210 ======== ======== B. OTHER ACQUIRED INTANGIBLES, NET Cost: Developed software products $ 13,926 $ 12,053 Trade name 283 283 Distribution rights 930 224 -------- -------- 15,139 12,560 -------- -------- Accumulated amortization: Developed software products 12,138 12,053 Trade name 283 283 Distribution rights 274 224 -------- -------- 12,695 12,560 -------- -------- $ 2,444 $ -- ======== ======== NOTE 8 - OTHER ASSETS, NET Comprised as follows:
DECEMBER 31, ------------------- 2 0 0 3 2 0 0 2 -------- -------- Cost: Software development costs $ 43,466 $ 42,120 Deferred financing costs relating to the issuance of 5 1/4% convertible subordinated notes -- 1,188 Other -- 1,346 -------- -------- 43,466 44,654 -------- -------- Accumulated amortization: Software development costs 30,170 26,937 Deferred financing costs relating to the issuance of 5 1/4% convertible subordinated notes -- 912 Other -- 192 -------- -------- 30,170 28,041 -------- -------- $ 13,296 $ 16,613 ======== ========
-F 20- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 9 - 5 1/4% CONVERTIBLE SUBORDINATED NOTES On August 12, 1997, the Company issued to the public an aggregate amount of $ 97,750 convertible subordinated notes (the "Notes"). The related issuance expenses of $ 3,104 were recorded as deferred expenses and were amortized using the straight-line method over the life of the Notes. The Notes bore interest at 51/4% per annum, payable semi-annually. The maturity date of the Notes was August 15, 2004. The Notes were convertible into ordinary shares of the Company at any time at or before maturity, unless previously redeemed, at a conversion price of $ 42.39 per share, subject to adjustment in certain events. The Company could, at its option, redeem the Notes on or after August 18, 2000, in whole or in part, at different redemption prices. Through September 2003, the Company repurchased an aggregate amount of $82,951 principal amount of the Notes. In December 2003, the Company redeemed the remaining $14,799 principal amount of the Notes at a redemption price of 100.75% plus accrued interest as of the redemption date. As a result of the repurchases in 2003, 2002 and 2001 the Company realized a gain of $156, $599 and $1,393, respectively. NOTE 10 - LONG TERM BANK LOAN In April 2003, the Company obtained from Bank Hapoalim B.M (the "Bank") a credit line in the aggregate principal amount of $25,000. Through December 31, 2003, the Company drew the full amount of the credit line. Loans drawn under the credit line bear interest at a rate of 3.325%, which is equal to the three-month LIBOR rate at the time of the withdrawal (1.25%) plus a spread of 2.075%. The Company used this credit line to repurchase additional Notes in the third quarter of 2003 and to redeem the notes in the fourth quarter of 2003. The credit line matures four years after withdrawal. Unless the Company uses its right of prepayment of the credit, repayment of an amount of $10,000 under the line of credit is required to be made in equal quarterly payments, commencing 15 months after withdrawal, and repayment of the remaining amounts under the line of credit, is required to be made upon the maturity of the line of credit or the earlier maturity of certain bonds deposited with the Bank to secure repayment. In connection with the credit line, the Company agreed to pledge its assets as collateral to the Bank and to maintain certain financial ratios which include (a) a covenant to maintain certain levels of cash, cash equivalents, bonds and deposits, as long as the credit line is outstanding with such level being initially $30 million and gradually decreasing as the Company progresses with repayment of the credit line; (b) commencing with the third quarter of 2004, an average quarterly EBITDA of at least $1 million in the preceding three quarters; (c) a ratio of shareholders' equity to total assets of not less than 40% and an amount of shareholders' equity of not less than $33 million; and (d) a ratio of current assets to current liabilities (excluding amounts due under its convertible subordinated notes and excluding then current maturities under the credit line) of at least 1.5 at each balance sheet date commencing with the first quarter of 2004. As of December 31 2003, the Company was in compliance with the relevant covenants. NOTE 11 - ACCRUED SEVERANCE PAY, NET The majority of the Company's liability for severance pay is calculated in accordance with the Israeli law based on the most recent salary paid to employees and the length of employment with the Company. The Company's liability for severance pay is fully provided for. Part of the liability is funded through individual insurance policies purchased from outside insurance companies, which are not under the Company's control. The aggregate value of the insurance policies as of December 31, 2003 and 2002 was $1,903 and $1,504, respectively. Severance pay expenses for the years ended December 31, 2003, 2002 and 2001 were $697, 561 and $683, respectively. The Company has no liability for pension expenses to its employees. -F 21- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES ROYALTIES 1. The Company is committed to pay royalties to the Office of the Chief Scientist of the Israeli Ministry of Commerce and Trade on proceeds from sales of products in the research and development of which the Chief Scientist has participated by way of grants, up to the amount of 100%-150% of the grants received (in dollar terms) (from 1999 - up to the amount of 100% of the grants received plus interest at LIBOR). The royalties are payable at a rate of 3% for the first three years of product sales and 3.5% thereafter. The total amount of grants received, net of royalties paid or accrued, at December 31, 2003 was $ 13,773. Royalty expenses to the Chief Scientist in 2003, 2002 and 2001 were $1,443, $1,627 and $ 1,504, respectively. The refund of the grant is contingent on future sales and the Company has no obligation to refund these grants, if sufficient sales are not generated. 2. The Company and its subsidiaries are obligated to pay royalties to certain parties, based on agreements which allow the Company to incorporate their products into the Company's products. Royalty expenses to these parties in 2003, 2002 and 2001 were $ 869, $ 1,070 and $ 488, respectively. CROSS LICENSING AND MARKETING AGREEMENT WITH EDS. In July 2002 the Company entered into a strategic alliance with UGS PLM Solution, Inc. (previously named Unigraphics Solutions, Inc.) ("UGS"), a wholly-owned subsidiary of Electronics Data Systems, Inc. ("EDS"), a leading global information technologies service provider engaged in the development, selling and marketing of Product Lifecycle Management ("PLM") solutions. The Cross Licensing and Marketing Agreement (the "Agreement") establishes a joint development strategy, as well as cooperative marketing and distribution rights. Under the Agreement, UGS and the Company will share revenues for all sales of the Company's MPM products and UGS planner product made by UGS and its distributors. In large strategic accounts where both UGS and the Company are currently engaged, selling will be done jointly. In all other UGS accounts, UGS will sell independently of the Company and provide all pre-sales, professional service and hot-line support. In non-UGS accounts, the Company will continue to sell directly to its customers as is currently practiced. In order to provide UGS with an additional incentive to sub-license the Company's products and to perform its obligations under the Agreement, UGS was issued a warrant to purchase up to 1,592,502 of the Company's ordinary shares. The amount of the Company's ordinary shares which UGS may acquire through the exercise of the warrant with respect to each 12-month period during the four-year term covered by the warrant are based on the achievement by UGS of certain goals relating to the revenues amounts received by UGS during each such 12-month period from the licensing of products developed by the Company. In addition, if at any time during the four-year term of the warrant UGS reaches certain levels of revenues from the licensing of such products, it may exercise the warrant with respect to certain ordinary shares as to which the warrant shall not have been previously exercised. The exercise price of the ordinary shares underlying the warrant is based on the revenue amounts received by UGS from the licensing of products developed by the Company, with such exercise price increasing based on the increase in such revenue amounts. Through December 31,2003 no revenue goals have been achieved. During 2003 the Company paid or accrued to UGS royalties in the amount of $2,350 related to this agreement. -F 22- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES (contd.) LEASE COMMITMENTS 1. The premises of the Company and its subsidiaries are leased under various operating lease agreements which expire on various dates. Future aggregate minimum annual rental payments, pursuant to existing lease commitments in effect at December 31, 2003, are as follows: YEAR ENDED DECEMBER 31, 2004 $ 4,694 2005 3,764 2006 1,812 2007 1,545 2008 and thereafter 2,497 --------- Total $ 14,312 ========= 2. The Company leases its motor vehicles under cancelable operating lease agreements for periods through 2007. The minimum payment under these operating leases, upon cancellation of these lease agreements, amounted to $138 as of December 31, 2003. FINANCIAL INSTRUMENTS CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and long-term investments, totaling $33,569 and 41,919 as of December 31, 2003 and 2002, respectively, and accounts receivable. The Company's cash and cash equivalents and short-term investments are invested in deposits with major banks in the U.S., Europe and Israel. Management believes that the financial institutions holding the Company's cash and cash equivalents are financially sound. In addition, the marketable securities held by the Company consist mainly of debt securities of the Government of Israel and highly-rated corporate bonds. The accounts receivable are derived from sales to a large number of customers, mainly large industrial corporations and their suppliers located mainly in Europe, the United States and Asia. The Company generally does not require collateral. The Company performs ongoing credit evaluations of its customers and maintains an allowance for doubtful accounts which management believes adequately covers all anticipated losses in respect of trade receivables. FAIR VALUE OF FINANCIAL INSTRUMENTS The financial instruments of the Company consist mainly of cash and cash equivalents, marketable securities, current and non-current accounts receivable, accounts payable and long-term bank loans. In view of their nature, the fair value of the financial instruments is usually identical or close to their carrying amounts. TRANSACTIONS WITH RELATED PARTIES The Company is party to a management service agreement with A.T.L. Management Services Ltd ("A.T.L."), a related party, which provides for the payment to A.T.L. of an annual management fee of $ 300 and reimbursement of expenses in consideration for strategic management and business and financial consulting services, on a basis which the Company believes represents fair value. -F 23- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES (contd.) SALE OF TRADE RECEIVABLES The Company entered into factoring agreements with a financial institution under which the Company assigned by way of sale certain amounts of its account receivables subject to the financial institution inspection and acceptance. The financial institution is responsible for collecting the receivables with no recourse to the Company. Upon completion of the sale, the financial institution remits 90% of the funds to the Company, less discount and service fees, and remits the balance of the funds upon collection of the receivables. Upon the sale, the receivables are derecognized from the Company's records. During 2003 and 2002 the Company sold receivables in the amount of $6,482 and $ 1,071, respectively, and incurred related expenses in the amount of $85 and $ 32, respectively. NOTE 13 - SHAREHOLDERS' EQUITY SHARE CAPITAL 1. The Company's shares are traded in the United States and are listed on the Nasdaq National Market. 2. Loans granted to purchase shares The balance at December 31, 2002 represented loans granted to, the Chairman of the Company's board of directors and until recently the Company's Chief Executive Officer, in October 1998 and July 1999 with respect to the exercise of options to purchase the Company's shares. The loans were in dollars, bore interest at 6.8% per annum and were due on December 31, 2002. The loans were granted in consideration of recourse notes. On January 1, 2003 the Company repurchased 110,000 of its shares from the Chairman and CEO for a total amount of $844 representing a price per share of $7.67, equal to the average closing price of the ordinary shares as quoted on the Nasdaq National Market during the three-month period prior to the date of the repurchase. The consideration was used to offset the outstanding balance of the loan. In addition, the CEO repaid $300 of the outstanding amount of these loans. This repayment was funded by using the proceeds of a compensatory retention bonus in the amount of $300 paid to the CEO in connection with his commitment to continue serving the Company as either CEO or Chairman until December 31, 2005. In the event that the CEO and Chairman terminates his service for the Company, he shall be required to return to the Company one third of the compensatory retention bonus for each year in which he failed to provide a full year of service. EMPLOYEE SHARE PURCHASE PLAN In December 2000, the Company adopted the Tecnomatix Technologies Ltd. 2000 Employee Share Purchase Plan ("the Share Purchase Plan"), pursuant to which the Company's employees may purchase up to 500,000 ordinary shares. Every six months, each employee is entitled to purchase ordinary shares for an amount up to 10% of his gross salary at that period, but not more than 750 ordinary shares. The purchase price under the Share Purchase Plan is the lower of 85% of the fair market value of an ordinary share at the beginning of such six-month period or 85% of the fair market value at the end of such six-month period. As of December 31, 2003, 475,318 shares have been purchased under the Share Purchase Plan. -F 24- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 13 - SHAREHOLDERS' EQUITY (contd.) STOCK OPTION PLANS AS OF DECEMBER 31, 2003, THE COMPANY HAD THE FOLLOWING EMPLOYEES' AND DIRECTORS' STOCK OPTION PLANS: 1996 PLAN Under the 1996 Stock Option Plan (the "1996 Plan") for employees of the Company, options to purchase up to 3,726,600 shares of the Company may be granted at an exercise price equal to the fair market value of the share at the date of the grant. The options granted vest at a rate of 40%, 30% and 30% after two, three and four years, respectively, from the date of the grant, or in four equal annual installments, commencing one year from the date of grant. Under the 1996 Plan, options will expire ten years from the date of the grant. As of December 31, 2003, options to purchase 3,140,960 shares were outstanding with exercise prices ranging from $ 4.75 to $ 40.385 per share. DIRECTORS PLAN Under the 1996 Directors' Stock Option Plan (the "Directors Plan") for directors of the Company, options to purchase up to 364,000 shares of the Company may be granted at an exercise price equal to the fair market value of the share at the date of the grant. The options granted are exercisable in five equal annual installments, commencing two years from the date of the grant. Under the Directors Plan, options will expire on the earlier of the termination of the service of the director or the tenth anniversary of the date of grant. As of December 31, 2003 options to purchase 248,000 shares were outstanding with an exercise price raining from $6.88 to $ 18.38 per share. 2003 PLAN In December 2002 the Company's Board of Directors approved the adoption of the Tecnomatix Technologies Ltd. 2003 Global Share Option Plan (the "2003 Plan"). Under the 2003 Plan options to purchase up to 690,106 shares of the Company may be granted at an exercise price equal to the fair market value of the share at the date of the grant. Officers, directors, employees and consultants of the Company are eligible to participate in the 2003 Plan. The options granted vest in four equal annual installments, commencing one year from the date of grant. Under the 2003 Plan, options will expire ten years from the date of the grant. As of December 31, 2003 options to purchase 681,500 shares were outstanding with an exercise price ranging from $7.01 to $11. A summary of the status of the Company's stock option plans as of December 31, 2003, 2002 and 2001 and changes during the years then ended, is presented below:
DECEMBER 31, --------------------------------------------------------------------------------- 2 0 0 3 2 0 0 2 2 0 0 1 ------------------------- ------------------------- ------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ---------- ----------- ---------- ----------- ---------- ----------- Options outstanding at beginning of year 3,894,917 $ 12.16 4,204,422 $ 12.16 3,330,231 $ 13.61 Granted during year 681,500 $ 9.03 237,200 $ 8.46 1,297,900 $ 8.76 Exercised during year (112,590) $ 5.34 (69,700) $ 6.52 (20,056) $ 9.41 Forfeited during year (164,125) $ 11.12 (477,005) $ 11.09 (403,653) $ 13.35 ---------- ---------- ---------- Outstanding at end of year 4,299,702 $ 11.88 3,894,917 $ 12.16 4,204,422 $ 12.16 ========== ========== ========== Options exercisable at year-end 2,623,745 $ 13.55 1,969,965 $ 13.80 1,233,970 $ 14.64 ========== ========== ========== Weighted average fair value of options granted during the year $ 4.65 $ 5.14 $ 4.25 ========== ========== ==========
-F 25- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 13 - SHAREHOLDERS' EQUITY (contd.) THE FOLLOWING TABLE SUMMARIZES INFORMATION RELATING TO STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------- ---------------------------- WEIGHTED AVERAGE NUMBER OF SHARES REMAINING WEIGHTED NUMBER OF SHARES WEIGHTED OUTSTANDING AT CONTRACTUAL AVERAGE EXERCISABLE AT AVERAGE RANGE OF DECEMBER 31, LIFE (IN EXERCISE DECEMBER 31, EXERCISE EXERCISE PRICES 2003 YEARS) PRICE 2003 PRICE - ----------------- --------------- ------------ --------- ---------------- --------- $ 4 - 7.82 1,398,935 7.75 $ 6.42 555,685 $ 5.90 $ 9 - 11.563 873,875 7.04 $ 10.34 430,625 $ 10.39 $ 12 - 13.813 1,268,992 6.57 $ 13.04 911,035 $ 13.14 $ 14 - 18.375 172,250 3.69 $ 17.54 157,250 $ 17.87 $ 20.375 - 25.75 538,150 5.49 $ 21.53 529,150 $ 21.54 $ 28.75 - 40.38 47,500 6.11 $ 40.38 40,000 $ 40.38 --------------- ------------- $ 4 - 40.75 4,299,702 6.79 $ 11.88 2,623,745 $ 13.55 =============== =============
NOTE 14 - TAXES ON INCOME TAXATION UNDER VARIOUS LAWS 1. The Company and its subsidiaries are assessed for tax purposes on an unconsolidated basis. The Company and its Israeli subsidiaries are assessed under the provisions of the Income Tax Law (Inflationary Adjustments), 1985, pursuant to which the results for tax purposes are measured in Israeli currency in real terms in accordance with changes in the Israeli CPI. Each of the subsidiaries is subject to the tax rules prevailing in the country of incorporation. 2. "Approved enterprise" The production facilities of the Company in Israel have been granted "approved enterprise" status in eleven separate programs under the Law for the Encouragement of Capital Investments, 1959, as amended. Under this law, income attributable to each of these enterprises is fully exempt from tax for either two or four years, commencing the first year in which each enterprise generates taxable income and is entitled to a reduced tax rate of 10%-25% (based on the percentage of foreign ownership in each taxable year), for a further eight or six years, respectively. The expiration date of the period of benefits is limited to the earlier of twelve years from commencement of production or fourteen years from the date of the approval. Through December 31, 2003, the period of benefits of eight enterprises has commenced. In the event of a distribution of cash dividends to shareholders of earnings subject to the exemption, the Company will be liable to tax at a rate of 10%-25%. The Company has not provided deferred taxes on future distributions of tax-exempt earnings, as management and the Board of Directors have determined not to make any distribution that may result in a tax liability for the Company. Accordingly, such earnings have been considered to be permanently reinvested. The tax-exempt earnings may be distributed to shareholders without subjecting the Company to taxes only upon a complete liquidation of the Company. -F 26- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 14 - TAXES ON INCOME (contd.) TAXATION UNDER VARIOUS LAWS (contd.) 2 "Approved enterprise" (contd.) As of December 31, 2003, the aggregate amount of undistributed tax-exempt earnings for which deferred taxes had not been provided was $ 14,093 and the amount of unrecognized deferred taxes in respect of such earnings amounted to $ 2,114. Income derived from sources other than the "approved enterprises" is taxable at the regular corporate tax rate of 36%. 3. "Industrial company" The Company and one of its Israeli subsidiaries are "industrial companies" as defined in the Law for the Encouragement of Industry (Taxes), 1969, and as such, qualify for special depreciation rates for machinery, equipment and buildings used by an industrial enterprise. These rates vary based on factors such as the date of commencement of operation and the number of work shifts COMPOSITION OF INCOME TAX BENEFIT (PROVISION):
YEAR ENDED DECEMBER 31, ----------------------------------- 2 0 0 3 2 0 0 2 2 0 0 1 --------- --------- --------- Loss before taxes on income: Israel $ (7,456) $ (6,325) $ (3,030) Non-Israeli (2,569) 3,778 (10,294) --------- --------- --------- $ (10,025) $ (2,547) $ (13,324) ========= ========= ========= Income tax benefit (provision): Current: Israel $ -- $ (90) $ 198 Non-Israeli (212) 548 (65) --------- --------- --------- (212) 458 133 --------- --------- --------- Deferred: Israel -- -- (26) Non-Israeli -- (310) (161) --------- --------- --------- -- (310) (187) --------- --------- --------- $ (212) $ 148 $ (54) ========= ========= =========
-F 27- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 14 - TAXES ON INCOME (contd.) DEFERRED TAXES The main components of the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31, ---------------------- 2 0 0 3 2 0 0 2 --------- --------- Deferred tax assets: Technology assets of non-Israeli subsidiaries $ 431 $ 2,146 Reserves and accruals not currently deductible 855 732 Credit carryforwards 3,388 3,034 Deferred revenue 571 673 In-process research and development 1,086 -- Net operating loss carryforwards of non-Israeli subsidiaries 13,542 12,502 Net operating loss carryforwards in Israel 340 -- --------- --------- 20,213 19,087 Less - valuation allowance 18,013 16,544 --------- --------- 2,200 2,543 --------- --------- Deferred tax liabilities: Software development costs (2,747) (3,188) Fixed assets and intangible assets (313) (215) --------- --------- (3,060) (3,403) --------- --------- Net deferred tax liabilities $ (860) $ (860) ========= =========
Under Statement No. 109 of the FASB, deferred tax assets are to be recognized for the anticipated tax benefits associated with net operating loss carryforwards and deductible temporary differences, unless it is more likely than not that some or all of the deferred tax asset will not be realized. The adjustment is made by a valuation allowance. Since the realization of the net operating loss carryforwards and deductible temporary differences is less likely than not, a valuation allowance has been established for the amounts of the related tax benefits. As of December 31, 2003, the Company has approximately $2,000 of Israeli net operating loss carryforwards. The Israeli loss carryforwards have no expiration date. Tax loss carryforwards of a U.S. subsidiary totaling $ 14,800 expires between 2018 and 2023. The following is a reconciliation of the theoretical taxes on income assuming that all income is taxed at the ordinary rate applicable to Israeli companies and the actual taxes on income:
YEAR ENDED DECEMBER 31, ----------------------------------- 2 0 0 3 2 0 0 2 2 0 0 1 --------- --------- --------- Loss before taxes on income $ (10,025) $ (2,547) $ (13,324) ========= ========= ========= Theoretical tax on the above amount (36%) $ (3,609) $ (917) $ (4,797) Tax benefit arising from "approved enterprise" 942 1,981 186 Increase (decrease) in valuation allowance 1,469 (725) 5,056 Carryback of net operating losses of subsidiary -- (636) -- Adjustment arising from the differences between the basis of measurement for tax purposes and for financial reporting purposes 1,370 -- -- Other 40 149 (391) --------- --------- --------- $ 212 $ (148) $ 54 ========= ========= =========
-F 28- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 14 - TAXES ON INCOME (contd.) TAX ASSESSMENTS The Company and its Israeli subsidiaries received final tax assessments through the tax year ended December 31, 1999. Certain subsidiaries of the Company in Europe received tax assessments through the tax year ended December 31, 1999. NOTE 15 - TRANSACTIONS WITH RELATED PARTIES
YEAR ENDED DECEMBER 31, ----------------------------------- 2 0 0 3 2 0 0 2 2 0 0 1 --------- --------- --------- Management fees to related parties $ 300 $ 400 $ 400 --------- --------- --------- General and administrative expenses, net $ (20) $ (21) $ (161) --------- --------- ---------
NOTE 16 - SUPPLEMENTARY BALANCE SHEET INFORMATION OTHER RECEIVABLES AND PREPAID EXPENSES
DECEMBER 31, ---------------------- 2 0 0 3 2 0 0 2 --------- --------- Research and development participation from the Government of Israel $ 1,247 $ 1,056 Interest receivable 407 623 Employees 194 135 Advances to suppliers 64 106 Prepaid expenses 2,613 2,117 Others 1,222 1,247 --------- --------- $ 5,747 $ 5,284 ========= =========
NON-CURRENT RECEIVABLES
DECEMBER 31, ---------------------- 2 0 0 3 2 0 0 2 --------- --------- Deposits $ 1,021 $ 844 Employees 76 62 Other 11 9 --------- --------- $ 1,108 $ 915 ========= =========
OTHER PAYABLES AND ACCRUED EXPENSES
DECEMBER 31, ---------------------- 2 0 0 3 2 0 0 2 --------- --------- Payroll and related amounts $ 8,426 $ 7,915 Accrued expenses 7,873 4,107 Deferred income taxes 860 860 Interest payable 165 737 Advances from customers 605 212 Value added tax 787 792 Income tax authorities -- 206 Others 447 127 --------- --------- $ 19,163 $ 14,956 ========= =========
-F 29- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 17 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION A. OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION The Company develops, sells, markets and supports MPM software tools for the collaborative development and optimization of manufacturing processes across the extended enterprise. The Company's products are used by world-leading automotive, electronics, and aerospace companies and their suppliers and other discrete manufacturing companies. The Company operates in two segments, the Mechanical Division and the Electronics Division, reflecting the different nature of the products and the manufacturing processes they address. The Mechanical Division develops, sells, markets and supports software products to the automotive, aerospace and heavy equipment industries, and the Electronics Division develops, sells, markets and supports software products to the electronics industry. The Company evaluates performance based on profit and loss from operations before income taxes, interest expenses and other income. The Company does not identify or allocate its assets by operating segments as part of the assessment of segment performance; accordingly, assets are not reported by segment. YEAR ENDED DECEMBER 31, ----------------------------------- 2 0 0 3 2 0 0 2 2 0 0 1 MECHANICAL: --------- --------- --------- Revenues $ 71,617 $ 64,670 $ 66,454 ========= ========= ========= Operating loss $ (6,908) $ (180) $ (1,530) ========= ========= ========= ELECTRONICS: Revenues $ 14,640 $ 17,335 $ 20,446 ========= ========= ========= Operating loss $ (3,796) $ (1,568) $ (12,985) ========= ========= ========= The following table summarizes the Company's revenues and long-lived assets, by country. Revenue is attributed to geographic region based on the location of the customers. Long-lived assets include property and equipment, acquired intangibles (excluding goodwill) and capitalized software development costs and are attributed to geographic region based on the country in which the assets are located. REVENUES: YEAR ENDED DECEMBER 31, --------------------------------- 2 0 0 3 2 0 0 2 2 0 0 1 --------- --------- --------- Israel $ 100 $ 37 $ 9 U.S.A 28,754 24,781 24,809 Germany 23,008 24,262 22,665 France 11,466 9,299 10,260 Japan 12,976 9,691 16,393 Other Asian countries 2,205 3,248 2,274 Other European countries 7,748 10,687 10,490 --------- --------- --------- Total revenues $ 86,257 $ 82,005 $ 86,900 ========= ========= ========= -F 30- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 17 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION (contd.) A. OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION (contd.) LONG-LIVED ASSETS: DECEMBER 31, 2 0 0 3 2 0 0 2 --------- --------- Israel $ 8,224 $ 10,079 U.S.A. 7,893 7,472 Germany 3,217 2,903 France 578 571 Japan 617 974 Other countries 111 290 --------- --------- Total long-lived assets $ 20,640 $ 22,289 ========= ========= B. COST OF SOFTWARE LICENSE FEES IMPAIRMENT OF CAPITALIZED SOFTWARE DEVELOPMENT COSTS During 2003, the Company wrote off previously capitalized software development costs, with a net book value of $2,180 after it was determined that there was no useful life remaining on the assets. This determination was made as a result of the Company's analysis comparing the estimated net realizable value of these assets with the unamortized capitalized costs performed in accordance with SFAS 86. Of the total, $888 of net capitalized costs was written off as a result of duplication of product offerings subsequent to the acquisition of USDATA in the current year (see note 3a). C. RESEARCH AND DEVELOPMENT, NET
YEAR ENDED DECEMBER 31, --------------------------------- 2 0 0 3 2 0 0 2 2 0 0 1 --------- --------- --------- Gross research and development costs $ 22,525 $ 23,491 $ 28,333 Less- software development costs capitalized 3,937 4,097 5,103 Less - participation: The Government of Israel: Royalty-bearing grants 1,576 2,418 1,244 Other grants 1,426 1,481 1,724 Non Israeli grants 626 683 1,046 --------- --------- --------- Research and development, net $ 14,960 $ 14,812 $ 19,216 ========= ========= =========
D. RESTRUCTURING PLANS 2003 RESTRUCTURING PLAN In the first, third and fourth quarters of 2003 the Company's management approved and implemented plans to restructure its operations in both business segments of the Company. The actions, in the first and fourth quarters, included mainly workforce reductions associated with managing the Company's cost structure to better align with current business conditions. The third quarter action included workforce reduction associated with the identification of overlapping positions relating to the acquisition of USDATA net assets. The discharged employees were identified by name and position in advance as part of the plans and given notice during the relevant quarters. -F 31- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 17 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION (contd.) D. RESTRUCTURING PLANS (contd.) 2003 RESTRUCTURING PLAN (cont.) The $2,659 charge in 2003 (related to the first and the fourth quarter) was composed of the following:
SEVERANCE BENEFITS AND EXCESS FACILITIES AND RELATED EXPENSES WRITE-OFF OF FIXED ASSETS TOTAL ---------------------- ------------------------- ------------- First quarter $ 1,082 $ 405 $ 1,487 Fourth quarter 1,172 -- 1,172 ---------- --------- ------------ Total $ 2,254 $ 405 $ (1) 2,659 ========== ========= ============
(1) An amount of $1,603 was paid through December 31, 2003. The balance of $1,056.is expected to be paid during 2004. The $337 charge in the third quarter related to the USDATA acquisition was recorded as acquisition costs in the consolidated statements of operations. PRIOR YEARS RESTRUCTURING PLANS In the fourth quarter of 2002 following the continuous worldwide economic recession and slowdown in investments in information technologies, especially in the Electronics industry in the U.S., management resolved to initiate an additional cost reduction plan aimed at reducing excess personnel and capacity costs. As a result of such plan, the Company recorded in the fourth quarter of 2002 restructuring costs of $ 651. The restructuring plan included the discharge of certain employees mainly in the Electronics segment. Discharged employees were identified by name and position in advance as part of the plan, and given notice during the fourth quarter of 2002. Restructuring costs relating to such employees represent severance and benefits expenses incurred by the Company in connection with the lay-off of the employees, and related legal consulting expenses in connection with the lay-off process. The reduction in headcount resulted in utilization of less office and equipment in certain offices of the Company around the world. Consequently, the Company wrote-off office equipment for which no alternative use has been found. The 2002 restructuring costs are summarized in the following table: SEVERANCE BENEFITS AND RELATED EXPENSES WRITE-OFF OF FIXED ASSETS TOTAL -------------------- ------------------------- -------- $ 495(1) $ 156 $ 651 ========== ======== ======== (1) An amount of $ 240 was paid through December 31, 2002. The balance of $ 255 was paid during 2003. In October 2001, in light of the worldwide economic recession and the slowdown in investments in information technologies, especially in the U.S., the management of the Company resolved to initiate a cost reduction plan aimed at reducing excess personnel and capacity costs, and thus the level of its operating expenses. As a result of this plan, the Company recorded in the fourth quarter of 2001 restructuring costs and asset impairment in the amount of $ 1,843. -F 32- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 17 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION (CONTD.) D. RESTRUCTURING PLANS (contd.) PRIOR YEARS RESTRUCTURING PLANS (cont.) The reorganization plan included mainly the discharge of certain employees in both business segments of the Company, Mechanical and Electronics. The discharged employees were identified by name and position in advance as part of the plan, and given termination notice during the fourth quarter of 2001. Restructuring costs relating to such employees represent severance and benefits expenses incurred by the Company in connection with the layoff of the employees, and related legal consulting in connection with the layoff process. The reduction in headcount resulted in the utilization of less office space and office equipment in certain offices of the Company around the world. Consequently, the Company recorded costs in connection with payments required under lease contracts and write-off of office equipment for which no alternative use has been found. The 2001 restructuring costs are summarized in the following table: SEVERANCE BENEFITS EXCESS FACILITIES AND AND RESULTED EXPENSES WRITE-OFF OF FIXED ASSETS TOTAL --------------------- ------------------------- ----------- $ 1,121 $ 406 $ 1,527(1) ======== ======= ========== (1) An amount of $ 764 was paid through December 31, 2001. The balance of $ 689 (excluding the non-cost asset impairment and write-off of fixed assets) was paid during 2002. E. IMPAIRMENT OF SOFTWARE ACQUIRED During 2003, the Company recorded a charge of $937 related to the impairment of a certain software acquired from a third-party for the purpose of being integrated into the Company's products offering. Such third-party notified the Company that it will not provide certain required enhancements and will no longer support the product. As a result, the Company decided not to integrate the product into its product offering and not to launch it to the market. During 2002 the Company recorded a charge of $ 375 related to the impairment of certain software acquired as a result of technological changes in the platform of the Company's software products. F. SELLING AND MARKETING Selling and marketing expenses include doubtful accounts and bad debt expenses of $1,833, $1,217 and $1,553 for the years ended December 31, 2003, 2002 and 2001, respectively. G. FINANCIAL INCOME (EXPENSES), NET
YEAR ENDED DECEMBER 31, ----------------------------------- 2 0 0 3 2 0 0 2 2 0 0 1 --------- --------- --------- Interest income from marketable securities $ 1,779 $ 1,889 $ 1,726 Interest expenses and bank fees (909) (160) (118) Amortization of deferred issuance costs (153) (192) (226) Interest expenses on convertible notes (1,376) (2,201) (2,466) Gain from repurchase of convertible notes 156 599 1,393 Gain (loss) from realization and devaluation of marketable securities -- (153) 933 Gain (loss)on foreign currency transactions, net 877 (217) 872 Exchange differences gains (losses), net 305 (364) (923) --------- --------- --------- $ 679 $ (799) $ 1,191 ========= ========= =========
-F 33- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 18 - UNAUDITED PRO FORMA FINANCIAL INFORMATION The pro forma unaudited consolidated condensed balance sheet has been prepared by taking the December 31, 2002 balance sheet of Tecnomatix Technologies Ltd. (the "Company") and the December 31, 2002 balance sheet of USDATA Corporation, ("USDATA") and giving effect to the acquisition of USDATA by the Company as if it had occurred on December 31, 2002. The pro forma consolidated condensed balance sheet has been prepared for informational purposes only and does not purport to be indicative of the financial condition that necessarily would have resulted had this transaction taken place on December 31, 2002. The following pro forma unaudited consolidated condensed statements of operations for the year ended December 31, 2002 give effect to the Company's acquisition of USDATA as if it had occurred as of the beginning of 2002. The revenues and results of operations included in the following pro forma unaudited consolidated condensed statement of operations is not considered necessarily indicative of the results of operations for the year 2002 had the transaction actually been completed at the beginning of that year. These financial statements should be read in conjunction with the notes to the pro forma unaudited consolidated condensed financial statements, which follow, the financial statements of the Company and related notes thereto, and the financial statements of US DATA and related notes thereto, included herewith. -F 34- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 18 - UNAUDITED PRO FORMA FINANCIAL INFORMATION (contd.) UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET AS OF DECEMBER 31, 2002
PRO FORMA TECNOMATIX USDATA ADJUSTMENTS TECHNOLOGIES LTD. CORPORATION INCREASE (DECREASE) NOTES PRO FORMA ---------------- ------------ ------------------ ------- --------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 10,466 $ 978 $ 2,000 a $ 13,444 Short-term investments 5,981 -- -- 5,981 Accounts receivable doubtful accounts of $ 2,091 27,671 2,331 -- 30,002 Other receivables and prepaid expenses 5,284 582 -- 5,866 -------- -------- ------- --------- Total current assets 49,402 3,891 2,000 55,293 -------- -------- ------- --------- NON-CURRENT ASSETS 26,484 -- -- 26,484 -------- -------- ------- --------- PROPERTY AND EQUIPMENT, NET 6,108 510 -- 6,618 -------- -------- ------- --------- OTHER ASSETS, NET 33,823 3,783 12,307 c (3,783) b 46,130 ======== ======== ======= ========= Total assets $115,817 $ 8,184 $10,524 $ 134,525 ======== ======== ======= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 2,950 $ 941 $ -- $ 3,891 Other payables and accrued expenses 14,956 3,917 400 b 2,950 e 722 a 22,945 Deferred revenue 4,659 1,559 (635) i 5,583 -------- -------- ------- --------- Total current liabilities 22,565 6,417 3,437 32,419 -------- -------- ------- --------- LONG-TERM LIABILITIES 38,335 1,657 -- 39,992 -------- -------- ------- --------- SHAREHOLDERS' EQUITY: Share capital 40 52,728 (52,728) e 40 Additional paid-in capital 71,948 6,653 (6,653) 10,390 a 82,338 Loans granted to purchase shares (1,158) -- -- (1,158) Deferred shares compensation (481) 481 g -- Retained earnings (Accumulated deficit) 1,633 (50,905) 50,905 g (3,193) d (1,560) Treasury shares (13,200) (6,787) 6,787 g (13,200) Accumulated other comprehensive income (loss): (4,346) (1,098) 1,098 g (4,346) -------- -------- ------- --------- 54,917 110 7,087 62,114 ======== ======== ======= ========= Total liabilities and shareholders' equity $115,817 $ 8,184 $10,524 $ 134,525 ======== ======== ======= =========
-F 35- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 18 - UNAUDITED PRO FORMA FINANCIAL INFORMATION (contd.) UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002
PRO FORMA TECNOMATIX USDATA ADJUSTMENTS TECHNOLOGIES LTD. CORPORATION INCREASE (DECREASE) NOTES PRO FORMA --------------- ----------- ------------------ ------- --------- REVENUES : $ 82,005 $ 10,344 $ -- $ 92,349 COSTS AND EXPENSES: Cost of revenues 23,067 4,591 (3,256) 24,402 Amortization of acquired intangibles 2,491 118 542 h 3,151 Impairment of capitalized software development costs -- 3,336 (3,336) j -- Research and development, net 14,812 1,468 -- 16,280 Selling and marketing 36,887 4,123 -- 41,010 General and administrative 5,013 3,089 -- 8,102 Write-off of long-term investment 457 -- -- 457 Restructuring and asset impairment 651 730 -- 1,381 Impairment of software acquired 375 -- -- 375 -------- -------- ------- --------- Total costs and expenses 83,753 17,455 (6,050) 95,158 -------- -------- ------- --------- OPERATING LOSS (1,748) (7,111) 6,050 (2,809) Financial expense, net (799) (97) -- (896) -------- -------- ------- --------- LOSS BEFORE TAXES ON INCOME (2,547) (7,208) 6,050 (3,705) Taxes on income 148 -- -- 148 -------- -------- ------- --------- LOSS AFTER TAXES ON INCOME (2,399) (7,208) 6,050 (3,557) Company's share in loss of affiliated company (431) -- -- (431) Income from discontinued operation -- 98 -- 98 -------- -------- ------- --------- NET LOSS $ (2,830) $(7,110) $ 6,050 $ (3,890) ======== ======== ======= ========= Loss per ordinary share Basic and diluted $ (0.27) $ (0.37) ======== =========
-F 36- TECNOMATIX TECHNOLOGIES LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 18 - UNAUDITED PRO FORMA FINANCIAL INFORMATION (contd.) NOTES TO THE PRO FORMA UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS The accompanying pro forma unaudited consolidated condensed balance sheet and statement of operations present the financial position and results of operations of the Company giving effect to the acquisition on September 19,2003 of USDATA in consideration of 1,085,571 ordinary shares of the Company (see Note 3a). The adjustments below were prepared based on estimates or approximations. It is possible that the actual amounts recorded may have an impact on the results of operations and the balance sheet different from that reflected in the accompanying pro forma unaudited consolidated condensed financial statements. It is therefore possible that the entries below will not be the amounts actually at the closing date. (a) To record the acquisition of USDATA for a purchase price of $11,112 (including acquisition costs of $722) as follows: Issuance of 945,807 ordinary shares to USDATA and 139,764 ordinary shares to SCP, the primary shareholder of USDATA in consideration of $2,000 in cash and to accrue for acquisition costs of $722. (b) To eliminate USDATA existing capitalized intangible assets. (c) To record intangible assets and goodwill related to the acquisition. (d) To record the $3,193 allocated to in-process research and development assumed to be written off at the acquisition date. (e) To record liabilities to exit activities in USDATA of $2,950. (f) To record an adjustment to book value of assumed liability to a third party software supplier in the amount of $400. (g) To eliminate shareholders equity of USDATA. (h) To eliminate the amortization and impairment of capitalized software development costs of USDATA in 2002. (i) To reduce deferred revenue of USDATA based on estimated costs and an appropriate profit margin. (j) To amortize intangible assets based on their useful life. -F 37- SCHEDULE VIII TECNOMATIX TECHNOLOGIES LTD. VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, -------------------------------- 2 0 0 3 2 0 0 2 2 0 0 1 -------- -------- -------- Allowance for doubtful accounts at beginning of year $ 2,091 $ 2,000 $ 2,617 Provision 1,833 1,217 1,553 Translation adjustments 566 (656) (304) Accounts receivable written off (418) (470) (1,866) -------- -------- -------- Allowance for doubtful accounts at end of year $ 4,072 $ 2,091 $ 2,000 ======== ======== ========
-F 38- INDEPENDENT AUDITORS' REPORT The Board of Directors Tecnomatix Technologies, Inc. We have audited the accompanying consolidated balance sheets of Tecnomatix Technologies, Inc. (the Company), an indirect, wholly owned affiliate of Tecnomatix Technologies, Ltd. (TTL), as of December 31, 2003 and 2002, and the related consolidated statements of operations, shareholders' deficit and comprehensive income, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in notes 1 and 3 to the consolidated financial statements, the Company conducts a significant amount of business with its affiliates and receives support from TTL to fund its operations. As discussed in note 2(e) to the consolidated financial statements, the Company changed the estimated useful lives of certain capitalized software development costs in 2002. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tecnomatix Technologies, Inc. as of December 31, 2003 and 2002, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. January 23, 2004 /s/ KPMG LLP Detroit, Michigan -F 39- INDEPENDENT AUDITORS' REPORT THE STOCKHOLDERS AND BOARD OF DIRECTORS OF USDATA CORPORATION: We have audited the accompanying consolidated balance sheets of USDATA Corporation and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity (deficit) and comprehensive loss, and cash flows for each of the years in the three-year period ended December 31, 2002. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. The consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of USDATA Corporation and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Dallas, Texas February 3, 2003, except for note 6, which is as of March 17, 2003 F1 USDATA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, DECEMBER 31, 2002 2001 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 978 $ 1,844 Accounts receivable, net of allowance for doubtful accounts of $82 and $279, respectively 2,331 2,573 Other current assets 582 557 -------- -------- Total current assets 3,891 4,974 -------- -------- Property and equipment, net 510 1,212 Computer software development costs, net 1,093 6,443 Software held for resale, net 1,313 426 Customer relationships 1,301 -- Other assets 76 23 -------- -------- Total assets $ 8,184 $ 13,078 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 941 $ 694 Deferred revenue 1,559 1,248 Accrued compensation and benefits 698 468 Notes payable and current portion of long-term debt 1,327 1,837 Other accrued liabilities 1,699 717 Net liabilities of discontinued operation 193 339 -------- -------- Total current liabilities 6,417 5,303 -------- -------- Other noncurrent liabilities 1,550 985 Long-term debt, less current portion 107 590 -------- -------- Total liabilities 8,074 6,878 -------- -------- Commitments and contingencies (Note 14) Stockholders' equity: Series A cumulative convertible preferred stock, $.01 par value; liquidation preference $100 per share; 100,000 shares authorized; 50,000 shares issued and outstanding in 2002 and 2001 6,368 5,968 Series B cumulative convertible preferred stock; $.01 par value; liquidation preference $100 per share; 800,000 shares authorized; 281,800 shares issued and outstanding in 2002 and 265,000 shares issued and outstanding in 2001 33,096 29,262 Series C-1 cumulative convertible preferred stock; $.01 par value; liquidation preference $80 per share; 125,000 shares authorized; 75,000 shares issued and outstanding in 2002 and 53,750 shares issued and outstanding in 2001 13,229 10,442 Series C-2 cumulative convertible preferred stock; $.01 par value; liquidation preference $120 per share; 125,000 shares authorized; 0 shares issued and outstanding in 2002 and 2001 -- -- Common stock, $.01 par value, 40,000,000 shares authorized; 3,485,624 shares issued in 2002 and 3,264,872 shares issued in 2001 35 33 Additional paid-in capital 6,653 12,815 Deferred stock compensation (481) -- Accumulated deficit (50,905) (43,795) Treasury stock at cost, 396,292 shares in 2002 and 438,247 shares in 2001 (6,787) (7,522) Accumulated other comprehensive loss (1,098) (1,003) -------- -------- Total stockholders' equity 110 6,200 -------- -------- Total liabilities and stockholders' equity $ 8,184 $ 13,078 ======== ========
See accompanying notes to consolidated financial statements. F2 USDATA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ----------------------- 2002 2001 2000 ---- ---- ---- Revenues: Product license $ 8,287 $ 11,477 $ 13,019 Services 2,057 2,095 3,015 -------- -------- -------- Total revenues 10,344 13,572 16,034 -------- -------- -------- Operating expenses: Selling and product materials 8,714 9,088 12,812 Product development 1,468 1,694 6,402 General and administrative 3,089 3,222 6,521 Customer relationships amortization 118 - - Severance and other restructuring charges 730 1,068 2,518 Write off of capitalized software 3,336 391 1,781 -------- -------- -------- Total operating expenses 17,455 15,463 30,034 -------- -------- -------- Loss from operations (7,111) (1,891) (14,000) Interest expense (119) (213) (388) Other income, net 22 37 114 -------- -------- -------- Loss from continuing operations before preferred stock dividends of subsidiary (7,208) (2,067) (14,274) Preferred stock dividends of subsidiary - - (642) -------- -------- -------- Loss from continuing operations (7,208) (2,067) (14,916) Discontinued operations: Income (loss) from discontinued operation 98 182 (28,324) Loss on disposal of discontinued operation, including operating losses of $360 for 2001 - - (1,193) -------- -------- -------- Net loss (7,110) (1,885) (44,433) Dividends on preferred stock, preferred stock warrant and beneficial conversion (4,491) (10,812) (401) -------- -------- -------- Net loss applicable to common stockholders $(11,601) $(12,697) $(44,834) ======== ======== ======== Net loss per common share: Basic: Loss from continuing operation $ (4.02) $ (4.57) $ (5.60) Income (loss) from discontinued operation 0.03 0.07 (10.79) -------- -------- -------- Net loss per common share - basic $ (3.99) $ (4.50) $ (16.39) ======== ======== ======== Diluted: Loss from continuing operation $ (4.02) $ (4.57) $ (5.60) Income (loss) from discontinued operation 0.03 0.07 (10.79) -------- -------- -------- Net loss per common share - diluted $ (3.99) $ (4.50) $ (16.39) ======== ======== ======== Weighted average shares outstanding: {a} Basic 2,908 2,820 2,735 Diluted 2,908 2,820 2,735 ======== ======== ========
{a} As of December 31, 2002, total shares outstanding on an as converted basis was 8,192,000 shares. See accompanying notes to consolidated financial statements. F3 USDATA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS (IN THOUSANDS)
Accumulated Total Additional Deferred Other Stockholders' Preferred Common Paid-in Stock Retained Treasury Comprehensive Equity Stock Stock Capital Compensation Earnings Stock Loss (Deficit) -------- ------ --------- ------------ -------- -------- ------------- ------------- Balance, at December 31, 1999 $ - $26 $ 22,082 $(1,278) $ 2,523 $(8,434) $ (832) $ 14,087 Exercise of stock options 56 330 386 Exercise of common stock warrants 7 2,102 2,109 Issuance of common stock 206 259 465 Amortization of deferred compensation 1,278 1,278 Acquisition of common stock 116 (116) - Preferred stock (Note 9) 5,167 (164) 5,003 Preferred stock dividends 401 (401) - Acceleration of stock option vesting 25 25 Comprehensive loss: Net loss (44,433) (44,433) Foreign currency translation adjustment (132) (132) -------- Total comprehensive loss (44,565) ------- --- -------- ------- -------- ------- ------- -------- Balance, at December 31, 2000 5,568 33 24,022 - (41,910) (7,961) (964) (21,212) Issuance of common stock (382) 439 57 Issuance of common stock warrant 87 87 Issuance of preferred stock 2,150 (100) 2,050 Conversion of eMake Series A-1 and A-2 preferred stock into Series B preferred stock 27,142 27,142 Preferred stock dividends 2,662 (2,662) - Series C-2 warrant beneficial conversion 6,000 (6,000) - Series C-1 beneficial conversion 2,150 (2,150) - Comprehensive loss: Net loss (1,885) (1,885) Foreign currency translation adjustment (39) (39) -------- Total comprehensive loss (1,924) ------- --- -------- ------- -------- ------- ------- -------- Balance, at December 31, 2001 45,672 33 12,815 - (43,795) (7,522) (1,003) 6,200 Issuance of common stock (712) 735 23 Issuance of common stock warrant 32 32 Issuance of preferred stock 850 (40) 810 Preferred stock dividends 2,791 (2,791) - Series C-2 warrant beneficial conversion 850 (850) - Series C-1 beneficial conversion 850 (850) - Series B issued for acquisition 1,680 2 (1,453) 229 Deferred stock compensation - related to acqusition 502 (502) - Amortization of deferred compensation 21 21 Comprehensive loss: - Net loss - (7,110) (7,110) Foreign currency translation adjustment (95) (95) -------- Total comprehensive loss (7,205) ------- --- -------- ------- -------- ------- ------- -------- Balance, at December 31, 2002 $52,693 $35 $ 6,653 $ (481) $(50,905) $(6,787) $(1,098) $ 110 ======= === ======== ======= ======== ======= ======= ========
See accompanying notes to the consolidated financial statements. F4 USDATA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------- 2002 2001 2000 ---- ---- ---- Cash flows from operating activities: Net loss $ (7,110) $ (1,885) $(44,433) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: (Income) loss from discontinued operations (98) (182) 28,324 Loss on disposal of discontinued operations - - 1,193 Furniture and equipment transfer in lease negotiation 135 - - Depreciation and amortization 3,978 3,586 2,527 Non-cash stock compensation 53 87 - Write off of capitalized software development costs 3,336 391 1,781 Write off of fixed assets - - 81 Non-cash interest expense - - 313 Preferred stock dividends of subsidiary - - 642 Changes in operating assets and liabilities, net of working capital from acquisition: Accounts receivable, net 804 1,500 2,134 Other assets, net 191 140 (51) Accounts payable and other accrued liabilities (396) (1,678) 1,977 Accrued compensation and benefits 152 (340) (1,112) Deferred revenue (153) 30 (636) -------- -------- -------- Net cash provided by (used in) continuing operations 892 1,649 (7,260) Net cash used in discontinued operations (48) (1,892) (16,204) -------- -------- -------- Net cash provided by (used in) operating activities 844 (243) (23,464) -------- -------- -------- Cash flows from investing activities: Capital expenditures (579) (60) (1,114) Capitalized software development costs (668) (1,317) (4,120) Acquisition (304) - - Refund of leasehold improvement costs - 209 - -------- -------- -------- Net cash used in continuing operations (1,551) (1,168) (5,234) Net cash used in discontinued operations - - (2,783) -------- -------- -------- Net cash used in investing activities (1,551) (1,168) (8,017) -------- -------- -------- Cash flows from financing activities: Proceeds from stock warrant exercise - - 2,109 Proceeds from stock option exercises - - 386 Proceeds from issuance of common stock 23 57 - Proceeds from issuance of preferred stock, net 810 2,050 6,937 Proceeds from issuance of demand notes payable - - 26,750 Payments on demand notes payable - - (7,500) Borrowing under revolving line of credit 1,229 1,657 750 Other borrowings 139 710 - Payments on revolving line of credit and debt (2,360) (1,892) (126) -------- -------- -------- Net cash provided by (used in) financing activities (159) 2,582 29,306 -------- -------- -------- Net increase (decrease) in cash and cash equivalents (866) 1,171 (2,175) Cash and cash equivalents, beginning of period 1,844 673 2,848 -------- -------- -------- Cash and cash equivalents, end of period $ 978 $ 1,844 $ 673 ======== ======== ======== Supplemental disclosures of non-cash operating, investing and financing activities: In conjunction with the acquisition: Series B preferred and common stock issued $ 229 $ - $ - Accrued liability related to software held for resale 920 - - Furniture and equipment transfer in lease negotiation 135 - - Conversion of accrued liabilities to long-term notes payable - 232 - Conversion of notes payable and accrued interest to preferred stock - - 19,563 Property and equipment acquired by capital lease - - 645 Cash paid for interest 91 181 75 See Notes 3, 6, and 8 for other non-cash financing activities ======== ======== ========
See accompanying notes to consolidated financial statements F5 USDATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS USDATA Corporation is an independent, global supplier of industrial automation software tools, applications and consulting services designed to provide businesses with the knowledge and control needed to perfect the products they produce and the processes they manage. During the 1980s, USDATA evolved its software research and engineering to focus on supervisory control and data acquisition. As a result, we developed FactoryLink(R), our main industrial automation software product, which has become one of the manufacturing and process industry's most widely used automation products. FactoryLink(R) was launched in 1986 and to date has shipped more than 79,000 copies to more than 110 countries around the world. As manufacturing continued to evolve, so did the need to create new solutions that would assist companies to better manage their production processes. In 1998, USDATA launched Xfactory(R). Building on its expertise on the shop floor, USDATA's Xfactory(R) product is designed to track all aspects of discrete manufacturing production in real time. Xfactory(R) maintains historically accurate records, provides defect tracking, and complete product genealogy. Data gathered and analyzed by this powerful product gives companies the insight needed to improve production performance and meet the changing requirements of customers dynamically, while generating enhanced competitive advantage. Our software solutions span a wide range of manufacturing and automation processes, from monitoring equipment to tracking product flow, and are designed to integrate seamlessly with customers' existing manufacturing and business software. This combination of product breadth and ease of integration is intended to provide a total plant solution that defines new levels of manufacturing performance and gives customers a distinct competitive advantage. Our products and services are designed to help customers manage their business in real time, reduce operating costs, shorten cycle times and improve quality in their manufacturing operations. We provide this knowledge through software products and services and deliver it through a community of business partners. We have channel support locations in the United States and Europe and we have a global network of distribution and support partners. Our family of software products provides a powerful set of software tools and applications designed for users who are technically competent but who may not be experienced software programmers. LIQUIDITY Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. At December 31, 2002, we had a working capital deficit of $2.5 million, an accumulated deficit of $50.9 million and have incurred losses from continuing operations in each of the years ended December 31, 2002, 2001 and 2000. Based upon anticipated levels of operations, we anticipate that our ongoing working capital requirements will continue to be funded through internally generated funds, our net borrowings from our working capital line of credit and the $1.5 million equity financing we received on January 15, 2003 (See Note 17). We anticipate that such sources of funds will be sufficient to satisfy our operating and debt service cash needs throughout 2003 and for the foreseeable future; however, there can be no assurance that these funds will be sufficient. Our working capital line of credit requires us to maintain compliance with certain financial covenants each quarter. Certain of these covenants require us to maintain increasingly higher amounts of earnings before interest, taxes, depreciation and amortization ("EBITDA") and tangible net worth during 2003. In order to meet such requirements throughout 2003, we will be required to achieve sales levels, which are above those that have currently been attained. There is no assurance we will be able to reach such sales levels and maintain compliance with the financial covenants contained in the working capital line of credit. Based on the conditional financing arrangements of our working capital line of credit, there can be no assurance we will be able to obtain any additional funding on acceptable terms, if at all. In the event of a default under our working capital line of credit and in the event the lending bank does not waive the default, our operations could be materially adversely affected. In that event, we would be required to delay or abandon certain operating activities and capital expenditures, which would further adversely affect our operations. USE OF ESTIMATES Management has made a number of estimates and assumptions related to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities in preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. F6 USDATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of USDATA and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. RECLASSIFICATIONS Certain reclassifications have been made to 2001 and 2000 to conform to the presentation in 2002. CASH EQUIVALENTS USDATA considers all highly liquid investments purchased with maturities of three months or less at the time of purchase to be cash equivalents. PROPERTY AND EQUIPMENT Property and equipment are stated at original cost. Maintenance and repairs are charged to expense as incurred, and the costs of additions and major betterments and replacements are capitalized. Depreciation is provided in amounts, which amortize costs over the estimated useful lives of the related assets, generally three to five years, utilizing the straight-line method. Leasehold improvements are amortized over the lesser of the term of the respective leases or estimated useful life of the improvement. INTANGIBLE ASSETS Computer Software Development Costs. Software development costs incurred prior to establishing technological feasibility are charged to operations and included in product development costs. Software development costs incurred after establishing technological feasibility, and purchased software costs, are capitalized and amortized on a product-by-product basis when the product is available for general release to customers. Annual amortization, charged to selling and product materials, is the greater of the amount computed using the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product, or the straight-line method over the remaining estimated economic life of the product. The total computer software development costs capitalized for 2002, 2001 and 2000 were $668 thousand, $1.3 million, and $2.3 million (net of a write-off of $1.8 million), respectively. The total costs amortized and charged to operations for 2002, 2001 and 2000 were $2.7 million, $2.3 million, and $1.1 million, respectively, and is included in selling and product materials expense. Accumulated amortization at December 31, 2002 and 2001 was $5.5 million and $3.3 million, respectively. Software Held for Resale. Purchased software or the purchase of underlying source code for a certain software product that is held for resale in the ordinary course of business is capitalized and amortized on a straight-line basis over the estimated economic useful life, generally three to five years. Total costs amortized and charged to operations for all software held for resale were $572 thousand, $398 thousand and $480 thousand for 2002, 2001 and 2000, respectively. Accumulated amortization at December 31, 2002 and 2001 was $1.6 million and $1.0 million, respectively. Customer Relationships. The cost of acquired companies is allocated to the assets acquired and liabilities assumed based on estimated fair values at the date of acquisition. Costs allocated to identifiable intangible assets, other than intangible assets with definite lives, are generally amortized on a straight-line basis over their remaining estimated useful life. Our identifiable intangible asset is comprised of the customer relationships resulting from the 2002 acquisition described in Note 2. IMPAIRMENT OF LONG-LIVED ASSETS The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets," effective January 1, 2002. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of." Both of these standards require that long-lived assets and certain intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the net asset exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. F7 USDATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- REVENUE RECOGNITION Revenue from the licensing of software products is recognized in accordance with Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2"), as amended by SOP 98-9, Modification of SOP 97-2, With Respect to Certain Transactions ("SOP 98-9"), and we generally recognize revenue when all of the following criteria are met as set forth in paragraph 8 of SOP 97-2: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the fee is fixed or determinable; and (4) collectibility is probable. Each of the four criteria above is defined as follows: Persuasive evidence of an arrangement exists. It is customary practice to have a written contract, which is signed by both the customer and us or, in situations where a contract is not required, a customer purchase order has been received. Delivery has occurred. Our software may be either physically or electronically delivered to the customer. Delivery is deemed to have occurred upon the delivery of the electronic code or the shipment of the physical product based on standard contractual committed shipping terms, whereby risk of loss passes to the customer when shipment is picked up by the carrier. If undelivered products or services exist in an arrangement that is essential to the functionality of the delivered product, delivery is not considered to have occurred until these products or services are delivered as described above. The fee is fixed or determinable. Our customers generally pay a per-license fee that is based on the number of servers on which the software is installed, the size of the application that they will develop for the software, the options provided for those servers, and the number of client workstations that access the server. Additional license fees are due when the total number of subscribers using our products increases beyond the specified number for which a license was purchased or when additional options are added. License fees are generally due within 30-45 days from product delivery in the United States and within 30 - 90 days from product delivery internationally. Collectibility is probable. Collectibility is assessed on a customer-by-customer basis. We typically sell to customers with high credit ratings and solid payment practices. New customers are subjected to a credit review process, in which we evaluate the customers' financial position and ultimately their ability to pay. If it is determined from the outset of an arrangement that collectibility is not probable based upon our credit review process, revenue is recognized as cash payments are received. We allocate revenue on software arrangements involving multiple elements to each element based on the relative fair value of each element. Our determination of fair value of each element in multiple element arrangements is based on vendor-specific objective evidence ("VSOE"). We limit our assessment of VSOE to the price charged when the same element is sold separately. We have analyzed all of the elements included in our multiple-element arrangements and determined that we have sufficient VSOE to allocate revenue to maintenance and support services and professional service components of our license arrangements. We sell our professional services separately, and have established VSOE on this basis. VSOE for maintenance and support services is based on the customer's annual renewal rates for these elements. Accordingly, assuming all other revenue recognition criteria are met, revenue from licenses is recognized on delivery using the residual method in accordance with SOP 98-9, and revenue from maintenance and support services is recognized ratably over the respective term. Professional services generally are not essential to the functionality of the software. Our software products are fully functional upon delivery and implementation and do not require any significant modification or alteration. Customers purchase these professional services to facilitate the adoption of our technology and dedicate personnel to participate in the services being performed, but they may also decide to use their own resources or appoint other professional service organizations to provide these services. Software products are typically billed separately and independently from professional services, which are generally billed either on a time-and-materials or a milestone-achieved basis. We generally recognize revenue from professional services as the services are performed. SOFTWARE LICENSE AGREEMENT WARRANTIES AND INDEMNIFICATIONS We typically provide our customers a warranty on our software products for a period of 90 days. Such warranties are accounted for in accordance with SFAS No. 5, "Accounting for Contingencies." To date, we have not incurred any costs related to warranty obligations. Under the terms of substantially all of our software license agreements, we have agreed to indemnify our customers for all costs and damages arising from claims against such customer based on, among other things, allegations that our software infringes the intellectual property rights of a third party. In most cases, in the event of an infringement claim, we retain the right to (i) procure for the customer the right to continue using the software; (ii) replace or modify the software to eliminate the infringement while providing substantially equivalent functionality; or (iii) if neither (i) nor (ii) can be reasonably achieved, we may terminate the license agreement and refund to the customer the license fee paid to us. Such indemnification provisions are accounted for in accordance with SFAS No. 5. Through December 31, 2002, there have been no claims under such indemnification provisions. STOCK-BASED COMPENSATION We apply the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations, in accounting for stock options and other stock based awards under our stock option plan. The difference between the quoted market price as of the date of the grant and the contractual purchase price of shares is charged to operations over the vesting period. No compensation cost has been recognized for fixed stock options with exercise prices equal to the market price of the stock on the dates of grant and shares acquired by employees under the USDATA 1994 Equity Compensation Plan. Pro forma net income and earnings per share disclosures as if we recorded compensation expense based on the fair value for stock-based awards have been presented in accordance with the provisions of SFAS No. 148, Accounting for Stock-Based Compensation-Transition F8 USDATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- and Disclosure, and are as follows for the years ended December 31, 2002, 2001 and 2000:
(in thousands, except per share data) 2002 2001 2000 --------------------------------------- Net loss: As reported $(11,601) $(12,697) $(44,834) Stock-based employee compensation cost included in reported net income, net of related tax effects -- -- -- Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects (505) (140) (1,156) -------- -------- -------- Proforma $(12,106) $(12,837) $(45,990) ======== ======== ======== Basic and diluted net loss per common share As reported $ (3.99) $ (4.50) $ (16.39) Pro forma (4.16) (4.55) $ (16.82) ======== ======== ========
The weighted-average fair value of options granted was $1.64, $3.09 and $53.95 for 2002, 2001, and 2000, respectively. The fair value of each option is estimated at the date of grant using a modified Black-Scholes option pricing model, with the following weighted-average assumptions for 2002, 2001 and 2000, respectively: dividend yields of 0% for all three years; expected volatility of 150%, 100% and 121%; risk-free interest rate of 2.9% to 4.7%, 4.7% to 6.0%, and 5.0% to 6.3%; and expected lives of 5 years. ACCOUNTING CHANGES In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used and establishes new standards for the recognition of certain identifiable intangible assets, separate from goodwill for all business combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values. We adopted the provisions of SFAS No. 141 effective July 1, 2001 and fully adopted SFAS No. 142 effective January 1, 2002. The acquisition discussed in Note 2 was accounted for in accordance with both SFAS No. 141 and SFAS No. 142. INCOME TAXES Income taxes are accounted for under the asset and liability method. This method results in the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. FINANCIAL INSTRUMENTS The carrying values of cash equivalents, accounts receivable and accounts payable approximate fair value due to their short maturities. The carrying value of our bank note payable and revolving line of credit at December 31, 2002 and 2001 approximates fair value as these notes payable bear interest at market rates. NET LOSS PER SHARE OF COMMON STOCK Net loss per share of common stock is presented in accordance with the provisions of SFAS No. 128, "Earnings Per Share." Under SFAS No. 128, basic loss per share excludes dilution for potentially dilutive securities and is computed by dividing income or loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Potentially dilutive securities are excluded from the computation of diluted earnings (loss) per share when their inclusion would be antidilutive to the results of continuing operations. Options to purchase 437,000; 294,000; and 301,000 shares of common stock for 2002, 2001 and 2000, respectively, were not included in the computation of diluted earnings per share as their impact would be antidilutive. In addition, the following common stock equivalents were not included in the computation of diluted earnings per share for 2002 due to their impact being antidilutive: (1) warrants to purchase 1,712,500, 50,000 and 243,902 shares of common stock; and (2) 2,907,566 equivalent common shares that would be issued upon the conversion of our issued and outstanding F9 USDATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Series A Preferred, Series B Preferred, and Series C-1 Preferred. FOREIGN CURRENCY TRANSLATION The balance sheets of our foreign subsidiaries are translated using year-end exchange rates and we translate our statement of operations amounts using the average exchange rates in effect during the year. The gains and losses resulting from the change in exchange rates from year to year have been reported separately as a component of accumulated other comprehensive loss in stockholders' equity. Gains and losses resulting from foreign currency transactions are included in the statements of operations and such amounts have not been significant. CONCENTRATION OF CREDIT RISK We license software and provide services to established companies. We perform credit evaluations of our customers and generally do not require collateral. We maintain reserves for estimated credit losses. At December 31, 2002, we had one customer with an outstanding accounts receivable balance of approximately $0.5 million. This customer represented approximately 28% of our revenues for 2002. At December 31, 2001, we had two customers with outstanding accounts receivable balances of approximately $0.6 million and $0.3 million, respectively. These customers represented approximately 21% and 7%, respectively, of our revenues for 2001. 2. ACQUISITION On October 1, 2002, USDATA acquired all the issued and outstanding stock of Wizard Information Systems, Ltd ("Wizard"), pursuant to the terms of an Agreement for the Purchase of Wizard Information Systems Limited ("Acquisition Agreement"), dated October 1, 2002 ("Completion Date"), by and among USDATA and John Adrian Wise and David John Moody (each a "Seller" and together the "Sellers"). We acquired Wizard primarily to secure direct access to end-users. Wizard is a privately held company located in the United Kingdom and is one of USDATA's largest European distributors. Wizard is an independent automation solutions provider founded in 1995 and has offices in the United Kingdom, France and the Netherlands. In connection with the acquisition, USDATA paid consideration of $140,000 in cash, 220,752 unregistered shares of USDATA common stock, and 16,800 shares of USDATA Series B Preferred, each of which is convertible into 3.28 shares of USDATA common stock. The Series B Preferred and common stock was valued at an aggregate fair market value of $229 thousand. We also incurred $164 thousand in acquisition costs. In addition, the Sellers are entitled to receive additional consideration in the aggregate; (i) a maximum of 257,544 shares of unregistered USDATA common stock and 19,600 shares of Series B Preferred ("Performance Shares") contingent upon Wizard achieving a certain target gross revenue level by March 31, 2003, and (ii) a maximum of 257,544 shares of USDATA common stock and 19,600 shares of Series B Preferred ("Retention Shares") contingent upon continued employment with Wizard for three years, under the terms and conditions of an Executive Service Agreement entered into by and among Wizard and the Sellers. The Performance Shares and Retention Shares, if earned, shall be granted in equal installments on each of the first three anniversaries of the Completion Date; and, to the extent not yet granted, shall be forfeited in the event that the Seller's employment with USDATA terminates as set forth in the Acquisition Agreement. The Performance Shares and Retention Shares, if earned, will be recognized as non-cash compensation expense in our statement of operations. We recorded $21 thousand in non-cash stock compensation in connection with the earned portion of the Retention Shares during the year ended December 31, 2002. The acquisition has been accounted for under the purchase method of accounting in accordance with SFAS No. 141. The purchase price has been allocated to the assets acquired and liabilities assumed based on estimated fair values at the date of acquisition. The purchase price allocations are subject to adjustment resulting from the finalization of those estimated fair values. The excess purchase price over the estimated fair value of net tangible assets of $1.4 million has been allocated to customer relationships and is being amortized on a straight-line basis over its remaining estimated useful life of 3 years. We recorded $118 thousand in amortization expense for the three months and year ended December 31, 2002. The results of the acquired business have been included in the consolidated financial statements since the date of acquisition of October 1, 2002. A summary of the total purchase price and purchase price allocation of the acquisition is as follows: F10 USDATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (in thousands) Accounts receivable, net $ 543 Customer relationships 1,419 Other assets, net 234 Accounts payable (547) Deferred revenue (464) Other accrued liabilities (652) ------- Total purchase price $ 533 =======
Unaudited pro forma operating results as though the acquisition had occurred on January 1, 2001, with adjustments primarily to give effect to amortization of customer relationships, is as follows:
Year Ended December 31, ----------------------- (in thousands, except per share data) 2002 2001 --------- -------- (unaudited) Revenues $ 11,776 $ 15,822 Loss from operations (8,140) (2,663) Net loss applicable to common stock (12,631) (13,470) Net loss per share: Basic and diluted $ (4.34) $ (4.78) ======== ========
3. DISCONTINUED OPERATION In February 2001, management of USDATA determined that the market adoption rate of the technology around our eMake subsidiary was not progressing in a manner to support the resources needed to continue eMake's newly developed operating plan. As a result, our Board of Directors approved a plan on February 26, 2001 to terminate the operations of eMake as of March 31, 2001 as part of a strategy to commit our resources to our core business. At December 31, 2000, we recorded an estimated loss on disposal of $1.2 million, including operating losses of $360 thousand expected to be incurred through the disposal date of March 31, 2001. eMake is reported as a discontinued operation, and the consolidated financial statements have been reclassified to segregate the net assets and operating results of the business. Summarized financial data of the discontinued operation are as follows:
(in thousands) 2002 2001 2000 -------- -------- -------- Financial position: Net liabilities of discontinued operation (a) $ (193) $ (339) $ (2,413) ======== ======== ======== Discontinued operation: Revenues $ -- $ -- $ 1,075 -------- -------- -------- Operating (income) expense before severance and other restructuring and acquisition related charges -- -- 18,087 Amortization of intangible assets (b) -- -- 1,078 Non-cash stock compensation (b) -- -- 1,278 Severance and other restructuring charges (a) (c) (98) (182) 1,861 Asset impairment charge (d) -- -- 7,095 -------- -------- -------- Income (loss) from discontinued operation $ 98 $ 182 $(28,324) ======== ======== ========
(a) In December 2002, we reversed $98 thousand in estimated legal fees that were accrued as a result of terminating the operations of eMake. The balance at December 31, 2002 represents $119 thousand in accounts payable and $74 thousand in other accrued liabilities. (b) Acquisition On August 6, 1999, we completed the acquisition of substantially all of the assets and certain liabilities of Smart Shop Software, Inc. ("Smart Shop") for $6.4 million in cash, plus transaction costs of $0.2 million. The eMake segment F11 USDATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- operations were built around the Smart Shop operations and assets acquired. This acquisition was accounted for under the purchase method of accounting. The excess purchase price over the estimated fair value of net tangible assets was allocated to various intangible assets, consisting of developed technology of $1.8 million, assembled work force of $251 thousand and goodwill of $5.2 million, all of which were being amortized to expense on a straight-line basis over 5 years. We recorded $1.1 million to expense for the period ended December 31, 2000. In connection with the acquisition, we issued 500,000 shares of USDATA common stock to certain former shareholders of Smart Shop who became employees of eMake. The shares of common stock were held in escrow as collateral for performance under the purchase agreement to be released from escrow to the shareholders in six tranches, each six months following the closing date of August 6, 1999. As a result, we recorded deferred stock compensation of $1.9 million to stockholders' equity in 1999. The deferred stock compensation was recognized as compensation expense over 36 months, as the restrictions lapsed. Due to the restructuring plan described in (b) below, the remaining shares were released from escrow and we accelerated the amortization of the compensation charge in full and recorded a non-cash stock compensation charge of $1.3 million for the period ended December 31, 2000. (c) Severance and Other Restructuring Charges During the year 2000, we implemented a restructuring plan designed to reduce our cost structure by reducing our workforce and other operating expenses. We recorded a one-time charge for eMake of $1.9 million primarily consisting of employee severance and other employee-related costs of $1.2 million. Other charges included in the $1.9 million are early lease termination and facility shutdown costs of $112 thousand, write-downs of redundant property and equipment of $308 thousand, lease costs associated with vacated office space of $242 thousand and $10 thousand for legal and other related costs. Severance costs were determined based upon employees' years of service as well as level within the organization. The reduction in workforce included approximately 93 employees, or approximately 67%, and affected all functions of eMake. Of the total amount charged to expense for the year ended December 31, 2000, approximately $603 thousand was paid during 2000 and the remaining $549 thousand was paid during 2001. All affected employees were terminated as of December 31, 2000. Of the total lease termination and facility shutdown costs charged to expense for the year 2000 of $354 thousand, $54 thousand were paid by December 31, 2000 and $168 thousand were paid by December 31, 2001. We settled the remaining $132 thousand accrual related to lease costs associated with vacated office space and reversed this accrual in 2001. The reversal is included in income from discontinued operations in the consolidated statement of operations, in addition to $50 thousand received related to a royalty agreement with eMake and one of its competitors, for the year ended December 31, 2001. $10 thousand was paid related to legal and other costs through December 31, 2000. At December 31, 2001, $14 thousand other employee-related costs remained in accrued liabilities, which was paid in 2002. As of December 31, 2002, no employee-related costs were outstanding. (d) Asset Impairment Charge As a result of our restructuring plan described in Note 8, we re-evaluated eMake's business model during the fourth quarter of 2000. A revised operating plan was developed to restructure and stabilize the business. Based on the forecasted undiscounted cash flows from the revised operating plan, it was determined that certain intangible assets of eMake were impaired and we recorded an asset impairment charge of $7.1 million. The amount of the impairment was measured based upon projected discounted future cash flows from the revised operating plan. The asset impairment charge includes a write-off of goodwill and intangible assets of $4.0 million, net and $1.5 million, net, respectively. Also included in the impairment charge were capitalized website development costs and capitalized software costs of $1.2 million, net and $365 thousand, net, respectively. The acquired intangible assets were written off in 2000. F12 USDATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 4. PROPERTY AND EQUIPMENT The components of property and equipment at December 31, 2002 and 2001 were as follows:
(in thousands) 2002 2001 - ------------------------------------------------------ Equipment $ 2,096 $ 2,083 Purchased software 1,315 1,301 Furniture and fixtures 381 381 Leasehold improvements 84 83 Vehicles -- -- Assets under capital leases 305 605 ------- ------- 4,181 4,453 Accumulated depreciation and amortization (3,671) (3,241) ------- ------- Net property and equipment $ 510 $ 1,212 ======= =======
5. INTANGIBLE ASSETS Intangible assets with definite useful lives are amortized over their respective estimated useful lives to their estimated residual values. The following is a summary of intangible assets at December 31, 2002 and 2001:
2002 2001 -------------------------------------- -------------------------------------- Gross Gross Carrying Accumulated Carrying Accumulated (in thousands) Amount Amortization Total Amount Amortization Total ---------- ---------- ---------- ---------- ---------- ---------- Definite Useful Lives Computer software development costs $ 6,557 $ 5,464 $ 1,093 $ 9,721 $ 3,278 $ 6,443 Software held for resale 2,896 1,583 1,313 1,436 1,010 426 Customer relationships 1,419 118 1,301 -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total $ 10,872 $ 7,165 $ 3,707 $ 11,157 $ 4,288 $ 6,869 ========== ========== ========== ========== ========== ==========
Amortization expense related to intangible assets was $3.4 million, $2.7 million and $1.6 million for the years ended December 31, 2002, 2001, and 2000, respectively. Estimated amortization expense related to intangible assets subject to amortization at December 31, 2002 for each of the years in the five year period ending December 31, 2007 and thereafter is: 2003 - $2.230 million; 2004 - $960 thousand; 2005 - $517 thousand; 2006 - $0; 2007 - $0 and thereafter - - $0. On March 20, 2002 (the "Effective Date"), we entered into a source code license agreement with the developer of the client graphics used within our FactoryLink(R) software product. We have a nonexclusive right to reproduce, modify and incorporate the licensed software into other computer software. In addition, the licensed software shall be marketed, distributed and sublicensed under one or more of our and/or third party's trademarks, trade names or service marks. The purchase price of the licensed software was $900,000 payable over three years as follows: (a) $200,000 within 10 business days of the Effective Date; (b) $200,000 six months after the Effective Date; (c) $250,000 on April 30, 2003; and (d) $250,000 on March 20, 2004. As of December 31, 2002, $250,000 of the remaining amount due is included in other accrued liabilities with the balance of $250,000 included in other non-current liabilities. We capitalized the original purchase price of $900,000 of the licensed software as software held for resale and it is being amortized on the straight-line method over the estimated economic life of three years. On July 9, 2002, we acquired the rights to certain source code related to value added products that are currently bundled into our FactoryLink(R) software product for $560,000. Under the license agreement we were granted a worldwide, non-exclusive, perpetual, irrevocable, assignable and transferable license to use the source code, design documentation, user documentation, setups and related materials. The $560,000 is payable over three years in annual payments of $140,000 beginning in 2002. The first payment was made on July 9, 2002 upon receipt of the source code. Each additional payment is due on each of the first, second and third anniversary of the effective date, June 30, 2002. As of December 31, 2002, $140,000 of the remaining amount due is included in other accrued liabilities with the balance of $280,000 included in other non-current liabilities. We capitalized the original purchase price of $560,000 as software held for resale and it is being amortized on the straight-line method over the estimated economic life of three years. The $1.4 million excess purchase price over the estimated fair value of net tangible assets of the acquired business described in Note 2 has been allocated to customer relationships and is being amortized on a straight-line basis over its remaining estimated useful life of 3 years. We recorded $118 thousand in amortization expense for the three months and year ended December 31, 2002. F13 USDATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Due to lower than expected future revenue from the S2K software product and due to our decision to re-direct our sales and development efforts to our core software products, FactoryLink(R) and Xfactory(R), we determined that the carrying amount of the capitalized software development costs for S2K may not be recoverable. We compared the carrying amount of the capitalized software developments costs for S2K to future net cash flows expected to be generated by the asset and determined that the asset was impaired. As a result, we wrote off the entire carrying value of $3.3 million to expense in December 2002. As a result of strategy changes from two of our suppliers, we determined that the carrying amount of capitalized software development costs related to two of our software products were not recoverable and as a result deemed to be impaired during the third quarter of 2001. We wrote off $355 thousand related to our Analyzer software product and $36 thousand related to our Connector software product, totaling $391 thousand. In 2000, we wrote off $1.8 million of capitalized software costs due to impairment of certain software products. 6. DEBT Our borrowings at December 31, 2002 and 2001 consisted of:
