Item 1. BUSINESS
Unless the context otherwise requires, “RadView,” “us,” “we” and “our” refer to RadView Software Ltd. and its subsidiaries.
Company Overview
RadView provides innovative application testing software and services that enable companies to evaluate and measure the performance of their business-critical web applications. Our software allows companies to accelerate the development and deployment of their web applications and enables the successful implementation of their strategies involving their websites. We also provide support and maintenance services to our installed base of customers.
We were incorporated in Israel in 1991 and conducted our operations in Israel from 1993 until April 2000, when we relocated our corporate offices to the United States. We maintain our research and development operations in Israel. In August 2000, we completed the initial public offering of our ordinary shares, raising $35.3 million after offering costs.
We provide an integrated suite of products that comprehensively verifies the performance, scalability, and integrity of web applications throughout the development lifecycle. Together our award-winning products provide all the technology needed to implement an organized, efficient process for automated testing through central consoles, seamless script sharing and support for open-standards. By using our family of products customers can detect and resolve issues faster and improve the quality of their web applications.
Over 1,600 customers worldwide have purchased our products, such as Audi, Bank of America, Best Western, British Telecom, Cabela’s, Canadian Broadcasting Corporation, Federal Express, Fidelity Investments, London Stock Exchange, Microsoft, Mitsubishi, Philip Morris, Sun Microsystems and The Vanguard Group.
Recent Developments
In our report on Form 10-Q for the quarter ended September 30, 2005, we had previously disclosed that we were evaluating our alternatives for the potential sale of our business with the assistance of investment bankers and that we were engaged in negotiations with prospective purchasers. Our negotiations with a prospective purchaser concluded unsuccessfully in late November 2005 when the
prospective purchaser was unable to secure sufficient financing to acquire us. As a result, we resumed discussions with other prospective purchasers while also pursuing alternative sources of financing necessary to continue our operations.
In January 2006, we entered into a term sheet for a proposed financing lead by Fortissimo Capital Fund GP LP, and a group of co-investors that would include one of our directors and two existing shareholders. In January 2006, we also signed a bridge loan financing agreement with the investors for interim financing of up to $500,000. On April 4, 2006, we executed definitive agreements with the investors for an initial investment of $1.5 million consisting of $750,000 from the purchase of 25,000,000 convertible preferred shares, or Preferred Shares, at a purchase price of $0.03 per share, and $750,000 as a convertible loan, of which $500,000 has been or would be provided under the bridge loan. The investors would also have the right to purchase up to an additional $2.25 million of Preferred Shares at a price of $0.03 per share, for up to a total of 75,000,000 additional Preferred Shares, within 18 months after the closing of the initial investment. The Preferred Shares would be convertible, at the election of the holder, into our ordinary shares on a one-for-one basis. In addition to voting rights similar to our ordinary shares, Preferred Shares would also be entitled to nominate a majority of the members of our board of directors and would have voting control over significant corporate actions. Preferred Shares would also have a preference in liquidation over our ordinary shares. The investors would also receive warrants to purchase 18,750,000 Preferred Shares with respect to the initial investment and up to a total of 56,250,000 additional Preferred Shares with respect to the additional investment, each at an exercise price of $0.04 per share exercisable for a period of five years from date of issuance.
The maximum number of ordinary shares potentially owned by the investors as a result of the proposed financing would be 200,000,000 ordinary shares, assuming the purchase of all available Preferred Shares in the initial and additional investments, exercise of all available warrants to purchase Preferred Shares and conversion of all convertible debt into Preferred Shares under the proposed financing, and further assuming the subsequent conversion of all such Preferred Shares into ordinary shares.
The completion of the proposed financing remains subject to the approval by a majority of our shareholders. See the section titled “Risks Related to Our Financing Transaction” in Item 1A.
Item 1A. RISK FACTORS
In addition to risks and uncertainties in the ordinary course of business that are common to all businesses, important factors that are specific to our industry and our company could materially impact our future performance and results. We have provided below a list of these risk factors that should be reviewed in connection with our securities. These are not all the risks we face and other factors currently considered immaterial or unknown to us may impact our future operations.
Risks Relating Our Financing Transaction
We will need additional capital to finance our operations.
We need to raise additional capital to finance our operations unless we are able to generate cash from operations. To date we have been unable to generate cash from operations. Cash used in operating activities was $4.6 million in 2003, $2.7 million in 2004, and $2.2 million in 2005.
We obtained a bridge loan that provides for borrowings of up to $500,000, of which $280,000 has been borrowed as of April 5, 2006. We have entered into definitive agreements in connection with an initial investment of $1.5 million, including amounts borrowed under the bridge loan, with the investors having the right to invest an additional $2.25 million over the 18 month period after the closing. The completion of this financing remains subject to approval by a majority of our shareholders. Our management believes that approval by a majority of our shareholders can be reasonably expected based on representations from several of our significant shareholders, representing 39.3% of our outstanding ordinary shares, that they intend to vote in favor of the financing. However, there can be no complete assurance that a majority of our shareholders will approve this financing or that the financing will close.
Failure to close this financing would materially adversely affect our ability to conduct our business. Even if this financing were to close, there is no assurance as to the amounts that the investors will elect to invest beyond the initial investment.
The financing may have an adverse effect on the market price of our ordinary shares.
Under the terms of the financing, our ordinary shares may be issued as a result of the conversion of convertible securities or the exercise of warrants. All of these ordinary shares would be sold at prices that are substantially below the market price of our ordinary shares on March 31, 2006 and substantially below the historical market prices of our ordinary shares. As a result, the market price of our ordinary shares may decline.
There will be substantial dilution to our existing shareholders as a result of the financing.
At the initial closing of the financing, we would issue a minimum of 25,000,000 Preferred Shares, convertible debt that would be convertible into 25,000,000 Preferred Shares, and warrants to purchase 18,750,000 Preferred Shares. As a result, upon the closing of the financing, the investors would have the ability to acquire up to 68,750,000 of our ordinary shares as a result of the conversion of the Preferred Shares and convertible debt and exercise of the warrants.
If the investors invest the maximum amount under the proposed financing, then the investors would hold 100,000,000 Preferred Shares, convertible debt that would be convertible into 25,000,000 Preferred Shares, and warrants to purchase 75,000,000 Preferred Shares. As a result, the investors would have the ability to acquire up to 200,000,000 of our ordinary shares as a result of the conversion of the Preferred Shares and convertible debt and exercise of the warrants.
Our shareholders will suffer substantial dilution as a result of this financing. Based on the number of our ordinary shares outstanding as of December 31, 2005, and not taking into account any outstanding options or warrants to other investors, upon the closing of the initial investment of the financing our existing shareholders will own 45.2% of our outstanding capital shares and 23.1% of those shares on a fully diluted basis. If the investors were to make the maximum investment under this financing, on a similar basis, our existing shareholders would own 17.0% of our outstanding capital shares and 9.3% of those shares on a fully diluted basis.
There may be an adverse effect on the market price of our shares as a result of shares being available for sale in the future.
In connection with previous capital raising activities, including our private placement in March 2004 and revolving line of credit facility in 2005, we have outstanding several series of warrants to purchase our ordinary shares at various exercise prices. In connection with the financing, we would issue a substantial number of Preferred Shares and warrants to purchase Preferred Shares, as well as convertible debt that is convertible into Preferred Shares. Under the terms of the financing, the holders of these securities and the holders of certain other securities outstanding prior to the financing would be able to require us to register the ordinary shares underlying these securities for resale to the public.
If our current or future shareholders sell substantial amounts of our ordinary shares, including shares issued upon the conversion of Preferred Shares or convertible debt, or upon the exercise of outstanding options and warrants, then the market price of our ordinary shares may decline. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and place that we deem appropriate.
Fortissimo and the other investors in the financing would have control over most matters submitted to a vote of the shareholders, thereby limiting the power of other shareholders to influence corporate action.
As of March 31, 2005, our principal shareholders, executive officers, and directors owned 49.5% of our outstanding ordinary shares. As a result, these shareholders may have the power to substantially influence the outcome of most matters submitted to a vote of shareholders, including approval of the
financing transaction, the election of members of our board and the approval of significant corporate transactions. This concentration of ownership may also have the effect of making it more difficult to obtain approval for a change in control of us.
In connection with the financing, Fortissimo’s portion of the investment would be 75% of the total investment and three existing shareholders, one of whom is one of our directors, would collectively account for the remaining 25%. Upon closing of the initial investment of the financing, Fortissimo would be expected to hold 41.2% of the outstanding voting shares and 57.8% of the voting shares on a fully-diluted basis. In addition, Fortissimo will also be entitled to nominate a majority of the members of our board of directors to be designated as preferred directors. These preferred directors will be granted approval authority over significant corporate actions and transactions.
As a result, upon closing of the initial investment of the financing, Fortissimo will have substantial control over both the voting shares and our board of directors, which may significantly limit the power of all other shareholders and our existing directors to influence corporate actions.
Additionally, Fortissimo may exercise its control over our business that may have a direct or indirect effect on other aspects of our operations, such as our business strategy, management structure, and personnel. There can be no assurance that any changes resulting from the influence of Fortissimo will not materially adversely affect our business.
There would be an adverse effect on the privileges and rights of our ordinary shareholders as a result of changes in our capital structure and Articles of Association as a result of the financing.
Our Articles of Association currently provide for the issuance of only one a class of shares designated as ordinary shares.
In connection with the financing, our Articles of Association would be amended to allow for the creation of Preferred Shares and establishment of their rights and preferences, which include the following:
· Preferred Shares would vote on an as-converted basis with ordinary shares on all matters presented at a general meeting of shareholders;
· Preferred Shares would be entitled to nominate a majority of the members of the board of directors, including the chairman;
· Preferred Shares would have a priority preference in the event of the declaration of any dividends or upon liquidation; and
· Preferred Shares would have protective rights over significant corporate actions, such as approval over merger and acquisitions, voluntary liquidation or dissolution, declaration of dividends, amendments to articles of association, sale or transfer of assets, and issuance of securities with equal or superior rights.
As a result, the rights granted to holders of our Preferred Shares may have an adverse effect on the rights and preferences of our ordinary shareholders.
Our ability to actively seek out other forms of financing or pursue strategic alternatives is significantly restricted under the terms of the financing.
Since the execution of the term sheet for the financing signed on January 12, 2006, we have been prohibited from actively soliciting or participating in discussions with other parties that may be interested in investing in or acquiring all or a portion of our business. Under the terms of the financing, we would remain subject to this limitation until the conclusion of the meeting of our shareholders to be convened to
approve the financing. Upon closing of the financing, similar limitations would exist as a result of the protective rights granted to holders of Preferred Shares.
In addition, under the terms of the financing, we would be required to pay a break-up fee of $500,000 if we were to conduct discussions with another party that resulted in the completion of an alternate transaction within twelve months of the termination or unsuccessful completion of the financing.
We are restricted in our ability to seek other financing or pursue other strategic alternatives. As a result, in the event that the Proposed Financing is not approved by a majority of our shareholders or does not close, our ability to continue operations will be materially adversely affected.
We will incur additional costs in connection with the financing.
We will incur costs and expenses arising directly from the financing such as interest expense and amortization of deferred financing charges and warrants. We incurred legal and accounting expenses in connection with the negotiation and execution of the financing agreements and will incur additional expenses to prepare the proxy materials for the shareholders meeting to approve the financing. In addition, we would be required to pay to Fortissimo a management fee in a minimum amount of $50,000 per year, plus an additional amount up to $70,000 per year, such additional amount payable from our annual profits, if any. These additional expenses will adversely affect our results of operations if we are not able to increase our revenues and/or decrease our other expenses.
Risks Related to Our Operations
We have had losses since our inception and expect to incur losses for the foreseeable future.
We incurred net losses of $5.1 million in 2003, $3.8 million in 2003 and $2.5 million in 2005. As of December 31, 2005, we had an accumulated deficit of $59.3 million. We expect to incur losses for the foreseeable future and cannot be certain if or when we will achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis in the future.
Our quarterly operating results may fluctuate, and if we fail to meet the expectations of our investors, our share price may decrease significantly and shareholders could lose part or all of their investment.
Our quarterly revenues and operating results have varied significantly in the past and are likely to continue to vary significantly in the future. Our future quarterly operating results may fluctuate significantly and may not meet the expectations of investors.
The factors that may cause fluctuations of our operating results include the following:
· the size, timing and terms of sales of our products and services;
· unexpected delays we may encounter in introducing new versions of our existing products as well as any new future products and services;
· our ability to successfully retain our direct sales force and international sales organization;
· our ability to establish and maintain relationships with our partners;
· the fixed nature of expenses such as base compensation and rent; and
· transaction costs, including legal, investment banking and accounting fees, in connection with extraordinary activities, such as obtaining financing or pursuing our strategic alternatives.
Due to these and other factors, we believe that period-to-period comparisons of our results of operations may not be meaningful and should not be relied upon as indicators of our future performance.
It is possible that in future periods our results of operations may be below the expectations of public market analysts and investors. If this occurs, the price of our ordinary shares may decline.
We expect to depend on sales of our WebLOAD product for a substantial majority of our revenues for the foreseeable future. We are licensing WebLOAD to others and sales by our licensees may compete with our sales of this product.
We anticipate that revenues from our WebLOAD will constitute a substantial majority of our revenues for the foreseeable future. Consequently, any decline in the demand for our WebLOAD product would seriously harm our business.
We have also entered into technology licenses arrangements with Ixia and OPNET Technologies that permit the use of the technology underlying our WebLOAD products and we may enter into additional licenses in the future. These technology licenses will generate revenues for only a specified period of time. Our licensees may compete with us for sales of WebLOAD and their product offerings may contain features in addition to those contained in WebLOAD. Competition from our licensees could reduce the amount of revenues we generate from our sales of these products in an amount that exceeds any license revenues recognized by us directly from the licensee. This could have an adverse affect on our results of operations.
If we fail to develop new products or fail to enhance our existing products to respond to emerging technologies and industry trends, we will likely lose market share to our competitors and our revenues will likely decline.
The target market for our products is characterized by rapid technological change, frequent new product introductions, changes in customer requirements, evolving industry standards and significant competition. We expect to introduce new products and develop enhancements to our existing products. Our future financial performance depends upon our ability to timely identify new market trends and Internet technology and to develop and commercialize software that is compatible with these emerging trends and technologies. We may not accurately identify trends and technologies or we may experience difficulties that delay or prevent the successful development, introduction or marketing of new or enhanced software products in the future. In addition, our products may not meet the requirements of the marketplace or achieve market acceptance. If we fail to successfully and timely develop and deploy new products or product enhancements, we may lose market share to our competitors and our revenues may decline.
In addition, our existing software products could become obsolete and unmarketable with the introduction of products, web applications or computer systems employing new technologies or industry standards. If our current software products become obsolete and we fail to introduce new products, our business will not be viable. Further, if our competitors introduce products earlier or that are more responsive than our products to emerging technologies and market trends, we will lose market share to our competitors and our revenues may decline.
We face significant competition from other technology companies and we may not be able to compete effectively.
The web application performance and testing solutions market is intensely competitive, subject to rapid change and significantly affected by new product introductions and other activities of market participants. Our primary competitors include companies who offer application-testing software, such as Mercury Interactive and Compuware. We also compete against companies that provide a broader spectrum of development tools that include some verification functionality, such as Rational Software. In addition, we compete with companies like Quest Software whose main offering is application performance management software.
We expect that competition will intensify in the future and that additional competitors will enter the market with competing products as the size and visibility of the market opportunity increases. Increased competition is likely to result in pricing pressures, reduced margins and may result in the failure of our products to achieve or maintain market acceptance, any of which could have a material adverse effect on our business, results of operations and financial condition.
Some of our competitors have longer operating histories, better brand recognition, a larger installed base of customers and substantially greater financial, technical, marketing and other resources than we do. As a result, they may be able to respond more quickly to new or changing opportunities, technologies, standards or customer requirements.
Many of our competitors also have broader and more established distribution channels that may be used to deliver competing products directly to customers through bundling or other means. If competitors were to bundle competing products with their products, the demand for our products might be substantially reduced and our ability to distribute our products successfully would be substantially diminished. The entry of new competitors into our market could reduce our sales, require us to lower our prices, or both. Many of the factors that affect competition are outside our control, and there can be no assurance that we can maintain or enhance our competitive position against current and future competitors.
Our sales cycle depends partly on factors outside our control and may cause our revenues to vary significantly.
Our customers view the purchase of our products as an important decision. As a result, our customers may take a long time to evaluate our products before making their purchase decisions and this could result in a long, and often unpredictable, sales and implementation cycle for our products. This may cause our revenues and results of operations to vary significantly from period to period. In addition, we may expend significant sales and marketing expenses during the evaluation period before the customer places an order with us. Our customers often begin by purchasing our products on a pilot basis before they decide whether or not to purchase additional licenses for broader use within their organizations.
We usually have no significant order backlog. This makes revenues in any quarter substantially dependent upon orders we receive and deliver in that quarter. Because of this, our revenues and results of operations in any quarter may not meet market expectations or be indicative of future performance and it may be difficult for an investor to evaluate our prospects.
Defects in our products may increase our costs and diminish the demand for our products.
Our products are complex and they have occasionally contained, and may in the future contain, undetected errors when first introduced or when new versions are released. If our products do not perform as intended in specific company environments, we may incur warranty and repair costs, be subject to liability and experience delays. Regardless of the source of the errors, we must divert the attention of our engineering personnel from our research and development efforts to address any errors. We may incur warranty or repair costs, be subject to liability claims for damages related to product errors or experience delays as a result of these errors in the future. Any insurance policies that we may have may not provide sufficient protection should a claim be asserted. Moreover, the occurrence of errors, whether caused by our products or the products of another vendor, may result in significant customer relation problems and injury to our reputation and may impair the market acceptance of our products and technology.
Failure to develop strategic relationships could limit our growth.
We believe that our success in penetrating our target markets depends in part on our ability to develop and maintain strategic relationships with resellers, systems integrators and distribution partners. If we are unable to maintain our existing marketing and distribution relationships, or fail to enter into
additional relationships, we will have to devote substantially more resources to direct sales and marketing of our products. In addition, licenses of our products through indirect channels have been limited to date. Our existing relationships do not, and any future relationships may not, afford us exclusive marketing or distribution rights. Therefore, our partners could reduce their commitment to us at any time in the future. In addition, many of these partners have multiple relationships and they may not regard us as significant for their business. In addition, these partners may terminate their relationships with us, pursue other relationships with our competitors or develop or acquire products that compete with our products. Even if we succeed in entering into these relationships, they may not result in additional customers or revenues.
If we fail to manage our geographically dispersed organization, we may fail to implement our business plan and our revenues may decline.
We have our principal executive offices in the U.S. and conduct our research and development primarily in Israel. In addition, we have sales offices in the U.S., Israel, Germany and the United Kingdom. Our directors, executive officers and other key employees are similarly dispersed throughout the world. Our management must devote resources to manage geographically diverse operations. In addition, conducting international operations subjects us to risks we do not face in the United States. These include:
· currency exchange rate fluctuations;
· seasonal fluctuations in purchasing patterns;
· unexpected changes in regulatory requirements;
· longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
· difficulties in managing and staffing international operations;
· potentially adverse tax consequences, including restrictions on the repatriation of earnings;
· the burdens of complying with a wide variety of foreign laws; and
· reduced protection for intellectual property rights in some countries.
Failure to manage our geographically dispersed organization could harm our business.
The success of our business depends on our senior management, including Ilan Kinreich, our Chief Executive Officer and President, whose knowledge of our business and expertise would be difficult to replace.
Our success depends largely on the continued contributions of our senior management. In particular, we depend on the services of Ilan Kinreich, our Chief Executive Officer and President. Employment agreements with our senior management team and other key personnel, including Mr. Kinreich, do not require a specified service obligation. We also do not carry life insurance on our senior management or other key personnel. If one or more members of our senior management were to terminate their employment, we could experience delays in product development, loss of sales and diversion of management resources.
We may not be able to retain our existing personnel, which could negatively impact development, sales and support of our products.
In the past we have reduced the size of our workforce in order to reduce our operating expenses. As a result, our success depends on our ability to retain our existing experienced employees. If we fail to retain our current employees, our revenues could decline. Competition for qualified personnel is intense, and we may not be able to retain our highly qualified personnel. Our future success also depends upon the continued service of our key sales, marketing and support personnel. In addition, our products and technologies are complex and we are substantially dependent upon the continued service of our existing engineering personnel. None of our key employees are bound by an employment agreement that requires a specified service obligation. If we are not able to retain our existing personnel, we could have difficulty developing, selling or supporting our products.
We may not be able to protect our intellectual property rights and we may lose a valuable asset or incur costly and time-consuming litigation attempting to protect our rights.
Our success depends upon the protection of our technology, trade secrets and trademarks. To protect our rights to our intellectual property, we rely on a combination of trade secret protection, patent law, trademark law, confidentiality agreements and other contractual arrangements. The protective steps we have taken may be inadequate to deter infringement or misappropriation. We may be unable to detect the unauthorized use of our intellectual property or take appropriate steps to enforce our intellectual property rights. Policing unauthorized use of our products and technology is difficult. In addition, the laws of some foreign countries in which we currently or may in the future sell our products do not protect our proprietary rights to as great an extent as do the laws of the United States.
To date, we have granted to two separate strategic partners licenses to use the source code of certain of products or technology. We expect that we may grant similar license rights to other partners in the future. The measures we take to ensure that the source code provided under these licenses are protected may not be sufficient to protect our intellectual property. As a result, these technology licenses may result in an increase in risk to us with respect to our ability to control, monitor and enforce our intellectual property rights.
Failure to adequately protect against or to promptly detect unauthorized use of our intellectual property could devalue our proprietary content and impair our ability to compete effectively. Defending our intellectual property rights could result in the expenditure of significant financial and managerial resources, whether or not the defense is successful. Our means of protecting our proprietary rights may not be adequate and our competitors may independently develop similar technology, or duplicate our products or our other intellectual property. We may have to resort to litigation to enforce our intellectual property rights, to protect our trade secrets or know-how or to determine the scope, validity or enforceability of our intellectual property rights. Our protective measures may prove inadequate to protect our proprietary rights, and any failure to enforce or protect our rights could cause us to lose a valuable asset.
We may be subject to intellectual property infringement claims that, with or without merit, could be costly to defend or settle.
Substantial litigation regarding intellectual property rights exists in the software industry. We expect that software products may be increasingly subject to third-party infringement claims as the number of competitors in our industry segments grows and the functionality of products in different industry segments overlaps. Third parties may make a claim of infringement against us with respect to our products and technology or claims that our intellectual property rights are invalid. Any claims, with or without merit, could:
· be time-consuming to defend;
· result in costly litigation;
· divert management’s attention and resources; or
· delay product delivery.
In addition, if our products were found to infringe a third party’s proprietary rights, we could be required to enter into royalty or licensing agreements in order to continue to be able to sell our products. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all. A successful claim of product infringement against us and our failure or inability to license the infringed or similar technology could harm our business.
We do not have sufficient insurance to cover all of our potential product liability and warranty claims.
Companies use our products to assure the performance of their web applications. In many cases, web applications serve critical business functions. The sale and support of our products may entail the risk of product liability or warranty claims based on our products not detecting critical errors or problems with web applications that fail in a “live” environment and cause companies financial loss. In addition, the failure of our products to perform to customer expectations could give rise to warranty claims. Although we seek to limit our exposure to claims under our license terms and we carry general liability insurance, it is unlikely that our insurance would cover potential claims of this type and our insurance may not be adequate to protect us from all liability that may be imposed. If we are subject to any claims, our results of operations may be harmed.
We have not yet evaluated our internal controls over financial reporting in compliance with Section 404 of the Sarbanes-Oxley Act.
We are required to comply with the internal control evaluation and certification requirements of Section 404 of the Sarbanes-Oxley Act by no later than the end of our 2007 fiscal year. We have only recently begun the process of determining whether our existing internal controls over financial reporting systems are compliant with Section 404. This process may divert internal resources and will take a significant amount of time and effort to complete. If it is determined that we are not in compliance with Section 404, we may be required to implement new internal control procedures and reevaluate our financial reporting. We may experience higher than anticipated operating expenses as well as external auditor fees during the implementation of these changes and thereafter. Further, we may need to hire additional qualified personnel in order for us to be compliant with Section 404. If we are unable to implement these changes effectively or efficiently, it could harm our operations, financial reporting or financial results and could result in our being unable to obtain an unqualified report on internal controls from our independent auditors.
Risks Relating to the Market for Our Ordinary Shares
Our ordinary shares are listed on the Over-the-Counter Bulletin Board, or OTCBB.
Our shares are quoted on the OTCBB. Until September 2004, our shares were traded on the Nasdaq SmallCap Market. As a result of being traded on the OTCBB, our shareholders and we may experience negative consequences, including:
· a less liquid trading market for our ordinary shares;
· loss of investor confidence that could result in the decline in the trading price or volume of our ordinary shares;
· decrease of our reputation with prospects, customers, employees and vendors, any of which may have a material adverse affect on our business; and
· reduced access to capital markets in the event we need to raise additional capital.
The market price of our ordinary shares has fluctuated and may continue to fluctuate significantly.
Our share price has fluctuated and may continue to fluctuate significantly. Fluctuations in our share price can occur for reasons that may be unrelated to operating results, including stock market-wide downturns and events in the technology industry as well as in Israel. These fluctuations may adversely affect the market price of our ordinary shares.
Risks Relating to Our Location in Israel
Conditions in Israel affect our operations and may limit our ability to produce and sell our products, which could have a material adverse effect on our business.
Our principal offices and many of our subcontractors and suppliers are located in Israel. Accordingly, political, economic and military conditions in Israel affect our operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. A state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Since October 2000, there has been a marked increase in hostilities between Israel and the Palestinians, and in January 2006, Hamas, an Islamic movement responsible for many attacks against Israelis, won the majority of the seats in the Parliament of the Palestinian Authority. The election of a majority of Hamas-supported candidates is expected to be a major obstacle to relations between Israel and the Palestinian Authority, as well as to the stability in the Middle East as a whole.
The future of relations between Israel and the Palestinian Authority is uncertain. Terrorist attacks, armed conflicts or political instability in the region could negatively affect local business conditions and harm our results of operations. We cannot predict the effect on us of the increase in the degree of violence by Palestinians against Israel or the effect of military action elsewhere in the Middle East. Furthermore, several countries restrict doing business with Israel and Israeli companies, and additional companies may restrict doing business with Israel and Israeli companies as a result of the increase in hostilities. This may also seriously harm our operating results, financial condition and the expansion of our business.
If our key personnel are required to perform military service, we could experience disruptions in our business.
A number of our key personnel in Israel have standing obligations to perform periodic reserve duty in the Israel Defense Forces and are subject to be called for active military duty at any time. If our key personnel are absent from our business for a significant period of time, we may experience disruptions in our business that could affect the development, sales or technical support of our products. As a result, we might not be able to compete in the market and our results of operations could be harmed.
Because substantially all of our revenues are generated in U.S. dollars, while a portion of our expenses is incurred in New Israeli Shekels, or NIS, inflation in Israel could harm our results of operations.
Substantially all of our revenues are generated in U.S. dollars, while a portion of our expenses, primarily salaries and related expenses incurred in our Israeli facility, is in NIS. Our Israeli-based employees’ salaries are influenced by inflation in Israel. As a result, any increase in the rate of inflation in Israel may have a negative impact on our dollar-measured operating results unless the inflation in Israel is offset by a devaluation of the NIS in relation to the U.S. dollar. In 2003, the rate of deflation in Israel was 1.9% and the value of the U.S. dollar decreased in relation to the NIS by 7.6%. In 2004, the rate of inflation in Israel was 1.2% and the value of the U.S. dollar decreased in relation to the NIS by 1.6%. In 2005, the rate of inflation in Israel was 2.4% and the value of the U.S. dollar increased in relation to the NIS by 6.8%. We cannot predict any future trends in the rate of inflation in Israel or trends in the rate of exchange between the NIS and the dollar. If the dollar cost of our operations in Israel increases, our dollar-measured results of operations will be adversely affected.