(in thousands) 2002 2001 ------ ------ Revolving line of credit $ 663 $1,145 Bank promissory note 79 143 Non-interest bearing note payable 74 174 Capital leases 169 414 Note payable 449 468 Financed insurance -- 83 ------ ------ Total debt 1,434 2,427 Less current portion 1,327 1,837 ------ ------ $ 107 $ 590 ====== ======
A wholly-owned subsidiary of USDATA, United States Data Corporation, our operating entity, maintains a revolving credit facility with JPMorgan Chase Bank (the "Lending Bank") to provide us with working capital assistance relating to timing of our cash flow (the "Credit Facility"). The Credit Facility originated on January 15, 2001 and on January 15, 2002, it was amended to extend the Credit Facility to January 31, 2003 and increase the commitment fee from 1.0% to 1.5% per annum on the total commitment of up to $3.0 million. Effective January 31, 2003, we renewed the Credit Facility through January 31, 2004, increased the interest rate to the prime rate plus 3.0% and increased the commitment fee from 1.5% to 2.0% per annum on the total commitment of up to $3.0 million. At December 31, 2002 and 2001, the interest rate was 5.75% and 6.25%, respectively. The Credit Facility is collateralized by certain of our foreign accounts receivable, and is guaranteed by USDATA and Export-Import Bank of the United States ("EXIM Bank"). EXIM Bank guarantees 90% of the principal and interest. At December 31, 2002 and 2001, $663 thousand and $1.1 million, respectively, was drawn under the Credit Facility and is included in current liabilities. Based on the qualifying borrowing base arrangement, total remaining availability at December 31, 2002 and 2001 was $97 thousand and $309 thousand, respectively. Due to the nature of the qualifying borrowing base arrangement, our borrowing capability varies each month depending on billings and cash collections. We were not in compliance with the tangible net worth debt covenant for the months ended March 31, April 30, and May 31, 2002. In addition, we did not comply with the EBITDA debt covenant for the quarter ended March 31, 2002. On April 15, 2002 and July 12, 2002, we received two separate waivers from the Lending Bank waiving these defaults under the Credit Facility. In connection with the April 15, 2002 waiver, the interest rate under the Credit Facility was increased by 75 basis points to the prime rate plus 2.25% per annum. On July 12, 2002, the Lending Bank amended both debt covenants going forward beginning in June 2002 to be consistent with our most recent operating plan. We complied with both debt covenants as of June 30, 2002, but due to lower than expected revenue for the third quarter of 2002 and an unexpected asset impairment charge in the fourth quarter of 2002, we failed to comply with the EBITDA debt covenant for both quarters and the tangible net worth debt covenant for the fourth quarter. On October 24, 2002 and at renewal on January 31, 2003, we received waivers from the Lending Bank waiving these defaults under the Credit Facility. The EBITDA and tangible net worth covenants for the three months ended December 31, 2002 was $900 thousand and ($2.3) million, respectively. Actual EBITDA and tangible net worth for this period was ($3.0) million and ($3.6) million. The debt covenant defaults are attributed to lower than anticipated fourth quarter revenues and for EBITDA the $3.3 million write down of impaired assets described in Note 5. The EBITDA and tangible net worth covenants to be met for the first, second, third and fourth quarters F14 USDATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- of 2003, respectively, are as follows: (a) EBITDA - ($564) thousand, ($50) thousand, ($25) thousand and $1.3 million; and (b) tangible net worth - ($3.4) million, ($3.7) million, ($3.9) million and ($2.5) million. In conjunction with the Smart Shop acquisition, we, through our wholly owned subsidiary, assumed a promissory note with a bank in the amount of $297 thousand of which $79 thousand and $143 thousand was outstanding at December 31, 2002 and 2001, respectively. The note agreement requires monthly installments of $7 thousand including interest at the bank prime rate plus 1.5%, or 5.75% at December 31, 2002 and 6.25% for the same period in 2000. The note is collateralized by all accounts receivable, inventory, general intangibles, equipment and fixtures of the wholly-owned subsidiary. The promissory note is guaranteed by USDATA and the final payment of the outstanding balance is due in August 2003. Interest paid in 2002, 2001 and 2000 totaled $4 thousand, $17 thousand and $24 thousand, respectively. Also, in connection with the 1999 acquisition of Smart Shop, we assumed a $174 thousand noninterest-bearing note payable to a former Smart Shop shareholder. The note was due in its entirety on August 5, 2002. As of December 31, 2002, $74 thousand was outstanding on the loan. The final payment was made on January 17, 2003 settling the debt in full. In December 2000, we entered into a development and commercialization agreement with an OEM and one of our customers. On May 11, 2001, the agreement was amended to include a loan agreement ("Loan") between a wholly-owned subsidiary of USDATA and the OEM in connection with a co-coordinated development program to co-develop what was to be the next major release of our software product FactoryLink(R), or S2K. During 2001, the OEM advanced to USDATA $467,500 in three separate advances. The Loan bears interest at 10.5% per annum and is repayable in eight equal quarterly installments of principal and interest with the first installment due on April 15, 2002. As of December 31, 2002 and December 31, 2001, $446 thousand and $468 thousand was outstanding on the Loan with the entire balance being included in current liabilities for 2002 and $172 thousand included in current liabilities for 2001. We have not paid the quarterly loan payments due for the third and fourth quarters of 2002 or the first quarter of 2003, totaling $212 thousand. In October 2002, we contacted the OEM and requested delaying the loan payments, as a result of their significantly lower than forecasted purchases from USDATA. A key provision of the development and commercialization agreement was that our software products were to be a preferred solution of the OEM and that they were to actively promote and sell our software products. On March 17, 2003, we entered into an amendment to the development and commercialization agreement, whereby USDATA granted to the OEM a license to the S2K source code as it existed on that date and the OEM forgave the $446 thousand outstanding balance of the Loan. USDATA retains the intellectual property rights to the existing S2K software product. In addition, we have an obligation to provide 192 hours of support over the next twelve months. In November 2001, we renewed our Directors and Officers Liability insurance. We financed the $125 thousand premium under a premium finance agreement, which bears interest at 5.74% per annum. Monthly installments of $12 thousand were payable during 2001 and $83 thousand was outstanding at December 31, 2001. These amounts were paid in 2002. No such amounts were outstanding at December 31, 2002 7. INCOME TAXES Loss from continuing operations before dividends on preferred stock, preferred stock warrant and beneficial conversion was ($7.2) million, ($2.1) million and ($14.3) million for the years ended December 31, 2002, 2001 and 2000, respectively. The benefit (provision) for income taxes differed from the amounts computed by applying the United States Federal statutory income tax rate of 34% to income (loss) before taxes as a result of the following for the years ended December 31, 2002, 2001 and 2000:
(in thousands) 2002 2001 2000 -------- -------- -------- Expected tax benefit $ 2,417 $ 703 $ 5,071 State taxes, net of federal impact (373) -- -- Change in valuation allowance (2,038) (246) (15,323) Change in prior year estimate -- (377) -- Discontinued operations -- (62) 10,036 Other (6) (18) 216 -------- -------- -------- Income tax (provision) benefit $ -- $ -- $ -- ======== ======== ========
F15 USDATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The components of deferred taxes at December 31, 2002 and 2001 were as follows:
(in thousands) 2002 2001 -------- -------- Deferred tax assets: Net operating loss $ 21,940 $ 15,835 Impairment and restructuring 525 4,024 Allowance for doubtful accounts 36 104 Accrued benefits 40 74 Credits 1,075 1,075 Intangible assets 1,187 155 Compensation 247 247 Other 272 666 Valuation allowance (20,152) (18,114) -------- -------- $ 5,170 $ 4,066 ======== ======== Deferred tax liabilities: Depreciation 616 851 Capitalized software 4,025 2,920 Other 529 295 -------- -------- $ 5,170 $ 4,066 ======== ========
At December 31, 2002, we had net operating loss carryforwards of approximately $64.4 million, which will expire beginning in 2018. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon these considerations, we have fully reserved all deferred tax assets to the extent such assets exceed deferred tax liabilities. We believe as a result of common stock issuances in 2001 and 2002, we have undergone an ownership change within the meaning of Section 382 of the Internal Revenue Code ("IRC"). As a result, our ability to utilize our operating loss carryforwards incurred prior to the ownership changes are limited on an annual basis to the amount equal to the value of USDATA, as defined by the IRC, as of the date of change in ownership, multiplied by the long-term exempt bond rate. No taxes have been provided on undistributed earnings of foreign subsidiaries, as they are considered permanently reinvested. 8. SEVERANCE AND OTHER RESTRUCTURING CHARGES During the fourth quarter of 2000, we implemented a restructuring plan designed to reduce our cost structure by reducing our workforce and other operating expenses. We recorded a charge of $2.5 million primarily consisting of employee severance and other employee-related costs of $1.1 million. This charge excludes the restructuring associated with eMake. See Note 3 for discussion on eMake. Severance costs were determined based upon employees' years of service as well as level within the organization. The reduction in workforce included approximately 56 employees, or approximately 41% of the workforce, and affected all functions within our organization. All affected employees were terminated as of December 31, 2000. Other charges included in the $2.5 million are early lease termination and facility shutdown costs of $200 thousand, write-downs of redundant property, plant and equipment of $81 thousand, lease costs associated with vacated office space of $1.0 million and $91 thousand for legal and other related costs. These charges provide for future streamlining of operations related to cost reduction initiatives. Of the total amount expensed in 2000, approximately $827 thousand was paid during the year ended December 31, 2000 and approximately $1.5 million was paid during the year ended December 31, 2001. The remaining $76 thousand was paid during 2002. The continuing deterioration of the real estate market affected our ability to sublease approximately 44,400 square feet of excess office space at our headquarter facilities. As a result, we accrued an additional $1.1 million in restructuring charges related to lease costs associated with vacated office space in the third quarter of 2001, representing an estimated one full year of lease costs associated with the excess office space. In October 2001, we initiated negotiations with Crescent Real Estate Funding VIII, L.P. (the "Landlord") whereby the Landlord would remove the 44,400 square feet of excess office space under the facility lease. On March 19, 2002, we entered into a Fourth Amendment to the Office Lease Agreement (the F16 USDATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- "Fourth Amendment") with the Landlord to reduce our lease payment commitment obligations and our excess leased office space. Pursuant to the Fourth Amendment, the Landlord reacquired approximately 44,400 rentable square feet, reducing our headquarters' space to 34,982 rentable square feet ("Existing Premises"). We sublease approximately 14,802 square feet of the Existing Premises. The Fourth Amendment extended the lease term four months to December 31, 2010, and increased the base rental rate per square foot on the Existing Premises by $1.00 each year beginning in 2003 and ending in 2005. In year 2006, the base rental rate per square foot increases by $1.75 from year 2005 and remains constant through year 2010. In addition, we owed $444 thousand at March 31, 2002 to the Landlord representing rents due on the excess leased space for five months. The Landlord agreed to waive any claim to such amount owed contingent upon timely payment of all rent to be paid on the Existing Premises. The $444 thousand will be reduced by $51 thousand per year over the remaining term of the lease. We also transferred to the Landlord our right, title and interest in excess office furniture, with a carrying value of approximately $135 thousand. In connection with the Fourth Amendment, we issued a Warrant, dated March 19, 2002, to the Landlord for the purchase of up to 243,902 shares of our common stock at an exercise price per share of $2.05, the closing market price on the date of the Warrant. The Warrant is exercisable by the Landlord, in whole or in part, at any time commencing on March 19, 2002 and ending on March 18, 2007. In addition, under the Fourth Amendment, we released certain rights, such as our right to terminate the Lease in 2005, certain preferential rights to lease additional space and the right to extend the Lease. By implementing the provisions of the Fourth Amendment, we realized a cash savings of approximately $1.0 million in lease costs during 2002. In connection with the Fourth Amendment we recorded a $356 thousand restructuring charge for the consultant who assisted us in the negotiations. At December 31, 2002, $67 thousand of the remaining accrual was included in other current liabilities and $119 thousand was included in other non-current liabilities. We compute rent expense to be recognized under the Lease, as amended, considering the increasing rent over the rent term and all amounts previously accrued for as rent expense, including the $1.1 million recorded in the third quarter of 2001 for unoccupied excess lease space, $135 thousand for the excess office furniture transferred to the Landlord and $383 thousand for the value of the Warrant issued on March 19, 2002. The remaining accrual will be amortized over the remaining lease term as an offset to rent expense, and the carrying value of the excess office furniture and value of the Warrant will be amortized as an increase to rent expense. At December 31, 2002, $129 thousand of the remaining accrual was included in other current liabilities and $901 thousand was included in other non-current liabilities. For the nine months ended September 30, 2002, revenues declined by 31% when compared to the same period in 2001 and declined by 25% when compared to the second quarter of 2002. As a result, in November 2002 we implemented a 23% reduction in our workforce in an effort to streamline and reduce our overhead costs. The reductions included approximately 17 employees and were primarily from general and administrative, quality assurance, and documentation. The quality assurance functions will be outsourced at a lower cost. A portion of the cost savings from the general and administrative reductions will be offset by newly established sales positions and sales and marketing programs. All affected employees were terminated as of December 31, 2002. We recorded $374 thousand in severance and other employee related costs associated with this reduction and related to the resignation of our former president and chief executive officer in October of 2002. Our board of directors appointed an interim president and chief executive officer to serve in this capacity for a considerable amount of time and who is with a turnaround management firm. As of December 31, 2002, $280 thousand was outstanding and is included in accrued compensation and benefits on the balance sheet. The severance costs were determined based upon employees' years of service as well as level within the organization. 9. STOCKHOLDERS' EQUITY AND CONVERTIBLE PREFERRED STOCK STOCK SPLIT On July 10, 2001, our board of directors approved and recommended that the stockholders approve an amendment to our Certificate of Incorporation to affect a one-for-five reverse stock split (the "Reverse Split") of our issued and outstanding common stock (the "Existing Common"). On July 10, 2001, the holders of a majority of the outstanding shares of Existing Common approved the amendment by written consent. Approval by the board of directors and by the holders of a majority of the outstanding shares of common stock is required under Delaware law to effect the amendment. The amendment became effective upon the filing of the amendment to our Certificate of Incorporation with the Delaware Secretary of State on August 20, 2001. The Reverse Split became effective August 21, 2001 the ("Effective Date"). Pursuant to the terms of the Reverse Split, each five shares of Existing Common outstanding immediately prior to the Effective Date was reclassified as, and exchanged for, one share of newly issued common stock, par value $0.01 per share ("New Common"). No fractional shares of New Common were issued. If the conversion resulted in a fraction of a share, then we rounded up such fraction of a share and the holder received a whole share for such fraction. The per share amounts reported herein have been adjusted to give effect to the Reverse Split for all periods presented. PREFERRED STOCK F17 USDATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The board of directors is authorized, subject to certain limitations and without stockholder approval, to issue up to 2.2 million shares of preferred stock in one or more series and to fix the rights and preferences of each series. In 1999, the board of directors designated 100,000 shares of authorized preferred stock as Series A Preferred, of which 50,000 shares were issued and outstanding at December 31, 2002 and 2001. In September 2000, we executed an amendment to the Certificate of Designation for our Preferred Stock which changed the terms of the Series A Preferred and designated 800,000 shares of authorized preferred stock as Series B Preferred, of which 281,800 shares and 265,000 shares were issued and outstanding at December 31, 2002 and 2001, respectively. The amended terms included that neither the Series A Preferred nor Series B Preferred are redeemable and that the cumulative dividends are no longer interest bearing. In March 2001, we executed a Certificate of Designation for Series C-1 Preferred and Series C-2 Preferred which designated 125,000 shares of authorized preferred stock as Series C-1 Preferred and designated 125,000 shares of authorized but unissued preferred stock as Series C-2 Preferred. As of December 31, 2002 and 2001, 75,000 and 53,750 shares, respectively, of Series C-1 Preferred were issued and outstanding. SERIES A CONVERTIBLE PREFERRED STOCK On August 6, 1999, we issued through a private placement 50,000 shares of our Series A Preferred for $5.0 million to a wholly-owned subsidiary of Safeguard, which was one of our primary stockholders. The Series A Preferred has a par value of $0.01 per share and a liquidation preference of $100 per share, plus cumulative dividends. Dividends on the Series A Preferred are cumulative and payable in additional shares of Series A Preferred or in cash at a rate of $8.00 per share per annum and in preference to any dividends on our common stock. The preferred stock is convertible at any time into shares of our common stock at a conversion rate of $23.25 per share of common stock. The preferred stock is also convertible into shares of common stock of any majority owned subsidiary of USDATA through the earliest of the following events: (a) June 1, 2006; (b) the commencement of the liquidation or winding up of the business of eMake; (c) the sale of all or substantially all of the assets and properties of eMake; (d) a merger, consolidation or other similar transaction involving eMake in which eMake is not the surviving entity or eMake is the surviving entity but after which the holders of the outstanding voting securities of eMake before the transaction hold less than 50% of eMake's outstanding voting securities after the transaction; (e) the sale by eMake of its securities in a public offering; or (f) a decrease in the ownership percentage of USDATA's voting securities of eMake to the extent that eMake would cease to be a consolidated subsidiary of USDATA. The Series A Preferred was mandatorily redeemable according to the original terms, however in September 2000, the Series A designation was amended to remove the mandatory redemption provision. At December 31, 2002 and 2001, the aggregate liquidation preference was $6.4 million and $6.0 million, including cumulative dividends of $1.4 million and $968 thousand, respectively. The holders of the Series A Preferred are subordinated to the holders of the Series B Preferred and Series C-1 and C-2 Preferred. Dividends of $400 thousand, $400 thousand and $401 thousand have been recorded for the years ended December 31, 2002, 2001 and 2000, respectively. SERIES A-1 AND A-2 REDEEMABLE CONVERTIBLE PREFERRED STOCK OF EMAKE On August 7, 2000, USDATA and eMake executed a Securities Purchase Agreement to provide $26.5 million in financing in the form of eMake preferred stock. The transaction was approved by our stockholders on September 11, 2000 and the transaction was completed on September 12, 2000. On September 12, 2000, SCP and Safeguard each purchased through a private placement 5,300,000 shares, for a total of 10,600,000 shares, of eMake Series A-1 Preferred and Series A-2 Preferred and warrants to purchase up to an additional 5,300,000 shares each of eMake Series A-1 and Series A-2 Preferred, respectively. The aggregate purchase price of $26,500,000 was comprised of $6,936,754 in cash and cancellation of $19,250,000 of the notes payable and the related accrued interest of $313,246. On January 31, 2001, SCP and Safeguard elected to exercise their right to acquire 132,500 shares each of USDATA Series B Preferred in exchange for 5,300,000 shares in eMake Series A-1 Preferred and 5,300,000 shares of eMake Series A-2 Preferred, respectively. As a result, no series of eMake preferred stock remains outstanding. SERIES B CONVERTIBLE PREFERRED STOCK The Series B Preferred has a par value of $0.01 per share and a liquidation preference of $100 per share, plus cumulative dividends. Dividends on the Series B Preferred are cumulative and payable in additional shares of Series B Preferred at a rate of $8.00 per share per annum. The holders of the Series B Preferred rank senior to the holders of the Series A Preferred with respect to dividend rights, rights on liquidation, dissolution and winding up and preference to any dividends on the common stock. The preferred stock is convertible at any time into our shares of common stock at a conversion rate of $30.45 per share of common stock. At December 31, 2002 and 2001, the aggregate liquidation preference was $33.2 million and $29.3 million, respectively, including cumulative dividends of $4.3 million in 2002 and F18 USDATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- $2.1 million in 2001 and cumulative preferred stock dividends of subsidiary of $642 thousand in 2000. Dividends of $2.154 million and $2.120 million have been recorded for the years ended December 31, 2002 and 2001. Pursuant to the acquisition described in Note 2, we issued 16,800 shares of Series B Preferred to the Sellers and recorded $1,680,000 to Series B Preferred stock. SERIES C CONVERTIBLE PREFERRED STOCK On March 30, 2001, we secured an equity infusion of $1.5 million from SCP through the issuance of 37,500 shares of USDATA Series C-1 Preferred and a warrant to purchase up to 75,000 shares of Series C-2 Preferred. In addition, SCP committed to purchase an additional 37,500 shares of Series C-1 Preferred ("Option Stock") at the purchase price of $40 per share or $1.5 million. We had the right to exercise our right to sell the Option Stock on or before the expiration of nine months after March 30, 2001 ("Closing Date"), but not before May 30, 2001, and we were required to be in compliance with specified monthly targets as defined in the Series C Preferred Stock Agreement. As an additional condition to this equity financing, SCP and Safeguard 2000 agreed not to convert upon exercise of eMake warrants to acquire Series A-1 and A-2 Preferred, respectively, which are convertible into USDATA Series B Preferred. On July 20, 2001, we exercised our right to sell 16,250 shares of the Option Stock to SCP. We received $635,596, net of transaction costs, in exchange for issuing 16,250 shares of our Option Stock to SCP. USDATA and SCP entered into a First Amendment to the Series C Preferred Stock Purchase Agreement (the "Agreement"). The Agreement amends that certain Series C Preferred Stock Purchase Agreement dated March 30, 2001 (the "Original Agreement") to extend our right to sell the remaining 21,250 shares of our Series C-1 Preferred ("Remaining Option Preferred Stock") at $40 per share or $850,000 to December 31, 2002. In addition, the Agreement provides SCP with warrant coverage for 50% of the Remaining Option Preferred Stock issued if we exercise our right to sell the Remaining Option Preferred Stock (up to 10,625 shares). The Agreement deleted the provision that we had to be in compliance with specified monthly targets in order to exercise our right to sell the Remaining Option Preferred Stock. On March 8, 2002, the Agreement was unanimously approved by the disinterested members of our Board of Directors. On September 30, 2002, we exercised our right to sell the remaining 21,250 shares of the Remaining Option Preferred Stock to SCP. We received $809,867 in cash, net of transaction costs, in exchange for the shares. In connection with issuing the remaining 21,250 shares of Remaining Option Preferred Stock to SCP, we issued a warrant to SCP granting them the right to purchase up to an additional 10,625 shares of Series C-2 Preferred at a purchase price of $40 per share. As of December 31, 2002, SCP held two warrants granting them the right to purchase in the aggregate 85,625 shares of our Series C-2 Preferred at a purchase price of $40 per share. As of December 31, 2002 and 2001, 75,000 and 53,750 shares of Series C-1 Preferred were issued and outstanding. The total proceeds were $2.9 million, net of transaction costs. The Series C-1 Preferred has a par value of $0.01 per share and a liquidation preference of $80 per share, plus cumulative dividends and interest. The preferred stock is convertible into our common stock at a conversion rate of 20 shares of common stock for each share of preferred stock and the cumulative dividends are payable at $4.00 per share per annum in the form of additional shares of Series C-1 Preferred. The Series C-1 Preferred ranks senior to all other classes and series of our capital stock with respect to dividend rights, rights on liquidation, dissolution and winding up. The excess of the liquidation preference over the purchase price of the preferred stock has been reflected as a $3.0 million and $2.150 million dividend on preferred stock for the year ended December 2002 and 2001, respectively, increasing the loss applicable to common stockholders and decreasing additional paid-in capital. At December 31, 2002 and 2001, the aggregate liquidation preference was $13.2 million and $10.4 million, including cumulative dividends of $378 thousand for 2002 and $142 thousand for 2001, dividends related to the beneficial conversion feature of the liquidation preference of $3.0 million and dividend on the Series C-2 Preferred warrant of $6.9 million (see below). Dividends of $236 thousand and $142 thousand have been recorded for the years ended December 31, 2002 and 2001. Dividends related to the beneficial conversion feature of the liquidation preference of $850 thousand and $2.150 million have been recorded for the years ended December 31, 2002 and 2001. WARRANT TO PURCHASE SERIES C-2 PREFERRED STOCK The Series C-2 Preferred warrants issued to SCP by USDATA grants SCP the right to purchase up to 85,625 shares of USDATA Series C-2 Preferred at a purchase price of $40 per share. The Series C-2 Preferred has a par value of $0.01 per share and a liquidation preference of $120 per share, and is convertible into our common stock at a conversion rate of 20 shares of common stock for each share of preferred stock. The right to purchase the shares of Series C-2 Preferred F19 USDATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- under the warrant are exercisable on any business day on or before March 30, 2011. On exercise, the warrant provides the holder a liquidation preference of three times the exercise price per share. The excess of the liquidation preference of the Series C-2 Preferred to be acquired on warrant exercise over the warrant exercise price of $3.4 million has been reflected as additional return to the Series C-1 preferred stockholder, increasing loss applicable to common stockholders of $850 thousand and $6.0 million for the years ended December 31, 2002 and 2001, respectively, and decreasing additional paid-in capital by $6.9 million. WARRANTS TO PURCHASE SERIES A-1 AND A-2 PREFERRED STOCK The eMake Series A-1 and eMake Series A-2 Preferred warrants grant to the holder the right to purchase up to an additional 5,300,000 shares of eMake Series A-1 Preferred and up to an additional 5,300,000 shares of eMake Series A-2 Preferred at an exercise price of $0.01 per share. The holder of the eMake Series A-1 and Series A-2 Preferred warrants agreed not to convert upon exercise of eMake warrants to acquire Series A-1 and A-2 Preferred, respectively, which are convertible into USDATA Series B Preferred. These warrants expire on June 30, 2006. WARRANTS TO PURCHASE COMMON STOCK In 1994, we issued warrants to Safeguard and a director of USDATA to purchase our common stock. The warrants entitled Safeguard and the director to purchase 698,238 and 77,582 shares, respectively, of USDATA common stock at an exercise price of $3.02 per share. In December 1999, the director exercised his warrant to purchase 77,582 shares of USDATA common stock and in June 2000 Safeguard exercised its warrant to purchase 698,238 shares of USDATA common stock for $2.1 million in cash. The changes in the number of issued and outstanding shares of our preferred and common stock are summarized as follows:
Preferred Stock Common Stock -------------------------------------------------------------------------------- Held In Series A Series B Series C Issued Treasury Outstanding --------- --------- --------- --------- --------- ----------- BALANCE AT DECEMBER 31, 1999 -- -- -- 3,125,224 490,463 2,634,761 Series A Preferred Stock 50,000 -- -- -- -- -- Common shares issued or purchased -- -- -- 139,648 (27,061) 166,709 --------- --------- --------- --------- --------- --------- BALANCE AT DECEMBER 31, 2000 50,000 -- -- 3,264,872 463,402 2,801,470 Series B Preferred Stock -- 265,000 -- -- -- -- Series C-1 Preferred Stock -- -- 53,750 -- -- -- Common shares issued or purchased -- -- -- -- (25,155) 25,155 --------- --------- --------- --------- --------- --------- BALANCE AT DECEMBER 31, 2001 50,000 265,000 53,750 3,264,872 438,247 2,826,625 Series B Preferred Stock -- 16,800 -- -- -- -- Series C-1 Preferred Stock -- -- 21,250 -- -- -- Common shares issued or purchased -- -- -- 220,752 (41,955) 262,707 --------- --------- --------- --------- --------- --------- BALANCE AT DECEMBER 31, 2002 50,000 281,800 75,000 3,485,624 396,292 3,089,332 ========= ========= ========= ========= ========= =========
On October 1, 2002, SCP entered into a Stock Purchase Agreement with Safeguard Delaware, Inc., Safeguard Scientifics (Delaware), Inc. and Safeguard 2000, pursuant to which SCP acquired for an aggregate purchase price of $300,000, (1) 1,003,182 shares of USDATA common stock; (2) 50,000 shares of the USDATA Series A Preferred; (3) 132,500 shares of USDATA Series B Preferred; and (3) warrants to purchase 5,300,000 shares of Series A-1 Preferred of eMake. Upon a sale, transfer or other disposition of such shares and warrants purchased by SCP, or any portion thereof, or sale of all or substantially all of the assets or stock of USDATA, on or before December 31, 2003, Safeguard shall receive an aggregate of 25% of the excess that SCP receives over the $300,000 in the same form and on the same terms and conditions, received by SCP in such transaction. As of December 31, 2002, SCP held warrants exercisable for 10,600,000 shares of eMake Series A-1 and A-2 Preferred, which are convertible into a total of 265,000 shares of USDATA Series B Preferred. 10. EQUITY COMPENSATION PLAN In 1994, we adopted the 1994 Equity Compensation Plan (the 1994 Plan), which provides for stock options to be granted to employees, independent contractors and directors. The 1994 Plan was amended in 2000 to provide for the issuance of up to 600,000 shares of common stock pursuant to the grant of incentive stock options (ISO), non-qualified stock options (NSO), stock appreciation rights (SARs) and restricted stock awards. Options issued under the 1994 Plan generally vest over a four-year period and are exercisable up to eight years from the date of grant at a price per share equal to the fair market value of the underlying stock on the date of grant. The 1994 Plan also authorizes an automatic grant of options to purchase 4,000 shares of common stock to certain eligible directors upon initial election to the board of directors, F20 USDATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- which vest over four years, and a further grant of options to purchase 1,000 shares of common stock as an annual service grant, which fully vest as of the grant date. Options granted to directors have an eight-year term. At December 31, 2002 and 2001, there were 25,000 and 168,000 shares, respectively, available for future grant under the 1994 Plan. All share and per share amounts have been adjusted to reflect the one for five reverse stock split effective August 21, 2001. Option activity under our 1994 Plan is summarized as follows:
(in thousands, except share prices) 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------- ------- ------- ------- ------- ------- Outstanding at beginning of period 294 $ 18.76 301 $ 24.45 330 $ 20.10 Options granted 191 1.64 80 3.09 85 53.95 Options exercised -- -- -- -- (19) 20.65 Options forfeited (48) 13.95 (87) 29.61 (95) 35.60 ------- ------- ------- ------- ------- ------- Outstanding at end of period 437 $ 10.77 294 $ 18.76 301 $ 24.45 ------- ------- ------- ------- ------- ------- Options exercisable at year-end 193 $ 18.60 164 $ 20.86 166 $ 20.15 Shares available for future grant 25 168 161 ======= ======= =======
The following summarizes information about our stock options outstanding at December 31, 2002 (in thousands, except share prices):
Options Outstanding Options Exercisable ------------------------------------------------ ----------------------------- Weighted Avg. Remaining Number Contractual Life Weighted Avg. Number Weighted Avg. Range of Exercise Prices Outstanding (in years) Exercise Price Exercisable Exercise Price - ----------------------------------------------------------------------------------------------------------------------- $ 0.34 -- $ 1.90 172 7.3 $ 1.61 4 $ 1.25 $ 2.50 -- $ 4.69 75 6.2 3.08 21 3.02 $ 12.50 -- $ 17.50 42 2.8 15.38 36 15.49 $ 18.44 -- $ 22.50 121 3.0 19.74 116 19.74 $ 28.13 -- $ 44.38 17 5.1 30.02 11 31.00 $ 55.00 -- $ 85.00 10 5.2 66.21 5 66.11 ------- ------- 437 5.3 $ 10.77 193 $ 18.60 ======= =======
11. RETIREMENT PLAN We maintain a discretionary defined contribution plan covering substantially all employees. During the years ended December 31, 2002, 2001 and 2000, we made contributions of approximately $48 thousand, $62 thousand and $200 thousand, respectively, to this plan. 12. NASDAQ COMPLIANCE NOTICES On February 14, 2002, we received a letter from The Nasdaq Stock Market notifying us that over the previous 30 consecutive trading days, our common stock had not maintained a minimum market value of publicly held shares ("MVPHS") of $5.0 million as required for continued listing on The Nasdaq National Market under Marketplace Rule 4450(a)(2) (the "Rule"). In accordance with Nasdaq Marketplace Rule 4450(e)(1), we were provided 90 calendar days, or until May 15, 2002, to regain compliance. F21 USDATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- As of May 8, 2002, we had not regained compliance with the Rule and applied to transfer our securities to The Nasdaq SmallCap Market. On June 11, 2002, our application was approved and our securities were transferred to The Nasdaq SmallCap Market at the opening of business on June 12, 2002. On July 23, 2002, we received a notice from The Nasdaq SmallCap Market that for the last 30 consecutive trading days, the price of our common stock had closed below the minimum $1.00 per share requirement for continued inclusion under Marketplace Rule 4310(c)(4). In accordance with Marketplace Rule 4310(c)(8)(D), we had 180 days, or until January 21, 2003, to regain compliance. On September 10, 2002, we received notice from The Nasdaq SmallCap Market that the closing bid price of our common stock has been at $1.00 per share or greater for at least 10 consecutive trading days. Accordingly, we regained compliance with the minimum $1.00 per share requirement. However, on November 12, 2002, we received notice that our common stock again fell below the minimum $1.00 per share requirement for the last 30 consecutive trading days. We have 180 calendar days, or until May 12, 2003, to regain compliance. There can be no assurance that we will be able to regain compliance by May 12, 2003. 13. RELATED PARTY TRANSACTIONS As of December 31, 2002, SCP beneficially owns approximately 68%, or 5,593,718 shares of our common stock by purchasing convertible preferred stock and common stock as described below. At various times throughout 2000, a subsidiary of Safeguard and SCP provided $19.250 million in bridge financings to USDATA or eMake in exchange for seven demand notes ranging from $1.5 million to $6.0 million. On September 12, 2000, USDATA and eMake secured $26.5 million in financing from Safeguard and SCP through the issuance of eMake Series A-1 and A-2 Preferred. In connection with this transaction, we received $6,936,754 in cash and Safeguard and SCP cancelled the then outstanding notes payable balance due them of $19.250 million plus accrued interest of $313,246. On January 31, 2001, SCP and Safeguard elected to exercise their right to acquire 132,500 shares each of USDATA Series B Preferred in exchange for 5,300,000 shares in eMake Series A-1 Preferred and 5,300,000 shares of eMake Series A-2 Preferred, respectively. As a result, no series of eMake preferred stock remains outstanding. On March 30, 2001, we secured an equity infusion of $1.5 million from SCP through the issuance of 37,500 shares of Series C-1 Preferred of USDATA and a warrant to purchase up to 75,000 shares of Series C-2 Preferred. In addition, SCP committed to purchase an additional 37,500 shares of Series C-1 Preferred ("Option Stock") at a purchase price of $40 per share or $1.5 million. On July 20, 2001, we exercised our right to sell 16,250 shares of the Option Stock to SCP and on September 30, 2002, we exercised our right to sell 21,250 shares of the Remaining Option Preferred Stock to SCP. We received $635,596 in cash, net of transaction costs, in exchange for issuing the 16,250 shares and $809,867 in cash, net of transaction costs, in exchange for issuing the 21,250 shares. See Note 9 for further details. On October 1, 2002, SCP acquired Safeguard's interest in USDATA by entering into a Stock Purchase Agreement with Safeguard Delaware, Inc., Safeguard Scientifics (Delaware), Inc. and Safeguard 2000, pursuant to which SCP acquired for an aggregate purchase price of $300,000, (1) 1,003,182 shares of USDATA common stock; (2) 50,000 shares of the USDATA Series A Preferred; (3) 132,500 shares of USDATA Series B Preferred; and (3) warrants to purchase 5,300,000 shares of Series A-1 Preferred of eMake. Upon a sale, transfer or other disposition of such shares and warrants purchased by SCP, or any portion thereof, or sale of all or substantially all of the assets or stock of USDATA, on or before December 31, 2003, Safeguard shall receive an aggregate of 25% of the excess that SCP receives over the $300,000 in the same form and on the same terms and conditions, received by SCP in such transaction. In March 2000, USDATA, through its wholly-owned subsidiary, eMake, entered into a master agreement with CompuCom Systems, Inc. ("CompuCom"), a Safeguard partnership company. The master agreement engaged CompuCom to assist USDATA with the planning, development, implementation and support of eMake. This agreement was subsequently terminated in December 2000 due to our restructuring plan. Total payments to CompuCom during 2000 were approximately $1.0 million. 14. COMMITMENTS AND CONTINGENCIES LEASES We lease office space, equipment and automobiles under non-cancelable capital and operating lease agreements, which expire at various dates through the year 2010. Assets recorded under capital leases were $0.3 million and $0.6 million at December 31, 2002 and 2001, respectively, and the related accumulated amortization was $142 thousand and F22 USDATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- $231 thousand at December 31, 2002 and 2001, respectively. Amortization of capital lease assets of $15 thousand and $158 thousand was included in depreciation expense for the years ended December 31, 2002 and 2001, respectively. Future minimum lease payments at December 31, 2002 under capital and operating leases were as follows (in thousands):
Capital Operating Leases Leases - -------------------------------------------------------------------------------- 2003 67 $ 922 2004 67 922 2005 44 938 2006 -- 932 2007 -- 875 2008 and thereafter -- 2,623 ----- ------ Total minimum lease commitments 178 $7,212 ----- ------ Less amounts representing interest 9 ----- Present value of net minimum lease payments 169 Less current portion 62 ----- $107 =====
Total rent expense was approximately $0.6 million; $0.8 million and $1.1 million during the years ended December 31, 2002, 2001 and 2000, respectively. OTHER USDATA has other contingent liabilities resulting from litigation, claims and commitments incident to the ordinary course of business. Management believes that the ultimate resolution of such contingencies will not have a materially adverse effect on the financial position or results of operations of USDATA. 15. OTHER ACCRUED LIABILITIES Other accrued liabilities were comprised of the following components at December 31, 2002 and 2001:
(in thousands) 2002 2001 ------ ------ Lease costs associated with vacated office space $ 129 $ 129 Source code license agreements 390 -- Taxes other than income 213 -- Accrued costs associated with software license purchases and billable services 199 -- Professional services 141 110 Other accrued expenses 627 478 ------ ------ $1,699 $ 717 ====== ======
16. SEGMENT AND GEOGRAPHIC DATA We operate predominantly in one line of business: the development, marketing and supporting of component-based software products for customers requiring enterprise-wide, open systems solutions for the manufacturing and production markets. The following table presents the pertinent data relating to foreign operations: F23 USDATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
Year Ended December 31, - -------------------------------------------------------------------------------- (in thousands) 2002 2001 2000 - ------------------------------- ------- ------- ------- Revenues to external customers: United States $ 2,793 $ 4,479 $ 5,230 France 3,000 2,852 3,235 United Kingdom 1,034 950 1,450 Italy 621 814 802 Germany 517 679 481 Canada 414 948 703 Others 1,965 2,850 4,133 ------- ------- ------- $10,344 $13,572 $16,034 ======= ======= =======
The basis for grouping revenues from external customers is based on the physical location of the customer. Long-lived assets, primarily property and equipment and capitalized computer software development costs, are principally located in the United States. 17. SUBSEQUENT EVENTS USDATA and SCP entered into a Series C Preferred Stock Purchase Agreement dated as of January 14, 2003, pursuant to which SCP acquired on January 15, 2003, for an aggregate purchase price of $1.5 million, (1) 37,500 shares of Series C-1 Preferred; (2) a warrant to purchase 18,750 shares of Series C-2 Preferred at an initial exercise price of $40.00 per shares, subject to adjustment upon the occurrence of certain events; and (3) 619,186 shares of USDATA common stock. We received $1.486 million in cash, net of transaction costs. As of March 31, 2003, SCP beneficially owned approximately 74%, or 7,337,904 shares of our common stock F24 USDATA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (in thousands, except per share data)
FIRST SECOND THIRD FOURTH 2002 QUARTER QUARTER QUARTER QUARTER - -------- ------- ------- ------- ------- Revenues $ 2,602 $ 2,709 $ 2,032 $ 3,001 ------- ------- ------- ------- Income (loss) from continuing operations (892) (463) (1,066) (4,787) Income from discontinued operation -- -- -- 98 ------- ------- ------- ------- Net loss (892) (463) (1,066) (4,689) Dividends on preferred stock (684) (684) (2,384) (739) ------- ------- ------- ------- Net loss applicable to common stockholders $(1,576) $(1,147) $(3,450) $(5,428) ======= ======= ======= ======= Net loss per common share (Basic and Diluted): Loss from continuing operations $ (0.56) $ (0.40) $ (1.20) $ (1.79) Income from discontinued operation -- -- -- 0.03 ------- ------- ------- ------- Net loss per common share $ (0.56) $ (0.40) $ (1.20) $ (1.76) ======= ======= ======= ======= Weighted average shares outstanding: Basic and diluted 2,836 2,836 2,868 3,089 ======= ======= ======= =======
(in thousands, except per share data)
FIRST SECOND THIRD FOURTH 2001 QUARTER QUARTER QUARTER QUARTER - -------- ------- ------- ------- ------- Revenues $ 3,468 $ 3,843 $ 3,261 $ 3,000 ------- ------- ------- ------- Income (loss) from continuing operations (539) 31 (1,771) 212 Income from discontinued operation -- -- 132 50 ------- ------- ------- ------- Net loss (539) 31 (1,639) 262 Dividends on preferred stock (8,130) (668) (1,330) (684) ------- ------- ------- ------- Net loss applicable to common stockholders $(8,669) $ (637) $(2,969) $ (422) ======= ======= ======= ======= Net loss per common share (Basic and Diluted): Loss from continuing operations $ (3.08) $ (0.23) $ (1.10) $ (0.17) Income from discontinued operation -- -- 0.05 0.03 ------- ------- ------- ------- Net loss per common share $ (3.08) $ (0.23) $ (1.05) $ (0.14) ======= ======= ======= ======= Weighted average shares outstanding: Basic and diluted 2,814 2,815 2,826 2,826 ======= ======= ======= =======
(in thousands, except per share data)
FIRST SECOND THIRD FOURTH 2000 QUARTER QUARTER QUARTER QUARTER - -------- -------- -------- -------- -------- Revenues $ 3,545 $ 3,761 $ 4,275 $ 4,453 -------- -------- -------- -------- Loss from continuing operations (2,626) (5,321) (3,583) (3,386) Loss from discontinued operations (4,438) (7,254) (5,848) (10,784) Loss on disposal of discontinued operation -- -- -- (1,193) -------- -------- -------- -------- Net loss (7,064) (12,575) (9,431) (15,363) Dividends on preferred stock (108) (108) (108) (77) -------- -------- -------- -------- Net loss applicable to common stockholders $ (7,172) $(12,683) $ (9,539) $(15,440) ======== ======== ======== ======== Net loss per common share (Basic and Diluted): Loss from continuing operations $ (1.06) $ (1.97) $ (1.33) $ (1.24) Loss from discontinued operation (1.73) (2.65) (2.13) (4.28) -------- -------- -------- -------- Net loss per common share $ (2.79) $ (4.62) $ (3.46) $ (5.52) ======== ======== ======== ======== Weighted average shares outstanding: Basic and diluted 2,558 2,739 2,747 2,801 ======== ======== ======== ========
Earnings per share calculations are based on the weighted average number of shares outstanding in each period; therefore, the sum of the earnings per share amounts for the quarters does not necessarily equal the year-to-date earnings per share. F25 USDATA Corporation and Subsidiaries Schedule II - Valuation and Qualifying Accounts For the Years Ended December 31, 2002, 2001 and 2000
Balance at Description beginning of Charged to Accounts Balance at end year expense Written Off of year --------- --------- --------- --------- December 31, 2002 Allowance for doubtful accounts $ 279,000 $ (8,000) $(189,000) $ 82,000 December 31, 2001 Allowance for doubtful accounts $ 224,000 $ 55,000 $ -- $ 279,000 December 31, 2000 Allowance for doubtful accounts $ 453,000 $ 6,000 $(235,000) $ 224,000
33 EXHIBIT INDEX 1 (1) Articles of Association (incorporated by reference to Exhibit 1 to the Annual Report on Form 20-F for the year ended December 31, 2000). (2) An English translation of the Hebrew original which is the official version of the Memorandum of Association (incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the registration statement on Form F-1 (File No. 33-56152) filed on February 25, 1993). 4(a) (1) An English translation of the Hebrew original, which is the official version of the Letter of Intent dated April 27, 2003 among Bank Hapoalim, Tecnomatix Technologies Ltd. and Tecnomatix Ltd. (incorporated by reference to Exhibit 4(b)(1) to the Annual Report on Form 20-F for the year ended December 31, 2002). (2) An English translation of the Hebrew original which is the official version of the Debenture between Tecnomatix Technologies Ltd. and Bank Hapoalim B.M. (incorporated by reference to Exhibit 4(b)(2) to the Annual Report on Form 20-F for the year ended December 31, 2002). (3) Asset Purchase Agreement dated July 29, 2003 by and between USDATA Corporation, Tecnomatix Technologies Ltd. and certain other parties specified therein (incorporated by reference to Exhibit A to Schedule 13D of Tecnomatix Technologies Ltd. describing certain holding in the securities of USDATA Corporation, filed with the Securities and Exchange Commission on August 7, 2003). (4) Share Purchase Agreement dated July 29, 2003, by and between SCP Private Equity Partners II, L.P. and Tecnomatix Technologies Ltd. (incorporated by reference to Exhibit C to the Schedule 13D of Tecnomatix Technologies Ltd. describing certain holding in the securities of USDATA Corporation, filed with the Securities and Exchange Commission on August 7, 2003). (5) Services Agreement between Tecnomatix Ltd. and Hewlett Packard (Israel) Ltd. dated October 30, 2003, as amended by Amendment No. 1 thereto dated December 29, 2003 and Amendment No. 2 thereto dated February 25, 2004. (Portions of this exhibit have been omitted pursuant to a request for confidential treatment). 4(b) (1) Share Purchase and Buy Back Agreement dated January 1, 2003 between Tecnomatix Technologies Ltd. and Harel Beit-On, our chairman of the board of directors (incorporated by reference to Exhibit 4(b)(3) to the Annual Report on Form 20-F for the year ended December 31, 2002). (2) First Amendment dated January 26, 2003 to Letter of Agreement dated January 16, 2001 between Tecnomatix Technologies Ltd. and Amir Livne, executive vice president of business development and strategy (incorporated by reference to Exhibit 4(b)(4) to the Annual Report on Form 20-F for the year ended December 31, 2002). (3) Second Amendment dated December 1, 2003 to Letter of Agreement dated January 16, 2001 between Tecnomatix Technologies Ltd. and Amir Livne, executive vice president of business development and strategy. (4) An English translation of the Hebrew original, which is the official version of the Lease Agreement dated June1, 2003 between Tecnomatix Technologies Ltd. and Intergama Assets (1961) Ltd. and exhibits thereto (incorporated by reference to Exhibit 4(b)(5) to the Annual Report on Form 20-F for the year ended December 31, 2002). 4(c) (1) Tecnomatix Technologies Ltd. 1994 Stock Option Plan (incorporated by reference to Exhibit 10.8 to the registration statement on Form F-1 (File No. 333-3540)). (2) Tecnomatix Technologies Ltd. 1996 Stock Option Plan (incorporated by reference to Exhibit 4(c) to the Annual Report on Form 20-F for the year ended December 31, 2000). (3) 1996 Directors Stock Option Plan (incorporated by reference to Exhibit 4(c) to the Annual Report on Form 20-F for the year ended December 31, 2000). (4). Robcad Technologies (1980) Ltd. Stock Option Plan (incorporated by reference to Exhibit 4(c) to the Annual Report on Form 20-F for the year ended December 31, 2000). (5) Performance Based Stock Option Plan (incorporated by reference to Exhibit 4(c) to the Annual Report on Form 20-F for the year ended December 31, 2000). (6) Tecnomatix Technologies Ltd. 2000 Employee Share Purchase Plan (incorporated by reference to Exhibit 4(c) to the Annual Report on Form 20-F for the year ended December 31, 2000). (7) Tecnomatix Technologies Ltd. 2003 Global Share Option Plan and United States and Israel Appendixes (incorporated by reference to Exhibit 4(c) to the Annual Report on Form 20-F for the year ended December 31, 2003). 8. List of subsidiaries. 12.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) 12.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) 13.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 13.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 14.1 Consent of Independent Public Accountants of Tecnomatix Technologies Ltd. 14.2 Consent of Independent Public Accountants of Tecnomatix Technologies, Inc. 14.3 Consent of Independent Public Accountants of USDATA Corporation. EX-99 3 exhibit_4a-5.txt PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC EXHIBIT 4(a)5 CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE `[**]' SYMBOL INDICATES THAT INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2 AND THAT CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO SUCH OMITTED PORTIONS. EX-99 4 exhibit_4b9-1.txt PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC EXHIBIT 4(B)9 CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE `[**]' SYMBOL INDICATES THAT INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2 AND THAT CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO SUCH OMITTED PORTIONS. EX-99 5 exhibit_4b9-2.txt PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC EXHIBIT 4 a (5) SERVICES AGREEMENT FOR HP-OMS OPERATIONS SERVICES BETWEEN TECHNOMATIX LTD AND HP-OMS-COMPAQ (ISRAEL) LTD 1 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC SERVICES AGREEMENT FOR HP-OMS OPERATIONS SERVICES THIS SERVICES AGREEMENT FOR HP-OMS OPERATIONS SERVICES is entered into as of this 30th day of October 2003, by and between HP-OMS (ISRAEL) LTD., a limited liability company organized and existing under the laws of Israel, having its registered office at 9 Ha'Dafna St. Ra'anana ("HP-OMS") and TECNOMATIX LTD., a limited liability company organized and existing under the laws of Israel, having its registered office at 16 Hagalim Avenue, Herzlia Pituach, Israel (the "CUSTOMER"). WHEREAS, the Customer wishes to purchase from HP-OMS and HP-OMS wishes to render to the Customer certain global IT outsourcing services, subject to the terms and conditions hereinafter set forth; WHEREAS, the parties through this Agreement desire to commence a strategic relationship, as more particularly set out below; and WHEREAS, in connection with the provision of such services, the Parties have also entered into that certain Employee Transfer Agreement, attached to this Agreement as Exhibit F. NOW, THEREFORE, in consideration of the mutual covenants and conditions set forth in this Agreement, the Parties hereto agree as follows: 1. DEFINITIONS As used in this Agreement, unless expressly otherwise stated or evident in the context, the following terms shall have the following meanings, the singular (where appropriate) shall include the plural and vice versa and references to Exhibits and Sections shall mean Exhibits and Sections of this Agreement. 1.1 "ADD-ON ASSETS" means both the Purchased Add-On Assets and the Leased Add-On Assets. 1.2 "AFFILIATE" means any entity Controlling, Controlled by, or under common Control with HP-OMS or Customer, as the case may be. 2 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 1.3 "AGREEMENT" means the terms and conditions of this Services Agreement for HP-OMS Operations Services, including (unless otherwise stated) all Exhibits and their respective Appendixes. 1.4 "CHANGE REQUEST" has the meaning set out in Exhibit B [Statement of Work]. 1.5 "COMMENCEMENT DATE" means the first day of the month which follows sixty (60) days from the Effective Date, upon which date HP-OMS shall commence the provision of the Services in accordance with this Agreement, and which more specifically designates the launch of the Transition and Stabilization Phases. 1.6 "CONFIDENTIAL INFORMATION" has the meaning set out in Section 17.1 (CONFIDENTIAL INFORMATION). 1.7 "CONTROL" and its correlative meanings, "Controlling", "Controlled by" and under common Control with mean the legal, beneficial or equitable ownership, directly or indirectly, of more than fifty percent (50%) of the aggregate of all voting equity interests in an entity. 1.8 "CUSTOMER" means Tecnomatix Ltd. 1.9 "CUSTOMER COMPETITOR" means the list of companies set out in Exhibit J [Customer Competitors], which list may be updated from time to time by Customer, with the names of companies who compete with Customer in the same industry in which Customer operates, by notice in writing to HP-OMS. 1.10 "CUSTOMER CONTRACTORS" means third party contractors, vendors, agents, representatives, and consultants selected and retained by Customer. 1.11 "CUSTOMER DATA" means any information contained in the Customer Databases, and any derivatives resulting therefrom. 1.12 "CUSTOMER DATABASE" means any database at any time established (whether in magnetic, paper or other form) by, on behalf of, or at the direction of, the Customer, and including any customized database established by HP-OMS in performance of this Agreement, which contains information relating to the business or affairs of the Customer, its employees or any third party. 1.13 "CUSTOMER EMPLOYEES" means the employees employed by the Customer, and Customer Contractors who is given a user name in the Tecnomatix WAN. For the avoidance of doubt, Customer Employees exclude HP-OMS Personnel. . 3 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 1.14 "CUSTOMER PRE-COMMENCEMENT OWNED MATERIALS" has the meaning set out in Section 15.1 (PRE-EXISTING MATERIALS). 1.15 "CUSTOMER SITES" means any office, branch, site, location or other facilities which are owned, leased, occupied or used by Customer and to which it is necessary for HP-OMS to obtain access in order to provide the Services or carry out any HP-OMS obligation in relation to them, and as set out in Exhibit H - [Customer Sites]. Any addition or reduction to this list is subject to the change management process set out in and Exhibit E - [Pricing and Pricing Principles]. 1.16 "CUSTOMER SOFTWARE" means Third Party Software licensed to and in use by the Customer prior to the Commencement Date, and which are included within the categories identified in Exhibit I - [HP-OMS Software and Customer Software Categories]. 1.17 "DELIVERABLES" has the meaning set out in Section 13.1 (TESTING) 1.18 "DEVELOPED MATERIALS" means any Materials or modifications, enhancements or derivative works thereof, developed by or on behalf of HP-OMS for Customer in connection with or as part of the Services. 1.19 "DISPUTE RESOLUTION PROCESS" means the process for dispute resolution set out in Section 21.7 (DISPUTE RESOLUTION PROCESS). 1.20 "DUE DILIGENCE PROCESS" means the due diligence process entered into and completed by the Parties from July 1, 2002 to December 31, 2002 in connection with this Agreement. 1.21 "EFFECTIVE DATE" has the meaning set out in Section 2.5 (CONDITIONS PRECEDENT TO EFFECTIVE DATE). 1.22 "EMPLOYEE TRANSFER AGREEMENT" means the employee transfer agreement between the parties, attached hereto as Exhibit F. 1.23 "GENERAL SETUP COSTS" means the one-time setup cost set out in Exhibit E [Pricing and Pricing Principles], for HP-OMS' setup and installation of utilities, equipment, and infrastructure. 1.24 "GOVERNMENT APPROVAL" has the meaning set out in Section 2.5 (CONDITIONS PRECEDENT TO EFFECTIVE DATE). 4 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 1.25 "HARDWARE" means computing, networking and/or communications equipment or hardware, including, without limitation, (i) midrange, storage systems, server and distributed computing equipment and associated attachments, features, accessories, peripheral devices, and cabling, (ii) personal computers, laptop computers and workstations and associated attachments, features, accessories, peripheral devices, and cabling, and (iii) data telecommunications and network equipment and associated attachments, features, accessories, peripheral devices, and cabling. 1.26 "HP-OMS HARDWARE" means all Hardware or equipment in use by the Customer, as well as all Hardware included within the Add-On Assets, Transition Project Assets, Refreshed Assets, New Customer Employee Assets, Right to Use Assets and any Third Party Contracts, and all other Hardware used by HP-OMS in performing the Services, or which is the subject of the Services under this Agreement. 1.27 "HP-OMS PERSONNEL" means those employees and Subcontractors of HP-OMS and of HP-OMS Affiliates who perform any Services, including the Transitioned Employees, subject to and in accordance with this Agreement. 1.28 "HP-OMS SOFTWARE" means (i) all Third Party Software licensed to and in use by the Customer within the categories identified in Exhibit I [HP-OMS Software and Customer Software Categories], (ii) all Third Party Software included within the Add-On Assets, Transition Project Assets, Refreshed Assets, New Customer Employee Assets any Third Party Contracts, and Right to Use Assets; and (iii) all other Software owned or licensed by HP-OMS included within the categories identified in Exhibit I [HP-OMS Software and Customer Software Categories], to the extent such other Software is used by HP-OMS in performing the Services, or which is the subject of the Services, under this Agreement (such other Software hereinafter, the "OTHER HP-OMS SOFTWARE"). 1.29 "INITIAL TERM" has the meaning set out in Section 20.1 (TERM). 1.30 "INTELLECTUAL PROPERTY RIGHTS" includes copyrights, patents, trademarks, service marks, design rights, trade secrets and all other proprietary rights whether registered or unregistered. 5 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 1.31 "KEY PERSONNEL" means the HP-OMS Personnel designated in Exhibit G [Project Staff and Key Contacts] as Key Personnel, which list may change from time to time by mutual written agreement of the Parties; provided that the number of Key Personnel shall not be less than three (3) personnel providing Services under this Agreement. 1.32 "LEASED ADD-ON ASSETS" means all Hardware and Software licenses (excluding Customer Software licenses) leased from HP-OMS, or any entity designated by it, pursuant to the change management process set out in Section 11 or similar process, the support and maintenance of which will be included in the price of the lease and the license, respectively, in accordance with Exhibit E. 1.33 "LOSSES" means all liabilities, damages, fines, penalties and claims (including taxes), and all related costs and expenses (including reasonable legal fees and disbursements and costs of investigation, litigation, settlement, judgment, interest and penalties). 1.34 "MATERIALS" means, collectively, Software, source code literary works, other works of authorship, specifications, design documents and analyses, processes, procedures methodologies, programs, program listings, documentation, reports, drawings, databases and similar work product. 1.35 "MCC" means the Monitoring and Control Center, as more specifically described in Exhibit D. 1.36 "GENERAL SETUP ASSETS" has the meaning set out in Exhibit E [Pricing and Pricing Principles]. 1.37 "MCC GENERAL SETUP COSTS" means the one-time, fixed setup cost set out in Exhibit E [Pricing and Pricing Principles], Appendix E for HP-OMS' setup and installation of the MCC General Setup Assets. 1.38 "NEW CUSTOMER EMPLOYEE ASSETS" means Hardware and Software, which HP-OMS shall purchase and license, respectively, and provide to Customer, upon receipt of Customer notice that it has increased the number of Customer Employees, in accordance with Exhibits B and C. 6 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 1.39 "OPERATIONS SERVICES" or "SERVICES" means collectively the services, functions and responsibilities described in the Agreement as a responsibility of HP-OMS and to be provided by HP-OMS for the benefit of Customer, Customer Affiliates, and Customer Employees, whether located at the Customer Sites or otherwise, all pursuant to this Agreement and as they may be supplemented, enhanced, modified or replaced during the Term in accordance with this Agreement, including, without limitation: (i) the services described in Exhibit A - [Services Description], Exhibit B - [Statement of Work] and Exhibit C - [Service Level Agreement]; (ii) the Transition and Stabilization Services described in Exhibit D; (iii) HP-OMS responsibilities with respect to the supported Software described in Exhibit I [HP-OMS Software and Customer Software Categories]; (iv) the Termination Assistance Services described in Exhibit M [Termination Assistance]; and (v) any services provided pursuant to Section 11 (CHANGE MANAGEMENT). 1.40 "OTHER HP-OMS SOFTWARE" has the meaning set out in the definition of HP-OMS Software. 1.41 "PARTIES" shall mean both Customer and HP-OMS. 1.42 "PURCHASED ADD-ON ASSETS" means all Hardware and Software licenses (excluding Customer Software licenses) purchased by Customer from HP-OMS or a third party, the support and maintenance of which will be added to the Target Price, in accordance with the change management process set out in Section 11 or similar process. 1.43 "REFRESHED ASSETS" means Hardware and Software licenses (excluding Customer Software licenses) purchased by HP-OMS pursuant to the Technology Refresh Program. 1.44 "REQUIRED CONSENTS" means any consents, licenses or approvals required in accordance with Section 7 (REQUIRED CONSENTS). 1.45 "RSC" means Regional Support Center, as more specifically described in Exhibit D. 1.46 "RIGHT TO USE ASSETS" has the meaning set out in Exhibit E [Pricing and Pricing Principles]. 1.47 "SERVICE LEVEL CREDITS" has the meaning set out in Section 4.2(b) (SERVICE LEVEL CREDITS). 1.48 "SERVICE LEVELS" means the predetermined, objective performance criteria and services levels for delivery of Operations Services, as described in Exhibits A (SERVICES DESCRIPTION), B (STATEMENT OF WORK) and C (SERVICE LEVEL AGREEMENT) of this Agreement. 7 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 1.49 "SOFTWARE" means one or more computer programs capable of operating on a controller, processor or other hardware product, including documentation relating thereto, the applicable source or object codes, all updates and new releases thereof. 1.50 "HP-OMS SUBCONTRACTORS" means contractors, and consultants selected and retained by HP-OMS. 1.51 "TARGET PRICE" means the price payable by Customer for performing the Services, as specified (and adjusted) in accordance with Exhibit E - [Pricing and Pricing Principles]. 1.52 "TECHNOLOGY REFRESH PROGRAM" means the technology refresh program outlined in Section 2.11 of Exhibit C, Appendix A. 1.53 "TERM" means collectively, the Initial Term the Extended Term and any Termination Assistance Period. 1.54 "TERMINATION ASSETS" means, collectively, the Leased Add-On Assets, Transition Project Assets, Refreshed Assets, and New Customer Employee Assets and all related Third Party Contracts to which HP-OMS is a party immediately prior to expiration or earlier termination of this Agreement as permitted hereunder. 1.55 "TERMINATION ASSISTANCE PERIOD" has the meaning set out in Section 20.7(a) (TERMINATION ASSISTANCE SERVICES) 1.56 "TERMINATION ASSISTANCE SERVICES" means the services provided by HP-OMS at the Customer's request, after expiry or termination of this Agreement for any reason to facilitate the orderly transfer of the Services to Customer or to an alternative service provider nominated by Customer, as set out in Section 20.7 (TERMINATION ASSISTANCE SERVICES) herein. 1.57 "TERMINATION FEES" means the appropriate fees payable by Customer in the case of early termination, as detailed in Exhibit E [Pricing and Pricing Principles]. 1.58 "THIRD PARTY CONTRACTS" means all agreements (including Software licenses, Hardware leases and support and maintenance agreements) between third parties and Customer or third parties and HP-OMS that have been or will be used to provide, or which are the subject of, the Services, to the extent a Party has financial or operational responsibility for such contracts under this Agreement. Third Party Contracts shall include, without limitation, (i) all such agreements transferred or assigned to HP-OMS by agreement of the parties, as listed in Exhibits O1 and O2, which Exhibits shall be finalized by the parties as of the Commencement Date; (ii) all such agreements which are not transferred or assigned to HP-OMS, but under which HP-OMS shall act as Customer's agent, as listed in Exhibit O2, which Exhibit shall be finalized by the parties as of the Commencement Date; and (iii) Post Due Diligence-Pre Commencement Date Third Party Contracts (defined in Section 3.1 (b); and (iv) those third party agreements entered into by HP-OMS following the Commencement Date. 8 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 1.59 "THIRD PARTY SOFTWARE" means all Software licensed under, or which is the subject of, the applicable Third Party Contract. 1.60 "TRANSITION AND STABILIZATION PHASES" means the transition and stabilization phases of the Services, commencing as of the Commencement Date and expiring 12:00:01 a.m., Israel time, ten (10) months following the Commencement Date, as specified in Section 12 (TRANSITION AND STABILIZATION PHASES), unless expressly extended in writing by Customer. 1.61 "TRANSITION AND STABILIZATION SERVICES" means the Services provided by HP-OMS during the Transition Period, in accordance with Exhibit D [Transition and Stabilization] and this Agreement. 1.62 "TRANSITION MILESTONES" has the meaning set out in Section 12.1 (TRANSITION PLAN). 1.63 "TRANSITION PLAN" has the meaning set out in Section 12.1 (TRANSITION PLAN). 1.64 "TRANSITION PROJECT ASSETS" means Hardware and Software, including without limitation the MCC General Setup Assets, the "Worldwide Network Solution" deliverables and the technology gap projects, described in Exhibit D, which shall be delivered and implemented at HP-OMS premises or sites and at the appropriate Customer Sites during the Transition and Stabilization Phases, in accordance with Exhibit D. 1.65 "TRANSITIONED EMPLOYEES" means the employees of Customer who accept HP-OMS' offer of employment and become employed by HP-OMS pursuant to the Employee Transfer Agreement (Exhibit F) and subject to the terms and conditions of this Agreement. Upon being employed by HP-OMS, such Transitioned Employees shall be deemed to be HP-OMS Personnel. 9 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 2. SCOPE 2.1 PURPOSES. As part of organizational changes, and with the purpose of decreasing its IT expenditures around the world while improving and enhancing the internal IT environment and level of operation services, Customer has decided to transfer the responsibility and the management of its IT operations at the Customer Sites to HP-OMS, which will be performed under the supervision of the Customer. 2.2 SERVICES; EMPLOYEE TRANSFER. HP-OMS will provide the Customer with comprehensive outsourcing Services, including employee transfer, as defined in the Employee Transfer Agreement, and the provision of IT Services as more specifically detailed in this Agreement. 2.3 ELIGIBLE RECIPIENTS OF SERVICES. Throughout this Agreement, the Services shall be provided to Customer for the benefit of Customer and its Affiliates (including entities which may become Affiliates after the Commencement Date). For the avoidance of doubt, Customer shall be responsible for its Affiliates' compliance with Customer's obligations hereunder; however, notwithstanding anything in the Agreement to the contrary, Customer Affiliates shall have no liability under this Agreement. 2.4 STRATEGIC PARTNERSHIP. The parties acknowledge and agree that this Agreement reflects a strategic relationship between HP-OMS and the Customer, in which the business successes of one party will have corresponding benefits to the other. Accordingly, HP-OMS shall make best efforts to assist Customer in the development of its MPM business; each party will appoint a program manager dedicated to oversee and manage such assistance, and a representative of the senior management of each party shall meet on a quarterly basis after the Commencement Date to monitor the progress of this strategic relationship. 2.5 CONDITIONS PRECEDENT TO EFFECTIVE DATE. (a) The effective date of this Agreement shall be the date on which both of the following conditions have been satisfied (the "EFFECTIVE DATE"): (i) Customer has obtained written approval from both the Office of the Chief Scientist of the Israeli Ministry of Industry and Trade and the Israel Investment Center to the mechanism set out in the Services Agreement, including the applicable exhibits thereto, for Customer's investment in Hardware and Software ("GOVERNMENT APPROVAL"); and (ii) Customer has obtained approval from its board of directors to the signing of this Agreement, which approval is scheduled to occur on or before December 8, 2003; and HP-OMS has obtained the approval of HP Corporate, which approval is scheduled to occur on or before December 8, 2003. 10 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (b) Without derogating from subsection (a) above, Customer and HP-OMS shall cooperate with each other to achieve their mutual goal of obtaining Government Approval as soon as possible, but not later than January 1, 2004. In the event that the Customer fails to obtain Government Approval by January 1, 2004, the parties, in good faith, shall use their best commercial efforts to resolve the matter to obtain such approval on an expedited basis. 3. HP-OMS' OBLIGATIONS 3.1 SERVICES. In consideration for the Target Price, HP-OMS shall perform the Operations Services in accordance with the terms and conditions of this Agreement and for the Term of this Agreement beginning as of the Commencement Date. (a) AGREEMENT AND EXHIBITS. The Services shall consist of the services, functions and responsibilities described in this Agreement and in all Exhibits thereto, as they may evolve during the Term of this Agreement or be supplemented, enhanced, modified or replaced in accordance with this Agreement. (b) INCLUDED SERVICES. If any services, functions or responsibilities not specifically described in this Agreement (a) are an inherent and necessary part of the Services or required for proper performance or provision of the Services in accordance with this Agreement; or (b) were performed preceding the Commencement Date by or for Customer (provided that HP-OMS had knowledge or notice, obtained during the Due Diligence Period, of such services, functions or responsibilities - e.g., where reflected or a cost or amount allocated in Customer's or its Affiliates' books or records), then they shall be deemed to be included within the scope of the Services to be delivered for the Target Price, as if such services, functions or responsibilities were specifically described in this Agreement (collectively, "INCLUDED SERVICES"). Notwithstanding the foregoing, Included Services shall also mean operational and financial responsibility for services, functions and responsibilities not specifically described in this Agreement but included under Third Party Contracts between Customer and third parties, signed after the last day of the Due Diligence Period (i.e., after December 31, 2002) but prior to the Commencement Date ("POST DUE DILIGENCE-PRE COMMENCEMENT DATE THIRD PARTY CONTRACTS"); provided, however that HP-OMS shall have financial responsibility for such Post Due Diligence-Pre Commencement Date Third Party Contracts only from the Commencement Date until the end of the Transition and Stabilization Phases, after which time Customer shall bear such financial responsibility. In addition, if requested by HP-OMS, Customer shall terminate such Post Due Diligence-Pre Commencement Date Third Party Contracts, where early termination thereunder is permitted without penalty, provided that HP-OMS continues to bear throughout the Term operational responsibility for the services and functions otherwise performed under such terminated contracts. Any dispute between the Parties as to the scope of Services shall be resolved in accordance with Section 21.7 (DISPUTE RESOLUTION PROCESS). 11 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 3.2 CHANGES TO THE SERVICES. Except as may be necessary on an emergency basis to maintain the continuity of the Services, HP-OMS may not, without Customer's consent, modify (a) the composition or nature of the Services or (b) the manner in which the Services are provided or delivered if such modification(s) would have an adverse effect on the business of Customer. 4. SERVICE LEVELS 4.1 INCLUDED SERVICES. HP-OMS shall perform Included Services at the same levels of accuracy, quality, completeness, timeliness, responsiveness and productivity that apply to Services which are specifically described in the Agreement, as would be determined (a) by a reasonable person or (b) by reference to the HP IT Service Management Reference Model. 4.2 COMPLIANCE WITH SERVICE LEVELS. (a) ULTIMATE HP-OMS RESPONSIBILITY. HP-OMS shall provide the Services at all Customer Sites in accordance with the Service Levels, commencing on the date which is ten (10) calendar months after the Commencement Date. HP-OMS shall be responsible for meeting or exceeding the applicable Service Levels even where doing so is dependent on the provision of Services by HP-OMS Subcontractors. 12 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (b) SERVICE LEVEL CREDITS. HP-OMS recognizes that Customer is paying HP-OMS to deliver the Services at specified Service Levels. If HP-OMS fails to meet such Service Levels, then HP-OMS shall pay or credit to Customer the performance credits specified in Exhibit C ("SERVICE LEVEL CREDITS") in recognition of the diminished value of the Services resulting from HP-OMS' failure to meet the agreed upon level of performance, and not as a penalty. The Service Level Credit reimbursement will be done according to the mechanism detailed in Exhibit C section 1.6 (G) Service Level Credits shall not be HP-OMS' sole liability or Customer's exclusive remedy for failure to meet the Service Levels. 4.3 PROBLEM ANALYSIS. If HP-OMS fails to provide Services in accordance with the Service Levels and this Agreement, HP-OMS shall (after restoring service or otherwise resolving any immediate problem) (i) promptly investigate and report on the causes of the problem; (ii) provide a root cause analysis of such failure (i.e., diagnosing the problem at the lowest reasonable level) ("ROOT CAUSE ANALYSIS") as soon as practicable, after such failure or Customer's request (iii) use all commercially reasonable efforts to implement remedial action and begin meeting the Service Levels as soon as practicable; (iv) advise Customer of the status of remedial efforts being undertaken with respect to such problem; and (v) demonstrate to Customer's reasonable satisfaction that the causes of such problem have been or will be corrected on a permanent basis. HP-OMS shall use all commercially reasonable efforts to complete the Root Cause Analysis within fifteen (15) working days; provided that, if it is not capable of being completed within fifteen (15) working days using reasonable diligence, HP-OMS shall complete such Root Cause Analysis as quickly as possible and shall notify Customer prior to the end of the initial fifteen (15) working day period as to the status of the Root Cause Analysis and the estimated completion date. At any event, it is not intended that a protracted Root Cause Analysis should unduly delay prompt resolution of Service Level issues, including allocation of Service Level Credits. HP-OMS shall provide the results of the Root Cause Analysis to Customer in writing or comparable electronic media. 13 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 4.4 MONITORING AND CONTROL; HELP DESK AND ASSET MANAGEMENT SYSTEMS. As part of the Services, HP-OMS shall implement the monitoring and control, help desk and asset management systems, tools and procedures, all as set forth in Exhibits A, B and D, to measure and report on HP-OMS' performance of the Services against the applicable Service Levels. Customer or its designee shall have the right to audit all such systems. HP-OMS shall provide Customer with on-line access (in "read-only" mode) to up-to-date problem management data and other data regarding the status of service problems, service requests and user inquiries. HP-OMS also shall provide Customer with access to the data used by HP-OMS to calculate its performance against the Service Levels and the measurement and monitoring tools and procedures utilized by HP-OMS to generate such data for purposes of audit and verification. Customer shall not be required to pay for such measurement and monitoring tools or the resource utilization associated with their use. 4.5 NOTICE OF DEFAULT. If HP-OMS becomes aware of any failure by HP-OMS to comply with its obligations under this Agreement or any other situation (i) that has impacted or reasonably could impact the maintenance of Customer's financial integrity or internal controls, the accuracy of Customer's financial, accounting or human resources records and reports or compliance with Customer's strategic decisions, or (ii) that has had or reasonably could have any other material adverse impact on the Services in question or the impacted business operations of Customer, then HP-OMS shall immediately inform Customer in writing of such situation and the impact or expected impact and HP-OMS and Customer shall meet to formulate an action plan to minimize or eliminate the impact of such situation. 4.6 REPORTS. As part of the Services HP-OMS shall provide monthly performance reports to Customer in a form to be agreed upon between the Parties, in accordance with Exhibit B. 4.7 BENCHMARKING OF SERVICE LEVELS. (a) Customer may initiate a single benchmarking survey at any time during the Initial Term following the second anniversary of the Commencement Date. The purpose of such benchmarking survey is to ensure that HP-OMS provides Customer with the technology and Services Levels equal to or greater than other organizations receiving similar services and other organizations in similar industries. 14 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (b) The selection of the agent to conduct such benchmarking survey will be agreed upon by the Parties, and if the Parties are not able to agree on the identity of such agent within thirty (30) days, the Customer's independent auditor shall select the third party expert to conduct such surveys and the methodology of such surveys. (c) All costs incurred to conduct such benchmarking study will be borne by Customer. (d) Following receipt of the results of the benchmarking survey, and if requested by Customer, HP-OMS will provide the Customer, within sixty (60) days of study completion, with an action plan and schedule for HP-OMS to implement the survey results with respect to the technology or Service Levels for the Customer's approval, in accordance with the change management process set out in Section 11; provided, that if Customer approves such plan and schedule, (i) the Target Price shall not be reduced as a result thereof; (ii) Costs and expenses relating to addition of items which are not specified as in the scope of the Services hereto will be fully borne and paid by Customer; (iii) HP-OMS shall only be required by pay fifty percent (50%) of the fees and costs that Customer would otherwise be responsible for paying under the change management process, relating to changes of items which are specified as in the scope of the Services.. 5. HP-OMS PERSONNEL 5.1 QUALIFICATIONS OF HP-OMS PERSONNEL; HP RESPONSIBILITIES. (a) HP-OMS may select qualified and reputable HP-OMS Personnel to fulfill any of HP-OMS' obligations; provided, however, that HP-OMS will use only HP-OMS Personnel that have the requisite technical skills, competence, ability and qualifications to perform their portion(s) of HP-OMS' obligations in accordance with the Services standard set out in Section 14.1(a) (SERVICES STANDARD). Without limiting the generality of the foregoing, HP-OMS shall ensure that all HP-OMS Personnel performing Services for Customer shall be properly educated and trained for the Services they are to perform, including but not limited training in connection with Customer's special requirements and internal IT procedures. In addition, HP-OMS shall assign (or cause to be assigned) sufficient HP-OMS Personnel to provide the Services in accordance with this Agreement. Prior to HP-OMS' use of any HP-OMS Personnel, HP-OMS shall provide Customer the resumes of individual HP-OMS Personnel, which resumes shall, among other things, include specific information describing the requisite technical skills of such HP-OMS Personnel. 15 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (b) Subject to Section 5.2 (CUSTOMER RIGHTS CONCERNING KEY PERSONNEL; REPLACEMENT OF HP-OMS PERSONNEL), where HP-OMS Subcontractors are to be used by HP-OMS for the provision of the Services, HP-OMS shall give Customer reasonable prior notice specifying the components of the Services affected, the scope of the proposed subcontract, and the identity and qualifications of the proposed Subcontractor. (c) HP-OMS shall at all times be responsible for any failure by any HP-OMS Personnel to perform in accordance with this Agreement or to comply with any duties or obligations imposed on HP-OMS under this Agreement to the same extent as if such failure to perform or comply was committed by HP-OMS or HP-OMS employees. HP-OMS shall guarantee the performance of all such HP-OMS Personnel providing any of the Services hereunder. HP-OMS shall be Customer's sole point of contact regarding the Services, including with respect to payment. 5.2 CUSTOMER RIGHTS CONCERNING KEY PERSONNEL; REPLACEMENT OF HP-OMS PERSONNEL. Throughout the Term: (a) HP-OMS shall use in the performance of the Services and shall not replace or contract with any additional Key Personnel or any communication or security Customer Contractors utilized by Customer to provide the services (included within the Services) prior to the Commencement Date under Third Party Contracts, without receiving Customer's prior written approval; (b) at Customer's request (for reasonable reasons, including without limitation, those specified in Exhibit B, Appendix G), HP-OMS shall promptly replace or cease to negotiate or contract with any HP-OMS Personnel (or prospective HP-OMS Personnel) for the provision of the Services; and (c) all other HP-OMS Personnel, shall not be replaced by HP-OMS within the first twelve (12) months of engagement of such HP-OMS Personnel in the provision of Services without Customer's prior written approval, not to be unreasonably withheld. 16 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 5.3 REQUESTED REPLACEMENT BY CUSTOMER. In the event that Customer determines in accordance with Section 5.2(b) (CUSTOMER RIGHTS CONCERNING KEY PERSONNEL; REPLACEMENT OF HP-OMS PERSONNEL) that a member of HP-OMS Personnel should be replaced, then Customer shall give HP-OMS notice to that effect requesting that such HP-OMS Personnel be replaced. HP-OMS shall, upon Customer's request, replace as promptly as possible such HP-OMS Personnel with an individual of suitable ability and qualifications, without cost to Customer. Nothing in this provision shall operate or be construed to limit HP-OMS' responsibility for the acts or omissions of the HP-OMS Personnel. 5.4 MANAGEMENT OF HP-OMS PERSONNEL. Subject to Section 5.2 (CUSTOMER RIGHTS CONCERNING KEY PERSONNEL; REPLACEMENT OF HP-OMS PERSONNEL): (a) HP-OMS shall appoint a representative to supervise and coordinate HP-OMS' performance of obligations, which shall be identified in Exhibit G - [Project Staff and Key Personnel] ("HP-OMS Project Manager"). The HP-OMS Project Manager shall be deemed one of the Key Personnel and shall be located in Israel. HP-OMS shall not reassign or replace the HP-OMS Project Manager during the first two (2) years of his or her assignment as the HP-OMS Project Manager. (b) HP-OMS will perform the Services using a dedicated list of people detailed in E Exhibit G - [Project Staff and Key Personnel]. Any change or addition to this list will be communicated to Customer's Project Manager. 5.5 KEY PERSONNEL. (a) APPROVAL OF HP-OMS' KEY PERSONNEL. (i) The initial list of Key Personnel is set forth in Exhibit G. Such list may be modified by the mutual written agreement of the Parties. Neither Party will unreasonably withhold agreement to add or substitute a person onto Exhibit G. 17 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (ii) HP-OMS shall notify Customer of HP-OMS Personnel that HP-OMS suggests should be added to Exhibit G. HP-OMS shall introduce the individual to the appropriate Customer representatives, shall provide reasonable opportunity for Customer representatives to interview the individual, and shall provide Customer with a resume and such other information about the individual as may be reasonably requested by Customer. If Customer objects to the proposed assignment, the Parties shall attempt in good faith to resolve Customer's concerns on a mutually agreeable basis. If the Parties have not been able to resolve Customer's concerns within five (5) working days of Customer communicating its concerns, HP-OMS shall not assign the individual to that position and shall propose to Customer the assignment of another individual of suitable ability and qualifications. (b) CONTINUITY OF KEY PERSONNEL. HP-OMS shall cause each of the Key Personnel to devote full time and effort to the provision of Services under this Agreement. In the event of the voluntary resignation, involuntary termination for cause, illness, disability or death of one of its Key Personnel, HP-OMS shall (i) give Customer as much notice as reasonably possible of such development, and (ii) expeditiously identify and obtain Customer's approval of a suitable replacement. Subject to Section 5.2 (CUSTOMER RIGHTS CONCERNING KEY PERSONNEL; REPLACEMENT OF HP-OMS PERSONNEL), HP-OMS shall transfer, reassign or remove one of its Key Personnel only after (i) giving Customer at least ninety (90) days prior notice of such action, (ii) identifying a suitable replacement in accordance with Section 5.5(a)(ii) (APPROVAL OF HP-OMS' KEY PERSONNEL), and (iii) demonstrating to Customer's reasonable satisfaction that such action will not have an adverse impact on HP-OMS' performance of its obligations under this Agreement. Subject to Section 5.2 (CUSTOMER RIGHTS CONCERNING KEY PERSONNEL; REPLACEMENT OF HP-OMS PERSONNEL), under no circumstances shall HP-OMS transfer, reassign or remove more than one third (1/3) of the Key Personnel in any twelve (12) month period. 5.6 HP-OMS PERSONNEL NOT CUSTOMER EMPLOYEES. Except as otherwise expressly set forth in this Agreement, the Parties intend to create an independent contractor relationship and nothing in this Agreement shall operate or be construed as making Customer or HP-OMS partners, joint venturers, principals, joint employers, co-employers, agents or employees of or with the other. No officer, director, employee, agent, Affiliate, contractor or subcontractor retained by HP-OMS to perform work on Customer's behalf hereunder shall be deemed to be an officer, director, employee, agent, Affiliate, contractor or subcontractor of Customer for any purpose. No officer, director, employee, agent, Affiliate, or Contractor retained by Customer to perform work on Customer's behalf with which HP-OMS cooperates hereunder shall be deemed to be an officer, director, employee, agent, Affiliate, contractor or subcontractor of HP-OMS for any purpose. HP-OMS, not Customer, has the right, power, authority and duty to supervise and direct the activities of the HP-OMS Personnel and to compensate such HP-OMS Personnel for any work performed by them on Customer's behalf pursuant to this Agreement. HP-OMS, and not Customer, shall be responsible and therefore solely liable for all acts and omissions of HP-OMS Personnel. Customer, not HP-OMS, has the right, power, authority and duty to supervise and direct the activities of the Customer's Personnel and to compensate such Customer's Personnel for any work performed by them. Customer, and not HP-OMS, shall be responsible and therefore solely liable for all acts and omissions of Customer Employees. 18 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 5.7 RETENTION OF HP-OMS PERSONNEL. (a) TURNOVER RATE AND DATA. Subject to Section 5.5(b) (CONTINUITY OF KEY PERSONNEL), if Customer determines that HP-OMS' turnover rate is unacceptable and so notifies HP-OMS, HP-OMS shall within ten (10) working days (i) provide Customer with data concerning HP-OMS' turnover rate, (ii) meet with Customer to discuss the reasons for the turnover rate, and (iii) submit a proposal for reducing the turnover rate for Customer's review and approval. Notwithstanding any transfer or turnover of HP-OMS Personnel, HP-OMS shall remain obligated to perform the Services without degradation and in accordance with the Service Levels. (b) RESTRICTIONS ON PERFORMING SERVICES TO COMPETITORS; CHANGES TO SYSTEM ADMINISTRATION PASSWORDS. (i) HP-OMS shall not cause or permit, without Customer's prior written consent, any HP-OMS Personnel performing Services in connection with the RSC or the MCC to perform services for a Customer Competitor while engaged in the provision of Services to Customer and for an additional period of at least twelve (12) months immediately following the date of termination of such HP-OMS Personnel's provision of Services to Customer. Notwithstanding the foregoing, HP-OMS Subcontractors (except individual HP-OMS Subcontractors) shall not be subject to the twelve (12) month limitation above, provided that such HP-OMS Subcontractors have continuing obligations of confidentiality with respect to Customer's Confidential Information, at least to the extent set out in Section 17 (CONFIDENTIAL INFORMATION) and for a minimum period of three (3) years following the date of termination of such Subcontractor's provision of Services to Customer. In addition, during the Term, HP-OMS shall not utilize any RSC or the MCC dedicated for Customer for the benefit of any third party that is a Customer Competitor. 19 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (ii) HP-OMS shall change all HP-OMS Personnel system administration passwords (permitting such HP-OMS Personnel access to Customer's confidential and proprietary information, including any Customer Data) within twenty-four (24) hours after any HP-OMS Personnel performing system administration functions ceases to provide Services to Customer. In addition, in the event that any RSC HP-OMS Personnel receives a system administration password in order to perform a Service for which the MCC is otherwise responsible, HP-OMS shall change the relevant system administration passwords within twenty-four (24) hours after completion of the Service by such RSC HP-OMS Personnel. During the Transition and Stabilization Phases, HP-OMS shall propose for Customer's approval, IT business procedures which will mechanize and standardize the foregoing, and, upon Customer's approval, shall implement such procedures throughout the Term and the Termination Assistance Period. (iii) Prior to the commencement of any HP-OMS Personnel's involvement in the provision of the Services, HP-OMS shall ensure that such individual has executed a confidentiality agreement, which is at least as protective of Customer's Confidential Information as the terms and conditions of Section 17 (CONFIDENTIAL INFORMATION), and survives in all cases the termination of such HP-OMS Personnels' involvement in the provision of the Services. 5.8 CONDUCT OF HP-OMS PERSONNEL. (a) CONDUCT AND COMPLIANCE. While at Customer Sites, HP-OMS Personnel will comply with the applicable rules and regulations regarding personal and professional conduct generally applicable to personnel at such Customer Sites, including but not limited to those rules which will affect HP-OMS' provision and/or delivery of the Operations Services, and of any subsequent changes thereto, provided they were advised to HP-OMS in advance and in writing or made available to HP- OMS Personnel by means generally used by Customer to disseminate such information to its employees or contractors. HP-OMS Personnel shall also comply with reasonable requests of Customer personnel pertaining to personal and professional conduct and otherwise conduct themselves in a businesslike manner. 20 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (b) IDENTIFICATION OF HP-OMS PERSONNEL. If requested by Customer in writing, all HP-OMS Personnel shall clearly identify themselves as HP-OMS Personnel and not as employees of Customer. (c) RESTRICTION ON MARKETING ACTIVITY. Except for marketing representatives expressly agreed to by HP-OMS and Customer, none of the HP-OMS Personnel performing Services for Customer hereunder shall conduct, without the prior written consent of Customer, any sales or marketing activities directed at Customer or any third party, at any Customer Site or any other location, for as long as such HP-OMS Personnel are engaged in the provision of Services to Customer. (d) SUBSTANCE ABUSE. HP-OMS shall immediately remove (or cause to be removed) any HP-OMS Personnel who is known to be or reasonably suspected of engaging in substance abuse while on a Customer Site or while performing Services. In the case of reasonable suspicion, such removal shall be pending completion of the applicable investigation. Substance abuse includes the sale, attempted sale, possession or use of illegal drugs, drug paraphernalia, or, to the extent not permitted on Customer Sites, alcohol, or the misuse of prescription or non-prescription drugs. HP-OMS represents and warrants that it has and will maintain a substance abuse policy and that such policy will be applicable to all HP-OMS employees performing Services under this Agreement. HP-OMS represents and warrants that it shall require its HP-OMS Subcontractors and Affiliates providing Services to have and maintain such policy and practices and to adhere to this provision. 21 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 5.9 MEALS AND SOCIAL EVENTS FOR ON-SITE HP-OMS PERSONNEL; HP-OMS REIMBURSEMENT. Customer shall provide all HP-OMS Personnel, who are working at a Customer Site on a full-time basis during at least 80% of the applicable working week, with the same level of food, beverage and access to social events that are provided to Customer Employees, as a benefit of their employment with Customer at the applicable Customer Site. HP-OMS shall credit Customer against Customer's obligation to pay the fees due hereunder. 6. CUSTOMER OBLIGATIONS 6.1 COOPERATION WITH HP-OMS. (a) Customer acknowledges that HP-OMS' ability to deliver the Services is dependent upon Customer's and Customer's Affiliates' reasonable cooperation with HP-OMS. Customer will comply with the Customer obligations stated in this Agreement, as well as the payment obligations specified in Exhibit E - [Pricing and Pricing Principles] and the transition obligations specified in the Transition Plan referenced in Section 12 (TRANSITION AND STABILIZATION PHASES), and will perform and observe the Customer responsibilities outlined in all Exhibits and attachments. Furthermore, Customer undertakes, subject to Section 2.3 (ELIGIBLE RECIPIENTS OF SERVICES), that all of Customer's Affiliates at the applicable Customer Site shall be familiar with the relevant terms of this Agreement and that they shall abide by Customer's responsibilities derived therefrom in a timely manner. 6.2 CUSTOMER PROJECT MANAGER(S). Customer shall appoint one or more representative(s) (in Customer's discretion) to supervise and coordinate Customer's performance of Customer's obligations, which representatives shall be identified in Exhibit G - [Project Staff and Key Contacts], as updated by the Parties from time to time. Customer may change its representative(s) at any time upon thirty (30) days prior written notice. Customer's Project Manager(s) shall be authorized to act as the primary point of contact for HP-OMS in dealing with Customer with respect to each Party's obligations under this Agreement and issue all consents or approvals and make all requests on behalf of Customer. 22 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 6.3 PROVIDING ACCESS TO HP-OMS. Customer will provide HP-OMS with access to and use of all information, Customer Sites, Customer Data, and/or Customer Software and/or systems, internal resources, facilities, access passwords as necessary to deliver the Operations Services, subject to Section 5.7(b) (RESTRICTIONS ON PERFORMING SERVICES TO COMPETITORS; CHANGES TO SYSTEM ADMINISTRATION PASSWORDS), Section 5.8 (CONDUCT OF HP-OMS PERSONNEL), Section 17 (CONFIDENTIAL INFORMATION), and Section 21.2 (SECURITY). 6.4 DISCLOSURE OF QUARTERLY FINANCIAL RESULTS OF PARENT. Following the public release of Customer's financial reports and upon written request from HP-OMS, Customer shall procure that a management representative of Tecnomatix Technologies Ltd. will meet with a representative of HP-OMS to respond to questions concerning the quarterly financial results of Tecnomatix Technologies Ltd., to the extent permissible under applicable law. 7. REQUIRED CONSENTS 7.1 HP-OMS-ADMINISTRATIVE RESPONSIBILITY FOR REQUIRED CONSENTS. As part of the Services, HP-OMS shall assume primary responsibility for all administrative activities necessary to obtain all Required Consents and notify relevant third parties: (i) in connection with it acting as agent for Customer under the Third Party Contracts to which Customer is a party in connection with HP-OMS' provision of the Services, in accordance with Section 7.4 (HP-OMS AS CUSTOMER'S AGENT UNDER THIRD PARTY CONTRACTS) below; (ii) to grant to Customer (where applicable) the right to use and/or access the HP-OMS Software and HP-OMS Hardware; (iii) to assign or transfer to Customer or its designee the Termination Assets in accordance with Section 20.6(d) (TRANSFER OF TERMINATION ASSETS ON TERMINATION/EXPIRATION OF AGREEMENT) following the expiration or termination of this Agreement to the extent provided in this Agreement; (iv) to assign or transfer to Customer any Developed Materials, and (v) to otherwise use any Intellectual Property Rights or materials, to the extent necessary for the purpose of HP-OMS' performance of its obligations under this Agreement (collectively, the "HP-OMS- RESPONSIBLE REQUIRED CONSENTS"). Customer will cooperate with and assist HP-OMS in obtaining the HP-OMS Responsible Required Consents by executing all documents reasonably necessary, which are prepared or provided by HP-OMS. 23 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 7.2 FINANCIAL RESPONSIBILITY. The responsibility for payment of transfer, relicensing and/or termination fees and/or expenses associated with obtaining any HP-OMS- Responsible Required Consents or terminating any licenses or agreements as to which Required Consents cannot be obtained shall be referred for resolution to the Dispute Resolution Process, and the Parties will endeavor to equitably allocate any such fees and/or expenses. 7.3 ACCESS TO CUSTOMER SITES. Customer shall be responsible for obtaining, and shall pay and be liable against HP-OMS for any vendor fees required or costs occurring in connection with and relating to obtaining all Required Consents to grant HP-OMS the right to access Customer Sites (including any fees, royalties and costs required to provide HP-OMS such consents). 7.4 HP-OMS AS CUSTOMER'S AGENT UNDER THIRD PARTY CONTRACTS. Unless otherwise directed by Customer (and subject to Section 7.5 (CONTINGENT ARRANGEMENTS) below), HP-OMS is hereby appointed as Customer's agent in connection with Customer's rights and obligations under Third Party Contracts to the extent necessary to fulfill HP-OMS' obligations under the Agreement and HP-OMS accepts such appointment. HP-OMS shall retain operational and financial responsibility over such contracts and shall so notify the relevant third party vendor/service supplier under the applicable Third Party Contract. 7.5 CONTINGENT ARRANGEMENTS. Should an HP-OMS-Responsible Required Consent not be obtained, despite HP-OMS' using all commercially reasonable efforts, Customer and HP-OMS will cooperate with each other in achieving a reasonable alternative arrangement for Customer to continue to process its work with as minimal interference to its business operations as is reasonable until such Required Consent is obtained. Subject to the foregoing, if Customer shall retain financial and/or operational responsibility for such Services, any payments to be made by Customer to the third party for Services and related costs to Customer will be reimbursed by HP-OMS. The Service Levels will not apply to such Services for which operational responsibility is retained by Customer. Except as otherwise expressly provided herein, the failure to obtain any Required Consent shall not relieve HP-OMS of its obligations under this Agreement. 24 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 8. HARDWARE 8.1 SERVICES IN CONNECTION WITH HP-OMS HARDWARE. HP shall perform the Services in connection with the HP-OMS Hardware in accordance with this Agreement, including without limitation, complying with Section 14 (FUNDAMENTAL OBLIGATIONS; WARRANTIES AND DISCLAIMERS). 8.2 MINIMUM LEVEL OF HP-OMS HARDWARE MAINTENANCE. HP-OMS shall maintain all HP-OMS Hardware in good working order, including without limitation undertaking repairs and preventive maintenance on HP-OMS Hardware in accordance with the applicable Hardware manufacturer's recommendations and requirements, so as to be eligible for such manufacturer's maintenance program on termination or expiration of this Agreement ("ELIGIBILITY REQUIREMENTS"); provided, that HP-OMS shall not be required to meet the Eligibility Requirements with respect to any HP-OMS Hardware owned or leased by Customer prior to the Commencement Date, which Customer did not so maintain prior to the Commencement Date. 8.3 FINANCIAL AND OPERATIONAL RESPONSIBILITY. HP-OMS shall be responsible for all third party fees or expenses (including maintenance and/or support charges, if any) on or after the Commencement Date associated with all HP-OMS Hardware, and shall pay all amounts becoming due with respect to such HP-OMS Hardware, and all related expenses (including pro rata maintenance and/or support fees, if any), for periods on or after the Commencement Date. In addition, HP-OMS shall be responsible for the evaluation, procurement, testing, installation, use, support, management, administration, operation and maintenance of such HP-OMS Hardware and the performance, availability, reliability, compatibility and interoperability of such HP-OMS Hardware and related Third Party Contracts, each in accordance with this Agreement, including the Service Levels and change management procedures. 8.4 TITLE TO HP-OMS HARDWARE. (a) Subject to Section 20.6(d) (TRANSFER OF TERMINATION ASSETS ON TERMINATION/EXPIRATION OF AGREEMENT), title to the Leased Add-On Assets, Transition Project Assets, Refreshed Assets, and New Customer Employee Assets is retained by HP-OMS, and Customer has no rights thereto except as specifically permitted under this Agreement (the "HP-OMS-OWNED HARDWARE"). Under no circumstances whatsoever shall Customer be entitled to transfer to a third party any rights or obligations in such assets, including rights to retain and/or to use such assets. Without derogating from the above, Customer shall not transfer such assets as a loan to any third party, nor shall it sell it or cause it to be seized or mortgaged. 25 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (b) As between Customer and HP-OMS, title to all HP-OMS Hardware owned or leased by Customer prior to the Commencement Date and all Purchased Add-on Assets are retained by Customer, and HP-OMS has no rights thereto, except for the sole purpose of providing the Services (the "CUSTOMER-OWNED HARDWARE"). Under no circumstances whatsoever shall HP-OMS be entitled to transfer to a third party, any rights or obligations in such assets, including rights to retain and/or to use such assets. Without derogating from the above, HP-OMS shall not transfer such assets as a loan to any third party, nor shall it sell it or cause it to be seized or mortgaged. 8.5 NON-INTERFERENCE WITH HP-OMS HARDWARE. Each party shall refrain from any act or omission with regard to the HP-OMS Hardware, which may imply, directly or indirectly, that HP-OMS or Customer is not the rightful owner of the applicable HP-OMS Hardware (owned as set out in Section 8.4 (TITLE TO HP-OMS HARDWARE) above. Without derogating from the above, (a) if requested by HP-OMS, the Customer hereby undertakes to notify all relevant creditors or any other relevant institution that the title of HP-OMS-Owned Hardware is vested exclusively with HP-OMS; and (b) if requested by Customer, HP-OMS hereby undertakes to notify all relevant creditors or any other relevant institution that the title of Customer-Owned Hardware is vested exclusively with Customer. HP-OMS shall be entitled to mark HP-OMS-Owned Hardware as its property by attaching an appropriate legend to each item thereof, and Customer shall be entitled to mark Customer-Owned Hardware as its property by attaching an appropriate legend to each item thereof. 8.6 UPGRADE, MODIFICATION AND REPLACEMENT OF HP-OMS HARDWARE. (a) Subject to clause (b) below, HP-OMS may upgrade, modify and replace the HP-OMS Hardware, as HP-OMS, in its sole discretion, deems appropriate, so long as HP-OMS does not change, and remains in compliance with (i) the Service Levels, including but not limited to HP-OMS' obligations in connection with the Technology Refresh Program; (ii) all other relevant terms and conditions of this Agreement; and (iii) the language of the upgraded, modified or replaced HP-OMS Hardware (e.g., the language of the operating system and keyboard). 26 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (b) Any deviation by HP-OMS from Customer's standards with respect to infrastructure Hardware (i.e., routers, switches, servers, storage and backup devices, and communication lines), in effect prior to the Commencement Date (which standards shall be documented by HP-OMS during the Transition and Stabilization Phases), shall require Customer's prior written consent, which shall not be unreasonably withheld. 8.7 USE OF HP-OMS HARDWARE. Neither Party may use any HP-OMS Hardware for any purpose other than Customer's business purposes (and any other act which is reasonably incidental to such use). 9. SOFTWARE 9.1 LIMITED RIGHT TO USE CUSTOMER SOFTWARE. The Customer hereby grants HP-OMS a right to use the Customer Software solely in connection with HP-OMS' provision of the Services to Customer and to the extent permitted under the applicable Third Party Software. 9.2 HP-OMS' PROVISION OF CUSTOMER SOFTWARE SERVICES. HP-OMS shall provide the Services for the Customer Software in accordance with this Agreement, including Exhibit B (the "CUSTOMER SOFTWARE SERVICES"). 9.3 CUSTOMER SOFTWARE WARRANTIES. With respect to the Customer Software used by HP-OMS to provide the Operation Services, and unless otherwise specified in Exhibit B, the Customer represents and warrants that, during the entire Term of this Agreement: (a) Customer Software is and shall be supported under the applicable Third Party Contract, at the same level as prior to the Commencement Date and will continue to be supported by Customer or an authorized third party, all to the extent set out in Exhibit B. 9.4 OTHER RIGHTS/OBLIGATIONS IN CONNECTION WITH CUSTOMER SOFTWARE (a) HP-OMS reserves the right to move Customer Software and Customer Data solely within the applicable Customer Site, upon written consent from Customer, not to be unreasonably withheld. (b) Customer may change the location of Customer Software upon prior written notice to HP-OMS, subject to the terms and conditions of Exhibit B. 27 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (c) Customer is responsible for paying the applicable third party supplier of Customer Software the applicable fee entitling Customer to receive Customer Software updates. 9.5 CUSTOMER'S RIGHT TO USE HP-OMS SOFTWARE. HP-OMS grants to Customer a non-exclusive, royalty-free right, in object code form, to use all Software included within the Termination Assets throughout the Term, subject to Section 20.6(d) (TRANSFER OF TERMINATION ASSETS ON TERMINATION/EXPIRATION OF AGREEMENT), except with respect to Other HP-OMS Software, which shall be provided to Customer on a non-exclusive, right to use, paid-up, perpetual basis. 9.6 HP-OMS' PROVISION OF HP-OMS SOFTWARE SERVICES; FINANCIAL RESPONSIBILITY. (a) HP-OMS shall provide the Services in connection with the HP-OMS Software in accordance with this Agreement. Without limiting the generality of the foregoing, any support or maintenance services provided by HP-OMS with respect to the HP-OMS Software shall be performed in accordance with the applicable HP-OMS Software documentation, supplier recommendations and requirements. (b) HP-OMS shall be responsible for any third party fees or expenses on or after the Commencement Date associated with the provision of the Services described in this Agreement with respect to HP-OMS Software and related Third Party Contracts, and shall pay all amounts becoming due under such licenses or related agreements, and all related expenses (including any maintenance and/or support charges) for periods on or after the Commencement Date. (c) Customer shall be responsible for any third party fees or expenses due prior to the Commencement Date with respect to HP-OMS Software and related Third Party Contracts, and shall pay all amounts due under such licenses or related agreements, and all related expenses (including any maintenance and/or support charges) for periods prior to the Commencement Date. 9.7 PARTIES' COMPLIANCE WITH HP-OMS SOFTWARE AND CUSTOMER SOFTWARE LICENSE TERMS. Each party undertakes to abide by the provisions of the license to use terms and conditions of each HP-OMS Software and Customer Software (including every revision or update), as well as by all instructions concerning manufacturer's copyright in the Software and/or any relevant documentation. 28 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 9.8 SOURCE CODE ESCROW OF THIRD PARTY HP-OMS SOFTWARE. To the extent permitted by applicable third party licensors, HP-OMS will add Customer as a beneficiary to any source code escrow agreements entered into by HP-OMS under HP-OMS Software licenses received by HP-OMS from third parties (other than Software licenses owned or leased by Customer prior to the Commencement Date, which are used by HP-OMS to perform the Services). 9.9 HP-OMS' OPERATIONAL RESPONSIBILITY. In connection with HP-OMS' obligations under Third Party Contracts, HP-OMS shall be responsible for enforcing (and shall enforce) all of Customer's and HP-OMS' rights for (and shall comply with the applicable operational obligations in connection with) the evaluation, procurement, testing, installation, use, support, management, administration, operation and maintenance of all HP-OMS Software. In addition, HP-OMS shall be responsible for enforcing (and shall enforce) all of its rights for (and shall comply with the applicable operational obligations in connection with) the performance, availability, reliability, compatibility and interoperability of such HP-OMS Software, each in accordance with this Agreement, including the Service Levels and change management procedures. HP-OMS shall have the same operational responsibilities as described above with respect to Customer Software, to the extent of HP-OMS' "Make it Work" obligations set out in Exhibit B, except that HP-OMS shall not be responsible for evaluation and testing (in excess of fifty (50) hours of evaluation/testing) for each such Customer Software. 10. PRICE AND PAYMENT 10.1 TARGET PRICE AND BANK OF WORK HOURS INVOICING AND PAYMENT. In consideration of HP-OMS providing the Services as described in this Agreement, Customer shall pay to HP-OMS the Target Price. The Target Price shall be invoiced on a quarterly basis, in accordance with the payment schedule detailed in Exhibit E - [Pricing and Pricing Principles]. HP-OMS shall adjust the Target Price all as specified in Exhibit E - [Pricing]. In consideration of HP-OMS providing the Services outside of the "Service Window" hours (specified in Exhibit C,), Customer shall pay to HP-OMS the Bank of Work Hours hourly rates, described in Exhibit E. The invoice for such hourly work shall be delivered to Customer on a monthly basis, together with all supporting information reasonably requested by Customer, as more specifically set out in Exhibit E. Except as otherwise set forth herein, HP-OMS shall not invoice Customer for any advance or concurrent charges or other amounts. All HP-OMS expenses relating to the Services (including travel and living expenses) are included in the Target Price and Bank of Work Hours hourly rates and shall not be reimbursed by Customer unless agreed to by Customer in writing. 29 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 10.2 APPLICATION OF CREDITS/LIQUIDATED DAMAGES. To the extent a credit (including but not limited to a Service Level Credit) is due to Customer pursuant to this Agreement, HP-OMS shall provide Customer with an appropriate undisputed credit (in the invoice immediately following the date of such credit), applied against amounts then due and owing; if no further payments are due to HP-OMS, HP-OMS shall pay such undisputed amounts to Customer within thirty (30) days. 10.3 INVOICING; DATE OF PAYMENT OF INVOICES. HP-OMS shall issue quarterly invoices for all payments due under this Agreement not earlier than the first day of the first month of each quarter in which the quarterly Target Price is due hereunder. Subject to Section 10.5 (ESCROW OF DISPUTED AMOUNTS), Customer shall make payment of the Target Price due under this Agreement, as specified in Exhibit E hereto. 10.4 TAXES. Each party shall bear its own tax obligation, all as specified in Exhibit E hereto. 10.5 ESCROW OF DISPUTED AMOUNTS. (a) In the event Customer disputes in good faith any amount claimed to be payable by HP-OMS under the Agreement, Customer shall pay the disputed amount into escrow, in accordance with Subsection (c) below. (b) In the event HP-OMS disputes in good faith any credit (including but not limited to a Service Level Credit), which may be due to Customer pursuant to this Agreement, (i) Customer shall pay the disputed sum into escrow, in accordance with Subsection (c) below, provided that payments other than the disputed amounts remain to be paid under the Agreement; or (ii) HP-OMS shall pay the disputed sum into escrow, in accordance with Subsection (c) below, if no further payments are due to HP-OMS under the Agreement. 30 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (c) In the event of a disputed amount payable into escrow as described in Section 10.5 (DISPUTED AMOUNTS), the party with the obligation to pay shall so pay such disputed amount in full (the "DISPUTED AMOUNT") to Advocate Yossi Avraham, Advocate of Tel Aviv (or to any other party agreed upon in advance and in writing by the parties), as escrow agent for the parties (the "ESCROW AGENT"), in accordance with an escrow agreement to be executed among Customer, HP-OMS and the Escrow Agent, a signed copy of which shall be attached to this Agreement as Exhibit P [Escrow Agreement] within thirty (30) days from the Commencement Date (the "ESCROW AGREEMENT"). The escrow agreement shall provide, among other things, that any amounts desposited with the the Escrow Agent shall not be released to either party, until the dispute is resolved in accordance with Section 21.7 (DISPUTE RESOLUTION PROCESS) and the Escrow Agent receives either (i) written notice signed by both parties with instructions directing the release of the Disputed Amount; or (ii) a final, unappealable judgment signed by a court of competent jurisdiction in Israel ordering the release of the Dispute Amount to one of the parties. Unless otherwise agreed by the parties, the Escrow Agreement shall further provide that each party shall indemnify, defend and hold harmless the Escrow Agent from any claims, actions, damages, fees and expenses, costs, reasonable attorney's fees and other liabilities incurred by the Escrow Agent relating to this escrow arrangement except where it is adjudged that the Escrow Agent has acted with gross negligence or willful misconduct. 10.6 INTEREST ON UNPAID AMOUNTS. Interest on amounts in arrears shall be computed and paid as specified in Exhibit E. 10.7 CREDITS/REIMBURSEMENT FOR CUSTOMER PAYMENTS COVERING PERIODS AFTER COMMENCEMENT DATE. Except as otherwise permitted hereunder, Customer shall not make any payments (whether prior to or after the Commencement Date) to any third party in consideration for Services, Software, Hardware or other materials to be provided or performed on or after the Commencement Date by HP-OMS or a third party for which HP-OMS has financial responsibility hereunder, with the intention of diminishing the Services to be provided by HP-OMS hereunder, without the prior written authorization by HP-OMS. If HP-OMS has authorized such payments or if such payments are made by Customer in good faith - it shall promptly credit Customer against amounts then due and owing hereunder to HP-OMS; if no further payments are due and owning to HP-OMS, HP-OMS shall pay such amounts to Customer within thirty (30) days. If HP-OMS pays for services, Software, Hardware or other materials after the Commencement Date for services Software, Hardware or other materials provided to Customer prior to the Commencement Date, Customer shall reimburse HP-OMS in such amounts. 31 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 10.8 GUARANTEE FROM TECNOMATIX TECHNOLOGIES LTD. In addition to its other rights and remedies against Customer under this Agreement, in the event of a breach by Customer hereunder, HP-OMS may, at any time, exercise its rights as a beneficiary to the Guarantee, executed by Tecnomatix Technologies Ltd, attached hereto as Exhibit K. 10.9 CERTAIN GOVERNMENT INCENTIVES. In connection with certain government incentives available or which may become available to Customer, Customer has committed or may commit in the future through itself, its divisions, and Affiliates to expend funds or make investments or expenditures which may include the purchase of products or services, currency or capital investments, technology transfers through licensing or other arrangements, real property leases or purchases, and lease buy-back arrangements. Since it is anticipated that HP-OMS may be making or accomplishing such qualifying investments on behalf of Customer, each Party shall utilize its best efforts, consistent with all preexisting commitments and applicable legal requirements, in order to afford Customer the benefit of all such incentives which are available as a result of the performance of Services under this Agreement. HP-OMS shall make information available to Customer on a periodic basis as to the nature and amount of investment activities it is planning in respect of the Services, and shall provide Customer with such certificates and other appropriate documentation as are necessary to support utilization by Customer of such incentives. 10.10 AUDIT RIGHTS. (a) HP-OMS RECORDS. HP-OMS shall, and shall cause HP-OMS Subcontractors to, maintain complete and accurate records of and supporting documentation for all fees chargeable hereunder, all Customer Data and all transactions, soft document access, reports, data or information created, generated, processed or stored by HP-OMS in the performance of its obligations under this Agreement, including in respect of the Service Levels ("CONTRACT RECORDS"). HP-OMS shall maintain such Contract Records with respect to the Termination Assets in accordance with generally accepted accounting principles applied on a consistent basis and generally accepted auditing standards and in accordance with the financial record management provisions of Exhibit E, and with respect to other obligations under the Agreement, in accordance with HP-OMS' record retention policy as it may be modified from time to time and provided to HP-OMS in writing. 32 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (b) OPERATIONAL AUDITS. HP-OMS shall, and shall cause HP-OMS Subcontractors to, provide to Customer (and auditors and other representatives) access at reasonable hours to HP-OMS Personnel, to the facilities at or from which Services are then being provided, and to HP-OMS records and other pertinent information, all to the extent relevant to the Services and HP-OMS' obligations under this Agreement. Such access shall be provided for the purpose of performing audits and inspections of HP-OMS and HP-OMS Personnel in respect of Customer and its businesses, to (i) verify HP-OMS' compliance with this Agreement (ii) enable Customer to meet applicable legal, regulatory and contractual requirements and (iii) to verify the accuracy and completeness of fees (other than the Target Price). HP-OMS shall provide any assistance reasonably requested by Customer or its designee in conducting any such audit, including installing and operating audit software. Without limiting Customer's other rights and remedies under this Agreement, if an audit reveals a material breach of this Agreement or an overcharge by HP-OMS, HP-OMS shall promptly reimburse Customer for the actual cost of such audit, together with interest on the difference between the overcharged and the correct amounts from the date of HP-OMS' receipt of such overcharge at the rate set out in Section 10.6 (INTEREST ON UNPAID UNDISPUTED AMOUNTS). If an undercharge has occurred, Customer will reimburse HP-OMS to the extent of such undercharge. (c) QUARTERLY REPORT BY HP-OMS. Within fourteen (14) business days after the end of each calendar quarter, HP-OMS shall provide Customer with a report containing a list of the Termination Assets, initial book value, accumulated depreciation, net book value, and calculated years for depreciation per asset, as set out in HP-OMS' financial records, and any other relevant information requested by Customer to confirm compliance with HP-OMS' financial record management obligations, as set in Exhibit E, Appendix F. 33 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (d) FINANCIAL AUDITS. Except as provided below, Customer shall have no right to carry out, either directly or through a third party any financial audit of HP-OMS, or HP-OMS's Subcontractors. HP-OMS's auditors shall provide to Customer on a quarterly basis and at any other reasonable times if so requested by Customer, at the cost of HP-OMS, confirmation of HP-OMS' compliance with its obligations with respect to the Termination Assets as set out in Exhibit E, as well as (i) a list describing each of the Termination Assets, (ii) the initial book value of the asset, (iii) years for depreciation, (iv) method of depreciation; (v) net book value, and (vi) any other reasonable detail requested by Customer. If any such audit reveals non-compliance, HP-OMS shall promptly correct such noncompliance in its financial records. In accordance with the foregoing, during the Term of this Agreement and for a period of seven (7) years after termination or expiration of this Agreement, HP-OMS shall provide to Customer (and auditors and other representatives) access at reasonable hours to HP-OMS' Contract Records to the extent relevant to the performance of HP-OMS' obligations under this Agreement (and any other Contract Records relevant to the requirements of such governmental agencies), if and to the extent required by any applicable governmental authority. HP-OMS shall provide any assistance reasonably requested by Customer or its designee in conducting any such audit. 11. CHANGE MANAGEMENT 11.1 CHANGE REQUESTS. Customer or HP-OMS may submit a written Change Request to initiate changes in the Services as detailed in Exhibit B. The Change Request shall be managed in accordance with the process described in the Change Management chapters in Exhibit B - [Statement of Work] and Exhibit E - [Pricing and Pricing Principles]). 11.2 CHANGE REQUEST ORDERS. HP-OMS will advise Customer of the resultant impact of the Change Request on price and schedule within the time frame prescribed in Exhibit B - [Statement of Work]. Prior to implementation, all Change Requests must be mutually agreed upon in writing by the Parties. Pending such agreement, HP-OMS shall continue to perform and to be paid as if such Change Request had not been requested or recommended. Once a Change Request Order is signed by the Parties and implemented, HP-OMS will adjust Customer's invoice in accordance with the agreed terms of the Change Request order. However, the price of changes requiring up to fifty (50) person hours of work (per change request) shall be charged at the Bank of Work Hours rates, identified in Exhibit E - [Pricing and Pricing Principles]; provided, that HP-OMS shall perform the first fifty (50) person hours of work per calendar year, otherwise chargeable at the Bank of Work Hours rates, free of charge. 34 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 11.3 CUSTOMER'S RIGHT TO USE CUSTOMER CONTRACTORS. Nothing in this Agreement shall be construed as a requirements or exclusive contract, and notwithstanding anything to the contrary contained herein, this Agreement shall not be interpreted to prevent Customer from obtaining from Customer Contractors, or providing to itself, any or all of the same or similar Services described in this Agreement. For the avoidance of doubt, this Section shall not limit HP-OMS' obligations to perform, and Customer's obligations to pay for, the Services in accordance with the terms and conditions of this Agreement. 11.4 HP-OMS COOPERATION. HP-OMS shall fully cooperate with and work in good faith with Customer or Customer Contractors as requested by Customer and at no additional charge to Customer. Such cooperation shall include: (i) timely providing access to any facilities being used to provide the Services, as necessary for Customer personnel or Customer Contractors to perform the work assigned to them; (ii) timely providing reasonable electronic and physical access to the business processes and associated Hardware and Software, to the extent necessary and appropriate for Customer Employees or Customer Contractors to perform the work assigned to them; (iii) timely providing written requirements, standards, policies or other documentation for the business processes and associated Hardware or Software procured, operated, supported or used by HP-OMS in connection with the Services; or (v) any other cooperation or assistance reasonably necessary for Customer Employees or Customer Contractors to perform the work in question. Customer Employees and Customer Contractors shall comply with HP-OMS' security and confidentiality requirements, and shall, to the extent performing work on Software or Hardware for which HP-OMS has operational responsibility, comply with HP-OMS' standards, methodologies, and procedures. 35 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 12. TRANSITION AND STABILIZATION PHASES 12.1 TRANSITION PLAN. The Parties have agreed upon a transition plan for the transfer of the responsibilities relating to the Services from Customer to HP-OMS, which Plan is detailed in Exhibit D - [Transition and Stabilization] (the "TRANSITION PLAN"). Such Transition Plan shall be implemented during the Transition and Stabilization Phases. Exhibit D identifies, among other things (i) the transition and stabilization activities to be performed by HP-OMS and the significant components and subcomponents of each such activity, (ii) the Deliverables to be completed by HP-OMS, (iii) the date(s) by which each such activity or Deliverable is to be completed (the "TRANSITION MILESTONES"), and (iv) any transition responsibilities to be performed or transition resources to be provided by Customer. In addition, within thirty (30) after the Commencement Date, HP-OMS shall prepare and deliver to Customer for Customer's review, comment and approval a detailed work plan based on and consistent with Exhibit D. Such detailed work plan shall become a part of Exhibit D and be incorporated therein. 12.2 PERFORMANCE. As part of the Services, HP-OMS shall perform the Transition and Stabilization Services described in Exhibit D in accordance with the Transition Milestones set forth therein. HP-OMS shall provide all cooperation and assistance reasonably required or requested by Customer in connection with Customer's evaluation or testing of the Deliverables set forth in Exhibit D. HP-OMS shall perform the Transition and Stabilization Services so as to avoid or minimize to the extent possible (i) any material disruption to or adverse impact on the business or operations of Customer, (ii) any degradation of the Services then being received by Customer, or (iii) any material disruption or interference with the ability of Customer to obtain the full benefit of the Services, except as may be otherwise provided in Exhibit D. 12.3 DISCLOSING KNOWN RISKS; AVOIDING DELAYS. Prior to undertaking any transition activity, HP-OMS shall discuss with Customer all known Customer-specific material risks and shall not proceed with such activity until Customer is reasonably satisfied with the plans with regard to such risks (provided that, neither HP-OMS' disclosure of any such risks to Customer, nor Customer's acquiescence in HP-OMS' plans, shall operate or be construed as limiting HP-OMS' responsibilities under this Agreement). HP-OMS shall identify and resolve, with Customer's reasonable assistance, any problems that may impede or delay the timely completion of each task in Exhibit D that is HP-OMS' responsibility and shall use all commercially reasonable efforts to assist Customer with the resolution of any problems that may impede or delay the timely completion of each task in Exhibit D that is Customer's responsibility. 36 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 12.4 REPORTS. Key Personnel shall meet at least weekly with Customer's Project Manager(s) to report on HP-OMS' progress in performing its responsibilities and meeting the timetable set forth in Exhibit D. HP-OMS also shall provide written reports to Customer at least weekly regarding such matters, and shall provide oral reports more frequently if reasonably requested by Customer. Promptly upon receiving any information indicating that HP-OMS may not perform its responsibilities or meet the timetable set forth in Exhibit D, HP-OMS shall notify Customer in writing of material delays and shall identify for Customer's consideration and approval specific measures to address such delay and mitigate the risks associated therewith. After the Transition and Stabilization Phases are completed, HP-OMS will provide Customer with periodic reports as described in Exhibit B - [Statement of Work]. 12.5 INFORMATION REQUESTED/PROVIDED DURING DUE DILIGENCE PROCESS. Customer hereby represents and warrants that it has provided HP-OMS with access to Customer's relevant books and records during the Due Diligence Process. However, if, during the Transition and Stabilization Phases, HP-OMS discovers that such access was not provided, HP-OMS and Customer will discuss in good faith the need to amend the Agreement to provide for an equitable adjustment to the Target Price, considering all the facts and circumstances surrounding such material inaccuracy or deficiency. If Customer or HP-OMS disputes the need for or the extent of such equitable adjustment, Customer and HP-OMS will initially submit the matter to the Dispute Resolution Process defined in Section 21.7 (DISPUTE RESOLUTION PROCESS). For the avoidance of doubt, Customer shall have no responsibility (and the Target Price shall not be adjusted) if HP-OMS had knowledge or notice, obtained during the Due Diligence Period, of services, functions or responsibilities performed by or for the Customer prior to the Commencement Date - e.g., where reflected or a cost or amount allocated in Customer's or its Affiliates' books or records. 37 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 13. TESTING AND ACCEPTANCE TEST PROCEDURES 13.1 TESTING. At the end of each Transition Milestone and in accordance with the Transition Plan, and at the end of each milestone identified in any statement of work or upon delivery of any new Hardware or Software (i.e., after the Transition and Stabilization Phases), HP-OMS, as part of the Services, shall conduct testing of the deliverables thereunder (the "DELIVERABLES") during an agreed acceptance testing period to determine if the Deliverables are in compliance with the agreed testing criteria and specifications ("ACCEPTANCE TEST(S)") and shall permit Customer (in its sole discretion) to witness or participate in the Acceptance Test. If HP-OMS determines that the Deliverables for the applicable Transition Milestone have passed the Acceptance Test, HP-OMS shall so notify Customer. If the Deliverables successfully complete the Acceptance Tests during the Acceptance Test Period, Customer shall indicate its written acceptance thereof and deliver such acceptance to HP-OMS. If the applicable Acceptance Test reveals any noncompliance with such acceptance criteria and specifications ("NONCOMPLIANCE"), HP-OMS shall promptly (and in a manner that does not delay completing the Transition and Stabilization Services within the Transition Milestones): (i) so notify Customer in writing (ii) remedy the Noncompliance; and (iii) re-perform the Acceptance Test for Customer's approval (under the same procedures for the initial Acceptance Test). 14. FUNDAMENTAL OBLIGATIONS; WARRANTIES AND DISCLAIMERS 14.1 CERTAIN HP-OMS FUNDAMENTAL OBLIGATIONS. HP-OMS' fundamental obligations under the Agreement shall include, without limitation, the following: (a) SERVICES STANDARD. HP-OMS will perform the Operations Services with promptness and diligence, in a professional and workmanlike manner in accordance with the Services Levels, in accordance with the ITSM guidelines and HP best known practices for the applicable service level. HP-OMS shall provide on or before the Commencement Date a copy of the applicable ITSM guidelines. (b) HP-OMS PERSONNEL. HP-OMS shall use adequate numbers of qualified individuals with suitable training, education, experience, competence and skill to perform the Services. HP-OMS shall provide such individuals with training as to new products and services prior to the implementation of such products and services in the Customer environment. (c) HARDWARE/SOFTWARE MAINTENANCE. Unless otherwise agreed, HP-OMS shall maintain the HP-OMS Hardware and HP-OMS Software so that they operate substantially in accordance with the Service Levels and their specifications. 38 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (d) THIRD PARTY HARDWARE/SOFTWARE NO LONGER SUPPORTED. For third party HP-OMS Hardware and HP-OMS Software no longer supported by the third party licensor or manufacturer, HP-OMS shall use commercially reasonable efforts to perform maintenance for such HP-OMS Hardware or HP-OMS Software, as required. (e) TECHNOLOGY REFRESH. At all times throughout the Term, HP-OMS shall upgrade or replace HP-OMS Hardware in accordance with the Technology Refresh Program. (f) SOFTWARE CURRENCY. At all times throughout the Term, HP-OMS shall upgrade or replace HP-OMS Software as necessary to satisfy its obligations under this Agreement according to Exhibit C, at no additional cost to Customer; provided, HP-OMS shall utilize at least the second to most (if not the most) updated version of such Software. (g) HP-OMS SOFTWARE. Any HP-OMS Software will comply with its specifications and will provide the functions and features and operate in the manner described therein, subject to any software manufacturer-caused errors. (h) DEVELOPED MATERIALS. Developed Materials shall be free from material errors in operation and performance, shall comply with their documentation and the applicable specifications in all material respects and shall provide the functions and features and operate in the manner agreed by the Parties. (i) NONCONFORMITY. In the event that the HP-OMS Software or Developed Materials do not comply with the applicable specifications and criteria set forth in this Agreement, and/or materially and adversely affect the Services provided hereunder and subject to subsection (g) above, HP-OMS shall repair in accordance with the Service Levels or replace such HP-OMS Software or Developed Materials with conforming HP-OMS Software or Developed Materials. 39 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (j) MALICIOUS CODE. HP-OMS shall take all commercially reasonable actions and precautions (including the use of the latest updated version of antivirus Software) according to Customer's security policy, defined prior to the Commencement Date, to prevent the introduction and proliferation of Malicious Code into Customer's environment or any system used by HP-OMS to provide the Services,. Any deviation from said policy, which is not supported by upgrades of the security systems in use prior to the Commencement Date by the Customer, will be carried out as per the Change Management Procedure. HP-OMS shall only be required to invest up to 175,000 USD during the Term in new security systems.As used herein, "MALICIOUS CODE" means any known (i) code, program, or sub-program, whose knowing or intended purpose is to damage or interfere with the operation of the computer system containing the code, program or sub-program, or to halt, disable or interfere with the operation of the Software, code, program, or sub-program, itself, or (ii) device, method, or token that permits any person to circumvent or breach the normal security of the Customer network, systems, the Software or the system containing the code. Without limiting HP-OMS' other obligations under this Agreement, in the event Malicious Code is found in Hardware, Software or systems managed or supported by HP-OMS or used by HP-OMS to provide the Services, HP-OMS shall exercise all commercially reasonable efforts, at no additional charge to Customer, to eliminate and reduce the effects of such Malicious Code and, if the Malicious Code causes a loss of operational efficiency or loss of data, to mitigate such losses and restore such data with generally accepted data restoration techniques. 14.2 CERTAIN HP-OMS WARRANTIES. In addition to its warranties, representations and other obligations set out elsewhere in this Agreement, HP-OMS represents and warrants to the Customer as follows: (a) OWNERSHIP AND USE. HP-OMS represents, warrants and covenants that it is either the owner of, or authorized to use, any and all Software provided and used by HP-OMS in providing the Services. As to any such Software that HP-OMS does not own but is authorized to use, HP-OMS shall advise Customer as to the ownership and extent of HP-OMS' rights with regard to such Software to the extent any limitation in such rights would materially impair HP-OMS' performance of its obligations under this Agreement. 40 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (b) TRANSFER OF TERMINATION ASSETS ON TERMINATION/EXPIRATION; THIRD PARTY CONTRACT TERMS. Upon expiration of the Initial Term or Extended Term or earlier termination of this Agreement for any reason, HP-OMS will (i) have full authority to transfer its interest as owner, lessee or licensee of the relevant Termination Assets, without the payment by Customer or its designee of any license fees (associated with any period prior to the expiration of the Initial Term or Extended Term or earlier termination of this Agreement) or transfer fees, in accordance with Section 20 (TERM; BREACH; AND TERMINATION); and (ii) use best efforts to make Third Party Contracts for the support and maintenance of HP-OMS Hardware and HP-OMS Software assignable to Customer for a period extending one year after such expiration or earlier termination of this Agreement, on terms, conditions and prices no less favorable to Customer or its designees, and at least sufficient for the continuation of the activities comprising the Services. (c) COMPLIANCE WITH LAWS. With respect to the provision of the Services and the performance of its other legal and contractual obligations hereunder, HP-OMS is and shall be in compliance with all applicable laws (including privacy laws) on the Commencement Date and shall remain in compliance with such laws for the entire Term of this Agreement. 14.3 MUTUAL GENERAL WARRANTIES. Each Party represents and warrants to the other that: (a) CORPORATE EXISTENCE. It is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation; (b) CORPORATE POWER AND AUTHORITY. It has the requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement; (c) LEGAL AUTHORITY. It has obtained all licenses, authorizations, approvals, consents or permits required to perform its obligations under this Agreement under all applicable laws and under all applicable rules and regulations of all authorities having jurisdiction over the Services, except to the extent the failure to obtain any such license, authorizations, approvals, consents or permits is, in the aggregate, immaterial; 41 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (d) DUE AUTHORIZATION. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated by this Agreement have been duly authorized by the requisite corporate action on the part of such Party; and (e) NO VIOLATION OR CONFLICT. The execution, delivery, and performance of this Agreement shall not constitute a violation of any judgment, order, or decree; a material default under any material contract by which it or any of its material assets are bound; or an event that would, with notice or lapse of time, or both, constitute such a default. 14.4 WARRANTIES OF NON-INFRINGEMENT. (a) PERFORMANCE OF RESPONSIBILITIES. Each Party represents and warrants that it shall perform its responsibilities under this Agreement (including, without limitation, HP-OMS' responsibilities with respect to HP-OMS Software and HP-OMS Hardware) in a manner that does not infringe, or constitute an infringement or misappropriation of, any Intellectual Property Right or other proprietary or privacy rights of any third party; provided, however, that the performing Party shall not have any obligation or liability to the extent any infringement or misappropriation is caused by (i) modifications made by the other Party or its contractors or subcontractors, without the knowledge or approval of the performing Party, (ii) the other Party's combination of the performing Party's work product or Materials with items not furnished, specified or reasonably anticipated by the performing Party or contemplated by this Agreement, (iii) a breach of this Agreement by the other Party, (iv) the failure of the other Party to use corrections or modifications provided by the performing Party offering equivalent features and functionality, or (v) Third Party Software, except to the extent that such infringement or misappropriation arises from the failure of the performing Party to obtain the necessary licenses or Required Consents or to abide by the limitations of the applicable Third Party Software licenses. Each Party further represents and warrants that it will not use or create Materials in connection with the Services which are libelous, defamatory or obscene. 42 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (b) THIRD PARTY SOFTWARE INDEMNIFICATION. In addition, unless otherwise agreed, with respect to HP-OMS Software licensed to HP-OMS from a third party during the Term, HP-OMS covenants that it shall make commercially reasonable efforts to obtain and provide intellectual property indemnification for Customer (or obtain intellectual property indemnification for itself and enforce such indemnification on behalf of Customer) from the suppliers of such Software. Unless otherwise approved in advance by Customer, such indemnification shall be comparable to the intellectual property indemnification provided by HP-OMS to Customer under this Agreement. (c) ACTIONS IN CASE OF INFRINGEMENT. In the event that (i) any Materials, Developed Materials, Hardware or Software provided by HP-OMS or its Affiliates or HP-OMS Subcontractors pursuant to this Agreement or used by them in the performance of the Services are found or, based upon a third party claim or threatened claim of infringement, are likely to be found, to infringe upon the Intellectual Property Rights, proprietary or privacy rights of any third party in any country in which Services are to be performed or received under this Agreement or (ii) the continued use of such Materials, Developed Materials, Hardware or Software is enjoined, HP-OMS shall, in addition to defending, indemnifying and holding harmless Customer as provided in Section 16 (INDEMNITIES) and to the other rights Customer may have under this Agreement, promptly and at its own cost and expense and in such a manner as to minimize the disturbance to Customer's business activities do one of the following: (i) OBTAIN RIGHTS. Obtain for Customer the right to continue using such Materials, Developed Materials, Hardware or Software. (ii) MODIFICATION. Modify the item(s) in question so that it is no longer infringing, provided that such modification does not degrade the performance or quality of the Services or adversely affect Customer's intended use as contemplated by this Agreement. (iii) REPLACEMENT. Replace such item(s) with a non-infringing functional equivalent acceptable to Customer. (d) IMPACT ON SERVICE LEVELS OF CUSTOMER INFRINGEMENT. If HP-OMS is prevented by court injunction from using any Hardware and/or Software as a result of Customer's breach of its obligations under this Section 14.4 (WARRANTIES OF NON-INFRINGEMENT), then HP-OMS shall not be required to meet the relevant Service Levels to the extent and for as long as the infringing action prevents HP-OMS from so meeting such Service Levels, without prejudice to Customer's obligation to pay HP-OMS the Target Price in respect of the relevant Services. 43 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 14.5 OPERATION OF HP-OMS HARDWARE AND HP-OMS SOFTWARE. HP-OMS does not warrant that the operation of the HP-OMS Hardware or HP-OMS Software will be uninterrupted or error free; provided, however, that the foregoing will not relieve HP-OMS of its obligation to provide Operations Services in accordance with the Service Levels or to repair or replace, at its discretion, any HP-OMS Hardware or HP-OMS Software in order to comply with the terms of this Agreement. 14.6 STATIC AND/OR MOBILE TELEPHONE LINES. HP-OMS shall have no liability arising out of or in connection with the availability, performance, non-performance, defective performance, maintenance or otherwise, of Static and/or Mobile Telephone lines used by Customer to telecommunicate with third parties. 14.7 SAVINGS CLAUSE. HP-OMS shall not be liable for any delays in performance of Services or part thereof and/or damages caused and/or failure to meet the Service Levels to the extent such HP-OMS non-performance is caused by Customer's (or any third party under Customer's control) act or omission, but only if (i) HP-OMS provides prompt and reasonable notification (including by e-mail) to the Customer of such act or omission and HP-OMS' inability to perform under such circumstances, (ii) HP-OMS provides Customer with a reasonable opportunity to correct such act or omission and thereby avoid such HP-OMS non-performance, and (iii) HP-OMS uses commercially reasonable efforts to perform notwithstanding Customer's personnel's act or omission, provided that such act or omission does not constitute a breach of Customer's contractual obligations hereunder. 14.8 NO OTHER WARRANTIES. The warranties expressly set out in this Agreement are exclusive and no other warranty, whether written or oral, is expressed or implied. To the extent permitted by law, HP-OMS specially disclaims the implied warranty of merchantability fitness for a particular purpose, title and non-infringement. 44 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 15. INTELLECTUAL PROPERTY RIGHTS 15.1 PRE-EXISTING MATERIALS. All rights of ownership, know how, methodology or other Intellectual Property Rights in the Materials owned by each Party prior to the Commencement Date, shall belong to the Party that owned such Materials immediately prior to the Commencement Date ("CUSTOMER PRE-COMMENCEMENT-OWNED MATERIALS" or "HP-OMS PRE-COMMENCEMENT-OWNED MATERIALS", respectively). 15.2 OTHER HP-OMS OWNED MATERIALS. HP-OMS shall be the owner of all Intellectual Property Rights in (i) the Materials acquired by HP-OMS on or after the Commencement Date (including Materials purchased from Customer pursuant to this Agreement, subject to Section 20.6(d) (TRANSFER OF TERMINATION ASSETS ON TERMINATION/EXPIRATION OF AGREEMENT), (ii) derivative works of HP-OMS Pre-Commencement-Owned Software created by HP-OMS and not otherwise owned by Customer pursuant to the terms of this Agreement, (iii) Materials developed by HP-OMS other than in the course of the performance of its obligations under this Agreement or in connection with the use of any Customer Data or Customer Pre-Commencement-Owned Materials (collectively, "OTHER HP-OMS OWNED MATERIALS") (HP-OMS Pre-Commencement-Owned Materials and Other HP-OMS Owned Materials collectively, the "HP-OMS OWNED MATERIALS"). 15.3 DEVELOPED MATERIALS. Unless the Parties agree otherwise, and subject to Section 15.2 (OTHER HP-OMS OWNED MATERIALS) above, all Developed Materials created by or for HP-OMS in connection with the Services provided by HP-OMS under this Agreement shall, upon creation, be owned by Customer and considered to be works made for hire. If any such Developed Materials may not be considered a work made for hire under applicable law, HP-OMS hereby irrevocably assigns, and shall assign, to Customer without further consideration, all of HP-OMS' right, title and interest in and to such Developed Materials, including Intellectual Property Rights. HP-OMS agrees to execute any documents and take any other actions reasonably requested by Customer to effectuate the purposes of this Section. 15.4 CUSTOMER OWNERSHIP OF CUSTOMER DATA. Customer Data are and shall remain the property of Customer. HP-OMS shall promptly deliver or provide Customer access to Customer Data in the format, on the media and in the timing prescribed by Customer (i) at any time at Customer's request, or (ii) at the expiration of the Term or termination of this Agreement and the completion of all requested Termination Assistance Services. Thereafter, HP-OMS shall return or destroy, as directed by Customer, all copies of the Customer Data in HP-OMS' possession or under HP-OMS' control within ten (10) business days and deliver to Customer written certification of such return or destruction signed by an officer of HP-OMS. HP-OMS shall not withhold any Customer Data as a means of resolving any dispute. Customer Data shall not be utilized by HP-OMS for any purpose other than the performance of Services under this Agreement. Nor shall Customer Data be sold, assigned, leased, commercially exploited or otherwise provided to third parties by or on behalf of HP-OMS or HP-OMS Personnel. 45 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 15.5 SOURCE CODE AND DOCUMENTATION. HP-OMS shall, promptly as it is developed by HP-OMS, provide Customer with the source code and documentation for all Customer owned Developed Materials. The source code shall be sufficient to allow a reasonably knowledgeable and experienced programmer to maintain and support such Materials; and the user documentation for such Materials shall accurately describe in terms understandable by a typical end user the functions and features of such Materials and the procedures for exercising such functions and features. Customer may freely use, copy, distribute, create derivative works of and modify all documentation provided by HP-OMS applicable to the Developed Materials. 16. INDEMNITIES 16.1 INDEMNITY BY HP-OMS. HP-OMS agrees to indemnify, defend and hold harmless Customer, its Affiliates and their respective officers, directors, employees, agents, representatives, successors, and assigns from any and all Losses relating to third party claims arising from or in connection with any of the following, all subject to the limitation of liability as per Section 18 hereunder: (a) BREACH OF WARRANTIES. HP-OMS' breach of any of its warranties set out in Section 14 (FUNDAMENTAL OBLIGATIONS; WARRANTIES AND DISCLAIMERS); (b) THIRD PARTY CONTRACTS. HP-OMS' decision to terminate or breach of obligations to be performed on or after the Commencement Date by HP-OMS under any of the Third Party Contracts, including as a result of HP-OMS' failure to obtain any Required Consents, to the extent HP-OMS is financially or operationally responsible under this Agreement; (c) TAXES. Taxes, together with related interest and penalties, that are the responsibility of HP-OMS under Section 10.4 (TAXES); (d) CUSTOMER DATA OR CONFIDENTIAL INFORMATION. HP-OMS' breach of its obligations with respect to Customer Data or Customer Confidential Information; 46 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (e) AFFILIATE OR SUBCONTRACTOR CLAIMS. Any claim, initiated by a HP-OMS Affiliate, Subcontractor or Personnel asserting rights under this Agreement; and (f) EMPLOYMENT CLAIMS. Any claim relating to any: (i) violation by HP-OMS, HP-OMS Affiliates or HP-OMS Subcontractors, or their respective officers, directors, employees, representatives or agents, of applicable law protecting persons or members of protected classes or categories, including laws or regulations prohibiting discrimination or harassment on the basis of a protected characteristic; (ii) liability arising or resulting from the employment of HP-OMS Personnel, including Transitioned Employees (solely for acts/omissions occuring prior to the effective date of their employment) by HP-OMS, HP-OMS Affiliates or HP-OMS Subcontractors; (iii) payment or failure to pay any salary, wages or other cash compensation due and owing to any HP-OMS Personnel (including Transitioned Employees from and after their employment effective dates); (iv) employee pension, benefit plan, bonus program, vacation benefit, sick leave benefit, tuition assistance, severance program, medical benefit, stock benefit, stock option benefit or other benefits of any HP-OMS Personnel (including Transitioned Employees for benefits accruing from and after their employment effective dates); and/or (v) other aspects of the employment relationship of HP-OMS Personnel (including Transitioned Employees) with HP-OMS, HP-OMS Affiliates or HP-OMS Subcontractors or the termination of such relationship, including claims for wrongful discharge, claims for breach of express or implied employment contract and claims of co-employment or claims based on waivers, releases and other covenants made by Transitioned Employees with or to HP-OMS. 16.2 INDEMNITY BY CUSTOMER. Customer agrees to indemnify, defend and hold harmless HP-OMS and its officers, directors, employees, agents, representatives, successors, and assigns, from any Losses relating to third party claims arising from or in connection with any of the following, all subject to the limitation of liability as per Section 18 hereunder: 47 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (a) BREACH OF WARRANTIES. Customer's breach of any of its warranties set out in Section 14 (FUNDAMENTAL OBLIGATIONS; WARRANTIES AND DISCLAIMERS). (b) THIRD PARTY CONTRACTS. Customer's breach of obligations to be performed by Customer under any of the applicable Third Party Contracts to the extent Customer is financially or operationally responsible under this Agreement; (c) PRE-COMMENCEMENT DATE MATTERS. Customer's breach of duties or obligations to be observed or performed or amounts (including deferred payments for benefits or services received by Customer prior to the Commencement Date) to be paid for periods prior to the Commencement Date by Customer under any of the Third Party Contracts assigned to HP-OMS by Customer pursuant to this Agreement; and (d) TAXES. Taxes, together with related interest and penalties, that are the responsibility of Customer under Section 10.4 (TAXES). (e) AFFILIATE OR SUBCONTRACTOR CLAIMS. Any claim, initiated by a Customer Affiliate, Customer Contractor or Customer's personnel asserting rights under this Agreement; and (f) EMPLOYMENT CLAIMS. Any claim relating to any: (i) violation by Customer, Customer Affiliates or Customer Contractors, or their respective officers, directors, employees, representatives or agents, of applicable law protecting persons or members of protected classes or categories, including laws or regulations prohibiting discrimination or harassment on the basis of a protected characteristic; (ii) liability arising or resulting from the employment by Customer, Customer Affiliates or Customer Contractors of their respective employees, including Transitioned Employees (solely for acts/omissions occuring while employed at Customer, prior to the effective date of their employment with HP-OMS or its Affiliates); (iii) payment or failure to pay any salary, wages or other cash compensation due and owing to any Customer Employees (including Transitioned Employees prior to their employment effective dates with HP-OMS or its Affiliates); (iv) employee pension, benefit plan, bonus program, vacation benefit, sick leave benefit, tuition assistance, severance program, medical benefit, stock benefit, stock option benefit or other benefits of any Customer Employees (including Transitioned Employees for benefits accruing prior to their employment effective dates); and/or (v) other aspects of the employment relationship of Customer Employees (including Transitioned Employees prior to their employment effective dates with HP-OMS or its Affiliates) with Customer, Customer Affiliates or Customer Contractors or the termination of such relationship, including claims for wrongful discharge, claims for breach of express or implied employment contract and claims of co-employment or claims based on waivers, releases and other covenants made by Transitioned Employees prior to their employment effective dates with HP-OMS or its Affiliates. 48 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 16.3 DEATH, BODILY INJURY; TANGIBLE PROPERTY DAMAGE. HP-OMS and Customer each agree to indemnify, defend and hold harmless the other, and their respective Affiliates, officers, directors, employees, agents, representatives, successors, and assigns, from any and all Losses and threatened Losses arising from or in connection with any of the following: (a) the death or bodily injury of any agent, employee, customer, business invitee, business visitor or other person caused by the negligence or other tortious conduct of the indemnifying Party or the failure of the indemnifying Party to comply with its obligations under this Agreement; and (b) the damage, loss or destruction of any real or tangible personal property caused by the negligence or other tortious conduct of the indemnifying Party or the failure of the indemnifying Party to comply with its obligations under this Agreement. 16.4 INDEMNIFICATION PROCEDURES. With respect to third party claims, the following procedures shall apply: (a) NOTICE. Promptly after receipt by any entity entitled to indemnification under this Agreement of notice of the commencement or threatened commencement of any civil, criminal, administrative, or investigative action or proceeding involving a claim in respect of which the indemnified Party will seek indemnification pursuant to any such Section, the indemnified Party shall notify the indemnifying Party of such claim. No delay or failure to so notify an indemnifying Party shall relieve it of its obligations under this Agreement except to the extent that such indemnifying Party has suffered actual prejudice by such delay or failure. Within fifteen (15) days following receipt of notice from the indemnified Party relating to any claim, but no later than five (5) days before the date on which any response to a complaint or summons is due, the indemnifying Party shall notify the indemnified Party that the Indemnifying Party elects to assume control of the defense and settlement of that claim (a "NOTICE OF ELECTION"). 49 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (b) PROCEDURE FOLLOWING NOTICE OF ELECTION. If the indemnifying Party delivers a Notice of Election within the required notice period, the indemnifying Party shall assume sole control over the defense and settlement of the claim; provided, however, that (i) the indemnifying Party shall keep the indemnified Party fully apprised at all times as to the status of the defense, and (ii) the indemnifying Party shall obtain the prior written approval of the indemnified Party before entering into any settlement of such claim asserting any liability against the indemnified Party or imposing any obligations or restrictions on the indemnified Party or ceasing to defend against such claim. The indemnifying Party shall not be liable for any legal fees or expenses incurred by the indemnified Party following the delivery of a Notice of Election; provided, however, that (i) the indemnified Party shall be entitled to employ counsel at its own expense to participate in the handling of the claim, and (ii) the indemnifying Party shall pay the fees and expenses associated with such counsel if, in the reasonable judgment of the indemnified Party, based on an opinion of counsel, there is a conflict of interest with respect to such claim or if the indemnifying Party has requested the assistance of the indemnified Party in the defense of the claim or the indemnifying Party has failed to defend the claim diligently. The indemnifying Party shall not be obligated to indemnify the indemnified Party for any amount paid or payable by such indemnified Party in the settlement of any claim if (x) the indemnifying Party has delivered a timely Notice of Election and such amount was agreed to without the written consent of the indemnifying Party, (y) the indemnified Party has not provided the indemnifying Party with notice of such claim and a reasonable opportunity to respond thereto, or (z) the time period within which to deliver a Notice of Election has not yet expired. (c) PROCEDURE WHERE NO NOTICE OF ELECTION IS DELIVERED. If the indemnifying Party does not deliver a Notice of Election relating to any claim within the required notice period, the indemnified Party shall have the right to defend the claim in such manner, as it may deem appropriate. The indemnifying Party shall promptly reimburse the indemnified Party for all such costs and expenses incurred by the indemnified Party, including attorneys' fees. 50 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 16.5 INDEMNITY BY HP-OMS FOR PROFESSIONAL ERRORS AND OMISSIONS. HP-OMS agrees to indemnify, defend and hold harmless Customer, its Affiliates and their respective officers, directors, employees, agents, representatives, successors, and assigns from any and all Losses arising from or in connection with any of the following, all subject to the limitation of liability as per Section 18 (LIMITATION OF LIABILITY) hereunder: (a) All Losses sustained by Customer due to acts or omissions of HP-OMS, HP-OMS Personnel (or those acting on their behalf) in the rendering of their services, and (b) All Losses relating to third party claims arising from acts or omissions of HP-OMS, HP-OMS Personnel (or those acting on their behalf) in the rendering of their services. 17. CONFIDENTIAL INFORMATION 17.1 CONFIDENTIAL INFORMATION. HP-OMS and Customer each acknowledges that the other possesses and will continue to possess information that has been developed or received by it, has commercial value in its or its customer's business and is not in the public domain. Except as otherwise specifically agreed in writing by the Parties, "CONFIDENTIAL INFORMATION" means (i) this Agreement and the terms thereof; (ii) all information marked confidential, restricted or proprietary by either Party; and (iii) any other information that is treated as confidential by the disclosing Party and would reasonably be understood to be confidential, whether or not so marked. In the case of Customer, Confidential Information also shall include Software provided to HP-OMS by or through Customer, Developed Materials, Customer Data, attorney-client privileged materials, attorney work product, customer lists, customer information and pricing, strategic plans, account information, research information, trade secrets, financial/accounting information, human resources and personnel information, marketing/sales information, information regarding businesses, plans, operations, third party contracts, internal or external audits, law suits or other information or data obtained, received, transmitted, processed, stored, archived, or maintained by HP-OMS under this Agreement. By way of example, Customer Confidential Information shall include plans for changes in Customer facilities, business units and product lines, plans for business mergers, acquisitions or divestitures, rate information, plans for the development and marketing of new products, financial forecasts and budgets, technical proprietary information, employee lists and company telephone or e-mail directories. In the case of HP-OMS, Confidential Information shall include financial information, account information, information regarding HP-OMS' business plans and operations, and proprietary software (e.g., the HP-OMS Software), documentation, tools and methodologies owned by HP-OMS and used in the performance of the Services, trade secrets, financial/accounting information, human resources and personnel information, marketing/sales information, information regarding businesses, plans, operations, products, third party contracts, internal or external audits. 51 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 17.2 OBLIGATIONS. (a) During the Term of this Agreement and at all times thereafter, HP-OMS and Customer shall not disclose, and shall maintain the confidentiality of, all Confidential Information of the other Party. Customer and HP-OMS shall each use at least the same degree of care to safeguard and to prevent disclosing to third parties the Confidential Information of the other as it employs to avoid unauthorized disclosure, publication, dissemination, destruction, loss, or alteration of its own like information (or information of its customers) of a similar nature, but not less than reasonable care. HP-OMS Personnel shall have access to Customer Confidential Information only to the extent necessary for such person to perform his or her obligations under or with respect to this Agreement or as otherwise naturally occurs in such person's scope of responsibility, provided that such access is not in violation of applicable law. (b) The Parties may disclose Confidential Information to their Affiliates, auditors, attorneys, accountants, consultants, contractors and subcontractors, where (A) use by such person or entity is authorized under this Agreement, (B) such disclosure is necessary for the performance of such person's or entity's obligations under or with respect to this Agreement or otherwise naturally occurs in such person's or entity's scope of responsibility, (C) the person or entity (and its applicable officers and employees) agree in writing to assume the obligations described in this Section, and (D) the disclosing Party assumes full responsibility for the acts or omissions of such person or entity and takes all reasonable measures to ensure that the Confidential Information is not disclosed or used in contravention of this Agreement. Any disclosure to such person or entity shall be under the terms and conditions as provided herein. Each Party's Confidential Information shall remain the property of such Party. 52 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (c) Neither Party shall (i) make any use or copies of the Confidential Information of the other Party except as contemplated by this Agreement, (ii) acquire any right in or assert any lien against the Confidential Information of the other Party, (iii) sell, assign, transfer, lease, or otherwise dispose of Confidential Information to third parties or commercially exploit such information, including through derivative works, or (iv) refuse for any reason (including a default or material breach of this Agreement by the other Party) to promptly provide the other Party's Confidential Information (including copies thereof) to the other Party if requested to do so. Upon expiration or any termination of this Agreement and completion of each Party's obligations under this Agreement, each Party shall return or destroy, as the other Party may direct, all documentation in any medium that contains, refers to, or relates to the other Party's Confidential Information within ten (10) business days. Each Party shall deliver to the other Party written certification of its compliance with the preceding sentence signed by an officer of such Party. In addition, each Party shall take all necessary steps to ensure that its employees comply with these confidentiality provisions. 17.3 EXCLUSIONS. Section 17.2 (OBLIGATIONS) shall not apply to any particular information which the receiving Party can demonstrate by written documentation (i) is, at the time of disclosure to it, in the public domain other than through a breach of the receiving Party's or a third party's confidentiality obligations; (ii) after disclosure to it, is published by the disclosing Party or otherwise becomes part of the public domain other than through a breach of the receiving Party's or a third party's confidentiality obligations; (iii) is lawfully in the possession of the receiving Party at the time of disclosure to it; (iv) is received from a third party having a lawful right to disclose such information; or (v) is independently developed by the receiving Party without reference to Confidential Information of the furnishing Party. In addition, the receiving Party shall not be considered to have breached its obligations under this Section 17 for disclosing Confidential Information of the other Party as required, in the opinion of legal counsel, to satisfy any legal requirement of a competent government body, provided that, promptly upon receiving any such request, such Party advises the other Party of the Confidential Information to be disclosed and the identity of the third party requiring such disclosure prior to making such disclosure in order that the other Party may interpose an objection to such disclosure, take action to assure confidential handling of the Confidential Information, or take such other action as it deems appropriate to protect the Confidential Information. The receiving Party shall use commercially reasonable efforts to cooperate with the disclosing Party in its efforts to seek a protective order or other appropriate remedy or in the event such protective order or other remedy is not obtained, to obtain assurance that confidential treatment will be accorded such Confidential Information. 53 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 17.4 LOSS OF CONFIDENTIAL INFORMATION. Each Party shall: (i) immediately notify the other Party of any possession, use, knowledge, disclosure, or loss of such other Party's Confidential Information in contravention of this Agreement; (ii) promptly furnish to the other Party all known details and assist such other Party in investigating and/or preventing the reoccurrence of such possession, use, knowledge, disclosure, or loss; (iii) cooperate with the other Party in any investigation or litigation deemed necessary by such other Party to protect its rights; and (iv) promptly use all commercially reasonable efforts to prevent further possession, use, knowledge, disclosure, or loss of Confidential Information in contravention of this Agreement. Each Party shall bear any costs it incurs in complying with this Section 17.4. 17.5 NO IMPLIED RIGHTS. Nothing contained in this Section 17 shall be construed as obligating a Party to disclose its Confidential Information to the other Party, or as granting to or conferring on a Party, expressly or impliedly, any rights or license to any Confidential Information of the other Party. 17.6 SURVIVAL. The Parties' obligations of non-disclosure and confidentiality shall survive the expiration or termination of this Agreement for a period of ten (10) years. 54 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 18. LIMITATION OF LIABILITY 18.1 CAP ON OVERALL LIABILITY. Except as provided in Section 18.3 (EXCEPTIONS TO LIMITATIONS OF LIABILITY), notwithstanding any provision in this Agreement and/or any applicable law, and to the extent each Party is held legally liable to the other under or in connection with this Agreement, HP-OMS' aggregate liability under this Agreement, for any reason and upon all claims and causes of action, is hereby limited to direct damages up to Four Million United States dollars (US $4,000,000). 18.2 EXCLUSION OF CERTAIN DAMAGE TYPES. IN NO EVENT WILL EITHER CUSTOMER OR HP-OMS OR THEIR RESPECTIVE AFFILIATES, SUBCONTRACTORS/CUSTOMER CONTRACTORS AND SUPPLIERS BE LIABLE FOR ANY CONSEQUENTIAL, SPECIAL, INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES, INCLUDING WITHOUT LIMITATION FOR LOSS OF GOODWILL, LOSS OF SAVINGS OR REVENUE, LOSS OF ACTUAL OR ANTICIPATED PROFITS, EVEN IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 18.3 EXCEPTIONS TO LIMITATIONS OF LIABILITY. (a) The limitations of liability set forth in Section 18.1 (CAP ON OVERALL LIABILITY) shall not apply to amounts paid with respect to (i) third party claims that are the subject of indemnification under this Agreement in connection with a breach of a party's obligations under Section 14.4 (WARRANTIES OF NON-INFRINGEMENT) regarding infringement of intellectual property rights or in connection with liability under Section 16.3(a) (DEATH OR BODILY INJURY); or (ii) Direct Losses occasioned by the wrongful termination of this Agreement by HP-OMS. 18.4 ITEMS NOT CONSIDERED DAMAGES. Charges and other amounts that are due and owing to HP-OMS for Services performed under this Agreement shall not be considered damages subject to, and shall not be counted toward the liability cap specified in Section 18.1 (CAP ON OVERALL LIABILITY). 55 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 18.5 ACKNOWLEDGED DIRECT DAMAGES. Direct costs and expenses incurred (i) to recover, recreate lost data; (ii) to restore Software; (iii) as a result of system downtime; (iv) to implement a workaround in respect of a failure to provide any Services; or (v) to procure the Services or corrected Services from an alternative source or to bring the Services in-house, including the costs and expenses associated with the retention of independent consultants and legal counsel to assist with any re-sourcing, all to the extent in excess of the prorated Target Price under this Agreement, shall be considered direct damages and neither Party shall assert that they are indirect, incidental, collateral, consequential or special damages or lost profits to the extent they result directly from either Party's failure to perform in accordance with this Agreement. 18.6 CONFIDENTIAL INFORMATION; DEATH/BODILY INJURY. Notwithstanding anything in this Agreement to the contrary, each party shall be entitled to recover all Losses occasioned by the intentional or grossly negligent breach of a party's obligations under Section 17 (CONFIDENTIAL INFORMATION) or all Losses in connection with liability under Section 16.3(a) (DEATH OR BODILY INJURY). 19. INSURANCE 19.1 INSURANCE. (a) REQUIREMENTS. With respect to performance hereunder both parties agree to maintain, at all times during the term of this Agreement, the following minimum insurance coverages and limits and any additional insurance and/or bonds required by law: (i) Workers Compensation insurance as required by applicable law. (ii) Third Party liability insurance, covering legal liability for physical loss or damage and/or bodily injury occurring to any person and/or property of any person and/or entity. (iii) Products liability/completed operations insurance, covering legal liability for physical loss or damage and/or bodily injury occurring to any person and/or property of any person and/or entity. The (i) Products liability/ completed operations policy and the (ii) Third Party liability insurance arranged by HP OMS shall be extended to include the Customer as additional insured in respect of Customer's liability for negligent acts and/or omissions of HP-OMS and HP-OMS Personnel subject to Cross Liability clause. Policies of HP-OMS as described in (b)-(c) below shall be with a single limit of: $[**] any one occurrence and in all for an annual insurance period. 56 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (b) HP OMS undertakes to additionaly arrange the following insurance policies at all times during the term of this agreement: Employers Liability insurance, covering the liability of HP OMS towards its employees, for death, injury or disease occurring during and/or as a result of their employment, with a limit of $[**] any one occurrence and in all for an annual insurance period. The policy shall be extended to include Customer as an additional insured, insofar it is considered as the employer of any of HP OMS's employees. (c) APPROVED COMPANIES. All such insurance shall be procured with reputable insurance companies. (d) PRIMARY, NON-CONTRIBUTORY POLICIES. Products liability insurance, third party liability insurance and Employers liability insurance required by this Agreement from HP-OMS, shall be primary and non-contributory with respect to other insurance which may be available to Customer and its affiliates and/or their officers, directors and employees. (e) ENDORSEMENTS. The cancellation clause on the certificate of insurance will be amended to read as follows: "THE ISSUING COMPANY WILL MAIL 30 DAYS WRITTEN NOTICE TO THE CERTIFICATE HOLDER PRIOR TO CANCELLATION OR A MATERIAL CHANGE TO POLICY DESCRIBED ABOVE." (f) NO IMPLIED LIMITATION. The obligation of the parties to provide the insurance specified herein shall not limit in any way any of their obligations or liabilities provided elsewhere in this Agreement. (g) SUBCONTRACTORS. HP-OMS shall also require all Subcontractors used by HP-OMS for the provision of the Services to maintain an appropriate insurance to the extent it is required to maintain under this contract. (h) DEDUCTIBLES. The deductible amounts of each insurance policy required hereunder shall not exceed US$[**] each occurance. 