Israeli regulations may impact our ability to engage in research and development and export of our products in accordance with our current practices.
Israeli law requires us to obtain a government license to engage in research and development of, and export of, the encryption technology incorporated in our products. We currently have government licenses to engage in production of our encryption technology in our products in their 40- and 128-bit versions. Our research and development activities in Israel would need to be modified to transfer this activity to our U.S.
development organization, and our current practice of exporting our products from Israel to the U.S., with embedded encryption technology, would need to be changed if:
· the Israeli government revokes our current licenses;
· our licenses fail to cover the scope of the technology in our products; or
· Israeli laws regarding research and development export or use in general of encryption technologies were to change.
We currently benefit from government programs and tax benefits that may be discontinued or reduced.
We received grants and currently receive tax benefits under Government of Israel programs. In order to maintain our eligibility for these programs and benefits, we must continue to meet specified conditions, including making specified investments in property and equipment. We may not be able to continue to meet all of these conditions. In addition, some of these programs restrict our ability to manufacture particular products or transfer particular technology outside of Israel. If we fail to comply with these conditions in the future, the benefits received could be canceled and we could be required to refund any payments previously received under these programs or to retroactively pay tax on any income at a higher tax rate than that applying under these benefits.
In recent years, the Government of Israel has reduced the benefits available under these programs and has amended the specified conditions that must be met in order to achieve or maintain eligibility. You can see more information regarding recent changes in Note 12(b) to the Notes to Consolidated Financial Statements. We cannot guarantee that these programs and tax benefits will continue in the future at their current levels or at all. If the Government of Israel reduces or ends these tax benefits, our business, financial condition and results of operations could be materially adversely affected.
It may be difficult to enforce a U.S. judgment against us or certain of our directors, or to assert U.S. securities laws claims in Israel or serve process on these persons.
We are incorporated in Israel. The chairman of the board of our directors and two other directors are nonresidents of the United States and a 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 or to effect service of process upon these persons in the United States. It may also be difficult to enforce civil liabilities under U.S. federal securities laws in original actions instituted in Israel.
Provisions of the Israeli law could delay, prevent, or make difficult, a change of control, thereby depressing the price of our ordinary shares.
Provisions of the Israeli Companies Law may have the effect of delaying, preventing or making more difficult a merger with, or acquisition of, us. The Israeli Companies Law generally provides that a merger be approved by both the board of directors of a company and a majority of the shares present and voting on the proposed merger at a meeting called upon with at least 21 days’ notice. For purposes of the shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if a majority of the shares not held by the other party to the merger (or by any person who holds 25% or more of the shares or the right to appoint 25% or more of the directors of the other party or its general manager) vote against the merger. Upon the request of any creditor of a party to the proposed merger, a court may delay or prevent the merger if it concludes that there is a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of the surviving company. Finally, a merger may not be completed unless at least 70 days have passed since the filing of the merger proposal signed by both parties with the Israeli Registrar of Companies.
The Israeli Companies Law also provides that an acquisition of shares in a public company on the open market must be made by means of a tender offer if, as a result of the acquisition, the purchaser will
become a 25% or greater shareholder of the company unless there is already another 25% or greater shareholder of the company. Similarly, an acquisition of shares must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% or greater shareholder of the company, unless there is already a majority shareholder of the company. In any event, if as a result of an acquisition of shares the acquirer will hold more than 90% of a company’s shares, the acquisition must be made by means of a tender offer for all of the shares.
Finally, Israeli tax law treats some acquisitions, such as stock-for-stock exchanges between an Israeli company and a foreign company, less favorably than United States tax law. For example, Israeli tax law may subject a shareholder who exchanges our ordinary shares for shares in another corporation to immediate taxation.
These Israeli laws could have the effect of inhibiting third party attempts to acquire us.
Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2.
Item 2. PROPERTIES
We do not own any real property. We lease 4,929 square feet of office space in Burlington, Massachusetts for our corporate headquarters under a lease expiring in July 2009. In addition, we lease 10,136 square feet of office space in Tel Aviv, Israel for our principal research and development and international sales operations under a lease expiring in August 2006. We also lease space for our sales operations in Milpitas, California. We believe that the properties leased by us are adequate for all of our present and near-term needs.
Item 3.
Item 3. LEGAL PROCEEDINGS
To our knowledge we are not involved in any legal proceedings that are material to our business or financial condition.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held an Annual Meeting of Shareholders, or the Annual Meeting, on December 14, 2005.
(b) Shai Beilis, Ilan Kinreich, William J. Geary, Kathleen A. Cote were elected as directors at the Annual Meeting. David Assia was elected as an external director for a period of three years.
(c) The following are the proposals that were considered at the Annual Meeting, together with the results for the respective proposals.
PROPOSAL 1-To elect the following individuals to our Board of Directors.
(1) Indicates an External Director Nominee elected to our Board of Directors, to serve as an External Director under the Israeli Companies Law.
PROPOSAL 2-to ratify and approve the selection of Kost Forer Gabbay & Kasierer, a Member of Ernst & Young Global, as our independent auditors for the year ended December 31, 2005. The proposal was approved with 14,809,883 shares voted in favor, 145,850 shares voted against, and 6,670 abstentions.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market for Ordinary Shares
In September 2004, our ordinary shares were delisted from the Nasdaq SmallCap Market because we no longer satisfied the shareholders’ equity, market capitalization and net income requirements for continued listing. Our shares are now traded on the Over-the-Counter Bulletin Board, or the OTCBB, under the trading symbol of “RDVWF.”
The high and low sales prices for our ordinary shares for the quarterly periods since January 1, 2004, as reported on Nasdaq or the OTCBB, as applicable, were as set forth below: These quotations reflect inter-dealer prices, without retail markup, markdown or commission and may not necessarily represent actual transactions.
Holders of Record
As of March 31, 2006, there were approximately 150 holders of record and, we believe, approximately 1,200 beneficial owners of our ordinary shares.
Dividends
We have never declared or paid any cash dividends on our capital shares and do not intend to pay any cash dividends in the foreseeable future.
Item 6.
Item 6. SELECTED FINANCIAL DATA
The following is our historical selected consolidated financial data and is qualified by reference to and should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report. The selected consolidated financial data set forth below as of December 31, 2004 and 2005 and for each of the years ended December 31, 2003, 2004 and 2005 are derived from our audited consolidated financial statements, which are included in Item 8 of this Annual Report on Form 10-K. The selected consolidated financial data as of December 31, 2001, 2002, and 2003 and for the years ended December 31, 2001 and 2002 are derived from our audited consolidated financial statements, which are not included in this Annual Report on Form 10-K. The data should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. In some cases, forward-looking statements are identified by words such as “believe,” “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” and similar expressions. In addition, any statements that refer to our plans, expectations, strategies or other characterizations of future events or circumstances are forward-looking statements. Our actual results could differ materially from those discussed in, or implied by, these forward-looking statements. Factors that could cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described in Item 1A. Risk Factors. Our business may have changes since the date hereof, and we undertake no obligation to update these forward-looking statements.
Overview
We develop, market and support software that enables companies to assure the scalability, performance, efficiency and reliability of web applications. In May 2004, we introduced the TestView suite of products, which provides a comprehensive test management solution for test automation and reporting for web applications. The TestView suite efficiently integrates test management and automation with the functionality of our existing stand-alone products to include functional testing, load testing, and root-cause analysis.
We derive the majority of our software license revenues from perpetual licenses of our load testing products and, to a lesser extent, our functional testing and root-cause analysis products. We derive the majority of our services revenues from support and maintenance arrangements and, to a lesser extent, from training and consulting services. Substantially all of our revenues are denominated in U.S. dollars.
A portion of our software license revenues, and to a lesser extent our services revenues, was derived from royalty fees, license fees and engineering service fees from technology license transactions. Revenues recognized under such arrangements totaled $213,000 in 2003, $730,000 in 2004 and $928,000 in 2005. While we expect to recognize a portion of our revenues from technology arrangements in 2006, we expect that the impact of future technology license transactions, if any, will not represent a material portion of our total revenues.
We measure our operating success using both financial and non-financial metrics. The financial metrics include revenue, gross profit, operating expenses, and loss from operations, as well as cash position and operating cash flow. Other key metrics include product orders by industry segment, average deal size, repeat customer orders, and the portion of revenue that is generated by indirect channels.
We have incurred net losses since our inception. Our net loss was $5.1 million in 2003, $3.8 million in 2004 and $2.5 million in 2005. Net losses have declined as a result of significant cost reductions achieved through restructuring actions undertaken in response to a decline in our revenues in previous years. In 2005, the decrease in our net loss was primarily attributable to an increase in revenues and, to a lesser extent, lower operating expenses. If we are to achieve future profitability, we must continue to increase our revenues while maintaining lower operating expenses.
Cash used in operating activities was $4.6 million in 2003, $2.7 million in 2004 and $2.1 million in 2005, attributable primarily to our net losses, partially offset by noncash charges such as depreciation expense and stock-based compensation along with changes in current assets and liabilities. We expect that operating expenses will constitute a material use of our cash resources.
On April 4, 2006, we signed definitive agreements for a financing lead by Fortissimo Capital Funds, or Fortissimo, along with several co-investors including one of our directors and two existing shareholders, to provide for a minimum initial investment of $1.5 million and up to $2.25 million of additional investments,
at the election of the investors, over 18 months. The completion of the proposed financing is subject to approval by a majority of our shareholders. See Note 1(b) in the Notes to Consolidated Financial Statements for further information related to the proposed financing. Prior to signing the definitive agreements for the financing, in January 2006, we executed a bridge loan agreement with Fortissimo to provide us with interim funding for up to $500,000, subject to compliance by the Company with an approved budget, of which we have borrowed $280,000 as of April 5, 2006 and have $220,000 available for future borrowings. Borrowings under the bridge loan will become part of the minimum investment at closing.
Our cash balance was $166,000 as of December 31, 2005. We believe that our existing cash and cash equivalents, along with the proceeds available under the bridge loan and the expected proceeds from the initial investment from the financing, assuming the approval by a majority our shareholders and completion of the financing, will be sufficient to meet our anticipated needs for working capital and capital expenditures for at least the next 12 months.
Critical Accounting Policies and Estimates
General
We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. To fully understand and evaluate our reported financial results, we believe it is important to understand the significant estimates and judgments applied as they relate to our policies for revenue recognition, software development costs, and accounting for stock options. More detailed descriptions of these policies are provided in Note 2 to the Consolidated Financial Statements.
Revenue Recognition
Our revenue recognition approach requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) is based on management’s judgments regarding the fixed nature of the fee charged for services rendered and products delivered, and the collectibility of those fees. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.
Software Development Costs
Software development costs incurred from the point of reaching technological feasibility until the time of general product release are normally capitalized. We define technological feasibility as the completion of a working model. The determination of technological feasibility requires the exercise of judgment by our management. Because we sell our products in a market that is subject to rapid technological change, new product development and changing customer needs, we have concluded that technological feasibility is not established until the development stage of the product is nearly complete. For us, the period in which we can capitalize software development costs is very short, so the amounts that could be capitalized are not material to our financial statements. Therefore, we have charged all such costs to research and development expense in the period incurred.
Accounting for Stock Options
Effective January 1, 2005, we have accounted for stock options issued to employees in accordance with SFAS No. 123R (Revised 2004), or SFAS 123(R), Share-Based Payment and SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. Under this approach all share-based payments to employees, including grants of employee stock options, are required to be recognized in the financial statements based on their fair values, instead of providing the information in a pro forma disclosure in the notes to the financial statements. We have elected to use the modified prospective method of adoption as permitted under SFAS 123(R), which requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123(R). We have determined the fair value of share-based payments issued after January 1, 2005 using the Black-Scholes option valuation model. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, expected lives and risk-free interest rates. These assumptions reflect management’s best estimates.
For reporting periods before January 1, 2005, we accounted for stock options using the intrinsic method in accordance with Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees. Under this approach we did not record any expense at the time the options were granted unless the exercise price of a granted option was below the fair market price of our ordinary shares on the date of grant. For reporting periods before January 1, 2005, we have provided pro forma disclosures of impact to our reported net loss and net loss per share if we had applied the fair value method.
The determination of fair value of stock options, whether for actual expense reporting under SFAS 123(R) or for pro forma disclosures, requires the application of estimates, such as estimated expected life of the options and estimated market volatility for our ordinary shares. These estimates are based on management’s review of historical option lives and computations of market volatility for our ordinary shares.
Results of Operations
The following table sets forth the consolidated statement of operations data as a percentage of total revenues for the periods indicated:
Years Ended December 31, 2004 and 2005
Revenues
Total Revenues. Total revenues were $4.7 million in 2004 and $5.6 million in 2005. Total revenues increased $982,000, or 21%, due to a $682,000 increase in product revenues and a $300,000 increase in services revenues.
Software Licenses. Software licenses revenues consist primarily of revenues from the license of our software products to end-users, resellers, and technology partners. Software license revenues were $2.5 million in 2004 and $3.1 million in 2005. Software license revenues increased $682,000, or 28%, due to a $416,000 increase in revenues attributable to the expansion of our product offerings following the introduction of TestView suite and new versions of WebLOAD Analyzer, and $266,000 of incremental software license fees from technology license transactions.
Services. Services revenues consist primarily of revenue from annual support and maintenance contracts and, to a lesser extent, training and consulting services. Services revenues were $2.2 million in 2004 and $2.5 million in 2005. Services revenues increased $300,000, or 14%, primarily due to $149,000 of incremental service revenues in 2005 attributable to engineering services provided under technology transactions with OPNET and IXIA, and an $82,000 increase maintenance services revenue derived from new customers and renewal orders.
Cost of Revenues
Cost of Software Licenses. Cost of software licenses consists principally of direct product costs, such as product media and packaging, as well as royalties due to third parties. Cost of software licenses was $86,000 in 2004, or 3.5% of software license revenue, compared to $147,000 in 2005, or 4.7% of software license revenue. The increase in cost of software licenses resulted from third-party royalties attributable to increased revenues from royalty-bearing products in 2005.
Cost of Services. Cost of services consists principally of personnel related costs associated with customer support and training. Cost of services was $327,000 in 2004, or 14.8% of services revenues, compared to $255,000 in 2005, or 10.2% of services revenue. This decrease was due to lower personnel costs for support and maintenance services resulting from staff reallocations made in late 2004 and through reductions in personnel and salary-related costs in July 2005.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist principally of salaries and commissions for sales personnel, recruiting costs, trade show costs, travel and other marketing costs such as lead generation activities, advertising and product promotion. Sales and marketing expenses were $3.5 million in 2004, or 75.9% of total revenues, compared to $3.3 million in 2005, or 58.2% of total revenues. The decrease in sales and marketing costs relate primarily to personnel reductions and lower marketing program spending. We expect that our sales and marketing expenses will decrease in 2006 as a result of cost reduction measures taken in July 2005.
Research and Development. Research and development expenses consist principally of salaries and related expenses required to develop and enhance our products. Research and development expenses were $2.6 million in 2004, or 56.4% of total revenues, compared to $2.2 million in 2005, or 39.5% of total revenues. These decreases resulted primarily as a result of cost reductions in July 2005 achieved through reductions in personnel and salary-related costs. We expect that our research and development expenses will decrease in 2006 as a result of cost reduction measures taken in July 2005 and March 2006.
General and Administrative. General and administrative expenses consist principally of executive, finance and administrative salaries and related expenses, and costs of being a publicly held company. General and administrative expenses were $1.8 million in 2004, or 39.3% of total revenues, compared to $2.0 million in 2005, or 35.5% of total revenues. The increase in general and administrative costs in absolute dollars resulted primarily from increased professional fees incurred in 2005 arising from the exploration of strategic alternatives, including the potential sale of our business. We expect that our general and administrative expenses will decrease in 2006 as a result of cost reduction measures taken in March 2006.
Interest Income (Expense), Net. Interest income, net was $19,000 in 2004 resulting primarily from interest earned on invested cash balances. Interest expense, net was $177,000 in 2005 resulting primarily from interest expense arising from borrowings under a revolving line of credit facility entered into in 2005, including amortization of deferred debt issuance costs, partially offset by interest income from lower invested cash balances in 2005 as compared to 2004. We expect that our interest expense, net may increase in 2006 as a result of interest and amortization of warrants and debt issuance costs in connection with the proposed financing we expect to complete in 2006.
Other Expense, Net. Other income (expense), net consists principally of currency translation gains and losses. Other expense, net was $45,000 in 2004 and $11,000 in 2005. The decrease resulted from exchange rate fluctuations.
Income Taxes. We have estimated net operating loss carry forwards for Israeli tax purposes totaling approximately $17.2 million through December 31, 2005 that would reduce future Israeli income taxes, if any. These net operating losses may be carried forward indefinitely and offset against future taxable business income. We expect that during the period these losses are utilized, our income would be substantially tax exempt.
Our U.S. subsidiary has net operating loss carry forwards for U.S. Federal and state tax purposes totaling approximately $34.6 million through December 31, 2005. These losses are available to offset any future U.S. taxable income of the U.S. subsidiary and will expire between 2012 and 2025.
We have recorded a full valuation allowance against all of our deferred tax assets since we believe it is not likely that those deferred taxes will be realized in the foreseeable future.
Years Ended December 31, 2003 and 2004
Revenues
Total Revenues. Total revenues were $4.8 million in 2003 and $4.7 million in 2004. Total revenues decreased $173,000, or 3.6%, due to a $234,000 decrease in total revenues from international customers, partially offset by a $61,000 increase in total revenues from customers in the U.S. The decreases in total revenues are attributable to lower unit volume sales of software licenses and, to a lesser extent, a decline in related services revenues.
Software Licenses. Software license revenues were $2.5 million in 2003 and $2.5 million in 2004. Software license revenues from U.S. customers increased $138,000 from $1.8 million in 2003 to $1.9 million in 2004, due primarily to the increase in software license revenue attributable to the technology license arrangement with Ixia. Software license revenues from international customers decreased $230,000 from $777,000 in 2003 to $546,000 in 2004, attributable to a decrease in orders from our Asia Pacific distributors and lower sales resulting from employee turnover in our Europe sales operation in 2004.
Services. Services revenues were $2.3 million in 2003 and $2.2 million in 2004. Services revenues from U.S. customers decreased $77,000 from $1.6 million in 2003 to $1.5 million in 2004, with services revenues from international customers remaining relatively the same. This decrease in U.S. services revenues was primarily a result of a decline in training and consulting revenues due to lower customer demand for consulting services.
Cost of Revenues
Cost of Software Licenses. Cost of software licenses was $147,000 in 2003, or 5.8% of software license revenue, compared to $86,000 in 2004, or 3.5% of software license revenue. The decrease in cost of software licenses resulted from lower spending on product packaging in addition to lower royalty costs as a result of a decline in orders for our products that result in third-party royalties.
Cost of Services. Cost of services was $426,000 in 2003, or 18.6% of services revenues, compared to $327,000 in 2004, or 14.8% of services revenue. This decrease was due to reduced personnel costs to provide support and maintenance services resulting from the headcount reductions taken in the first half of 2003.
Operating Expenses
Sales and Marketing. Sales and marketing expenses were $4.3 million in 2003, or 87.9% of total revenues, compared to $3.5 million in 2004, or 75.9% of total revenues. These decreases were due primarily to headcount reductions of sales and marketing personnel during the first half of 2003.
Research and Development. Research and development expenses were $3.0 million in 2003, or 61.0% of total revenues, compared to $2.6 million in 2004, or 56.4% of total revenues. These decreases were due primarily to headcount reductions of research and development personnel during the first half of 2003.
General and Administrative. General and administrative expenses were $1.9 million in 2003, or 38.9% of total revenues, compared to $1.8 million in 2004, or 39.3% of total revenues.
Restructuring Expenses. Restructuring expenses were $245,000 in 2003. There were no restructuring expenses in 2004. The restructuring expenses in 2003 consisted of severance costs for terminated employees of $207,000, lease termination costs of $26,000, and vendor contract termination fees and other costs of $12,000. A total of 20 employees were terminated, or approximately 27% of the then current workforce, of whom 6 employees were from sales and marketing, 11 employees were from research and development, and three employees were from general and administrative.
Interest Income (Expense), Net. Interest income, net consists principally of interest earned on cash investments. Interest income, net was $32,000 in 2003 compared to $19,000 in 2004. The decrease resulted from lower invested cash balances and lower interest rates in 2004 as compared to 2003.
Other Expense, Net. Other expense, net consists principally of currency translation gains and losses. Other expense, net was $51,000 in 2003 and $45,000 in 2004. The decrease resulted from exchange rate fluctuations.
Liquidity and Capital Resources
Cash and cash equivalents totaled $2.2 million as of December 31, 2004 and $166,000 as of December 31, 2005. Restricted cash totaled $40,000 as of December 31, 2005.
Cash used in operating activities was $4.6 million in 2003, $2.7 million in 2004 and $2.1 million in 2005. Cash used in operating activities have resulted substantially from our reported net losses partially reduced by noncash items such as depreciation and stock-based compensation, and changes in current assets and liabilities.
Cash used in operating activities in 2003 was due primarily to a net loss of $5.1 million, a decrease of $514,000 in accrued expenses and a decrease of $292,000 in accrued restructuring charge, partially offset by noncash items and a decrease of $348,000 in accounts receivable. Accrued expenses decreased as a result of additional reductions of operating expenses in 2003. Accrued restructuring charge decreased as a result of the lease payments made in 2003. Accounts receivable decreased as a result of decreased order volume and favorable collection activities.
Cash used in operating activities in 2004 was due primarily to a net loss of $3.8 million, a decrease of $128,000 in accounts payable and a decrease of $291,000 in accrued restructuring charge, partially offset by noncash items and a decrease of $73,000 in accounts receivable. The accounts payable decreased as a result of lower operating expenditures. The accrued restructuring charge decreased as a result of the payments made in 2004. Accounts receivable decreased as a result of decreased order volume and favorable collection activities.
Cash used in operating activities in 2005 was due primarily to a net loss of $2.5 million, an increase of $74,000 in accounts receivable, a decrease of $174,000 in accrued severance pay, and a decrease of $246,000 in deferred revenue, partially offset by noncash items, a decrease of $196,000 in prepaid expenses
and other current assets and an increase of $331,000 in accounts payable. Accounts receivable increased as a result of incremental amounts to be collected under a technology license agreement entered into in December 2005. Accrued severance pay decreased due to the termination of several employees in Israel during 2005. Deferred revenues decreased due primarily to the recognition of deferred technology license fees during 2005. Prepaid expenses and other current assets decreased as a result of lower prepayments of insurance policies and vendor maintenance contracts. Accounts payable increased due to increased professional costs incurred at end of 2005 and slower payments to vendors.
Cash used in investing activities was $43,000 in 2003 and $29,000 in 2004. Cash provided by investing activities was $105,000 in 2005. Cash used in investing activities in 2003 was for the purchase of $83,000 in property and equipment offset by a decrease of $40,000 in other assets. Cash used in investing activities in 2004 was for the purchase of $65,000 in property and equipment partially offset by a decrease of $36,000 in other assets. Cash provided by investing activities in 2005 was due to the decrease of $224,000 in other assets partially offset by the purchase of $79,000 in property and equipment and investment in restricted cash of $40,000. Other assets decreased as a result of the release to terminated employees of deposits maintained for severance pay obligations in 2003, 2004 and 2005 and reductions in security deposits for expiring office space leases in 2004 and 2005.
Cash provided by financing activities was $183,000 in 2003 and consisted of proceeds from exercise of stock options. Cash provided by financing activities was $1.8 million in 2004 consisting primarily of the net proceeds from a private placement in March 2004 of 3,333,331 of our ordinary shares, plus warrants and additional investment rights for an aggregate purchase price of $2.0 million. There was no net cash provided by financing activities in 2005 attributable to the issuance of warrants for $52,000 and borrowings of $1.3 million under the revolving line of credit, entirely offset by repayments totaling $1.3 million under the revolving line of credit and payment of debt issuance costs of $70,000.
In May 2005, we entered into a one-year revolving line of credit facility with Comerica Bank for borrowings of up to $2.0 million. Advances under the facility were limited to the lesser of $2.0 million or the sum of 75% of eligible accounts receivables plus $1.0 million. In December 2005, our borrowings under the credit facility exceeded the collateral base and, as a result, we triggered an event of default. We agreed upon a repayment plan with Comerica Bank to repay the outstanding borrowings under the facility in installments through January 2006. As of December 31, 2005, we had an outstanding balance under the facility of $70,000. In January 2006, all outstanding borrowings under the credit facility were fully repaid and the revolving line of credit facility was terminated.
On April 4, 2006, we signed definitive agreements for a financing with Fortissimo Capital Fund GP LP on behalf of several limited partnerships in which it serves as general partner and other potential co-investors including one of our directors and two existing shareholders, or the Investors. The initial investment of the financing would be for a minimum of $1.5 million consisting of $750,000 to purchase 25,000,000 of convertible preferred shares, or Preferred Shares, at a price of $0.03 per share and $750,000 as a convertible loan. The closing of the initial investment is required to occur within 14 days of approval by a majority of our shareholders. The financing also provides for an additional investment, at the option of the Investors, to purchase up to an additional $2.25 million of Preferred Shares at a price of $0.03 per share for a period of 18 months after the closing of the initial investment. Each Preferred Share would be convertible into one of our ordinary shares, subject to adjustment for anti-dilution events. Each Preferred Share would receive the same voting rights as ordinary shares, except Preferred Shares would be entitled to elect the majority of our board of directors and have approval rights over specified actions. Each Preferred Share would be entitled to a preference in liquidation over our ordinary shares. The Investors would also receive warrants to purchase 18,750,000 Preferred Shares with respect to the initial investment and up to 56,250,000 Preferred Shares with respect to the additional investment, each at an exercise price of $0.04 per share for a period of five years from date of issuance.
The financing also provides for the issuance of a convertible loan payable at the closing of the initial investment in the principal amount of $250,000 plus the balance of any borrowings still available under the Bridge Loan at the time of closing. The principal balance of bridge loans previously borrowed also will become part of the convertible loan at the closing of the Investment. The convertible loan will bear interest at 8.0% per annum. The convertible loan plus, at the election of the Investors, any accrued interest thereon, would be convertible into Preferred Shares at a conversion price of $0.03 per share. The convertible loan would mature three years from the closing date and, if not converted by such date, would become due and payable 30 days thereafter.
Prior to the signing of definitive agreements, on January 26, 2006, we entered into a bridge loan agreement, or the Bridge Loan, with the Investors. Under the Bridge Loan, the Investors agreed to provide us with up to $500,000 of loans, subject to the terms of the loan. As of April 5, 2006, we have borrowed $280,000 and the remaining $220,000 remains available for future borrowing on an as-needed basis until the closing, subject to approval of the Investors and compliance by us with an approved budget. The Bridge Loan bears interest at 8.0% per annum and is secured by a fixed charge on our accounts receivables and intellectual property and a floating charge on all of our assets. The Bridge Loan would be subject to the terms and conditions of the convertible loan portion of the financing when the financing closes. If the financing is not closed due to failure to secure shareholder approval or termination by either party, the Bridge Loan will become due and payable within 60 days of notice by either party of an intention to terminate negotiations with respect to the financing.
The financing remains subject to, among other things, filing of amended articles of association establishing the rights and preferences of the Preferred Shares and approval by a majority of our shareholders. Several of our significant shareholders, representing 39.3% of our outstanding ordinary shares, have represented to us that they intend to vote in favor of the financing. If a majority of our shareholders does not approve the financing, the Investors will be entitled to receive a termination fee of $250,000.
The financing also provides for an us to enter into an management services agreement with Fortissimo, under which Fortissimo will provide management and board services in consideration a minimum fee of $50,000 per year payable quarterly plus an additional amount of up to $70,000 payable at the end of each year that we are profitable, provided that such additional amount may not to exceed the available profits.