57 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (i) Both parties shall furnish upon request to the other party annually an insurance certificate evidencing the above-mentioned insurance policies, as relevant. Both parties undertake to notify the other party in advance at least thirty (30) days prior to cancellation or material change of any of such party's insurance policies detailed in this Section above. (j) It is hereby agreed that in respect to coverage provided to Customer under HP OMS's policies as aforesaid, the limit of liability under the policies shall in no way exceed the limitation of liability granted to HP OMS under Section 18 (LIMITATION OF LIABILITY). 19.2 RISK OF LOSS. (a) GENERAL. Except as otherwise provided in Section 16 (INDEMNITIES), each Party shall be responsible for risk of loss of, and damage to, any Hardware, Software or other materials owned by or licensed to such Party, unless loss or damage is caused by the intentional misconduct or negligence of the other party. Each Party shall promptly notify the other of any damage (except normal wear and tear), destruction, loss, theft, or governmental taking of any item of Hardware, Software or other materials in the possession or under the control of such Party, whether or not insured against by such Party, whether partial or complete, which is caused by any act, omission, fault or neglect of such Party ("EVENT OF LOSS"). Such Party shall be responsible for the cost of any necessary repair or replacement of such Hardware, Software or other materials due to an Event of Loss. For a Customer Event of Loss, HP-OMS shall coordinate and oversee repair or replacement performed by a third-party on a Pass-Through Expenses basis, or by HP-OMS at agreed-upon prices. (b) WAIVER. Except as provided below, HP-OMS and Customer each waive all rights to recover against the other Party for damage, destruction, loss, theft, or governmental taking of their respective real or tangible personal property (whether owned or leased) from any cause to the extent covered by insurance maintained by each of them, including their respective deductibles or self-insured retentions. This waiver of subrogation shall not extend to the damage, destruction, loss or theft of real or tangible personal property caused by the negligence or other tortious conduct of the other Party or the failure of the other Party to comply with its obligations under this Agreement. 58 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 20. TERM; BREACH; AND TERMINATION 20.1 TERM (a) INITIAL TERM. The initial term of this Agreement shall commence on the Commencement Date and continue for six (6) years (the "INITIAL TERM"), unless terminated earlier in accordance with this Agreement. (b) EXTENDED TERM. Customer, by notifying HP-OMS in writing at least one hundred and eighty (180) days prior to the expiration of the Initial Term, may extend the effectiveness of this Agreement at the then current Target Price and under the same terms and conditions which were in effect just prior to such expiration, for a period of up to twenty-four (24) months (the "EXTENDED TERM"). 20.2 TERMINATION FOR CAUSE BY CUSTOMER; OTHER REMEDIES (a) HP-OMS' FAILURE TO CURE MATERIAL BREACH. The Customer may terminate this Agreement immediately at any time by written notice to HP-OMS if HP-OMS is in material breach of any of its obligations under this Agreement and fails to remedy the breach for a period of thirty (30) days after a written notice by the Customer specifying the material breach. (b) CHANGE OF CONTROL. Customer may terminate this Agreement immediately upon written notice to HP-OMS in the event that HP-OMS experiences (in one transaction or any series of transactions) a change of majority ownership ("CHANGE OF CONTROL"), unless prior to such Change of Control Customer is notified of such change and (i) Hewlett-Packard Israel Ltd. agrees in writing to accept an assignment of this Agreement; or (ii) Customer provides its written consent to such Change of Control. (C) GUARANTEE FROM HEWLETT-PACKARD ISRAEL LTD. In addition to its other rights and remedies against HP-OMS under this Agreement, in the event of a breach by HP-OMS hereunder, Customer may, at any time, exercise its rights as a beneficiary to the Guarantee, executed by Hewlett-Packard Israel Ltd., attached hereto as Exhibit L. 59 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (d) STEP-IN RIGHTS. Without prejudice to any of the Customer's other rights: if any default or non-performance by HP-OMS under this Agreement in relation to any Service materially affects the performance of any critical function of the Customer for more than forty-eight (48) hours, the Customer may, at its option, take control of the relevant Services and take such other action as is reasonably necessary to restore the affected function of the Customer or otherwise continue the provision of the Services ("STEP-IN RIGHTS"). To the extent Customer exercises its Step-in Rights, HP-OMS shall be released from its obligation to meet the relevant Service Level (over which Customer has taken control) solely during the period in which the affected function is being corrected. Once corrected, HP-OMS shall resume responsibility for such Service Level. HP-OMS shall co-operate fully with the Customer and its Customer Contractors, in accordance with Section 11.5 (HP-OMS COOPERATION); provided, however, that HP-OMS may require any person or entity which is not a Party to this Agreement to execute its confidentiality agreement with HP-OMS, in a form which contains terms substantially similar to the terms set out in Section 17 (CONFIDENTIAL INFORMATION) hereof. Any third party used by Customer pursuant to this Section shall be deemed a Contractor of Customer. (e) OTHER REMEDIES. In addition to its rights and remedies under this Agreement, the each party may exercise all available legal and equitable remedies (except to the extent such remedies are inconsistent with the terms of this Agreement), including, but not limited to, seeking relief for compensation or seeking orders for declaration, injunctive relief or damages or such other orders and relief as it may think fit. 60 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 20.3 MUTUAL RIGHT OF TERMINATION. Either Party may terminate this Agreement, immediately at any time by written notice to the other Party, if the other Party (or in the event the other Party is HP-OMS, then Hewlett-Packard Israel Ltd or in the event the other Party is Customer, then Tecnomatix Technologies Ltd) (i) has a receiver appointed or an assignee for the benefit of creditors; (ii) is or becomes insolvent or is unable to pay debts as they become due; (iii) ceases to trade for a period of sixty (60) days (either in whole or as to any part or division involved in the performance of this Agreement) or (iv) ceases to operate in the normal course of business for a period of sixty (60) days (each of (i)-(iv) above an "INSOLVENCY EVENT"), unless the Insolvency Event is removed or is no longer in effect within forty-five (45) days of receipt of the notice of termination, in which case the initial Insolvency Event shall not be grounds for termination. 20.4 TERMINATION FOR CAUSE BY HP-OMS. HP-OMS may terminate this Agreement immediately by written notice to Customer if: (a) Customer fails to pay any undisputed sums equal to or greater than twenty percent (20%) of the (then current) quarterly Target Price on an accumulated basis, due to HP-OMS under this Agreement, on the due date and such payment is not made within forty-five (45) days after a written notice requiring the same; and provided that HP-OMS has given Customer a second written notice of its intention to terminate the Agreement at least fifteen (15) days (but not more than twenty (20) days) prior to the expiration of such forty-five (45) day period. 20.5 TERMINATION FOR CONVENIENCE (a) BY CUSTOMER. The Customer may terminate this Agreement for convenience by giving HP-OMS at least one hundred and eighty (180) days prior written notice, such notice not to be given before the end of the first year and a half following the Commencement Date. On the effective date of such termination, Customer shall pay to HP-OMS the Termination Fees and compensation amounts as specified in Exhibit E hereto. (b) BY HP-OMS. HP-OMS may terminate this Agreement for convenience by giving the Customer at least one year's prior written notice, such notice not to be given before the end of the third year following the Commencement Date. 61 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 20.6 CONSEQUENCES UPON TERMINATION OR EXPIRATION (a) RETURN OF HP-OMS OWNED MATERIALS AND OTHER HARDWARE. Upon the expiration or earlier termination of the Term for any reason whatsoever, the Customer will return (or relinquish access), within thirty (30) days of its receipt of HP-OMS' notice to that effect, to HP-OMS the HP-OMS Owned Materials and HP-OMS owned Hardware, subject to Section 20.6(d) (TRANSFER OF TERMINATION ASSETS ON TERMINATION/EXPIRATION OF AGREEMENT), and which are in Customer's possession or control; (b) RETURN OF CUSTOMER OWNED MATERIALS. Upon the expiration of the Term or earlier termination of this Agreement, as the case may be, for any reason whatsoever, with respect to Materials owned by Customer (including but not limited to the Customer Pre-Commencement-Owned Materials and Customer Software obtained by Customer after the Commencement Date), HP-OMS shall, at no cost to Customer: (i) deliver to Customer all such Materials in the format and medium in use by HP-OMS in connection with the Services as of the date of such expiration or termination; and (ii) following completion by HP-OMS of any Termination Assistance Services for which such Materials are required, destroy or securely erase all copies of such Materials then in HP-OMS' possession and cease using such Materials for any purpose. (C) UPGRADED HP-OMS SOFTWARE, THIRD PARTY CONTRACTS; CONTINUING SUPPORT. Upon the expiration of the Term or earlier termination of this Agreement for any reason whatsoever: (i) HP-OMS, unless otherwise agreed in advance by Customer in accordance with Section 14.2(b) (TRANSFER OF TERMINATION ASSETS ON TERMINATION/EXPIRATION; THIRD PARTY CONTRACT TERMS), A. shall deliver to Customer a copy of all HP-OMS Software, (excluding Software which is part of the Facilities Setup Assets), upgraded to at least the second to most, if not the most, updated version of such Software, associated documentation, and all applicable Third Party Contracts used by HP-OMS in the provision of the Services (to which Customer shall receive a license or assignment), in accordance with Section 14.2(b) (TRANSFER OF TERMINATION ASSETS ON TERMINATION/EXPIRATION; THIRD PARTY CONTRACT TERMS); and B. Except as otherwise expressly set forth in this Agreement and the exhibits thereto, Customer shall not be obligated to pay any license fees (associated with any period prior to the expiration of the Term or earlier termination of this Agreement for any reason) or transfer fees in connection with its receipt of the licenses and other rights specified in this Section (collectively, "TRANSFER FEES"); provided, however, that where Customer terminates this Agreement for convenience, (i) Customer shall be responsible for paying such Transfer Fees, and (ii) Customer shall be responsible for the actual termination fees incurred by HP-OMS associated with the termination of Third Party Contracts. Notwithstanding the foregoing, the amounts payable under subsections (i) and (ii) shall not exceed the then applicable quarterly Target Price payment. 62 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (d) TRANSFER OF TERMINATION ASSETS ON TERMINATION/EXPIRATION OF AGREEMENT. In the event of termination of this Agreement for any reason whatsoever HP-OMS shall transfer the Termination Assets to Customer and Customer shall purchase such Assets in accordance with the terms set out in Section 7 (TERMINATION) of Exhibit E. (e) HARDWARE AND SOFTWARE MAINTENANCE REINSTATEMENT FEES. (i) HP-OMS shall not terminate any Third Party Contract for the support or maintenance of HP-OMS Hardware or HP-OMS Software ("THIRD PARTY SUPPORT CONTRACTS"), under which Customer was receiving support or maintenance just prior to the Commencement Date without Customer's prior written consent, given in Customer's sole discretion. For the avoidance of doubt, Customer may condition its consent on HP-OMS' agreement to pay any third party maintenance reinstatement fees otherwise chargeable to Customer to the relevant third party (due to lapse or non renewal of such support or maintenance), upon expiration of the Term or earlier termination of this Agreement. (ii) Without limiting the generality of the foreogoing, where HP-OMS provides direct support or maintenance for HP-OMS Hardware or HP-OMS Software, HP-OMS, upon expiration of the Term or earlier termination of this Agreement, shall continue to provide such support or maintenance to Customer as part of Termination Assistance Services, if requested by Customer. 63 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (f) HARDWARE TRANSFERRED BACK NOT AT PROPER WARRANTY LEVELS. In the event that HP-OMS transfers to Customer any Hardware included within the Refreshed Assets, Add-On Assets or New Customer Employee Assets, in accordance with Section 20.6(d) (TRANSFER OF TERMINATION ASSETS ON TERMINATION/EXPIRATION OF AGREEMENT) with a remaining warranty period shorter than the standard warranty period generally maintained by Customer for such Hardware type (as specified in Exhibit B), considering the purchase date of such Hardware, HP-OMS shall be responsible for paying the fees Customer would otherwise pay to a third party manufacturer to purchase the required additional warranty service. (g) HIRING. Customer or its designee shall be permitted to undertake, without interference from HP-OMS, HP-OMS Subcontractors or Affiliates to hire, effective after the later of the termination of this Agreement or completion of any Termination Assistance Services requested by Customer: (i) any HP-OMS Personnel primarily assigned to the performance of Services within the 12-month period prior to the date of expiration of the Term or termination of this Agreement; and (ii) any former Transitioned Employees. HP-OMS shall waive, and shall cause HP-OMS Subcontractors and Affiliates to waive, their rights, if any, under contracts with such personnel restricting the ability of such personnel to be recruited or hired by Customer or its designee. Customer or its designee shall have reasonable access to such HP-OMS personnel for interviews, evaluations and recruitment. Customer shall endeavor to conduct the above-described hiring activity in a manner that is not unnecessarily disruptive of the performance by HP-OMS of its obligations under this Agreement. All such personnel and Transitioned Employees, if hired by Customer, shall be transferred to Customer without any employer liabilities, such as severance pay, vacation, and the like. 64 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 20.7 TERMINATION ASSISTANCE SERVICES (a) Upon expiration of the Initial Term or Extended Term or earlier termination of this Agreement for any reason, HP-OMS, at the Customer's request in writing, shall perform the Termination Assistance Services as provided herein for a period of up to (as determined by Customer) twelve (12) months from the effective date of expiration or termination, as applicable the "TERMINATION ASSISTANCE PERIOD"). (b) Commencing from the date that is the earlier of six (6) months prior to the scheduled expiration or termination of this Agreement; or, where notice of termination for cause has been given under this Agreement, within fourteen (14) days after the receipt of that notice, HP-OMS and Customer shall meet regularly and as often as is required to develop and finalize a transition plan for the orderly transition of the Services to the Customer or its designee, for approval by the Customer, at least fourteen (14) days prior to the effective date of expiration or termination of the Initial Term or Extended Term, as applicable (the "TRANSITION-OUT PLAN"). (c) The Transition-Out Plan shall set out the obligations to be performed by each Party in connection with the orderly transition of the Services to the Customer (including estimates of the resources required to achieve that transition), or its designee and shall include, in addition to the requirements set out in this Section, those matters described in Exhibit M [Termination Assistance Services]. (d) Termination Assistance Services may include, among other services, any service or assistance required by Customer for facilitating the transfer of Operations Services to Customer or to a new service provider, assistance and training and relocation of Customer Hardware and Customer Software from HP-OMS sites to Customer Site(s) or new service provider locations, as indicated by Customer. (e) As part of the Termination Assistance Services, HP-OMS shall: (i) do all reasonable things, execute all documents and provide the Customer with all reasonable assistance, information, forms, templates and documents which are required to enable services similar to the Services to be provided to the Customer internally or by another service provider in a manner which ensures orderly transition and continuity of service all as more fully described in Exhibit M [Termination Assistance Services]; 65 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (ii) ensure that Customer receives all current and updated Customer Data, Customer Databases, manuals, and the current and updated source and object code of all HP-OMS Software (including Third Party Software, provided the consent of the third party licensor has been obtained): (a) on the applicable Hardware transferred back from HP-OMS, in accordance with this Agreement; or (b) where Customer does not receive the return of such Hardware, in accordance with this Agreement, on appropriate media in a readily useable format, as instructed by Customer; (iii) deliver (and not retain any copies thereof) to the Customer all material forms of: A. the Customer's Confidential Information; B. other property of the Customer relating to the Services; and C. the current and updated source and object code of the Customer Software; in the possession, power or control of HP-OMS or any HP-OMS Subcontractors, including all backup copies thereof (whether or not those material forms were created by HP-OMS or HP-OMS Subcontractors); (iv) except with the prior consent of the Customer, cease accessing any of the Customer's systems, electronic or communications links; (v) at the Customer's request, continue for a period not exceeding twelve (12) months after the effective date of Agreement termination or expiration to supply the Services to the Customer on the terms and conditions of this Agreement pursuant to a statement of work to be agreed by both parties which will specify the scope, time period and other terms and conditions thereof; 66 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (vi) provide to the Customer and its designated representatives, such training in the HP-OMS Software used by HP-OMS in the provision of the Services, as the Customer may reasonably request, for a period of up to three (3) months; (vii) perform the other obligations set out in the Transition-Out Plan (f) HP-OMS shall perform the Termination Assistance Services at the lower of (a) the discounted rates applicable to the Bank of Work Hours, set out in Exhibit E, Section 3.2 (BANK OF WORK HOURS); or (b) HP-OMS` then current standard fees for such services. HP-OMS' performance of Termination Assistance Services is subject to (i) Customer's prior payment of all undisputed amounts due to HP-OMS under this Agreement (and all disputed amounts to the Escrow Agent in accordance with Section 10.5 (ESCROW OF DISPUTED AMOUNTS) up to the date of termination or expiration of the Initial Term or Extended Term, as applicable, and (ii) Customer allowing HP-OMS to use reasonably, at no charge, any Customer resources and Customer Sites required to provide the Termination Assistance Services. (g) To the extent HP-OMS provides Termination Assistance Services during the Initial Term or the Extended Term, the terms and condition of this Agreement will remain in force, including but not limited to the Service Levels and the applicable Service Level Credits. If Termination Assistance Services is provided after the expiration or termination of the Initial Term or the Extended Term, then Customer shall be entitled to receive services which are the same or similar to the Services in accordance with an agreed statement of work and service levels, based on the Service Levels, subject to the fees chargeable in accordance with Section 20.7(f) above. 67 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 21. GENERAL 21.1 NON-RESTRICTIVE RELATIONSHIP. Nothing contained in this Agreement shall be construed as creating a joint venture, partnership or employment relationship between the Parties, nor shall either Party have the right, power or authority to create any obligation or duty, express or implied, on behalf of the other. This Agreement will not be interpreted as preventing HP-OMS from entering into similar agreements with others, whether or not in the same industry, subject to Section 5.7(b) (RESTRICTIONS ON PERFORMING SERVICES TO COMPETITORS; CHANGES TO SYSTEM ADMINISTRATION PASSWORDS). 21.2 SECURITY (a) PHYSICAL SECURITY. Customer is responsible for the physical security of the Customer Sites; provided, that HP-OMS shall be responsible for the safety and physical access and control of the areas that HP-OMS is using in performing the Services, and HP-OMS shall not permit any person to have access to, or control of, any such area unless such access or control is permitted in accordance with control procedures approved by Customer or any higher standard agreed to by Customer and HP-OMS (all to the extent that Customer provides HP-OMS the physical ability to limit access and control over such areas). HP-OMS shall be solely responsible for compliance by HP-OMS Personnel with such control procedures, including obtaining advance approval to the extent required. (b) SECURITY PROCEDURES AT CUSTOMER SITES. HP-OMS shall maintain and cause HP-OMS Personnel to adhere to the operational, safety and security standards, requirements and procedures then in effect at the Customer Sites, as such standards, requirements and procedures may be modified by Customer from time to time (to the extent HP-OMS has received written notice of such standards, requirements and procedures or modifications thereof). 68 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC (c) SAFEGUARDING CUSTOMER DATA. (i) SAFEGUARDING PROCEDURES. HP-OMS shall establish and maintain environmental, safety and facility procedures, data security procedures and other safeguards against the destruction, loss, unauthorized access or alteration of Customer Data in the possession of HP-OMS which are in accordance with Customer's security policy to be established as described in Exhibit D-. HP-OMS shall provide to Customer backup copies of Customer Data, in accordance with Customer's backup procedures in effect as of the Commmencement Date, and Customer shall have the right to keep such backup copies of the Customer Data in Customer's or a third party's possession at Customer's expense if Customer so chooses. HP-OMS shall remove all Customer Data from any media taken out of service and shall destroy or securely erase such media. No media on which Customer Data is stored may be used or re-used to store data of any other customer of HP-OMS or to deliver data to a third party, including another HP-OMS customer, unless securely erased. In the event HP-OMS discovers or is notified of a breach or potential breach of security relating to Customer Data, HP-OMS will promptly notify Customer and investigate and remedy the effects of such breach or potential breach of security. (ii) RECONSTRUCTION PROCEDURES. As part of the Services, HP-OMS shall be responsible for developing and maintaining procedures for the reconstruction of lost Customer Data which arein accordance with Customer's security policy to be established as described in Exhibit D-. (iii) CORRECTIONS. HP-OMS shall correct, at no charge to Customer, any destruction, loss or alteration of any Customer Data attributable to the failure of HP-OMS or HP-OMS Personnel to comply with HP-OMS' obligations under this Agreement. 69 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 21.3 FILE ACCESS. Customer will have unrestricted access to, and the right to review and retain, all computer or other files containing Customer Data, as well as all systems and network logs. At no time will any of such files or other materials or information be stored or held in a form or manner not immediately accessible to Customer. HP-OMS shall provide to the Customer all passwords, codes, comments, keys, documentation and the locations of any such files promptly upon the request of Customer, including Hardware and Software keys and such information as to format, encryption (if any) and any other specifications or information necessary for Customer to retrieve, read, revise and/or maintain such files. 21.4 PUBLICITY. Without derogating from HP-OMS' confidentiality obligations, HP-OMS may not use Customer as a reference in marketing HP-OMS services unless Customer, in its sole discretion, gives its express prior written consent to the specific case in which HP-OMS seeks to refer a prospective HP-OMS customer to Customer. For the avoidance of doubt, Customer's consent to act as a reference to one prospective HP-OMS customer does not imply Customer's agreement to act as a reference to any other prospective HP-OMS customers. In addition, in no event will either Party publicize or disclose to any third party, without the prior written consent of the other Party, any terms or conditions of this Agreement, including without limitation, the fact of its existence, except as required by applicable law. 21.5 NO ASSIGNMENT. Except with respect to HP-OMS' rights regarding the use of HP-OMS Subcontractors, neither Party may assign any rights or obligations under this Agreement without the prior written consent of the other Party; provided, however, that each Party may assign or transfer any rights and obligations hereunder to its Affiliate, provided that the assigning Party remains liable hereunder, subject to Section 20.2(b) (CHANGE OF CONTROL). For the avoidance of doubts: HP-OMS' issuance of invoices in accordance with Exhibit E to entities other than Customer shall not be deemed an assignment of Customers legal undertaking pursuant to this agreement and the exhibits thereto, to pay all amounts due to HP-OMS, and any non payment of such invoices, in full or in part, shall be considered as non payment by Customer, which shall entitle HP-OMS to all remedies and other rights prescribed by this agreement and by law. 70 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 21.6 FORCE MAJEURE (a) FORCE MAJEURE EVENT. Performance delays, errors in performance or non-performance by a Party will be excused to the extent that performance is delayed or rendered impossible by earthquake, strike, fire, flood, governmental acts, governmental orders, or governmental restrictions, or where failure to perform is beyond a Party's reasonable control (each being a "FORCE MAJEURE EVENT") except to the extent the non-performing Party is at fault in failing to prevent or causing such default or delay, and provided that such default or delay cannot reasonably be circumvented by the non-performing Party through the use of alternate sources, workaround plans or other means, and such Party claiming a Force Majeure Event shall be entitled to a reasonable extension of time to remedy any such delay or failure to perform. Regular military reserve duty of HP-OMS Personnel, strike, lockout or labor dispute involving HP-OMS or a Subcontractor and its own personnel shall not excuse HP-OMS from its obligations hereunder. The Party claiming a Force Majure Event will give the other Party notice as soon as practically possible after becoming aware of the occurrence of a Force Majeure Event and will describe at a reasonable level of detail the circumstances of the Force Majeure Event, the steps being taken to address such Force Majeure Event, and how long it is expected to continue. If a Force Majeure Event prevents delivery of a material portion of the Operations Services for more than sixty (60) days, Customer, with immediate effect upon written notice to HP-OMS, may terminate this Agreement, or may negotiate a Change Request, in accordance with the procedures set out in Section 11 (CHANGE MANAGEMENT) for changes to the Agreement. Subject to the foregoing, Customer shall remain liable to pay HP-OMS such portion of the Target Price equitably adjusted according to the portion of the Operations Services which HP-OMS continues to perform in accordance with the Agreement for the duration of such Force Majeure Event. (b) DISASTER RECOVERY. Upon the occurrence of a Force Majeure Event, HP-OMS shall implement promptly, as appropriate, its disaster recovery plan and provide disaster recovery services, and shall periodically update and test such disaster recovery plan, as described in Exhibit D. The occurrence of a Force Majeure Event shall not relieve HP-OMS of its obligation to implement its disaster recovery plan and provide disaster recovery services. HP-OMS shall provide the disaster recovery services for a separate fee to be agreed upon the parties. (c) ALLOCATION OF RESOURCES. Without limiting HP-OMS' obligations under this Agreement, whenever a Force Majeure Event or disaster causes HP-OMS to allocate limited resources between or among HP-OMS' customers and Affiliates, Customer shall receive at least the same treatment as comparable HP-OMS customers. 71 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 21.7 DISPUTE RESOLUTION PROCESS. (a) GOVERNANCE. Any dispute between the Parties shall be resolved in accordance with Exhibit N (GOVERNANCE). HP-OMS and Customer shall each appoint one or more Project Manager(s) of suitable experience to be its primary contact(s) to be responsible for performance of this Agreement according to Sections 5.4 (MANAGEMENT OF HP-OMS PERSONNEL) and 6.2 (CUSTOMER PROJECT MANAGER(S)) above. The Parties, including the Project Managers, will meet at mutually agreed times and locations to discuss issues arising in connection with performance of this Agreement. In the event there is a dispute, which cannot be resolved at these review meetings, either party may request in writing that the Service Account managers of HP-OMS and the Director of Information Technology of the Customer meet separately within ten (10) days to resolve the dispute. If the dispute has not been resolved to the mutual satisfaction of both Parties within ten (10) days of the meeting, then the dispute shall be referred to the HP-OMS Manager and the Customer's Manager who have authority to settle the dispute. If the dispute has not been resolved by these representatives within ten (10) days of the referral, HP-OMS and Customer will each designate a senior corporate executive who will meet to resolve the dispute. (b) MEDIATION. (i) If the dispute is not resolved within ten (10) days of the referral, the Parties may exercise their rights under this Agreement, provided that prior to seeking court action (except in the event that injunctive relief is required), the Parties shall make reasonable, good faith efforts to resolve the matter through nonbonding mediation (without prejudice to either Party's rights under Section 20 (TERM; BREACH; AND TERMINATION)), according to the following procedures: (ii) A single mediator, with the relevant technical and legal training, shall be appointed by agreement of the Parties; if the Parties fail to agree upon the mediator within thirty (30) days of notice of mediation, provided by either Party, the then president of the Israel Bar Association shall appoint the mediator. The mediator shall be made aware of the terms hereof prior to his appointment. The mediation shall be carried on continuously and completed within forty-five (45) business days of its commencement (or such other period agreed by the Parties) (the "MEDIATION PERIOD"). Each Party shall bear its own costs of participating in the mediation. If after the Mediation Period, the Parties have still not resolved their dispute, each Party may seek resolution in accordance with Section 21.16 (GOVERNING Law). 21.8 WAIVER. Neither Party's failure to exercise any of its rights under this Agreement shall constitute or be deemed to constitute a waiver or forfeiture of such rights. 21.9 SEVERABILITY. If any term or provision of this Agreement is held to be illegal or unenforceable, the validity or enforceability of the remainder of this Agreement shall not be affected. 72 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 21.10 EXHIBITS. The Exhibits attached and listed below are part of this Agreement: Exhibit A Services Description Exhibit B Statement of Work Exhibit C Service Level Agreement Exhibit D Transition and Stabilization Exhibit E Pricing and Pricing Principles Exhibit F Employee Transfer Agreement Exhibit G Project Staff and Key Contacts Exhibit H Customer Sites Exhibit I HP-OMS Software and Customer Software Categories Exhibit J Customer Competitors Exhibit K Guarantee of Tecnomatix Technologies Ltd. Exhibit L Guarantee of Hewlett-Packard Israel Ltd. Exhibit M Termination Assistance Exhibit N Governance Exhibit O1 Third Party Contracts Exhibit O2 Not Transferred Third Party Contracts Exhibit P Escrow Agreement 21.11 SURVIVAL. The following provisions survive termination of this Agreement: Sections 5.7(b)(1) (RESTRICTIONS ON PERFORMING SERVICES TO COMPETITORS; CHANGES TO SYSTEM ADMINISTRATION PASSWORDS.) 10 (Price and Payment), 14.2-14.8 (FUNDAMENTAL OBLIGATIONS; WARRANTIES AND DISCLAIMERS), 15 (INTELLECTUAL PROPERTY RIGHTS), 16 (INDEMNITIES), 17 (CONFIDENTIAL INFORMATION), 18 (LIMITATION OF LIABILITY), 20 (TERM; BREACH; AND TERMINATION) and 21.7 (DISPUTE RESOLUTION PROCESS); 21.16 (GOVERNING LAW; JURISDICTION). 73 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 21.12 HEADINGS. The headings in this Agreement are for the convenience of the Parties only, and are in no way intended to define or limit the scope or interpretation of the Agreement or any provision hereof. 21.13 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between HP-OMS and Customer, and supersedes any prior or contemporaneous communications, representations or agreements between the Parties, whether oral or written, regarding the subject matter of this Agreement. Either Party's additional or different terms and conditions shall not apply. The terms and conditions of this Agreement may not be changed except by an amendment signed by an authorized representative of each Party. 21.14 CONFLICTS. If there is a conflict among the terms in the various documents within this Agreement: (a) to the extent the conflicting provisions can reasonably be interpreted so that such provisions are consistent with each other, such consistent interpretation will prevail; and (b) to the extent clause (a) above does not apply, the following order of precedence shall prevail: i) this Agreement (exclusive of its attachments) will prevail over a conflicting term in its Exhibits; and ii) an Exhibit will prevail over a conflicting term in its Appendices. 21.15 NOTICES. All notices that are required to be given under this Agreement shall be in writing and shall be sent to the address of HP-OMS and Customer recipient set out below. For the purposes of this Section the address of each Party shall be: CUSTOMER: Tecnomatix Ltd Attention: Director of IT Address: 16 Hagalim Avenue, Herzlia Pituach, Israel Telephone: +972-9-9594777 Facsimile: +972-9-9544402 74 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC WITH A COPY OF ALL DEFAULT NOTICES TO: CUSTOMER'S LEGAL COUNSEL at the above address HP-OMS: HP-OMS-COMPAQ (Israel) Ltd. Attention: Project Manager - Tecnomatix Address: 9 Dafna St. Ra'anana Telephone: 09-7623747 Facsimile: 09-7425155 WITH A COPY OF ALL DEFAULT NOTICES TO: Attention: HP-OMS Legal Counsel, at the above address Unless specified otherwise in this Agreement, when HP-OMS or Customer is required to provide written notice to the other, such notice will be deemed given upon the earlier of: [i] the day of receipt, if delivered in person or electronically; [ii] the day of receipt, if delivered by facsimile, upon confirmation of transmission, provided that a confirmatory copy is sent by first class pre-paid mail, overnight courier, or hand delivery by the end of the next business day. [iii] one (1) business day after being given to an express courier with a reliable system for tracking delivery; or [iv] three (3) business days after the date of mailing, when using local postal services, registered or certified mail, return receipt requested, postage prepaid. 21.16 GOVERNING LAW; JURISDICTION. This Agreement shall be governed by and construed in accordance with the laws of Israel. Subject to Section 21.7 (DISPUTE RESOLUTION PROCESS), any dispute, controversy or claim arising out of or relating to this Agreement or the breach, termination or validity thereof shall be exclusively and finally settled in the competent courts in Tel Aviv, Israel. 75 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC IN WITNESS WHEREOF, HP-OMS AND CUSTOMER, EACH ACTING WITH PROPER AUTHORITY, HAVE CAUSED THIS AGREEMENT TO BE EXECUTED AS OF THE DATE SET FORTH BELOW. Made in Israel, in two original counterparts, each Party receiving its own. SIGNED FOR AND ON BEHALF OF SIGNED FOR AND ON BEHALF OF TECNOMATIX LTD HP-OMS-COMPAQ (ISRAEL) LTD By: /s/ Harel Beit-On___________ By: /s/ Moshe Lasman Name: Harel Beit-On_______________ Name: Moshe Lasman Title: Chairman & CEO______________ Title: HPS Country Manager____ Date: 30.10.2003__________________ Date: 30.10.2003 By: /s/ Efrat Safran____________ By: /s/ Shmuel Blank Name: Efrat Safran________________ Name: Shmuel Blank Title: General Counsel_____________ Title: HP-OMS General Manager Date: 30.10.2003__________________ Date: 30.10.2003 76 EX-99 6 exhibit4b9-2_1.txt PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC AGREEMENT AMENDMENT NO. 1 EFFECTIVE AS OF THE 29TH DAY OF DECEMBER 29, 2003 By and Between TECNOMATIX LTD. 16 Hagalim Avenue Herzlia Pituach Israel ("CUSTOMER") And HP-O.M.S. (ISRAEL) LTD. 9 Daphna Street Ra'anana Israel ("HP-OMS") WHEREAS The parties have signed an Agreement on October 30th 2003 ("Main Agreement") for the provision of global IT outsourcing services to Customer by HP-OMS; and WHEREAS The parties wish to amend the Main Agreement to include the following changes as stated hereunder: NOW THEREFORE, THE PARTIES HAVE AGREED AS FOLLOWS: 1. The Preamble to this Amendment shall constitute an obligatory and inseparable part thereof. 2. This Amendment shall constitute an obligatory and inseparable part of the Main Agreement. 3. The definition or interpretation of all the terms stated in this Amendment shall be as stated in the Main Agreement, unless stated otherwise herein or understood to mean otherwise in the context of this Amendment. 4. It is agreed that Section 2.5 (b) of the Main Agreement shall be changed to read as follows: "(b) Without derogating from subsection (a) above, Customer and HP-OMS shall cooperate with each other to achieve their mutual goal of obtaining Government Approval as soon as possible, but not later than February 15, 2004. In the event that the Customer fails to obtain Government Approval by February 15, 2004, the parties, in good faith, shall use their best commercial efforts to resolve the matter to obtain such approval on an expedited basis." 1 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 5. All other terms and conditions of the Main Agreement shall remain unchanged. This Amendment shall be valid as of the date of signature by both the parties hereto. AS WITNESS, THE PARTIES HAVE HEREBY SIGNED THIS AMENDMENT : TECNOMATIX LTD. HP-O.M.S. (ISRAEL) LTD. /s/ Harel Beit-On /s/ Moshe Lasman ______________________________ _______________________________ Signature(s) of Authorized Signature(s) of Authorized Signatory(ies) Signatory(ies) Harel Beit-On Moshe Lasman _______________________________ ______________________________ Name(s) of Authorized Signatory Name(s) of Authorized Signatory (ies) (ies) /s/ Oren Steinberg ______________________________ Signature(s) of Authorized Signatory(ies) Oren Steinberg _______________________________ Name(s) of Authorized Signatory (ies) Date: December 29, 2003 Date: December 29, 2003 2 EX-99 7 exhibit4b9-2_2.txt PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC - -------------------------------------------------------------------------------- AGREEMENT AMENDMENT NO. 2 - -------------------------------------------------------------------------------- MADE AS OF THE 25TH DAY OF FEBRUARY 2004 BETWEEN HP-OMS (ISRAEL) LTD. 9 HA'DAFNA STREET RA'ANANA , ISRAEL ("HP-OMS") AND HEWLETT-PACKARD (ISRAEL) LTD. 9 HA'DAFNA STREET RA'ANANA , ISRAEL ("HP") AND TECNOMATIX LTD. 16 ABBA EBAN AVENUE, HERZLIA PITUACH, ISRAEL ("CUSTOMER") WHEREAS, Customer and HP-OMS entered on October 30, 2003 into a SERVICES AGREEMENT FOR HP-OMS OPERATIONS SERVICES (the "AGREEMENT"); and WHEREAS, the parties entered on December 29, 2003 into Amendment No. 1 to the Agreement (the Agreement and all Exhibits thereto, as previously amended by Amendment No. 1, shall be referred to herein as the "SERVICES AGREEMENT"); and WHEREAS, Customer desire that HP-OMS shall assign the Services Agreement and all of HP-OMS' rights and obligations thereunder to HP; and HP-OMS and HP agree to such assignment; and WHEREAS, the parties wish to further amend and/or clarify certain provisions in the Services Agreement as set forth herein. NOW, THEREFORE, in consideration of the covenants, promises and representations set forth herein, the parties agree as follows: PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 1. Unless otherwise defined herein, capitalized terms used in this Amendment No. 2 shall have the meaning ascribed to them under the Services Agreement. 2. HP-OMS hereby assigns the Services Agreement and all its rights and obligations thereunder to HP, its parent company, and HP hereby accepts such assignment and agrees to be bound and obligated by all the terms and conditions of the Services Agreement. As used in this Agreement, unless expressly otherwise stated or evident in the context, the term "HP-OMS (Israel) Ltd" shall be replaced by "Hewlett-Packard (Israel) Ltd." and the term "HP-OMS" shall be replaced by "HP". 3. Customer agrees that HP may engage and use the services of HP-OMS as a subcontractor to provide the Services under the Services Agreement to Customer. 4. The parties hereby declare and acknowledge that all the conditions precedent included in Section 2.5 of the Services Agreement have been fully satisfied and fulfilled. HP-OMS and HP specifically declare that they have received the approval of HP Corporate to the Services Agreement and to this Amendment No. 2. Notwithstanding anything to the contrary in the Services Agreement, the Effective Date of the Services Agreement shall be, for all intents and purposes, the signature date hereof and the Commencement Date shall be May 1, 2004. 5. Sub-section (b) of Section 20.2 of the Services Agreement (TERMINATION FOR CAUSE BY CUSTOMER; OTHER REMEDIES) shall be amended to read in its entirety as follows: (B) "CHANGE OF CONTROL. Customer may terminate this Agreement immediately upon written notice to HP in the event that HP experiences (in one transaction or any series of transactions) a change of majority ownership, following which the majority ownership of HP shall be held by a third party other than Hewlett Packard Company or an entity Controlled by it ("CHANGE OF CONTROL"), unless prior to such Change of Control Customer is notified of such change and (i) Hewlett-Packard Volendam B.V. or any other entity within the Hewlett Packard Company Group, which is approved by Customer, agrees in writing to accept an assignment of this Agreement; or (ii) Customer provides its written consent to such Change of Control." 6. Sub-section 20.2(c) of the Services Agreement (GUARANTEE FROM HEWLETT-PACKARD ISRAEL LTD.) shall be deleted from the Services Agreement in its entirety. 7. Section 20.3 of the Services Agreement (MUTUAL RIGHT OF TERMINATION) shall be amended to read in its entirety as follows: 2 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC "MUTUAL RIGHT OF TERMINATION. Either Party may terminate this Agreement, immediately at any time by written notice to the other Party, if the other Party (or in the event the other Party is Customer, then Tecnomatix Technologies Ltd.) (i) has a receiver appointed or an assignee for the benefit of creditors; (ii) is or becomes insolvent or is unable to pay debts as they become due; (iii) ceases to trade for a period of sixty (60) days (either in whole or as to any part or division involved in the performance of this Agreement) or (iv) ceases to operate in the normal course of business for a period of sixty (60) days (each of (i)-(iv) above an "INSOLVENCY EVENT"), unless the Insolvency Event is removed or is no longer in effect within forty-five (45) days of receipt of the notice of termination, in which case the initial Insolvency Event shall not be grounds for termination." 8. The words "Exhibit L Guarantee of Hewlett-Packard Israel Ltd." shall be deleted from Section 21.10 of the Services Agreement. 9. Exhibit L (Guarantee of Hewlett-Packard Israel Ltd.) shall be omitted from the Services Agreement. 10. On the Commencement Date and as a security for satisfying its obligations for payment under the Services Agreement of the applicable portions of the Target Price due to HP in each of the first three full quarters of the Term beginning July 1, 2004 (each a "QUARTERLY PAYMENT"), Customer shall deposit with HP three checks made by Customer to the benefit of HP at the estimated amounts due for each such three Quarterly Payments. The three security checks shall be dated August 15, 2004 (the "FIRST CHECK"), November 15, 2004 (the "SECOND CHECK") and February 15, 2005 (the "THIRD CHECK") (collectively referred to as the "CHECKS"). For the avoidance of doubt it is clarified that payment by HP to Customer of the one time fee in the amount of US$[**] (Section 2.3 of Exhibit E) shall be subject to Customer depositing the Checks as stipulated herein. HP may only deposit and cash the Checks in the event that Customer fails to pay to HP the applicable Quarterly Payment, in whole or in part, on its due date. In the event that HP deposits any of the Checks due to partial non-payment by Customer of the applicable Quarterly Payment, it is agreed that concurrently with the deposit of such Check HP shall deposit with Customer's bank account an amount equal to the difference between (i) the amount that was paid by Customer plus the amount of the Check to be deposited by HP and (ii) the Quarterly Payment. Thus, the equation for the settlement between the parties shall be: A+B-C =X. A = Amount that was paid by Customer; B = Amount of the Check; C = Quarterly Payment; and X = Amount to be deposited by HP in the account of Customer. 3 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Under no circumstances shall the First Check, the Second Check and the Third Check be used to secure and/or be deposited and cashed by HP to satisfy the payment of any amount due by Customer to HP under the Services Agreement or otherwise other than the respective Quarterly Payment during the Term. It is hereby specifically agreed that HP shall return to Customer the First Check, the Second Check and the Third Check within four (4) business days after the full payment by Customer of the respective Quarterly Payment. 11. This Amendment No. 2 shall be deemed for all intents and purposes as an integral part of the Services Agreement. The Services Agreement and this Amendment No. 2 constitute the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and undertakings, both written and oral, between the parties hereto with respect to the subject matter hereof. 12. This Amendment No. 2 may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Amendment by telecopier shall be effective as delivery of a manually executed counterpart of this Amendment No. 2. - SIGNATURE PAGES FOLLOW - 4 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC IN WITNESS WHEREOF, the parties have caused this Amendment No. 2 to the Services Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. SIGNED FOR AND ON BEHALF OF SIGNED FOR AND ON BEHALF OF TECNOMATIX LTD. HP-OMS (ISRAEL) LTD. By: /s/ Harel Beit-on By: /s/ Ehud Graff - --------------------- ------------------ Name: Harel Beit-On Name: Ehud Graff Title: Chairman of the Board Title: Chairman of the Board By: /s/ Jaron Lotan By: /s/ Moshe Lasman - ------------------- -------------------- Name: Jaron Lotan Name: Moshe Lasman Title: President and CEO Title: Director and HP Israel Services General Manager SIGNED FOR AND ON BEHALF OF HEWLETT-PACKARD ISRAEL LTD. By: /s/ Ehud Graff - ------------------ Name: Ehud Graff Title: General Manager 5 EX-99 8 exhibit-a.txt PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A Service Description V 7.0 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description DOCUMENT INFORMATION Project Manager: Gil Tal - ---------------------------- --------------------------------------------------- Customer Project Na'ama Halperin Manager Prepared by: Document Version No. : V 7.0 Preparation Date: 26.10.2003 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description INDEX Document Information 2 1 GENERAL.................................................................... 5 1.1 Scope of Document...................................................... 5 1.2 Definitions............................................................ 5 1.3 General Customer Responsibilities...................................... 6 1.4 General HP-OMS Responsibilities........................................ 7 2 WORKSTATION ENVIRONMENT SERVICE (WES) DESCRIPTION.......................... 8 2.1 Service Description.................................................... 8 2.2 Service Items.......................................................... 9 2.2.1 Incident Resolution................................................ 9 2.2.2 Hardware Installations............................................. 9 2.2.3 Software, Operating System (OS) and Standard Image Installation... 10 2.2.4 Install, Move, Add and Change (IMAC).............................. 10 2.3 Roles and Responsibilities............................................ 10 3 SERVER MANAGEMENT SERVICE DESCRIPTION..................................... 12 3.1 Scope................................................................. 12 3.1.1 Server Operations & Management Model.............................. 12 3.1.2 Customer is Responsible to Manage the Application Layer (CAD & Development tools) (Variant A)........................................... 13 3.1.3 Customer is not Responsible to Manage the Business IT Application (Clarify) (Variant B).................................................... 14 3.1.4 Customer is Responsible to Manage the Business IT Application (SUN, Kopel Reem) (Variant C)............................................ 14 3.1.5 The Customer is not Responsible to Manage Back Office Servers (File Servers, Exchange, IIS, etc.) (Variant D).......................... 15 3.2 Server Service Description............................................ 15 3.2.1 Customer Site Documentation....................................... 15 3.2.2 Service Items - Release to Production............................. 15 3.2.2.1 Server Hardware Installation.................................. 16 3.2.2.2 Server Operating System (OS) Installation..................... 16 3.2.2.3 Server Backup Setup........................................... 16 3.2.2.4 Monitoring Setup.............................................. 16 3.2.3 Service Items - Operations Management............................. 17 3.2.3.1 General OS Administration..................................... 17 3.2.3.2 Service Restoration (Incident Resolution)..................... 18 3.2.3.3 Backup........................................................ 19 3.2.3.4 Restore....................................................... 20 3.2.3.5 UPS........................................................... 21 3.2.4 Service Items - Service Management -> Security.................... 22 3 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description 3.2.4.1 Security General.............................................. 22 3.2.4.2 Scope Exclusions.............................................. 22 3.2.4.3 Responsibilities.............................................. 22 3.2.4.4 Periodic Password Changes..................................... 23 3.2.4.5 Security Patch Management..................................... 23 3.2.4.6 Windows Servers Security Management........................... 24 3.2.4.7 Operational Criteria.......................................... 26 3.2.5 Security Audits................................................... 26 3.2.6 Privileged Access (Administrative Access)......................... 26 3.2.6.1 Security Policies............................................. 27 4 UNIX MANAGEMENT SERVICE DESCRIPTION...................................... 28 4.1 Service Items........................................................ 29 4.1.1 Incident Resolution............................................... 29 4.1.2 Hardware Installations............................................ 29 4.1.3 Software, Operating System and Image Installation................. 29 4.2 Roles and Responsibilities........................................... 29 5 BUSINESS APPLICATION SUPPORT............................................. 30 5.1 Scope................................................................ 30 Customer and HP-OMS Will Mutually Review the service every 6 Months........ 30 5.2 Service Items........................................................ 30 5.2.1 Application Support............................................... 30 Excluded:................................................................ 31 6 NETWORK MANAGEMENT SERVICE DESCRIPTION................................... 32 6.1 Service Items........................................................ 32 6.1.1 Management of Hubs, Switches and Routers.......................... 32 6.1.2 Dns Management.................................................... 32 6.1.3 Ip Management..................................................... 33 6.1.4 VPN Management.................................................... 34 6.1.5 DHCP Management................................................... 34 6.1.6 RAS Management.................................................... 35 6.1.7 Firewall Management............................................... 35 6.2 Assumptions / Requirements........................................... 36 7 PROCUREMENT AND IT ADMINISTRATIVE SUPPORT................................ 37 7.1 Procurement Services................................................. 37 7.2 It Administrative Services........................................... 38 4 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description 1 GENERAL 1.1 SCOPE OF DOCUMENT This Exhibit A is attached to the Master Services Agreement, dated as of [_____________] 2003 by and between HP-OMS and Customer (the "Agreement") and made a part thereof by reference. Capitalized terms not otherwise defined herein shall have the meaning specified in the Agreement. This document presents the provision of the Services provided by HP-OMS to the Customer. The Services will be provided following the "Transition and Stabilization Phases" at each Customer Site as described in EXHIBIT D. 1.2 DEFINITIONS HP-OMS will provide the Services under this Agreement in the following support levels. The support levels are described from the highest level (Full Support) to the lowest level (Special Support):
LEVEL OF SUPPORT LEVEL SUPPORT LEVEL DESCRIPTION SUPPORT TYPE - ------------- --------------------- ------------------------------------------------------------- 1 FULL SUPPORT Means all support and maintenance Services, including, operating, managing, supporting, installing, updating, moving, adding, deleting HP-OMS Hardware and HP- OMS Software, and any related Third Party Contracts within HP-OMS Hardware and HP-OMS Software; as well as application configuration and application support and related Third Party Contracts within HP-OMS Hardware and HP-OMS Software. 2 MAKE IT WORK Means support and maintenance Services required to SUPPORT ensure that the infrastructure levels are operating and the Customer can utilize the applications within the HP-OMS Software, Customer Software and the Customer's proprietary Software. 3 SPECIAL SUPPORT Means support Services required to ensure that the Customer can utilize software or hardware that no longer supported by its original manufacture. HP-
5 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description LEVEL OF SUPPORT LEVEL SUPPORT LEVEL DESCRIPTION SUPPORT TYPE - ------------- --------------------- ------------------------------------------- OMS will provide for such incidents support services and maintenance required to ensure that all the infrastructure levels are operating and the Customer can utilize the applications within the HP-OMS Software, Customer Software and the Customer's proprietary Software. Due to the nature of these incidents they will not be defined by SLA commitment. "IT ENVIRONMENT" means all HP-OMS Hardware, HP-OMS Software, Customer Software, Customer's proprietary Software and any Hardware or Software under Third Party Contracts. "IT DEVELOPMENT ENVIRONMENT" means all HP-OMS Hardware and Customer Software and Customer's proprietary Software. 1.3 GENERAL CUSTOMER RESPONSIBILITIES Customer shall have the following responsibilities in connection with the Services: o Provide access to basic site amenities (cafeterias, coffee rooms, vending services, etc.) at Customer Sites at the same level as is available to the Customer's employees, in accordance with the Agreement. o Provide HP-OMS Personnel with necessary access to all physical sites. o Provide access to its IT infrastructure (Servers, Network Routers, etc.). o Provide HP-OMS a list of contacts that are authorized to raise requests, to receive notification for pre-defined events or for notification and escalation of incidents. (Contact list); o Co-operating with HP-OMS with necessary activities to resolve problems (e.g. testing, onsite help, etc.). 6 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description 1.4 GENERAL HP-OMS RESPONSIBILITIES HP-OMS shall have the following responsibilities in connection with the Services: o Manage, administer and maintain all Third Party Contracts, including contracts between Customer and third parties for the maintenance of Hardware included within Add-On Assets that have not been transferred to HP-OMS. The Services for the Third Party Contracts will be provided as detailed in the contracts. . 7 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description 2 WORKSTATION ENVIRONMENT SERVICE (WES) DESCRIPTION 2.1 SERVICE DESCRIPTION The scope of this Section (2) relates to the desk side of the HP-OMS Hardware and the related IT Environment, including WES support for all devices (i.e. workstation PCs, portable PCs, printers, scanners, etc.). The parties will cooperate to achieve standardization of Customer's workstation environment, however, it is acknowledged that where Customer's requirements are for non-standardized workstations, HP-OMS shall continue to support such environments at a level of support which is at least as high as the Service Levels applicable to standardized workstations. The workstation environment service components are defined in Exhibit B (SECTION 6 - SERVICE COMPONENTS). HP-OMS is responsible for the desk side support of all workstations and peripheral devices in the IT Environments, as well as for support of software applications running on these workstations. All workstations and peripheral devices in the IT Environment will be supported at least at the software, hardware and operating system ("OS") levels. The operating idea of "WES" is high-quality support of the user's workstation environment, in accordance with Service Levels. The service includes tasks to support, assist and advise the users in order for them to gain the greatest possible benefits from their workstations and the applications they use. TASK DESCRIPTION: o Trouble-shooting and fault repair of problems (desk side support) involving the workstation environment (e.g. updates of virus definition file) o Repair of workstations hardware. o Installation, maintenance, updating and removal of the supported software listed in Exhibit B (SECTION 6.2 - WES ENVIRONMENT SUPPORT) o Receipt of all fault notifications and work requests related to the workstation management through HP-OMS's Ticketing System, as well as relaying them to the agreed responsible organizations, in accordance with Exhibit B. o Full Support for HP-OMS Software in the IT Environment; 8 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description o Make It Work Support for Customer Software and Customer proprietary Software in the IT Environment; o Hardware installation of new equipment o Full responsibility for Hardware maintenance, which will meet or exceed the applicable Service Levels o Software distribution/installation o Network support o Configuration of software and hardware according to Exhibit B (SECTION 6 - SERVICE COMPONENTS). o Support of workstation scripts, e.g., user Login scripts o Installation and removal of Customer Software THE FOLLOWING ITEMS ARE OUT OF SCOPE OF SERVICES TO BE PROVIDED BY HP-OMS FOR THE CUSTOMER THROUGHOUT THIS AGREEMENT: o Individual backups o Personal software (end users-owned non standard software) installation and support - i.e. games, digital camera applications, etc. o PBX, telephony & voice mail support and management o Software application content (Web, etc.) o Software development not related to the support work (e.g. Customer's proprietary Software) o Consumables (e.g. printer ink, paper) 2.2 SERVICE ITEMS 2.2.1 INCIDENT RESOLUTION o Troubleshooting and problem solving, in accordance with Exhibit B (SECTION 5 INCIDENT MANAGEMENT), in the IT Environment regarding events concerning hardware (e.g. workstations, peripherals, etc.), software and network. 2.2.2 HARDWARE INSTALLATIONS o Installation / setup of hardware Comprises all of the tasks included in the hardware installation for end-users (desktop, laptop, printer, peripherals, etc.). A detailed description of "Hardware Support" tasks is listed in Exhibit B (SECTION 6.3 - HARDWARE SUPPORT). 9 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description 2.2.3 SOFTWARE, OPERATING SYSTEM (OS) AND STANDARD IMAGE INSTALLATION o Installation and update of software, operating system and standard images. A detailed description of tasks is listed in Exhibit B (SECTION 6.2 - WES ENVIRONMENT SUPPORT). 2.3.4 INSTALL, MOVE, ADD AND CHANGE (IMAC) o A detailed description of tasks is listed in Exhibit B (SECTION 6.2 - WES ENVIRONMENT SUPPORT). 2.3 ROLES AND RESPONSIBILITIES HP-OMS RESPONSIBILITIES o Document, qualify and route the requests and events under HP-OMS responsibility to the correct support resource and escalate when necessary. o Regularly update the Customer regarding the status of incidents and the progress made towards their resolution. o Notify the Customer Employee who reported the relevant incident. o Immediately inform the Customer's Project Manager in writing of any incident report which HP-OMS considers to be outside of the scope of Services (or which is subject to the Change Management Process). o Monitor open incidents to ensure the progression towards end-user satisfaction. o Manage incident resolution as defined in the Exhibit B (SECTION 5 - INCIDENT MANAGEMENT). o Propose the implementation of necessary changes through the Change Management process for events requiring solutions outside the scope of this agreement, subject to Customer's approval in its sole discretion. o Notify Customer IT management about incidents that have exceeded escalation thresholds. o Maintain the necessary maintenance contracts and contacts with third parties suppliers. o Perform service recovery in the event of service down and restore the service to its pre- break down situation. 10 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description CUSTOMER RESPONSIBILITIES o Supply the necessary known information required to access application support team as well as third party contacts, if maintained by Customer. o Inform HP-OMS of planned changes to user numbers or site locations to ensure there will not be any degradation of service (Change Management). o Approve technical service recovery solution (fix or detour) in case of service down o Help HP-OMS enforce OS and application language standards as agreed by HP-OMS and the Customer during the Transition and Stabilization Phases. o Customer is obligated to provide software licenses for all the software currently in use. If there is more software installed then the amount of licenses provided, it is upon the Customer to decide on one of the following options: a. Purchase the necessary number of software licenses to be compliant or, b. Uninstall the unlicensed software at the Customer's expense. JOINT RESPONSIBILITIES o HP-OMS will work with Customer to define and validate PC Software images to be used by end-users. o HP-OMS and Customer will record incident ID (Work reference number) for further reference. 11 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description 3 SERVER MANAGEMENT SERVICE DESCRIPTION 3.1 SCOPE The service description provides a specification of the server management services HP-OMS will deliver to Customer. HP-OMS will provide Full Support of the Customer's servers, and services running on such servers (not included R&D services), in the IT Environment with a high degree of availability of service for the end user, in accordance with the Service Levels set out in Exhibit C. 3.11 SERVER OPERATIONS & MANAGEMENT MODEL The following Management Model represents the typical levels of responsibility for the operation of the Customer's environment. It describes the overall system from the business process level through to the IT infrastructure, and defines the responsibilities for the Customer and HP-OMS at the various layers. 12 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description LAYER 1 comprises the hardware services. This includes the elimination of hardware faults and updating hardware, e.g. firmware. LAYER 2 comprises the network services. This includes management of hubs / switches / routers and related administrative tasks excluding passive network. LAYER 3 comprises the services that ensure availability of the operating system at a defined service level. LAYER 4 represents the base operation of the application. LAYER 5 represents the administration of the database. LAYER 6 represents the services, which refer to the specifics of the application and organization of the Customer. LAYER 7 contains the business processes of the Customer. 3.1.2 CUSTOMER IS RESPONSIBLE TO MANAGE THE APPLICATION LAYER (CAD & DEVELOPMENT TOOLS) (VARIANT A) The Customer is responsible to manage the application layer. This results in the following division of responsibilities: HP-OMS RESPONSIBILITIES o Hardware o Network o Operating System o Application Infrastructure o Database Management (make it work) CUSTOMER RESPONSIBILITIES o Database Management o Application management o All components above the application infrastructure level 13 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description 3.1.3 CUSTOMER IS NOT RESPONSIBLE TO MANAGE THE BUSINESS IT APPLICATION (CLARIFY) (VARIANT B) The Customer is not responsible to manage the application layer. This results in the following division of responsibilities: HP-OMS RESPONSIBILITIES o Hardware o Network o Operating System o Application Infrastructure o Database Management o Application Management CUSTOMER RESPONSIBILITIES o All components above the application management level o Content of Business IT applications 3.1.4 CUSTOMER IS RESPONSIBLE TO MANAGE THE BUSINESS IT APPLICATION (SUN, KOPEL REEM) (VARIANT C) The Customer is responsible to manage the application layer. This results in the following division of responsibilities: HP-OMS RESPONSIBILITIES o Hardware o Network o Operating System o Application Infrastructure o Database Management o Application management CUSTOMER RESPONSIBILITIES o All components above the application infrastructure level o Content of Business IT applications 14 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description 3.1.5 THE CUSTOMER NOT RESPONSIBLE TO MANAGE BACK OFFICE SERVERS (FILE SERVERS, EXCHANGE, IIS, ETC.) (VARIANT D) The Customer not responsible to manage the back office servers.This results in the following division responsibilities: HP-OMS RESPONSIBILITIES o Hardware o Network o Operating System o Application Infrastructure o Database Management o Application Management CUSTOMER RESPONSIBILITIES o None 3.2 SERVER SERVICE DESCRIPTION 3.2.1 CUSTOMER SITE DOCUMENTATION HP-OMSS will provide the Customer with updated documentation of the Customer Sites' infrastructure, including but not limited to System Administrator passwords. 3.2.2 SERVICE ITEMS - RELEASE TO PRODUCTION Release To Production is the process that HP-OMS will perform when it would like to add/change/remove infrastructure components, which may affect the IT Environment (including but not limited to the IT Development Environment). Infrastructure components may include: addition of new servers, changes in Login scripts, network changes, etc. Release to Production process will be subject to Change Management process as described on EXHIBIT B SECTION 8. 15 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description ACTIVITIES WILL RELATE TO: o Network (Connectivity configuration, Hardware installation, etc.) o Operating System (system/patches/service pack installation & configuration) o Backup and restore (installation, configuration, scheduling, etc.) o Security o Antivirus management o Operation Management Tools (installation and configuration tools) o Acceptance for production (integration into the existing operation) 3.2.2.1 SERVER HARDWARE INSTALLATION HP-OMS RESPONSIBILITIES o Hardware setup o Connect infrastructure to power UPS and network 3.2.2.2 SERVER OPERATING SYSTEM (OS) INSTALLATION HP-OMS RESPONSIBILITIES o Installation of OS (following the Customer's specifications on naming conventions, IP addressing, etc.) o Configure OS according to a standard to be developed by the parties during the Transition and Stabilization Phases, as set in Exhibit D. 3.2.2.3 SERVER BACKUP SETUP HP-OMS RESPONSIBILITIES o Deploy backup client o Configure backup according to documented specification, to be developed between the Customer and HP-OMS during the Transition and Stabilization Phases, as set in Exhibit D. o Backup media management o Monitoring the success of backups 16 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description 3.2.2.4 MONITORING SETUP HP-OMS RESPONSIBILITIES o Implement monitoring agent o Configure monitoring according to defined service level/package o The monitoring will include the following general guidelines: a. File Servers - e.g., Responsiveness (Ping), Disk Space, CPU and Memory b. Network - e.g., Responsiveness (Ping) of active devices, overall utilization on the International private lines and status of all communication lines (up/down). c. Applications - e.g., Messaging, Backup, Business applications and Databases d. Server Services - e.g., MTA, exchange services, database services. o Monitoring server services -the Parties will agree as to which of the . server services will be monitored by the Monitoring and Control System (HP-OV) 3.2.3 SERVICE ITEMS - OPERATIONS MANAGEMENT 3.2.3.1 GENERAL OS ADMINISTRATION HP-OMS RESPONSIBILITIES o Configure access and capability characteristics on a server o Add, change and delete users in the server environment o Ensure server processes are in proper running status, keep hardware clean and in working order o Log a ticket / incident prior to performing maintenance o Log and/or document any action taken and recommendation provided o Configure access and capability characteristics for end users on a server o Document changes to the Customer's server environment o Take reasonable measures to confirm that only authorized users have access to the Customer's IT Environment. o Recommend user management policies 17 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description CUSTOMER RESPONSIBILITIES o Provide user management policies. o Issue administrative changes via Incident Management / Change Management o Provide authorization prior to the actual implementation of HP-OMS recommendations or additional maintenance activities o Provide Hardware and Software support contracts (if they are not transferred to HP-OMS) in order for HP-OMS to be eligible to receive OS patches, Software upgrades and support as per the contracts o Document changes to the Customer's server environments, which were done by the Customer. JOINT RESPONSIBILITIES o Ensure that no one (internal or external to the Customer's company) perform any configuration changes in any back office server system without a prior written confirmation from HP-OMS. All configuration changes must be performed by HP- OMS or coordinated with HP-OMS. 3.2.3.2 SERVICE RESTORATION (INCIDENT RESOLUTION) Service restoration focuses on restoring the availability of the server environment by responding to incidents detected by or reported to the MCC (Monitoring & Control Center). Service restoration is intended to minimize disruptions to the end-user by minimizing each single downtime upon its occurrence. HP-OMS RESPONSIBILITIES o Resolve the assigned incident according to defined metrics in EXHIBIT C (SERVICE LEVEL AGREEMENT), to ensure the return of the specified service. o Make temporary configuration changes as needed to recover a failed resource; recommend and perform permanent configuration changes as necessary to maintain the SLA. o Document resolution activities. o Provide an action plan for events requiring permanent solutions beyond the scope of this agreement. o Manage end user communications during fault isolation and resolution of identified problem in sites with HP-OMS Personnel working onsite (at the applicable Customer Site). 18 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description CUSTOMER RESPONSIBILITIES o Authorize HP-OMS (or HP-OMS designated personnel) to apply needed . software patches and/or service packs. o Manage end user communications during fault isolation and resolution of identified problem at Customer Sites with no onsite HP-OMS Personnel. o Notify HP-OMS about problems, which are identified as being outside the scope of this agreement, but may have an impact on the delivery of the services in the agreement. JOINT RESPONSIBILITIES o Schedule required downtime for fault isolation, maintenance and/or resolution. 3.2.3.3 BACKUP Backup management involves the scheduling, verification, completion and integrity of regular and optional extra backups of Customer's data to a backup media. This enables HP-OMS to restore Customer's data in the event of data being corrupted, destroyed or otherwise unavailable. There are several types of Backup Sets: daily, weekly, monthly, yearly and permanent. Backup Services includes safekeeping of the tapes on site and off site. Backup service also includes all restore activities. HP-OMS will execute backups, monitor them for completion, and troubleshoot them in the event of a problem. Backups may be full backups or incremental (only the changed data is backed up). 19 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description HP-OMS RESPONSIBILITIES o Perform scheduled and requested backups and restore of the entire server data required for recovery or any subset defined by the Customer. o Loading, unloading, labeling, on site storage of media and cleaning of backup hardware devices on class 1 sites (See EXHIBIT B SECTION 6.4 - SERVERS ENVIRONMENT). o Managing, labeling of media and cleaning of backup hardware devices on class 2 sites. o Troubleshoot the backup and restore process when an error condition or event is detected- 2nd level. o Adjust and maintain the backup job/script to correct or prevent problems. o Escalate backup problems, if needed, in accordance with the escalation procedures. o Identify and issue media requirements for the store / restore o Maintain responsibility for the quality and usability of backup data following the commencement date o Use open file Agent and application agents (such as Agent for Exchange and Database) for backup o Provide backup media tapes worldwide o Preparation and coordination of backup media to be shipped to safe locations o Report to the Customer the success/failure of company wide backup on a weekly basis. o Monitor all backup jobs o Communicate backup schedule to Customer's end user community at Customer Sites with HP-OMS on site personnel. CUSTOMER RESPONSIBILITIES o Communicate backup schedule to Customer's end user community at sites with no HP-OMS on site personnel. o Responsibility for the quality and usability of backup data completed prior to the start of this service through HP-OMS. o Loading, unloading, and storage of media on class 2 sites (SEE EXHIBIT B SECTION 6.41- BACKUP). o Responsible for off site backup storage. o Provide a safe location for backup media storage (On site and off site). o Approve backup and retention schedule 3.2.3.4 RESTORE HP-OMS will execute system restore operations to resolve system problems or, at the request of the Customer, restore any subset of files from the backup media. 20 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description HP-OMS RESPONSIBILITIES o Perform requested restores of the server data for recovery defined by the Customer. o Troubleshoot the restore process when an error condition or event is detected - 2nd level. o Escalate recovery problems, if needed, in accordance with the escalation procedures. o Responsibility for the quality and usability of backup data completed after commencement date o Performing a scheduled restore test to verify backup integrity as will be agreed with the Customer o Responsibility for correctly specifying destination of data, which is requested for restore. CUSTOMER RESPONSIBILITIES o Responsibility for correctly specifying destination of data, which is requested for restore, when not accepting HP-OMS recommendations. o Responsibility for the quality and usability of backup data completed prior to the start of this service through HP-OMS. JOINT RESPONSIBILITIES o In the event a backup is needed to be used for recovering loss of data, HP-OMS will decide with Customer the backup versions and procedures to use for restoring the data most accurately. 3.2.3.5 UPS HP-OMS will provide the customer with UPS services for the server environment to allow proper data save and server shutdown to prevent possible damage to information and/or to hardware infrastructure. HP-OMS RESPONSIBILITIES o Implement procedures to maintain UPS operations o Implement UPS solution on Customer sites where UPS is missing or insufficient (SEE EXHIBIT D SECTION 2.3.4 - TECHNOLOGY GAPS PER CUSTOMER SITE) 21 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description 3.2.4 SERVICE ITEMS - SERVICE MANAGEMENT -> SECURITY 3.2.4.1 SECURITY GENERAL The main task of Security Management is to assure that access to Customer Data and systems are granted to authorize Customer Employees and Contractors and HP-OMS Personnel only. HP-OMS will comply and mutually enforce with the Customer, the Security Policy that had been defined by the Customer prior to Commencement Date. Changes to the Security Policy will be done by Change Management Process only. HP-OMS MAINTAINS THE FOLLOWING SERVER SECURITY CLASSIFICATIONS FOR SERVER MANAGEMENT: INTERNET: Server directly connected to the public Internet, hosting Internet applications such as a Web Server or a Mail Server. By definition, this server is also considered as Stringent. STRINGENT: The confidentiality of the data is "highly sensitive", or access to the server includes "limited" or "public" access. BASELINE: All non-stringent servers managed by HP-OMS are considered to require baseline security. All servers are classified into one of these server security classifications and the security rules and guidelines are applied accordingly. Additional security rules defined by the Customer are optional and must not contradict those provided by HP-OMS. 3.2.4.2 SCOPE EXCLUSIONS The Security Management service does not include assistance, which involves program development, coding, and isolation of coding problems or implementation assistance regardless of the cause of data loss or hardware malfunctions. Security Management does not include consulting (IT Audit, Vulnerability Assessment or Application Security). 22 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description 3.2.4.3 RESPONSIBILITIES HP-OMS RESPONSIBILITIES o HP-OMS will work with the Customer to implement the outcome of the Customer's system and data classification. o HP-OMS will regularly operate software which will help enforce the decisions made by Customer as to which personnel will be permitted access to Customer's computing environment. o HP-OMS will implement Customer's security policy, which Customer shall provide during the Transition and Stabilization Phases. o Recommend security policy. CUSTOMER RESPONSIBILITIES o Approve security policy to be used worldwide JOINT RESPONSIBILITY o Customer and HP-OMS to take reasonable measures to confirm that only authorized users have physical access to Customer's environment. o Enforce security policy 3.2.4.4 PERIODIC PASSWORD CHANGES HP-OMS RESPONSIBILITIES o HP-OMS will change all default passwords and perform password changes to all HP-OMS owned user and Administration passwords and will change these passwords on a periodic basis - 6 characters at least, letter and numbers, 4 times a year and cannot be repeated in a 12 month period. o HP-OMS will be responsible for enforcing Customer's policy of changing passwords of logins used by end users at least once per quarter, unless required to do so on a more frequent basis. CUSTOMER RESPONSIBILITIES o Will change password when requested. NOTE: Password aging is optional on Baseline servers, but must be applied to administrative passwords on Stringent servers and to all passwords on Internet servers. 3.2.4.5 SECURITY PATCH MANAGEMENT Security patch management will be provided for the Customer's Stringent and Internet servers under HP-OMS management. 23 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description This proactive service coordinates and executes maintenance tasks in the Customer's environment with the goal of preventing unexpected downtime of infrastructure resources. HP-OMS RESPONSIBILITIES o Identify, obtain and coordinate installation of security software patches o Analyze security problems with the objective of identifying opportunities to prevent future failures. o Review recommendations with the Customer during Account Review. o Update the maintenance/patch log when maintenance is performed or security patches are implemented. o Make recommendations to the Customer for security patches and additional security maintenance activities according to HP-OMS's professional judgment. o Log and/or document any recommendation and action taken. CUSTOMER RESPONSIBILITIES o Customer will not unreasonably withhold permission to apply needed security patches. o Authorize HP-OMS recommendations prior to the actual implementation of major security patches or additional security maintenance activities. JOINT RESPONSIBILITIES o Schedule required downtime for patch management and maintenance. o Installation of security software or major upgrades will be mutually agreed upon. 3.2.4.6 WINDOWS SERVERS SECURITY MANAGEMENT WINDOWS DOMAIN MANAGEMENT HP-OMS will manage the system properties, system policies and services on each of the MS- Windows servers throughout the Customer's domain(s), including adding to or removing computers from the domain(s) as required, managing Trust relationships, User and Group accounts and the access rights to domain shared resources via group membership. 24 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description MS/WINDOWS SERVER VIRUS PROTECTION HP-OMS will provide server based anti-virus protection for all MS-Windows servers in the Customer environment including MS-Windows based Web, File, Mail, Application and/or FTP servers. Both regularly scheduled full server virus scanning and active continuous background scanning of files which have been downloaded, opened, created, modified, or run from all servers are included in the virus protection. HP-OMS will perform routine server scanning for known viruses at scheduled intervals. In the event of virus outburst or other virus crisis, HP-OMS will provide support and will manage the crisis through to its resolution. HP-OMS RESPONSIBILITIES o Provide server based anti-virus protection for all MS- Windows servers in the Customer's environment (Back office and DMZ) including MS-Windows based Web, Mail and/or FTP servers. o Perform routine server scanning for known viruses at scheduled intervals. o Send broadcast alerts concerning discovered viruses to Customer. o Configure the system to attempt to repair infected files as the primary option whenever a virus is detected. Infected files, which cannot be repaired, will be configured to deny end user access and will notify the end-users about such denial. o HP-OMS will implement Antivirus stabilization plan as described in Exhibit D (SECTION 2.3.2 - ANTIVIRUS STABILIZATION) o HP-OMS is responsible for communicating virus detection information to the appropriate Customer organization(s). o HP-OMS will not be responsible for lost data due to any limitations of virus detection software. CUSTOMER RESPONSIBILITIES o Customer is responsible for lost or destroyed data due to infections, caused by Customer Employees who disabled their Antivirus update and scan without HP- OMS' approval. JOINT RESPONSIBILITIES o Mutually agree on the schedule for virus scanning. 25 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description 3.2.4.7 OPERATIONAL CRITERIA THE FOLLOWING CRITERIA GOVERN THIS AGREEMENT: o The Customer is to forbid any of his employees, contractors or third party personnel to use any "hacker" tools, such as port scanners, password crackers, network sensors or Trojan horses on HP-OMS-managed systems and networks (including systems which are only crossed by HP-OMS) unless communicated to and approved by HP-OMS. HP-OMS will not be liable for any unauthorized system access or unavailability due to Customer's current or previous employees, contractors or third party personnel not following the security rules listed in this document. o The Customer's personnel must report any and all computer virus infestation immediately upon recognition to the HP-OMS MCC. o Passwords on Servers, Firewall or Router devices and SNMP community strings will not be shared with the Customer, unless specifically requested by Customer in accordance with the AGREEMENT, SECTION [21.3] (FILE ACCESS). 3.2.5 SECURITY AUDITS HP-OMS agrees to allow the Customer to perform security audits in accordance with the AGREEMENT, SECTION [10.10] (AUDIT RIGHTS). The Customer may, where appropriate, recommend improvements in HP-OMS's practices and procedures and the Parties shall together review and discuss the related correction plan. In the event HP-OMS's practices and procedures are not compliant with the requirements of this Agreement, HP-OMS shall at its cost promptly correct any such non-compliance. All changes will be done using Change Management Process. 3.2.6 PRIVILEGED ACCESS (ADMINISTRATIVE ACCESS) CUSTOMER RESPONSIBILITIES The Customer's users, who may need access to an administrative account on one or more of HP-OMS managed systems for their job, are required to complete a Privileged Access Request Form for submission to the Customer and HP-OMS Management for approval. (SEE EXHIBIT B, APPENDIX C) 26 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description 3.2.6.1 SECURITY POLICIES CUSTOMER RESPONSIBILITIES o Customer will assist HP-OMS to enforce the security policy company wide, approved by Customer during the Transition and Stabilization Phases. HP-OMS RESPONSIBILITIES o Provide a draft security policy covering Customer's IT Environment within ninety (90) days after the Commencement Date for Customer's review and approval during the Transition and Stabilization Phases o Any variations required by the Customer to these policies must be agreed and documented. o HP-OMS to implement, manage and support the Customer's security policy. JOINT RESPONSIBILITIES o HP-OMS and the Customer will define company wide security policy. o Changes to the security procedures, approved by Customer during the Transition and Stabilization Phases must be done in close cooperation with the Customer and must pass the Change Management process, as changes in this area will be vital for system integrity. 27 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description 4 UNIX MANAGEMENT SERVICE DESCRIPTION HP-OMS will provide Full Support (except as otherwise stated herein) of UNIX services. As of today, HP-OMS understands the UNIX operating system within the IT Environment, as defined in Exhibit B (SECTION 6.7 - UNIX SUPPORT AND ADMINISTRATION) as the description of the supported environment. HP-OMS takes full responsibility for all types of UNIX systems in use by the Customer (i.e. SGI, HP UX, AIX etc), which are still supported by the original manufacture. HP-OMS will provide Special Support on all UNIX systems, which are no longer supported by the original manufacture but are still in use by the Customer or its clients. TASK DESCRIPTION FOR UNIX SUPPORT: o Trouble-shooting and fault repair of problems within the UNIX environment (e.g.UNIX operating system problem) o Repair of workstations with related hardware. o Updating, installing, maintaining and removing operating system. o Reception of all fault notifications and work requests related to the UNIX management through HP-OMS's Ticketing System as well as relaying them to the agreed responsible organizations. o Hardware Installation of new equipment o Full responsibility of Hardware maintenance o Network support o Support UNIX R&D end-users o Scripts, patches, updates and modifications of UNIX systems and UNIX applications, which are not related to R&D coding and development. o Maintain full connectivity with MS-Windows server. o Installation and administration of Customer Software THE FOLLOWING ARE NOT IN SCOPE: o UNIX coding for R&D tasks 28 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description 4.1 SERVICE ITEMS 4.1.1 INCIDENT RESOLUTION o Troubleshooting and problem solving in the UNIX environment regarding events concerning hardware (e.g. workstations, peripherals, etc.), software and network. 4.1.2 HARDWARE INSTALLATIONS o Installation / setup of hardware comprise all of the tasks included in the hardware installation for end-users. A detailed description of such tasks is listed in Exhibit B (SECTION 6 SERVICES COMPONENTS). 