We expect that operating expenses will constitute a material use of our cash resources. We believe that our existing cash and cash equivalents, along with amounts available under the existing bridge loan agreement and potential investment by the Investors, assuming the execution of definitive agreements related to the proposed investment and approval by a majority of our shareholders, will be sufficient to meet our anticipated needs for working capital for at least the next 12 months. In the event that we are unable to complete the proposed investment with the Investors, we may not be able to continue as a going concern.
Contractual Obligations
We lease all of our office facilities under noncancellable operating leases that expire over varying terms through 2009.
(1) Severance pay relates to accrued severance obligations to our Israeli employees as required under Israeli labor laws. These obligations are payable only upon the termination of the respective employee and may be reduced if the employee’s termination is voluntary.
Impact of Inflation and Currency Fluctuations
A substantial majority of our revenues is received, and a majority of our expenses is incurred, in U.S. dollars. Revenues denominated in U.S. dollars as a percent of total revenues were 92.6% in 2003, 94.8% in 2004 and 88.9% in 2005. Expenses denominated in U.S. dollars as a percent of total expenses were 55.1% in 2003, 57.9% in 2004, and 57.6% in 2005.
A portion of our expenses, mainly salary and personnel costs related to our employees in Israel, is incurred in New Israeli Shekels, or NIS. The salaries of our Israel-based employees are partially linked to increases in the Israeli consumer price index. As a result, the U.S. dollar cost of our Israeli operations is influenced by inflation in Israel as well as the currency exchange rate between the NIS in relation to the U.S. dollar. Any increase in the rate of inflation in Israel may have a negative effect on our operating results, unless such inflation is offset by a devaluation of the NIS in relation to the U.S. dollar. Exchange rates between the NIS and the dollar fluctuate continuously, and therefore exchange rate fluctuations and especially larger periodic devaluations will have an impact on our operating results and period-to-period comparisons of its results. The effects of foreign currency translations are reported in our financial statements in current operating results. We believe that neither inflation in Israel, nor exchange rate fluctuations between the NIS and the U.S. dollar, historically has had a material effect on our operations.
In addition to our operations in Israel, we also conduct operations in Germany and the United Kingdom. Transactions denominated in currencies other than the U.S. dollar or NIS were not material.
Effective Corporate Tax Rate
Israeli companies are currently subject to tax at the rate of 34% for 2005, 32% for 2006 and 29% for 2007, 27% for 2008, 26% for 2009 and 25% thereafter. However, we have derived, and expect to continue to derive, a substantial portion of our income under our Approved Enterprise capital investment program. Subject to compliance with applicable requirements, such income will be tax exempt for a period of two years and will be subject to a reduced corporate tax rate of 25% in the following five to eight years, subject to the level of foreign shareholders holdings in our ordinary shares. Tax benefits for each capital investment program are only effective in restricted periods according to the Encouragement of Capital Investments Law. If we do not comply with the applicable requirements, the tax benefits may be canceled. We believe that we comply with these conditions. If we operate under more than one approval, or if our capital investments are only partially approved, our effective tax rate will be a weighted combination of the various applicable tax rates. We may not be able to obtain approval for additional Approved Enterprise
programs. Since we have incurred tax losses through December 31, 2005, we have not yet used the tax benefits for which we are eligible.
Market Risk
We currently do not invest in, or hold for trading or other purposes, any financial instruments subject to market risk. Except for the $500,000 bridge loan obtained in January 2006, we currently do not have any outstanding borrowings or other credit facilities.
Impact of Recently Issued Accounting Standards
In May 2005, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard, or SFAS, No. 154, Accounting Changes and Error Corrections, a replacement of APB, No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. APB No. 20 previously required that most voluntary changes in accounting principles be recognized by including in net income for the period of the change the cumulative effect of changing to the new accounting principle. SFAS 154 requires retroactive application to prior periods’ financial statements of a voluntary change in accounting principles unless it is impracticable. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.
Passive Foreign Investment Company Status
General
Under U.S. federal income tax laws, we will be treated a passive foreign investment company, or PFIC, in any tax year if, in such tax year, either 75% or more of our gross income is passive in nature, also referred to as the Income Test, or, on average for such tax year, 50% or more the fair market value of our assets produce or are held for the production of passive income, also referred to as the Asset Test. We must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change from year to year. Classification as a PFIC may have important and adverse tax implications to U.S. Holders. For purposes of this summary, a U.S. Holder is a holder of our ordinary shares that is, for U.S. income tax purposes:
· a citizen or resident of the United States;
· a domestic U.S. corporation;
· an estate, the income of which is subject to U.S. federal income tax regardless of the source of its income; and
· any trust if either (i) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all the substantial decisions of the trust, or (ii) the trust has a valid election in effect under applicable U.S. Treasury regulations to be treated as a United States person.
In applying the Asset Test, the average fair market value of our assets is determined on the basis of the average fair market value of our assets as of the end of each quarter of the tax year. The value of the total assets of a publicly traded foreign corporation is generally equal to the sum of the aggregate value of its outstanding stock plus its liabilities. Although we may no longer be “publicly traded” for this purpose, we believe our share price continues to provide the best indication of the fair value of our assets for this purpose.
Our Determination of PFIC Status
Based on the composition of our income and assets for purposes of the Income Test and the Asset Test, respectively, we believe that we were a PFIC for the 2002 and 2003 tax years, but we do not believe we were a PFIC for the 2004 and 2005 tax years. There can be no assurance that we will not be treated as a PFIC in any future tax year. Although we generally will be treated as a PFIC as to any U.S. Holder if we are a PFIC for any year during such U.S. Holder’s holding period of our ordinary shares, such U.S. Holder may avoid the consequences of PFIC classification for years after we cease to be a PFIC by making an election, as described below. In view of the complexity of the issues regarding our treatment as a PFIC, U.S. Holders are urged to consult their own tax advisors for guidance as to our status as a PFIC.
Tax Consequences if We Are a PFIC
There are no U.S. federal income tax consequences to a non-U.S. Holder if we are classified as a PFIC.
If we are a PFIC for U.S. federal income tax purposes for any year during a U.S. Holder’s holding period of our ordinary shares and such U.S. Holder does not make either of the special elections described below, any gain recognized by such U.S. Holder upon the sale of ordinary shares, or upon the receipt of certain distributions, will be treated as ordinary income. Such income generally would be allocated ratably over the U.S. Holder’s holding period of our ordinary shares. The amount allocated to prior years, with certain exceptions, will be subject to tax at the highest tax rate in effect for those years and an interest charge will be imposed on the amount of deferred tax on the income allocated to the prior taxable years.
Although we generally will be treated as a PFIC as to any U.S. Holder if we are a PFIC for any year during such U.S. Holder’s holding period, if we cease to satisfy the requirements for PFIC classification, the U.S. Holder may avoid PFIC classification for subsequent years by electing to recognize gain based on the unrealized appreciation in the ordinary shares through the close of the tax year in which we cease to be a PFIC. Additionally, if we are a PFIC, a U.S. Holder who acquires ordinary shares from a decedent will be denied the normally available step-up in tax basis for our ordinary shares to fair market value at the date of death and instead will have a tax basis equal to the lower of fair market value or the decedent’s tax basis.
For any tax year in which we are determined to be a PFIC, U.S. Holders may elect to treat their ordinary shares as an interest in a qualified electing fund, or a QEF Election, in which case such U.S. Holders would be required to include in income currently their proportionate share of our earnings and profits in years in which we are a PFIC regardless of whether distributions of such earnings and profits are actually distributed to such U.S. Holders. Any gain subsequently recognized upon the sale of their ordinary shares by such U.S. Holders generally would be taxed as capital gain and a denial of the basis step-up at death would not apply.
A U.S. Holder may make a QEF Election with respect to a PFIC for any taxable year of the U.S. Holder. A QEF Election is effective for the year in which the election is made and all subsequent taxable years of the U.S. Holder. Procedures exist for both retroactive elections and the filing of protective statements. A U.S. Holder making the QEF Election must make the election on or before the due date, as extended, for the filing of the U.S. Holder’s income tax return for the first taxable year to which the election will apply.
A U.S. Holder must make a QEF Election by completing Form 8621, Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, and attaching it to their U.S. federal income tax return, and must satisfy additional filing requirements each year the election remains in effect. We intend to provide to each U.S. Holder, upon request, the tax information required to make a QEF Election and to make subsequent annual filings.
As an alternative to a QEF Election, a U.S. Holder of PFIC shares that are “marketable” generally may be able to avoid the imposition of the special tax and interest charge described above by electing to mark to market the ordinary shares, or a Mark-to-Market Election. Our ordinary shares ceased being “marketable” for purposes of the Mark-to-Market Election in 2004, however, and as a result, any such election made by a U.S. Holder for a prior year terminated automatically as of the beginning of our 2004 tax year.
U.S. Holders should consult their own tax advisors regarding the eligibility, manner and advisability of making a QEF Election, the consequences of the automatic termination of any existing Mark-to-Market Election in 2004, and the effect of these elections on the calculation of the amount of foreign tax credit that may be available to them.
A U.S. Holder who beneficially owns shares of a PFIC must file Form 8621 with the U.S. Internal Revenue Service for each tax year in which the U.S. Holder holds shares in a PFIC. This form describes any distributions received with respect to these shares and any gain realized upon the disposition of these shares.
The summary above is based on current provisions of the United States Internal Revenue Code of 1986, as amended, final, temporary and proposed U.S. Treasury Regulations promulgated thereunder, and administrative and judicial interpretations thereof, all of which are subject to change, possibly with retroactive effect. This summary is limited to a description of certain of the material U.S. federal income tax consequences to U.S. Holders of our status as a PFIC and does not consider any other aspects of U.S. federal income taxation that may be relevant to U.S. Holders, nor does it consider all aspects of the PFIC regime that may be relevant to particular U.S. Holders by reason of their particular circumstances. This summary is directed only to U.S. Holders that hold ordinary shares as capital assets and does not address the considerations that may be applicable to particular classes of U.S. Holders, including tax-exempt organizations, holders of ordinary shares as part of a “straddle,” “hedge” or “conversion transaction,” U.S. Holders who own, directly, indirectly or through attribution, 10% or more of our outstanding ordinary shares, and persons who own ordinary shares through a partnership or other pass-through entity.
Rules relating to the income tax consequences of being treated as a PFIC are very complex. U.S. Holders are urged to consult their own tax advisors regarding the application of the PFIC rules to their investment in our ordinary shares.
ITEM 7A.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We do not use derivative financial instruments in our investing portfolio. We place our investments in instruments that meet high credit quality standards such as money market funds, government securities, and commercial paper. We limit the amount of credit exposure to any one issuer. We do not expect any material loss with respect to our investment portfolio.
We conduct business in various foreign currencies, primarily in Europe and the Israel. As a result, we are exposed to the effect of foreign currency exchange rate fluctuations on the U.S. dollar value of foreign currency-denominated revenues and expenses. We do not use foreign exchange forward contracts to hedge our foreign currency denominated receivables. Looking forward, there can be no assurance that changes in foreign currency rates, relative to the U.S. dollar, will not materially adversely affect our consolidated results.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RADVIEW SOFTWARE, LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
IN U.S. DOLLARS
INDEX
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
RadView Software Ltd.
We have audited the accompanying consolidated balance sheets of RadView Software Ltd. and its subsidiaries (the “Company”) as of December 31, 2004 and 2005 and the related consolidated statements of operations, shareholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of RadView Software Ltd. and its subsidiaries as of December 31, 2004 and 2005 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with U.S. generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 2005, the Company changed its method of accounting for stock-based compensation.
Kost Forer Gabbay & Kasierer
A Member of Ernst & Young Global
Tel-Aviv, Israel
April 10, 2006
RADVIEW SOFTWARE LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
RADVIEW SOFTWARE LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
RADVIEW SOFTWARE LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
RADVIEW SOFTWARE LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
RADVIEW SOFTWARE LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Operations
(a) Overview
RadView Software Ltd., an Israeli corporation, and its subsidiaries (collectively, the “Company”) develops, markets and supports software that enables organizations to verify the scalability, efficiency and reliability of web applications, and facilitates their rapid development.
The Company incurred net losses of $5.1 million in 2003, $3.8 million in 2004 and $2.5 million in 2005, and had an accumulated deficit of approximately $59.3 million as of December 31, 2005. The Company has reduced its net losses primarily through the reduction of operating costs, and in 2005 through an increase in revenues. The Company has funded these losses principally from proceeds from equity financing, including an initial public offering in August 2000 and a private placement in March 2004, as well as proceeds from technology license arrangements (see Note 3).
As of December 31, 2005, the Company had cash of $166,000 and had an outstanding balance of $70,000 under a revolving credit facility that was subsequently repaid and terminated in January 2006 (see Note 7).
In January 2006, subsequent to the balance sheet date, the Company obtained a bridge loan from a group of potential investors for borrowings of up to $500,000. On April 4, 2006, the Company subsequently entered into definitive agreements with this group of investors to provide for a minimum investment of at least $1.5 million (see Note 1(b)). The completion of the investment transaction remains subject to the approval by a majority of the Company’s shareholders. Several significant shareholders, representing 39.3% of the outstanding ordinary shares, have represented to the Company their intention to vote in favor of the investment. Management believes that existing cash and cash equivalents, along with borrowings currently available from the bridge loan and the proceeds that would be available at the closing of the investment transaction, will be adequate to fund operations into 2007.
(b) Subsequent Financing
On April 4, 2006, subsequent to the balance sheet date, the Company signed definitive agreements for a financing with Fortissimo Capital Fund GP LP on behalf of several limited partnerships in which it serves as general partner and other potential co-investors including one of the Company’s directors and two existing shareholders (the “Investors”). The initial investment of the financing would be for a minimum of $1.5 million consisting of $750,000 to purchase 25,000,000 of convertible preferred shares (the “Preferred Shares”), at a price of $0.03 per share and $750,000 as a convertible loan. The closing of the initial investment is required to occur within 14 days of approval by the Company’s shareholders. The financing also provides for an additional investment, at the option of the Investors, to purchase up to an additional $2.25 million of Preferred Shares at a price of $0.03 per share for a period of 18 months after the closing of the initial investment. Each Preferred Share would be convertible into one of the Company’s ordinary shares, subject to adjustment for anti-dilution events. Each Preferred Share would receive the same voting rights as ordinary shares, except Preferred Shares would be entitled to elect the majority of the Company’s board of directors and have approval rights over specified actions. Each Preferred Share would be entitled to a preference in liquidation over ordinary shares. The Investors would also receive warrants to purchase 18,750,000 Preferred Shares with respect to the initial investment and up to 56,250,000 Preferred Shares with respect to the additional investment, each at an exercise price of $0.04 per share for a period of five years from date of issuance.
The financing also provides for the issuance of a convertible loan at the closing of the initial investment in the principal amount of $250,000 plus the balance of any borrowings still available under an existing $500,000 bridge loan at the time of closing. The principal balance of bridge loans previously borrowed also will become part of the convertible loan at the closing of the initial investment of the financing. The convertible loan would bear interest at 8.0% per annum. The convertible loan plus, at the election of the Investors, any accrued interest thereon, would be convertible into Preferred Shares at a conversion price of $0.03 per share. The convertible loan would mature three years from the closing date and, if not converted by such date, would become due and payable 30 days thereafter.
Prior to the signing of definitive financing agreements, on January 26, 2006, the Company entered into a bridge loan agreement (the “Bridge Loan”) with the Investors. Under the Bridge Loan, the Investors have agreed to provide the Company with up to $500,000 of loans, subject to the terms of the loan. As of April 5, 2006, the Company has borrowed $280,000 and the remaining $220,000 remains available for future borrowing on an as-needed basis until the closing, subject to approval of the Investors and compliance by the Company with an approved budget. The Bridge Loan bears interest at 8.0% per annum and is secured by a fixed charge on the Company’s accounts receivables and intellectual property and a floating charge on all of its assets. The Bridge Loan would be subject to the terms and conditions of the convertible loan portion of the financing if the financing closes. If the financing is not closed due to failure to secure shareholder approval or termination by either party, the Bridge Loan will become due and payable within 60 days of notice by either party of an intention to terminate negotiations with respect to the financing.
The financing remains subject to, among other things, filing of amended articles of association establishing the rights and preferences of the Preferred Shares and approval by a majority of the Company’s shareholders. Several significant shareholders, representing 39.3% of the outstanding ordinary shares, have represented to the Company that they intend to vote in favor of the financing. If a majority of the Company’s shareholders do not approve the financing, the Investors will be entitled to receive a termination fee of $250,000.
The financing also provides for an us to enter into an management services agreement with Fortissimo, under which Fortissimo will provide management and board services in consideration a minimum fee of $50,000 per year payable quarterly plus an additional amount of up to $70,000 payable at the end of each year that we are profitable, provided that such additional amount may not to exceed the available profits.
(c) Major Customers
For a discussion of major customers, refer to Note 2 (q).
2. Significant Accounting Policies
The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. The significant accounting policies followed in the preparation of the consolidated financial statements, applied on a consistent basis, are as follows:
(a) Use of Estimates
The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
(b) Financial Statements in U.S. Dollars
Substantially all of the Company’s revenues are in U.S. dollars. In addition, most expenses are incurred in U.S. dollars. The Company’s management believes that the U.S. dollar is the primary currency of the economic environment in which the Company operates. Thus, the functional and reporting currency of the Company is the U.S. dollar.
Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 52, “Foreign Currency Translation”. Changes in currency exchange rates between the Company’s functional currency and the currency in which a transaction is denominated are included in the Company’s results of operations as financial income (expense) in the period in which the currency exchange rates change.
All exchange gains and losses from the above-mentioned remeasurement are reflected in the statements of operations and were not material for all periods presented. The representative rate of exchange was U.S. $1.00 to 4.379 New Israeli Shekel (“NIS”) at December 31, 2003, U.S. $1.00 to NIS 4.308 at December 31, 2004 and U.S. $1.00 to NIS 4.603 at December 31, 2005.
(c) Principles of Consolidation
The consolidated financial statements include the accounts of RadView Software Ltd. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
(d) Cash Equivalents and Restricted Cash
Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months or less. Restricted cash is invested in a short-term bank deposit, which is used as security for Company’s guarantee to leased facilities. The deposit is in U.S. dollars and bears interest at an average rate of 3.274%.
Restricted cash as of December 31, 2005 consists of security for a bank guarantee to landlord in Israel.
(e) Accounts Receivable Reserve
The Company provides for an allowance for doubtful accounts reserve against its accounts receivable. The reserve is computed for specific accounts, the collectibility of which is doubtful based upon the Company’s experience. A summary of the allowance for doubtful accounts is as follows:
\(f) Property and Equipment, net
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful life of the assets as follows:
(g) Impairment of Long-Lived Assets
The Company’s long-lived assets are reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
(h) Severance Pay
In accordance with Israeli compensation law, the Company is required to make severance payments to Israeli employees upon their termination of employment. The amount of such severance payments is based on the most recent monthly salary multiplied by the number of years of employment as of the balance sheet date. The Company has accrued for the estimated total cost of severance pay as computed as of the balance sheet date. Severance expense totaled $178,000 in 2003, $192,000 in 2004 and $90,000 in 2005.
The Company has partially funded its severance pay obligations by monthly deposits for insurance policies. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israeli severance pay law or labor agreements. The value of the deposited funds is based on the cash surrender value of these policies and is presented as an asset in the consolidated balance sheets (see Note 6).
(i) Revenue Recognition
The Company generates revenues mainly from licensing the rights to use its software products. The Company also generates revenues from support and maintenance services and, to a lesser extent, training and consulting services. The Company sells its products primarily through its direct sales force and, to a lesser extent, through resellers and distributors considered as end-users.
The Company recognizes revenue in accordance with Statement of Position (“SOP”) 97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. Under SOP 97-2, revenues from software product licenses are recognized upon delivery of the software provided there is persuasive evidence of an agreement, the fee is fixed or determinable and collection of the related receivable is probable and no further obligations exist. Revenues under multiple-element arrangements, which may include software licenses, support and maintenance, and training and consulting services, are allocated to each element based on their respective fair values based on vendor-specific objective evidence. This objective evidence represents the price of
products and services when sold separately. When vendor-specific objective evidence of fair value exists for undelivered elements but does not exist for delivered elements of a software arrangement, the Company uses the residual method for recognition of revenues, when all other revenue recognition criteria are met. Under the residual method, the Company defers revenues related to the undelivered elements based on their vendor specific objective evidence of fair value and recognizes the remaining arrangement fee for the delivered elements. When vendor-specific objective evidence of fair value for undelivered elements does not exist, and the only undelivered element is services, revenues from the entire arrangement are recognized over the term of the service agreement.
Revenues from support and maintenance agreements are recognized ratably over the term of the maintenance period, which is typically one year. Revenues from training and consulting arrangements are recognized as the services are performed.
Revenue is recognized for software licenses sold to resellers or distributors at the time of shipment, provided that all revenue recognition criteria set forth in SOP 97-2 are fulfilled.
The Company generally does not grant a right of return to its customers. When a right of return exists, revenue is deferred until the right of return expires, at which time revenue is recognized provided that all other revenue recognition criteria are met.
Amounts collected or billed prior to satisfying the above revenue recognition criteria are reflected as deferred revenue. Deferred revenue primarily represents deferred maintenance revenue.
(j) Advertising Expenses
Advertising expenses are charged to the consolidated statements of operations as they are incurred. Advertising expenses totaled $62,000 in 2003, $177,000 in 2004, and $200,000 in 2005.
(k) Research and Development Costs
The Company has evaluated the establishment of technological feasibility of its products in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed. The Company sells products in a market that is subject to rapid technological change, new product development and changing customer needs. Accordingly, the Company has concluded that technological feasibility is not established until the development stage of the product is nearly complete. The Company defines technological feasibility as the completion of a working model. The time period during which costs could be capitalized from the point of reaching technological feasibility until the time of general product release is very short. Consequently, the amounts that could be capitalized are not material to the Company’s financial position or results of operations. Therefore, the Company has charged all such costs to research and development expense in the period incurred.
(l) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 prescribes the use of the liability method whereby deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to be reversed. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.
(m) Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123R (Revised 2004) (“SFAS 123(R)”), Share-Based Payment, which replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123(R), as amended, requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first annual reporting period beginning after January 1, 2006. Early adoption will be permitted in periods in which financial statements have not yet been issued. SFAS 123(R) permits public companies to adopt its requirements using one of two methods:
· A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.
· A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
The Company has elected to early adopt the provisions of SFAS 123(R) effective January 1, 2005 following the modified prospective method of adoption described above.
The Company has determined the fair value of share-based payments issued after January 1, 2005 and unvested options granted in prior periods using the Black-Scholes option valuation model, using the following weighted-average assumptions:
Expected volatilities are based on historical volatility of the Company’s ordinary shares. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. The expected term of options granted is based on the Company’s estimate and represents the period of time that options granted are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve.
For all periods presented before January 1, 2005, the Company elected to follow APB No. 25 and FASB Interpretation (“FIN”) No. 44, Accounting for Certain Transactions Involving Stock Compensation, in accounting for its employee stock option plans. Under APB No. 25, when the exercise price of an employee stock option is equivalent to or above the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company adopted the disclosure provisions of SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, which amended certain provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation, effective as of the beginning of the fiscal year.
Pro forma information regarding the Company’s net loss and net loss per share prior to the adoption of SFAS No. 123(R) has been determined as if the Company had accounted for its employee stock options under the fair value method prescribed by SFAS No. 123.
The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation prior to January 1, 2005.
The Company applies SFAS No. 123 and Emerging Issues Task Force (“EITF”) No. 96-18, Accounting for Equity Instruments that Are Issued to Other than Employee for Acquiring, or in Conjunction with Selling Goods or Services, with respect to options and warrants issued to nonemployees. SFAS No. 123 requires the use of option valuation models to measure the fair value of the options and warrants at the measurement date.
(n) Reclassifications
Certain amounts in the accompanying consolidated financial statements have been reclassified to conform to the current period’s presentation.
(o) Basic and Diluted Net Loss Per Share
Basic and diluted net loss per share is presented in conformity with SFAS No. 128, Earnings Per Share, for all periods presented. Basic and diluted net loss per ordinary share was determined by dividing net loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted net loss per ordinary share is the same as basic net loss per ordinary share for all periods presented, as the effects of the Company’s potential additional ordinary shares were antidilutive.
The calculation of diluted net loss per share excludes outstanding stock options, warrants and additional investment rights held by certain investors because their inclusion would be antidilutive, as set forth in the following table.
(p) Fair Value of Financial Instruments
The Company’s financial instruments consist mainly of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and line of credit. The carrying amounts of these instruments approximate their fair value due to their short-term maturity of such instruments.
(q) Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, restricted cash and accounts receivables.
Cash, cash equivalents and restricted cash are invested mainly in U.S. dollars with major banks in Israel and the United States. Such deposits in the United States may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Company’s investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments.
Accounts receivable are derived from sales to customers located in the United States, Europe, Israel and Japan. The Company performs on-going credit evaluations of its customers and to date has not experienced any material losses. An allowance for doubtful accounts is maintained with respect to those amounts that the Company has determined to be doubtful of collection.
The Company has no significant off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements.
In 2003, no single customer represented greater than 10% of total revenues or greater than 10% of total accounts receivable as of December 31, 2003. In 2004, one customer represented 16% of total revenue in 2004 and one customer represented 16% of total accounts receivable as of December 31, 2004. In 2005, one customer represented 13% of total revenue and one customer represented 17% of total accounts receivable as of December 31, 2005.
(r) Recently Issued Accounting Standards
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. APB No. 20 previously required that most voluntary changes in accounting principles be recognized by including in net income for the period of the change the cumulative effect of changing to the new accounting principle. SFAS 154 requires retroactive application to prior periods’ financial statements of a voluntary change in accounting principles unless it is impracticable. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.
3. Technology License Transactions
(a) Ixia
On July 7, 2004, the Company received $1,000,000 in cash from a technology license transaction for its WebLOAD product with Ixia, an original equipment manufacturer, pursuant to the exercise of an option by Ixia under the terms of a former development, publishing and distribution agreement. As a result of the option exercise, the technology license provides Ixia with expanded license rights including the right to access and use source code for the WebLOAD product and the right to create derivative products. Under the terms of the original agreement, Ixia was required to continue to pay to the Company royalties on its sale of WebLOAD at a reduced rate through July 7, 2005. Ixia was also granted a right to make a single
lump-sum payment of $250,000 to the Company in lieu of its reduced royalty obligations. In November 2004, Ixia exercised its right and made payment to the Company. Accordingly, Ixia has no further license fee or royalty payment obligations to the Company pursuant to this arrangement.
The Company was obligated to provide product updates and technical and engineering support to Ixia until July 2005. The Company recognized the $1,000,000 technology license fee as revenue over the 12-month period commencing July 7, 2004, which was the term the Company was obligated to provide support services to Ixia. The Company recognized as revenue the $250,000 payment in lieu of royalties on a straight-line basis over the remaining term from November 2004 until July 2005.
The Company recognized revenue under this technology license transaction of $575,000 in 2004 and $725,000 in 2005 that has been classified as software licenses revenues in the condensed consolidated statements of operations.
(b) OPNET Technologies
On December 7, 2005, the Company and OPNET Technologies, Inc. (“OPNET”) entered into a license and distribution agreement (the “License Agreement”), which granted to OPNET a non-exclusive, non-royalty-bearing, perpetual source code license for the Company’s WebLOAD and WebFT products. In addition, the Company agreed to provide limited engineering support services for a period of eight weeks for the purpose of assisting OPNET with the use of the source code and up to ten days of training services for OPNET’s support personnel. OPNET was also was granted a right to extend the service period for up to an additional eight weeks for an additional fee. The total consideration under the agreement of approximately $572,000 was payable in cash as follows: $360,000 paid upon execution of the Agreement; $200,000 paid in bi-weekly installments in varying amounts through January 16, 2006; and $12,000 paid at varying dates as training services are performed.