4.1.3 SOFTWARE, OPERATING SYSTEM AND IMAGE INSTALLATION o Installation and update of software, operating system and standard images. A detailed description of tasks is listed in Exhibit B (SECTION 6 - SERVICE COMPONENTS). 4.2 ROLES AND RESPONSIBILITIES HP-OMS RESPONSIBILITIES o Document, qualify, and route requests and events under HP-OMS responsibility to the correct support resource, and escalate when necessary. o Regularly update the Customer regarding the status of incidents and progress made toward their resolution. o Notify the Customer's designated point of contact, as defined for a server and/or service, of detected events. o Monitor open incidents to ensure their progression to end user satisfaction. o Work on incident resolution as defined in the Exhibit B (SECTION 5 - INCIDENT MANAGEMENT). o Propose the necessary changes for events requiring solutions outside the scope of this agreement. o Notify Customer IT management about incidents that have exceeded escalation thresholds. o Maintain the necessary maintenance contracts and contacts with third parties suppliers. o Perform service recovery in the event of service down. 29 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description 5 BUSINESS APPLICATION SUPPORT HP-OMS will provide Business Application support for the Customer. Business Application Support is an additional layer of service as shown in EXHIBIT B, SECTION 6.12 and EXHIBIT I. 5.1 SCOPE HP-OMS is committed to provide the customer with an Application Support team. The team will provide applicative support and maintain the Customer's Business Application environment as agreed in EXHIBIT B SECTION 6.12 - BUSINESS APPLICATION SUPPORT. The Customer will provide HP-OMS with a yearly plan for the business application support services that will be according to Section 5 herein, EXHIBIT B SECTION 6.12 and EXHIBIT I. Changes to these services will be done by using the Change Management Process. CUSTOMER AND HP-OMS WILL MUTUALLY REVIEW THE SERVICE EVERY 6 MONTHS. 5.2 SERVICE ITEMS 5.2.1 APPLICATION SUPPORT Application support by HP-OMS is to be provided for the all applications, including without limitation: o [**] o Oracle Applications o Intranet applications o Kopel Reem o Replicon o Lavi o Synel JOINT RESPONSIBILITIES o Provide a yearly work plan for the Application Support team HP-OMS RESPONSIBILITIES o Maintain up-to-date documentation o For the above applications, HP-OMS will perform all support tasks as described in EXHIBIT B SECTION 6.12 - BUSINESS APPLICATION SUPPORT. 30 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description EXCLUDED: o HP-OMS will not provide 3rd level support, coding and customization services for the following applications: o Kopel Reem o Replicon o Lavi o Synel 31 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description 6 NETWORK MANAGEMENT SERVICE DESCRIPTION HP-OMS shall provide Full Support in connection with network management not including passive infrastructure. 6.1 SERVICE ITEMS 6.1.1 MANAGEMENT OF HUBS, SWITCHES AND ROUTERS This Section consists of ensuring that all network active equipment in the IT Environment is up and running. HP-OMS will perform the following tasks: o Network Software maintenance (OS support, application trouble shooting, etc.) o Backup of configurations for critical systems (if applicable) o Monitoring: up/down status, utilization, error rate, multicast/broadcast rate, etc. o Troubleshooting HP-OMS RESPONSIBILITIES o Provide the above mentioned deliverables o Maintain up to date documentation o Coordinate on-site intervention when needed o Maintain WAN infrastructure so that the monitored devices can be reached 6.1.2 DNS MANAGEMENT The Internet Domain Name Service (DNS) provides mapping between a human-readable domain name (e.g. www.hp.com) and the Internet Protocol (IP) address(es). All domain names are unique and must be registered with a recognized naming authority. The DNS management role is to maintain the translation mechanism up and running for DNS in Data Center as within the scope of this agreement. 32 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description HP-OMS will ensure that the service is up and running and answers the queries by performing the following tasks: o Troubleshooting of DNS problems o Configuration of the application including: o Creation of domains/sub domains structure o Delegation information o Configuration of master, slave, cache DNS o Separation between the internal and external DNS o Upgrade of version HP-OMS RESPONSIBILITIES o Provide deliverables as described above o Adding/deleting of DNS records (A, PTR, CNAME, MX) o Design/architecture of DNS platform o Mange and perform domain registrations for the Customer CUSTOMER RESPONSIBILITIES o Ownership, control and use of the domain name upon its registration, and are responsible for requesting any new domain from the Internet authorities. o Pay any fees associated with the local naming authority, designated agent or other Domain registration fees. 6.1.3 IP MANAGEMENT This service aims to enable network environment moves, additions and changes by logically providing addressing resources and name/address translation. It also maintains the translation mechanism up and running, and control of the IP addressing consistency. A unique IP address is allocated for each controlled and used network component such as PC, printer, scanner, hub, bridge, switch, and router. HP-OMS will manage the address space used by Tecnomatix, the management network, which is a private space. HP-OMS RESPONSIBILITIES o Provide management IP addresses (192.168.*.*, 172.17.*.* and 10.*.*.* ranges) 33 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description 6.1.4 VPN MANAGEMENT The VPN management module provides setup and operation services for IPSec tunnels (VPNs) built over CheckPoint FW1 equipment. This equipment, as of today, is being used to establish a connection between remote users to Tecnomatix computing environment and between sites that have only Internet connection. HP-OMS RESPONSIBILITIES o Execute any changes in the rules following the pre-agreed process of change o Perform the necessary maintenance, administration and configuration work on Firewall rules o Periodically change password for the roaming user Secure Remote CUSTOMER RESPONSIBILITIES o Defining security requirements 6.1.5 DHCP MANAGEMENT The Dynamic Host Configuration (DHCP) management service describes a network service, which automatically provides network configuration parameters to network devices, which have been configured to use DHCP. After obtaining configuration parameters via DHCP, the network device can then actively communicate with other devices in the network. HP-OMS will deliver the DHCP management for the entire network environment. The DHCP Management module includes supporting the following services: o DHCP Application Management o DHCP Server Management o Scheduled Maintenance Outages 34 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description HP-OMS RESPONSIBILITIES o Maintain configuration of DHCP application o Execute requested changes, following the Change Management process 6.1.6 RAS MANAGEMENT Secure Remote Access Services are provided by the VPN gateway on the existing Checkpoint Firewalls. The only way to connect to the Customer's network from remote is to first connect to the Internet (by Dial-up, DSL, Network or any other way) and then open a secure and encrypted channel to the Customer's network - VPN. HP-OMS RESPONSIBILITIES o Monitoring the availability of VPN connection. o Maintain configuration of VPN equipment o Execute requested changes, following the Change Management process o Periodically change password for the roaming user Secure Remote 6.1.7 FIREWALL MANAGEMENT The management of firewalls includes: o Configuration of rules for NAT, access, users' login, etc. o Troubleshooting problems with the firewall HP-OMS RESPONSIBILITIES o Provide deliverables as mentioned above o Ensure that the Security Policies are followed o Periodic changes to Secure Remote password for Secure Remote users o Maintain the latest security patches o Provide connectivity from any Customer Site to any Customer Site ("full mesh") o Manage and maintain the Gateway anti virus connectivity and functionality o Take all measure available by the Firewall (checkpoint) in use to enforce the security policy last approved by the parties. o Allow Customer to perform security audits in accordance with the AGREEMENT, SECTION [10.10] (AUDIT RIGHTS). 35 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description JOINT RESPONSIBILITIES o HP-OMS and the Customer will agree on a Change Request process for firewall changes, including a list of authorized requestors and approval personnel. 6.2 ASSUMPTIONS / REQUIREMENTS o For all network equipment under HP-OMS responsibility, only HP-OMS has the administration rights, and HP-OMS is able to modify password as often as required to be compliant with security policies o All devices must be SNMP compliant, with at least a read only access login, and have the ability to send SNMP traps to the monitoring station o Customer to provide up to date network topology map o Customer to provide a complete and up to date list of used/free IP addresses. 36 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description 7 PROCUREMENT AND IT ADMINISTRATIVE SUPPORT As part of HP-OMS project management duties and responsibilities, HP-OMS is committed to support the Customer's IT administrative processes. 7.1 PROCUREMENT SERVICES HP-OMS will centralize and manage the Customer's IT Procurement process. (The procurement process will not include the technology refresh as this is done by predefined schedules, which will be agreed upon every 6 months). The process will include the following components: o Hardware procurement o Software procurement HP-OMS Responsibilities: o Provide the Customer with information regarding the specific procurement process (i.e. costs, product specifications, price offers, etc.) o Provide the Customer with relevant information required for the decision to procure the necessary product o Perform the actual procurement including shipments to all Customer sites, staging and deployment of the procured item. o Issue an invoice to cover the procured goods as service if hardware will be owned by HP-OMS o HP-OMS will ask the vendor/3rd party provider to issue an invoice if the hardware or software will be owned by the Customer o HP-OMS will coordinate and supervise all 3rd party warranty and maintenance obligations under Third Party Contracts for HP-OMS Hardware and HP-OMS Software; o In the event that upon supplying any HP-OMS Hardware or HP-OMS Software (excluding the Fixed Assets), which is out of order or defective or otherwise requires repair, HP-OMS will contact the relevant vendor and will ship/receive /assemble /disassemble the same ("PURCHASED PRODUCTS"). 37 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit A - Service Description Customer Responsibilities: o Inform HP-OMS when hardware /software purchase is required o Approve purchase order prior to execution o Pay shipping costs (if necessary) o Pay the invoice submitted by HP-OMS according to Exhibit E (Pricing). Joint Responsibility: o HP-OMS and the Customer to define procurement procedures 7.2 IT ADMINISTRATIVE SERVICES HP-OMS will provide the Customer with IT management and administrative support services for no additional costs. HP-OMS will assign relevant administrative resources to services as described below to ensure continuation of IT administrative services for the following activities: o Software license management o 3rd party contracts management o Provide assistance with IT projects management o Provide assistance in planning future IT projects HP-OMS Responsibilities: o Provide the Customer or authorized 3rd party with any IT information requested by the Customer o Provide relevant IT information for creating RFI/RFP, etc. o Provide the Customer with technical definitions/requirements within 24 hours for urgent issues/projects o Provide the Customer with technical definitions/requirements within 72 hours for on going issues/projects Customer Responsibilities: o Inform HP-OMS about any process requiring any IT information o Inform HP-OMS about the need to receive assistance in planning/ managing IT projects 38 EX-99 9 exhibit-b.txt PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) Exhibit B Statement of Work (SOW) V 7.0 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) DOCUMENT INFORMATION Project Manager : Gil Tal Customer Project Manager : Na'ama Halperin Prepared by: Document Version No: V7.0 Preparation Date: 26/10/2003 2 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) INDEX DOCUMENT INFORMATION............................................... 1 DOCUMENT INFORMATION............................................... 2 INDEX.............................................................. 3 1 GENERAL ................................................... 4 DEFINITIONS ....................................................... 4 2 MANAGEMENT SUMMARY ........................................ 7 2.1 GENERAL.................................................... 7 2.2 INTRODUCTION TO IT SERVICE MANAGEMENT / IT INFRASTRUCTURE LIBRARY.... 7 THE PICTURE SHOWS THE PRINCIPLE ITSM REFERENCE MODEL....... 9 2.3 GENERAL TERMS.............................................. 9 3 SERVICE LEVEL MANAGEMENT .................................. 10 4 AVAILABILITY MANAGEMENT ................................... 12 5 INCIDENT MANAGEMENT ....................................... 13 5.1 PROCESS DESCRIPTION........................................ 16 5.2 SUPPORT WORKFLOW........................................... 21 5.3 SUPPORT WORKFLOW CHART..................................... 22 5.4 ESCALATION PROCESS......................................... 26 5.5 CALL FLOW.................................................. 26 5.6 BUSINESS APPLICATION HELP DESK............................. 30 5.7 TICKETING SYSTEM MANAGEMENT................................ 30 5.8 REMOTE AND TRAVELING END-USERS............................. 33 5.9 EMERGENCY ESCALATION PROCESS............................... 34 5.10 ADOPTING HP-OMS RECOMMENDATIONS- [MICHAEL: TO BE REVIEWED]. 38 6 SERVICE COMPONENTS ........................................ 39 6.1 SOFTWARE SUPPORT AND MIANTEINACE........................... 42 6.2 WES ENVIRONMENT SUPPORT.................................... 42 6.3 HARDWARE SUPPORT........................................... 45 6.4 SERVERS ENVIRONMENT........................................ 45 6.4.1 Backup ................................................. 46 6.4.2 General System Administration .......................... 47 6.4.3 Web servers: ........................................... 47 6.5 MAIL ADMINISTRATION........................................ 48 6.6 LAN/ WAN MANAGEMENT........................................ 48 6.7 UNIX SUPPORT AND ADMINISTRATION............................ 49 6.8 STORAGE SUPPORT............................................ 50 6.9 ANTIVIRUS ADMINISTRATION................................... 50 6.10 FIREWALL................................................... 51 6.10.1 Firewall Administration ................................ 51 3 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 6.11 CONTENT PROTECTION......................................... 52 6.11.1 Content Protection (Esafe) Administration .............. 52 6.12 BUSINESS APPLICATION SUPPORT............................... 53 6.13 INSTALL, MOVE ADD OR CHANGE (IMAC)........................ 54 6.14 SCOPE AND OUT OF SCOPE WORK................................ 55 6.15 TECHNOLOGY REFRESH PROCESS................................. 56 7 RELEASE TO PRODUCTION ..................................... 57 8 CHANGE MANAGEMENT ......................................... 59 8.1 ROLES AND RESPONSIBILITIES................................. 59 8.1.1 Change Manager(s) ...................................... 60 8.1.2 Change Advisory Board (CAB) ............................ 60 8.1.3 Change Requester ....................................... 61 8.1.4 Change Supervisor ...................................... 61 8.1.5 Change Tester(s) ....................................... 62 8.1.6 Change Coordinator ..................................... 62 8.1.7 Change Implementer(s) .................................. 62 8.2 CHANGE CATEGORIES.......................................... 63 8.3 PROCESS DESCRIPTION........................................ 65 8.3.1 Adding or Removing a Customer Site ..................... 66 8.3.2 Adding or Removing a System ............................ 66 8.3.3 Changing Service Level ................................. 67 8.3.4 Introducing or Eliminating a Service ................... 67 8.3.5 Emergency Change ....................................... 67 8.3.6 Process Flow Chart ..................................... 68 APPENDIX A: CUSTOMER STAFF AUTHORIZED TO TRANSFER CASES OR CALL HP-OMS ....................................................... 70 APPENDIX B: PRIVILEGED ACCESS REQUEST FORM ........................ 71 APPENDIX C: SECURITY AUDITS ....................................... 74 APPENDIX D: HP-OMS ACCEPTABLE USE POLICY .......................... 76 APPENDIX E: REASONABLE REQUEST TO REPACE KEY PERSONNEL, SECURITY OR COMMUNICATION SUPPLIERS CONTRACTORS ............................... 77 APPENDIX F: CHANGE REQUEST FORM ................................... 78 APPENDIX G - EMERGENCY ESCALATION PROCESS PHONE NUMBERS............ 80 4 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 1 GENERAL DEFINITIONS This Exhibit B is attached to the Master Service Level Agreement dated as of [______________] by and between HP-OMS and Customer (the "AGREEMENT") and made a part thereof by reference. All capitalized terms not otherwise defined in this Exhibit shall have the meanings ascribed thereto in the Master Service Level Agreement between the parties. The following terms shall have the meanings specified below: "CHANGE" has the meaning set out in SECTION [8] (CHANGE MANAGEMENT). "EMERGENCY CHANGE" has the meaning set out in SECTION [8.2], TABLE 8 (CHANGE CATEGORIES). "END OF QUARTER PERIOD" has the meaning set out in SECTION [4] (AVAILABILITY MANAGEMENT). "FULL SUPPORT" has the meaning set out in EXHIBIT A to the Agreement. "INCIDENT" means a fault, error, or problem in the IT Environment in respect to which Customer is entitled to Service in accordance with the Agreement. "IT ENVIRONMENT" has the meaning set out in EXHIBIT A to the Agreement. "ITSM" has the meaning set out in SECTION [2.2] (INTRODUCTION TO IT SERVICE MANAGEMENT / IT INFRASTRUCTURE LIBRARY). "MAJOR CHANGE" has the meaning set out in SECTION [8.2], TABLE 8 (CHANGE CATEGORIES). "MAKE IT WORK SUPPORT" has the meaning set out in EXHIBIT A to the Agreement. "MEDIUM CHANGE" has the meaning set out in SECTION [8.2], TABLE 8 (CHANGE CATEGORIES). "MINOR CHANGE" has the meaning set out in SECTION [8.2], TABLE 9 (CHANGE CATEGORIES). "MUO" or Multi User Outage is defined in EXHIBIT C, SECTION [2], TABLE 1. "OS" Operating System "PRIORITY" means either MUO, Critical, Regular or Low (as such terms are defined in EXHIBIT C, SECTION [2], TABLE 1), indicating the business impact to Customer of an Incident and thus the urgency for follow-up in accordance with the Service Levels. 5 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) "RFC" means Request for Change. "SERVICE LEVEL COMMITTEE" has the meaning set out in SECTION [3] (SERVICE LEVEL MANAGEMENT). "SERVICE COMPONENTS" has the meaning set out in SECTION [6] (SERVICE COMPONENTS). "SERVICE SYSTEMS" means the ticketing and monitoring modules of the "HP Openview" system, provided by HP-OMS for the provision of the Services, including without limitation, Incident management and monitoring of HP-OMS Hardware in accordance with the Service Levels. "SERVICE REQUEST" means Customer's formal request for Services when the Customer discovers an Incident. "SLM" has the meaning set out in SECTION [3] (SERVICE LEVEL MANAGEMENT). "TECHNOLOGY REFRESH ASSETS" has the meaning set out in SECTION [6.15] (TECHNOLOGY REFRESH PROCESS). "TICKETING SYSTEM" means the help desk management system within the HP Openview system. "VERSION RELEASE PERIOD" has the meaning set out in SECTION [4] (AVAILABILITY MANAGEMENT). 6 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 2 MANAGEMENT SUMMARY 2.1 GENERAL The Statement of Work (SOW) provides roles and responsibilities and detailed information as a basis for the delivery of the Services by HP-OMS, as well as for the future cooperation of Customer and HP-OMS. This exhibit describes the working process and the services during the Steady State, which is defined as the period following the end of the Transition and Stabilization phases. HP-OMS will support all projects, which were started prior to the commencement day (i.e. Windows and Exchange 2000). It is understood that the IT service functions and, thus the SOW may be improved in the future as the level of experience and knowledge about Customer's IT Environment and its use increases. The SOW consists of the following Sections: o Service Level Management o Availability Management o Incident Management o Service Management o Release to Production o Change Management This Section introduces the concept of the SOW and presents a summary description of each of the individual Sections as listed above. 2.2 INTRODUCTION TO IT SERVICE MANAGEMENT / IT INFRASTRUCTURE LIBRARY HP has been working with IT organizations around the world to develop the HP IT Service Management Reference Model ("ITSM") It provides a tool for initiating a meaningful dialog with HP-OMS's Customers concerning IT process requirements and solutions by providing a coherent representation of IT processes and a common language. 7 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) The ITSM incorporates many of the IT Infrastructure Library (ITIL) best practices, which are relevant to the provision of the Services. ITIL is a UK government standard manifested in a library of books describing 'best practices' for delivering and managing IT service functions. The aim of the ITIL is to facilitate improvements in efficiency and effectiveness in the provision of quality IT services and the management of the IT infrastructure within any organization. In order to take advantage of the ITSM this document will show services as a function of the ITSM reference model. The advantages are: o ITSM/ ITIL is a 'complete' description of IT service functions/processes o Service activities are clearly defined allowing clear allocation of responsibility and clearly delineated separation and integration points HP-OMS will provide the Sercvices based on ITSM guidelines. 8 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) THE PICTURE SHOWS THE PRINCIPLE ITSM REFERENCE MODEL. 2.3 GENERAL TERMS This SOW refers to the steady state of the Services provided by HP-OMS to the Customer. The steady state is defined as the time following the Transition and Stabilization Phases at each Customer Site (see description in EXHIBIT D). The Transition and Stabilization Phases are described in detail in Exhibit D - Transition and Stabilization The SOW describes the processes that are used to deliver the services for HP-OMS Hardware, HP- OMS Software, Customer Software and Customer's proprietary Software defined in the Agreement. 9 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 3 SERVICE LEVEL MANAGEMENT The SERVICE LEVEL MANAGEMENT process is used to verify with the Customer that the Service is delivered according to the agreed Service Levels and their parameters. In the face of changing business needs, service level management adapts quality and/or quantity parameters. HP-OMS will nominate a service level manager ("SLM") who will be responsible to verify that the Service Levels are achieved. Once a month, on or before the 15th day of each calendar month, the SLM will issue a report that will compare the actual service levels achieved with the Service Levels required to be achieved. A Service Level committee will review the report and determine the corrective actions to be taken (the "SERVICE LEVEL COMMITTEE"). From HP-OMS, the participants on the Service Level Committee will be the HP-OMS Project Manager, the Technical Manager and the Service Level Manager, unless otherwise agreed by the parties. From the Customer, the participants on the Service Level Committee will be the Director of IT and the Global Infrastructure Manager, unless otherwise agreed by the parties. HP-OMS RESPONSIBILITIES o Provide the Customer with the Services described in the Agreement. o Provide a primary contact who will be the HP-OMS SLM o Collect, consolidate, distribute and maintain data to provide standard reports for the services being delivered o Evaluate monitored system events and thresholds to ensure their appropriateness and accuracy o Produce regular reports as defined in Exhibit B o Perform actions necessary to achieve the Service Levels o Perform special correction actions when the Service Levels are not met by HP-OMS at HP-OMS' cost and expense, to ensure that the Service Levels are met in the next monthly measurement period. 10 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) CUSTOMER RESPONSIBILITIES o Provide a primary contact as a counterpart to HP OMS's responsible Project Manager o Notify HP-OMS prior to making changes in their business processes or organization that may have an impact on the service to be delivered JOINT RESPONSIBILITIES o HP-OMS and Customer will review Service Levels achievement and determine necessary amendments/changes to service 11 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 4 AVAILABILITY MANAGEMENT The AVAILABILITY MANAGEMENT process focuses on achieving and measuring the agreed availability levels for the IT Environment (defined in EXHIBIT A and EXHIBIT C APPENDIX A). The Service Level Committee will manage availability of the IT Environment in accordance with the Service Levels. When a planned downtime is required, HP-OMS will coordinate planned downtimes with the Customer. The last two (2) weeks of the quarter and the first four (4) weeks of a new quarter are considered "END OF QUARTER PERIOD". The last three (3) weeks before any major version release of Customer's proprietary Software are called "VERSION RELEASE PERIOD". Planned downtime will not accrue during the End of Quarter Period and/or during the Version Release Period, except for emergency cases and where approved by the Customer IT Director AND the relevant Country manager using the Change Management Process. In addition HP-OMS will have a planned down time window as detailed in EXHIBIT C SECTION 3.3 (DOWNTIME). HP-OMS RESPONSIBILITIES o Coordinate with Customer all planned downtimes required to deliver the agreed service and will make best efforts to perform maintenance work during non - working hours. o Monitor the infrastructure availability and report to the Customer on a monthly basis CUSTOMER RESPONSIBILITIES o Follow HP-OMS recommendations for good availability practices (e.g. provide planned downtimes to allow HP-OMS to performed proactive maintenance and consistency checking jobs). o Notify HP-OMS about changes in Customer business processes that may impact the service availability. JOINT RESPONSIBILITIES Customer and HP-OMS will agree on a defined maintenance window, which will allow HP-OMS to perform proactive maintenance for system administration tasks to improve service performance. Downtimes will be scheduled to after working hours of the relevant site and will be planned not to occur during Version release Period or End of Quarter Periods. 12 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 5 INCIDENT MANAGEMENT The Incident management process describes the process to resolve Incidents. An Incident may be reported to HP-OMS, either as a Service Request or as an automatic alert generated by the Incident Management System. The INCIDENT MANAGEMENT process objective is to re-establish the Service affected by the Incident as soon as possible following an Incident and to minimize the disruption consequences. All Incidents will be classified by priorities. A four stage process analyzing the following factors determine Incident Priority: o The number of users affected by the Incident o The severity of the problem o The business risk o The number of Customer Sites affected by the Incident Priorities are ordered from 1 to 4 where 1 is termed "MUO" (Multi User Outage), 2 " Critical ", 3 "Regular" and 4 "Low". A matrix showing the Priority as a result of these four (4) factors is shown in EXHIBIT C, SECTION 2 - (PRIORITIES) 13 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) TIERS OF SUPPORT HP-OMS will provide the Customer with three Tiers of support: 1st Tier - support that the local HP-OMS Personnel provide at the applicable Customer Site; 2nd Tier - support from the MCC; 3rd Tier - MCC escalates the problem to HP-OMS experts or a third party supplier (Remote users or Customer Employees who are traveling shall receive 1st and 2nd Tier Support from the MCC) HP-OMS RESPONSIBILITIES o Document, qualify and route the requests and events under HP-OMS responsibility to the correct support resource, and escalate when necessary, o Regularly update end-user about call status and progress made. o Monitor open Incidents to ensure their progress towards end-user satisfaction o 1st, 2nd and 3rd Tier Incident resolution of all events and Customer requests & the execution of routine change orders o Propose the necessary changes for events requiring solutions outside the scope of the Agreement and provide such changes under change management process o Monitoring and reporting of service performance o Provide to the Customer a list of point of contacts (EXHIBIT G) o Invest constant efforts without any interruptions until a solution is found for problems of the first 2 priorities (MOU and Critical) or Customer's representative will agree to a temporary solution o Provide technical support as described in this Exhibit SECTION 6 - SERVICE COMPONENTS o Solve service tickets submitted by end-users o Software distribution 14 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) CUSTOMER RESPONSIBILITIES o Provide HP-OMS personnel with necessary access to all sites where operational. o Provide access to the IT infrastructure (Servers, Network Routers...). o Provide access to the Telecom infrastructure as required to provide in scope services o Provide a list of contacts authorized to raise requests, and/or to receive notification for pre-defined events (APPENDIX A herein) o Supply information required to access application support team as well as third party contacts, if maintained by Customer o Open Incidents (service request) via web interface, if possible, and provide a description of the request including contact information o End-users should respond to HP-OMS request for information regarding an Incident o Assist HP-OMS with necessary activities to resolve problems (e.g. test, onsite help, etc.). o Inform HP-OMS of planned changes to user numbers (differences of greater than 10% plus/ minus) or Customer Site locations to ensure no degradation of service. JOINT RESPONSIBILITIES o Customer & HP-OMS will be responsible to define and validate most Desktop and Laptop Software images used by end-users. o Customer & HP-OMS will record Incident ID for further reference. 15 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 5.1 PROCESS DESCRIPTION HP-OMS SUPPORT PROCESS: 1) Class 1 Sites- Include sites which are R&D centers and have [**] or more R&D users or general sites with [**] or more end-users 2) Class 2 Sites- Include general sites which have less then [**] end-users or R&D sites with less then [**] R&D users but more then [**] 3) Class 3 Sites - Include sites with [**] or less users, include end-users located on very small Customer sitesand Home users who are working from home as their main working place. Home Users - Include end-users working from home as their main working place 4) Customers' Customer Site Users - Include end- users working on Customer's customer site (e.g. BMW) as their main working place 5) Traveling Users - Include end-users that are traveling away from the customer sites described above Support delivery overview is detailed in Figure 2 (Support Provision for End-Users) herein In order to carry out support operations worldwide, HP-OMS will set up a Monitoring and Control Center (MCC). This center will operate with on-site support engineers 24/6 (according to MCC Service Window as detailed in Exhibit C section 3.2), and will have the following duties and responsibilities: o Infrastructure monitoring management o 2nd and 3rd Tier support o Crisis management o Windows & Unix system administration o Exchange administration o Oracle database administration and management o Information security management o Web servers management (not include content management) 16 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) o Network monitor and management (Including WAN connections) o Firewall & Anti virus management o Monitor and control all open Service Request tickets worldwide o 3rd party contracts management o Professional's asistence management o Escalation to Key Personnel or to Professionals when requieured 17 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) FIGURE 2: SUPPORT PROVISION FOR END-USERS 18 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) To provide 1st Tier support for end users, HP-OMS will setup Regional Support Centers (RSC). RSC will be combined with permanent on site personnel (on Class1 sites) and by HP-OMS personnel visiting on site per request due to Incident or scheduled maintenance task (on Class 2 sites). RSC will have the following duties and responsibilities: o 1st Tier support o Hardware break/fix o Hardware install o On site technical support o Backup operation o Software installation and support o IMAC (Install, Move, Add, Change) - See details in Section 6.13 HEREIN (INSTALL, MOVE, ADD OR CHANGE (IMAC)) o Escalation to MCC Service request tickets from end-users located on sites bound to RSC will route to a regional work queue and will be handled according to ticket's Priority. [**] 19 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) HP-OMS Regional Support Center (RSC) Personnel will provide assistance for issues requiring 1st Tier support or technical support, which requires presence on site (on Class 1&2 sites). Support procedure will be based on the Ticketing System, which will route services request tickets to pre-defined work queues. The queue is set according to the end-user regional location, the content of the problem, Customer working process and the handler. SERVICE REQUEST INITIATION The Ticketing System will be web based and will run over the Internet (Naama: Internet was decided between Harel and Erez in the past so it will be accessable by end-users who can't access the intranet). The system will be accessible worldwide to all Company end-users providing user name and password. It will be mandatory for all Customer employees to open a Service Request ticket using the Ticketing System in order to receive service except for the occasions listed below. The Ticketing System will also allow end-users to view and check the status of their open Service Request ticket via the web interface. No services will be given to end-user unless ticket has been submitted using the Ticketing System. In the unlikely event that the Ticketing System is down, HP-OMS will notify/redirect end-users to temporarily submit Service Requests via email, phone or fax. EXCEPTIONS HP-OMS will allow end-users to initiate Service Requests using email, phone or fax submission if the Service Request meets one or more of the following conditions: o End-user requires service but is unable to connect to the Internet to submit a standard Service Request ticket o End-user has problem with his/her personal computer and has no access to another computer which would allow him/her to submit a standard Service Request ticket o End-user is in the contact list specified in APPENDIX A herein - Customer staff authorized to transfer cases or call HP-OMS o Ticketing (Service) System is not available o End user traveling or located at Customer's Customer Sites 20 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 5.2 SUPPORT WORKFLOW End-users on Class 1 sites, Class 2 sites, sites with less then 3 users and home users are required to open a Service Request ticket for all cases, which requires technical support with the exceptions described above. Support process for traveling users and users at Clients sites will be done by MCC as detailed in SECTION 5.1 and 5.6 herein. In the event the Service Request was not submitted directly by the end user [I.E. VIA THE INTERNET], it will be submitted to the MCC and the ticket ID will be given to the initiator. The system is receiving tickets from registered end-users and proactive alerts [i.e. automatically generated Incidents] from infrastructure monitoring environment (i.e. Open View monitoring alerts). The Ticketing System will route Service Request tickets to the appropriate work queue. TABLE 5: EXAMPLE CASES OF TICKETING SYSTEM ROUTING:
SITE NAME & CLASS CASE OUTCOME - -------------------- ------------------------------------- ---------------------------------------- Service request will be submitted to RSC work queue for assistance. RSC Class1 End-user submits a ticket, on site support person will provide the requesting help end-user with 1st Tier support as required. End-user submits a ticket, Service request will Class 2 requesting help be submitted to RSC work queue for handling. RSC support person will contact the end- user and provide him with remote control assistance. If the end-user will require on site help, RSC will engage HP authorized personnel, who will arrive to Class 2 site and provide on site support according to the appropriate SLA.
21 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW)
End-user submits a ticket, Service request will be submitted to Class1 asking to open mail account for MCC (Monitor & Control Center) new employee work queue for resolution Traveling End user calls MCC and MCC will open Service End- user requests help Request that will be submitted to MCC work queue.MCC support person will provide the end-user with remote assistance. If the problem requires hardware/on site help, MCC will direct the user to Customer's nearest site. In the event there isn't a nearby site, MCC will direct the user to the nearest HP-OMS authorized support contact.
RSC and MCC support personnel will use remote control technology to resolve end-user technical issues. At Class 2 sites, where there are no permanent HP-OMS personnel, in situations which will require on site technical assistance, MCC and RSC will operate HP-OMS authorized personnel, who will arrive to the end-user site according to SLA as defined in EXHIBIT C. For Incidents initiated for an individual issue, HP-OMS will verify with initiator that he/she approves the problem was fixed prior to closing the ticket. 22 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 5.3 SUPORT WORKFLOW CHART Figure 3 - support workflow chart for Class 1, Class 2 and Home end users 23 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) Figure 4 - support workflow chart for Class 1, Class 2 and Home end users 24 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) TABLE 6: SUPPORT CLASSIFICATION BETWEEN MCC AND RSC The Table below describes, without limitation, the major functions of the MCC and the RSC. INSCOPE OWNER OUT OF SCOPE - ------------------------------------- ------------ ------------- [**] [**] [**] [**] Escalation Management MCC Exchange administration MCC [**] [**] [**] [**] 2nd and 3rd Tier support MCC Crisis management MCC [**] [**] 3rd party contracts management MCC System management & maintenance o Install patches o Change parameter o File system modifications MCC o User setup [**] [**] [**] Remote traveling users MCC Hardware break/fix RSC Hardware replace RSC [**] [**] [**] 25 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) In scope Owner Out of scope - ----------------------------------------- --------------- ---------------- 1st Tier support RSC General Software support RSC All Customer purchased application on RSC make it work basis 5.4 ESCALATION PROCESS Service request tickets from Class 1 sites will receive 1st Tier Support on-site according to the Ticketing System routing process. Service request tickets from Class 2 sites will receive 1st Tier Support off-site according to the Ticketing System routing process. Service requests, which are not resolved by RSC will be escalated to HP-OMS Monitoring and Control Center (MMC), which will act as 2nd Tier support. The person who escalated the issue will own all 2nd Tier escalated Tickets. This is to maintain the principal of HP-OMS's SPOC (Signal Point Of Contact). All escalated Tickets will be continually managed until final resolution of the problem. Service requests, which are not resolved by MCC, will be escalated to HP-OMS Professionals or other 3rd party that will act as 3rd Tier support who will support the MCC at the background. Service requests, which are not resolved by HP Professionals, will be escalated to HP-OMS Key Personnel that will also act as 3rd Tier support and will verify the resolution of the Service Request according to the SLA measures. 5.5 CALL FLOW End-user at Custoemrs' Custoemr Sites or Traveling users will call MCC to request for Service. MCC will open a ticket on the Ticketing System onbehalf of the users and provide the services according to Service Request Priority and the nature of the problem. The handling of the Service Request will be according to the Support Procedure and Escalation Procedure and the SLA described in EXHIBIT C. Figure 5 - Call flow and escalation process 26 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 27 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) REPORTING: HP-OMS MCC will provide the Customer and HP-OMS Project Manager with on going reports, which will include the type of service provided worldwide. HP-OMS will update the form of the reports according to Customer's requests. HP-OMS reports to the Customer will include: WEEKLY REPORTS: o Total number of service tickets for period o Calls per sites per priority o Class classification per priority o Top 3 most common service categories o Failed service tickets: o Total number of tickets including failed tickets percentages o Missed SLA tickets per service o Number of IMAC requests o Back log tickets - Tickets that remain unsolved from the last week o Average Time to resolve a ticket by priority o Overall ticket report by priority (display the total number of tickets per priority and the resolution time for those tickets on the same graph) o Maxuimum repair time - Time to fix tickets which failed their SLA MONTHLY REPORTS: o Total number of service tickets for period o Calls per sites o Top end-users with most calls o Top 3 most common incidents category o Service incidents trends o Number of IMAC requests o Average Time to resolve a ticket by priority o Maxuimum repair time - Time to fix tickets which failed their SLA o Failed tickets: o Total number of tickets including failed tickets percentages o Failed tickets per service 28 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) QUARTERLY/ANNUALLY REPORTS: o Quarterly service incidents trends: o Availability trends o Time to resolve trends o Number of end-users per number of tickets o Number of users trend o IMAC requests compared to HP-OMS commitment o Total SLA commitment for credit It will be the responsibility of the HP-OMS Project Manager to analyze these reports and investigate exceptional cases (e.g., more then X Service Requests from end-users per month, service tickets which missed their SLA (miss commits) and verify that the service provided was correct, and whether a service/technical change or adjustment is needed. HP-OMS will also provide Customer with hardware and software asset reports on a quarterly basis. Reports should be provided by HP-OMS in the formats set out in Appendix H hereto, and shall be reviewed by the Service Level Committee, as described in SECTION 3 (SERVICE LEVEL MANAGEMENT). 29 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 5.6 BUSINESS APPLICATION HELP DESK As described in SECTION 6.12 (BUSINESS APPLICATION SUPPORT), HP-OMS will provide the Customer with support services for business applications. HP-OMS will consolidate current Customer helpdesk support (except for [**] support) process into Service Desk Ticketing System (SEE SECTION 5.7 - TICKETING SYSTEM MANAGEMENT). The consolidation process will make the current working process more efficient and will provide the benefits of using a workflow and escalation Ticketing System with report abilities. HP-OMS defined the Business application Help Desk consolidation into Service Desk, as part of the Ticketing System projectas deribed in EXHIBIT D. During consolidation process, HP-OMS and the Customer will work together to analyze the working process and the relationships the help desk presently has with groups and end-users across the company. The outcome of this process will be a workflow process, which will be implemented into Service Desk Ticketing System. For [**] support, HP-OMS will continue the current work-flow using the [**] module. As recommended for the regular support process (SECTION 5.2 - SUPPORT WORKFLOW), a similar support process will be defined for the application helpdesk. It will have a dedicated work queue, which will be managed according to ticket priority and its content and will integrate with the Company's global support process (SEE 5.3 -SUPPORT WORKFLOW CHART). 30 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 5.7 TICKETING SYSTEM MANAGEMENT Upon logging a ticket in Service (Ticketing) Systems the data linked to a user is automatically shown. This means that the geographical location, user's direct manager, user's contact details and configuration items such as PC and Monitor, Printers and Servers in use can be linked to the user. The search engine also provides the possibility to search by either User ID, user name or Workstation name. In populating information automatically, Service Systems provide the history of the user including old tickets and current tickets which are in the process of being resolved as well as information about the Hardware being used by the end user. Service Systems preserve all information regarding a ticket including the source, Incident or request details as well as the resolution. Closed tickets serve as a knowledge base or repository of past problems and resolutions and are used to increase the resolution rate of the support personnel at the 1st Tier support, particularly for cases that are linked specifically to the Customer's IT Environment. Through the use of Service Desk, HP-OMS is able to track tickets, manage Incidents, manage and report Service level achievement. Service Systems also enable HP- OMS to produce reports and information necessary to track performance against these Service levels. As an ongoing improvement function, HP-OMS will continually analyze the reports to understand trends and whether any changes should be recommended to optimize service delivery and improve End-User productivity. Web version of the tool allows the Service provider to commence working toward the resolution of an Incident in 'real time' without having to once again ask the end-user to repeat their question or Incident. Service desk network traffic works over http protocol and will have minimal impact to network infrastructure. 31 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) SUPPORTED LANGUAGES: Official supported language by HP-OMS will be English including phone support. In some of Customer's sites, HP-OMS will provide a Ticketing System with end users' User Interface (UI) in the following languages: o English o French o German o Japanese (Kangi) In case that the number of employees in the region using Mandarin language will reach or exceed 7% of the total number of end-users, HP-OMS will provide a user interface for the web ticketing system in Mandarin language. The system will display the Ticketing System pages including the drop down menus in the languages mentioned above. If the end user will require/wish to enter free text the system will recommend him/her to use English text only. Customer's employees that can't use English will be able to submit the ticket description in their local languge. At locations where the above languages are not the local languages, UI will be displayed in English. 32 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) SYSTEM IMPLEMENTATION: HP-OMS defined Ticketing System implementation, as part of the projects necessary for the Stabilization phase (EXHIBIT D). During implementation process, HP-OMS and Customer will work together to analyze the Customer's working process HP-OMS in use methods. The outcome of this process will be a workflow procedure to be implemented into Service Desk to be used for on-going support operation. As part of delivering the product, HP will provide the Customer representative access (read only) to the system, the ability to generate reports and access to the system database to allow the Customer to generate custom reports. 5.8 REMOTE AND TRAVELING END-USERS As discovered during the Due Diligence phase, there are end-users who work from home, traveling end-users , end-users working at sites with less then 3 end-users and end users working at Customer's client sites. The support process for home users and users that are working from sites with less then 3 end-users will rely on the global support process describe in SECTION 5.2 - SUPPORT WORKFLOW and will have the following exceptions: o Home users and users that are working from site with less then 3 end-users will be able to contact the local support person by phone in the event of mass failure which prevents him/her from submitting Service Request tickets (according to procedure that will be agreed) o Service Desk Ticketing System will prompt every user for his/her location. End-users who are geographically close to an existing site will select the site as their location and will receive support by the local RSC o On personal home computers (not belonging to or not purchased by the Customer or not HP-OMS Hardware), support will be limited to ability to use Secure Remote to access mail and file services only Home PCs which are the property of the Customer or HP-OMS Hardware will be fixed on Customer's site The support process for traveling users and users that are on Customer' s Customers sites will rely on the Call Flow described in Section 5.8 (Remote and Trevelling End-Users). Support Process is described in SECTION 5.2 (SUPPORT WORKFLOW) and will have the following exceptions: 33 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) o HP-OMS will provide 1st Tier support by phone to the above users by MCC (see Figure 2 for support levels description) o Remote end-users who are traveling will receive phone support 24/6 (according to MCC Service Window as detailed in Exhibit C section 3.2) by phone or a beeper to the MCC. MCC will provide any remote assistance possible for traveling users. o In the event end-user will be directed to a beeper or a Voice Mail, MCC will contact the end-user within 30 minutes from the moment a message is left (MCC support for traveling users based on the assumption that at any given time, a maximum of 100 end-users will be traveling out of their original office) EXCLUDED (WILL NOT BE SUPPORTED BY HP-OMS): o HP-OMS will not support any home computer (hardware and software) except for the ability to use Secure Remote. o HP-OMS will not provide on site support at end- user or non-standard locations (end- user home, hotel, etc.) 5.9 EMERGENCY ESCALATION PROCESS HP-OMS will provide the Customer with 2 emergency contact details: (1) HP-OMS Key Personnel; and (2) MCC (Monitor & Control Center) with a 24/7 technical emergency phone number, as detailed in Appendix G herein (Emergency Escalation Process Phone Numbers). Only a Customer Contact listed in APPENDIX A herein is permitted to "escalate an Incident", i.e., for the purpose of changing the Priority of an Incident. Accordingly, a Customer user shall contact one of the Customer Contact persons when the user believes there is a requirement for such escalation. If the Customer Contact person chooses to escalate the Incident, he/she will contact one of the emergency contacts detailed above. 34 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) If the Contact Person is directed to a beeper or a Voice Mail, the MCC is responsible to contact him/her back within thirty (30) minutes from the moment a message has been left. The Customer Contact persons may escalate an Incident priority to any priority. Examples of when an escalation can occur are as follows: o The Customer Contract has no ability to report an Incident to the Ticketing System because of technical problems. o An Incident has been opened and there is a need to increase the Priority in order to achieve a faster resolution time. o An incident has been opened and HP-OMS has not resolved the Incident in accordance with the Service Levels, resulting in a need to increase the Priority in order to achieve a faster resolution time. HP-OMS RESPONSIBILITIES o For technical emergency escalation process, HP- OMS MCC will activate all necessary contacts to ensure problem resolution according to HP-OMS' Service Level commitments. o Upon initiation of a service emergency escalation process, the HP-OMS Project Manager will conduct a process investigation. o HP-OMS Project Manager will ensure resolution according to HP-OMS' Service Levels o HP-OMS will submit a report to site/office manager and Customer's HP-OMS coordinator as described in Appendix H herein (Escalation Management Report). o Upon logging of MUO or Critical Incidents, or changing the Incident priority to MUO or Critical, HP-OMS will work continuously on resolution until problem is solved or Customer's representative approves a work around or temporary fix, in accordance with the Services Levels and subject to the applicable Service Level Credits. 35 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) CUSTOMER RESPONSIBILITIES o Instruct the contact persons listed in Appendix A herein about the conditions to use the above process. The Customer will emphasize that the process should be initiated on emergency cases only. 36 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) FIGURE 6: ESCALATION PROCESS WORKFLOW 37 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 5.10 ADOPTING HP-OMS RECOMMENDATIONS- [MICHAEL: TO BE REVIEWED] If, in order for HP-OMS to meet the Service Levels, HP-OMS determines that a Change or an action must be taken (HP-OMS Recommendation). This Recommendation will be introduce by using Change Management Process and can be one of the following: 1. HP-OMS Recommendation that does not require additional costs: The Recommendation must be reviewed by the Change Advisory Board (CAB). In cases of service failures before the change was implemented or if the customer did not approve the recommendation - The related service will be measured in parameters different then the original SLA parameters during the resolution time but all other SLA indicators will be kept. 2. HP-OMS Recommendation that required additional costs: (i) Borne and paied by HP-OMS, provided that HP-OMS should have reasonably foreseen this requirement, based on its review of Customer's requirements during the Due Diligence process; (ii) Borne and paied by the Customerif HP-OMS should not reasonably have foreseen this requirement, based on its review of Customer's requirements during the Due Diligence process; or (iii) Addressed according to another mechanism, if mutually agreed by the parties. In any case, HP-OMS shall provide at least two (2) different technical recommendations for a resolution of the foregoing problem. 38 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 6 SERVICE COMPONENTS The following table describes the ownerships and the level of responsibility for the major services and process setout under this agreement: "OWN" means the highest level of responsibility that a party has for a service or a process or a function set out in this agreement. Including, without limiting: Full Support, propriety ownership, managing, maintaining, operating, updating of a service or a process or a function set out in this agreement "PARTICIPATE" means responsibility of a party to ensure that the other party can do fill its responsibility for a service or a process or a function set out in this agreement. Including, without limiting: assist, report, reply support, inform in regarding of a service or a process or a function set out in this agreement TABLE 7: MAJOR SERVICE COMPONENTS DESCRIPTION
MAJOR SERVICE ITEMS HP-OMS CUSTOMER WORK REFERENCE COMMENTS - ------------------------- ----------- ---------- ----------------- ------------ WES - Workstation Own --- EXHIBIT A - Environment Services SECTION 2 EXHIBIT B - SECTION 5.2 Server Environment Own --- EXHIBIT A - Management SECTION 3 EXHIBIT B - SECTION 6.4 Hardware Support Own --- Exhibit A - Sections 2,3 EXHIBIT B - SECTION 5.3 Mail Administration Own --- EXHIBIT B - SECTION 5.5 Exhibit C - Section LAN / WAN Management Own --- EXHIBIT A -
39 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW)
MAJOR SERVICE ITEMS HP-OMS Customer WORK REFERENCE Comments - ------------------------- ----------- ----------- ----------------- ------------ Business Applications According According to EXHIBIT A - (Clarify, to Exhibit Exhibit N SECTION 5.2.1 Business Object, N Table 1 Table 1 EXHIBIT B - Web Intelligence, Citrix) SECTION 6.12 Other Business Application: Participate Own EXHIBIT A - Customer is Systems Union SECTION 5.2.1 the owner of Lavi EXHIBIT B - the Software. Kav Ma'arch SECTION 6.12 HP-OMS will Kopel Reem provide Make Replicon It Work support Customer Software Participate Own EXHIBIT B - Customer is the SECTION 6.1 owner of the Software. HP- OMS will provide Make It Work support Customer Proprietary Participate Own Exhibit B - Customer is the Software owner of the Section 6.1 Software. HP-OMS will provide Special Support Oracle Application Participate Own Exhibit B - Customer is Section 6.1 the owner of the Software. HP-OMS will provide Make It Work support
40 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW)
Statement of Work (SOW) MAJOR SERVICE ITEMS HP-OMS Customer WORK REFERENCE Comments - ------------------------- ----------- ----------- ----------------- ------------ HP-OMS Software Own Participate EXHIBIT A - SECTION 2 EXHIBIT B - SECTION 6.1 EXHIBIT C - SECTION 1.8 HP-OMS Software, Own --- Exhibit A - Customer Software SECTION 7.1 license management Exhibit E - and procurement Exhibit C - SECTION 1.8 UNIX Support Own Participate EXHIBIT A - SECTION 4 Exhibit B - SECTION 6.7 Storage Support Own --- EXHIBIT B - SECTION 6.8 Security Systems Own Participate EXHIBIT A - o Anti-Virus; SECTION 3.2.4 o Firewall; and Exhibit B - o Content Protection Sections 6.9, 6.10, 6.11 Incident management Own Participate Exhibit A - SECTION 2.2.1 Exhibit B - SECTION 4 Weekly/Monthly/Quarterly Own Participate EXHIBIT B - Reports SECTION 5 IMAC Own Participate Telephony --- Own Exhibit A - Section R&D Tasks --- Own Exhibit A - Section Technology Refresh Own --- Exhibit E - Section EXHIBIT C - 1.8
41 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 6.1 SOFTWARE SUPPORT AND MIANTEINACE In order to define the Parties duties and responsibilities as for Software support, all Customer Software and HP-OMS Software items have been classified in Exhibit I Table 1.The classification was done according to the levels of support, 3rd party support and maintaince and Software upgrades responseblities. 6.2 WES ENVIRONMENT SUPPORT HP-OMS will perform Full Support, including without limitation, troubleshooting and problem solving in the IT Environment regarding events concerning hardware (e.g. workstations, peripherals, etc.) and software, including the following tasks: 1. Problem analysis 2. Preliminary search of the source of problem in network related problems 3. Restoration of service as soon as possible (with temporary fix if needed) 4. Directing hardware to maintenance in the event of hardware failure 5. Problem escalation to specialist if needed 6. Remote user support: Dialup tool (AT&T, Secure remote) - If applicable HP-OMS will deliver an operational Computer PC or laptop device to a Customer's end-users as required and agreed. The PC / Laptop delivery will comprise the following tasks: 42 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) o Assembly and installation of operating system and pre-defined utilities and applications o Functional testing of hardware o Deployment of clients based on agreed configuration specifications, acquisition rate and schedule HP-OMS WILL PROVIDE FULL SUPPORT FOR HP-OMS SOFTWARE, INCLUDING BUT NOT LIMITED TO: o MS office o WinZip o Anti Virus o Web Browser - Internet Explorer (for standardization propose) o [**] o Babylon o Acrobat read/write o [**] o Oracle client o SQL DB client o OS: Microsoft Windows and UNIX OS used by the Customer and still supported by the original manufacture (UNIX OS that are no longer supported by the original manufacture will be supported on a Special Support basis) Note: The usage of new versions is part of the provision of the Services. The deployment of a new version will be handled according to the Change Management Process defined in SECTION 8. HP-OMS WILL PROVIDE MAKE IT WORK SUPPORT FOR CUSTOMER SOFTWARE, INCLUDING BUT NOT LIMITED TO: o All software purchased by the Customer (i.e. R&D tools, CAD/PDM tools, Microsoft products, etc.) o Software support to peripheral devices 43 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) o PDA and Cellular phones will be supported to allow interface connection between them and Customer's working IT Environment (i.e. connection to MS-Outlook). HP-OMS WILL PROVIDE SPECIAL SUPPORT FOR HARDWARE AND SOFTWARE, WHICH IS NEITHER HP-OMS HARDWARE, HP-OMS SOFTWARE, OR CUSTOMER SOFTWARE, INCLUDING BUT NOT LIMITED TO: o Palm software support o Windows 95 o Windows Millennium o Additional support to applications which were defined as Make it work Support o Novell network support o R&D application configuration OUT OF SCOPE: o All personal purchased applications o Shareware software o Freeware software o Netscape web browser EXCEPTIONS: o During the Transition and Stabilization Phases, HP-OMS will still provide Special Support for Customer's applications defined as out of scope (i.e. shareware application) o HP-OMS will provide Make it work Support for all items which are not included within HP-OMS Software or HP-OMS Hardware and used for R&D purposes o Application support for applications not included within HP-OMS Software, Customer software or HP-OMS Hardware and not used for R&D purposes will be given with the applicable Customer Site manager approval. 44 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 6.3 HARDWARE SUPPORT HP-OMS will provide Full Support for all HP-OMS Hardware, including without limitation, responsibility for the following actions: 0 Client PCs Hardware Incidents 0 Diagnosis of Hardware problems on Client PCs 0 Repair and/ or replacement of equipment 0 Backup media tapes worldwide 0 Manage repair process (contact 3rd party, ship, receive, supervise, etc.) for all HP- OMS Hardware, including peripherals and non-HP products NOTE: HP-OMS will provide alternative hardware in the event the hardware repair will take more then 1 day. SUPPORTED HARDWARE: o All HP-OMS Hardware EXCLUDED ITEMS (WILL NOT BE SUPPORTED OR SUPPLIED BY HP-OMS) o PDA & cell phone hardware o Consumables will not be supplied by HP-OMS (printer toners, cartridges, paper, cleaning kits, etc.) o Peripheral devices (which are not included in HP OMS Hardware): o Hardware warranty and SLA to these peripherals will be the original warranty provided by the vendor /manufacturer. HP-OMS will not provide any extension to that service, 6.4 SERVERS ENVIRONMENT o HP-OMS will provide Full Support for the Customer's server environment. The service will include, without limitation, Full Support for all server types (e.g., PDC, file servers, print servers, application servers, Windows, UNIX, etc.). Such Full Support includes the following services: 45 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 6.4.1 BACKUP o HP will report to the Customer on a weekly basis on successful backup completion company wide (or any problems) o Backup Software: backup routines and restore o Customizable backup solutions o Ability to perform unattended backups o Service spanning multiple operating platforms o Daily measurement and review of completion rates for all scheduled backups o Backup tapes and media as defined in backup operating SLA in Exhibit C, Appendix A, Section 2.8 - (Backup and Restore SLA) o Media management (Note: At Class 2 Customer Sites, tapes rotation will be Customer's responsibility) o Responsibility of backup media o Preparation and coordination of backup media to be shipped to safe location o Backup problems - Problem analysis - search of the source of problem, restoration of service as soon as possible (with temporary fix if needed) o Central Backup location of user data. Note: It will be end-user responsibility to save workstations' data to central location to be backed up o HP-OMS will do a restore test on 3 selected items according to Customer request every 3 months at each Customer Site o According to customer request all servers' data will be defined to be backed up o Restore services will be done according to end-user request 46 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 6.4.2 GENERAL SYSTEM ADMINISTRATION o Windows administration: user and group management o Password management o Login script o Day Light Saving Time - Implement changes and support to all servers and application systems o Time server administration o Software management services - Fixes, patches, service packs and new versions will be installed and managed by HP-OMS according to HP-OMS guidelines and professional judgment pending Customer approval o Access control management (Share, NTFS, etc.) o Active directory management (Sites, replication) o Print queue management - Add and manage print queues o Domain and Trust management o FTP administration - Internal & External o Monitoring of LOG files on a regular basis to reveal server and services problems o Monitoring Server up time using the monitoring system (HPOV) o Monitoring Server Services to enable proactive alerts (i.e., automatically generated Incidents) 6.4.3 WEB SERVERS: o Operating system o IIS operation o Security o FTP 47 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) EXCLUDED ITEMS (WILL NOT BE SUPPORTED BY HP-OMS): o Backup of personal computers and laptops o Backup of personal development environment o Web content 6.5 MAIL ADMINISTRATION HP-OMS will provide Full Support for the Customer's email system. Such Full Support includes, without limitation, the following services: o Mailbox management: o Add / remove /change users o Quota management o Exchange database backup and restore o Exchange Database defrag on a regular basis (6 month) o Distribution list management o Exchange Antivirus management o Mail routing o Exchange monitoring o Monitoring Exchange Server Services using HPOV 6.6 LAN/ WAN MANAGEMENT HP-OMS will provide Full Support for the Customer's network infrastructure. THE CUSTOMER'S NETWORK INFRASTRUCTURE INCLUDES, WITHOUT LIMITATION, THE FOLLOWING ITEMS: o LAN devices: o All LAN equipment o Manageable and configurable routers/hubs/switches o Domain Controllers o Trust relationships management o WAN monitoring - See description in Exhibit C, Appendix A, Section 2.4 (WAN Availability) 48 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) o WAN security: o Firewall support o VPN o Content Prot ection (i.e. eSafe) / Antivirus o DNS Administration - Internal and External (Internet) o WINS administration o DHCP Administration - Management and Scope definition o External Mail Routing Management (Incoming & Outgoing) o Remote user support: Dialup tool (AT&T, Secure remote) o ISP monitor and control o HP-OMS will define and supervise the work of any 3rd party vendors performing network changes EXCLUDED ITEMS (WILL NOT BE SUPPORTED BY HP-OMS): o Telephony operation and support o Passive network infrastructure (wall cables, T.O., etc.) 6.7 UNIX SUPPORT AND ADMINISTRATION HP-OMS will provide Full Support for the Customer's Unix systems. THE TYPES OF SERVICES TO CUSTOMER UNIX SYSTEMS SHALL INCLUDE THE FOLLOWING: o UNIX system administration and maintenance o UNIX bugs fixes o Patches updates o UNIX version control o UNIX Workstation and server hardware support o UNIX Workstation OS support o NIS Server administration and support 49 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) o UNIX time synchronization activities and support o Support end-users with Exceed problems o Update UNIX backup procedures o UNIX scripts for non R&D purposes This list shall not prevent Customer from including additional items of similar nature, in case they have been disclosed during the Due Diligence process. EXCLUDED ITEMS: o UNIX support for systems which are no longer supported by original manufacturer will be given on Special Support basis o HP-OMS will not perform UNIX development or other R&D tasks o UNIX support for development servers will be OS install/reinstall only 6.8 STORAGE SUPPORT HP-OMS will provide Full Support Customer's storage systems, shall include the following services: Maintenance, management, monitoring and operation of storage systems o Optimizing storage usage and availability o Backup & Recovery according to agreed procedures o Increase storage by 10% per year (in accordance with EXHIBIT C, APPENDIX A, SECTION [2.11], (TECHNOLOGY REFRESH PROGRAM SLA) This list shall not prevent Customer from including additional items of similar nature, in case they have been disclosed during the Due Diligence process. 50 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 6.9 ANTIVIRUS ADMINISTRATION This service component focuses on the prevention, isolation and removal of viruses before they can impact the Customers' businesses. HP-OMS will provide Full Support for the Customer's Antivirus systems. Such support shall be provided after installing the most up-to-date version of the Antivirus system on all workstations and servers as defined in Exhibit D, and will verify the daily and weekly updates of such systems. Full Support shall include the following items o Antivirus updates o Virus crises management o Service recovery due to virus attack o Updates of virus definition file worldwide o Monthly report of any Incoming and outgoing infected e- mails This list shall not prevent Customer from including additional items of similar nature, in case they have been disclosed during the Due Diligence process. 6.10 FIREWALL HP-OMS will provide Full Support of the Customer's Firewall systems to secure the Customer Internet gateways worldwide at all Customer Sites, and provide Full Support for the Secure Virtual Network (VPN) Architecture between all Customer Sites. In addition, HP-OMS will provide VPN architecture security infrastructure that enables secure and reliable Internet communications. HP-OMS shall secure the Customer communications and resources of the Customer networks, remote employees, branch offices and partner. HP-OMS will provide Firewall and VPN Services according to the Customer Security Policy that will be defined by the customer. In addition HP-OMS will make changes to the Firewall and VPN Services according to changes that will be approved by the Change Management process. 6.10.1 FIREWALL ADMINISTRATION HP-OMS will provide Full Support for firewall administration, shall include, the following:Add / Maintain Rule base o Add / Change / Remove site o Manage "F/W Management" 51 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) o Backup "F/W Management" o Incident Management o Secure Remote Administration o Full Firewall management o Keeping the firewall versions up to date o Comply with the Customer Security Policy This list shall not prevent Customer from including additional items of similar nature, in case they have been disclosed during the Due Diligence process. 6.11 CONTENT PROTECTION HP-OMS will provide Full Support for content protection of the Customer with proactive, multi-tiered Internet Content Security for gateway and mail servers, protecting the entire IT Environment from: o Viruses, Trojans, worms, blended threats, and other malicious code that destroys or steals digital assets o Security exploits in corporate email servers and email clients HP-OMS will provide content protection Services according to the Customer Security Policy that will be defined by the customer. In addition HP-OMS will make changes to the content protection Services according to changes that will be approved by the Change Management process. 6.11.1 CONTENT PROTECTION (ESAFE) ADMINISTRATION HP-OMS will provide Full Support for content protection (Esafe) administration, including without limitation, the following: o Monitor viruses o Maintain e-Safe servers and application o Log checkups and problem fix o Keeping the Antivirus definitions up to date o Provide Customer with a monthly report of the number of viruses stopped from entering and leaving the Customer network(s) 52 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 6.12 BUSINESS APPLICATION SUPPORT HP-OMS will provide Full Support for the Customer's business applications included within the HP- OMS Software. HP-OMS will provide Make it Work Support for business applications included within Customer Software. BUSINESS APPLICATIONS WITHIN HP-OMS SOFTWARE, RECEIVING FULL SUPPORT FROM HP-OMS, SHALL INCLUDE WITHOUT LIMITATION: o Oracle and SQL data base administration - Only for Business IT environments (i.e. Clarify, Kopel Reem, SUN) o Clarify - full application support (administration, application and users support): o Administration - add/change users o Tech Support - Administration and user support o License Key generation ([**]) Interfaces programming and maintenance o Server technical support o End-users technical support and error fixing o Maintain [**] business rules o Maintain [**] UI o End-user training o [**]- full support - Administration and management o [**] - Universe maintenance o Web Intelligence support o Minor customization of [**] interface BUSINESS APPLICATIONS WITHIN CUSTOMER SOFTWARE, RECEIVING MAKE IT WORK SUPPORT FROM HP-OMS, SHALL INCLUDE: o [**] - General administration and application support o Lavi - General administration and application support o Kav Ma'archot - General administration and application support o Kopel Reem - General administration and application support o [**] - General administration and application support o 3rd Tier support and maintenance contract for all Busniess Application will be in accordance to Exhibit N (Customer and HP-OMS Software) Table 1. 53 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) This list shall not prevent Customer from including additional items of similar nature, in case they have been disclosed during the Due Diligence process. EXCLUDED ITEMS (WILL NOT BE SUPPORTED BY HP-OMS): o Every ASP (Application Service Provider) in use will be supported on a Make It Work Support basis only (i.e. SalesForce.com) o Code changes except for [**] (CRM) code 6.13 INSTALL, MOVE ADD OR CHANGE (IMAC) HP-OMS divides IMAC activities in 2 classifications: 1. Small IMAC - Software Installation (does not include operating system) 2. Large IMAC - Install, add, move, relocate of Hardware, operating system upgrade and Hardware change of owner (waterfall) HP-OMS will provide the Customer with unlimited small IMAC activities and will provide Large IMAC according to the following description: o Sites with less then [**] end-users - [**] Large IMAC events a month per site o Sites with [**] end-users - [**] Large IMAC events a month per site o Sites with [**] end-users - [**] Large IMAC events a month per site o Sites with [**] end-users - [**] Large IMAC events a month per site o Sites with more than [**] end-users - [**] Large IMAC events a month per site HP-OMS and Customer will review the IMAC figures above once a year and mutually agree to changes in the numbers of large IMAC events. Any Large IMAC will comprise the following tasks: 1. Contacting end user or end users' representative, confirm location(s) and any special considerations 1. Location change will be at the same Customer Site 2. Disconnecting cables and peripherals 3. Transfer of the equipment if in same floor or building (except where Customer Site includes more then one building or floor) 54 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 4. Installation with same procedures as mentioned in the Hardware installation tasks 5. Hardware change between [**] end-users will be considered [**] Large IMAC events 6. Testing system functionality following restore 7. Receiving end user and/or Customer's acceptance of the procedure HP-OMS RESPONSIBILITIES: o Manage the logistics for moving between sites (packing, unpacking, assemble, disassemble, etc.) o In the event of Large IMAC events planned by the Customer, HP-OMS will set up in advance the necessary resources to support such events CUSTOMER RESPONSIBILITIES: o Order and pay for packing materials and/or services, insurance and other costs relating to the shipping o Inform HP-OMS representative if a massive IMAC is planned in advance (Time line will be agreed mutually) 6.14 SCOPE AND OUT OF SCOPE WORK The following mechanisms will be used by both parties throughout the Term in the event of work which is out of the scope of the Services. BANK OF WORK HOURS The "Bank of Work Hours" is a billing rate for projects requiring up to fifty (50) person hours of work that is out of the scope of the Services. In such events, the Work will be done as needed with no delay and will be charged and paid for at the Bank of Work Hours rates set out in Exhibit E, Section 3.2. HP-OMS shall not perform any out-of-scope services at the Bank of Hours rates, without obtaining Customer's prior written consent. The Customer and HP-OMS will specify all relevant details for Bank of Work Hours projects pursuant to a written statement of services, signed by the parties. 55 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) At least once a month, the HP-OMS Project Manager will produce a report of Bank hours' utilization and accounting. 6.15 TECHNOLOGY REFRESH PROCESS HP-OMS shall comply with the Technology Refresh Program described herein and in EXHIBIT C, APPENDIX A, SECTION [2.11] (TECHNOLOGY REFRESH PROGRAM SLA). SCOPE o All HP-OMS Hardware and HP-OMS Software, excluding the Add-On Assets ("Technology Refresh Assets") o All Customer Sites. HP-OMS RESPONSIBILITIES o Purchase and supply of all Refreshed Assets within the scope of the Technology Refresh Program, in accordance with EXHIBIT C, APPENDIX A, SECTION [2.11] (TECHNOLOGY REFRESH PROGRAM SLA) o Procurement Planning: o Product acquisition plan and process o Maintenance of standardized product lists, consisting of HP-OMS Hardware (excluding Hardware within Add-On Assets) and products/configurations. o Provision of product availability and shipment status information o Communication of product availability and configuration changes from suppliers o Asset Tracking: o Technology acquisition and refresh plan o Methodologies, processes and tools for gathering, tracking and management of asset information o Hardware configuration o HP-OMS Software licenses (excluding Software within Add-On Assets) o Asset tracking of Technology Refresh Assets 56 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) o Asset data collection, tagging, tracking, management, reporting o Physical inventory of the existing environment o Warranty management o Contract information maintenance o Provision and ownership of hardware CUSTOMER RESPONSIBILITIES o Refresh of Customer Software is procured at Customer's expense. o Provide 6-month order forecast twice a year JOINT RESPONSIBILITIES o Provide a complete delivery plan with complete shipping location information 7 RELEASE TO PRODUCTION Release to Production manages the introduction of products and services into the Customer's IT Environment. This service may include the following: o Production integration o Hardware/Software set up o Service implementation o Operational testing o Customer acceptance testing HP-OMS and Customer will work together closely in this service as each organization has specific and related responsibilities. HP-OMS RESPONSIBILITIES o Manage Release to Production for all tools used to deliver the Services in scope under the Agreement o Report changes in the IT Environment to Customer and follow Change Management procedures where applicable. o Closely cooperate with Customer to introduce fixes and hot packages to Customer IT Environment. o Coordinate downtime to occur during non-working hours and receive Customer's approval for the downtime 57 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) CUSTOMER RESPONSIBILITIES o Approve HP-OMS Release to Production plan and cost, if applicable under the Change Management Process o Provide HP-OMS with feedback about the quality of Release to Production 58 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 8 CHANGE MANAGEMENT The CHANGE MANAGEMENT process coordinates, prioritizes, authorizes, schedules resources for, and assesses the risk of changes to the Customer's IT Environment. Changes to the IT Environment can occur where there is a request by a party to: o Introduce a new Service Component o Modify or remove an existing Service Component o Adapt to changes in Customer's IT Environment (e.g., additional offices) o Resolve an Incident reported to the Ticketing System, which is defined as out of scope by MCC and approved by the Customer Project Manager. o Change to Customer business process which are related to the Services o Changes to IT Environment procedures and work instructions o Changes to the Service Levels o Release to production o Changes to the Security Policy (Collectively, a "CHANGE") Changes are scheduled during agreed Change windows to minimize the impact, unless they are emergency Changes requiring immediate implementation to correct a problem. All Changes must be approved in accordance with (and unless otherwise specified in) Table 9 and under a Change Request Form, set out in APPENDIX F herein (Change Request Form), prior to the implementation of the Change. 88.1 ROLES AND RESPONSIBILITIES The involvement of people with the correct skills is a critical success factor to achievement of the objective of the Change Management Solution. The parties shall appoint each of the applicable individuals to the following defined roles, required by the Change Management Process, according to the specific Customer Site involved. Note: a given person may act in more than one role and some roles may have more than one person involved. 59 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 8.1.1 CHANGE MANAGER(S) The Change Manager(s) act(s) as the focal point for the Change Management process. They own the overall responsibility for the successful implementation of Changes in the supported IT Environment. Customer's Change Manager and an HP-OMS Change Manager are to be assigned. They must closely interface with one another and act as one when dealing with the other contributors. They must decide together on the priority and the category of the Changes as well as on the composition of the Change Advisory Board (CAB) and the deliverable prerequisites to the CAB meeting. The Change Manager(s) participate(s) in all CAB meetings or respectively send delegates. The Customer's Change Manager and the HP-OMS Change Manager represent a very strong link between Customer and HP-OMS. They are the central interface between the outsourcing partners regarding all Changes to the IT infrastructure, their supporting processes and the corresponding documentation. All decisions must be made in consensus. In the event consent cannot be achieved repeatedly, the situation will need to be escalated. 8.1.1.1 HP-OMS CHANGE MANAGER HP-OMS Customer Change Manager ensures that all aspects of each Change comply with the HP-OMS IT Risk Management (HP-OMS ITRM) security policies. ITRM requires a security review for every Change to an IT Environment operated and/or managed by HP-OMS Operations. 8.1.1.2 CUSTOMER CHANGE MANAGER The Customer's Change Manager represents the Customer's responsibilities in the Change Management Process. This person is responsible for working closely with the HP-OMS Change Manager in order to assure complete Customer involvement. 60 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 8.1.2 CHANGE ADVISORY BOARD (CAB) The Change Advisory Board (CAB) is a council to discuss and approve Changes prior to their introduction to the live environment. The Change Manager(s) call CAB meetings at least on a weekly basis in Israel. Additional CAB meetings may occur on a case by case basis either in Israel or at the applicable Customer Site, according to the Changes to be assessed. The procedure is open to define categories of Changes with dedicated CAB members for each specific Change category. Categories might be initially defined or introduced later by the Change Manager(s) and approved by the members of the assigned CAB. The members of the CAB can be either fixed for all Changes or categories of Changes or they vary depending on the Changes to be assessed. The Change Manager(s) should always be a member of the CAB. For Minor Changes, the Change Manager(s) may be the sole members of the CAB and approve Changes quickly and without overhead. CAB meetings shall be face to face meetings, unless otherwise approved by the Customer Change Manager, in which case the applicable CAB meetings may be planned and executed as phone conferences, email circulation or whatever else is appropriate and efficient. The composition of the CAB as well as the definition of the CAB meeting is within the responsibility of the Change Manager(s). The objective is to efficiently assess and approve Changes as extensively as needed for secure systems operation but also as quickly as possible in order to avoid risks without slowing down the Change process. To this end it is crucial for the Change Manager(s) to define the CAB with a minimal but sufficient set of approvers for the particular Change / Change category. 8.1.3 CHANGE REQUESTER The initiator of any Change to the IT Environment is the Change Requester. This person initiates the Change, and provides a clear description of the goals and objectives for the Change. The Change Requester fills out the Request for Change (RFC) Form. On behalf of the Customer side, only the personnel listed in the Customer Contact list described in Appendix A (CUSTOMER STAFF AUTHORIZED TO TRANSFER CASES OR CALL HP-OMS), are allowed to initiate Changes. Customer may change the Customer Contact List upon written notice to HP-OMS. From HP-OMS, the Project Manager or the HP-OMS Personnel working at the applicable Customer Site are allowed to initiate a Change request. Emergency Changes by definition have to be introduced via Incident Management, according to SECTION 5 herein. 8.1.4 CHANGE SUPERVISOR The Change Supervisor is an HP-OMS Personnel responsible for leading, managing and supervising the progress and execution of a given Change as assigned by the HP-OMS's and Customer's Change Manager). 61 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) Activities include (where assigned): o Acting as lead planner - assigned according to the work on the planning side to prepare a successful implementation of a Change. o Accuracy and completeness of Change documentation for a given Change, including Change description, Change classification, implementation plan, risk and impact assessment, risk/benefits comments, test plan, backup plan, communication plan, billing requirements , Change schedule & resource information. o Leading and coordinating the deployment of the Change; including resource planning, scheduling, build & test, release to production and monitoring. o Taking part in the Change review and definition of follow up actions and close successful Changes. The person in the Change supervisor role is a function of the type and scope of each given Change. It is common for the Change supervisor to be one of a small group a technical leads associated with a given Customer account. 8.1.5 CHANGE TESTER(S) Subject matter experts who conduct testing and document test outcomes for a given Change. The Change tester executes tests defined in the test plan and documents test results. The Change tester has the necessary technical expertise to identify flaws and shortcomings in the implementation and test plan as well as to evaluate appropriately the outcome of the tests conducted. A Change tester documents and immediately reports any newly identified risk to the Change Supervisor. 8.1.6 CHANGE COORDINATOR The Change Coordinator is an HP-OMS Personnel responsible for coordinating and administrating the execution of a given Change as assigned by the HP-OMS's. Activities include (where assigned): o Meeting schedule and coordination o Minuets of Meetings o Schedule, coordinate and locate the CAB weekly meeting o Verify the closing of RFC form on HP-OMS information system 8.1.7 CHANGE IMPLEMENTER(S) Subject matter experts who perform and document progress and outcome of tasks defined in the implementation plan for a given Change. 62 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) The implementer has the necessary technical expertise to identify flaws and shortcomings in the implementation plan as well as appropriately react following the back out plan (or escalation) on implementation failure. The Change implementer is also in charge of conducting the production acceptance testing as defined in the test plan. A Change implementer documents and immediately reports any newly identified risk to the Change supervisor. 8.2 CHANGE CATEGORIES A Change is always applied within one of the following Change categories where all Changes follow the Change Management Process: TABLE 8: CHANGE CATEGORIES
# OF INFLUENCE ON APPROVAL CATEGORY DESCRIPTION SITES BUSINESS PROCESS OF - ----------------- ----------------------------- --------- ---------------- --------- Minor Change Change that affects One No CAB only one site, with no influence influence on the daily business processes. Medium Change that affects One or Little CAB Change one or more sites, with more influence little influence on the daily business processes. Major Change Change that affects More Influence CAB more then one site, than one with influence on the daily business processes. Any side may not implement this Change without prior approval from the CAB, in writing Commercial Change has major More Influence Stirring Change commercial affects on than one Committee this agreement and/or has major affects on the business processes of either sides
63 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW)
# OF INFLUENCE ON APPROVAL CATEGORY DESCRIPTION SITES BUSINESS PROCESS OF - ----------------- ----------------------------- --------- ---------------- --------- Emergency Minor Change or One or No or little Country Change without Medium Change more Influence Manager extra cost to required on an or Customer emergency basis that Customer affects one or more Project sites and is essential for Manager. a resolution of a serious Written problem in the IT Report will Environment. In such be to CAB. case HP-OMS may submitted implement the Change afterwards without Customer approval, provided that the Change is reported to Customer promptly after such implementation. Emergency Minor Change or One or No or little Country Change with Medium Change more Influence Manager extra cost to required on an or Customer emergency basis that Customer affects one or more Project sites and is essential for Manager. a resolution of a Written serious problem in the IT report will Environment. HP-OMS be afterwards should get prior submitted to CAB. approval from the Customer Project Manager or the manager of the applicable Customer Site, in writing. In such case HP-OMS may implement the Change without Customer approval, provided that the Change is reported to Customer promptly after such implementation.
64 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) The above-mentioned Change categories are defined from an operations point of view and such Changes may also impact pricing, provided that the Change is a request for services, Hardware or Software, which are out of the scope of the Services, or request for change to the Service Levels in accordance with Appendix A of Exhibit E (Bandwidth Pricing). The following Sections summarize responsibilities at the task level for Change Management of the Customer IT Environment. HP-OMS RESPONSIBILITIES o Own all Change requests initiated by HP-OMS Personnel o Prepare a detailed technical proposal for the Change request, the cost and the cost implications on the Target Price. o Review, approve, respond to and perform Change requests following the Change Management Process within the Service Boundaries. CUSTOMER RESPONSIBILITIES o Own all Change requests initiated by the Customer o Generating/forwarding RFCs to HP-OMS when needed o Consider HP-OMS's recommendations on Change requests which directly impact the Service Levels. o Approve Change requests in accordance with TABLE 8. 65 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 8.3 PROCESS DESCRIPTION After a party submits a Change Request Form (in the form set out in Appendix F herein), the Change Managers shall first categorize the Change and then determine whether the proposed Change is within or outside the scope of the Services. To the extent a Change requires the performance of services, which are within the scope of the Services, HP-OMS shall provide the Change at no additional fee or cost payable by Customer. The Change should be approved according to the definitions in the hange Category TABLE NO 8. To the extent that a Change requires the performance of services, which are outside the scope of the Services, the following shall apply: 8.3.1 ADDING OR REMOVING A CUSTOMER SITE In the event that Customer adds or removes a Customer Site, the Change will be categorized as a Minor Change. The Target Price will be updated according to the mechanism set out in Exhibit E, Appendix A, Section [1.1] (USER INCREASE/DECREASE AT CUSTOMER SITES). HP-OMS will prepare a written detailed proposal for a one-time only fee, which will include all fees for the relevant work, Software licenses and Hardware to be provided, in accordance with Exhibit E, Appendix A (Bandwidth Pricing). 8.3.2 ADDING OR REMOVING A SYSTEM In the event that Customer adds or removes a System, the Change will be categorized by the Change Managers of both parties. With Minor Changes, the Target Price will not be updated. HP-OMS will prepare a written detailed proposal for a one-time only fee. The fees for the relevant services will be based on the Bank of Work Hours rates set out in Exhibit E. With Medium Changes, the Target Price may be updated. HP-OMS will prepare a written detailed proposal for the change of the Target Price and a one-time only fee. The fees for the relevant services will be based on the Bank of Work Hours rates set out in Exhibit E. With Major Changes, HP-OMS will prepare a Request for Information (RFI) and/or a Request for Proposal (RFP). Then HP-OMS will issue a proposal for both the change to the Target Price and a one-time only fee. In all cases, the Customer may consider the proposals of third party suppliers, however HP-OMS will have the rights set out in the AGREEMENT, SECTION 11.3 (CUSTOMER RIGHT TO USE CUSTOMER CONTRACTS). 66 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 8.3.3 CHANGING SERVICE LEVEL In the event one of the parties submits a request to change a Service Level, the Change will be categorized as Commercial Change. The Stirring Committee will discuss the issue and HP-OMS will prepare a written document of the impact of such Change on the Target Price and/or a one-time only fee, according to the process defined in EXHIBIT C SECTION 1.7 (ADDTIONS, MODOFICTIONS AND DELTIONS OF CRITICAL SERVICE LEVELS). 8.3.4 INTRODUCING OR ELIMINATING A SERVICE In the event of the introduction of a new service or the elimination of an existing Service, the Change will be categorized by the Change Managers of both parties and then they will define the Service Measures. The parties may not categorize the introduction of a new service or the elimination of an existing Service as a Minor Change. With Medium Changes, the Target Price may be adjusted (upwards or downwards). HP-OMS will prepare a written detailed proposal for the change of the Target Price and a one-time only fee (in the case of the introduction of a new service. The services fee will be based on the Bank of Work Hours rates set out in Exhibit E. With Major Changes, HP-OMS will prepare a Request for Information (RFI) and/or a Request for Proposal (RFP). Then HP-OMS will issue a proposal for both the change to the Target Price (upward or downward) and a one-time only fee (in the case of the introduction of a new service. In all cases, the Customer may consider the proposals of third party suppliers, however HP-OMS will have the rights set out in the AGREEMENT, SECTION 11.3 (CUSTOMER RITGHTS TO USE CUSTOMER CONTRACTS). 67 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 8.3.5 EMERGENCY CHANGE In the event of an Emergency Change, HP-OMS, as soon as possible and on an emergency basis, will provide Customer with a firm estimate of the services to be performed; the Customer will review, consider, negotiate, and/or agree to such proposal. If agreed, the (a) one-time only fee for such services will be calculated based on the actual hours performed by HP-OMS, chargeable at the Bank of Work Hour rates; and (b) HP-OMS shall not perform services in connection with such Emergency Change, which are chargeable in excess of the estimated fees, without obtaining Customer's prior written consent thereto. With Emergency Changes that are Minor Changes, the Target Price will not be updated. With Emergency Changes that are Medium Changes, HP-OMS will prepare a written detailed proposal for the change to the Target Price. If the Customer does not approve such change, the issue will be transferred to the CAB on an emergency basis in a time frame of 4 hours. If the CAB does not approve such change, Customer may request and HP-OMS shall perform the proposed services to address the Emergency Change, with the dispute to be resolved in accordance with AGREEMENT, SECTION 21.7 (DISPUTE RESOLUTION PROCESS). 68 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 8.3.6 PROCESS FLOW CHART 69 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) APPENDIX A: CUSTOMER STAFF AUTHORIZED TO TRANSFER CASES OR CALL HP-OMS The following list of people is authorized to initiate emergency escalation process (as describe in SECTION 5.9 (EMERGENCY ESCALATION PROCESS herein), call directly to HP-OMS MCC phone or contact HP-OMS Project Manager directly. o Custumer Director of IT o Infrastructure Manager o Division Manager o Country Manager o Customer Executive VP (or above) o Office Manager 70 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) APPENDIX B: PRIVILEGED ACCESS REQUEST FORM ACCESS TO PRIVILEGED USERS ON MANAGED SERVERS POLICY Customer's users, who need access to an administrative account to one of HP-OMS Operations managed systems for their job, will be granted access to it by filling out a Risk acceptance form. The form documents the reason the user needs the access and has to be approved by their manager, and by HP-OMS OSC management. The approval will need to be renewed upon expiration of the Agreement. HP-OMS' standard policy is that only people in the HP-OMS's Management and Control Center (MCC) have administrative capability on Customer-managed systems. We realize that there are occasions where exceptions have to be made, but we strive to minimize them. We believe this is critical to meet our machine availability and Customer requirements. For these reasons, we have security owners for our systems who are expected to be aware of any changes on their systems and to be involved in any decisions that need to be made regarding these same systems. If a person needs administrative capability to perform his/her job, we will work with him/her to create a shared-root window like solution. This will give him/her the ability to perform those tasks while minimizing the risk - to either him/her or us - of giving him/her all capabilities without control. If a person demonstrates an understanding of system administration and/or this person's job requires him/her to perform numerous functions as administrator with time being critical, he/she may be given the ability to become administrator. This is subject to certain rules, and must be compatible with the contract terms and approved by HP-OMS management. We require that individuals outside of HP-OMS's MCC fill out a Risk Acceptance form, which documents the reason why administrative access is needed and have this form approved by their manager, the Customer IT management and the HP-OMS OSC management. Access on a permanent basis requires an additional Risk Assessment to be signed by the regional HP Delivery Manager and the regional HP Business Manager, and will be added as an addendum to the outsourcing contract. 71 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) If person needs occasional functions performed as administrator and these functions can be scheduled, we would like to continue to see the requests come to HP-OMS as change request (Request For Change, RFC) and follow the standard change management process. This would include disk changes, kernel parameter changes, etc. The vast majority of requests fit into this category. PRIVILEGED USERS RISK ACCEPTANCE FORM [[This chapter should be duplicated for each requested access]] GENERAL INFORMATION Name of the user:_______________________________ [ ] Customer employee. Customer Employee ID: Mail Address: Phone: Division Name: Group Name: Office Location: Department Name: User's Manager Name: [ ] Not a Customer employee. Mail Address: Phone: Division Name: Group Name: Office Location: Department Name: User's Manager Name: User's Manager Customer Employee ID:__________________________ REQUEST INFORMATION Requested account name:___________________________________ Operating System: [ ] Unix [ ] NT Account requested capabilities or group membership: [ ] administrator [ ] backup [ ] power user [ ] users [ ] Other (Please specify): Please give the list of machines on which the access is requested: 72 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) Please outline below why access is necessary on each machine listed above: The access will be: [ ] Permanent (reviewed at least every month) [ ] Temporary until:____________________ [ ] Shared root window on request STATEMENT OF RESPONSIBILITY FOR POLICY EXCEPTION In COMPLIANCE with documenting the risk above, I acknowledge accepting the risk and responsibilities for this special access. [X] I will use this capability only for the reasons listed above [X] I will manage password control for my user id [X] I will follow the risk acceptance renewal process By signing this form, I accept the responsibility for ensuring adequate controls are in place to safeguard against any security breaches and I agree to follow HP-OMS's policies, procedures, and standards as well as any local policies, procedures, and standards. I have identified and assessed all risks that apply to this request. I further understand that I am responsible for establishing and maintaining adequate controls and that I will be accountable for security audit results and for notifying HP-OMS of any account ownership and/or Exception request changes. I will follow the standard change management process, send a RFC to HP-OMS before any major change and notify HP-OMS after any emergency change. Requested by:______________________________________ Date:________________ Name/signature: Requestor/Account Owner Approved by: ______________________________________ Date:________________ Name/signature: Requester's Manager 73 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) APPENDIX C: SECURITY AUDITS Internal HP-OMS auditors and HP-OMS Outsourcing Security Staff audit the HP-OMS Outsourcing infrastructure regularly. The results of these audits always remain the confidential property of HP- OMS. HP-OMS shall inform the Customer immediately of any finding that may result in the compromise of the security of the Customer IT Environment. During such audits, the HP-OMS auditors may access Customer's IT Environment, to verify that the security policies are observed and enforced by HP-OMS personnel, but in any case the auditors will not retain any Customer Confidential Information. Any audit of Customer's IT Environment shall be subject to the same prerequisites which must be fulfilled by Customer in the case of a Customer audit of HP-OMS, as set out below. Customer may conduct security audits of the relevant HP-OMS environment in accordance with the AGREEMENT, SECTION [10.10] (AUDIT RIGHTS), provided the following pre-requisites are performed: 2. A 24-month Non Disclosure Agreement (NDA) signed between HP-OMS and Customer's independent auditors. 3. Notice of the upcoming audit must be provided a minimum of 10 working days prior to the audit and cannot be planned during a holiday period. 4. Subject to the AGREEMENT, SECTION 10.10 (AUDIT RIGHTS), A specific document must be signed between HP-OMS and Customer which represents the contractual agreement between HP-OMS and Customer while running the audit. It describes the roles and responsibilities of parties as well as the terms and conditions which apply during the entire audit. 5. Formal agreement as a document to kick off the audit according to the definition, the scope and the parameter of the audit as defined. The document is to include the following: o The entity which will be conducting the audit; o The name of the person representing the entity during the audit; o The time period the audit is targeted to take place; o The targeted agenda of the audit; o The objective(s) of the audit; o The methodology used to conduct the audit; o The domain(s) targeted to be audited; o The test(s) that are foreseen by the audit (when targeted) 74 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) 6. One HP-OMS representative is designated to welcome and accompany the audit team throughout the entire audit. 7. The audit minutes and reports remain Customer's property but are made available to HP-OMS by Customer with the goal to improve the benefit of working with HP- OMS. 75 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) APPENDIX D: HP-OMS ACCEPTABLE USE POLICY HP-OMS AND CUSTOMER SHALL NOT: o Permit the Services to be performed or used in any manner (including, without limitation, transmission, distribution or storage) for any purpose that is (or would be): o Illegal or violate good practice, legislative provisions or regulations issued by authorities o Contrary to the instructions on good practice followed in marketing (e.g., fraudulent or misleading), o Obscene (as defined by legislative provisions or regulations issued by authorities in the country where the service is provided), harassing or distressing (including so-called SPAM mass deliveries), o Disruptive of or harmful to Network resources or any connected equipment resources o An unauthorized use, access or monitoring of any host, any Network or other network device, or any other breach of any security measure. EXAMPLES Without limiting the foregoing undertaking or attempting to undertake any of the conduct in the following non-exclusive list which is deemed to violate the Acceptable Use Policy: o Alteration of source of data in violation of good practice (causing origination of malformed data or network traffic); o Engaging in pyramid or ponzi schemes, impersonations or misrepresentations which violate instructions on good practice followed by marketing; o Identity theft; o Hacking or scamming (unauthorized use of non-Customer accounts or resources, scamming, stealing or tricking the release of passwords, etc.) in violation of legislative provisions or regulations issued by authorities; Distribution of harmful code such as computer viruses, worms and trap doors which cause interference with the Network, network traffic or other users; 76 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) APPENDIX E: REASONABLE REQUEST TO REPACE KEY PERSONNEL, SECURITY OR COMMUNICATION SUPPLIERS CONTRACTORS Customer will have the right to initiate a process to change HP-OMS Key Personnel, security personnel or communication vendors in accordance to the following events: o In the event that Customer concludes that a member of HP OMS's Key Personnel has behaved improperly, or in the event that Customer concludes that a member of HP- OMS's Key Personnel has continuously shown insufficient level of proficiency, Customer may notify same to HP-OMS with a detailed description of said member's misbehavior, or non proficiency. HP-OMS shall conduct, upon receipt of such notification, a hearing to such member and if it finds Customer's allegations to be true, it shall allow such member to present a 30 days improvement plan. If the Key Personnel did not make an improvement 90 days after such allegations been originally submitted by the Customer, HP-OMS shall act in order to replace said personnel with another one. o In the event that Customer concludes that HP-OMS's communication vendor or security personnel have failed to comply with their Service obligations with respect to HP-OMS SLA commitment, Customer may notify same to HP-OMS with a detailed description of said failures. HP-OMS shall conduct, upon receipt of such notification, an investigation for such complains. If found true, HP-OMS will allow such vendor/subcontractor 30 days to provide HP-OMS and the Customer with an improvement plan. If the vendor/ personnel did not show an improvement process implementation 90 days after such allegations been originally submitted by the Customer, HP-OMS shall act in order to replace said vendor/ personnel with another one. 77 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) APPENDIX F: CHANGE REQUEST FORM ORDER FOR SERVICES PURSUANT TO CHANGE MANAGEMENT PROCESS This Order for Change Request services is issued pursuant to the Master Service Level Agreement between TECHNOMATIX LTD ("Customer") and HP-OMS-COMPAQ (ISRAEL) LTD ("HP-OMS"), dated ________________, 2003 (the "Agreement"), and except as otherwise expressly stated below, incorporates the terms and conditions of the Agreement. All capitalized terms not otherwise defined in this Order shall have the meanings set out in the Agreement. The following form (RFC) will be used as reference for information system for Change Management process that will be implemented by HP-OMS. DATE: _______________________ CHANGE REQUEST NO: CHANGE REQUESTER: CUSTOMER CHANGE MANAGER: _______________________ HP-OMS CHANGE MANAGER: _______________________ CHANGE TYPE: Minor Medium Major Emergency INITIATED BY INCIDENT NO: INCIDENT DATE: IMPACTED SERVICES: POSSIBLE RISK: DESCRIPTION OF THE CHANGE REQUEST THE CHANGE IS IN OR OUT OF SCOPE? FEES/PAYMENT TERMS: 78 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) SPECIAL TERMS AND CONDITIONS SIGNED FOR AND ON BEHALF OF SIGNED FOR AND ON BEHALF OF TECNOMATIX LTD [HP-OMS (ISRAEL) LTD] By: _________________________ By: _________________________ Name: _______________________ Name: _______________________ Title:_______________________ Title:_______________________ Date: _______________________ Date: _______________________ 79 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) APPENDIX G - EMERGENCY ESCALATION PROCESS PHONE NUMBERS HP-OMS will provide the Customer with 2 emergency contact details: HP-OMS Key Personnel Name: Title: Phone Number: MCC (Monitor & Control Center) 24/7 technical emergency phone number: +972-9-______________ 80 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Statement of Work (SOW) APPENDIX H: REPORTS WEEKLY REPORTS: o Total number of service tickets for period o Calls per sites o Class classification per priority o Top 3 most common service categories o Miss commit service tickets: o Total number of tickets with missed tickets percentages o Missed SLA tickets per service o Number of IMAC requests o Backload tickets - Tickets that remain unsolved from the last week o Average Time to close a ticket by priority o Overall ticket report by priority (display the total number of tickets per priority and the resolution time for those tickets on the same graph) MONTHLY REPORTS: o Total number of service tickets for period o Calls per sites o Top end-users with most calls o Top 3 most common service category o Service incidents trends o Number of IMAC requests o Average Time to close a ticket by priority o Miss commit service tickets: o Total number of tickets with missed tickets percentages o Missed SLA tickets per service QUARTERLY/ANNUALLY REPORTS: o Quarterly service incidents trends: o Availability trends o Time to resolve trends o Number of end-users per number of tickets o Number of users trend o IMAC requests compared to HP-OMS commitment Total SLA commitment for credit_________________________ 81 EX-99 10 exhibit-c.txt PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit C Service Levels and Service Level Credits V 6.0 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Service Levels and Service Level Credits DOCUMENT INFORMATION HP Project Manager: Gil Tal Customer Project Manager: Na'ama Halperin Prepared by: Document Version No: V 6.0 Preparation Date: 16/09/03 2 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Service Levels and Service Level Credits INDEX DOCUMENT INFORMATION...................................................... 1 DOCUMENT INFORMATION...................................................... 2 INDEX..................................................................... 3 1 GENERAL PROVISIONS................................................... 4 1.1 GENERAL........................................................... 4 1.2 EFFECTIVE DATE OF SERVICE LEVELS.................................. 4 1.3 REPORTING......................................................... 4 1.4 DEFINITIONS....................................................... 5 1.5 CRITICAL SERVICE LEVEL FAILURES................................... 7 1.6 SERVICE LEVEL CREDITS............................................. 7 1.7 ADDITIONS, MODIFICATIONS AND DELETIONS OF CRITICAL SERVICE LEVELS: 10 1.8 TECHNOLOGY REFRESH PROGRAM........................................ 12 1.9 TIMES............................................................. 12 1.10 EXCEPTIONS..................................................... 12 2 PRIORITIES........................................................... 14 2.1 GENERAL........................................................... 14 2.2 PRIORITY REPORTING................................................ 16 3 SERVICE WINDOW....................................................... 17 3.1 GENERAL SERVICE WINDOW............................................ 17 3.2 MCC SERVICE WINDOW................................................ 17 3.3 DOWNTIME.......................................................... 18 3.3.1 Scheduled/Planned Downtime..................................... 18 3.3.2 Emergency Downtime ........................................... 19 3.4 ON-CALL SERVICE OUTSIDE THE GENERAL SERVICE WINDOW................ 19 3.5 SERVICE WINDOW EXCEPTIONS......................................... 20 4 RESOLUTION CONTINUITY................................................ 21 5 BASELINE INDEPENDENT SURVEYS......................................... 22 3 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Service Levels and Service Level Credits 1 GENERAL PROVISIONS 1.1 GENERAL This Exhibit C is attached to the Master Services Agreement dated as _____________ by and between HP-OMS and Customer (the "AGREEMENT") and made a part thereof by reference. Capitalized terms not otherwise defined herein shall have the meaning specified in the Agreement. This Exhibit C sets forth certain quantitative Critical Service Levels against which HP-OMS' performance shall be measured. 1.2 EFFECTIVE DATE OF SERVICE LEVELS. HP-OMS commits to start the implementation of (and become subject to) the Service Levels (including without limitation the Critical Service Levels) as of the completion of the final Transition Milestone at each applicable Customer Site, as defined in EXHIBIT D (TRANSITION AND STABILIZATION), but no later than the ten (10) month period following the Commencement Date (the "SERVICE LEVEL EFFECTIVE DATE"). Customer will start crediting HP-OMS only after the end of the final Transition and Stabilization Phases, but no later ten (10) months period following the Commencement Date. 1.3 REPORTING Unless otherwise specified in this Exhibit C, each Service Level and each Critical Service Level shall be measured on a monthly basis and reported on a quarterly monthly basis beginning on the designated Service Level Effective Date, subject to SECTION 1.7 HEREIN (ADDITIONS, MODIFICATIONS AND DELETIONS OF CRITICAL SERVICE LEVELS). By the fifteenth (15th) day of each month, HP-OMS shall provide, as part of HP-OMS' monthly performance reports, a set of soft copy reports, in a format set out in Appendix B to this Exhibit C, to verify HP-OMS' performance and compliance with the Service Levels and the Critical Service Levels. HP-OMS shall provide detailed supporting information for each report to Customer in machine-readable form suitable for use on a personal computer and read only access to the Service Systems. The raw data and detailed supporting information shall be Customer and HP-OMS Confidential Information, and HP-OMS shall provide Customer with access to such information on-line and in real-time during the Term. 4 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Service Levels and Service Level Credits HP-OMS will also be responsible for promptly investigating and correcting failures to meet the Service Levels by: 1.3.1 Promptly initiating problem investigations, including Root Cause Analyses conducted in accordance with SECTION [4.3] OF THE AGREEMENT; 1.3.2 Promptly reporting problems to Customer in accordance with the escalation process set forth in EXHIBIT B; 1.3.3 Using all commercially reasonable efforts to correct problems and to begin meeting or restoring Service Levels as soon as practicable; 1.3.4 Advising Customer of the root cause of problems and the status of remedial efforts being undertaken with respect to such problems; 1.3.6 Making written recommendations to Customer for improvement in procedures. HP-OMS will identify root causes, correct problems and minimize recurrences of missed Service Levels for which HP-OMS is responsible and which cause or contribute to HP-OMS not meeting the Service Levels. 1.4 DEFINITIONS Terms used herein with initial capital letters shall have the respective meanings set forth in the Agreement or its Schedules. The following terms shall have the meanings specified below: "AT RISK AMOUNT" means eight percent (8%) of the Monthly Target Charges. "CRITICAL SERVICE LEVELS" are those service level measurements for each Incident defined in Appendix A, Section 1 or subsequently defined pursuant to Section [1.7] (ADDITIONS, MODIFICATIONS AND DELETIONS OF CRITICAL SERVICE LEVELS) for which Service Level Credits are payable in accordance with this Exhibit C. "CRITICAL TIME TO RESOLVE SUCCESS RATE" means the sum of Critical Incidents in which HP-OMS complied with their Time to Resolve, divided by the total number of Critical Incidents in an applicable month. "INCIDENT" has the meaning set out in EXHIBIT B, SECTION 1 (GENERAL; DEFINITIONS). 5 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Service Levels and Service Level Credits "INCIDENT RESOLUTION" means that the problem that was reported dose not exist any more or that a work around was found. In case the Time to Resolve of a Workaround is more then 50% then the required Time to Resolve the incident time to resolve will be exceeded by 5 working days. "MEASUREMENT PERIOD" means calendar monthly, unless otherwise provided herein or agreed by the Parties. "MONTHLY TARGET CHARGES" means an amount equal to one-twelfth (1/12th) of the annual Target Price, as specified (and adjusted) in accordance with Exhibit E - [Pricing]. "MUO TIME TO RESOLVE SUCCESS RATE" means the sum of MUO Incidents in which HP-OMS complied with their Time to Resolve, divided by the total number of MUO Incidents in an applicable month. "PRIORITY" has the meaning set out in EXHIBIT B and in SECTION 2 herein. "SERVICE LEVEL CREDIT" means any credit payable pursuant to SECTION [1.6] (SERVICE LEVEL CREDITS) below. "SERVICE LEVEL CREDIT ALLOCATION PERCENTAGE" means, for a particular Critical Service Level, the percentage used to calculate the Service Level Credit payable to Customer in the event of a Critical Service Level Failure in such Critical Service Level as set forth in Appendix A. "SERVICE LEVEL EFFECTIVE DATE" means the date from which a particular Critical Service Level will be measured and reported, as designated in SECTION [1.2] above in the case of new Critical Service Levels. "SERVICE SYSTEMS" has the meaning set out in EXHIBIT B. "TIME TO OWN" means the time between the reporting of the Incident and the time HP-OMS Personnel must start to provide Service in response to such Incident. "TIME TO RESOLVE" means the period between the time that HP-OMS must begin to resolve an Incident and the time that such Incident must be completely resolved (including correcting the root cause of the Incident) or a Workaround is found, provided that where a Workaround is implemented, the time that such Incident must be resolved shall be extended by a one-time extension of five (5) working days, or provide a workaround that the Customer agreed to consider as a solution. 6 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Service Levels and Service Level Credits "TOTAL AVERAGE SUCCESS RATE" means the Sum of MUO Time to Resolve Success Rate + Critical Time to Resolve Success Rate (all in the same applicable month), divided by two (2). "WORKAROUND" means a fix to an Incident, such that after the fix is implemented the fault, error or problem has been eliminated (from a user's perspective), but the root cause of the Incident remains. The incident is not marked as closed until the root cause is resolved. 1.5 CRITICAL SERVICE LEVEL FAILURES A "CRITICAL SERVICE LEVEL FAILURE" will be deemed to occur whenever HP-OMS' level of performance for a particular Critical Service Level fails to meet the Critical Service Level as specified so designated in APPENDIX A, SECTION 2 herein for that Service Level. A "CRITICAL SERVICE LEVEL FAILURE RATE" will be calculated by dividing the sum of the Critical Service Level Failures for the same Incident, occurring in the same Measurement Period, by the sum total number of the same incidents occurring during such Measurement Period for the specific Critical Service Level. 1.6 SERVICE LEVEL CREDITS In the event of a Critical Service Level Failure, HP-OMS shall provide Customer credits as defined below: A. Appendix A sets forth the information required to calculate the credits that HP-OMS shall pay to Customer (or apply against Monthly Quarterly Target Charges) in the event of a Critical Service Level Failure ("Service Level Credit"). For each Critical Service Level Failure, HP-OMS shall pay to Customer, subject to SECTION [1.7] (ADDITIONS, MODIFICATIONS AND DELETIONS OF CRITICAL SERVICE LEVELS) BELOW, a Service Level Credit that will be computed in accordance with the following formula: Service Level Credit = A x B x C Where: A = The Service Level Credit Allocation Percentage as specified in APPENDIX A for the Critical Service Level as to which the Critical Service Level Failure occurred. 7 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Service Levels and Service Level Credits B = the At Risk Amount. C = CRITICAL SERVICE LEVEL FAILURE RATE. For example, assume that during the one month Measurement Period HP-OMS fails to meet the Minimum Service Level with respect to a Critical Service Level for the same Incident (as set forth in Appendix A) twenty-two (22) out of one hundred (100) such Incidents. Also, assume that HP-OMS' Monthly Target Charges for the month in which the Critical Service Level Failure occurred were $400,000, the At Risk Amount is 8% of the Monthly Target Charges, and that the Service Level Credit Allocation Percentage for such Critical Service Level Failure (as would also be set forth on Appendix A) is 8% and that. The Service Level Credit due to Customer for such Critical Service Level Failure would be computed as follows: A = 8% (the assumed Service Level Credit Allocation Percentage), multiplied by $400,000 B = $32,000 (the At-Risk Amount). multiplied by C = 22/100=0.22 = $7,040 (the amount of the Service Level Credit) B. If more than one Critical Service Level Failure has occurred in a single month, the sum of the corresponding Service Level Credits shall be credited to Customer. C. If the accumulated amount of a Service Level Credit which was calculated for a Measurement Period is less then one (1%) percent of the At Risk Amount, HP-OMS will not credit the Customer for any Service Level Credit for such Measurement Period. D. In no event shall the aggregate amount of Service Level Credits credited to Customer with respect to all Critical Service Level Failures occurring in a single month exceed, in total, the At Risk Amount. 8 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Service Levels and Service Level Credits E. Customer and/or HP-OMS may initiate Commercial Change Management Request if either party wishes to make changes to the Critical Service Levels, Service Level Credit Allocation Percentages for any Critical Service Level specified in Appendix A to Exhibit C, such change shall be deemed a Commercial Change (as defined in EXHIBIT B, SECTION 8.2, TABLE 8 (CHANGE CATEGORIES), provided the Change has a major commercial effect on the Agreement and/or has a major effect on the business processes of either party and affects more than one (1) Customer Site. In such case, the Change Management Process set out in Exhibit B for Commercial Changes (the "Commercial Change Management Process") shall apply by sending written notice to HP-OMS at least thirty (30) days prior to the date that such new percentages are to be effective. Such change request notices shall include changes necessary to accommodate the addition of new Critical Service Levels made pursuant to SECTION [1.7] (ADDITIONS, MODIFICATIONS AND DELETIONS OF CRITICAL SERVICE LEVELS) below. In no event may the total Service Level Credit Allocation Percentages for all Critical Service Levels exceed [**] percent ([**]%). F. By the fifteenth (15) day of each quarter, HP-OMS shall notify Customer in writing of any Critical Service Level Failures in the preceding three (3) months and any Service Level Credits associated with such Critical Service Level Failures. G. [**] ([**]%) percents of the total amount of Service Level Credits that HP-OMS is obligated to pay to Customer with respect to Critical Service Level Failures occurring each month, shall be reflected on the quarterly invoices that contain charges for the quarter following the month during which the Critical Service Level Failure(s) giving rise to such credit(s) occurred (e.g., the amount of Service Level Credits payable with respect to Critical Service Level Failures occurring in July, August and Septembershall be set forth in the quarterly invoice for the Target Price due for September, October and November (issued in October)). [**] ([**]%) percents of the total amount of Service Level Credits that HP-OMS is obligated to pay to Customer, shall be credited to the Customer's Bank of Working Hours according to the rates detailed in Exhibit E Section 3.2. Such hours can also be used for projects with up to [**] ([**]) working hours. H. HP-OMS acknowledges and agrees that the Service Level Credits shall not be deemed or construed to be liquidated damages or a sole and exclusive remedy or in derogation of any other rights and remedies Customer has hereunder or under the Agreement in accordance with SECTION [4.2(B)] (SERVICE LEVEL CREDITS) of the Agreement. 9 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Service Levels and Service Level Credits I. There will be no double credit for the same event. 1.7 ADDITIONS, MODIFICATIONS AND DELETIONS OF CRITICAL SERVICE LEVELS: Customer may add, modify or delete Service Levels or Critical Service Levels as follows: A. ADDITIONS. Customer and /Or Hp-oms may add Critical Service Levels in accordance with this Section [1.7] (ADDITIONS, MODIFICATIONS AND DELETIONS OF CRITICAL SERVICE LEVELS) and SECTION 1.6 (E) above using the Commercial Change Management Process [As Detailed in EXHIBIT B SECTION 8]. Critical Service Level Commitments Associated with added Service Level or Critical Service Levels Will be Computed as Follows: (1) Where at least six (6) consecutive months of HP-OMS provided service measurements exist for a particular Service, the Parties agree that the highest and lowest monthly service measurements for the six (6) month Measurement Period shall be excluded and that the Critical Service Level shall then be defined as the average of the remaining four (4) monthly service measurements, or (2) Where no measurements exist for a particular Service, the Parties shall in good faith attempt to agree during a thirty (30) day period on a Critical Service Level commitment using software industry standard measures or third-party HP-OMS advisory services (e.g., Gartner Group, Meta Group, etc.), or (3) Where no measurements exist for a particular Service, and the Parties fail to agree on a Critical Service Level commitment using industry standard measures as described in Section [1.7(a)(2)] above, the Parties shall do the following: (i) HP-OMS shall begin providing monthly measurements within thirty(30)days after HP-OMS' receipt of Customer's written request and subject to agreement on such measurements in accordance with the Commercial Change Management Process. (ii) After six (6) or more actual service level attainments have been measured (or should have been measured pursuant to Section [1.7(a)(3)(i)] above, Customer may at any time in writing request that Section [1.7(a)(1)] above be used to establish the Critical Service Level commitments. 10 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Service Levels and Service Level Credits B. Deletions. The parties may delete Critical Service Levels using the Commercial Change Process by sending written notice to HP-OMS at least thirty (30) days prior to the date that such deletions to Critical Service Levels are to be effective. Customer shall, in the case of deletions, modify the Service Level Credit Allocation Percentages for the remaining Critical Service Levels such that the total of the Service Level Credit Allocation Percentages for all remaining Critical Service Levels equals [**]percent ([**]%). C. MODIFICATIONS. The parties may modify the Service Level Credit Allocation Percentages for Critical Service Levels. Customer also may remove existing and add new Critical Service Levels. In both cases the parties will use the Commercial Change Management Process, subject to Section 1.7(d) below. Customer shall notify HP-OMS in writing of such changes at least thirty (30) days prior to the date such modifications to the Critical Service Levels are to be effective in order to initiate a Change Management process. Customer shall, in the case of modifications, modify the Service Level Credit Allocation Percentages for the remaining Critical Service Levels such that the total of the Service Level Credit Allocation Percentages for all Critical Service Levels equals [**]percent ([**]%). D. PERMITTED CHANGES TO. Notwithstanding anything to the contrary, Customer and/ or HP-OMS may make changes in the Service Level Credit Allocation Percentage(s) for one (1) or more Incidents, set out in Exhibit C, Appendix A, Table 1, without being subject to the Commercial Change Management Process, by giving HP-OMS at least thirty (30) days prior written notice, provided that (i) there is no change either to the Time to Own or Time to Resolve parameters per Incident; and (ii) the total of the Service Level Credit Allocation Percentages for all Critical Service Levels remains equals to [**]percent ([**]%). E. NOTICE REQUIREMENT. Customer will send written notice to HP-OMS at least thirty (30) days prior to the date that such additions, deletions or modifications to Critical Service Levels are to be effective or for which agreement or measurement should be undertaken or initiated pursuant to Section [1.7(a)] above. 11 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Service Levels and Service Level Credits 1.8 TECHNOLOGY REFRESH PROGRAM A. In the event that HP-OMS fails to comply with the Technology Refresh Program by upgrading or replacing the Refreshed Assets in accordance with Appendix A, Section 2.11 (Technology Refresh Program) on or before the Maximum Asset Age (defined in APPENDIX A, SECTION 2.11), such failure shall be deemed a Critical Service Level Failure and HP-OMS shall provide Customer credits as defined below: In the event of a Critical Service Level Failure in connection with the Technology Refresh Program which continues for a period in excess of sixty (60) calendar days, HP-OMS shall pay to Customer (or apply against Monthly Target Charges) five percent (5%) per month of the fair market value of the asset that should have been replaced or upgraded. B. In the event HP-OMS fails to purchase the relevant Refreshed Assets in accordance with the Technology Refresh Program by more than one hundred and eighty (180) calendar days, such delay shall be deemed to be a material breach of the Agreement. 1.9 TIMES Unless otherwise set forth herein, all references in this Exhibit C to times shall refer to the time at the applicable Customer Site. 1.10 EXCEPTIONS HP-OMS will be relieved of responsibility for Critical Service Level(s) and associated Service Level Credits in accordance with the Agreement (including situations where responsibility has been suspended) or pursuant to the mutual agreement of the Parties and/or to the extent HP-OMS' failure to meet the Critical Service Level(s) is due to: (a) Problems resulting from components (other than the Customer's IT Environment) for which HP-OMS is not operationally responsible under the Agreement; or 12 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Service Levels and Service Level Credits (b) Circumstances that excuse performance in connection with a Force Majeure Event as specified in Section [21.6] (Force Majeure) of the Agreement. (c) Cases where 3rd party contracts that are under Customer's responsibility, are needed to resolve incidents and for which the response time and/or resolve time doesn't comply with the Service Level as detailed in EXHIBIT C APPENDIX A. (d) Cases where Customer's Personnel or Customer's 3rd party employees, other then HP-OMS Personnel, failed to comply with the written procedures and guidelines agreed (in writing) between HP-OMS and the Customer. (e) Customer's faulty written instructions to HP-OMS to install or configure (i) Customer's proprietary software; or (ii) third party software or hardware, provided HP-OMS advises Customer in writing that such instructions are contrary to the third party licensor's/ manufacturer's associated documentation. Fault guidelines or fault instructions from the Customer or Customer's representative 13 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Service Levels and Service Level Credits 2 PRIORITIES 2.1 GENERAL The Incident Priority will be determined by the following factors, as set out in Tables 1, 2 and 3 below: o The number of users affected by the Incident o The number of Customer Sites affected by the Incident o The severity of the problem o The business risk Priorities are defined as: TABLE 1 - PRIORITIES DEFINITIONS & TIME TO OWN DEFINITIONS
NO PRIORITY PRIORITY DESCRIPTION [**] - ----- ----------- ------------------------------------------------------ ---- 1 MUO - Multi Incident in which all users at a Customer Site or more [**] User Outage than [**] users in one or more Customer Sites are affected and there is a high business risk involved, as determined by Customer 2 Critical Incident in which all users at a Customer Site or more [**] than [**] users in one or more Customer Sites are affected and there is a medium business risk involved, as determined by Customer 3 Regular Incident in which one or more users in one or more [**] Customer Sites are affected and there is a low business risk involved, as determined by Customer
14 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Service Levels and Service Level Credits
NO PRIORITY PRIORITY DESCRIPTION [**] - ----- ----------- ----------------------------------------------------- --------- by Customer 4 Low Incident in which one or more users at one or more [**] Customer Sites are affected and there is no business risk involved, as determined by Customer
The Priority will be categorized by the type of the Customer Site, as detailed in Tables 2 and 3 below: TABLE 2: PRINCIPALS PRINCIPLES OF PRIORITY ASSIGNMENTS IN CLASS1 SITES MORE THAN ALL ONE ONE IMPACT ON CUSTOMER CUSTOMER CUSTOMER MORE THAN SERVICE SITES SITE SITE ONE USER 1 USER - ------------------------------------------------------------------------------- UNABLE TO MUO MUO MUO Critical Critical WORK SEVER IMPACT WITH WORK MUO MUO Critical Regular Regular AROUND AVAILABLE LOW IMPACT Critical Regular Low Low Low TABLE 3: PRINCIPLES PRINCIPALS OF PRIORITY ASSIGNMENTS IN CLASS 2 SITES 15 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Service Levels and Service Level Credits MORE THAN ALL ONE ONE IMPACT ON CUSTOMER CUSTOMER CUSTOMER MORE THAN SERVICE SITES SITE SITE ONE USER 1 USER - ------------------------------------------------------------------------------- UNABLE TO MUO MUO Critical Regular Regular WORK SEVERE IMPACT WITH WORK MUO MUO Regular Regular Low AROUND AVAILABLE LOW IMPACT Critical Regular Low Low Low 2.2 PRIORITY REPORTING When reporting an Incident, the Ticketing System will automatically ask the user several questions in order to set the Priority automatically by pre-defined rules that will be mutually agreed by HP- OMS and Customer in accordance with Tables 1,2, and 3 in Exhibit C and Tables 1 and 11 in Exhibit C, Appendix A the user shall also report the Priority. The information system Priority setting can be changed by the Commercial Change Management Process. Notwithstanding the foregoing, in special cases, such as the occurrence of an Incident report prior to a user's business trip or an important meeting, the user shall be entitled to contact the MCC to change the Priority of an Incident and HP-OMS that will change the Priority of the such Incident and respond in accordance with the Service Levels. 16 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Service Levels and Service Level Credits 3 SERVICE WINDOW 3.1 GENERAL SERVICE WINDOW HP-OMS will provide a general Service Window, which will apply to all Incidents of all Priorities except MUO Priority Incidents. The Service Window will be provided at the following Customer Site local times (local holidays will be considered weekend days). GENERAL SERVICE WINDOWS FOR ALL CUSTOMER SITES WORLDWIDE EXCEPT ISRAEL WILL BE: o Monday - Friday 8:00AM-5:00PM (Local time) or 9:00AM-6:00PM (Local time) - Depending on office working hours GENERAL SERVICE WINDOWS FOR ISRAEL WILL BE: o Sunday - Thursday 8:00AM-7:00PM (Collectively, the "GENERAL SERVICE WINDOW"). 3.2 MCC SERVICE WINDOW MCC Service Window will be 24 hours a day, 6 days a week, world wide for all Customer Sites. From Saturday 6:00am (Israel time) until Sunday morning 5:59am (Israel time), MCC will operate with an On Call person who will receive the calls and will provide the services with one (1) hour response time. The payment mechanism for the On Call service will be defined in Exhibit E section 3.3. The On Call person will have, at least, the following skill set: o Windows System Administration o Security connectivity systems o Exchange System Administrator 17 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Service Levels and Service Level Credits PHONE SUPPORT FOR TRAVELING END-USERS : While traveling, end-users will receive phone support from the MCC according to the support process described in EXHIBIT B, SECTION 5.8 - REMOTE AND TRAVELING END-uSERS. In the event an end-user is directed to a beeper or voice mail, the MCC will contact the end-user by telephone within thirty (30) minutes from the moment a message was left. (All of the above, collectively, the "MCC SERVICE WINDOW") 3.3 DOWNTIME 3.3.1 SCHEDULED/PLANNED DOWNTIME Customer and HP-OMS will agree on defined maintenance windows to allow HP-OMS to perform regular preventive maintenance, proactive maintenance for system administration, and tasks to improve service performance. Downtimes will be scheduled for after-work hours of the relevant Customer Site and will be planned not to occur during the last three (3) weeks before the Version Release Period or the End of Quarter (as such terms are defined in EXHIBIT B, SECTION 4 (AVAILABILITY MANAGEMENT)). Customer will not be charged by HP-OMS for Services provided outside of the General Service Window for on going maintenance and system administration work. In addition to the General Service Window, HP-OMS and Customer will mutually agree on 4 major down times a year, which will be used to introduce major network/service changes. All downtime outages must be pre-approved by the Customer. HP-OMS and Customer will send advance notification to the end-users who will be impacted by the down time. The advanced notification will allow them the time to ask for a postponement, if needed. HP-OMS shall not charge Customer for scheduled and/or planned downtime, even if it occurs outside of the General Service Window. 18 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Service Levels and Service Level Credits 3.3.2 EMERGENCY DOWNTIME HP-OMS will define an Emergency Planned Downtime (EPD) procedure during the Transition and Stabilization Phases. This process will allow for immediate down time resulting from (and designed to prevent) anticipated system failure, which potentially could result in even longer system unavailability. Emergency Downtime must be pre-approved by the Customer, which approval shall be reviewed by the Customer on an emergency basis. 3.4 ON-CALL SERVICE OUTSIDE THE GENERAL SERVICE WINDOW HP-OMS shall provide Services (on an on-call basis) outside the General Service Window, if requested by Customer's authorized personnel, as set out in EXHIBIT B, APPENDIX A. o During defined periods of time (i.e. End of Quarter Period, Version Release Period, etc.) MCC will be a point of contact for urgent end-user issues at Customer Sites worldwide at no additional charge to Customer. o In the event on site help is outside of the General Service Window in Israel, HP-OMS will provide an on-call support person able to arrive on site (at the Customer Site) over weekends within 4 hours' notice at the Israeli Site. If on site help is needed, Customer will be charged, in addition, for the actual working time on site on Fridays at the Bank of Work Hours rates as specified in Exhibit E Section 3.2 (BANK OF HOURS) and on Saturdays at the MCC On Call Services rates according to Exhibit E Section 3.3 (MCC ON CALL SERVICES). o In the event on site help is necessary outside the General Service Window in Customers Sites out of Israel, HP-OMS will provide an on-call support person able to arrive on site within four (4) hours notice at Customer sites outside Israel. Customer will be charged for such arrival time at the rate of 1 Bank of Work Hour for every 4 on-call hours. If on site help is needed, Customer will be charged, in addition, for the actual working time on site (including traveling time) at the Bank of Work Hours rates as specified in Exhibit E Section 3.2 (BANK OF HOURS). 19 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Service Levels and Service Level Credits o The Customer must inform HP-OMS two (2) business days in advance of the need to have on-call person(s) available, as described above with the ability to cancel the request twenty-four (24) hours in advance. 3.5 SERVICE WINDOW EXCEPTIONS Remote traveling end-users (also defined as Class 3 Customer Site in Exhibit B) will be given 1st tier support by phone and will receive service per call on a 24/7 basis. 20 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Service Levels and Service Level Credits 4 RESOLUTION CONTINUITY The resolution process for MUO or Critical Priority Incidents will not stop even if it extends the General Service Window or MCC Service Window. The resolution process will continue within and outside of the applicable Service Window until full resolution or workaround has been implemented. The resolution process of Regular and Low Priorities will be performed during the General Service Window. If an Incident is not resolved during the General Service Window, the resolution process will stop and continue during the next General Service Window. 21 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Service Levels and Service Level Credits 5 BASELINE INDEPENDENT SURVEYS A. Within fifteen (15) days after the Effective Date (of the Agreement), the Parties shall mutually agree on the identity of an independent third party that will conduct a baseline customer satisfaction survey of the Services to be provided under this Agreement in accordance with the survey protocols and procedures specified in EXHIBIT D (TRANSITION AND STABILIZATION) (the "BASELINE SURVEY"). At least thirty (30) days before the Commencement Date, such independent third party shall have conducted the survey and shall submit the results to Customer for its approval. Such Baseline Survey shall thereafter become the baseline for measuring performance improvements and conducting other satisfaction surveys hereunder. During the Term and as part of the Services, HP-OMS shall engage independent third parties (such third parties to be approved in advance by Customer) to conduct satisfaction surveys at least on a semi-annual (every six months) basis, beginning on one year after Commencement Date (2 months after the end of Transition and Stabilization phase) the date of delivery of the Baseline Survey. The survey shall at a minimum cover at least the following classes of users: (i) end users of the Services ; and (ii) senior management of end users . The content, scope, and method of the survey shall be consistent with the Baseline Survey. B. Customer Conducted Surveys. In addition to the satisfaction surveys to be conducted by an independent third party pursuant to Section 5 herein, Customer may survey end user satisfaction with HP-OMS' performance in connection with and as part of broader end user satisfaction surveys periodically conducted by Customer. At Customer's request, HP-OMS shall cooperate and assist Customer with the formulation of the survey questions, protocols and procedures and the execution and review of such surveys. 22 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Service Levels and Service Level Credits Survey Follow-up. If the results of any satisfaction survey conducted pursuant to Sections 5 herein indicate that the level of satisfaction with HP-OMS' performance is less than the level of the Baseline Survey, HP-OMS shall promptly: (i) analyze and report on the root cause of the management or end user dissatisfaction; (ii) develop an action plan to address and improve the level of satisfaction; (iii) present such plan to Customer for its review, comment and approval, and (iv) take action in accordance with the approved plan and as necessary to improve the level of satisfaction. Customer and HP-OMS shall establish a schedule for completion of a Root Cause Analysis and the preparation and approval of the action plan which shall be reasonable and consistent with the severity and materiality of the problem; provided, that the time for completion of such tasks shall not exceed thirty (30) days from the date such user survey results are finalized and reported. HP-OMS' action plan developed hereunder shall specify the specific measures to be taken by HP-OMS and the dates by which each such action shall be completed. Following implementation of such action plan, HP- OMS will conduct follow-up surveys with the affected Customer users and management to confirm that the cause of any dissatisfaction has been addressed and that the level of satisfaction has improved. The implementation of said plan shall be subject to Change Management Process as follows: o Changes which require modifications in order to enable HP-OMS to meet its undertakings as per the agreed Service Level - shall be borne and paid by HP-OMS. Changes which require modifications to the current in scope services will be bare by HP-OMS o Changes which require additional modifications which change the agreed Service Level - shall be borne and paid by Customer. Changes which require additional out of scope equipment will be bare by Customer C. Customer shall consider the results of the surveys in evaluating HP-OMS' qualifications to be awarded additional business. D. Consistent inability to meet satisfaction survey standards will be deemed a material breach of this Agreement. HP-OMS agrees that increasing measured customer satisfaction shall be a key performance incentive for compensation for Key Personnel assigned to Customer's account. E. Costs and expenses of independent third parties which will perform the above Surveys will be paid as follows: (i) Baseline Survey costs and expenses will be born by HP-OMS (ii) Future Surveys costs and expenses will be split on a fifty fifty basis between HP-OMS and Customer 23 EX-99 11 exhibit-c_apendix.txt PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Appendix A to Exhibit C PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC
1 CRITICAL SERVICE LEVELS AND SERVICE LEVEL CREDITS 3 2 INFRASTRUCTURE SLA MEASUREMENTS 7 2.1 GENERAL......................................................................... 7 2.2 MESSAGING DELIVERY SLA.......................................................... 7 2.3 LAN AVAILABILITY................................................................ 8 2.4 WAN AVAILABILITY................................................................ 8 2.5 GENERAL NETWORK PERFORMANCE SLA................................................. 9 2.6 SERVER UP TIME.................................................................. 9 2.7 AVAILABILITY CALCULATION........................................................ 10 2.8 BACKUP AND RESTORE SLA.......................................................... 10 2.9 PROCUREMENT AND IT ADMINISTRATIVE SLA........................................... 11 2.10 HP-OMS OVERALL SLA COMMITMENT FOR MUO AND CRITICAL PRIORITY INCIDENTS........... 12 2.11 TECHNOLOGY REFRESH PROGRAM SLA.................................................. 12 2.12 NEW EMPLOYEES HARDWARE AND SOFTWARE............................................. 16 3 REGULAR AND LOW PRIORITY SERVICE LEVELS 18 3.1 HP-OMS OVERALL SLA COMMITMENT FOR REGULAR & LOW PRIORITY INCIDENTS.............. 18 3.2 "MAXIMUM TIME TO RESOLVE" SERVICE LEVEL......................................... 18 3.3 SERVICE LEVELS FOR REGULAR AND LOW PRIORITY INCIDENTS........................... 19 APPENDIX B: FORM OF CRITICAL SERVICE LEVEL REPORTS........................................ 24 APPENDIX C: FORM OF SOFTWARE TO BE PROVIDED TO NEW CUSTOMER'S EMPLOYEES................... 26
2 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 1 CRITICAL SERVICE LEVELS AND SERVICE LEVEL CREDITS For each Service, HP-OMS shall comply with the Time to Own and Time to Resolve parameters for each Critical Service Level set out in Table 1, and subject to the Service Level Credits in the case of a Critical Service Level Failure, as follows: TABLE 1: CRITICAL SERVICE LEVELS
TIME TO TIME TO TIME TO RESOLVE RESOLVE SERVICE LEVEL OWN AN CLASS 1 CLASS 2 CREDIT INCIDENT SITES (IN SITES (IN ALLOCATION NO. PRIORITY TYPE INCIDENT DESCRIPTION (IN HOURS) HOURS) HOURS) PERCENTAGE - ---- ---------- ----------------- ------------------------------ ---------- --------- --------- ------------- 1 MUO Hardware [**] [**] [**] [**] [**] 2 MUO Hardware Printer hardware failure and [**] [**] [**] [**] all end users cannot print to alternative printer Failure to comply with Server 3 MUO Servers Up Time according to SECTION [**] 2.6 Failure to comply with Backup and Restore SLA 4 MUO Servers according to SECTION 2.8 [**] TABLE 6 5 MUO Servers [**] [**] [**] [**] [**] 6 MUO Servers [**] [**] [**] [**] [**] 7 Critical Servers [**] [**] [**] [**] [**] 8 MUO Servers [**] [**] [**] [**] [**] 9 MUO Servers [**] [**] [**] [**] [**] Exchange delivery time does Mail not comply with Messaging 10 MUO Delivery SLA Table 2 and [**] Table 3, as set out in SECTION 2.2 BELOW 11 MUO Mail [**] [**] [**] [**] [**] 12 MUO Mail [**] [**] [**] [**] [**] 13 MUO Network [**] [**] 14 MUO Network [**] [**] 15 MUO Network [**] [**] [**] [**] [**] 16 MUO Network [**] [**] [**] [**] [**]
3 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC
TIME TO TIME TO TIME TO RESOLVE RESOLVE SERVICE LEVEL OWN AN CLASS 1 CLASS 2 CREDIT INCIDENT SITES (IN SITES (IN ALLOCATION NO. PRIORITY TYPE INCIDENT DESCRIPTION (IN HOURS) HOURS) HOURS) PERCENTAGE - ---- ---------- ----------------- ------------------------------ ---------- --------- --------- ------------- 17 MUO Network [**] [**] [**] [**] [**] 18 MUO Network [**] [**] [**] [**] [**] 19 MUO Storage [**] [**] [**] [**] [**] 20 MUO Storage [**] [**] [**] [**] [**] 21 MUO Antivirus [**] [**] [**] [**] [**] 22 MUO Firewall [**] [**] [**] [**] [**] 23 MUO Firewall [**] [**] [**] [**] [**] 24 MUO Firewall [**] [**] [**] [**] [**] Content 25 MUO Protection [**] [**] [**] [**] [**] (e-Safe) 26 MUO Business [**] [**] [**] [**] [**] Application 27 MUO Business [**] [**] [**] [**] [**] Application 28 Critical WES [**] [**] [**] [**] [**] 29 Critical WES [**] [**] [**] [**] [**] 30 Critical WES [**] [**] [**] [**] [**] 31 Critical WES [**] [**] [**] [**] [**] 32 Critical WES [**] [**] [**] [**] [**] 33 Critical WES [**] [**] [**] [**] [**] 34 Critical Hardware [**] [**] [**] [**] [**] 35 Critical Hardware [**] [**] [**] [**] [**] 36 Critical Hardware [**] [**] [**] [**] [**] 37 Critical Servers [**] [**] [**] [**] [**] 38 Critical Servers [**] [**] [**] [**] [**] 39 Critical Servers [**] [**] [**] [**] [**] 40 Critical Servers [**] [**] [**] [**] [**]
4 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC
TIME TO TIME TO TIME TO RESOLVE RESOLVE SERVICE LEVEL OWN AN CLASS 1 CLASS 2 CREDIT INCIDENT SITES (IN SITES (IN ALLOCATION NO. PRIORITY TYPE INCIDENT DESCRIPTION (IN HOURS) HOURS) HOURS) PERCENTAGE - ---- ---------- ----------------- ------------------------------ ---------- --------- --------- ------------- 41 Critical Servers [**] [**] [**] [**] [**] 42 Critical Mail [**] [**] [**] [**] [**] 43 Critical Mail [**] [**] [**] [**] [**] 44 Critical Network [**] [**] [**] [**] [**] 45 Critical Network [**] [**] [**] [**] [**] 46 Critical Network [**] [**] [**] [**] [**] 47 Critical Unix Support & [**] [**] [**] [**] [**] Administration 48 Critical Unix Support & [**] [**] [**] [**] [**] Administration 49 Critical Unix Support & [**] [**] [**] [**] [**] Administration 50 Critical Storage [**] [**] [**] [**] [**] 51 Critical Storage [**] [**] [**] [**] [**] 52 Critical Business [**] [**] [**] [**] [**] Application 53 Critical Business [**] [**] [**] [**] [**] Application 54 N/A Procurement and [**] [**] IT administration 55 Regular Overall SLA [**] [**] Commitment 56 Regular Overall SLA [**] [**] Commitment 57 Regular Overall SLA [**] [**] Commitment 58 Low Overall SLA [**] [**] Commitment 59 Low Overall SLA [**] [**] Commitment 60 Low Overall SLA [**] [**] Commitment
The Time to Own for Critical Priority Incidents, which are related to one user will be measured within the General Service Window. The Time to Own for MUO and Critical Priority Incidents, which are related to more then one user will be measured immediately when the incident is open within a twenty-four (24) hour period. The Time to Resolve for MUO and Critical Priority Incidents is a number of hours within a twenty-four (24) hour over six (6) days (exclude Saturdays) period. Such resolution efforts will be continuous, even if they extend the General Service Window or MCC Service Window. .. 5 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Whether or not Service Level Credits apply, the resolution process for MUO and Critical Priority Incidents will continue until full resolution or workaround, agreed by the Tecnomatix Key Personnel, has been implemented. 6 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 2 INFRASTRUCTURE SLA MEASUREMENTS 2.1 GENERAL The metric and SLA figures in this Section (2) represent both Critical Services Levels and other Service Levels. HP-OMS shall comply with all Service Levels, but only Critical Service Level Failures may trigger Service Level Credits. SECTION 1, TABLE 1 contains all of the Critical Service Levels, unless modified in accordance with Exhibit C (although not all of the Critical Service Levels are referenced in this Section 2). It is agreed that HP-OMS and Customer will review all Service Levels six (6) months following the end of the Transition and Stabilization Phases and thereafter every six (6) months throughout the Term. This review process will allow Customer and HP-OMS to mutually adjust the Service Levels according to performance reports and mutual analysis. 2.2 MESSAGING DELIVERY SLA The Message Delivery time is measured by sending test messages once per 6 hours from all mail servers to all mail servers. Messages less than [**] shall be delivered anywhere in the world in [**]in more than [**]% of the cases, and messages larger then [**] shall be delivered anywhere in the world according to the table below in more than [**]% of the cases. The 1-month average will be reviewed once every 6 months. TABLE 2: MAIL METRIC INSIDE CUSTOMER'S NETWORK - TIME FOR A 100K MAIL MESSAGE TO ARRIVE TO ITS DESTINATION FROM EACH REGION: Site Europe USA Israel Asia-Pacific -------------- ---------- --------- ---------- ---------------- 1 Europe 7 min 7 min 7 min 7 min 2 USA 7 min 7 min 7min 7 min 3 Israel 7 min 7 min 1 min 7 min 4 Asia-Pacific 7 min 7 min 7 min 7 min TABLE 3: MAIL METRIC INSIDE CUSTOMER'S NETWORK - TIME FOR A 1MB MAIL MESSAGE TO ARRIVE TO ITS DESTINATION FROM EACH REGION: Site Europe USA Israel Asia-Pacific -------------- ---------- ---------- ---------- --------------- 1 Europe 20 min 40 min 20 min 50 min 2 USA 40 min 20 min 30 min 50 min 3 Israel 20 min 30 min 5 min 50 min 4 Asia-Pacific 50 min 50 min 50 min 40 min o Address books are updated in all [**] of changes made. 7 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC ASSUMPTIONS: o The maximum size of a mail message is 5 Mb in order to guarantee consistent service o All Customer Sites are connected to Customer's WAN 2.3 LAN AVAILABILITY HP-OMS will provide the Customer with LAN network related services as described in EXHIBIT B SECTION 6.6 - LAN/ WAN MANAGEMENT. HP-OMS responsibilities: o Provide addresses and network configuration to network attached devices o Network interconnection within a Customer Site o Interface to WAN router and wall sockets in the Customer Site The 1-month average On-time Delivery for LAN services figures are as follows (see SECTION 2.7 BELOW (AVAILABILITY CALCULATION): 1. Monthly commitment in all Class1 Customer Sites: [**] % 2. Monthly commitment in all Class 2 Customer Sites: [**]% 2.4 WAN AVAILABILITY HP-OMS will provide the Customer with WAN services in all Customer Sites worldwide. As part of the Transition and Stabilization Phases, HP-OMS will consolidate WAN network services to allow central monitoring and control over all WAN resources and will be able to commit to WAN availability as shown below. HP-OMS according to its sole discretion will be able to change the network provider and/or the network topology. Such change must comply with the Service Levels as detailed herein and with Customer security policy HP-OMS responsibilities: o Provide WAN communication to Customer sites world wide as described in EXHIBIT B SECTION 6.6 - LAN/ WAN MANAGEMENT o Responsible to ensure on going operating WAN dependent services (Internet, Intranet, File Sharing, etc.) o Maintain or improve network performance as it exists prior to commencement date as the baseline for all future WAN services (WAN indicators will be available from Customer's current network provider and by individual site analysis performed mutually by HP-OMS and the Customer) 8 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC The 1-month average On-time Delivery for WAN services figures are as follows (see SECTION 2.7 BELOW (AVAILABILITY CALCULATION): o Monthly commitment for WAN availability in all Customer Class 1 sites: [**]% o Monthly commitment for WAN availability in all Customer Class 2 sites: [**]% 2.5 GENERAL NETWORK PERFORMANCE SLA As agreed with the Customer, HP-OMS network performance SLA commitment to the Customer will be as follows: HP-OMS WILL PROVIDE NETWORK BANDWIDTH ACCORDING TO THE FOLLOWING FORMULA FOR [**]: o Class 1 sites [**] bandwidth = Number of [**] o Class 2 sites [**] bandwidth = Number of [**] HP-OMS WILL PROVIDE NETWORK BANDWIDTH ACCORDING TO THE FOLLOWING FORMULA FOR [**]: o Class 1 sites bandwidth = Number of [**] o Class 2 sites bandwidth = Number of [**] HP-OMS WILL ENSURE THAT THE FOLLOWING USAGE INDICATORS: o Mail (SMTP) - As detailed on SECTION 2.2 o Clear Case / Source Safe o Clarify Report o SUN o FTP 2.6 SERVER UP TIME HP-OMS will provide the Customer with server services in all branches worldwide. As part of the Transition and Stabilization Phases, HP-OMS will consolidate, upgrade and install a monitoring agent on all Customer servers to allow central monitoring and control over all servers and will be able to commit to server up time as shown below. HP-OMS responsibilities: o Provide support maintenance of all servers Customer wide o Responsible to ensure on going operating Servers and dependent services o Maintain Server and Server services at all Customer Sites o Analysis of up time will be performed by HP-OMS and will be presented to the Customer on a monthly basis o Monthly commitment for server up time in all Class1 Customer Sites: [**]% o Monthly commitment for server up time in all Class 2 Customer Sites: [**]% 9 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 2.7 AVAILABILITY CALCULATION The availability calculation for the above sections is based on the availability measurement and performed as follows: AVAILABILITY=100- (TOTAL DOWNTIME-ECLUDED DOWNTIME) *100 --------------------------------------------- SUM(HOURS OF OPERATION PER CALULATION PERIOD) TABLE 5: DEFINITION OF TERMS DOWNTIME means the time during which a specific service is not available EXCLUDED DOWNTIME means Downtime that is approved by the Customer in writing in advance and/or as agreed in EXHIBIT C SECTION 3.3 (DOWNTIME) HOURS OF OPERATION PER means the number of hours in the Measurement Period CALCULATION PERIOD 2.8 BACKUP AND RESTORE SLA HP-OMS has responsibility for the following: Creating backup copies of all data residing in all servers within the IT Environment and routine backup procedures, as well as the monitoring of the success and correctness of the backup procedures to ensure a quick recovery into production for the servers and the individual files. BACKUP: Backups must be performed by HP-OMS according to Customer and HP-OMS Backup Policy worldwide, which will be mutually defined by the Parties during the Transition and Stabilization Phases. There are several types of Backup Sets: daily, weekly, monthly, yearly and permanent. Type of Backup Set, Backup Frequency, Restorability Rate, Safekeeping Times, Maximum Time to Restore are presented in the table below. Backup of the data will be performed once every working day, during the night (Local Customer Site time). "RESTORABILITY RATE" means the rate of successful restore of an entity such as a file, directory or database can be restored from the backup media in the agreed time. A copy from the full backup is performed at least every month and this copy is stored in locked fireproof safes, in a remote location, which is the Customer's responsibility. 10 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC TABLE 6: BACKUP AND RESTORE SLA
MAXIMUM TIME TO MAXIMUM TIME TO START RESTORE - START RESTORE - TYPE OF BACKUP SET BACKUP FREQUENCY RESTORABILITY RATE SAFEKEEPING TIME CLASS 1 SITES CLASS 2 SITES - -------------------- ------------------ -------------------- ------------------ ------------------ ---------------- DAILY [**] [**] [**] [**] [**] WEEKLY [**] [**] [**] [**] [**] MONTHLY [**] [**] [**] [**] [**] YEARLY [**] [**] [**] [**] [**] ETERNITY [**] [**]
RESTORE: The Safekeeping Time and Restoring Time depend on the Type of the Backup Set according to the table above. HP-OMS shall restore data or applications (e.g. Clarify) as they were at the time of the backup. HP-OMS is responsible for the applications' ability to use restored data. EXCLUDED: o HP-OMS will not guarantee backup data and restore quality of backup performed prior to Commencement Date. o Safekeeping remote location and tapes transition to that remote location is the Customer's responsibility 2.9 PROCUREMENT AND IT ADMINISTRATIVE SLA The following table describes the SLA for the procurement and IT administrative tasks performed by HP-OMS. TABLE 7: DETAILED PROCUREMENT AND IT ADMINISTRATIVE SLA ITEM NUMBER SERVICE SLA - ------ --------------------------------------- -------------------------- 1 Regular procurement request [**] 2 Urgent procurement request [**] 3 Procurement request which requires at [**] least 3 price offers 4 Invoice Customer for the procured goods [**] (Payment terms according to Exhibit E) 5 Software license status [**] 6 3rd party contract information [**] 7 Provide IT information for RFI/RFP Will be mutually agreed on process a case by case basis 8 Asset information [**] 9 Delivery [**] 10 Pricing [**] 11 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 2.10 HP-OMS OVERALL SLA COMMITMENT FOR MUO AND CRITICAL PRIORITY INCIDENTS For each Incident, the Time to Own and Time to Resolve will be inserted into the Ticketing System. For each Incident entered into the Ticketing System, the Time to Own and the Time to Resolve for Critical Service Levels (i.e. set out in SECTION 1, TABLE 1) will be measured against the actual Time to Own and Time to Resolve achieved by HP-OMS within the Measurement Period. If HP-OMS does not comply with the Time to Own or the Time to Resolve Service Levels with respect to a particular Incident, the ticket for such Incident shall be deemed to be a failed ticket (whether or not HP-OMS eventually resolves the Incident). If HP-OMS complies with the Time to Own and the Time to Resolve Service Levels with respect to a particular Incident, the ticket for such Incident shall be deemed to be a successful ticket. HP-OMS shall measure and report its success/fail rate to Customer for all Service Levels for MUO and Critical Priority Incidents on a monthly basis. Without limiting the Customers right to terminate the agreement for Material Breach, if, for a consecutive three (3) month period, the Total Average Success Rate constitutes a substantial deviation from MUO and Critical Time to Resolve parameters of the Critical Service Levels, HP-OMS will be deemed to be in material breach of the Agreement. 2.11 TECHNOLOGY REFRESH PROGRAM SLA HP-OMS will provide the Customer with technology refresh of the HP-OMS Hardware and HP-OMS Software. At the beginning of each calendar quarter, HP-OMS and Customer will mutually prepare a list of the prospective assets to be replaced in accordance with the Customer preferences and Customer's IT environment needs. The hardware amounts to be supplied by HP-OMS are detailed in Table 9 and Table 10 herein. The hardware models that will be provided by HP-OMS are detailed in table 9 herein. By the end of such quarter, all such assets must be replaced. The hardware and software supplied by HP-OMS will be according to the local standard of langue in use at the specific office (i.e. operating system and keyboard). All Servers and Laptops included within the Refreshed Assets, Add-On Assets and New Customer Employee Assets must be maintained at a level equal to or better than HP's "Carepack Service", e.g., on a 24X7 basis, with repairs within 4 hours of the call for servers etc. 12 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC TABLE 9: TECHNOLOGY REFRESH SLA
ITEM DESCRIPTION MAXIMUM ASSET AGE(2) - -------------------------- ------------------------------------------------- --------------------------- Office desktop Computer desktop that can run the latest office [**](5) environment applications [**]) Will be replaced with water fall developers desktops Developer desktop Computer desktop that can run [**] [**]. The computer will have [**] or similar [**] card and the second best CPU available upon time of purchase (like EvoD510 or (3)Equivalent) Office laptop Computer laptop that can run the latest office [**] environment applications (like [**] Sales Laptop Computer laptop that can run [**]. The laptop [**] will have [**]or similar [**]support and the second best CPU available for laptop upon time of purchase (like [**]. Such hardware can be provided as refurbish hardware with a minimum of [**] years Carepaq service. Unix Workstation Unix workstation which can run the latest [**] operating system and development environment applications as utilized by the Customer (like [**]. Such hardware can be provided as refurbish hardware with a minimum of [**]Carepaq service. Laser printers Department laser printer (like LaserJet 4600/ 4 4200/1300 or (3)Equivalent) Ink-Jet printers Color ink printers for personal and department 4 usage (like HP DeskJet 6122/ink jet 3000 or (3)Equivalent) Peripheral equipment Configuration will be determined according to [**] the [**] Storage devices(4) Storage system category, which is Equivalent to [**] the storage system used by the Customer with minimal storage capacity that is [**]% greater then currently in use. Backup and Restore Systems Backup system which can backup Customer site 5 data without manual interference Networking Equipment Latest available network equipment available 5 upon date of refresh with respect to equipment category currently in usage by the Customer.
13 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC
ITEM DESCRIPTION MAXIMUM ASSET AGE(2) - -------------------------- ------------------------------------------------- --------------------------- Microsoft Software Latest released software 3 product available from 3 Microsoft upon the date of refresh. HP-OMS Software except Latest released software product available from 3.5 Microsoft Software the software vendor upon the date of refresh. Unix Server Configuration will be determined according to 5 Customer requirements with respect to average hardware configuration of the last 12 months of usage Back Office Servers Computer server that can run latest Microsoft [**] server's operating and applications utilized by the Customer. The server configuration will be according to the number of end-users at each site and will consist with second best parts configuration currently available in the market (like Based on [**]
An estimation for the hardware Technology Refresh program as described in Table 9 above will be applied according to the estimated information detailed in Table 10 herein (Customer Hardware Age At Commencement Date) and on Customer's end-users hardware needs as detailed in TABLE 11 herein (Customer's End-users Hardware Allocation). It is agreed between the parties that HP-OMS is allowed to use existing equipment (e.g. Customer Hardware, New Employee Assets or Refreshed Assets) for Technology Refresh purposes as long as the equipment age did not exceed its Maximum Age as described above (e.g. HP-OMS will be able to use computer equipment of retired employee for the Technology Refresh program as long as the computer age did not exceed the Maximum Age criteria). TABLE 10: ESTIMATION OF CUSTOMER HARDWARE AGE AT COMMENCEMENT DATE LAPTOP COMPUTERS AGE PERCENTAGE ------------------------------- AGE IN YEARS ISRAEL US EUROPE ASIA - ---------------------- ---------- --------- ----------- -------- 3 or more [**]% [**]% [**]% [**]% 2-3 [**]% [**]% [**]% [**]% 1-2 [**]% [**]% [**]% [**]% 1 or less [**]% [**]% [**]% [**]% Total Percentage 100% 100% 100% 100% 14 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC DESKTOP COMPUTERS AGE PERCENTAGE -------------------------------- AGE IN YEARS ISRAEL US EUROPE ASIA - ------------------------ ---------- -------- ----------- -------- 3 or more [**]% [**]% [**]% [**]% 2-3 [**]% [**]% [**]% [**]% 1-2 [**]% [**]% [**]% [**]% 1 or less [**]% [**]% [**]% [**]% Total Percentage 100% 100% 100% 100% For the avoidance of doubt, the maximum refreshed assets in the first 2 years following Commencement Date will not exceed [**]% of the total equipment. Equipment that has been refreshed by HP-OMS will be retired. HP-OMS will have the right to use retired equipment (equipment which passed the Maximum Age) for any purpose. 15 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC TABLE 11: CUSTOMER'S END-USERS HARDWARE ALLOCATION BY GROUP AND SUB-GROUP [**] In addition, the refresh program will apply to the following computer equipment: o [**] Desktops for labs and training purposes o [**] Power Desktops for labs and training purposes o [**] Power Desktops If the upgrade or replacement of development desktops will require (according to the needs of the Customer's software development teams) a more frequent refresh rate than the rate set out in Table 9, the requirement will be checked and mutually greed by the Customer's IT department and HP-OMS. If approved, HP-OMS may try to upgrade the relevant desktops part that is essential for the software development needs (e.g. memory upgrade). If upgrading the specific part is not possible, HP-OMS will replace the desktop on a per need basis and may use the replaced desktop for refreshing office desktop. (1) REFRESH RATE FOR SIX YEAR PERIOD means the amount of times every component will be replaced during the [**] (2) MAXIMUM ASSET AGE means the age specified in table 9 beyond which the assets set out in Table 9 shall not exceed. (3) EQUIVALENT means alternative Hardware, which falls under the same class definition of the current Hardware from any vendor. (4) STORAGE CAPABILITIES - HP-OMS will provide the Customer with [**]% growth in total storage capacity every year in addition to the refresh rate described in Table 9 in connection with Storage devices. (5) OFFICE DESKTOP MAXIMUM AGE - HP-OMS will provide the Customer [**]office desktop with Maximum Age of [**]. 2.12 NEW EMPLOYEES HARDWARE AND SOFTWARE HP-OMS will provide the Customer's new employees with Hardware and Software in accordance with her/his job description and group category. The Customer is required to notify HP-OMS 3 weeks in advance about the arrival such employee. Once the Customer had notified HP-OMS about the arrival of a new employee, HP-OMS will provide in 3- weeks period time the applicable hardware and software. The hardware will be supplied according to table 11 (CUSTOMER'S END-USERS HARDWARE ALLOCATION BY GROUP AND SUB-GROUP) and software will be provided according to Appendix C table 14 (Software to be provided to new employees) herein. 16 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC In case Customer cannot notify HP-OMS about the arrival of a new employee 3 weeks in advance, HP-OMS will provide the new employee an alternative hardware and/or software which will be as close as possible to the applicable configuration until such hardware/software will be available. New employees Hardware and Software will be subject to the same Technology Refresh Rate as described in section 2.11 herein. 17 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 3 REGULAR AND LOW PRIORITY SERVICE LEVELS 3.1 HP-OMS OVERALL SLA COMMITMENT FOR REGULAR & LOW PRIORITY INCIDENTS For each Incident, the Time to Own and Time to Resolve will be inserted into the Ticketing System. For each Incident entered into the Ticketing System, the Time to Own and the Time to Resolve for Service Levels (i.e. set out in Section 3.1, Table 11) will be measured against the actual Time to Own and Time to Resolve achieved by HP-OMS within the Measurement Period. If HP-OMS does not comply with the Time to Own or the Time to Resolve Service Levels with respect to a particular Incident, the ticket for such Incident shall be deemed to be a failed ticket (whether or not HP-OMS eventually resolves the Incident). If HP-OMS complies with the Time to Own and the Time to Resolve Service Levels with respect to a particular Incident, the ticket for such Incident shall be deemed to be a successful ticket. HP-OMS' "Overall SLA Commitment" with respect to Regular and Low Priority Incidents is to meet or exceed in each (monthly) Measurement Period: (a) The Minimum Success Rate for Time to Own, (b) The Minimum Success Rate for Time to Resolve and (c) The Minimum Success Rate for [**] (as defined in Section 3.2 below), As set out in Table 11 below, based on the Service Levels for Regular and Low Priority Incidents described in SECTION 3.3, TABLE 12, respectively. TABLE 11: OVERALL SLA COMMITMENT - REGULAR AND LOW PRIORITY INCIDENTS MINIMUM MINIMUM SUCCESS RATE SUCCESS RATE YEAR PRIORITY FOR TIME TO OWN FOR TIME TO RESOLVE [**] - ---------------- -------- --------------- ------------------- -------- 1st and 2nd Regular [**]% [**]% [**]% support years Low [**]% [**]% [**]% 3rd support year Regular [**]% [**]% [**]% and above Low [**]% [**]% [**]% 3.2 "MAXIMUM TIME TO RESOLVE" SERVICE LEVEL For each Service, HP-OMS shall comply with the Time to Own, Time to Resolve and Maximum Time to Resolve parameters for each Service Levels with Regular and Low Priorities set out in Table 11. These Services are subject to the Service Level Credits in the case of a Critical Service Level Failure, as detailed in Table 1. 18 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC The "Maximum Time to Resolve" indicator is intended to ensure that even in cases where HP-OMS' fails to meet the "Time to Resolve" Service Level for an applicable Regular or Low Priority Incident, as specified in Table 12 in Section 3.3 below, HP-OMS shall then meet a second "Maximum Time to Resolve" Service Level for such Incident.. The Maximum Time to Resolve is defined as follows: [**] 3.3 SERVICE LEVELS FOR REGULAR AND LOW PRIORITY INCIDENTS TABLE 12: REGULAR AND LOW INCIDENTS SERVICE LEVEL
TIME TO TIME TO TIME TO RESOLVE RESOLVE OWN AN CLASS 1 CLASS 2 INCIDENT SITES (IN SITES (IN NO. PRIORITY TYPE INCIDENT DESCRIPTION (IN HOURS) HOURS) HOURS) - ---- ---------- -------------- --------------------------------- ---------- --------- --------- Non critical operating system 61 Regular WES problem (e.g. OS error [**] [**] [**] messages) affecting end user work Operating system problem- 62 Regular WES (e.g. OS crashed, end-user [**] [**] [**] can't work) End-user problem (e.g. 63 Regular WES hardware failure) affecting [**] [**] [**] end user work Customer Software Service 64 Regular WES Request affecting end user [**] [**] [**] work HP-OMS Software problem 65 Regular WES (e.g. Outlook problem, Internet [**] [**] [**] Explorer error) affecting end user work Windows Administration Service Request (e.g. password reset/unlock, Group 66 Regular WES management, change end- [**] [**] [**] user properties) affecting one end user work Fully supported application- 67 Regular WES IMAC Service Request (e.g. Ms- [**] [**] [**] Office installation) and end user cannot work Make It Work Supported 68 Regular WES applications Urgent IMAC [**] [**] [**] Service Request Security Service Request (e.g. End-user infected file, secure remote etc) affecting end user 69 Regular WES work and the end user will not [**] [**] [**] infect the company with viruses
19 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC
TIME TO TIME TO TIME TO RESOLVE RESOLVE OWN AN CLASS 1 CLASS 2 INCIDENT SITES (IN SITES (IN NO. PRIORITY TYPE INCIDENT DESCRIPTION (IN HOURS) HOURS) HOURS) - ---- ---------- -------------- --------------------------------- ---------- --------- --------- Printing problem (e.g. printer 70 Regular WES doesn't work) and one end [**] [**] [**] user cannot print with ability to print to alternative printer Any other end-user WES service components (which are not 71 Regular WES mentioned above) end user [**] [**] [**] work is effected but can still do most of the work End-user hardware failure, (e.g., PC hardware failure), 72 Regular Hardware affecting end user work with [**] [**] [**] some functionality problems Non critical Hardware Service Request (e.g., hardware 73 Regular Hardware upgrade/replace) and end [**] [**] [**] user work is affected Printer hardware failure - (e.g. End-user can't print); there are 74 Regular Hardware alternative printers on site for [**] [**] [**] end user to use Hardware IMAC request - (e.g., relocate desktop 75 Regular Hardware location) and one end user [**] [**] [**] cannot perform his/her tasks Windows Administration - Service Request (e.g. open 76 Regular Servers new NT/mail account) [**] [**] [**] affecting end user work Windows Administration Service Request (e.g. password reset/unlock, Group 77 Regular Servers management, change end- [**] [**] [**] user properties) affecting one end user work Non urgent Service Request for restore from backup (e.g. 78 Regular Servers Single user file, etc) and [**] [**] [**] affecting end user work UNIX server system Service 79 Regular Servers Request affecting end user [**] [**] [**] work Backend Service Incident that 80 Regular Servers is not a failure, affecting the [**] [**] [**] work at one or more end users at one Customer Site Exchange Administration - Service requests (e.g. 81 Regular Mail add/change mailing lists, [**] [**] [**] change end-user properties) and end user cannot perform some/all work related to mail Exchange Service Request 82 Regular Mail end-user cannot send or [**] [**] [**] receive mail Any other mail issues effect the 83 Regular Mail mail of end users that cannot [**] [**] [**] send and receive mail
20 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC
TIME TO TIME TO TIME TO RESOLVE RESOLVE OWN AN CLASS 1 CLASS 2 INCIDENT SITES (IN SITES (IN NO. PRIORITY TYPE INCIDENT DESCRIPTION (IN HOURS) HOURS) HOURS) - ---- ---------- -------------- --------------------------------- ---------- --------- --------- LAN Network Service Request 84 Regular Network (e.g. Switch configuration [**] [**] [**] change) affecting end user work WAN Network Service Request 85 Regular Network (e.g. Router configuration [**] [**] [**] change) affecting the work of more than one user at more than one Customer Site 86 Regular Unix Support & UNIX workstation Service [**] [**] [**] Administration Request affecting end user work 87 Regular Unix Support & UNIX workstation hardware [**] [**] [**] Administration Service Request affecting end user work 88 Regular Unix Support & Unix workstation failure [**] [**] [**] Administration affecting end user work Service Request for Storage 89 Regular Storage configuration affecting one [**] [**] [**] end user work Administration or support request for business 90 Regular Business application, affecting more [**] [**] [**] Application than one user at more than one Customer Site Non critical operating system problem (e.g. OS error 91 Low WES messages) not affecting end [**] [**] [**] user work Customer Software Service 92 Low WES Request not affecting end user [**] [**] [**] work HP-OMS Software problem 93 Low WES (e.g. Outlook problem, Internet [**] [**] [**] Explorer error) not affecting end user work Windows Administration Service Request (e.g. password reset/unlock, Group 94 Low WES management, change end- [**] [**] [**] user properties) not affecting one or more end user work Fully supported application- IMAC Service Request (e.g. Ms- 95 Low WES Office installation) not [**] [**] [**] affecting end user work 96 Low WES Make it Work Supported [**] [**] [**] applications IMAC Service Request Printing problem (e.g. printer 97 Low WES doesn't work) and one or more [**] [**] [**] end users can print on other printer Any other end-user WES service components (which are not 98 Low WES mentioned above) does not [**] [**] [**] effect the end user work
21 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC
TIME TO TIME TO TIME TO RESOLVE RESOLVE OWN AN CLASS 1 CLASS 2 INCIDENT SITES (IN SITES (IN NO. PRIORITY TYPE INCIDENT DESCRIPTION (IN HOURS) HOURS) HOURS) - ---- ---------- -------------- --------------------------------- ---------- --------- --------- End-user hardware failure, 99 Low Hardware (e.g., PC hardware failure) not [**] [**] [**] affecting end user work Non critical Hardware Service Request (e.g., hardware 100 Low Hardware upgrade/replace) and end [**] [**] [**] user work is not affected Hardware IMAC Service Hequest (e.g., relocate 101 Low Hardware Resktop location) and one [**] [**] [**] dnd user can perform his/her tasks Windows Administration - Service Request (e.g. open 102 Low Servers new NT/mail account) not [**] [**] [**] affecting end user work Windows Administration Service Request (e.g. password 103 Low Servers reset/unlock, Group [**] [**] [**] management, change end- user properties) not affecting end user work Non urgent Service Request for 104 Low Servers restore from backup (e.g. [**] [**] [**] Single user file, etc) not affecting end user work UNIX server system Service 105 Low Servers Request not affecting end user [**] [**] [**] work Backend Service Incident that 106 Low Servers is not a failure, not affecting [**] [**] [**] the work at one or more end users at one Customer Site Exchange Administration - Service requests (e.g. 107 Low Mail add/change mailing lists, [**] [**] [**] change end-user properties) and end user can perform some/all work related to mail Exchange Service Request - 108 Low Mail end-user can send or receive [**] [**] [**] mail Any other mail issues does not 109 Low Mail Affect the mail end users can [**] [**] [**] esend and receive mail LAN Network Service Request (e.g. Switch configuration 110 Low Network change) not affecting end [**] [**] [**] user work WAN Network Service Request (e.g. Router configuration 111 Low Network change) not affecting the [**] [**] [**] work of more than one user at more than one Customer Site 112 Low Unix Support & UNIX workstation Service [**] [**] [**] Administration Request not affecting end user work
22 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC
TIME TO TIME TO TIME TO RESOLVE RESOLVE OWN AN CLASS 1 CLASS 2 INCIDENT SITES (IN SITES (IN NO. PRIORITY TYPE INCIDENT DESCRIPTION (IN HOURS) HOURS) HOURS) - ---- ---------- -------------- --------------------------------- ---------- --------- --------- 113 Low Unix Support & UNIX workstation hardware [**] [**] [**] Administration Service Request not affecting end user work 114 Low Unix Support & Unix workstation failure and [**] [**] [**] Administration end user can still work Service Request for Storage 115 Low Storage configuration not affecting [**] [**] [**] end user work Business Administration or support 116 Low Application request for business [**] [**] [**] application, affecting one user
23 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC APPENDIX B: FORM OF CRITICAL SERVICE LEVEL REPORTS SAMPLE OF CRITICAL SERVICE LEVEL REPORT TO BE SUBMITTED BY HP-OMS TO CUSTOMER ON A MONTHLY BASIS:
TOTAL NUMBER OF CRITICAL SERVICE NUMBER OF LEVELS FAILED CRITICAL CRITICAL SERVICE LEVEL CALCULATED INCIDENTS/ SERVICE LEVEL INCIDENT CREDIT ERVICE LEVEL COMMITMENTS INCIDENTS/ TYPE ALLOCATION CREDIT PER CRITICAL COMMITMENTS FAILURE PERCENTAGE PER PERCENTAGE NO. PRIORITY CRITICAL INCIDENT TYPE INCIDENT TYPE PER TYPE RATE TYPE PER TYPE - ----- -------- ---------------------- ------------- --------------- -------- -------------- ------------ 1 MUO [**] [**] [**] [**] [**] [**] 2 MUO [**] [**] [**] [**] [**] [**] 4 MUO [**] [**] [**] [**] [**] [**] 5 MUO [**] [**] [**] [**] [**] [**] 6 MUO [**] [**] [**] [**] [**] [**] 8 MUO [**] [**] [**] [**] [**] 9 Critical [**] [**] [**] [**] [**] [**] 10 Critical [**] [**] [**] [**] [**] [**] TOTAL MONTHLY CREDIT PERCENTAGE (TO BE MULTIPLIED BY THE AT RISK AMOUNT) [**]
24 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC 25 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC APPENDIX C: FORM OF SOFTWARE TO BE PROVIDED TO NEW CUSTOMER'S EMPLOYEES TABLE 14: SOFTWARE TO BE PROVIDED TO NEW EMPLOYEE DEVELOPER DESKTOP: NAV [**] Win Zip Acrobat Reader [**] 4 Dos NT* [**] Office 2000 [**] [**] [**] [**] [**] [**] [**] Babylon (supply only with license) * The above items license to be provided by the Customer. OFFICE DESKTOP NAV [**] Win Zip [**] [**] Office 2000 THE OPERATING SYSTEM SUPPLIED WILL BE IN ACCORDANCE WITH THE LOCAL LANGUAGE IN USE AT THE OFFICE. EX-99 12 exhibit-d.txt PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit D Transition and Stabilization V7.0 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization DOCUMENT INFORMATION Project Manager: Gil Tal Customer Project Na'ama Halperin Manager: Prepared by: Consolidation Document Version No. V 6.0 Preparation Date: 16.09.2003 2 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization INDEX DOCUMENT INFORMATION................................................ 1 DOCUMENT INFORMATION................................................ 2 1 INTRODUCTION................................................. 4 1.1 DEFINITIONS................................................... 4 2 TRANSITION PHASE............................................. 6 2.1 GENERAL....................................................... 6 2.2 OPERATIONAL TRANSFER.......................................... 6 2.2.1 TRANSFER OPERATIONS ACTIVITIES FROM CUSTOMER TO HP-OMS..... 6 2.2.2 HP-OMS DAY 1 OPERATION..................................... 7 2.2.3 REQUEST FOR SERVICE DURING TRANSITION PHASE................ 9 2.2.4 DEFINE STANDARDIZATION POLICY.............................. 10 2.2.5 ESTABLISH HP-OMS REGIONAL SUPPORT CENTERS (RSC)............ 11 2.2.6 ESTABLISH HP-OMS MONITORING & CONTROL CENTER (MCC)......... 11 2.3 GAPS UPGRADE.................................................. 12 2.3.1 BACKUP SOLUTION COMPANY WIDE............................... 13 2.3.2 ANTIVIRUS STABILIZATION.................................... 14 2.3.3 CONNECT UNCONNECTED CUSTOMER SITES TO CUSTOMER'S NETWORK 15 2.3.4 TECHNOLOGY GAPS PER CUSTOMER SITE ......................... 17 2.4 SECURITY COMPLIANCE........................................... 18 2.4.1 SECURITY SERVICES ......................................... 18 2.4.2 SECURITY POLICY ........................................... 18 2.4.3 SECURITY COMPONENTS ....................................... 18 2.5 SOFTWARE LICENSE COMPLIANCE................................... 19 2.6 HP-OMS'S APPROACH & ASSOCIATED TIMELINES...................... 20 3 STABILIZATION PHASE.......................................... 21 3.1 OBJECTIVE..................................................... 21 3.2 SOLUTION INITIATIVES - GLOBAL PROJECTS........................ 21 3.3 DESCRIPTION OF SOLUTION INITIATIVES........................... 21 3.3.1 [**] IMPLEMENTATION ........................................ 22 3.3.2 MONITORING AND CONTROL SYSTEM IMPLEMENTATION .............. 22 3.3.3 WORLDWIDE NETWORK SOLUTION................................. 23 3.3.4 SOFTWARE DISTRIBUTION SYSTEM IMPLEMENTATION................ 25 3.3.5 [**] 3.3.6 [**] APPENDIX B - TIMETABLE.................................................. 29 APPENDIX D - PROCEDURES TO BE DEFINED DURING TRANSITION PHASE........... 30 APPENDIX E - LIST OF THIRD PARTIES OUTSOURCERS.......................... 34 3 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization 4 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization 1 INTRODUCTION This Exhibit D is attached to the Master Services Agreement, dated as of [_____________] 2003 by and between HP-OMS and Customer (the "Agreement") and made a part thereof by reference. Capitalized terms not otherwise defined herein shall have the meaning specified in the Agreement. 1.1 DEFINITIONS "TRANSITION" - means the work that must be done to transfer the accountability of all aspects included in the Services from Customer to HP-OMS without interrupting the operation delivery. "AS-IS LEVEL" means the service level of the Services existing at the Customer Sites immediately prior to the Commencement Date, as described in the Customer Site visit reports, collected by HP-OMS representatives during the Due Diligence phase, and set out in APPENDIX A herein (Tecnomatix Site Reports), subject to any improvement or changes that where made since then by the Customer prior to the commencement date. "TIMETABLE" has the meaning set out in SECTION 1(3) "TRANSITION AND STABILIZATION PHASES" has the meaning set out in Section 1.3. 1. The Transition and Stabilization Phases shall commence as of the Commencement Date and shall continue at varying lengths per Customer Site, until the completion of the final Transition Milestone at each applicable Customer Site, as described in the Timetable specified in Appendix B ("Timetable"). Accordingly, the Transition and Stabilization Phases may end at one Customer Site while continuing at another Customer Site, provided, however, that in no event shall the Transition and Stabilization Phases extend later than the ten (10) month period following the Commencement Date (the "Transition and Stabilization Phases"). 2. During the Transition and Stabilization Phases, HP-OMS will: (i) provide all the Services for a maximum period of the first ten (10) months following the Commencement Date at the "As-Is" Level, provided that HP-OMS shall provide Special Support for all Customer Software; and (ii) perform the transition and stabilization services described in this Exhibit in accordance with the Transition and Stabilization Milestones set out in the Timetable. Upon completion of the Transition and Stabilization Phases at each applicable Site, HP-OMS shall provide the Services at the Service Levels without Credits. After ten (10) month from commencement date, HP-OMS shell provide the Services at the Service Levels including Credits. 5 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization 3. During the Transition and Stabilization Phases, HP-OMS will build the Services operations, including without limitation, all tools, methodologies and standardizations to enable the provision of the Services in accordance with the Service Levels upon completion of the Transition and Stabilization Phases. 4. At first during the Transition Phase, HP-OMS will provide the Services with no change as they were before Commencement Date. Then, HP-OMS will systematically set up its mode of operations, as described herein, in order to achieve the Service Levels. Changing the mode of operation and providing solutions for agreed gaps will enable HP-OMS to standardize the Service Levels. In addition, HP-OMS shall define the detailed IT business procedures, subject to Customer's written approval. 5. The work during the Transition and Stabilization Phases will be performed in two parallel phases: Transition Phase and Stabilization Phase. 6 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization 2 TRANSITION PHASE 2.1 GENERAL TRANSITION PHASE IS DIVIDED INTO TWO TYPES OF ACTIVITIES: o Operational transfer o Technological gaps closure 2.2 OPERATIONAL TRANSFER OPERATIONAL TRANSFER INITIATIVES: o Transitioned Employees transfer - according to EXHIBIT F o Transfer operations activities from Customer to HP-OMS o Set up HP-OMS Monitoring& Control Center (MCC) o Set up HP-OMS Regional Support Centers (RSC) o Define support Policy o Define working procedures 2.2.1 TRANSFER OPERATIONS ACTIVITIES FROM CUSTOMER TO HP-OMS The operational transfer shall be the first part of the Transition Phase. During this phase HP-OMS will: o Define (subject to Customer's approval) the support policy and guidelines including but not limited to: o The roles and responsibilities of the MCC o The roles and responsibilities of the RSC o Standardization o Security compliance according to Customer's Security Policy o Software license compliance o 3 tiers of support (as described in EXHIBIT B, SECTION 5 (INCIDENT MANAGEMENT))("SUPPORT TIERS") o Define (subject to Customer's approval) operational and technical procedures (as described in Appendix D - Procedures to be Defined During Transition Phase) 7 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization o Conduct training (HP-OMS-culture, administrative processes & procedures) - HP-OMS will train/educate HP-OMS Personnel with all necessary information and details in respect of the Services, including without limitation the working procedures. o Create site folder - HP-OMS will create a "Site Folder" for every Customer Site. Each Site Folder will include information similar to the content managed as of the Commencement Date at the Customer Site in Israel. That folder includes: o NT Server Form o Unix Server Form o List of workstations o Network & relationships (Wins, DHCP etc) Diagrams o Excel sheet for all names and roles of Customer Site users including names of power users and users who authorized to initiate Emergency Escalation Process o Hardware inventory and users who are the "owners" of the hardware o Applications in use at the Customer Site and support procedures for the applications (e.g. installation, troubleshoot, etc.) o Backup and restore procedures o Any relevant procedures for Customer Site operation o Ensure that the Baseline Survey and follow-up satisfaction surveys are conducted, in accordance with the terms and conditions of EXHIBIT C SECTION 5 (BASELINE INDEPENDENT SURVEYS) of the Agreement. 2.2.2 HP-OMS DAY 1 OPERATION As of the commencement date: i. [**]; ii. [**] iii. HP-OMS shall take prompt steps to ensure that the third party contractors providing outsourcing services to Customer immediately prior to the Commencement Date, listed in Appendix [E] (the "THIRD PARTY OUTSOURCERS") shall continue to provide such services through HP-OMS at least t for a period of 4 months (Publicom for a period of 6 months), subject to SECTIONS [7] (REQUIRED CONSENTS) AND [5.1B] (CUSTOMER RIGHTS CONCERNING KEY PERSONNEL; REPLACEMENT OF HP-OMS PERSONNEL) of the agreement. 8 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization IV. There are Customer's employees who provide support Services prior to Commencement Date and those Services are part of HP-OMS scope under this agreement. Some of those employees are included in Exhibit F and some are not. Those employees that are excluded from Exhibit F will continue to provide the same support Services according to the "As Is" description as shown in Appendix A herein. This is until HP-OMS will take operational responsibility to the applicable site and to a period no longer then 10 months. In the event that, for any reason, HP-OMS fails to contract for the continuing services of the Third Party Outsourcers throughout the Transition and Stabilization Periods and Customer pays for such services directly to the Third Party Outsourcers, Customer shall be entitled to deduct the amount of such payments from the quarterly Target Price invoice from HP-OMS. Such Third Party Outsourcer payments will be limited to the fees payable by the Customer for such Outsourcers as mentioned in the Due Diligence findings and subject to HP-OMS review of the invoice prior the payment. Customer will have the right to deduct such payments as follows: o Israel support contractor ("Integrity") - Deduction will be only for a maximum period of up to 4 months if HP-OMS failed to contract for the continuing services o Israel security contractor ("Publicom") - Deduction will be only for a maximum period of up to 6 months if HP-OMS failed to contract for the continuing services o Italy support contractor (Luigi Maspero) - Deduction will be only for a maximum period of up to 6 months if HP-OMS failed to contract for the continuing services HP-OMS will prepare a training program for all HP-OMS Personnel (including without limitation the Transitioned Employees) required for the provision of the Services during the Transition and Stabilization Phases, provided that such training will not adversely affect the Customer's daily activities. The training program will include, without limitation: o HP-OMS culture and methodologies o The new support structure (RSC, MCC) o Working procedures o Scope of Work and Services to be provided to the Customer In connection with all purchase orders issued by Customer prior to the Commencement Date for HP-OMS Hardware, HP-OMS Software and/or Customer Software, HP-OMS shall have the responsibility for (i) providing the Services in connection therewith; and (ii) paying the relevant invoices, if received by Customer or HP-OMS after the Commencement Date (or if not paid by HP-OMS, Customer may pay, after receiving HP-OMS approval, the same and deduct the amount of such payments from the quarterly Target Price invoice from HP-OMS). Such approval will not be withheld without a reasonable cause. 9 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization From and after the Commencement Date, any purchase request will be transferred to HP-OMS to provide procurement services as defined in EXHIBITS A-B, subject to SECTION [11] (CHANGE MANAGEMENT) OF THE AGREEMENT. 2.2.3 REQUEST FOR SERVICE DURING TRANSITION PHASE During the Transition Phase, HP-OMS will set up its operations of the RSC and the MCC. Without limiting HP-OMS' obligations to provide the Services in accordance with the Agreement, HP-OMS will ensure that its support engineers and all other relevant HP-OMS Personnel (e.g. Network Engineer, System Administrator, etc.) will learn, understand and gain in depth knowledge about the Customer's work processes and needs. This stage is scheduled to last ninety (90) calendar days as described in the APPENDIX B herein. HP-OMS shall provide Customer end user support during the Transition and Stabilization Phases and thereafter, in accordance with the following request procedures, depending on the stage at which the request is made: POINT AT WHICH SERVICE REQUEST IS MADE (IN DAYS FOLLOWING COMMENCEMENT DATE) METHOD FOR CUSTOMER REQUESTS FOR SUPPORT - ----------------------- -------------------------------------------- Customer Site in Israel - via syshelp 1 - 30 DAYS Customer Sites other than in Israel - AS IS PRIOR TO COMMENCEMENT DATE ISRAEL - VIA SYSHELP 31-90 DAYS Customer sites other than in israel - via email to dedicated email address Israel - Via Ticketing System 91-150 DAYS Customer Sites Other Than in Israel - Via Email to Dedicated Email Address 151 DAYS - End of Term All Customer Sites - Via Ticketing System or According to Procedure Defined In EXHIBIT B, 10 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization Piont at which service request is Made (in days following Method for Customwe Request for Support Commencement Date) SECTION 5.6 (TICKETING SYSTEM MANAGEMENT) 2.2.4 DEFINE STANDARDIZATION POLICY HP-OMS shall defined standards (for Customer's prior written approval) and then shall standardize the IT Environment in a manner consistent with HP-OMS' obligations to provide the Services in accordance with the Service Levels. HP-OMS understands the complexity of the Customer's IT Environment and the fact that support of Customer's IT Environment will include support of the following environments: o Office environment; and o Development environment HP-OMS will define a standard (for Customer's prior written approval) and then standardize for each such environment the HP-OMS Hardware and HP-OMS Software. It will be Customer's responsibility to cooperate with HP-OMS in its efforts to implement the Customer-approved standardization policy in each environment, provided that Customer end users are not prevented or delayed from performing their daily tasks or otherwise adversely affected as a result of such cooperation. HP-OMS shall bear, and in no case shall Customer incur or be responsible for paying, any additional costs or expenses as a result of HP-OMS' standardization efforts unless the Customer did not purchase enough licenses as defined in SECTION 2.5 (SOFTWARE LICENSE COMPLIANCE) HEREIN. For example, if as a result of a new HP-OMS antivirus standard, existing anti-virus software licenses are required to be replaced and purchased at one or more Customer Sites, HP-OMS shall bear all costs and expenses in connection with the purchase, installation and ongoing maintenance and support of such software licenses at the applicable Customer Site(s), in accordance with the Services. For the avoidance of doubt, HP-OMS shall define (with the Customer's prior written approval) the Customer's IT corporate standards (e.g. IT corporate internet browser application for office environment - Netscape or Explorer) and standardize the same in accordance with this Section. 11 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization 2.2.5 ESTABLISH HP-OMS REGIONAL SUPPORT CENTERS (RSC) Regional Support Centers are HP-OMS' 1st tier support arm at the Class 1 Customer Sites. RSCs support Class 1 and Class 2 Customer Sites as described in EXHIBIT B SECTION 5.1, TABLE 2. The RSC will serve as a single point of contact (SPOC) for Customer end-users. HP-OMS responsibilities in setting up the RSC will include without limitation: o Defining RSC support workflow and working procedures until Monitoring and Control System is operational. o Defining escalation process until Monitoring and Control System is operational. o Hiring RSC personnel if required o Training the RSC personnel on the defined support workflow and working procedures o Publishing the support workflow and escalation process to the Customer end users. The RSC at the Israeli Customer Site will receive daily/weekly activity reports from RSC personnel prior to the implementation of the Ticketing System. These reports will assist the RSC to control the Customer Site support. Once the MCC is operative, HP-OMS will update the support workflow and working procedures and the RSC will continue to serve as first tier support to the Customer end users. 2.2.6 ESTABLISH HP-OMS MONITORING & CONTROL CENTER (MCC) The Monitoring & Control Center (MCC) will be located at the HP-OMS premises in Ra'anana, Israel. The MCC functions will include without limitation, providing the RSC and the Customer global control over the worldwide support process, 2nd and 3rd tier support (as defined in EXHIBIT B, SECTION 5 (INCIDENT MANAGEMENT), and ability to monitor the infrastructure and system administration services. HP-OMS will install a communication line between the MCC and the Israeli Customer Site that will be used to connect the MCC to the Customer WAN as detailed in SECTION 3.3.3 herein. 12 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization In order to provide support for HP-OMS efficient provision of the Services, HP-OMS will implement information systems as described in SECTION 3 [STABILIZATION PHASE] herein. Only authorized HP-OMS Personnel from the MCC will have access to the Customer network. Until the Transition and Stabilization Phases are finalized, the MCC will provide basic services, including without limitation: o 2nd and 3rd Support Tiers for the RSC o NT and Unix system administration o Exchange administration and support o Security Systems (e.g. Firewall) management o Non proactive network monitoring o DBA Services 2.3 GAPS UPGRADE HP-OMS shall implement and perform projects to address the agreed technology gaps in Customer's infrastructure at the applicable Customer Sites, in accordance with the Timetable, and as specified below and in Exhibit E Appendix D. HP-OMS RESPONSIBILITIES o Consult the Customer on any open technical issues, implement and support the suggested solution for each technology gap upgrade item, as specified in EXHIBIT E, APPENDIX C (THE EXHIBIT E GAPS UPGRADES") o Provide the Customer, prior to HP-OMS performing any work, with a separate cost list for all technology gap upgrade items, which are not defined in Exhibit E, Appendix C, for Customer's approval, and implement and support the agreed solution for such technology gap upgrades, as agreed in writing between the parties (such agreed technology gap upgrades and the Exhibit E GAPS UPGRADES COLLECTIVELY, the "gaps upgrades"). customer responsibilities o Review and confirm whether it approves of HP-OMS solution design for the Gaps Upgrades JOINT RESPONSIBILITIES o HP-OMS will work with Customer to define a working plan to implement Gaps Upgrades 13 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization GAPS UPGRADE INITIATIVES INCLUDE AMONG OTHER THINGS: o Backup solution company wide o Antivirus stabilization o Technology gaps - Provide solutions per Customer Site o [**] 2.3.1. BACKUP SOLUTION COMPANY WIDE 2.3.1.1 PURPOSE AND BACKGROUND As discovered during the Due Diligence phase, backup and recovery procedures are not clearly defined and there is no working backup infrastructure for every Customer Site. The Customer Sites locations at which backup and restore systems will be improved, in accordance with the standard backup policy by HP-OMS are: o [**] HP-OMS shall implement the backup and recovery solution before other major projects, in accordance with the Timetable. 2.3.1.2 OBJECTIVES The objectives of this project are: o Define backup and recovery procedures o Reliable backup and recovery solutions at all Customer Sites o Improve backup success rate 2.3.1.3 PROJECT SCOPE The scope of this project is to: o Define backup and restore policy o Analyze and define backup recovery and restore procedures o Design backup solution per Customer Site o Purchase systems and media (tapes) o Reconfigure existing systems to comply with HP-OMS backup procedures (Hardware and Software) o Implement Backup and Restore Systems at all Customer Sites o Connect the backup systems to the Monitoring and Control System (will be done as part of the Stabilization Phase) o Nominate at least two backup operators) per Class 2 Customer Site and train them o Create and submit to the Customer, commencing immediately after the implementation of the backup system, weekly and monthly backup success rate reports. 14 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization 2.3.1.4 PROJECT ABSTRACT DESCRIPTION o Design new/upgraded backup solution based on the existing tools or implementation of new tools o Implementation of the defined solutions at all Customer Sites o Analyze the existing backup and recovery requirements o Analyze roles and responsibilities o Design new/changed backup solution based on the existing tools or implementation of new tools o Implementation of the defined solution 2.3.1.5 DELIVERABLES o Backup and restore policy in accordance with the Service Levels o Backup and restore procedures per Customer Site o Document solution design for backup and recovery processes o Operative Backup and restore system per Customer Site o Training kit for backup operators o Weekly and monthly backup success rate reports commencing immediately after implementation of the backup system and continuing throughout the Term. 2.3.2 ANTIVIRUS STABILIZATION 2.3.2.1 PURPOSE AND BACKGROUND As discovered during the Due Diligence phase, Antivirus protection is not installed on all Customer Site servers and workstations and virus update is not always being performed correctly. The survey also discovered that different Antivirus applications are used company wide. Due to the high security risk of virus intrusion attacks, HP-OMS will deal with this issue as one of the first technology projects (in accordance with the Timetable) to ensure that standard Antivirus on all Customer servers and workstation will be installed and configured and will operate and be supported in accordance with the Service Levels. 15 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization 2.3.2.2 OBJECTIVES The objective of this project is: o Provide virus protection for all company computers (Servers and workstations) in accordance with the Service Levels 2.3.2.3 PROJECT SCOPE The scope of this project is to: o Design new/changed Antivirus solution o Purchase missing Antivirus Licenses. If replacing existing licenses not compliant with standard at no cost. If there were no licenses before Commencement Date, on Customer expense. o Install Antivirus applications on all Servers and Workstation at all Customer Sites o Configure Antivirus applications according to the solution design at all Customer Sites o Verify that updates are done constantly at all Customer Sites o Train support teams on security policy and Antivirus procedures o Communicate the importance of Antivirus updates to end-users 2.3.2.4 PROJECT ABSTRACT DESCRIPTION o List all the workstations and the servers that require Antivirus installation/reinstallation/update o Execute changes to necessary computers o Update the scanning and update/scan procedure in all the computers: servers every day and workstations every week o Monitor servers and workstations to ensure computers are working according to the update/scan procedure 2.3.2.5 Deliverables o Security policy implementation o Antivirus procedures o Document solution design for Antivirus o Constant Antivirus updates on all workstations and Servers at all Customer Sites o Training kit for support teams and end-users o Weekly and monthly updates reports for Servers 2.3.3 CONNECT UNCONNECTED CUSTOMER SITES TO CUSTOMER'S NETWORK 2.3.3.1 PURPOSE AND BACKGROUND In order to provide Services to all Customer's end-users, HP-OMS will use remote control technology. The parties acknowledge that not every Customer Site as of the Commencement Date has a connection to the Customer network. HP-OMS will decide whether or not to connect an unconnected office to the Customer's network, as long as the Service Levels to an unconnected office will be maintained. THE CUSTOMER SITES IN THE FOLLOWING LOCATIONS [WILL BE CONNECTED] TO THE CUSTOMER'S NETWORK NO LATER THEN TEN (10) MONTH AFTER COMMENCEMENT DATE: Brussels 16 2.3.3.2 OBJECTIVES The objective of this project is: o To connect all Customer Sites (not connected as of the Commencement Date) to the Customer network in accordance with the Timetable. 2.3.3.3 PROJECT SCOPE The scope of this project is to: o Learn and identify the Customer's technology requirements to perform the connection per unconnected Customer Site o Decide on communication method per Customer Site o Order communication lines and relevant equipment o Install security systems according to security policy o Install and configure Customer Sites' systems to enable remote monitoring o Connect the Customer Sites 2.3.3.4 PROJECT ABSTRACT DESCRIPTION o Understand Customer's technology needs o Look for suitable technology solution that complies with the Customer global network o Contact network provider to perform the connection o Define working procedures with new connection method o Execute necessary connection of the Customer Sites 2.3.3.5 DELIVERABLES o HP-OMS Personnel will be able to support end-users by remote control on a Customer-wide basis o Ability to monitor all Customer infrastructure at all Customer Sites o Ability to perform automatic software distribution to all Customer Sites 17 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization 2.3.4 TECHNOLOGY GAPS PER CUSTOMER SITE 2.3.4.1 PURPOSE AND BACKGROUND The parties acknowledge that each Customer Site has a technology gap, which adversely affects the quality of IT services and the service that the end-users are receiving, and which has a significant impact on the overall Customer IT operation. This project consists of implementing necessary changes to bring the Customer Sites to a technology level in accordance with the Timetable, which will enable HP-OMS to provide the Services according to the Service Levels. HP-OMS shall perform the technology gaps projects in accordance with a detailed report prepared by HP-OMS based on its analysis of each Customer Site, which report's recommendations are detailed in Exhibit E, Appendix C. 2.3.4.2 OBJECTIVES The objective of this project is to: o Solve major IT Environment infrastructure issues at Customer Sites 2.3.4.3 Project Scope The scope of (and HP-OMS' responsibilities under) this project is to: o Define Class 1 Customer Site IT Environment infrastructure standards o Define Class 2 Customer Site IT Environment infrastructure standards o List technology gaps at each Customer Site o Purchase (at no additional cost to Customer in excess of the fees set out in Exhibit E) required equipment and install it o Provide and implement solutions for technology gaps according to gaps table list described in Exhibit E Appendix C 2.3.4.4 PROJECT ABSTRACT DESCRIPTION o Define Class 1 Customer Site IT Environment infrastructure standards o Define Class 2 Customer Site IT Environment infrastructure standards o Suggest technology solutions o Set up a working plan to deal with technology gaps o Work with Customer to reach agreement on work which needs to be done o Execute resolution 2.3.4.5 DELIVERABLES o Customer Sites will be compatible with Customer's needs 18 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization 2.4 SECURITY COMPLIANCE [**] 2.4.1 SECURITY SERVICES [**] 2.4.2 SECURITY POLICY The Customer will provide HP-OMS, within one month after the Commencement Date, an Information Security Policy. The Customer's Information Security Policy defines information security as the protection of information from loss of confidentiality, integrity and/or availability. The scope of the policy includes all information, which is stored, processed, transmitted or printed, using any system or storage medium. The policy shall apply to all Customer Employees and HP-OMS Personnel. For the first [**] months of the Transition and Stabilization Phases, HP-OMS will maintain at least the same level of security ("As-Is") as detailed in section 2.4.3 herein. Based on the Customer Information Security Policy, HP-OMS and the Customer will define the security business procedures, which will comply with Customer's security policy within [**] months after the Customer will provide HP-OMS its Security Policy. HP-OMS shall comply with the Customer's Information Security Policy and procedure and shall ensure its enforcement among all relevant HP-OMS Personnel. Customer shall comply with the Customer's Information Security Policy and procedure. Customer will submit HP-OMS its security policy for review and approval. If Customer security policy will include additional Services other then detailed in section 2.4.3 will be on Customer's expense. 2.4.3 SECURITY COMPONENTS HP-OMS acknowledges that the Customer has in place, immediately prior to the Commencement Date, security standards that allow for or have: 19 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization o [**] o [**] o [**] o [**] o [**] o [**] o [**] o [**] o [**] o [**] o [**] o [**] o [**] o [**] o [**] For the first [**] months of the Transition and Stabilization phases, HP-OMS will maintain at least the same level of security as detailed above and will implement or suggest security improvements that will be defined no later then [**] months after commencement date. The time frame for security components versions upgrade (e.g. Fire wall, Antivirus definition files) will be mutually defined per version release. [**]. 2.5 SOFTWARE LICENSE COMPLIANCE HP-OMS will gather and provide to Customer within [**] months from the Commencement Date, information to Customer concerning the number of HP-OMS Software licenses purchased by the Customer worldwide, before the Commencement Date and will compare that number to the number of HP-OMS Software licenses in use, as determined though HP-OMS' inventory system. In order to obtain any missing licenses, for Microsoft software, Customer will pay directly to HP-OMS the applicable amount to cover software relative cost in the baseline payments. The pricing for the customer will be calculated using the Microsoft Enterprise pricing model. For other software license, the Customer, in its discretion, shall choose between purchasing the missing licenses directly, through a third party or through HP-OMS, under the procurement process described in EXHIBIT A SECTION 7.1(PROCUREMENT SERVICES), subject to SECTION 11 (CHANGE MANAGEMENT) OF THE AGREEMENT. 20 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization 2.6 HP-OMS'S APPROACH & Associated Timelines HP-OMS is committed to the Timetable as described in Appendix B herein. The Timetable shall not be revised or amended without the Customer's prior written consent. Time is "of the essence" with respect to the completion of the Transition and Stabilization Phases at all Customer Sites in accordance with the Agreement not later than [**] months following the Commencement Date. Accordingly, if HP-OMS fails to complete the Transition and Stabilization Phases within such period as a result of factors within the responsibility and control of HP-OMS, Customer will provide HP-OMS with a list of rejections that should be accepted by both parties and HP-OMS will have a Grace Period of [**] months to correct those rejections. [**] For the avoidance of doubt HP-OMS will provide the Services to the Customer using Service Level measurements [**] months after the Commencement Date. 21 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization 3 STABILIZATION PHASE The fully detailed Timetable for the Stabilization Phase is set out in Appendix B, attached hereto and made a part of this Exhibit by reference. 3.1 OBJECTIVE The objective of the Stabilization Phase is to implement information systems that will assist HP-OMS to provide the Services. 3.2 SOLUTION INITIATIVES - GLOBAL PROJECTS The following table summarizes the solution initiatives, which are considered as required to evolve the Customer's IT Environment into one that compares to HP-OMS Best Known Method (BKM) and ITSM guidelines]. TABLE 2: GLOBAL PROJECTS GLOBAL PROJECTS - ---------------------------------------------------------------------------- [**] [**] [**] [**] [**] [**] [**] Therefore, the Parties agree that the implementation of the [**] and the Monitoring and Control System is a condition precedent to meeting minimum requirements to perform services according to the Service Levels. [**] 3.3 DESCRIPTION OF SOLUTION INITIATIVES All Stabilization initiatives are described in more detail in the following section with respect to: o Purpose and Background o Objectives o Project scope o Project abstract description o Deliverables 22 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization 3.3.1 [**] IMPLEMENTATION 3.3.1.1 PURPOSE AND BACKGROUND [**] 3.3.1.2 OBJECTIVES o [**] 3.3.1.3 PROJECT SCOPE o [**] 3.3.1.4 PROJECT ABSTRACT DESCRIPTION o [**] 3.3.1.5 DELIVERABLES o [**] 3.3.2. MONITORING AND CONTROL SYSTEM IMPLEMENTATION 3.3.2.1 PURPOSE AND BACKGROUND Using advanced technology infrastructure with advanced management and monitoring abilities is required to operate a 24/7 (manned 24/6) central control center, which will manage all company infrastructure and control support activities worldwide. MCC operation will rely on this technology to provide real time support and monitoring from a central location. MCC will also be responsible for the availability and functionality of the Monitoring and Control System. 3.3.2.2 OBJECTIVES o Provide abilities to manage company infrastructure from central location o Support back-office systems and communication infrastructures o Ensure systems up-time o Implement web enabled Monitoring and Control System to be used at all Customer Sites worldwide. o Preventive maintenance for HP-OMS Software and HP-OMS Hardware o Improve performance and availability checks 23 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization 3.3.2.3 PROJECT SCOPE o Define Monitoring and Control System (MCS) technology requirements o Define automated checks and related alerts o Implement the Monitoring and Control System at all Customers Sites, starting with Israel and then at the rest of the world o Optimize the preventive maintenance actions 3.3.2.4 PROJECT ABSTRACT DESCRIPTION [**] 3.3.2.5 DELIVERABLES o 7/24 monitored IT Environment o [**] o Provide Service reports as defined in EXHIBIT B APPENDIX H o Constant update of solutions knowledge base o Improve resolution of Service Requests 3.3.3 WORLDWIDE NETWORK SOLUTION Current Customer Wide Area Network (WAN) relays on two types of communication lines: Frame Relay (F/R) and Internet lines. 12 Customer Sites are connected via F/R lines to the Israeli Customer Site office. X sites are connected via point-to-point lines. 3.3.3.1 PURPOSE AND BACKGROUND Customer is currently (prior to the Commencement Date) using (at most of its Customer Sites) Infonet as the private WAN provider and a local ISP for an Internet connection. o [**] 3.3.3.2 OBJECTIVES o [**] 24 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization 3.3.3.3 PROJECT SCOPE o [**] 3.3.3.4 Project Abstract Description HP-OMS will connect Customers sites to the WAN network according to connection types methods as follows: o [**] CUSTOMER'S SITES CONNECTION TYPE WILL BE AS FOLLOWS: [**] [**] [**] - ----- ------ -------- [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] 25 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization [**] [**] [**] - ----- ------ -------- [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] WAN network Services that will be provided by HP-OMS to the Customer will comply with the Service Levels as detailed in EXHIBIT C APPENDIX A SECTIONS 2.4, 2.5. 3.3.3.5 DELIVERABLES o [**] o Monthly report of compliant with the above performance tables 3.3.4 SOFTWARE DISTRIBUTION SYSTEM IMPLEMENTATION 3.3.4.1 PURPOSE AND BACKGROUND HP-OMS acknowledges the importance to Customer of achieving ability to support software distribution. Software Distribution Systems implementation will allow HP-OMS to perform Software distribution and installation, and remote troubleshooting tools. 3.3.4.2 OBJECTIVES The objective of this project is: o Enable electronic HP-OMS Software and Customer Software distribution o Standardize HP-OMS Software in use 26 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization REASONS FOR USING ELECTRONIC SOFTWARE DISTRIBUTION TOOL: o ELECTRONIC SOFTWARE DISTRIBUTION - Eliminates desktop visits and human error by electronically distributing Software to all desktops and servers on the Customer network from a central location. o INSTALLATION - Provides an installation tool, which allows repackaging changes and writing scripts to create a package for any Windows-based application. The users will use these scripts to install or update the Software on their computers. o UNATTENDED SOFTWARE INSTALLATION - Installs Software without requiring any user interaction and can install Software with administrator rights using Systems Management Server for off-hours distribution or distribution to servers 3.3.4.3 PROJECT SCOPE o Implement software distribution system for all types of Customer users (e.g. software development users, administrative users) in supported languages as defined in EXHIBIT B SECTION 5.7 (TICKETING SYSTEM MANAGEMENT) 3.3.4.4 PROJECT ABSTRACT DESCRIPTION o Analyze the different types of Software versions and languages, which will be distributed around the world o Design software distribution and management servers' architecture. o Define and document working procedures including installation approval procedure o Installation of management servers according to suggested architecture. o Gather information on the status of computers and the installed Software. o Build the necessary scripts to enable the users to perform the Software updates remotely. o Build the reports and the control procedures in order to have the same Software level in all the computers and to control the Software that is being installed in each computer o Train the support teams and end-users how to use the system o Implementation of the defined solution 3.3.4.5 DELIVERABLES o Software distribution and installation approval working procedures o Operative Software distribution system o Training kit for support teams and Customer end-users o Up to date Software inventory 27 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization 3.3.5 [**] 3.3.5.1 Purpose and Background [**] 3.3.5.2 OBJECTIVES The objectives of this project are: o [**] 3.3.5.3 PROJECT SCOPE o [**] 3.3.5.4 PROJECT ABSTRACT DESCRIPTION o [**] 3.3.5.5 DELIVERABLES o [**] 3.3.6 [**] 3.3.6.1 PURPOSE AND BACKGROUND [**] 3.3.6.2 OBJECTIVES o [**] 3.3.6.3 PROJECT SCOPE o [**] 3.3.6.4 PROJECT ABSTRACT DESCRIPTION o [**] o Train the end-users worldwide about the new system o Implement support knowledge base 28 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization 3.6.5.5 DELIVERABLES [**] 29 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization APPENDIX B - TIMETABLE 30 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization APPENDIX D - PROCEDURES TO BE DEFINED DURING TRANSITION PHASE
TYPE PROCEDURE NAME DESCRIPTION - -------- ----------------------- ---------------------------------------------------------------------- Security Permissions procedure How to manage permissions to a user account. The procedure will include process description for permission approval for end-user, which level will be given, etc. Security Remote Access Which users are entitled to Secure Remote connection. How to use the secure remote connection. Security Security Policy Detailed Customers' Security policy Security Firewall management How to manage the firewalls and their rule base Security e-Safe management How to manage the e-Safe's and their rule base Security Antivirus management How to manage the Antivirus systems on the workstation level, server level and mail systems level. Security Virus alert What should be done when a virus was fund on the workstation level, server level and mail systems level? Security Password reset procedure Procedure for resetting/ unlocking end-user account MCC Backup and restore Backup and restore activities locally and by MCC MCC Support workflow Incident workflow and end-users escalation procedures. Support Incident Management Support Remote/traveling users Supporting procedure for remote/traveling users' support environment Support Home users Supporting procedure for home users' support environment Support Business Application - Clarify support process and procedures Clarify Support Business Application Support process and procedures for other business applications Support New installations - Desktop installation procedure for office use Desktops office environment Support New installations - Desktop installation procedure for development use Desktops development environment Support New installations - Laptop installation procedure for office use Laptops Office environment Support New installations - Sales Laptop installation procedure for sales usage Laptops Support New installations - Unix Unix workstation installation procedure for development use workstation Support Software installation - Installation procedure for office environment software (e.g. MS-office, Office environment Visio etc) software
31 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization
TYPE PROCEDURE NAME DESCRIPTION - -------- ----------------------- ---------------------------------------------------------------------- Support Software installation - Installation procedure for development software (e.g. exceed, visual Development environment studio etc) software Support Full Support procedure Support Make it work support procedure Support Special support procedure Support Support 3rd party support How and when to ask for a 3rd party support procedure Support 3rd party support List all 3rd party vendors , suppliers and providers which requires for providers list the support process and their contact information Support Computers/ hardware location change procedure Support New end-users installation request procedure Support Hardware upgrade procedure Support Software Support Support procedure of HP-OMS Software and Customer Software Support Management escalation Process and procedure for operating necessary project key personnel procedure RSC RSC Class1 working RSC duties and responsibilities in Class 1 sites procedure RSC RSC Class2 working RSC duties and responsibilities in Class 2 sites procedure RSC RSC escalation procedure MCC MCC escalation procedure MCC Environment What is the current monitoring system setting and what is being monitor monitoring procedure MCC Monitoring system Process required for changing the monitoring and control; system changing procedure settings MCC Ticketing System What is the current ticketing system setting and what is the current procedure workflow MCC Ticketing system changing Process required for changing the monitoring and control; system procedure settings
32 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization
TYPE PROCEDURE NAME DESCRIPTION - -------- ----------------------- ---------------------------------------------------------------------- MCC Proactive maintenance When and how to perform proactive maintenance procedure MCC Server installation How to install a new server procedure MCC Crisis management MCC Reporting procedure SLA management and reporting procedure MCC Shift transfer Internal MCC procedure on what should be done during MCC shifts transfer. MCC Environmental changes Who is allowed to make changes in the different infrastructure environments, when and who should authorize it. MCC Remote/traveling users Remote/traveling users' support environment MCC Service Request Escalation Process MCC Software Distribution MCC HP-OMS Software Standard MCC Assets management MCC Site operation How to operate Customer Sites IT infrastructure MCC Printer installation How to install printer, when and printers maintenance activities MCC Site folder change How and who can approve changes to the sites folder procedure MCC WAN support procedure WAN current configuration and support procedure MCC WAN escalation procedure Procurement Hardware and software How to order new hardware or software, who can order, who needs to order procedure approve, where should the order made etc Procurement Orders tracking procedure How and when to track hardware and software orders Procurement General Change Management Change management process and procedure Procedure General General License management Software license management procedure procedure General Contracts management 3rd party contracts management
33 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization
TYPE PROCEDURE NAME DESCRIPTION - -------- ----------------------- ---------------------------------------------------------------------- General New HP-OMS support person Process and procedure for training new HP-OMS support peerson General Adding/removing sites Process and procedure for adding or removing customer's site End user Service Request Reporting How to report a Service Request to the Ticketing Systems and what to do when the System is not accessible
34 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Transition and Stabilization APPENDIX E - LIST OF THIRD PARTIES OUTSOURCERS Israeli Office - Integrity Israeli Office - Publicom Italian Office - Luigi Maspero 35 EX-99 13 exhibit_d-a.txt Appendix A of Exhibit D: Tecnomatix Sites Reports [Consulting & Managed Services by HP] [hp invent] TABLE OF CONTENTS
Appendix a Tecnomatix Sites Reports........................... 3 Tecnomatix Belgium - Brussels................................. 4 Tecnomatix France - Paris..................................... 4 Tecnomatix Netherlands - Enschede............................. 4 Tecnomatix France - [**]...................................... 5 Tecnomatix Germany - [**]..................................... 5 Tecnomatix Germany Neu-isenburg............................... 5 Tecnomatix Germany - Stuttgart................................ 5 Tecnomatix Italy -[**]........................................ 5 Tecnomatix Spain Madrid....................................... 5 Tecnomatix Technologies U.k................................... 5 Tecnomatix Sweden Gothenburg.................................. 5 Tecnomatix China - [**]....................................... 5 Tecnomatix Japan - Tokyo...................................... 5 Tecnomatix Korea.............................................. 5 Tecnomatix Far East - Singapore............................... 5 Tecnomatix Usa - Morgen Hill.................................. 5 Tecnomatix Usa - [**]......................................... 5 Tecnomatix Usa - Portsmouth & NASHUA.......................... 5
[Consulting & Managed Services by HP] [hp invent] APPENDIX A TECNOMATIX SITES REPORTS GENERAL During the joint Due Diligence phase HP-OMS has gathered information regarding the Customer's IT Environment. This information is detailed in Tecnomatix Sites Reports below. Since the joint Due Diligence phase, Tecnomatix IT Environment has been changed and modified as follows: 1. Windows 2000 and Exchange 2000 migration: All Tecnomatix sites are scheduled to be migrated to Windows 2000 Active Directory and Exchange 2000 by Q4 2003. 2. Additional changes that have been done by Tecnomatix Corporate IT. Such changes have been incorporated into the sites information reports below. Based on the Due Diligence findings and Customer's requirements HP-OMS has prepared technology gaps list. The list includes items that HP-OMS will fix/upgrade (as detailed in Exhibit D section 2.3) in order to keep the Service Level commitment under this agreement. The Technology gaps report is detailed in Exhibit E Appendix D. [XX] EX-99 14 exhibit-e.txt PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit E Pricing and Pricing Principles V 3.0 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") Document Information Project Manager: Gil Tal Customer Project Na'ama Halperin Manager: Prepared by: Document Version No. : Preparation Date: 2 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER")
TABLE OF CONTENTS 1. GENERAL....................................................................................... 4 2. THE TARGET PRICE AND TERMS OF PAYMENT......................................................... 5 2.1. TARGET PRICE AMOUNT........................................................................... 5 2.2. TARGET PRICE COMPONENTS....................................................................... 5 2.3. RIGHT TO USE.................................................................................. 5 2.4. QUARTERLY PAYMENTS............................................................................ 6 2.4.1. PAYMENT OF INVOICES........................................................................ 7 2.5. INVOICING METHOD.............................................................................. 8 2.5.1. QUARTERLY PAYMENT DIVIDED INTO 5 INVOICES.................................................. 8 2.5.2. CURRENCY................................................................................... 8 3. PRICE IMPLICATIONS OF CHANGES................................................................. 10 3.1. AGREED PRINCIPLES............................................................................. 10 3.2. BANK OF WORK HOURS............................................................................ 10 3.3. ADD-ON ASSETS................................................................................. 13 4. PRICING ADJUSTMENT............................................................................ 15 4.1. CURRENCY ADJUSTMENT........................................................................... 15 4.2. PAYMENTS DEDUCTION............................................................................ 5. MINIMUM PAYMENT PERIOD........................................................................ 18 6. TRANSITION AND STABILIZATION FEES............................................................. 19 6.1. GAP UPGRADES PROJECTS......................................................................... 19 6.2. EXHIBIT D PROJECTS............................................................................ 20 7. TERMINATION................................................................................... 21 7.1. REFRESHED ASSETS, NEW CUSTOMER EMPLOYEE ASSETS AND LEASED ADD ON ASSETS......... ................................................... 7.2. GENERAL SETUP COSTS........................................................................... 7.3. EARLY TERMINATION COMPENSATION................................................................ 32 8. CONTRACT EXPIRATION........................................................................... 9. TAXATION...................................................................................... 33 9.1. WITHHOLDING TAX............................................................................... 33 9.2. VAT PAYMENTS FOR EQUIPMENT OUTSIDE ISRAEL..................................................... 33 9.3. TAXATION UPON EXPIRATION OR TERMINATION OF THE CONTRACT....................................... 34 APPENDIX A: BANDWIDTH PRICING AND CAPACITY CALCULATIONS/ EXAMPLES..................................... 36 APPENDIX B: TECHNOLOGY GAPS UPGRADES PROJECTS......................................................... 45 APPENDIX C: FINANCIAL RECORDS MANAGEMENT.............................................................. 49 APPENDIX D:........................................................................................... 51 LIST OF FIVE GROUPS OF CUSTOMER SITES................................................................. 51
3 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") 1. GENERAL This Exhibit E (the "EXHIBIT") is attached to the Services Agreement for HP-OMS Operations Services (the "SERVICES AGREEMENT") dated as _____________ by and between HP-OMS and Customer. Capitalized terms not otherwise defined herein shall have the meaning specified in the Services Agreement and in the exhibits attached hereto to which this document is attached as Exhibit E. This Exhibit sets forth the pricing and pricing principles regarding HP-OMS's provision of the Services to Tecnomatix ("CUSTOMER"). 4 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") 2. THE TARGET PRICE AND TERMS OF PAYMENT 2.1. TARGET PRICE AMOUNT The annual Target Price payable by Customer to HP-OMS during each [**] period of the Term of the Services Agreement is [**] U.S Dollars. Said annual Target Price will be based on the actual number of Customer Employees as of the Commencement Date. Within fifteen (15) working days of the Commencement Date Customer shall notify HP-OMS in writing of the number of Customer Employees on the Commencement Date (the "INITIAL EMPLOYEE NUMBER"). The annual Target Price will be adjusted according to the mechanism described in Appendix A herein. 2.2. SERVICES COMPONENTS The Target Price constitutes payment for the following services: (a) Transition and Stabilization Projects (as detailed in Exhibit D) except for Gap Upgrade projects (as detailed in Exhibit D and Exhibit E Appendix C herein) (b) Services, Hardware and Software delivery (as detailed in the Services Agreement and all of its Exhibits). 5 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") 2.3. RIGHT TO USE In order to allow HP-OMS to provide the Services under the Services Agreement, the Customer shall grant HP-OMS the right to use (the "RIGHT TO USE") the Hardware and Software owned, leased and/or licensed by Customer, as applicable, immediately prior to the Commencement Date (the "RIGHT TO USE ASSETS") until their full amortization in the Customer's books. HP-OMS will pay Customer for the said Right to Use, a one time fee which will be as follows: (a) a sum of [**] (b) payable within ten (10) calendar days from the Commencement Date against one invoice to be issued in Israel by the Customer. (c) HP-OMS shall add Israeli VAT to said amount against invoice ("HESHBONIT MASS") to be issued by Customer. The VAT amount shall be paid by HP-OMS to Customer seven days before Customer has to pay the VAT amount to the VAT authorities. HP-OMS will use said Right to Use Assets solely for the provision of the Services under the Services Agreement and its Exhibits. The Right to Use shall terminate automatically in the event of early termination or expiration of the Services Agreement for any reason whatsoever (including, without limitation, termination for convenience by Customer or by HP-OMS, termination for cause by either Customer or HP-OMS). 2.4. QUARTERLY PAYMENTS HP-OMS will invoice Customer for the Target Price on a quarterly basis by invoicing one-fourth (1/4) of the annual Target Price, as adjusted from time to time in accordance with this Exhibit E (the "QUARTERLY PAYMENT"), not earlier than on the first day of the first month of the applicable calendar quarter. 6 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") 2.4.1. PAYMENT OF INVOICES Customer shall pay the Quarterly Payment within forty-five (45) days from the invoice date (e.g. invoice on February 28, payment due on April 15). Customer shall add to all payments due from it to HP-OMS pursuant to this Agreement, if made in arrears, interest at the rate of [**], computed from the period commencing as of their payment due date until actual payment thereof in full. The above notwithstanding, Customer will be exempt from said interest payments to the extent that the total number of days for any part of the outstanding payments in arrears throughout the Initial Term of this agreement is less than 45 calendar days and a separate count for the Extended Term shall apply. In case however that payment in arrears is less then 25% of the total outstanding amount then an additional period of fourteen (14) days of non interest accrual and payment will be added to said forty five (45) calendar days Examples: o Customer exceeds for the first time the payment due date by 6 days: no interest will be paid by Customer and the number of allowed arrears days will be reduced by 6 days and will be set to 39 days. o Customer exceeds the payment due date by 7 days and the number of allowed arrears days is 4: Customer will pay interest only for 3 days (according to the interest set above). 7 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") 2.5. INVOICING METHOD 2.5.1. QUARTERLY PAYMENT DIVIDED INTO 10 INVOICES In accordance with the Services Agreement, Section 10.1 (TARGET PRICE AND BANK OF WORK HOURS INVOICING AND PAYMENT), for each quarterly payment of the Target Price, HP-OMS shall deliver to Customer ten (10) invoices (equal, in the aggregate, to the applicable Quarterly Payment of the Target Price), each such invoice in an amount equal to a fraction of the Quarterly Payment of the Target Price, the numerator of which shall be the then current aggregate number of Customer Employees within each of the applicable ten (10) groups of Customer Sites listed in Appendix E herein (none of the groups being in the U.S.A), and the denominator of which shall be the total number of Customer Employees. The sum of all Customer Employees in the ten (10) groups shall equal the total number of Customer Employees. Customer shall provide HP-OMS the number of Customer Employees in each group no later than the beginning of each applicable quarter in the Term. 2.5.2. PAYMENTS AND COLLECTION OF 10 INVOICES It is the Customer responsibility to perform the collection of the Quarterly Payment from all the entities to which HP-OMS has issued an invoice, in accordance with Section 2.4.1 (PAYMENT OF INVOICES) herein. In case one or more of the entities has failed to pay to HP-OMS said payments (fully or partly), Customer shall pay such outstanding amounts. Delays in the Quarterly Payment for any reason whatsoever are subject to section 2.4.1 herein. 8 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") For the avoidance of doubt, in case any of the entities to whom HP-OMS has issued an invoice in accordance with Section 2.5.1 fails to pay said outstanding amount or a part of it, and Customer also fails to pay on their behalf, HP-OMS shall notify Customer of such failure. Customer will have fourteen (14) business days from such notice to pay any unpaid amount. Failure to pay any unpaid amount fourteen (14) business days after such notice will be considered a breach by Customer, subject to Sections 10.5 (ESCROW OF DISPUTED AMOUNTS) and 20.4 (TERMINATION FOR CAUSE BY HP-OMS) of the Services Agreement. 2.5.3. CURRENCY Each of the ten (10) quarterly invoices referenced above shall be issued in local currencies according to Appendix E herein. Invoices which will not be issued in US Dollar will be converted from US Dollars to the local currency, corresponding to the applicable group of Customer Sites listed in Appendix E below, by multiplying the original US dollar amount by the Euro/US Dollar Ratio, Yen/US Dollar Ratio, Singapore Dollar/US Dollar Ratio or the US Dollar/NIS Exchange Rate (each as applicable and as defined in section 4.1 herein) plus an additional twenty-five one hundredths of a percent (0.25%). The exchange rates/ratios defined above will be those published by the Bank of Israel for the last business day prior to the date that such invoice is issued. 9 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") 3. PRICE IMPLICATIONS OF CHANGES 3.1. AGREED PRINCIPLES (a) The Target Price will be adjusted according to changes in the number of Customer Employees, as specified in Appendix A to this Exhibit. (b) "Customer Employees" has the meaning ascribed to such term in Section 1.13 of the Services Agreement . 3.2. BANK OF WORK HOURS (a) As requested by Customer, HP-OMS will provide on-call services (outside the General Services Window) at Bank of Work Hours rates, in accordance with Exhibit C, Section 3.4 (ON-CALL SERVICE OUTSIDE THE GENERAL SERVICE WINDOW). (b) HP-OMS will provide IMAC services at Bank of Work Hours rates, in accordance with Exhibit B, Section 6.13 (INSTALL, MOVE ADD OR CHANGE) (c) HP-OMS will provide projects, which will be provided in less ten 50 hours, at Bank of Work Hours rates. (d) The Customer may purchase "Bank of Work Hours", for the above, according to the following criteria: 10 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") o Minimum number of hours for any single purchase order to be used only in the Israel Customer Site: five hundred (500) hours o Minimum number of hours for any single purchase order to be used only in sites outside of Israel: five hundred (500) hours o Price per hour: o For services provided in Israel: Flat rate of $[**] per hour. The above price does not include VAT o For services provided outside Israel: Flat rate of $[**]per hour. The above price does not include VAT (e) HP-OMS will invoice Customer immediately upon purchasing Bank of Work Hours package at the applicable Bank of Work Hours rates. Customer shall pay invoices within sixty (60) days from the end of the month of the invoice date. 11 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") (f) HP-OMS shall deliver, for Customer approval, at the end of each month a detailed list of the actual working hours performed during the previous month. Following Customer approval of such list HP-OMS shall deduct the approved hours from the Bank of Work Hours balance. (g) Customer may use the Bank of Work Hours with no time limitation. (h) Customer may purchase Bank of Work Hours as often as required. (i) As part of the Services Agreement and at no additional charge, HP-OMS will provide the Customer with a one time Bank of Work Hours package as follows: o [**] Bank of Work Hours for the Israel Customer Site o [**] Bank of Work Hours for Customer Sites located outside of Israel sites 3.3. MCC ON CALL SERVICES (j) As requested by Customer, HP-OMS will provide MCC on-call services (outside the General Services Window), in accordance with Exhibit C, Section 3.2 (MCC SERVICE WINDOW). (k) The Customer will pay for the on-call service [**] USD [**] per month. 12 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") (l) HP-OMS will charge the Customer with [**] USD [**] per hour, with a minimum charge of 2 hours per call. (m) HP-OMS will invoice the Customer at the end of the quarter according to the hourly on call usage at the applicable quarter. Such invoice is subject to Customer prior approval of a detailed list of hours delivered. Customer shall pay invoices within sixty (60) days from the end of the month of the invoice date. 3.4. ADD-ON ASSETS Without derogating from HP-OMS' obligations under the Services Agreement, including without limitation, with respect to the Technology Refresh Program, Customer may, in its discretion, purchase or lease new Hardware and/or Software, as part of Purchased/Leased Add-On Assets, from HP-OMS at a discount off of HP-OMS' then current local Internet website price list, as follows: o On HP-branded personal computers, laptops, software, printers, personal digital assistants, hubs and switches, the discount will be at least [**]% off the Internet list price. o On HP UNIX servers, operating systems and HP data storage systems and their components, the discount will be at least [**]% off the Internet list price. o On HP brand Software sold by HP the discount will be at least [**]% off the Internet list price 13 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") 3.5. LEASING PROCESS BY 3RD PARTY HP-OMS shall not use the services of any third party (except for HP-OMS' Affiliates) for leasing the Refreshed Assets without the prior written approval of Customer. 14 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") 4. PRICING ADJUSTMENT 4.1. CURRENCY ADJUSTMENT (A) DEFINITIONS EURO REFERENCE CURRENCY RATIO - means the Euro/US Dollar Ratio (as defined below) as of the Commencement Date YEN REFERENCE CURRENCY RATIO - means the Yen/US Dollar Ratio (as defined below) as of the Commencement Date The Euro Reference Currency Ratio and the Yen Reference Currency Ratio will be used to calculate the quarterly currency adjustment of the Quarterly Payment. PUBLISHED EURO RATIO - means the Euro/US Dollar Ratio as of the day prior to the last day of the applicable quarter. PUBLISHED YEN RATIO - means the Yen/US Dollar Ratio as of the day prior to the last day of the applicable quarter. EURO/US DOLLAR RATIO - means the (i) Euro/NIS Exchange Rate, divided by (ii) the US Dollar/NIS Exchange Rate. US DOLLAR/NIS EXCHANGE RATE - means the representative rate of exchange of the US Dollar to the NIS as published by the Bank of Israel for the applicable date (in case the applicable date is not a date for which the Bank of Israel publishes an exchange rate, then the last exchange rate published by the Bank of Israel prior to such date). YEN/US DOLLAR RATIO - means the (i) Yen/NIS Exchange Rate, divided by (ii) the US Dollar/NIS Exchange Rate. 15 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") SINGAPORE DOLLAR/US DOLLAR RATIO - means the (i) Singapore Dollar/NIS Exchange Rate, divided by (ii) the US Dollar/NIS Exchange Rate. (b) HP-OMS shall adjust the Target Price on a quarterly basis (I.E., every 3-months) one day before the end of the applicable calendar quarter (i.e, at March 30th) according to the currency adjustment formula described below: REVISED TARGET PRICE = TARGET PRICE IN US$ * 0.5 + TARGET PRICE IN US$ * 0.4 * (RATIO BETWEEN THE EURO REFERENCE CURRENCY RATIO AND PUBLISHED EURO RATIO) + TARGET PRICE IN US$ * 0.1* (RATIO BETWEEN THE YEN REFERENCE CURRENCY RATIO AND PUBLISHED YEN RATIO) BOTH EXAMPLES: TARGET PRICE = US $7M On the Commencement Date, the EURO REFERENCE CURRENCY RATIO is: 0.95Euro/1US$ = 0.95 On the Commencement Date, the YEN REFERENCE CURRENCY RATIO is: 120Yen/1US$ = 120 16 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") EXAMPLE 1: On 30.12.03 the PUBLISHED EURO RATIO is: 0.90Euro/1US$ = 0.9 On 30.12.03 the PUBLISHED YEN RATIO is: 110Yen/1US$ = 110 THE ADJUSTED TARGET PRICE FOR Q4/03 (31.12.03) WILL BE: (7*0.5)+(7*0.4*0.95/0.9)+(7*0.1*120/110)= US $7.21M EXAMPLE 2: On 29.6.04 the PUBLISHED EURO RATIO is: 1.05Euro/1US$ = 1.05 On 29.6.04 the PUBLISHED YEN RATIO is: 125Yen/1US$ = 125 THE ADJUSTED TARGET PRICE FOR Q2/04 (30.6.04) WILL BE: (7*0.5)+(7*0.4*0.95/1.05)+( 7*0.1*120/125)= $ US6.705M 17 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") 5. MINIMUM PAYMENT PERIOD - (a) During the first twelve (12) months following the Commencement Date (the "MINIMUM PAYMENT PERIOD"), the parties agree that no reduction to the Target Price will occur (i.e., Customer shall pay the Target Price identified in Section 2.1 (TARGET PRICE AMOUNT) for the first twelve (12) months of the Services Agreement, regardless of a change in number of Customer Employees). During the six (6) months following said initial twelve (12) month period the Target Price will be calculated according to Appendix A herein with the following exception: in case of a decrease in the number of Customer Employees upon such calculation, the minimum Customer Employees number (to be used for purposes of reducing the Target Price) will be 625. (b) During the Minimum Payment Period HP-OMS shall not reduce the agreed Services. (c) After the Minimum Payment Period any increase or decrease in the scope of Services will be handled according to Appendix A to this Exhibit (except as stated in Section 5(a) above). 18 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") 6. TRANSITION AND STABILIZATION FEES 6.1. GAPS UPGRADES PROJECTS. (a) The Gaps Upgrades projects described in Appendix C below ("GAPS UPGRADES PROJECTS") are intended, among other things, to complete technology gaps in Customer's infrastructure, in the absence of which certain operating activities may be affected. (b) Such projects will address, for example, infrastructure investment in the areas of backup, passive infrastructure, network connectivity and Antivirus, all in accordance with Exhibit D to the Services Agreement. (c) If immediately prior to the Commencement Date any workstation used by Customer, which, in Customer's discretion, requires antivirus software or lacks such anti-virus software, Customer shall be responsible for purchasing such additional license. For the avoidance of doubt, Customer shall not be responsible for purchasing such additional license where a workstation has an antivirus software license which simply does not conform to the requirements or policies of HP-OMS. (d) Implementation of the Gaps Upgrades Projects requires that Customer pay a one-time project charge of [**] US dollars (US $[**]) plus VAT at the invoice date (see gaps details Appendix C), in addition to the Target Price (the "GAPS UPGRADES PROJECT CHARGE"). The Customer will pay an additional amount for Gap Upgrade Projects required for USDATA offices according to a proposal that will be submitted by HP-OMS. In any case, the cost of Gap Upgrades Projects required for USDATA offices will not exceed [**] USD ($[**]). 19 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") (e) HP-OMS shall invoice the Customer for the Gaps Upgrades Project Charge in two (2) separate installments as follows: (i) 50% to be invoiced on the Commencement Date, and (ii) 50% to be invoiced upon Customer's Acceptance and written approval confirming finalization of all the Gaps Upgrades Projects. (f) Payment terms are sixty (60) days following the last day of the month in which HP-OMS' invoices for the Gaps Upgrades Project Charge are received by Customer. (g) The parties acknowledge that the Gaps Upgrades Projects, when completed, will bring Customer to a technology level sufficient to enable HP-OMS to meet the Service Levels. Accordingly, if it is determined that additional technology gaps exist beyond those listed in Appendix C, which prevent HP-OMS from meeting the Service Levels, HP-OMS shall perform such additional technology gaps projects without additional charge to Customer. 6.2. TRANSITION AND STABILIZATION (EXHIBIT D) PROJECTS Except with respect to the Gaps Upgrades Projects, the Target Price includes all fees and costs in connection with all the projects to be performed by HP-OMS during the Transition Phase, as described in Exhibit D. 20 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") 7. TERMINATION In the event of termination of the Services Agreement for any reason whatsoever HP-OMS shall transfer to Customer and Customer shall purchase from HP-OMS the Refreshed Assets, New Customer Employees Assets, Transition Project Assets and Leased Add-On Assets (together in this Section the "ASSETS") in accordance with the terms detailed herein. 7.1. REFRESHED ASSETS (a) GENERAL HP-OMS shall transfer to Customer ownership of the Refreshed Assets in any case of expiration or termination immediately upon payment completion by the Customer where payment is required, as set out in this Section 7.1. (b) TERMINATION FOR CAUSE BY HP-OMS. (i) Consideration The amount to be paid by the Customer, in case of early termination of the Services Agreement for cause by HP-OMS, in accordance with Section 20.4 (TERMINATION FOR CAUSE BY HP-OMS), for such Refreshed Assets shall be the Net Book Value of such Refreshed Assets as of the effective date of such termination (the "TERMINATION DATE"), calculated according to the rules set out in Appendix D herein. 21 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") (ii) Payment Terms The Customer will pay the whole amount due for the Refreshed Assets (as set out in subsection 7.1(b)(i) above) within sixty (60) days from such Termination Date. If after the sixty (60) day period Customer fails to pay all said outstanding amount, HP-OMS will so notify Customer in writing, and Customer will have another fourteen (14) days to complete such payment. Failure by Customer to pay such outstanding amounts shall constitute a material breach of the Services Agreement by Customer. (c) ALL OTHER TERMINATION EVENTS (i) Consideration The amount to be paid by Customer, in case of early termination of the Services Agreement by any of the parties and for any other reason (except for termination for cause by HP-OMS which is dealt with in Section (b) above and expiration which is dealt with under Section (d) below) for such Refreshed Assets, shall be the Net Book Value of such Refreshed Assets, calculated according to the rules set in Appendix D herein. (ii) Payment Terms Customer shall have the right to choose, in Customer's sole discretion, between two payments options: (A) pay the whole sum sixty (60) days from such Termination Date; or (B) pay to HP-OMS for such Refreshed Assets under a Capital Lease Payment Mechanism (as defined in section 7.5). The process for choosing between the foregoing payment options is defined in section 7.5 herein. 22 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") (d) EXPIRATION Customer will not pay any amount for the transfer of ownership of the Refreshed Assets, in case of expiration of the Services Agreement at the expiration of the Initial Term or Extended Term (as the case may be). 7.2. NEW CUSTOMER EMPLOYEE ASSETS (a) GENERAL HP-OMS shall transfer to Customer ownership of the New Customer Employee Assets in any case of expiration or termination immediately upon payment completion by the Customer, as set out in this Section 7.2. (b) TERMINATION FOR CAUSE BY HP-OMS (i) Consideration The amount to be paid by the Customer, in case of early termination of the Services Agreement for cause by HP-OMS, in accordance with Section 20.4 (TERMINATION FOR CAUSE BY HP-OMS), or upon expiration of the Services Agreement at the expiration of the Initial Term or Extended Term (as the case may be), for such New Customer Employee Assets shall be the Net Book Value of such New Customer Employee Assets as of such termination or expiration date, calculated according to the rules set out in Appendix D herein. 23 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") (ii) Payment Terms The Customer will pay the whole amount due for the New Customer Employee Assets (as set out in subsection 7.2(b)(i) above) within sixty (60) days from such termination or expiration date. If after the sixty (60) day period Customer fails to pay all said outstanding amount, HP-OMS will so notify Customer in writing and Customer will have another fourteen (14) days to complete such payment. Failure by Customer to pay such outstanding amounts shall constitute a material breach of the Services Agreement by Customer. (c) ALL OTHER TERMINATION EVENTS (i) Consideration The amount to be paid by Customer, in case of early termination of the Services Agreement by any of the parties and for any other reason (except for termination for cause by HP-OMS and expiration which are dealt with in Section 7.2(b) above) for such New Customer Employee Assets shall be the Net Book Value of such New Customer Employee Assets as of such Termination Date, calculated according to the rules set in Appendix D herein. (ii) Payment Terms Customer shall have the right to choose, in Customer's sole discretion, between two payments options: the Customer can either (A) pay the whole sum sixty (60) days from such Termination Date, or (B) pay HP-OMS for such Refreshed Assets under a Capital Lease Payment Mechanism (as defined below). The process for choosing between the foregoing payment options is defined in section 7.5 herein. 24 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") 7.3. LEASED ADD-ON ASSETS (a) GENERAL HP-OMS shall transfer to Customer ownership of the Leased Add-on Assets in any case of termination by any party and for any reason whatsoever or expiration immediately upon payment completion by the Customer, as set out in this Section 7.3. (b) ALL TERMINATION EVENTS (i) Consideration The amount to be paid by Customer, in case of early termination of the Services Agreement by any of the parties and for any other reason, for such Leased Add-on Assets shall be the Net Book Value of such Leased Add-on Assets as of such Termination Date, calculated according to the rules set in Appendix D herein. (d) (ii) Payment Terms Customer shall have the right choose, in Customer's sole discretion, between two payments options: the Customer can either (A) pay the whole sum within sixty (60) days from such Termination Date, or (B) pay HP-OMS for such Leased Add-on Assets under a Capital Lease Payment Mechanism (as defined below). The process for choosing between the foregoing payment options is defined in section 7.5 herein. 25 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") 7.4. TRANSITION PROJECT ASSETS (a) GENERAL HP-OMS shall transfer to Customer ownership of the Transition Project Assets (including but not limited to the MCC General Setup Assets) in any case of termination or expiration immediately upon payment completion by the Customer where payment is required, as set out in this Section 7.4. (b) TERMINATION FOR CAUSE BY HP-OMS AND TERMINATION FOR CONVENIENCE BY CUSTOMER (i) Consideration In the event of early termination by Customer for Convenience, in accordance with Section 20.5 (TERMINATION FOR CONVENIENCE) or early termination by HP-OMS for cause, in accordance with Section 20.4 (TERMINATION FOR CAUSE BY HP-OMS), of the Services Agreement, the Customer will have to pay only for the MCC General Setup Cost (out of the Transition Project Assets), as follows: The amount to be paid by the Customer, in such cases of early termination of the Services Agreement, shall be the MCC General Setup Cost as detailed in Appendix F (GENERAL MCC SETUP COST) herein, the value of which as of such Termination Date shall be calculated according to the rules set out in Appendix D (Financial Records Management) herein The Customer shall not pay for the transfer of ownership of any of the Transition Project Assets, except for the MCC General Setup Assets, as detailed above. 26 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") (ii) Payment Terms The Customer will pay the whole amount due for the MCC General Setup Cost (as set out in subsection 7.4(b)(i) above) within sixty (60) days from such Termination Date. If after the sixty (60) day period Customer fails to pay all said outstanding amount, HP-OMS will so notify Customer in writing and Customer will have another fourteen (14) days to complete such payment. Failure by Customer to pay such outstanding amounts shall constitute a material breach of the Services Agreement by Customer. (c) TERMINATION FOR FORCE MAJUER (i) Consideration In the event of Termination by Customer due to Force Majuer Event as defined in Section 21.6 (FORCE MAJEUR), of the Services Agreement, the Customer will have to pay only for fifty percent (50%) of the MCC General Setup Cost (out of the Transition Project Assets), as follows: The amount to be paid by the Customer, in such cases of early termination of the Services Agreement, shall be fifty percent (50%0 of the MCC General Setup Cost as detailed in Appendix F (GENERAL MCC SETUP COST) herein, the value of which as of such Termination Date shall be calculated according to the rules set out in Appendix D (Financial Records Management) herein The Customer shall not pay for the transfer of ownership of any of the Transition Project Assets, except for the MCC General Setup Assets, as detailed above. 27 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") (d) (ii) Payment Terms The Customer will pay the whole amount due for the MCC General Setup Cost (as set out in subsection 7.4(b)(i) above) within sixty (60) days from such Termination Date. If after the sixty (60) day period Customer fails to pay all said outstanding amount, HP-OMS will so notify Customer in writing and Customer will have another fourteen (14) days to complete such payment. Failure by Customer to pay such outstanding amounts shall constitute a material breach of the Services Agreement by Customer. (e) ALL OTHER TERMINATION EVENTS In any case of early termination of the Services Agreement by any of the parties and for any other reason (except for termination for cause by HP-OMS and termination for convenience by Customer, which are dealt with under Section 7.4(b) above), Customer will not pay any amount for the transfer of ownership of the Transition Project Assets (including for the MCC General Setup Assets). (f) EXPIRATION Customer will not pay any amount, for any of the Transition Project Assets (including the MCC General Setup Assets) in case of expiration of the Initial Term or the Extended Term. 28 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") 7.5. CHOICE PROCESS 7.5.1. GENERAL If Customer wishes to utilize the Capital Lease Payment Mechanism option marked "(B)" in Sections 7.1 (c) (ii), 7.2 (c) (ii), or 7.3 (c) (ii) above, HP-OMS undertakes to provide Customer with a proposal for a Capital Lease Payment Mechanism, the terms and conditions for which will be in accordance with those offered in similar transactions between HP Financial Services and its other customers at the time of the Agreement termination, within fifteen (15) working days from Customer's written notification thereof to HP-OMS. Customer shall notify HP-OMS within sixty (60) working days from Customer's receipt of HP-OMS' proposal as to which payment option (under Sections 7.1 (c) (ii), 7.2 (c) (ii), or 7.3 (c) (ii) above) Customer has chosen. Option A - Lump Sum Payment If option (A) above is chosen and after the sixty (60) day period (referred to under Sections 7.1 (c) (ii), 7.2 (c) (ii), or 7.3 (c) (ii) above) Customer fails to pay all said outstanding amount, HP-OMS will so notify Customer in writing and Customer will have another fourteen (14) days to complete such payment. Failure by Customer to pay such outstanding amounts shall constitute a material breach of the Services Agreement by Customer. 29 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") 7.5.2. OPTION B - CAPITAL LEASE If option (B) above is chosen the rules set forth below will apply. 7.5.2.1. CAPITAL LEASE DEFINITIONS (i) "CAPITAL LEASE PAYMENT MECHANISM" in this Schedule shall mean a mechanism by which the ownership of the applicable Assets is transferred to the Customer upon termination and the Customer pays to HP-OMS for such applicable Assets the Capital Lease Payment Sum (as defined below), payment to be made via equal quarterly or monthly installments over a lease period which will agreed upon in the lease contract between the parties. (ii) "CAPITAL LEASE PAYMENT SUM" shall mean the sum of the Net Book Value of the applicable Assets on the Termination Date calculated according to the rules set in Appendix D herein PLUS the Total Interest. (iii) "TOTAL INTEREST" shall mean the aggregate interest for the entire lease period. The interest per each month or quarter shall be calculated according to the annual interest rate determined by good faith negotiation between the Customer and HP Financial Services, but not more than the interest rate that HP Financial Services charges for similar transactions at the time of the termination (e.g., the factors for the determination of such interest rate shall be based on the lease period, Customer's credit rating and the then applicable market interest rate). 30 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") For the avoidance of doubt, the Customer and HP-OMS hereby agree that, as all such Assets mentioned above in this Section 7 are a critical element of Customer's ongoing operations, the following shall apply: During the Term or upon termination or expiration of the Services Agreement for any reason whatsoever, HP-OMS shall not remove any of the Assets from the Customer's premises without the Customer's prior written approval. No dispute of any kind or type whatsoever between HP-OMS and the Customer will affect or derogate from the Customer's ability and right to have physical possession of the Assets and the right to have such Assets transferred to the Customer in accordance with the terms detailed herein above and without derogating from the above, until such dispute is resolved in accordance with the Services Agreement, all the Assets shall remain in the physical possession of the Customer. HP-OMS hereby waives any right it may have under law, contract or otherwise to take physical possession of any of the Assets due to any reason whatsoever including due to any dispute, debts, moneys due or any other allegations of breach or termination of the Services Agreement. In accordance with the above principles, upon termination or expiration of the Services Agreement for any reason whatsoever, all the Assets will be immediately and unconditionally transferred to the Customer from HP-OMS and HP-OMS shall not remove any of the Assets from the Customers premises without the Customer's prior written permission to do so. 31 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") 7.6. EARLY TERMINATION COMPENSATION "EARLY TERMINATION COMPENSATION" is the total amount payable by the Customer to HP-OMS in order to compensate HP-OMS for the fact that the Services Agreement has been terminated before the expiration of the Initial Term. Customer undertakes to pay HP-OMS, in each case of such early termination as per section 7 above, the compensation amounts in accordance with the Termination Compensation Table below. TERMINATION COMPENSATION TABLE (payments are in U.S Dollars): [**] 32 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") 8. TAXATION 8.1. WITHHOLDING TAX Any withholding tax applicable under the law of the countries to which each of the 10 invoices will be issued according to Appendix E herein will be borne and paid by HP-OMS. Accordingly, any withholding tax which applies to Customer and Customer Affiliates under the local law of each such entity paying HP-OMS in accordance with Section 2.5.1 (QUARTERLY PAYMENT DIVIDED INTO 10 INVOICES) shall be deducted from the portion of the Quarterly Payments payable by the paying entity, and Customer undertakes to promptly provide HP-OMS with a certificate evidencing such payment of local withholding tax, which shall enable HP-OMS to receive a corresponding tax credit. 8.2 VAT IN ISRAEL With respect to any invoice between Israeli entities, value-added tax, according to Israeli law, shall be added by Customer to the Target Price payable by the Israeli Customer Affiliate against an Israeli VAT invoice ("HESHBONIT MAS") issued by HP-OMS. 8.3 VAT PAYMENTS FOR ASSETS OUTSIDE ISRAEL Value-added tax (VAT) for which Customer Affiliate will be able to receive a refund with respect to any Assets provided by HP-OMS to a Customer Affiliate in the various countries (except Israel) in which Customer and its Affiliates operate shall be borne and paid by Customer. In case Customer will not succeed to receive such refund, HP-OMS will use its best commercial efforts to receive the refund. In case neither Customer nor HP-OMS will be able to receive such refund, the parties will negotiate in good faith to find a solution. If the parties fail to reach an agreement, the Customer will have the right to purchase the assets and deduct the purchase amount from the Target Price. Such purchase is subject to HP-OMS prior written approval of the price. 33 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") 8.4 CUSTOMS DUTIES AND OTHER LEVIES AND TAXES FOR ASSETS OUTSIDE ISRAEL Customs duties and all other levies and taxes payments (excluding VAT which is refundable to the Customer and withholding Tax) imposed on the Assets and Services in the various countries (except for Israel) in which Customer and Customer Affiliates operate - shall be paid by Customer. Such customs duties and all other levies and taxes payments will be deducted from the Quarterly Payments of the entity which made the payment. Customer undertakes to promptly provide HP-OMS with a certificate for such Customs duties payments and all other levies and taxes payments. 8.5 TAXATION UPON EXPIRATION OR TERMINATION OF THE SERVICES AGREEMENT Upon termination or expiration of the Services Agreement as per section 7 of this Exhibit: 8.5.1 If Customer elects to lease the Assets from HP-OMS (or a party designated by HP-OMS) under the Capital Lease Payment Mechanism set out in Section 7.5.3 (OPTION B - CAPITAL LEASE), value added tax, purchase tax, or similar taxes or levies imposed on the lease shall be added by Customer to the lease amount; 8.5.2 If Customer elects to purchase said Assets in a lump sum, asset out in Section 7.5.2 (OPTION A - LUMP SUM PAYMENT), Value Added Tax, purchase tax, or similar taxes or levies imposed on the purchase shall be added by Customer to the purchase price set out in Section 7 above. 34 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") 8.5.3 In either case, whether Customer elects the Capital Lease Payment Mechanism or the lump sum payment mechanism, and where the applicable transaction is between Israeli entities value added tax according to applicable law shall be added by Customer to the lease amount/price payable by the Israeli Customer entity against Israeli VAT invoice (HESHBONIT MAS) issued by HP-OMS. 8.5.4 In case Customer elects the lump sum payment mechanism, if withholding tax is refundable to HP-OMS or (or to the party designated by HP-OMS to sell or lease the Assets, as applicable) such withholding tax will be borne and paid by HP-OMS or its affiliates. 8.5.5 In case Customer elects the Capital lease mechanism, If withholding Tax is refundable to HP-OMS (or to the party designated by HP-OMS to lease the Assets, as applicable), HP-OMS will do its best commercial efforts to reduce the capital lease amount by such withholding Tax. 35 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") APPENDIX A: BANDWIDTH PRICING AND CAPACITY CALCULATIONS/ EXAMPLES This Appendix A is the sole basis for any change to the Target Price due to changes to the number of Customer Employees: 1. BANDWIDTH PRICING Changes to the Target Price will be calculated using the Bandwidth Pricing model described below: 1.1. CUSTOMER EMPLOYEE INCREASE/DECREASE: In case of changes in Customer Employees (according to the Calculation Rules below), the following shall apply: o Increase and decrease calculation will maintain reciprocity concept; o The reduction in the Target Price shall not reflect reduction of Customer Employees below 590 o Customer Employee head count will be split into 2 categories: o Category 1: Up to (and including) the INITIAL CUSTOMER EMPLOYEE NUMBER o Category 2: Above the INITIAL CUSTOMER EMPLOYEE NUMBER o The new Target Price will be calculated on the basis of the following formula for Category 1 (up to and including) the INITIAL CUSTOMER EMPLOYEE NUMBER): NT = OT - (CT X 0.8) IN CASE OF DECREASE IN HEAD COUNT NT = OT + (CT X 0.8) IN CASE OF INCREASE IN HEAD COUNT 36 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") o The new Target Price will be calculated on the basis of the following formula for Category 2 (above INITIAL CUSTOMER EMPLOYEE NUMBER): NT = OT - CT IN CASE OF DECREASE IN HEAD COUNT NT = OT + CT IN CASE OF INCREASE IN HEAD COUNT DEFINITIONS: NT = New Target Price for the remaining contract years/months of the Initial Term. OT = Original Target Price of the Service Agreement for the remaining contract years/months of The Initial Term o CT = Change in Target Price due to changes in Customer head count; CT will be calculated on the basis of the following formula: CT = ORIGINAL TARGET PRICE (SEE SECTION 3.2 ABOVE)/INITIAL EMPLOYEE NUMBER*(NUMBER OF INCREASE OR DECREASE OF CUSTOMER HEAD COUNT) o CALCULATION RULES: i. Change in Customer Employee head count will be reviewed by the parties every quarter after the Minimum Payment Period. ii. If the number of Customer Employees increases or decreases by at least ten (10) persons compared to the number of Customer Employees in effect at the same time that the Target Price was last established, then as of the beginning of the next quarter, the New Target Price (NT) will be updated according to the change. 37 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") Note: for the purposes of these Examples: the Initial Customer Employee Number used is 700, and the NT used is 7,000. o Example 1 (Increase of 12 Customer Employees above 700): On 1.1.2003 Customer has 700 Employees. Between 1.1.2003 and 31.3.2003 the Customer adds 12 Employees. The calculation of the adjustment to the Target Price will be as follows (in thousands of US$): NT = 7,000 + 7,000/700*12 = 7,120 The new Target Price will be effective from the beginning of the next quarter - 1.4.2003. o Example 2 (Decrease of less than 10 Customer Employees from the last review): On 1.4.2003 Customer has 712 Employees. Between 1.4.2003 and 30.6.2003 the Customer reduces the number of Customer Employees by 8 persons. The calculation of the adjustment to the Target Price will be as follows (in thousands of US$): NT = 7,120 (No change in Target Price as change in Customer Employees is less than 10) o Example 3 (Combination of Customer Employee decrease - From a number above 700 to a new number below 700): On 1.7.2003 Customer has 704 Customer Employees. During 1.7.2003 and 30.9.2003 the Customer reduces the number of Customer Employees by 14 persons. The calculation of the adjustment to the Target Price will be as follows (in thousands of US$): NT = 7,120 - 7,000/700*12 - 7,000/700*10*0.8 = 6,920 The New Target Price will be effective from the beginning of the next quarter - 1.10.2003. 38 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") 1.2. NEW CUSTOMER SITE: Subject to Section 11.3 (CUSTOMER'S RIGHT TO USE CUSTOMER CONTRACTORS) of the Services Agreement, in the event of additional Customer Sites other than those listed in Exhibit B table 2, the following algorithm will be implemented: o Customer may issue a Service Change Request in accordance with Exhibit B section 8 to add a new Customer Site. o HP-OMS will submit a proposal for Customer approval that will include the one time setup cost for the new Customer Site(s), if needed o The maximum price for such proposal will be [**] US Dollar o In case the invested required for the new site setup will be significant higher then the above maximum price the process will be done by using Change Management process o The change to Target Price due to changes in Customer Employee head count will be according to Appendix A Section 1.1 above. o Services for the new Customer Site will be according to the Services Agreement. 39 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") 1.3. REMOVAL OF EXISTING CUSTOMER SITE: Subject to Section 11.3 (CUSTOMER'S RIGHT TO USE THIRD PARTIES CONTRACTORS) of the Services Agreement, in the event of the removal of an existing Customer Site, the following algorithm will be implemented: o Customer may issue a Service Change Request according to Exhibit B section 8 to remove an Existing Customer Site. Customer must notify HP-OMS of Customer's intention to remove an Existing Customer Site at least sixty (60) days in advance. o HP-OMS will submit a proposal to the Customer that will include the one-time removal cost of the Customer Site, if needed. HP-OMS's removal costs shall not exceed US $ [**]. o HP-OMS will use the removed Assets for the sole benefit of the Customer at other Customer Sites. o The change to Target Price due to changes in Customer Employee head count will be according to Appendix A Section 1.1 above. 1.4. INTRODUCING A NEW SYSTEM (ADD-ON ASSETS): Subject to Section 11.3 (CUSTOMER'S RIGHT TO USE CUSTOMER CONTRACTORS) of the Services Agreement, in the event that the Customer wishes to implement any Add-On Assets (e.g., a new ERP application, technology leap etc...): 40 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") o Customer may issue a Service change order according to Exhibit B section 8 for implementation of such new system. o The Service change order proposed by HP-OMS shall specify the change in the Target Price and the purchase or lease price of the Add-On Asset. 1.5. INTRODUCING OR ELIMINATING A SERVICE (BEYOND THE SCOPE OF THE SERVICES): Subject to Section 11.3 (CUSTOMER'S RIGHT TO USE CUSTOMER CONTRACTORS) of the Services Agreement, in the event that the Customer wishes to implement a new service outside the scope of the Services (e.g., manned phone support company wide, Voice over IP etc...): o Customer may issue a Service change order according to Exhibit B section 8 for implementation or eliminating such service. o The Service change order proposed by HP-OMS shall specify the change in the Target Price. 41 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") APPENDIX B: HP-OMS'S TIME AND MATERIALS SERVICE RATES The prices in Table 3 below will be used to calculate the cost of Service Change Requests as described in Exhibit B, Section 8. TABLE3: HP-OMS TIME & MATERIALS RATES
SENIOR ENGINEER AND UNIX ON-SITE SYSTEM PROJECT COST PER HOUR IN: TECHNICIAN ENGINEER ENGINEER MANAGER OTHER - ---------------- ---------- -------- --------- -------- ---------- ISRAEL [**] [**] [**] [**] ISRAELI WORKER ABROAD (*) [**] [**] [**] [**] LOCAL IN USA WEST COAST [**] [**] [**] [**] LOCAL IN USA EAST COAST [**] [**] [**] [**] LOCAL IN EUROPE [**] [**] [**] [**] LOCAL IN JAPAN [**] [**] [**] [**] LOCAL IN SINGAPORE [**] [**] [**] [**] LOCAL IN CHINA [**] [**] [**] [**] LOCAL IN TAIWAN [**] [**] [**] [**]
42 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER")
SENIOR ENGINEER AND UNIX ON-SITE SYSTEM PROJECT COST PER HOUR IN: TECHNICIAN ENGINEER ENGINEER MANAGER OTHER - ---------------- ---------- -------- --------- -------- ---------- LOCAL IN KOREA [**] [**] [**] [**]
ASSUMPTIONS: o Prices are in US $ per hour o Section 10.4 (TAXES) of the Services Agreement shall apply. o The sole basis for adjustment of the time and materials rates set out above shall be the currency adjustment mechanism set out in Section 4.1 (CURRENCY ADJUSTMENT) of this Exhibit E. o *The time and materials rates for HP-OMS Personnel located in Israel, who are requested by Customer to provide services outside of Israel, do not include flights and hotels which will be borne by Customer according to the applicable travel site/s. o Prices are for general working window hours, local time not including holidays and weekends DESCRIPTION OF LABOR TYPE: ON-SITE TECHNICIAN (1ST LEVEL SUPPORT): Basic IT operational skills. Works according to documented routines and procedures. Is able to handle typical problems that cannot be solved remotely by the Service Desk but require local intervention (Break/Fix). Supports central Incident Management from the Service Desk by executing specific tasks as instructed from the Service Desk Engineer. Can carry out hardware installations and installation/configuration of predefined software packages. 43 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") ENGINEER: Medium to high IT-operational skills and training level for Microsoft based environments. Able to work independently, self-driven, ability to act as 2nd level IT specialist and to supervise more junior people. Can participate as resource in projects, works on defined tasks under supervision of a Senior Engineer or Project Manager. SENIOR ENGINEER, UNIX SYSTEM ENGINEER PROGRAMMER: High operational or technical IT skills - highly trained or experienced within a defined focus area. Acts as 3rd level support and/or able to oversee complex situations and problems. As a consultant, a Senior Engineer will deliver core tasks within medium to large projects maintaining his own planning and timing. Can act as an owner of defined parts of such a project. PROJECT MANAGER: Practical knowledge of project management tools and methodologies, skills and experience in managing IT projects. The Project Manager drives medium to large projects and will lead a full project team. He/she will hold overall responsibility for deadlines and financials of the project and be measured on project on-time and on-budget delivery. 44 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") APPENDIX C: TECHNOLOGY GAPS UPGRADES PROJECTS TABLE 4: LIST OF PROJECTS # [**] TOPIC [**] [**] --------- ---------- -------------- ----------- --------- 1 [**] Backup [**] [**] 2 [**] Backup [**] [**] 3 [**] Backup [**] [**] 4 [**] Backup [**] [**] 5 [**] Backup [**] [**] 6 [**] Backup [**] [**] 7 [**] Backup [**] [**] 8 [**] Backup [**] [**] 9 [**] Backup [**] [**] 10 [**] Backup [**] [**] 11 [**] Backup [**] [**] 12 [**] Backup [**] [**] 13 [**] Backup [**] [**] 14 [**] Backup [**] [**] 45 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") # [**] TOPIC [**] [**] --------- ---------- -------------- ----------- --------- 15 [**] Backup [**] [**] 16 [**] Computer room [**] [**] 17 [**] Computer room [**] [**] 18 [**] N/A [**] [**] 19 [**] LAN [**] [**] 20 [**] LAN [**] [**] 21 [**] LAN [**] [**] 22 [**] Passive [**] [**] Network 23 [**] Passive [**] [**] Network 24 [**] Printer [**] [**] 25 [**] Server Refresh [**] [**] 26 [**] Server Refresh [**] [**] 46 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") # [**] TOPIC [**] [**] --------- ---------- -------------- ----------- --------- 27 [**] Server Room [**] [**] Temperature 28 [**] UPS [**] [**] 29 [**] UPS [**] [**] 30 [**] UPS [**] [**] 31 [**] UPS [**] [**] 32 [**] UPS [**] [**] 33 [**] UPS [**] [**] 34 [**] UPS [**] [**] 35 [**] UPS [**] [**] 36 [**] UPS [**] [**] 37 [**] UPS [**] [**] 38 [**] UPS [**] [**] 39 [**] UPS [**] [**] 40 [**] UPS [**] [**] TOTAL AMOUNT [**] - -------------------------------------------------------------------------------- TECHNOLOGY GAPS UPGRADES PROJECTS FOR USDATA OFFICES WILL BE PROVIDED BY HP-OMS ACCORDING TO THE STANDARDS DESCRIBED IN EXHIBIT D. 47 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") 48 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") APPENDIX D: FINANCIAL RECORDS MANAGEMENT 1. FINANCIAL RECORDS All Assets (i.e. Leased Add-On Assets, Transition Projects Assets, Refreshed Assets, and New Customer Employee Assets) will be recorded in HP-OMS' financial records or it's authorized leasing partner's records according to US Generally Acceptance Accounting Principles (US GAAP). All assets will be recoded in separate group of accounts according to the following groups of assets: 1. Leased Add-On Assets 2. Transition Projects Assets 3. Refreshed Assets 4. New Customer Employee Assets 2. ACCOUNTING PRINCIPLES All Assets will be recorded in HP-OMS' financial records according to their fair market value as of the date HP-OMS delivers (or causes to be delivered) such assets to the applicable Customer Site. 3. DEPRECIATION METHOD; PERIOD OF DEPRECIATION 3.1. Subject to Section 3.2 of this Appendix D, all personal equipment Assets (e.g., desktops and laptops) will be depreciated according to the straight line method over a three (3) year period. 3.2. All servers, Unix computer equipment, computer accessories and other active equipment (e.g. backup systems, network equipment) will be depreciated according to the straight line method over a four (4) year period. 49 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") 3.3. The General Setup Assets will be depreciated according to the straight line method over a six (6) years period. 50 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") APPENDIX E: LIST OF 12 CUSTOMER ENTITIES TO WHOM HP-OMS WILL PROVIDE INVOICES The following table details the Customer entities for purposes of dividing the Quarterly Target Price into ten (10) invoices per section 2.5(INVOICING METHOD) herein.
Mailing Currency of Invoice # Entity Name Office Country Address Invoice --------- ------------------- --------------- --------------- --------------- --------------- 1 TECNOMATIX LTD. Herzeliya ISRAEL 16 HAGALIM NIS AVENUE HERZLIA, 46733 Tecnomatix Northville; MI US Technologies Inc. Morgan Hill CA US Richardson Texas US Tecnomatix Unicam Portsmouth NH US Inc. 2 TECNOMATIX Joy en Josses FRANCE 21 RUE ALBERT Euro S.A.R.L. (Paris) CALMETTE ESPACE JOUY TECHNOLOGIE 78353 JOUY-EN-JOSAS CEDEX Tecnomatix A.p.S. Denmark Tecnomatix Gutenberg Sweden Technologies Sweden AB
51 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER")
Mailing Currency of Invoice # Entity Name Office Country Address Invoice --------- ------------------- --------------- --------------- --------------- --------------- 3 NIHON TECNOMATIX Tokyo JAPAN MARUMASU Yen K.K. KOJIMACHI BLDG. 3 KOJIMACHI 3-CHOME, CHIYODA-KU TOKYO 102-0083T Seoul KOREA 4 TECNOMATIX UNICAM SINGAPORE 396 ALEXANDRA Singapore (SINGAPORE) PTE RD Dollar LTD. #16-01/02 BP TOWER SINGAPORE 119954 Tecnomatix Unicam Taipei Taiwan Taiwan Co., Ltd Tecnomatix Shenzhen China Technologies (Shenzhen) Ltd Shanghais China 5 Tecnomatix Europe Brussels Belgium Euro S.A. Tecnomatix Enschade The Netherlands Machining Automation B V 6 Tecnomatix Gmbh Nue-Isenburg Germany Euro Stuttgart Munich Dueseldorf
52 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER")
Mailing Currency of Invoice # Entity Name Office Country Address Invoice --------- ------------------- --------------- --------------- --------------- --------------- 7 Tecnomatix Turin Italy Euro Technologies Italia S.r.l. Milan Italy 8 Tecnomatix Solihull UK Euro Technologies Ltd. Leatherhead UK 9 Tecnomatix Unicam Lindau Germany Euro Gmbh Ekental Germany 10 Tecnoamtix Unicam Meylan France Euro France S.A.
53 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC PRICING AND PRICING PRINCIPLES FOR TECNOMATIX ("CUSTOMER") APPENDIX F: MCC GENERAL SETUP COST TABLE 5: MCC GENERAL SETUP COST INFORMATION
No Item Total Cost Remarks - ------------- ----------------------- --------------- -------------------------- 1 MCC General Setup costs 1.1 Monitoring system: Including License, Hardware and implementation o [**] 1.2 o [**] [**] Including License, Hardware and implementation 1.3 [**] Including License, Hardware and implementation 2 o [**] [**] Space, Electricity, Air Condition, UPS etc. TOTAL [**]
54 EX-99 15 exhibit-f.txt PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit F Employee Transfer Agreement V 6.0 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Employee Transfer Agreement DOCUMENT INFORMATION Project Manager: Gil Tal Customer Project Naama Halperin Manager: Prepared by: Consolidation Document Version No: V 6.0 Preparation Date: 16.09.2003 2 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Employee Transfer Agreement TABLE OF CONTENTS DOCUMENT INFORMATION ................................................. 2 1 EMPLOYEE TRANSFER .................................................. 4 1.1 CUSTOMER'S EMPLOYEES IN GERMANY AND FRANCE ..................... 5 1.2 DUTIES AND RESPONSIBILITIES .................................... 5 1.3 LIST OF EMPLOYEES .............................................. 7 1.4 EMPLOYEE TRANSFER PROCESS ...................................... 9 1.4.1 TRAINING AND GUIDELINES .................................... 11 3 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Employee Transfer Agreement 1 EMPLOYEE TRANSFER HP-OMS shall assure that the level and quality of services are maintained throughout the transfer of employees from Tecnomatix to HP-OMS directly or to its affiliates or authorized HP-OMS Subcontractors, as will be decided by HP-OMS. HP-OMS will encourage employees to continue in their roles, subject to cost and effectiveness constraints (but not less than the minimum salary offers set out in Table 3 below), assuring that significant operational and industry knowledge will be retained in the personnel within HP- OMS which are delivering the Services to the Customer's. The basic principle underlying the responsibilities of the parties with respect to the Transitioned Employees is the following one: Customer is, and shall remain at all times, responsible for all liabilities of any kind whatsoever relating to the Transitioned Employees which liabilities were created during the period prior to the Commencement Date (the "Pre-Commencement Date Period") (even if claimed later on with respect to such Pre-Commencement Date Period liabilities), and HP-OMS is responsible for all liabilities of any kind whatsoever relating to the Transitioned Employees which liabilities were created thereafter (i.e. after the Commencement Date). A party, who bore or paid, or will pay liability due by the other party, will be reimbursed and indemnified by that other party. HP-OMS (or its affiliates or authorized HP-OMS Contractors) shall make offers of employment as set out in this Exhibit F in order to retain nine (9) Customer employees from different countries, for a period of at least six (6) months after the Commencement Date, as follows: o ISRAEL - Four (4) Tecnomatix employees will be engaged by HP-OMS. o USA- Five (4) Tecnomatix employees will be engaged by HP-OMS' affiliates in the US or by an authorized HP-OMS S ubcontractor. o FRANCE - These Customer Sites have a total of one IT Employee, which employee will be not be engaged by HP-OMS. o GERMANY - These Customer Sites have a total of two It Employees - both will not be engaged by HP-OMS. HP-OMS (or its affiliates or authorized Subcontractors) will make offers of employment to the Transitioned Employees in Israel and the USA after an agreed date prior to the Commencement Date on which the parties shall announce the outsourcing project under the Agreement to the Customer Employees (the "CUSTOMER NOTIFICATION DATE"). The minimal salary offers by HP-OMS to the employees will be based on the total respective employer cost per year as detailed in TABLE 3 below. For the avoidance of doubt, such offers shall contain terms and conditions for salary and benefits which are not less favorable to the Transitioned Employee than those terms and conditions which were in effect immediately prior to the Commencement Date, as set out in the applicable employment contract between Customer and such individuals. HP-OMS acknowledges receipt of such employment contracts were provided during Due Diligence. 4 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Employee Transfer Agreement In the Israel site, the applicable Transitioned Employees will be engaged by HP-OMS. In the U.S.A sites, applicable Transitioned Employees will be engaged by HP-OMS' affiliates in the US or by an authorized HP-OMS Subcontractor. 1.1 CUSTOMER'S EMPLOYEES IN GERMANY AND FRANCE Customer's Affiliate's employees in France and Germany will not be transferred to HP-OMS or any other HP-OMS affiliate or authorized HP-OMS Subcontractor. On the Commencement Date, the Customer will provide notice of dismissal to the IT employees at the Customer Sites in Germany and in France (listed in table 2 herein), with the effective date of termination to be six (6) months from the Commencement Date. HP-OMS will pay the Customer all applicable Payments made by Customer to such employees while still employed by Customer's Affiliate, during the six (6) month termination notice period. The parties acknowledge that such employees may choose to terminate their own employment with Customer's Affiliate prior to the expiration of such termination notice period. The "Payments" shall mean payments in all forms, including salary payments, bonuses, costs incurred by Customer by extending any benefits, at least as detailed in TABLE 3 below. All severance payments for these employees will be borne and paid by the Customer. 1.2 DUTIES AND RESPONSIBILITIES The scope of responsibilities of HP-OMS and Customer for the completion of the employee transfer is as follows: 5 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Employee Transfer Agreement TABLE 1: PARTIES RESPONSIBILITIED CUSTOMER'S RESPONSIBILITIES HP-OMS'S RESPONSIBILITIES - ------------------------------------- ----------------------------------- Provide information on Customer Plan the transition employees and Customer compensation & benefits Send dismissal notices to applicable Make prompt offers of employment Customer Employees to be terminated to the Transitioned Employees in by Customer, in accordance with the accordance with this Exhibit and respective employment contract and communicate and/or consult with make severance payments to such Customer and applicable Customer employees. Employees as required Advise HP-OMS on successfully Staff the transition team as navigating Customer's culture required Provide access to empowered Customer Manage the employee transfer HR resources leveling Israel and process as detailed in SECTION 1.4 Germany 6 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Employee Transfer Agreement 1.3 LIST OF EMPLOYEES TABLE 2: EMPLOYEE TAKEOVER LIST NAME OF COUNTRY EMPLOYEE JOB TITLE - ------------ ----------------- ---------------- ISRAEL [**] Application Support [**] Application Support [**] Application Support [**] Application Support GERMANY* [**] Technical Support [**] Technical Support FRANCE* [**] Technical Support USA [**] Technical Support [**] Technical Support [**] Technical Support [**] Web Master [**] Technical Support 7 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Employee Transfer Agreement * At the Customer Sites in these countries, HP-OMS will not recruit the listed employees. TABLE 3: CUSTOMER EMPLOYEES COSTS (EMPLOYER COST) TOTAL COST FOR FIRST NAME LAST NAME EMPLOYER PER YEAR - ------------ ---------- ------------------- EUROPE ------ [**] [**] [**] [**] [**] [**]` [**] [**] [**] [**] [**] [**] ISRAEL ------ [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] USA --- [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] 8 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Employee Transfer Agreement 1.4 EMPLOYEE TRANSFER PROCESS The purpose of this phase is to get Transitioned Employees on board without disrupting the services delivered to Customer. The phase starts with the Customer Notification Date, including explanation of the implications to the affected staff and ends with the staff becoming HP-OMS employees in Israel or HP-OMS' affiliates or authorized HP-OMS Subcontractor employees in the USA. ON THE CUSTOMER NOTIFICATION DATE THE EMPLOYEE TRANSFER PROCESS IN ISRAEL WILL BEGIN AS FOLLOWS: o GATHERING On the Customer Notification Date Customer's IT manager and HP-OMS' Project Manager will meet with all Transitioned Employees in order to reduce the emotional aspects of change for the employees and explain what impacts the change will have on their daily activities. o PERSONAL MEETING HP-OMS Project Manager will meet each Transitioned Employee separately starting with the Sales Application Team Leader and then the team members. The meetings will take place after the Gathering (described above). The meeting will enable each side to present itself, its expectations and to answer any personal questions that might concern the employees. o EMPLOYMENT OFFER HP-OMS Project Manager and HP-OMS HR Manager will meet with each Transitioned Employee and present an employment offer (in accordance with Section 1 above), including salary and other benefits to which he/she may be entitled. The employee will have a grace period of two weeks following receipt of such offer to decide whether she/he would like to accept the employment offer made by HP-OMS. o HP-OMS might relocate some of the Transitioned Employees to HP-OMS premises according to HP-OMS operational needs in order to support the Services provision. Such Transitioned Employees will be relocated upon the establishment of the MCC and its ongoing operation. Transitioned Employees that will not be relocated will stay at the Customer's premises in Herzelia. 9 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Employee Transfer Agreement ON THE CUSTOMER NOTIFICATION DATE THE EMPLOYEE TRANSFER PROCESS IN THE U.S.A WILL BEGIN AS FOLLOWS: o INTRODUCTION Customer's Site manager and HP-OMS' Project Manager will meet* the Transitioned Employees at the applicable Customers Site in order to reduce the emotional aspects of change for the employees and explain what impacts the change will have on their daily activities. Afterward, HP-OMS' Project Manager and HP-OMS' affiliates in the US or by an authorized HP-OMS Subcontractor will offer employment contracts (in accordance with SECTION 1 above), to the Transitioned Employees. The employee will have a grace period of four () weeks following receipt of such offer in which decide whether she/he would like to accept HP-OMS' employment offer. * In order to allow HP-OMS Project Manager to ensure smooth transition and still provide vital information to the Transitioned Employees some of the meetings might occur via phone conference and face to face meetings will occur at a later stage. In the event that HP-OMS, after using all commercially reasonable efforts (in accordance with Section 1.4 above) and delivery of offers of employment as per this Exhibit fails to convince the Transitioned Employees, or any of them, to be HP-OMS (or HP-OMS affiliates and/or authorized Subcontractors) employees, then HP-OMS may request the Customer to delay the dismissal of such applicable employees from the Customer for a period of six (6) month following the Commencement Date. The Customer may, at its sole and absolute discretion, accept or reject HP-OMS request to delay the dismissal of certain of such employees for a period of six (6) months following the Commencement Date. In the event that the Customer accepts the HP-OMS request to delay the dismissal of certain employees (the "RETAINED EMPLOYEES"), Customer shall so notify HP-OMS in writing. HP-OMS shall make renewed commercially reasonable efforts (in accordance with SECTION 1.4 above) during the six (6) month period following the Commencement Date (the "INITIAL SIX MONTH PERIOD") to employ the Retained Employees. HP- OMS will credit Customer for all Payments (defined below) made to the Retained Employees during the Initial Six Month Period on the quarterly invoice for the payment of the Target Price, following the quarter in which such payment is made. 10 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Employee Transfer Agreement "Payments" shall mean payments in all forms, including salary payments, bonuses, and costs incurred by Customer by extending any benefits in whatever form (i.e. total employers cost). 1.5 TRAINING AND GUIDELINES Once the Transitioned Employees are hired by HP-OMS (or its affiliates or authorized Subcontractors), the Transitioned Employees will become part of HP-OMS permanent team, which will provide the Services to the Customer. At no additional charge, HP-OMS will provide guidelines and training to the Transitioned Employees concerning their duties and their integration into the support provision process. The training will emphasize HP-OMS' commitment to encourage the Transitioned Employees, to maintain their motivation and commitment to serve the Customer's needs, while adapting to a new corporate culture. HP-OMS will ensure that it and its affiliates and authorized Subcontractors provide, at no additional charge to Customer, the Transitioned Employees will receive the same training as do all other HP-OMS employees, according to HP-OMS's training standards and policies. These standards and policies are based on ensuring that employees will by trained with in depth and new technology courses that are related to their primary skill sets and are vital to their professional progress. In addition, the Transitioned Employees will be trained with any new technology the Customer chooses to utilize within a reasonable period prior to its implementation or prior to any evaluation HP-OMS will perform for the Customer related to such technology. 11 EX-99 16 exhibit-g.txt PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit G Project Staff and Key Contacts V 6.0 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Project Staff and Key Contacts DOCUMENT INFORMATION Project Manager: Customer Project Manager: Prepared by: Document Version No: V 6.0 Preparation Date: 2 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Project Staff and Key Contacts TABLE OF CONTENTS DOCUMENT INFORMATION............................................... 2 1 HP-OMS PROJECT STAFF AND KEY CONTACTS............................ 4 1.1 HP-OMS KEY PERSONNEL:...................................... 4 1.2 HP-OMS KEY CONTACT LIST.................................... 4 2 CUSTOMER'S PROJECT STAFF AND KEY CONTACTS........................ 5 2.1 CUSTOMER'S KEY CONTACT LIST................................ 5 3 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Project Staff and Key Contacts 1 HP-OMS PROJECT STAFF AND KEY CONTACTS 1.1 HP-OMS KEY PERSONNEL: HP-OMS Project Manager: Gil Tal HP-OMS Operation Manager: Erez Rachmil HP-OMS MCC Manager: TBD Service Level Manager (SLM): TBD IT Administrative and Procurement Assistant: TBD 1.2 HP-OMS KEY CONTACT LIST HP-OMS CEO: Shmuel Blank Customer Account Manager at HP: Eyal Dalit Project Manager: Gil Tal Finance Contact: Golan Mizrahi 4 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Project Staff and Key Contacts 2 CUSTOMER'S PROJECT STAFF AND KEY CONTACTS 2.1 CUSTOMER'S KEY CONTACT LIST Customer CFO: Oren Steinberg Customer Corporate IT Manager: Naama Halperin Customer Corporate IT Infrastructure Manager: Harel Weissman Customer Finance Contact at TECNOMATIX LTD: Aviram Steinhart Customer Finance Contact at TECNOMATIX FRANCE S.A.R.L: TBD Customer Finance Contact at TECNOMATIX TECHNOLOGIES, INC: TBD Customer Finance Contact at NIHON TECNOMATIX K.K: TBD Customer Finance Contact at TECNOMATIX UNICAM, INC: TBD Unicam Division Manager: Israel Levy Site Manager - 5 EX-99 17 exhibit-h.txt PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit H Customer Sites PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Customer Sites Document Information Project Manager: Prepared by: Document Version V 1.0 No.: Preparation Date: 2 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Customer Sites TABLE OF CONTENTS DOCUMENT INFORMATION................................................ 2 1 CUSTOMER SITES.................................................... 4 3 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Customer Sites 1 CUSTOMER SITES Table 1 details the Customer sites for which HP-OMS will provide the Services under this agreement. Service provision for Customer sites marked as Remote Site is detailed in EXHIBIT B SECTION 5.7. TABLE1: CUSTOMER SITES Number Country Site ------ ----------- ------------------------- 1 Belgium Brussels * 2 Belgium [**] 3 China [**] 4 China [**] 5 Denmark (USDATA) 6 France Juoy-en-Jose 7 France [**] 8 Germany [**] 9 Germany [**] 10 Germany [**] 11 Germany [**] 12 Germany Neu-Isenberg (Frankfurt) 13 Germany [**] 14 Israel Hertezlia 15 Italy [**] 16 Italy Segrate (Milan) 17 Italy [**] 18 Japan Tokyo 19 Korea Seoul 20 Netherlands [**] 21 Singapore Singapore 22 Sweden [**] 23 Taiwan Taipei 24 U.K. Leatherhead 25 U.K. [**] 26 U.S.A Morgan Hill (San Jose CA) 27 U.S.A [**] 28 U.S.A Portsmouth (NH) 29 U.S.A Richmond (Dallas TX) 30 U.S.A [**] * The above sites as defined as Remote Site. 4 EX-99 18 exhibit-i.txt PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit I HP-OMS Software and Customer Software Categories V 6.0 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC HP-OMS Software and Customer Software Categories DOCUMENT INFORMATION Project Manager: Gil Tal Customer Project Na'ama Halperin Manager: Prepared by: Document Version V 6.0 No.: Preparation Date: 26-10-2003 2 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC HP-OMS Software and Customer Software Categories TABLE OF CONTENTS Document Information................................................. 2 1 SOFTWARE SUPPORT................................................... 4 3 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC HP-OMS Software and Customer Software Categories 1 SOFTWARE SUPPORT Table 1 details the Software support classification in relation to the Services provided under this agreement. The table defines the duties and responsibilities regarding the following subjects: 1. Support level by HP-OMS (Full Support/ Make It Work/ Special Support) 2. Content management responsibilities 3. The party that will pay for license upgrade 4. The party that will pay for Software maintenance and 3rd party support contracts All Software items (HP-OMS Software and/or Customer Software) are classified as one of the 16 Software types as described in Table 1 below. TABLE1: SOFTWARE SUPPORT
MAKE IT FULL WORK SPECIAL SW SUPPORT SUPPORT SUPPORT LICENSES MAINTENANCE CONTENT BY HP- BY HP- BY HP- UPGRADE AND SUPPORT # CLASSIFICATION TYPE SOFTWARE ITEM MANAGEMENT OMS OMS OMS COST COST - ---- -------------- ------------- --------------- ---------- -------- -------- ------- -------------- -------------- Customer Business [**] HP Yes - - Tecnomatix Tecnomatix 1 Software Applications Finance Applications (e.g. SUN, Kav Tecnomatix - Yes - Tecnomatix Tecnomatix Customer Business Maarchot, 2 Software Applications Peach Tree) Other Business Applications (e.g.Maximizer, Tecnomatix - Yes - Tecnomatix Tecnomatix Kupel Reem, Customer Business Replicom, 3 Software Applications salesforce) Customer Business [**] Tecnomatix - Yes - Tecnomatix Tecnomatix 4 Software Applications Tecnomatix Products (Customer Tecnomatix - - Yes Tecnomatix Tecnomatix Customer Proprietary 5 Software Proprietarily Software) Back office Applications HP-OMS- (e.g. HP Yes - - HP HP 6 Software System Exchange) Customer 7 Software System [**] Tecnomatix - Yes - Tecnomatix Tecnomatix
4 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC HP-OMS Software and Customer Software Categories
MAKE IT FULL WORK SPECIAL SW SUPPORT SUPPORT SUPPORT LICENSES MAINTENANCE CONTENT BY HP- BY HP- BY HP- UPGRADE AND SUPPORT # CLASSIFICATION TYPE SOFTWARE ITEM MANAGEMENT OMS OMS OMS COST COST - ---- -------------- ------------- --------------- ---------- -------- -------- ------- -------------- -------------- Customer System R&D Tools Tecnomatix Yes - - HP HP 8 Software Microsoft Customer System [**] Tecnomatix - Yes - Tecnomatix Tecnomatix 9 Software HP-OMS- System Desktop Software Software HP Yes - - HP HP 10 Microsoft HP-OMS- System Desktop Software Software Non HP Yes - - HP HP 11 Microsoft HP-OMS- System Infrastructure HP Yes - - HP HP 12 Software HP-OMS- System Operating HP Yes - - HP HP 13 Software Systems HP-OMS- System [**] N/A - - Yes HP HP 14 Software HP-OMS- Other [**] According According to Software to the the classification classification 15 N/A - - Yes of the item of the item Customer Other Personal Tecnomatix - - Yes N/A N/A 16 Software Software Customer Other Software For Software Supporting Personal 17 Hardware Tecnomatix - - Yes N/A N/A
5 EX-99 19 exhibit-j.txt PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit J Customer Competitors V 6.0 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Customer Competitors Document Information HP Project Manager : Gil Tal Customer Project Manager : Na'ama Halperin Prepared by: Erez Rachmil Document Version No: V 6.0 Preparation Date: 16/09/03 2 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Customer Competitors INDEX DOCUMENT INFORMATION........................................ 1 DOCUMENT INFORMATION........................................ 2 INDEX....................................................... 3 1 CUSTOMER COMPETITORS................................... 4 3 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Customer Competitors 1 CUSTOMER COMPETITORS Table 1 consis a list of companies compete with Customer in the same industry in which Customer operates, by notice in writing to HP-OMS. TABLE 1: CUSTOMER'S COMPETITORS COMPANY NAME COMMENTS - ------------- --------- Dassault Systemes Including EAI-DELTA GmbH and its subsidiaries and affiliates Internation Business Machines Corp. Electronic Data Systems Corporation Including Unigraphics Solutions, and its subsidiaries and affiliates Inc. Polyplan Technologies, Inc. SAP AG Matrologic Group SA Datasweep, Inc. Aegis Industrial Software Corporation Valore Computerized Systems Ltd. 4 EX-99 20 exhibit-k.txt PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC EXHIBIT K GUARANTEE OF TECNOMATIX TECHNOLOGIES LTD. Tecnomatix Technologies Ltd (the "GUARANTOR") hereby guarantees HP-OMS (Israel) Ltd. ("HP-OMS") the full and prompt performance of each and any of the undertakings of Tecnomatix Ltd (the "CUSTOMER") under the Services Agreement For HP-OMS Operations Services between Tecnomatix Ltd. and HP-OMS (Israel) Ltd., dated October 30, 2003. Guarantor hereby waives its right pursuant to clause 8(1) of the Israeli Law of Guarantee 1967, and expresses its consent that HP-OMS will have the right to enforce the Guarantor's guarantee, without having first to demand from the Customer to fulfill its undertakings, in whole or in part, and without having first to initiate legal proceedings against Customer. TECNOMATIX TECHNOLOGIES LTD By: /s/ Harel Beit-On Name: Harel Beit-On Title: Chairman & CEO Date: 30.10.2003 By: /s/ Efrat Safran Name: Efrat Safran Title: General Counsel Date: 30.10.2003 EX-99 21 exhibit-l.txt PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC EXHIBIT L GUARANTEE OF HEWLETT-PACKARD ISRAEL LTD. Hewlett-Packard Israel Ltd. (the "Guarantor") hereby guarantees Technologies Ltd. (the Customer") the full and prompt performance of each and any of the undertakings of HP-OMS (Israel) Ltd. (the "HP-OMS") under the Services Agreement For HP-OMS Operations Services between Customer and HP-OMS, dated October 30, 2003. Guarantor hereby waives its right pursuant to clause 8(1) of the Israeli Law of Guarantee 1967, and expresses its consent that Customer will have the right to enforce the Guarantor's guarantee, without having first to demand from the Customer to fulfill its undertakings, in whole or in part, and without having first to initiate legal proceedings against HP-OMS. HEWLETT-PACKARD ISRAEL LTD. By: /s/ Moshe Lasman Name: Moshe Lasman Title: HPS Country Manager Date: 30.10.2003 By: /s/ Shmuel Blank Name: Shmuel Blank Title: HP-OMS General Manager Date: 30.10.2003 EX-99 22 exhibit-m.txt PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit M Termination Assistance Services Level Credits V 6.0 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Termination Assistance Services DOCUMENT INFORMATION HP Project Manager: Gil Tal Customer Project Manager: Na'ama Halperin Prepared by: Document Version No: V 6.0 Preparation Date: 16/09/03 2 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Termination Assistance Services INDEX DOCUMENT INFORMATION................................................. 1 DOCUMENT INFORMATION................................................. 2 INDEX................................................................ 3 1 DEFINITIONS..................................................... 4 2 GENERAL......................................................... 5 3 PROPERTY AND DATA............................................... 6 4 TRANSITION PLAN................................................. 7 5 OPERATIONAL TRANSITION.......................................... 9 3 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Termination Assistance Services 1 DEFINITIONS Unless otherwise defined herein, capitalized terms used in this Exhibit shall have the meaning ascribed to them in the Agreement and, if not defined therein, in the other Exhibits attached to this Agreement. 4 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Termination Assistance Services 2 GENERAL This Exhibit sets out HP-OMS' obligations to provide Termination Assistance Services in accordance with Section [20.7a] of the Agreement. The obligations set out in this Exhibit are in addition to those set out in Section [20.7a] of the Agreement. Depending on the extent of the efforts required to provide the assistance described herein, HP-OMS may charge the Customer for such assistance on a time and materials basis per the Bank Hours' rates specified in Exhibit E, Section3.2 (BANK OF WORK HOURS). 5 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Termination Assistance Services 3 PROPERTY AND DATA HP-OMS must provide reasonable notice to the Customer before removing any software, hardware or documentation from the Customer Site or any other location from which Services are provided. If the property is owned by the Customer, such property must not be removed without its prior written consent. HP-OMS will provide the Customer with such data as may be reasonably required regarding the Services, resources used, performance and current projects. 6 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Termination Assistance Services 4 TRANSITION PLAN The Transition Plan to be developed and implemented by HP-OMS and the Customer according to clause [20.7a] of the Agreement must include the following: Knowledge Transfer HP-OMS, or its Approved Subcontractors [to be defined], will provide knowledge transfer regarding the Services. This shall include: o Providing the Customer with information regarding the Services that is necessary to implement the Transition Plan, and providing such information regarding the Services as necessary for the Customer to assume responsibility for continued performance of the Services in an orderly manner so as to minimize disruption to the operations of the Customer, including (i) relevant documentation; (ii) schedules and work procedures; o Providing reasonable training to the Customer's personnel in the performance of those Services that are to be transferred; o Permitting the Customer to assign the Customer's personnel to work with personnel of HP-OMS, or its Approved Subcontractors, to facilitate knowledge transfer from HP-OMS to the Customer; o Explaining standards and procedures of MCC and RSC and Site(s) documentation to the Customer's operations staff; o Providing a list of all Software running at the commencement of the transition period; and o Providing details of the status of all projects current or proposed as at the commencement of the transition period. TRANSFER OF RESOURCES HP-OMS shall provide all reasonable assistance required for the transfer of resources, including software, third party contracts, at no charge to HP-OMS, and all Equipment [to be defined], and other assets used by HP-OMS to perform the Services for the Customer (the "Resources"). This shall include: o Making any equipment owned or leased by HP-OMS that is substantially dedicated to the performance of the Services available in the manner set out in Section [20.7a]; o Providing asset listings, including listings of hardware and software by Site, which will detail the purchase date of each asset, depreciation method, years of depreciation, book value, accumulated depreciation and net book value; 7 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Termination Assistance Services o Providing contract listing by Site which will detail the name of the service provider, the type of services provided and the price of the services; o Assigning contracts for any third party services that are utilized by HP-OMS solely to perform the Services, at the option of the Customer; o Licensing or assigning rights to use the Software in accordance with Section [20.7a] of the Agreement; o Obtaining Try to obtain any third party consents for the transfer of the Equipment, Software and third party service contracts; o Transferring billing, executing legal documents, and performing other functions necessary to effect the assignment of third party service contracts, to the extent commercially reasonable; and o Preparing bills of sale or taking reasonable actions necessary to affect the transfer of ownership of Resources. All as specified in Section [20.7a] of the Agreement. 8 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Termination Assistance Services 5 OPERATIONAL TRANSITION HP-OMS shall perform all activities required to effect a smooth transition of operations responsibilities for the Services. This shall include: o Providing to the Customer, to the extent available to HP-OMS and as directed by the Customer, data, files, databases and sources with respect to the HP-OMS Software (including third party software if permitted by the applicable licences), along with run documentation and job control listings, and other similar information necessary for the Customer to run the Software for the Customer's benefit; o Delivering then-existing systems support profiles, enhancement logs, problem tracking/resolution documentation, function point data, performance data, and status reports associated with applications support; o Providing work volumes, staffing requirements, actual service levels, and information on historical performance for each Equipment component, system or application over the preceding twelve (12) months; o Providing copies of all the Customer Data and system files on electronic media as specified by the Customer; o Identifying work and projects expected to be in progress as of the effective date of termination or expiration. With respect to such work, document current status, stabilize for continuity during transition, and provide any required training to achieve transfer of responsibility without loss of momentum or adverse impact on any work and project time tables; o Providing pre-transition services, including: o Providing the Customer with all the procedures and forms maintained, including the sites documentations and contact lists; o Providing the Customer with the current backup and restore systems and equipment as well as storage media; o Providing the Customer with the documentation used by HP-OMS to provide the Services, including technical documentation, in hard-copy or electronic media as indicated by the Customer; o Providing the Customer with any problem logs the Customer does not already have, reporting back at least two (2) years prior to the termination date (or at least back to the Commencement Date of the Agreement if the termination date is less than two (2) years from such commencement); o Identifying, recording and providing to the Customer control release levels for system software; o Providing and coordinating assistance in notifying HP-OMS' outside vendors of the procedures to be followed during the turnover phase; 9 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Termination Assistance Services o Reviewing all existing test, data and production software environments with the Customer's operations staff; o Providing reasonable assistance to the Customer in establishing or transferring naming conventions; o Delivering non-proprietary tools and databases used to provide the Services with the necessary documentation, including those for tracking projects and service information requests, and those used for knowledge transfer; o Generating and providing a tape and computer listing of the source code for the HP-OMS Software in a form reasonably requested by the Customer. Delivering the source code, technical specifications and materials to the Customer. At the Customer's request, deliver job streams and associated job control language and appropriate run documentation to the Customer, if applicable; o Assist the Customer in making arrangements for the physical de-installation, transportation, and relocation of the Hardware and physical assets; o Providing documentation and diagrams for the, data, IP addressing schema, managed device thresholds and configurations associated with the provision of the Services; and o Providing interim tapes of the Customer Data and off-site storage of production data, as reasonably requested; o PROVIDING OTHER SERVICES DURING THE TRANSITION, INCLUDING: o Copying and delivering to the Customer all relevant requested data files; o In conjunction with the Customer, conducting a rehearsal of the migration prior to cut-over as scheduled by the Customer; o Delivering the content listings of all relevant requested data files and print-outs of control file information to the Customer; o Providing reasonable assistance to the Customer in loading the data files; o Providing reasonable assistance to the Customer with the movement of data from the then existing databases to the new environment; o Providing an image copy of each operating system environment in dump/restore mode; o Providing reasonable assistance to the Customer with the turnover of all, data, and other communications networks and systems; and o Providing reasonable assistance to the Customer with the turnover of all storage systems; and o Providing reasonable assistance to the Customer with the turnover of all Security systems; and o Continuity of operations through the termination date. 10 EX-99 23 exhibit-n.txt PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Exhibit N Governance V 6.0 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Governance DOCUMENT INFORMATION HP Project Manager: Gil Tal Customer Project Manager: Na'ama Halperin Prepared by: Document Version No: V 6.0 Preparation Date: 16/09/03 2 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Governance INDEX DOCUMENT INFORMATION 1 DOCUMENT INFORMATION 2 INDEX 3 1 APPOINTMENTS 4 1.1 EXECUTIVE PRIME 4 1.2 OPERATIONAL PRIME 5 1.3 TASK/PROJECT OPERATIONS CO-ORDINATORS 6 1.4 BUSINESS SUPPORT AND RELATIONSHIP CO-ORDINATORS 7 2 COMMITTEES 7 2.1 JOINT OPERATIONS REVIEW COMMITTEE 7 2.2 JOINT EXECUTIVE REVIEW COMMITTEE 8 3 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Governance 1 APPOINTMENTS Concurrently with the execution of this Agreement, the Parties agree to appoint in each of their own organization the following: 1.1 EXECUTIVE PRIME The Executive Prime of each Party shall act, on behalf of said Party, as the overall business owner of the relationship between the Customer and HP-OMS (the "Relationship") for the purpose of the successful fulfillment of this Agreement. Each Executive Prime shall have the following responsibilities: i- Executive point of contact between the Parties on high level major matters in connection with the Relationship and the Services provided hereunder; ii- To oversee overall performance and progress of HP-OMS, including without limitation HP-OMS's progress with respect to the service levels set forth in EXHIBIT C to the Agreement; iii- To co-chair joint Executive Review Committee meeting; iv- To provide strategic guidance and direction with resepct to the objectives stated in the Agreement, and to identify new objectives, as shall be agreed upon by both Parties;. v- To generate a quarterly status and progress report. Executive Prime for Bell Customer is: the Chief Information Financial Officer (Oren Steinberg). Executive Prime for HP-OMS is: the Chief Executive Officer (Shmuel Blank). 4 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Governance 1.2 OPERATIONAL PRIME The Operational Prime of each Party shall act as overall business Co-ordinator for the purposes of this Agreement (the "Operational Prime"). The Operational Prime shall have the following responsibilities: i- Overall prime for the management of the Relationship; ii- To serve as a single point of contact between the Parties on significant matters in connection with the Relationship and the Services provided hereunder, which are not handled by the Task/Project Operations Co- ordinators or Business Support Relationship Co-ordinators; iii- To address and resolve material issues and concerns with respect to the Relationship and the Services provided hereunder; iv- To track and monitor progress and performance to ensure the service levels as set forth in Exhibit C are met; v- To ensure the obligations of HP-OMS and the Customer in connection with this Agreement are being met; vi- To co-ordinate any improvement processes and business changes in respect of the Services; vii- To co-chair joint committees and regular meetings; viii- To ensure the progress of any task and/or Project under the Agreement and the designation of a Task/Project Co-ordinator to govern such Project, on behalf of each Party; ix- To generate monthly status and progress report to be submitted to his/her Executive Prime and distributed in accordance with a mutually agreed upon distribution list; 5 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Governance x- Specifically, the HP-OMS Operational Prime will lead the Customer outsourcing management team. The composition of the outsourcing management team will be at Bell's HP-OMS's discretion. Bell will ensure major user representatives and groups are duly represented. Operational Prime for Customer is: Worldwide IT Director (Naama Halperin) Senior Director. Operational Prime for HP-OMS is: HP-OMS Project Manager (Gil Tal). 1.3 TASK/PROJECT OPERATIONS CO-ORDINATORS Number and specific assignment responsibilities of Task/Project Operations Coordinators will be determined by each Party's Operational Prime to meet their own requirements related to a specific task or Project, as the case may be. The Task/Project Operations Co-ordinators will have the following responsibilities: i- To serve as day to day contact to address operational issues arising from and related to the task/Project he/she is assigned to; ii- To address and resolve issues and concerns with respect to the relevant task or Project. Material issues and concerns shall be escalated to the Operational Primes; iii- To co-ordinate and facilitate the implementation of the Agreement in daily operations activities; iv- To participate in the monthly Joint Operations Review Committee when issues related to the task or Project to which he/she is assigned to are being discussed; 6 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Governance v- To generate a weekly status and progress report to be delivered to his/her Operational Prime and distributed in accordance with a mutually agreed upon distribution list. 1.4 BUSINESS SUPPORT AND RELATIONSHIP CO-ORDINATORS Each Party shall designate a permanent Business Support and Relationship Coordinator for the on-going support of the Operational Primes. In this support role for his/her Operational Prime, each Business Support and Relationship Co-ordinator shall have the following responsibilities: i- Serve as a single point of contact between the Parties on commercial or contractual matters and in that capacity, coordinate the work between any designated experts in such fields as legal, regulatory, finance or tax matters; ii- Overall professional support with respect to all matters arising from the Agreement governing the Relationship; iii- Address and resolve commercial or contractually related issues and concerns; including any proposed amendments to any of the terms of this Agreement or the Exhibits. Business Support and Relationship Co-ordinator for HP-OMS is: Account Manager (Eyal Dalit). 7 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Governance 2 COMMITTEES 2.1 JOINT OPERATIONS REVIEW COMMITTEE The Customer and HP-OMS agree to create a Joint Operations Review Committee, which will convene on a monthly basis, consisting of the Parties' Operational Primes and as may be required the Business Support and Relationship Co-ordinators, the Task/Project Co-ordinators, user representatives and any other managers of either Party who may be invited by the Parties as mutually agreed. This committee will: i- Preview on a monthly basis overall status of the Relationship, status and progress on the various aspects of the implementation of the Agreement, issues related to delivery of the Services, service level measurement and performance, Road Map implementation (including milestones and timeframes), Projects initiated by the Parties and aspects related to the implementation of objectives, measurements, accomplishments, going forward plans and priorities issues; ii- Discuss and approve improvements and changes to the processes and procedures; and iii- Address such other matters as may be delegated to them under this Agreement. Each party may request, by prior written notice, an additional meeting of the Joint Operations Review Committee in order to address specific outstanding and material issues related to the Relationship, which are within the scope of responsibility of the Joint Operations Review Committee. All issues that cannot be resolved by the Joint Operations Review Committee will be escalated to the Joint Executive Review Committee. 2.2 JOINT EXECUTIVE REVIEW COMMITTEE The Customer and HP-OMS agree to create a Joint Executive Review Committee consisting at least of the Parties' Executive Primes and Operational Primes as well as any other additional Executives of either Parties' organization that the committee decides should attend. This committee will: 8 PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT FROM THE SEC Governance i- Issue a quarterly status and progessprogress report and review, on a quarterly basis, performance, objectives and measurements; ii- Discuss major changes to the Relationship and objectives, subject to the prior written approval of both Parties; iii- Address such other matters as may be delegated to them under this Agreement or escalated by the Joint Operations Review Committee. Each Party may request, by prior written notice, an additional meeting of the Joint Operations Review Committee in order to address specific outstanding and material issues related to the Relationship, which are within the scope of responsibility of the Joint Operations Review Committee. 9 EX-99 24 exhibit_4b-3.txt EXHIBIT 4(B)(3) SECOND AMENDMENT TO LETTER OF AGREEMENT THIS SECOND AMENDMENT TO LETTER OF AGREEMENT (this "AMENDMENT NO. 2"), is made as of December 1, 2003 by and between Tecnomatix Technologies Ltd., a company duly incorporated under the laws of the State of Israel, with offices located at 16 Hagalim Avenue, Herzliya, Israel (the "COMPANY"), and Amir Livne, an individual residing at Be'er Gan Street, Ein Vered 40696, Israel (the "OFFICER") (each, a "PARTY", together, the "PARTIES). WITNESSETH: WHEREAS, on January 16, 2001 the Company entered into a Letter of Agreement (the "AGREEMENT") with the Officer regarding his terms of employment and compensation as Executive Vice-President Industry Marketing of the Company; and WHEREAS, on January 26, 2003 the Parties entered into the first amendment to the Agreement; and WHEREAS, the Parties wish to further amend the Agreement, subject to the terms and conditions of this Amendment No. 2; NOW, THEREFORE, in consideration of the mutual promises hereinafter set forth and other good and valuable consideration, the receipt of which are hereby acknowledged, the Parties hereby agree as follows: 1. AMENDMENT OF SECTION 6 Section 6 of the Agreement shall be amended to read in its entirety as follows: "At the Commencement Date (as defined in the Agreement) the Company shall provide to you a loan (the "Loan") in an amount of NIS 418,330 (the "Principal"). The Principal of the Loan shall be linked to the Israeli Consumer Price Index and shall bear interest as of the Commencement Date at the rate provided for, from time to time, pursuant to the Regulations promulgated under the Israeli Tax Ordinance. Two thirds (2/3) of Loan (principal and accrued interest thereon) will be forgiven (the "Forgiven Portion of the Loan") after two years of employment and one third (1/3) of the Loan (principal and accrued interest thereon) will be repaid by you to the Company upon the expiration of three years of employment from the Commencement Date, PROVIDED, HOWEVER, that if you or the Company terminate your employment at any time prior to the expiration of three years from the Commencement Date, you will be required to repay to the Company the Principal and any accrued interest thereon. The Forgiven Portion of the Loan may be subject to taxes, as required by law, which taxes shall be your sole liability and be borne by you. The Company may deduct any amounts due under the Loan from any amounts owed to you by the Company, including any salary, commission payments or expense reimbursements. You will remain obligated to repay to the Company the balance of any amount due under the Loan which was not repaid as aforesaid." 2. EFFECTIVE DATE This Amendment No. 2 shall have effect as of the date hereof. 3. SURVIVAL OF PROVISIONS All other terms and conditions of the Agreement, as previously amended, remain unchanged and are applicable hereto, except as modified by this Amendment No. 2. 4. ENTIRE AGREEMENT This Amendment No. 2 shall be deemed for all intents and purposes as an integral part of the Agreement. The Agreement, as previously amended, and the Amendment No. 2 constitute the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and undertakings, both written and oral, between the parties hereto with respect to the subject matter hereof. 5. COUNTERPARTS This Amendment No. 2 may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Amendment No. 2 by telecopier shall be effective as delivery of a manually executed counterpart of this Amendment No. 2. 2 IN WITNESS WHEREOF, the Parties have duly executed this Amendment No. 2 hereto and on the date first above written. TECNOMATIX TECHNOLOGIES LTD. OFFICER By: /S/ Harel Beit-on /S/ Amir Livne ----------------- -------------- Name: Harel Beit-On AMIR LIVNE Title: Chairman of the Board and Chief Executive Officer By: /S/ Jaron Lotan ----------------- Name: Jaron Lotan Title: President and Chief Operating Officer 3 EX-99 25 exhibit_8.txt EXHIBIT 8 LIST OF SUBSIDIARIES - -------------------- NAME COUNTRY OWNERSHIP - ----- ------- --------- Tecnomatix Ltd. Israel 100% Robcad Ltd. Israel 100% Tecnomatix Technologies, Inc. U.S. 100% Tecnomatix Unicam, Inc. U.S. 100% Nihon Tecnomatix K.K. Japan 100% Zuken Tecnomatix K.K. Japan 49% Tecnomatix Technologies (Gibraltar) Limited Gibraltar 100% Tecnomatix Technologies S.A. Luxembourg 100% Tecnomatix Europe S.A. Belgium 100% Tecnomatix GmbH Germany 100% Tecnomatix Denmark Aps Denmark 100% Tecnomatix S.A.R.L. France 100% Tecnomatix Technologies Italia S.r.l. Italy 100% Tecnomatix Technologies Limited. U.K. 100% Tecnomatix Technologies Sweden AB Sweden 100% Tecnomatix Machining Automation B.V. The Netherlands 100% Tecnomatix Unicam B.V. The Netherlands 100% Tecnomatix Unicam GmbH Germany 100% Tecnomatix Unicam France S.A.S. France 100% Tecnomatix Unicam (Singapore) Pte Ltd. Singapore 100% Tecnomatix Unicam Taiwan Co., Ltd. Taiwan 100% Tecnomatix Technologies (Shenzhen) Ltd. China 100% Fabmaster China Limited* Hong-Kong 100% View2Partner Israel Company Ltd.* Israel 100% * Inactive subsidiary. EX-99 26 exhibit_12-1.txt EXHIBIT 12.1 CERTIFICATION I, Jaron Lotan, certify that: 1. I have reviewed this annual report on Form 20-F of Tecnomatix Technologies Ltd.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure control and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /S/ Jaron Lotan* - ---------------- Jaron Lotan Chief Executive Officer Date: March 31, 2004 *The originally executed copy of this Certification will be maintained at the Company's offices and will be furnished to the Securities Exchange Commission or its staff upon request. EX-99 27 exhibit_12-2.txt EXHIBIT 12.2 CERTIFICATION I, Oren Steinberg, certify that: 1. I have reviewed this annual report on Form 20-F of Tecnomatix Technologies Ltd.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure control and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /S/ Oren Steinberg* - ------------------ Oren Steinberg Chief Financial Officer Date: March 31, 2004 *The originally executed copy of this Certification will be maintained at the Company's offices and will be made available for inspection upon request. EX-99 28 exhibit_13-1.txt EXHIBIT 13.1 Certification Required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) I, Jaron Lotan, as Chief Executive Officer of Tecnomatix Technologies Ltd. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002), that, to my knowledge: (1) The accompanying annual report on Form 20-F of the Company for the fiscal year ended December 31, 2003 (the "Report"), filed with the U.S. Securities and Exchange Commission, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /S/ Jaron Lotan* - ---------------- Jaron Lotan Chief Executive Officer March 31, 2004 *The originally executed copy of this Certification will be maintained at the Company's offices and will be furnished to the Securities Exchange Commission or its staff upon request. EX-99 29 exhibit_13-2.txt EXHIBIT 13.2 Certification Required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) I, Oren Steinberg, Chief Financial Officer of Tecnomatix Technologies Ltd. (the "Company"), certify, pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002), that, to my knowledge: (1) The accompanying annual report on Form 20-F of the Company for the fiscal year ended December 31, 2003 (the "Report"), filed with the U.S. Securities and Exchange Commission, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /S/ Oren Steinberg* - ------------------- Oren Steinberg Chief Financial Officer March 31, 2004 *The originally executed copy of this Certification will be maintained at the Company's offices and will be furnished to the Securities Exchange Commission or its staff upon request. EX-99 30 exhibit_14-1.txt EXHIBIT 14.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference into the registration statements on Form S-8 of Tecnomatix Technologies Ltd. (registration numbers 333-14082, 333-11466, 333-04766 and 33-66334) of our report dated February 9, 2004, issued with respect to the consolidated financial statements of Tecnomatix Technologies Ltd. and filed with this Annual Report on Form 20-F for the year ended December 31, 2003. /S/ BRIGHTMAN ALMAGOR & CO. CERTIFIED PUBLIC ACCOUNTANTS A MEMBER OF DELOITTE TOUCHE TOHMATSU Tel Aviv, Israel March 31, 2004 EX-99 31 exhibit_14-2.txt EXHIBIT 14.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors Tecnomatix Technologies, Inc.: We hereby consent to the incorporation by reference into the registration statements on Form S-8 of Tecnomatix Technologies Ltd. (registration numbers 333-14082, 333-11466, 333-04766 and 33-66334) of our reports dated January 23, 2004 with respect to the consolidated balance sheets of Tecnomatix Technologies, Inc., as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholder's deficit and comprehensive income (loss), and cash flows for each of the years in the two-year period ended December 31, 2003; and our report dated January 24, 2003 with respect to the consolidated balance sheets of Tecnomatix Technologies, Inc., as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholder's deficit and comprehensive income (loss), and cash flows for each of the years in the two-year period ended December 31, 2002, which reports appear in the annual report on Form 20-F of Tecnomatix Technologies Ltd. for the year ended December 31, 2003. Our reports refer to a change in the estimated lived of certain capitalized software development costs in 2002 and the adoption of the provisions of SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS as of January 1, 2002. /S/ KPMG LLP Detroit, Michigan March 29, 2004 EX-99 32 exhibit_14-3.txt EXHIBIT 14.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors Tecnomatix Technologies Ltd.: We hereby consent to the incorporation by reference into the registration statements on Form S-8 of Tecnomatix Technologies Ltd. (registration numbers 333-14082, 333-11466, 333-04766 and 33-66334) of our report dated February 3, 2003, except for note 6, which is as of March 17, 2003, with respect to the consolidated balance sheets of USDATA Corporation and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholder's equity (deficit) and comprehensive loss, and cash flows for each of the years in the three-year period ended December 31, 2002; which report appears in the annual report on Form 20-F of Tecnomatix Technologies Ltd. for the year ended December 31, 2003. /S/ KPMG LLP Dallas, Texas March 29, 2004 -----END PRIVACY-ENHANCED MESSAGE-----