According to SOP 97-2, if sufficient VSOE of the fair value of the elements does not exist to permit the allocation of revenue to the services and the only undelivered element is services, the entire arrangement fee should be recognized as the services are performed or on a straight-line basis over the service period if no other pattern of performance is discernible. The Company is recognizing the entire arrangement fee on a ratable basis over the initial eight-week engineering service period. The Company recognized revenue under this technology license transaction of $203,000 in 2005.
In January 2006, subsequent to the balance sheet date, OPNET exercised its right to extend the engineering services through March 2006 for an additional fee of $96,000. The revenue from these additional services will be recognized as they are delivered.
4. Restructuring Expenses
Restructuring expenses totaled $245,000 in 2003. There were no restructuring expenses in 2004 and 2005. The following is a reconciliation of the accrued restructuring charges for each of the three years ended December 31, 2005.
Accrued restructuring charges payable within one year have been classified as a current liability in the accompanying consolidated balance sheets.
Restructuring charges in 2003 were incurred in April 2003 and related to additional employee severance costs, facility termination charges, idle-lease space and vendor contract termination fees. Employee severance costs, which were paid in 2003, resulted from the termination of 20 employees, of whom 6 were sales and marketing employees, 11 were research and development employees, and 3 were general and administrative employees.
5. Property and Equipment, Net
Depreciation expense was $576,000 in 2003, $234,000 in 2004, and $99,000 in 2005.
6. Other Assets
7. Revolving Line of Credit Facility
On May 27, 2005, the Company, through RadView Software Inc., the Company’s U.S. subsidiary (the “U.S. Subsidiary”), obtained a one-year revolving line of credit facility with Comerica Bank for borrowings of up to $2.0 million. Advances under the facility were limited to the lesser of $2.0 million or the sum of 75% of eligible accounts receivables plus $1.0 million.
Borrowings under the facility bear interest at the bank’s prime rate (3.68% as of December 31, 2005) plus 1.25%. Borrowings under the credit facility were secured by substantially all of the assets of the U.S. Subsidiary and specified assets of the Company, and guaranteed by the Company and specified subsidiaries of the Company. The Company and the U.S. Subsidiary were required to maintain compliance with financial covenants including: (a) a minimum cash balance of $1.0 million and (b) specified net income (loss) levels based on the Company’s consolidated operating budget. The Company borrowed $1.2 million under the line of credit. In December 2005, an event of default was incurred under the credit facility when the borrowings under the credit facility exceeded the collateral base and the Company was unable to repay the amount of the overadvance. The bank suspended all future borrowings under the facility and demanded repayment of the overadvance. The Company and the bank agreed upon a plan of repayment for all outstanding borrowings. As of December 31, 2005, outstanding borrowings under the revolving line of credit totaled $70,000. This amount was fully repaid in January 2006, subsequent to the balance sheet date, and the revolving line of credit facility was terminated.
In connection with the facility, the Company issued to the bank a warrant to purchase 352,941 of the Company’s ordinary shares at an exercise price of $0.17 per share. The warrant was exercisable immediately and has a term of seven years. The warrant also provides for piggyback registration rights. These warrants are not affected by the early termination of the revolving line of credit facility. Pursuant to an evaluation of the terms of the warrant under the provisions of EITF 00-19, the Company has classified the warrant issued in connection with the line of credit as equity.
The total consideration of $1.3 million under the credit facility was allocated based on the relative fair values of the revolving line of credit and the warrants in accordance with APB No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants. At the grant date, the fair value of the warrants was determined to be $52,000 using the Black-Scholes option-pricing model assuming a risk free interest of 3.9%, a volatility factor of 120%, dividend yield of 0% and contractual life of seven years.
The Company also incurred financing costs totaling $70,000 consisting of bank fees and legal costs , which have been accounted for as deferred financing costs, until fully amortized following the repayment of the loan. The warrant costs and deferred financing costs were amortized as interest expense over the life of the revolving credit facility. Amortization of warrants costs and deferred financing costs totaled $122,000 in 2005.
8. Accrued Expenses
9. Deferred Revenues
10. Commitments and contingent liabilities
(a) Lease Obligations
The Company operates primarily from leased facilities. Lease agreements expire through July 2009. Annual minimum future rental payments due under the lease agreements as of December 31, 2005 are as follows:
Rent expense, net of sublease income and idle-lease restructuring credits, was $335,000 in 2003, $350,000 in 2004, and $284,000 in 2005.
(b) Royalties
In June 2003, the Company entered into a distribution agreement for the rights to re-brand, market and distribute certain software products from Altaworks Corporation under the Company’s private label name of WebLOAD Analyzer. The Company was required to pay royalties based on selling price at rates decreasing from 50% to 20% based on specified revenue volume levels. This distribution agreement was terminated in December 2005.
In May 2005, the Company entered into a distribution agreement with another third party to re-brand, market and distribute certain software products of a third party also under the Company’s private label name of WebLOAD Analyzer. The Company is required to pay royalties to the third party based on the Company’s selling price for end-user revenues from the WebLOAD Analyzer product.
Royalties incurred in connection with these royalty arrangements totaled $25,000 in 2003, $28,000 in 2004 and $88,000 in 2005 and have been classified as cost of license revenues.
11. Shareholders’ Equity (Deficit)
(a) Authorized Share Capital
As of December 31, 2005, the Company has authorized 40,000,000 ordinary shares NIS 0.01 par value. Ordinary shares confer upon their holders voting rights, the right to receive dividends or bonus shares, if declared, and the right to share in the excess assets upon liquidation of the Company.
(b) Treasury Shares
As of December 31, 2005, the Company holds 134,000 of ordinary shares as treasury shares at an aggregate cost of $100,000. Although such shares are legally considered outstanding, the Company has no dividend or voting rights associated with its treasury shares.
(c) Dividends
The Company has never paid cash dividends to shareholders. The Company intends to retain future earnings for use in its business and does not anticipate paying cash dividends on its ordinary shares in the foreseeable future.
(d) Private Placement
In March 2004, the Company completed a private placement (the “Private Placement”) of its ordinary shares, additional investment rights to purchase ordinary shares (the “Additional Investment Rights”) and four series of warrants to purchase ordinary shares (the “Warrants”) pursuant to a securities purchase agreement (the “Purchase Agreement”) between the Company and certain purchasers named therein (the “Purchasers”), in reliance on an exemption under Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.
The Company issued 3,333,331 ordinary shares to the Purchasers for aggregate gross proceeds of $2.0 million. The Company also issued Additional Investment Rights and Warrants to the Purchasers. The Company received net proceeds of $1.8 million from the Private Placement.
In accordance with the Purchase Agreement, the Company was required to register for resale on Form S-3 (the “Registration Statement”) the ordinary shares issued in the Private Placement and the ordinary shares issuable upon exercise of the Additional Investment Rights and Warrants. The Registration Statement was declared effective on June 17, 2004. The Company must maintain the effectiveness of the Registration Statement for a period of up to two years from the effective date of the Registration Statement.
(e) Warrants and Additional Investment Rights
In connection with the Private Placement, the Company issued to the Purchasers Additional Investment Rights to purchase 3,333,331 ordinary shares at an exercise price of $0.81 per share, exercisable from March 11, 2004 until June 17, 2005. None of the Additional Investment Rights were exercised before their expiration in June 2005 and are no longer outstanding as of December 31, 2005.
The Company also issued to the Purchasers four series of Warrants as follows:
The Warrants were initially exercisable for the number of shares indicated above, subject to customary anti-dilution adjustments and, with respect to the Series C and D warrants, subject to the conditions indicated below. The Series A and Series B warrants became exercisable beginning September 11, 2004 for a term as noted in the table above. One half of the Series C and Series D warrants became exercisable on September 20, 2004, the date the Company’s ordinary shares were delisted from the Nasdaq SmallCap Market. Because the Additional Investment Rights were not exercised before the delisting event, the other one-half of the Series C and Series D warrants are not exercisable. As a result, warrants to purchase 2,333,332 shares remain exercisable.
In May 2005, the exercise price of the Warrants was reduced in accordance with the anti-dilution provisions of the Warrants when the Company issued a warrant to a bank (see Note 7) at an exercise price below the then current exercise price of the Warrants. The table above reflects the adjusted exercise price for the Warrants immediately following the issuance of the bank warrant.
The Company may require the Purchasers to exercise their right to purchase ordinary shares pursuant to the Warrants if the closing price of the ordinary shares on an eligible market exceeds the respective exercise prices of any series of the Warrants by at least 100% for twenty consecutive trading days on which the average daily trading volume of the ordinary shares is at least 250,000 Ordinary Shares, excluding blocks of 25,000 or more ordinary shares.
Pursuant to an evaluation of the terms of the Purchase Agreement under the provisions of EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, the Company has classified all the above derivative financial instruments issued in connection with the private placement as equity.
As for warrants issued to a bank in connection with a revolving line of credit, see Note 7.
(f) Employee Share Purchase Plan
In November 2002, the Company established an employee share purchase plan (the “ESPP”) which permits the eligible employees of the Company to purchase shares of the Company’s ordinary shares at 85% of the closing market price on either the first day or the last day of the applicable three-month period, whichever is lower. Employees may participate in the ESPP through regular payroll deductions of up to 10% of their pre-tax gross salary. Subject to adjustment for stock splits, stock dividends and similar events, a maximum of 1,500,000 ordinary shares may be issued under the ESPP. No ordinary shares were issued in connection with the ESPP in 2003, 2004 and 2005. As of December 31, 2005, there are 1,491,791 ordinary shares available for future issuance under the ESPP.
(g) Stock Option Plans
The Company has approved for issuance an aggregate of 7,811,862 ordinary shares for the issuance of stock options under three stock option plans as follows:
· 4,786,622 ordinary shares approved for issuance under a key employee share incentive plan (the “1996 Option Plan”) adopted in 1996 and amended in 2001 and 2003;
· 75,240 ordinary shares approved for issuance under an affiliate stock option plan (the “1997 Option Plan”) adopted in 1997; and
· 2,950,000 ordinary shares approved for issuance under the United States Share Incentive Plan (the “2000 Option Plan”) adopted in 2000 and amended in 2001.
The 1996 Option Plan provides for the grant by the Company of option awards to officers and employees of the Company and its subsidiaries and to non-employees. The options granted under the 1996 Option Plan vest ratably over vesting periods ranging from three to five years of employment and expire 62 months from the date of issuance.
The 1997 Option Plan provided for the grant by the Company of nonqualified option awards to employees of RAD-Bynet Group of companies, which are affiliated companies. Options granted under this plan vest ratably over four years and expire 62 months from date of issuance. Through December 31, 2000, all available authorized options under this plan had been granted. No options were granted under this plan since completion of the initial public offering in August 2000. The Company accounted for these options in accordance with SFAS No. 123 utilizing the Black-Scholes option-pricing model. The Company has charged to operations $8,000 in 2003 and $3,000 in 2004 in connection with these options. As of December 31, 2005, there were no options outstanding under this plan.
The 2000 Option Plan provides for the grant by the Company of option awards to officers and employees of its U.S. subsidiary. Options granted under the 2000 Option Plan vest ratably over three to four years of employment and expire 10 years from the date of issuance.
Under all option plans, any options that are cancelled or forfeited before expiration become available for future grants. As of December 31, 2005, there were 3,371,772 options available for future grant.
Transactions related to the Company’s stock option plans for each of the three years in the period ended December 31, 2005 are summarized as follows:
The following table summarizes information about options outstanding and exercisable at December 31, 2005:
Through December 31, 2004 the amount of stock-based compensation arising from the difference between the exercise price and the fair market value on the date of the grant is included in shareholders’ equity as deferred compensation and totaled $8.5 million. Under APB Opinion No. 25, deferred compensation was amortized over the vesting periods of the underlying options as stock-based compensation expense.
The Company has elected to early adopt the provisions of SFAS 123(R) effective January 1, 2005 with respect to is stock-based payments to employees. The Company used the “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.
Stock-based compensation expense included in the reported net loss totaled $387,000 in 2003, $84,000 in 2004 and $116,000 in 2005.
The cumulative effect of the change in accounting principle related to the adoption of SFAS 123(R) was immaterial. Additional information related to our stock-based compensation awards is presented below along with the additional disclosures required by SFAS 123(R).
During 2003, the Company extended the exercise period for a former employee. The extension was accounted for under FIN No. 44, by applying a new measurement date, which resulted in no additional compensation expenses.
The following table summarizes the weighted average fair value of options granted for each of the three years in the period ended December 31, 2005:
The following table presents information regarding unvested stock option activity as of December 31, 2005:
As of December 31, 2005, there was $235,000 of total unrecognized compensation cost related to unvested stock options. Unrecognized compensation cost is expected to be recognized over a weighted average period of 2.7 years. Total fair value of shares vested during the year ended December 31, 2005 was $180,000.
12. Taxes on Income
(a) Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985
Results for tax purposes of RadView Software Ltd. are measured and reflected in accordance with the change in the Israeli Consumer Price Index (“CPI”). As described elsewhere, the Company’s consolidated financial statements are presented in U.S. dollars. The difference between the change in the Israeli CPI and the exchange rate between the U.S. dollar and the NIS causes a difference between taxable income or loss and the income or loss before taxes reflected in the consolidated financial statements. In accordance with SFAS No. 109, the Company has not provided deferred income taxes on this difference between the reporting currency and the tax bases of assets and liabilities.
(b) Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (“the Law”)
In 1998, the Company’s investment program totaling $66,000 was granted Approved Enterprise status under the Law. The Company elected to adopt the “Alternative Benefits Program Status.” This status entitles the Company to a benefit period of seven years on income derived from this program as follows: (a) a full income tax exemption for the first two years and (b) a reduced income tax rate of 25%, instead of the regular rate of 34% in 2005, for the remaining five-year period. Depending on the level of non-Israel
investments in the Company, the period for which the Company is entitled to a reduced tax rate of 25% can be extended to eight years. The period of the benefit is limited to 12 years from commencement of production or 14 years from the date of approval. As the Company has not yet reported any taxable income, the benefit period has not yet commenced. The tax benefit will expire in 2007.
The benefits from the Company’s approved enterprise programs are dependent upon the Company fulfilling the conditions stipulated by the Law for Encouragement of Capital Investments, 1959 and the regulations published under this law, as well as the specific criteria in the Company’s approved enterprise programs. If the Company does not comply with these conditions, the tax benefits may be canceled, and the Company may be required to refund the amount of the canceled benefits, with the addition of linkage differences and interest. As of the date of these financial statements, the Company believes it complies with these conditions.
If the Company distributes a cash dividend out of retained earnings which were tax exempt due to its approved enterprise status, the Company would have to pay a 25% corporate tax on the amount distributed, and a further 15% withholding tax would be deducted from the amounts distributed to the recipients.
As of December 31, 2005, the Company does not have retained earnings and accordingly, no tax-exempt income. Tax-exempt income attributable to the Approved Enterprise cannot be distributed to shareholders without subjecting the Company to taxes except upon complete liquidation of the Company. If the retained tax-exempt income is distributed in a manner other than upon the complete liquidation of the Company, it would be taxed at the corporate tax rate applicable to such profits as if the Company had not elected alternative tax benefits. The Company’s board of directors does not intend to distribute any amounts of its undistributed tax-exempt income as dividends.
On April 1, 2005, an amendment to the Investment Law came into effect (the “Amendment”) and has significantly changed the provisions of the Investment Law. The Amendment limits the scope of enterprises which may be approved by the Investment Center by setting criteria for the approval of a facility as a Privileged Enterprise, such as provisions generally requiring that at least 25% of the Privileged Enterprise’s income will be derived from export. Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded under the Investment Law so that companies no longer require Investment Center approval in order to qualify for tax benefits.
In addition, the Investment Law provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the law as they were on the date of such approval. Therefore, the Company’s existing Approved Enterprise will generally not be subject to the provisions of the Amendment.
As a result of the Amendment, tax-exempt income generated under the provisions of the new law will subject the Company to taxes upon distribution or liquidation and the Company may be required to record a deferred tax liability with respect to such tax-exempt income.
Income from sources other than the Approved Enterprise during the benefit period will be subject to tax at the regular corporate tax rate. Israeli companies are subject to income tax at the corporate tax rate of 34% for the 2005 tax year. On July 25, 2005, the Knesset (Israeli Parliament) passed the Law for the Amendment of the Income Tax Ordinance (No. 147), 2005, which prescribes, among others, a gradual decrease in the corporate tax rate in Israel to the following tax rates: 31% in 2006, 29% in 2007, 27% in 2008, 26% in 2009and 25% in 2010 and years thereafter.
Due to reported losses for tax purposes, the benefit period under the Approved Enterprise program has not yet commenced.
By virtue of this law, the Company is entitled to claim accelerated depreciation on equipment used by the Approved Enterprise during five tax years. The Company has received final approval in respect to the investment program.
(c) Tax benefits under Israel’s Law for the Encouragement of Industry (Taxation), 1969
The Company currently qualifies as an “Industrial Company” under the Law for Encouragement of Industry (Taxes), 1969 and is therefore entitled to tax benefits, mainly accelerated depreciation of machinery and equipment and deduction of expenses incurred in connection with a public offering.
(d) Income (Loss) before Income Tax
(e) Net Operating Losses
As of December 31, 2005, the Company’s net operating loss carry forwards for Israeli tax purposes amounted to approximately $17.2 million. These net operating losses may be carried forward indefinitely and offset against future taxable business income. The Company expects that during the period in which these tax losses are utilized its income would be substantially tax-exempt. There will be no tax benefit available from these losses and no deferred income taxes have been included in these financial statements. Deferred taxes in respect of other temporary differences are immaterial.
Through December 31, 1995, the Company’s losses generated in Israel for tax purposes were assigned to a shareholder, and are not available to the Company.
The Company’s U.S. subsidiary’s carry forward tax losses through December 31, 2005 totaled approximately $34.6 million. These losses are available to offset future U.S. taxable income of the U.S. subsidiary and will expire between the years 2012 and 2025. Net operating loss carry forwards are subject to review and possible adjustments by the Internal Revenue Service and may be limited in the event of certain cumulative changes in excess of 50% in the ownership interests of significant shareholders over a three-year period.
The components of the Company’s U.S. deferred tax asset are approximately as follows:
As of December 31, 2005 the Company had provided valuation allowances of approximately $13.9 million in respect of deferred tax assets resulting from tax loss carry forwards, and other temporary differences. The valuation allowance increased $667,000 in 2003, $1,782,000 in 2004, and $1,208,000 in 2005. Management currently believes that since the Company has a history of losses, it is not likely that those deferred taxes will be realized in the foreseeable future.
The main reconciling items between the statutory tax rate of the Company and the effective tax rate are the non-recognition of tax benefits from accumulated net operating losses carry forward among the various subsidiaries worldwide due to the uncertainty of the realization of such tax benefits and the effect of approved enterprise.
(f) Final Tax Assessments
The Company has received final tax assessments in Israel regarding tax years through the end of 2003.
13. Related Party Balances and Transactions
Balances with related parties consisted of the following:
Transactions with related parties consisted of the following:
Management believes that all related party transactions have been conducted on an arm’s-length basis.
14. Disclosures About Segments of an Enterprise
The Company has adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. The Company operates in one reportable segment (see Note 1 for a brief description of the Company’s business). The total revenues are attributed to geographic areas based on the location of the end-user customer.
The Company’s revenues by its customers’ geographic locations are as follows:
The Company’s long-lived assets by geographic location are as follows:
For major customers, see Note 2 (q).
15. Quarterly Statement of Operations Information (Unaudited)
The following table presents a summary of quarterly results of operations for the years ended
December 31, 2004 and 2005:
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures
As of December 31, 2005, under the supervision and with the participation of our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) was performed. Based on this evaluation, the CEO and CFO have concluded that as of December 31, 2005 our disclosure controls and procedures are effective to ensure that material information is recorded, processed, summarized and reported by our management on a timely basis in order to comply with our disclosure obligations under the Securities Exchange Act of 1934 and the SEC rules thereunder.
Inherent Limitations on Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Changes in internal controls
There were no significant changes in our internal controls or in other factors during the fourth quarter of 2005 that have materially affected, or are reasonably likely to materially affect, our internal controls.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference to the section titled “Proposal One-Election of Directors” in our definitive Proxy Statement (the “Proxy Statement”) relating to our Annual Meeting of Shareholders to be held on or about June 5, 2006, to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 with the Securities and Exchange Commission within 120 days after the end of the Company’s fiscal year to which this Annual Report on Form 10-K relates.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the section titled “Executive Compensation” included in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on or about June 5, 2006, which will be filed with the Securities and Exchange Commission within 120 days after the end of the Company’s fiscal year to which this Annual Report on Form 10-K relates.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The information required by this item is incorporated herein by reference to the section titled “Security Ownership of Certain Beneficial Owners and Management” included in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on or about June 5, 2006, which will be filed with the Securities and Exchange Commission within 120 days after the end of the Company’s fiscal year to which this Annual Report on Form 10-K relates.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to the section titled “Compensation Committee Interlocks and Insider Participation,” and “Certain Relationships and Related Transactions” included in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on or about June 5, 2006, which will be filed with the Securities and Exchange Commission within 120 days after the end of the Company’s fiscal year to which this Annual Report on Form 10-K relates.
Item 14.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents the aggregate fees for professional audit services and other services rendered by the Company’s independent auditors, Kost Forer Gabbay & Kasierer, a Member of Ernst & Young Global, in 2004 and 2005.
Audit Fees consist of fees billed for the annual audit and the quarterly reviews of the Company’s consolidated financial statements. Audit Fees also include fees billed for other audit services, which are those services that only the external auditor reasonably can provide, and include services performed in connection with documents filed with the SEC.
Tax Fees include fees billed for tax compliance services, including the preparation of tax returns and claims for refund and tax consultations.
All Other Fees include fees billed for assistance with tax examinations by Israeli income tax authorities.
The Audit Committee is required to approve in advance any audit or non-audit services performed by the Company’s independent public accountants that do not meet the pre-approval standards established by the audit committee. The pre-approval policies and procedures established by the Audit Committee require that the Audit Committee meet with the independent auditor and financial management prior to the audit to review planning and staffing, the scope of the proposed audit for the current year, the audit procedures to be utilized, and the proposed fees. During 2004 and 2005, 100% of the fees for services rendered by the Company’s independent auditors were pre-approved by the Audit Committee.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements.
Financial statements are shown in the index in Item 8 of this report.
(a)(2) Schedules.
All schedules have been omitted because either they are not required, are not applicable, or the information is otherwise set forth in the Consolidated Financial Statements and notes thereto.
(a)(3) Exhibits.
The following exhibits are filed as part of this Annual Report on Form 10-K.
Exhibit No.
Description
3.1
Memorandum of Association of Registrant (English translation) (filed as Exhibit 3.1 to the Company’s Registration Statement on Form, No. 333-41526, and incorporated herein by reference)
3.2
Amended and Restated Form of Articles of Association of Registrant (filed as Appendix B to the Company’s Proxy Statement Pursuant to Section 14(a) for the Year Ended December 31, 2000, and incorporated herein by reference)
4.1
Form of Ordinary Share Certificate (filed as Exhibit 4.1 to the Company’s Registration Statement on Form, No. 333-41526, and incorporated herein by reference)
4.2
Investor Rights Agreement (filed as Exhibit 4.2 to the Company’s Registration Statement on Form, No. 333-41526, and incorporated herein by reference)
10.1
Lease Agreement for 2 Habarzel St., Tel-Aviv, 69710, Israel (English Translation) (filed as Exhibit 10.1 to the Company’s Registration Statement on Form, No. 333-41526, and incorporated herein by reference)
10.1a
Amendment to Lease Agreement dated May 26, 2005 for 2 Habarzel St., Tel-Aviv, 69710, Israel (English Translation) (filed as Exhibit 10.1 to the Company’s Form 10-Q for the quarterly period ended June 30, 2005, and incorporated herein by reference)
10.2
Lease Agreement for 7 New England Executive Park, Burlington, Massachusetts (filed as Exhibit 10.2 to the Company’s Registration Statement on Form, No. 333-41526, and incorporated herein by reference)
10.2a
First Amendment to Lease Agreement for 7 New England Executive Park, Burlington, Massachusetts, 01803 dated July 20, 2004 (filed as Exhibit 10.1 to the Company’s Form 10-Q for the quarterly period ended June 30, 2004, and incorporated herein by reference)
10.3
Lease Agreement for 890 Hillview Court, Suite 130, Milpitas, California 95035 (filed as Exhibit 10.3 to the Company’s Registration Statement on Form, No. 333-41526, and incorporated herein by reference)
10.4
Amended and Restated Key Employee Share Incentive Plan (1996) (filed as Exhibit 99.1 to the Company’s Registration Statement on Form S-8, No. 333-67086, and incorporated herein by reference)
10.5
Amended and Restated United States Share Incentive Plan (2000) (filed as Exhibit 99.2 to the Company’s Registration Statement on Form S-8, No. 333-67086, and incorporated herein by reference)
10.6
Form of Indemnification Agreement (filed as Exhibit 10.7 to the Company’s Registration Statement on Form, No. 333-41526, and incorporated herein by reference)
10.7
Employee Share Purchase Plan (filed as Exhibit 10.1 to the Company’s Form 10-Q for the quarterly period ended September 30, 2002, and incorporated herein by reference)
10.8
Employment Agreement dated February 6, 2001 with Ilan Kinreich, President and Chief Executive Officer (filed as Exhibit 10.1 to the Company’s Form 10-Q for the quarterly period ended March 31, 2001, and incorporated herein by reference)
10.9
Employment Agreement dated September 16, 2003 with Christopher Dineen, Chief Financial Officer (filed as Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended September 30, 2003, and incorporated herein by reference)
10.10
Development, Publishing and Distribution Agreement, dated as of February 7, 2003, between Ixia and RadView Software Ltd. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 7, 2004 and incorporated herein by referenced) **
10.11
Amendment Number One to the Development, Publishing and Distribution Agreement, dated July 7, 2004, between Ixia and RadView Software Ltd. (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on July 7, 2004 and incorporated herein by referenced) **
10.12
License and Distribution Agreement between Allen Systems Group and RadView Software Ltd., dated as of December 21, 2004 (filed as Exhibit 10.12 to the Company’s Form 10-K for the year ended December 31, 2004, and incorporated herein by reference) **
10.13*
License and Distribution Agreement between OPNET Technologies Inc and RadView Software Ltd., dated as of December 7, 2005.
10.14
Loan and Security Agreement between RadView Software Inc. and Comerica Bank dated May 25, 2005 (filed as Exhibit 10.1 to the Company’s Form 10-Q for the quarterly period ended June 30, 2005, and incorporated herein by reference)
10.15
Third Party Security Agreement between RadView Software Ltd. and Comerica Bank dated May 25, 2005 (filed as Exhibit 10.1 to the Company’s Form 10-Q for the quarterly period ended June 30, 2005, and incorporated herein by reference)
10.16*
Loan Payoff and Termination Agreement between RadView Software, Inc. and Comerica Bank dated January 13, 2006.
10.17*
Bridge Loan Agreement between Fortissimo Capital Fund GP, L.P., and RadView Software Ltd., dated as of January 26, 2006.
10.18*
Share Purchase Agreement between Fortissimo Capital Fund GP, L.P. and RadView Software Ltd., dated as of April 4, 2006.
10.19*
Convertible Loan Agreement between Fortissimo Capital Fund GP, L.P. and RadView Software Ltd., dated as of April 4, 2006.
21.1
Subsidiaries of the Registrant (filed as Exhibit 21.1 to the Company’s Form 10-K for the year ended December 31, 2001, and incorporated herein by reference)
23.1*
Consent of Independent Registered Public Accounting Firm, Kost Forer Gabbay & Kasierer, a Member of Ernst & Young Global
31.1*
Certification by Chief Executive Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification by Chief Financial Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32*
Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Filed herewith
** A request for confidential treatment was filed for certain portions of the indicated document. Confidential portions have been omitted and filed separately with the Commission as required by Rule 406.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant, RadView Software Ltd., has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Burlington, in the Commonwealth of Massachusetts, on this 13th day of April, 2006.
RadView Software Ltd.
By:
/s/ ILAN KINREICH
Ilan Kinreich
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated: