In January 2005, we completed a private placement transaction in which we issued (i) 6,636,389 Series A Convertible Preferred Shares, par value NIS 0.50 each, or the Series A Preferred Shares, at a purchase price of $2.20 per share, resulting in aggregate proceeds (before expenses) of approximately $14.6 million and (ii) warrants to purchase up to 2,654,556 of our ordinary shares, pursuant to a Purchase Agreement dated as of November 29, 2004.
In January 2005, Team Software transferred 5,200,000 of our ordinary shares held thereby to Team Computers and Systems Ltd., its parent company, such that Team Computers held 5,200,020 or our ordinary shares directly and 762,530 of our ordinary shares through Team Software. In April 2005, Team Computers distributed to its shareholders 5,166,062 ordinary shares, such that immediately following the distribution, Team Computers held 719,488 of our ordinary shares, representing approximately 3.9% of our outstanding share capital. Of the 5,166,062 ordinary shares distributed by Team Computers, 3,714,435 was distributed to Team Computer’s controlling shareholders, including Arad Investments and Industrial Development Ltd., Shlomo Eisenberg and Meir Lipshes (see the table above). In December 2006, Team Computers distributed additional 453,822 of our ordinary shares to its shareholders.
The holders of our ordinary shares and the holders of our Series A Preferred Shares each have one vote per share held. As of March 13, 2008, approximately 56% of all Series A Preferred Shares issued have been converted into ordinary shares.
As of March 13, 2008, there were approximately 38 record holders of our ordinary shares, of which 19 were record holders with mailing addresses in the United States owning an aggregate of approximately 76% of our outstanding ordinary shares. The number of record holders in the United States is not representative of the number of beneficial holders nor is it representative of where such beneficial holders are resident since many of these ordinary shares were held of record by brokers or other nominees (including one U.S. nominee company, CEDE & Co., which held approximately 75% of our outstanding ordinary shares as of said date).
As of March 13, 2008, there were approximately 7 record holders of our Series A Preferred Shares, all of which were record holders with mailing addresses in the United States.
To our knowledge, we are not directly or indirectly owned or controlled by any foreign government. We are not aware of any arrangements the operation of which may at a subsequent date result in a change of our control.
Since the commencement of our operations in 1992, Team Computers, our former parent company, has from time to time paid us commissions in respect of the sale by us of certain products represented and offered by Team Computers. This relationship is reflected in an agreement between us and Team Computers dated October 1996. Team Computers generally pays us a commission at the rate of 15% of the sales price of these products, up to a maximum of 50% of the amount received by Team Computers from these sales less the cost to Team Computers. In connection with these sales, we recorded commissions of approximately $93,000 in 2005 and $502,000 in 2007. We have not recorded any commissions in 2006.
In addition, Team Computers provides us certain administrative services, including computer servicing, salary administration, automotive fleet maintenance, legal counsel and basic insurance coverage, and we reimburse Team Computers for the actual cost of such services. We recorded expenses for such services of $169,000 in 2005, $160,000 in 2006 and $164,000 in 2007. We and Team Computers have agreed to indemnify each other for liabilities resulting from the acts or omissions of our respective employees constituting intellectual property violations. The agreement is automatically renewed for successive terms of one year on each December 31, and can be terminated by either party at the end of any such term upon at least 60 days’ prior written notice.
Since 1992, we have also purchased fixed assets, such as computer hardware, from Team Computers and Omnitek-Eichut Ltd. (“Omnitek-Eichut”), a subsidiary of Team Computers. The payments made by us to Team Computers and Omnitek-Eichut in respect of such asset purchases were, in the aggregate, approximately $398,000 in 2005, $352,000 in 2006 and $437,000 in 2007. We believe that the terms of these purchases are not different in any material respect than the terms we could receive from unaffiliated third parties.
In December 2003, we issued a purchase order to Team Computers with respect to third party software, Team Computers represents in Israel, for the integration as part of our Netrac products. We have purchased licenses to be deployed as part of our solution to be sold to our customers, as part of our solution, in the initial amount of $100,000. The engagement with Team Computers was approved by our Board of Directors on December 23, 2003.
Registration Rights Agreement
Pursuant to a Registration Rights Agreement between us and Team Software, dated October 22, 1996, Team Software was entitled to registration rights with respect to our ordinary shares held by it. We agreed that, at the request of Team Software, but on no more than two occasions, we would file a registration statement under the Securities Act of 1933, as amended, for an offering of those shares as to which registration is requested. In addition, if we otherwise propose to register any of our ordinary shares under the Securities Act, we would include in such registration Team Software’s shares, subject to certain limitations. All fees and expenses incurred in connection with any registration would be borne by us, except that Team Software would pay all fees and expenses of its own counsel and all underwriting discounts and commissions relating to Team Software’s shares.
In June 2005, Team Software assigned its rights under the Registration Rights Agreement. At the request of Arad Investment & Industrial Development Ltd., one of the assignees, we filed a registration statement covering 4,408,123 ordinary shares owned by Arad and affiliates, which was effective until May 2007.
Leased Facilities
From February 1998 to July 2005, we leased our principal facilities in Petach Tikva, Israel from Team Computers pursuant to a lease agreement dated February 1, 1998. Aggregate payments under this lease, which amount includes rent, maintenance and additional related expenses, were approximately $1.4 million during 2005, $1.2 million during 2006 and $1.4 million during 2007. We extended the lease until December 20, 2007, when we relocated to new facilities of approximately 48,160 square feet of office space in Rosh Aaayin, Israel, which are leased from an unaffiliated party.
Since we became a tenant of Team Computers, Team Computers has performed various internal construction projects on our behalf, adapting our premises to our requirements. These construction projects were performed on a cost only basis. On September 2, 2002, we and Team Computers amended the lease, such that, among other things, the space leased by us was expanded by an additional 2,800 square meters, for a total of approximately 5,830 square meters. The amendment was approved by our shareholders on October 24, 2002. In order to reduce our expenses, on July 14, 2005, we entered into another written amendment to the lease agreement according to which the space leased by us was reduced by 1,258 square meters, and we agreed to pay to Team Computers a penalty of NIS 466,526 (approximately $104,000), which is equivalent to one-third of the pro rated rental fee for the returned space for the remainder of the lease term. The amendment was approved by our shareholders on December 27, 2005. This amount has been recorded as an expense in our general and administration expenses.On July 14, 2005, Team Computers sold this property but continued to lease it, and as such, we were subleasing the property from Team Computers.
Compensation to Directors
With respect to compensation including options granted to our directors, see Item 6B under the caption “Compensation to Directors.”
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C. Interests of Experts and Counsel
Not applicable.
| Item 8. | FINANCIAL INFORMATION |
A. Consolidated Statements and Other Financial Information
Financial Statements
See Item 18.
Legal Proceedings
Dispute with a Former Major Customer
In November 2002, we received a letter from a major customer notifying us of the termination of its agreement with us for the supply by us of a Manager of Managers system (“MoM”), and its intention to call the performance bond issued by a bank on our behalf under the agreement. As we believed that this customer terminated the agreement unlawfully, and in violation of the termination provisions set out in the agreement, we commenced legal proceedings against this customer. In July 2007, we and the customer entered into a settlement and release agreement under which we received from the customer £1.7 million (equates to approximately $3.45 million) (without admission of liability by either party) and both parties released their claims against each other.
Putative Shareholder Class Action
A putative shareholder class action lawsuit was filed in September 2004 against the Company, Team Software Industries Ltd. and certain of the Company’s executive officers. The lawsuit purports to be a class action filed on behalf of persons who held our shares during the period between February 6, 2002 and November 14, 2002. The complaint alleges that material misrepresentations and omissions concerning the Company’s operations and performance artificially inflated the Company’s stock price, causing damages to investors. We filed a motion to dismiss the complaint which motion was granted by an opinion dated October 6, 2006. The opinion dismissed the amended and consolidated complaint but granted plaintiff the right to file a second amended and consolidated complaint. The second amended and consolidated complaint was filed on November 9, 2006. We filed a motion to dismiss the second amended and consolidated complaint on January 10, 2007 which motion was denied with respect to us by order dated May, 2007. In December 2007, we reached a settlement agreement with the plaintiffs, which settlement is still subject to approval of the court. Based on the settlement agreement, our directors and officers insurance carrier is supposed to pay the entire settlement amount to the plaintiffs. In the event of disapproval of the agreement by court , we may be required to pay damages and other costs in excess of the amounts covered by our insurance, in which case, this action could have a materially adverse effect on our results of operations and financial condition.
Reimbursement of Withholding Tax
During the years 1998 to 2000, we granted Mr. Shlomo Eisenberg, the former chairman of our board of directors and a major shareholder of TTI, an aggregate of 105,000 options to purchase our ordinary shares. In the years 2001 to 2002, Mr. Eisenberg exercised a portion of his options and we withheld Israeli income tax from income realized by Mr. Eisenberg upon such exercise of options, as required under law.
At the end of 2005, we underwent a tax deductions audit by the Israeli Tax Authority (ITA). As a result of such audit, the ITA assessed an additional NIS 1.5 million in withholding taxes with respect to income derived by Mr. Eisenberg from the exercise of his options. Following consultation with our tax advisors, we paid the additional withholding tax amount assessed in the audit. The ITA informed us that we are required to collect such additional tax from Mr. Eisenberg otherwise such additional amount will be viewed as a benefit received by Mr. Eisenberg from us, resulting in additional withholding tax being charged to us as a result of the grant of such benefit.
We filed a NIS 1.6 million lawsuit against Mr. Eisenberg and demanded reimbursement for the additional withholding tax from Mr. Eisenberg. Based on advice from Israeli counsel, we believe that we are entitled to such reimbursement. However, we cannot assure you that the court will accept our view. The trial took place in September 2007 and we are now in a process of submitting written summations.
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Dispute with a Vendor
In April 2006, in connection with our cancellation of a purchase order from Embarcadero Technologies Inc., Embarcadero filed a lawsuit against us in the San Francisco Superior Court, alleging among other things, breach of contract and intentional misrepresentation. We believe that the cancellation of the purchase order and the return of Embarcadero’s software by us was made in accordance with applicable law and regulations. We answered and counterclaimed for negligent and intentional misrepresentation based on false representation made by Embarcadero’s salesperson. In April 2007, we reached a settlement and release agreement under which we paid Embarcadero $90,000 (without admission of liability) and both parties released their claims against each other.
Dividend Policy
We have never declared or paid any cash dividends on our ordinary shares. We currently intend to retain any future earnings to finance operations and to expand our business and, therefore, do not expect to pay any cash dividends in the foreseeable future.
B. Significant Changes
No significant change has occurred since December 31, 2007, except as otherwise disclosed in this annual report.
| Item 9. | THE OFFER AND LISTING |
A. Offer and Listing Details.
Our ordinary shares have been traded on the NASDAQ Global Market under the symbol “TTIL” since our initial public offering on December 4, 1996. The following tables set forth, for the periods indicated, the high and low closing prices of our ordinary shares, as reported by the NASDAQ.
| High
| Low
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| 2003: | | | | | | | | |
| Full Year | | | $ | 6.65 | | $ | 4.05 | |
| 2004: | | |
| Full Year | | | $ | 6.40 | | $ | 1.71 | |
| 2005: | | |
| Full Year | | | $ | 3.58 | | $ | 1.84 | |
| 2006: | | |
| Full Year | | | $ | 5.50 | | $ | 2.36 | |
| | | |
| First Quarter | | | | 4.42 | | | 3.12 | |
| Second Quarter | | | | 5.50 | | | 4.00 | |
| Third Quarter | | | | 5.28 | | | 3.31 | |
| Fourth Quarter | | | | 3.60 | | | 2.36 | |
| | | |
| 2007: | | |
| Full Year | | | $ | 3.22 | | $ | 2.20 | |
| | | |
| First Quarter | | | | 2.70 | | | 2.44 | |
| Second Quarter | | | | 3.00 | | | 2.30 | |
| Third Quarter | | | | 3.22 | | | 2.51 | |
| Fourth Quarter | | | | 2.66 | | | 2.20 | |
| | | |
| Most Recent Six Months | | |
| September 2007 | | | | 2.82 | | | 2.51 | |
| October 2007 | | | | 2.66 | | | 2.45 | |
| November 2007 | | | | 2.64 | | | 2.45 | |
| December 2007 | | | | 2.45 | | | 2.20 | |
| January 2008 | | | | 2.42 | | | 2.09 | |
| February 2008 | | | | 2.32 | | | 2.18 | |
| March 2008 (through March 28, 2008) | | | | 2.27 | | | 1.83 | |
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On March 28, 2008, the last reported closing sale price of our ordinary shares on the NASDAQ National Market was $1.93 per share.
B. Plan of Distribution
Not applicable.
C. Markets
Our ordinary shares are quoted on the NASDAQ National Market under the symbol “TTIL”.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
| Item 10. | ADDITIONAL INFORMATION |
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Our Memorandum of Association and Articles of Association were amended in October 2000, and on December 29, 2004 and our Articles of Association were further amended on December 27, 2005 and on August 10, 2006. The following is a summary description of certain provisions of our amended Memorandum of Association and Articles of Association, and certain relevant provisions of the Israel Companies Law which apply to us.
Objects and Purposes
We were first registered by the Israeli Registrar of Companies on February 5, 1990, as a private company. On November 17, 1996, we became a public company. We are registered with the Israeli Registrar of Companies under No. 52-004301-9.
Section 2 of our Memorandum of Association includes a comprehensive list of our objects and purposes of the Company. Among these objects and purposes are the following: to engage in the field of computer software as a software house in the design, development, conversion, manufacturing, marketing, enhancement, sale and manufacture of software; to organize, promote, and establish investment and financial services; to form all kinds of companies; to acquire shares in companies who have a business similar to ours; to purchase or otherwise own assets; and to fulfill any other objects any place in the world.
Directors
According to the our Articles of Association, our board of directors is to consist of not less than three and not more than seven directors, such number to be determined by a resolution of our shareholders.
Election of Directors
Directors, other than external directors, are elected by our shareholders at our annual general meeting of shareholders, or by our board of directors. In the event that any directors are appointed by our board of directors, their appointment is required to be ratified by the shareholders at the next shareholders’ meeting following the appointment. Our shareholders may remove a director from office under certain circumstances.
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There is no requirement that a director own any of our shares. Directors may appoint alternate directors in their stead. See “Item 6C – Board Practices.”
Remuneration of Directors
Directors’ remuneration is subject to shareholders approval, except for reimbursement of reasonable expenses incurred in connection with carrying out the directors’ duties.
Powers of the Board of Directors
Our board of directors may resolve to take action by a resolution approved by a vote of at least a majority of the directors present at a meeting in which a quorum is constituted. A quorum at a meeting of our board of directors requires the presence of at least a majority of the directors then in office who are lawfully entitled to participate in the meeting, but in any event, shall not be less than two directors. Our board of directors may elect one director to serve as the Chairman of the board of directors to preside at the meetings of the board of directors, and may also remove such director.
Share Capital
Our authorized share capital is NIS 18,318,195.50 divided into 30,000,000 Ordinary Shares, of a nominal value of NIS 0.50 each, and 6,636,391 Series A Convertible Preferred Shares, of a nominal value of NIS 0.50 each.
The ownership or voting of our ordinary shares by non-residents of Israel, except with respect to citizens of countries which are in a state of war with Israel, is not restricted in any way by our memorandum of association or articles of association or by the laws of the State of Israel.
Ordinary Shares
The holders of our ordinary shares have, among other rights generally available to shareholders of an Israeli company under our Articles of Association, as amended, and under the Companies Law, the following rights, preferences and restrictions:
| | — | one vote at meetings of our shareholders in respect of each ordinary share held thereby; |
| | — | the right to share pro rata in any distributions of dividends; and |
| | — | subject to the liquidation preference of holders of any shares having preferred rights upon liquidation, to share pro rata in the proceeds available for distribution upon liquidation. |
Series A Preferred Shares
The holders of our Series A Preferred Shares have, among other rights generally available to shareholders of an Israeli company under our Articles of Association, as amended, and under the Companies Law, the following rights, preferences and restrictions:
| | — | weighted-average anti-dilution protection in the event that following the closing of the private placement transaction in which the Series A Preferred Shares were issued (i.e., January 3, 2005), we issue or are deemed to have issued (subject to certain exceptions) ordinary shares at a price per share that is lower than the conversion price in effect at the time of such issuance or deemed issuance, which could result in dilution of the holdings of ordinary shareholders; |
| | — | automatic conversion into ordinary shares in the event that, at any time commencing two years from the effective date (which has not occurred as of yet) of the registration statement which we filed in connection with the aforesaid private placement, our ordinary shares trade at a closing bid price of 100% above the price per share of $2.20 in the private placement (i.e., $4.40) for a 20 consecutive trading day period, with an average daily trading volume of at least 100,000 shares per day during such period; |
| | — | one vote at meetings of our shareholders in respect of each ordinary share into which a Series A Preferred Share held of record could be converted; |
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| | — | the right to share pro rata in any distributions of dividends; and |
| | — | in the event of any voluntary or involuntary liquidation, dissolution or winding up of TTI, the holders of Series A Preferred Shares then outstanding shall be entitled to be paid out of the assets of TTI available for distribution to our shareholders, before any payment shall be made to the holders of our ordinary shares or any other class or series of stock ranking on liquidation junior to the Series A Preferred Shares by reason of their ownership thereof, an amount equal to the greater of: (i) $2.20 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares), plus any dividends declared but unpaid thereon, or (ii) such amount per share as would have been payable had each such share been converted into ordinary shares immediately prior to such liquidation, dissolution or winding up. |
It should be noted that the holders of our Series A Preferred Shares also had additional rights, which expired. For example, the Series A Preferred Shares had special voting rights which expired in April 2006, when more than 35% of all Series A Preferred Shares issued have been converted into ordinary shares.
Dividends
According to the Israeli Companies Law, a company may distribute dividends only out of its “profits,” as such term is defined in the Israeli Companies Law, as of the end of the most recent fiscal year or as accrued over a period of two years, whichever is higher. Our board of directors is authorized to declare dividends, provided that there is no reasonable concern that payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. Notwithstanding the foregoing, dividends may be paid with the approval of a court, provided that there is no reasonable concern that payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. Profits, for purposes of the Israeli Companies Law, means the greater of retained earnings or earnings accumulated during the preceding two years, after deduction of previous distributions that were not already deducted from the surpluses, as evidenced by financial statements prepared no more than six months prior to the date of distribution.
Dividends may be paid in assets or shares, debentures, or debentures stock of our company or of other companies. Dividends that remain unclaimed after seven years will be forfeited and returned to our company. Unless there are shareholders with special dividend rights, any dividend declared will be distributed among our shareholders in proportion to their respective holdings of our shares for which the dividend is being declared.
Redeemable Shares
Our Articles of Association allow us to create redeemable shares, but at the present time, we do not have any redeemable shares.
Changing the Rights Attached to Shares
We may only change the rights of shares with the approval of a majority of the holders of that class of shares present and voting at the separate general meeting called for that class of shares. An enlargement of a class of shares is not considered changing the rights of such class of shares.
Shareholders Meetings
We have two types of shareholders meetings: the annual general meetings and extraordinary general meetings. An annual general meeting must be held once in every calendar year, but not more than 15 months after the last annual general meeting. Our board of directors may convene an extraordinary general meeting whenever it sees fit, at any place within or outside of the State of Israel.
A quorum in a general meeting consists of two or more holders of ordinary shares, present in person or by proxy, who hold together at least a majority of the voting power of our company. If there is no quorum within an hour of the time set, the meeting is postponed until the following week, or any other time that the chairman of the board of directors and the shareholders present agree to. At the postponed meeting, any two shareholders will constitute a quorum. Every ordinary share entitles the holder thereof to one vote. A shareholder may only vote the shares for which all calls have been paid up on, except in separate general meetings of a particular class. A shareholder may vote in person or by proxy, or if the shareholder is a corporate body, by its representative.
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Duties of Shareholders
Under the Companies Law, the disclosure requirements which apply to an office holder also apply to a controlling shareholder of a public company. A controlling shareholder is a shareholder who has the ability to direct the activities of a company, including a shareholder that holds 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company, but excluding a shareholder whose power derives solely from his or her position as a director of the company or any other position with the company. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and the engagement of a controlling shareholder as an office holder or employee, require the approval of the audit committee, the board of directors and the shareholders of the company, in that order. The shareholder approval must be by a majority vote, provided that either:
| | — | at least one-third of the shares of shareholders who have no personal interest in the transaction and are present and voting, in person, by proxy or by written ballot, at the meeting, vote in favor; or |
| | — | the shareholders who have no personal interest in the transaction who vote against the transaction do not represent more than one percent of the voting rights in the company. |
In addition, under the Companies Law, each shareholder has a duty to act in good faith in exercising his rights and fulfilling his obligations toward the company and other shareholders and to refrain from abusing his power in the company, such as in shareholder votes. In addition, specified shareholders have a duty of fairness toward the company. These shareholders include any controlling shareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder vote and any shareholder who, pursuant to the provisions of the articles of association, has the power to appoint or to prevent the appointment of an office holder or any other power toward the company. However, the Companies Law does not define the substance of this duty of fairness.
Exculpation, Insurance and Indemnification of Office Holders
Exculpation of Office Holders
Under the Companies Law, an Israeli company may not exempt an office holder from liability with respect to a breach of his duty of loyalty, but may exempt in advance an office holder from his liability to the company, in whole or in part, with respect to a breach of his duty of care (except in connection with distributions), provided that the articles of association of the company allow it to do so. Our Articles of Association allow us to exempt our office holders to the fullest extent permitted by law.
Insurance of Office Holders
Our Articles of Association provide that, subject to the provisions of the Companies Law, we may enter into a contract for the insurance of the liability of any of our office holders with respect to an act performed in his capacity of an office holder, for:
| | — | a breach of his duty of care to us or to another person; |
| | — | a breach of his duty of loyalty to us, provided that the office holder acted in good faith and had reasonable cause to assume that his act would not prejudice our interests; or |
| | — | a financial liability imposed upon him in favor of another person. |
Indemnification of Office Holders
Our Articles of Association provide that we may indemnify an office holder with respect to an act performed in his capacity as an office holder against:
| | — | a financial liability imposed on him in favor of another person by any judgment, including a settlement or an arbitration award approved by a court; such indemnification may be approved (i) after the liability has been incurred or (ii) in advance, provided that our undertaking to indemnify is limited to events that our board of directors believes are foreseeable in light of our actual operations at the time of providing the undertaking and to a sum or criterion that our board of directors determines to be reasonable under the circumstances; |
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| | — | reasonable litigation expenses, including attorney’s fees, expended by the office holder as a result of an investigation or proceeding instituted against him by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against him and either (A) concluded without the imposition of any financial liability in lieu of criminal proceedings or (B) concluded with the imposition of a financial liability in lieu of criminal proceedings but relates to a criminal offense that does not require proof of criminal intent; and |
| | — | reasonable litigation expenses, including attorney’s fees, expended by the office holder or charged to him by a court, in proceedings we institute against him or instituted on our behalf or by another person, a criminal indictment from which he was acquitted, or a criminal indictment in which he was convicted for a criminal offense that does not require proof of criminal intent. |
Limitations on Exculpation, Insurance and Indemnification
The Companies Law provides that a company may not exculpate or indemnify an office holder nor enter into an insurance contract which would provide coverage for any monetary liability incurred as a result of any of the following:
| | — | a breach by the office holder of his duty of loyalty, unless, with respect to insurance coverage or indemnification, the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company’s interests; |
| | — | a breach by the office holder of his duty of care if the breach was done intentionally or recklessly; |
| | — | any act or omission done with the intent to derive an illegal personal benefit; or |
| | — | any fine levied against the office holder. |
In addition, under the Companies Law, indemnification of, and procurement of insurance coverage for, our office holders must be approved by our audit committee and board of directors and, if the beneficiary is a director, by our shareholders. We have obtained such approvals for the procurement of liability insurance covering our officers and directors and for the grant of indemnification letters to our officers and directors.
We have agreed to indemnify our office holders to the fullest extent permitted under Israeli law, but up to a maximum aggregate amount for all indemnified office holders equal to 25% of our total shareholders’ equity at the time of actual indemnification. We currently maintain directors and officers liability insurance for the benefit of our office holders.
Mergers and Acquisitions under Israeli Law
There are no specific provisions of our Memorandum or Articles that would have an effect of delaying, deferring or preventing a change in control of us or that would operate only with respect to a merger, acquisition or corporate restructuring involving us. However, certain provisions of the Companies Law may have such effect.
The Companies Law includes provisions that allow a merger transaction and requires that each company that is a party to a merger have the transaction approved by its board of directors and a vote of the majority of its shares. For purposes of the shareholder vote of each party, unless a court rules otherwise, the merger will not be deemed approved if shares, representing a majority of the voting power present at the shareholders meeting and which are not held by the other party to the merger (or by any person who holds 25% or more of the voting power or the right to appoint 25% or more of the directors of the other party), vote against the merger. Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be completed unless at least (1) 50 days have passed from the time that a proposal of the merger has been filed with the Israeli Registrar of Companies by each merging company and (2) 30 days have passed since the merger was approved by the shareholders of each merging company.
The Companies Law also provides that an acquisition of shares of a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% or greater shareholder of the company and there is no existing 25% or greater shareholder in the company. An acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% or greater shareholder of the company and there is no existing 45% or greater shareholder of the company. These requirements do not apply if, in general, the acquisition (1) was made in a private placement that received shareholder approval, (2) was from a 25% or greater shareholder of the company which resulted in the acquirer becoming a 25% or greater shareholder of the company, or (3) was from a 45% or greater shareholder of the company which resulted in the acquirer becoming a 45% or greater shareholder of the company. The tender offer must be extended to all shareholders, but the offeror is not required to purchase more than 5% of the company’s outstanding shares, regardless of how many shares are tendered by shareholders. The tender offer may be consummated only if (i) at least 5% of the company’s outstanding shares will be acquired by the offeror and (ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer.
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If, as a result of an acquisition of shares, the acquirer will hold more than 90% of a company’s outstanding shares, the acquisition must be made by means of a tender offer for all of the outstanding shares. If less than 5% of the outstanding shares are not tendered in the tender offer, all the shares that the acquirer offered to purchase will be transferred to it. The Companies Law provides for appraisal rights if any shareholder files a request in court within three months following the consummation of a full tender offer. If more than 5% of the outstanding shares are not tendered in the tender offer, then the acquiror may not acquire shares in the tender offer that will cause his shareholding to exceed 90% of the outstanding shares.
Finally, Israeli tax law treats stock-for-stock acquisitions between an Israeli company and a foreign company less favorably than U.S. tax laws. For example, Israeli tax law may, under certain circumstances, subject a shareholder who exchanges his ordinary shares for shares in another corporation to taxation prior to the sale of the shares received in such stock-for-stock swap.
C. Material Contracts
None.
D. Exchange Controls
There are currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our ordinary shares or the proceeds from the sale of the shares, except for the obligation of Israeli residents to file reports with the Bank of Israel regarding some transactions. However, legislation remains in effect under which currency controls can be imposed by administrative action at any time.
E. Taxation
The following is a general summary only and should not be considered as income tax advice or relied upon for tax planning purposes. Holders of our ordinary shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of ordinary shares, including, in particular, the effect of any foreign, state or local taxes.
U.S. TAX CONSIDERATIONS REGARDING SHARES ACQUIRED BY U.S. TAXPAYERS
Subject to the limitations described in the next paragraph, the following discussion describes the material United States federal income tax consequences to a U.S. holder arising from the purchase, ownership and disposition of our ordinary shares. A U.S. holder is a holder of ordinary shares that is: (1) an individual citizen or resident of the United States, (2) a corporation created or organized under the laws of the United States or any political subdivision thereof, or (3) an estate, the income of which is includable in gross income for United States federal income tax purposes regardless of its source, (4) a trust if a court within the U.S. 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 substantial decisions of the trust, or (5) a trust that has a valid election in effect to be treated as a U.S. person. This summary is for general information purposes only and does not purport to be a comprehensive description of all of the federal income tax considerations that may be relevant to a decision to purchase ordinary shares. This summary generally considers only U.S. holders that will own ordinary shares as capital assets. Except to the limited extent discussed herein, this summary does not consider the United States tax consequences to a person that is not a U.S. holder, nor does it describe the rules applicable to determine a taxpayer’s status as a U.S. holder.
This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended, current and proposed Treasury regulations promulgated thereunder, and administrative and judicial interpretations thereof, all as in effect on the date hereof and all of which are subject to change, possibly on a retroactive basis. This discussion does not address all aspects of United States federal income taxation that may be relevant to any particular shareholder based on such shareholder’s particular circumstances. In particular, this discussion does not address the tax treatment of U.S. holders who are broker-dealers or who own, directly, indirectly or constructively, 10% or more of our outstanding voting stock, U.S. holders holding the ordinary shares as a hedge or as part of a hedging, straddle or conversion transaction, and certain U.S. holders, including, without limitation, insurance companies, tax-exempt organizations, financial institutions and persons subject to the alternative minimum tax who may be subject to special rules not discussed below. Additionally, the tax treatment of persons who hold ordinary shares through a partnership or other pass-through entity is not considered, nor is the application of United States federal gift or estate taxes or any aspect of state, local or non-United States tax laws considered. Each prospective investor is advised to consult such person’s own tax advisor with respect to the specific United States federal income tax consequences to such person of purchasing, holding or disposing of the ordinary shares.
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Distributions on Ordinary Shares
We have never paid cash dividends on our ordinary shares, and we do not intend to pay cash dividends in the foreseeable future. In the event that we do pay dividends, and subject to the discussion under the heading “Passive Foreign Investment Companies” below, a U.S. holder will be required to include in gross income as ordinary income the amount of any distribution paid on ordinary shares to the extent that such distribution does not exceed our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. The amount of a distribution which exceeds our earnings and profits will be treated first as a non-taxable return of capital, reducing the U.S. holder’s tax basis for the ordinary shares to the extent thereof, and then as capital gain. Preferential tax rates for long-term capital gains are applicable for U.S. holders that are individuals, estates or trusts. Corporate holders generally will not be allowed a deduction for dividends received.
The amount of a distribution with respect to our ordinary shares will be measured by the amount of fair market value of any property distributed, and for U.S. federal income tax purposes, the amount of any Israeli taxes withheld therefrom. Cash distributions paid by us in NIS will be included in the income of U.S. holders at a U.S. dollar amount based upon the spot rate of exchange in effect on the date the dividend is includible in the income of the U.S. holder, and U.S. holders will have a tax basis in such NIS for U.S. federal income tax purposes equal to such U.S. dollar value. If the U.S. holder subsequently converts the NIS, any subsequent gain or loss in respect of such NIS arising from exchange rate fluctuations will be U.S. source ordinary income or loss.
Distributions paid by us will generally be foreign source passive income for U.S. foreign tax credit purposes. Subject to limiting rules set forth in the Internal Revenue Code, U.S. holders may elect to claim a foreign tax credit against their U.S. income tax liability for Israeli income tax withheld from distributions received in respect of ordinary shares. One such rule generally limits the amount of allowable foreign tax credits in any year to the amount of regular U.S. tax liability for the year attributable to foreign taxable income. This limitation on foreign taxes eligible for the foreign tax credit is calculated separately with respect to specific classes of income. Also, this limitation on the use of foreign tax credits generally will not apply to an electing individual U.S. holder whose creditable foreign taxes during the year do not exceed $300, or $600 for joint filers, if such individual’s gross income for the tax year from non-U.S. sources consists solely of certain passive income. A U.S. holder will be denied a foreign tax credit with respect to Israeli income tax withheld from dividends received with respect to the ordinary shares if such U.S. holder has not held the ordinary shares for at least 16 days out of the 30-day period beginning on the date that is 15 days before the ex-dividend date or to the extent that such U.S. holder is under an obligation to make certain related payments with respect to substantially similar or related property. Any day during which a U.S. holder has substantially diminished its risk of loss with respect to the ordinary shares will not count toward meeting the 16-day holding period referred to above. A U.S. holder may also be denied a foreign tax credit if the U.S. holder holds ordinary shares in an arrangement in which the U.S. holder’s reasonably expected economic profit is insubstantial compared to the foreign taxes expected to be paid or accrued. The rules relating to the determination of the foreign tax credit are complex, and U.S. holders should consult their own tax advisors to determine whether and to what extent they would be entitled to such credit. U.S. holders that do not elect to claim a foreign tax credit may instead claim a deduction for Israeli income tax withheld, provided such holders itemize their deductions.
Disposition of Shares
Except as provided under the passive foreign investment company rules, upon the sale, exchange or other disposition of ordinary shares, a U.S. holder generally will recognize capital gain or loss in an amount equal to the difference between such U.S. holder’s tax basis for the ordinary shares and the amount realized on the disposition (or its U.S. dollar equivalent, determined by reference to the spot rate of exchange on the date of disposition, if the amount realized is denominated in a foreign currency). The gain or loss realized on the sale, exchange or other disposition of ordinary shares will be long-term capital gain or loss if the U.S. holder has a holding period of more than one year at the time of disposition.
Gain realized by a U.S. holder on a sale, exchange or other disposition of ordinary shares generally will be treated as United States source income for United States foreign tax credit purposes. A loss realized by a U.S. holder on the sale, exchange or other disposition of ordinary shares is generally allocated to U.S. source income. However, these rules require the loss to be allocated to foreign source income to the extent certain dividends were received by the taxpayer within the 24-month period preceding the date on which the taxpayer recognized the loss. The deductibility of a loss realized on the sale, exchange or other disposition of ordinary shares is subject to limitations.
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Passive Foreign Investment Companies
We would be a passive foreign investment company, or PFIC, if:
| | — | 75% or more of our gross income, including the pro rata share of our gross income for any company, United States or foreign, in which we are considered to own 25% or more of the shares by value, in a taxable year is passive income; or |
| | — | at least 50% of the assets, averaged over the year and generally determined based upon value, including the pro rata share of the value of the assets of any company of which we are considered to own 25% or more of the shares by value, in a taxable year are held for the production of, or produce, passive income. |
Passive income generally consists of dividends, interest, rents, royalties, annuities, and income from certain commodities transactions and from notional principal contracts. Cash is treated as generating passive income.
If we become a PFIC, each U.S. holder who has not elected to treat us as a qualified electing fund (the QEF election), or who has not elected to mark the stock to market as discussed below, would, upon receipt of certain distributions by us and upon disposition of the ordinary shares at a gain, be liable to pay tax at the then prevailing highest tax rates on ordinary income plus interest on the tax, as if the distribution or gain had been recognized ratably over the taxpayer’s holding period for the ordinary shares. In addition, when stock of a PFIC is acquired by reason of death from a decedent that is a U.S. holder, the tax basis of the shares does not receive a step-up to fair market value as of the date of the decedent’s death, but instead would be equal to the decedent’s basis if lower, unless all gain is recognized by the decedent. Indirect investments in a PFIC may also be subject to special tax rules.
The PFIC rules above would not apply to a U.S. holder who makes a QEF election for all taxable years that such shareholder has held the ordinary shares while we are a PFIC, provided that we comply with certain reporting requirements. Instead, each U.S. holder who has made such a QEF election is required for each taxable year that we are a PFIC to include in income a pro rata share of our ordinary earnings as ordinary income and a pro rata share of our net capital gain as long-term capital gain, regardless of whether we make any distributions of such earnings or gain. In general, a QEF election is effective only if we make available certain required information. The QEF election is made on a shareholder-by-shareholder basis and generally may be revoked only with the consent of the Internal Revenue Service. Although we have no obligation to do so, we intend to notify U.S. holders if we believe we will be treated as a PFIC for any tax year in order to enable U.S. holders to consider whether to make a QEF election. In addition, we intend to comply with the applicable information reporting requirements for U.S. holders to make a QEF election. U.S. holders should consult with their own tax advisers regarding eligibility, manner and advisability of making the QEF election if we are treated as a PFIC.
A U.S. holder of PFIC stock which is publicly traded could elect to mark the stock to market annually, recognizing as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the fair market value of the PFIC stock and the U.S. holder’s adjusted tax basis in the PFIC stock. Losses would be allowed only to the extent of net mark-to-market gain previously included by the U.S. holder under the election for prior taxable years. If the mark-to-market election were made, then the rules set forth above would not apply for periods covered by the election.
We believe that we were not a PFIC in 2007and will not be a PFIC in 2008, The tests for determination PFIC status are applied annually. Our conclusions are based on an analysis of our financial position and future income and assets, about which it is difficult to make accurate predictions. Accordingly, there can be no assurance that we are not a PFIC. U.S. holders who hold ordinary shares during a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC, subject to certain exceptions for U.S. holders who made a mark-to-market or QEF election. U.S. holders are strongly urged to consult their tax advisors about the PFIC rules, including the eligibility, manner and consequences to them of making a mark-to-market or QEF election with respect to our ordinary shares in the event that we qualify as a PFIC.
Backup Withholding
A U.S. holder may be subject to backup withholding at a rate of 28% with respect to cash dividend payments and proceeds from a disposition of ordinary shares. In general, backup withholding will apply only if a U.S. holder fails to comply with certain identification procedures. Backup withholding will not apply with respect to payments made to certain exempt recipients, such as corporations and tax-exempt organizations. Backup withholding is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a U.S. holder, provided that the required information is furnished to the Internal Revenue Service.
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Non-U.S. holders of Ordinary Shares
Except as provided below, a taxpayer that is not a U.S. holder generally will not be subject to U.S. federal income or withholding tax on the payment of dividends on, and the proceeds from the disposition of, an ordinary share.
A non-U.S. holder may be subject to U.S. federal income or withholding tax on the proceeds from the disposition of an ordinary share if (1) such item is effectively connected with the conduct by the non-U.S. holder of a trade or business in the United States and, in the case of a resident of a country which has an income tax treaty with the United States, such item is attributable to a permanent establishment or, in the case of gain realized by an individual non-U.S. holder, a fixed place of business in the United States; or (2) the individual non-U.S. holder is present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met or (3) the non-U.S. holder is subject to tax pursuant to the provisions of the U.S. tax law applicable to U.S. expatriates.
In general, non-U.S. holders will not be subject to the 28% rate of backup withholding with respect to the payment of dividends on ordinary shares unless payment is made through a paying agent, or office, in the United States. After January 1, 2001, however, if payment is made in the United States or by a U.S. related person, non-U.S. holders will be subject to backup withholding. In general, if a non-U.S. holder provides a taxpayer identification number, certifies to its foreign status, or otherwise establishes an exemption, the non-U.S. holder will not be subject to backup withholding. A U.S. related person for these purposes is a person with one or more current relationships with the United States.
Non-U.S. holders generally will be subject to backup withholding at a rate of 28% on the payment of the proceeds from the disposition of ordinary shares to or through the United States office of a broker, whether domestic or foreign, unless the holder provides a taxpayer identification number, certifies to its foreign status or otherwise establishes an exemption. Non-U.S. holders will not be subject to backup withholding with respect to the payment of proceeds from the disposition of ordinary shares by a foreign office of a broker. However, non-U.S. holders will be subject to backup withholding at a rate of 28% with respect to the payment of proceeds from the disposition of ordinary shares effected outside the United States if the broker is a U.S. related person, unless the holder provides a taxpayer identification number, certifies to its foreign status or otherwise establishes an exemption.
The amount of any backup withholding from a payment to a non-U.S. holder will be allowed as a credit against such holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that the required information is furnished to the Internal Revenue Service.
ISRAELI TAXATION
The following is a summary of the current tax structure applicable to companies incorporated in Israel, with special reference to its effect on us. The following also contains a discussion of the material Israeli tax consequences to purchasers of our ordinary shares and Israeli government programs benefiting us. To the extent that the discussion is based on new tax legislation which has not been subject to judicial or administrative interpretation, we cannot assure you that the views expressed in the discussion below will be accepted by the Israel tax authorities or courts. This discussion is not intended, and should not be construed, as legal or professional tax advice, and is not exhaustive of all possible tax considerations.
This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law.
Holders of our ordinary shares should consult his or her own tax advisors as to the particular tax consequences of an investment in the ordinary shares including the effects of applicable Israeli or foreign or other tax laws and possible changes in the tax laws.
General Corporate Tax Structure
Israeli companies are generally subject to Corporate Tax on their taxable income at the rate of 29% for the 2007 tax year. Following an amendment to the Israeli Income Tax Ordinance [New Version], 1961 (the “Tax Ordinance”), which came into effect on January 1, 2006, the corporate tax rate is scheduled to decrease as follows: 27% for the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010 tax year and thereafter. Israeli companies are generally subject to Capital Gains Tax at a rate of 25% for capital gains, other than gains deriving from the sale of listed securities, derived after January 1, 2003. However, the effective tax rate payable by a company that derives income from an approved enterprise (as defined below) may be considerably less, as further discussed below.
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Tax Benefits and Grants for Research and Development
Israeli tax law allows, under certain conditions, a tax deduction in the year incurred for expenditures, including depreciation on capital expenditures, in scientific research and development projects, if the expenditures are approved by the relevant Israeli government ministry, determined by the field of research, and the research and development is for the promotion of the enterprise and is carried out by, or on behalf of, the company seeking such deduction. However, the amount of such deductible expenses must be reduced by the sum of any funds received through government grants for the finance of such scientific research and development projects. Expenditures not so approved or funded, are deductible over a three-year period.
Law for the Encouragement of Capital Investments, 1959
Our facilities currently enjoy approved enterprise status under the Investments Law. See discussion below regarding an amendment to the Investments Law that came into effect in 2005.
The Investments Law provided (prior to its amendment in 2005) that a proposed capital investment in eligible facilities may, upon application to the Investment Center of the Ministry of Industry and Trade of Israel, be designated as an approved enterprise. Each certificate of approval for an approved enterprise relates to a specific investment program delineated both by its financial scope, including its capital sources, and by its physical characteristics, for example, the equipment to be purchased and utilized pursuant to the program.
The tax benefits derived from any such certificate of approval relate only to taxable income attributable to the specific approved enterprise. Tax benefits under the Investments Law shall also apply to income generated by a company from the grant of a usage right with respect to know-how developed by the approved enterprise, income generated from royalties, and income derived from a service which is auxiliary to such usage right or royalties, provided that such income is generated within the approved enterprise’s ordinary course of business. The tax benefits under the Investment Law are not available with respect to income derived from products manufactured outside of Israel.
Taxable income of a company derived from an approved enterprise is subject to corporate tax at the rate of 25%, rather than regular corporate tax rates as stated above, for the benefit period, a period of seven years commencing with the year in which the approved enterprise first generated taxable income, limited to twelve years from the year of commencement of production or 14 years from the beginning of the year of approval, whichever is earlier, and, under certain circumstances, as further detailed below, extending to a maximum of ten years from the commencement of the benefit period. In the event that a company is operating under more than one approval or that its capital investments are only partly approved, its effective company tax rate is the result of a weighted combination of the various applicable rates.
A company owning an approved enterprise may elect to forego certain government grants extended to approved enterprises in return for an alternative package of tax benefits, which we have done. Under the alternative package, a company’s undistributed income derived from an approved enterprise will be exempt from company tax for a period of between two and ten years from the first year of taxable income, depending on the geographic location of the approved enterprise within Israel, and such company will be eligible for a reduced tax rate under the Investments Law for the remainder of the benefits period.
Most of our production facilities in Israel have been granted “approved enterprise” status under five separate investment programs and, as such, are entitled to tax benefits, under the Investments Law. According to the law, we have elected the “alternative benefits track”, and have waived certain government grants in return for a tax exemption. Upon our initial public offering in 1996, we became a “foreign investment company” for purposes of the Investments Law. Accordingly, we are entitled to a ten year period of benefits. Income derived from our investment programs is tax-exempt for the first two to four years and is entitled to a reduced tax rate of 10% to 25%, during the remaining benefit period of six to eight years (subject to the percentage of foreign ownership in each tax year). The investments under our approved investments programs were accomplished during 1994-2005. As of December 31, 2007 the benefit periods of the first and the second programs expired. The benefit periods of the third and forth programs will expire in 2009 and 2011, respectively. The benefit period of the fifth program has not yet commenced and will end in 2013. For the years which entitled to a reduced tax rate, the period of tax benefits detailed above is subject to limits of 12 years from the year of commencement of production, or 14 years from the date of granting the approval, whichever is earlier.
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A company that has elected the alternative benefits and that subsequently pays a dividend out of income derived from the approved enterprises during the tax exemption period will be subject to company tax in respect of the grossed-up equivalent of the amount distributed, including the recipient’s tax thereon, applying the rate which would have been applicable had the company not elected the alternative benefits. This is generally 10% to 25%, depending upon the extent to which non-Israeli shareholders hold our shares. The dividend recipient is taxed at the reduced rate of 15% applicable to dividends from approved enterprises, if the dividend is distributed during the tax exemption period or within a specified period thereafter. This tax must be withheld by us at the source, regardless of whether the dividend is converted into foreign currency. Subject to certain provisions concerning income, under the alternative benefits, all dividends are considered to be attributable to the entire company and their effective tax rate is the result of a weighted combination of the various applicable tax rates. However, we are not obligated to distribute exempt retained profits under the alternative benefits, and we may generally decide from which annual profits to declare dividends.
The Investments Law also provides that an approved enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved investment program. We have not utilized this benefit.
Grants and other incentives received by a company in accordance with the Investments Law remain subject to final ratification by the Investment Center of the Israeli Ministry of Industry and Trade, such ratification being conditional upon fulfillment of all terms of the approved program.
If the retained tax-exempt income were distributed, it would be taxed at the corporate tax rate applicable to such profits as if we had not chosen the alternative tax benefits (rate of 10% – 25% based on the percentage of foreign ownership) on the gross amount distributed. In addition, these dividends will be subject to a 15% withholding tax. Accordingly, no deferred income taxes have been provided on income attributable to the Company’s Approved Enterprise programs as the undistributed tax exempt income is essentially permanent in duration.
The benefits available to an approved enterprise are conditional upon the fulfillment of certain conditions stipulated in the Investments Law and its regulations and the criteria set forth in the specific certificate of approval, as described above. In the event that these conditions are violated, in whole or in part, we would be required to refund the amount of tax benefits, with the addition of the Israel consumer price index linkage adjustment and interest. We believe our approved enterprise operates in substantial compliance with all such conditions and criteria.
Amendment to the Investments Law
On April 1, 2005, an amendment to the Investments Law came into force. Pursuant to the amendment, a company’s facility will be granted the status of “Approved Enterprise” (which is referred to as a Benefited Enterprise following such amendment) only if it is proven to be an industrial facility (as defined in the Investments Law) that contributes to the economic independence of the Israeli economy and is a competitive facility that contributes to the Israeli gross domestic product. The amendment provides that the Israeli Tax Authority and not the Investment Center is responsible for a Benefited Enterprise under the alternative package of benefits. A company wishing to receive the tax benefits afforded to a Benefited Enterprise is required to select the tax year from which the period of benefits under the Investment Law are to commence by notifying the Israeli Tax Authority within 12 months of the end of that year. In order to be recognized as owning a Benefited Enterprise, a company is required to meet a number of conditions set forth in the amendment, including making a minimum investment in manufacturing assets for the Benefited Enterprise and having completed a cooling-off period of no less than two to four years from the company’s previous year of commencement of benefits under the Investments Law.
Pursuant to the amendment, a company with a Benefited Enterprise is entitled, in each tax year, to accelerated depreciation for the manufacturing assets used by the Benefited Enterprise and to certain tax benefits, provided that no more than 12 to 14 years have passed since the beginning of the year of commencement of benefits under the Investments Law. The tax benefits granted to a Benefited Factory are determined according to one of the following new tax routes that are relevant to us:
| | — | Similar to the currently available alternative route, exemption from corporate tax on undistributed income for a period of two to ten years, depending on the geographic location of the Benefited Enterprise within Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in each year. Benefits may be granted for a term of from seven to ten years, depending on the level of foreign investment in the Company. If the Company pays a dividend out of income derived from the Benefited Enterprise during the tax exemption period, such income will be subject to corporate tax at the applicable rate (10%-25%). The Company is required to withhold tax at the source at a rate of 15% from any dividends distributed from income derived from the Benefited Enterprise. |
| | — | A special tax route enabling companies owning facilities in certain geographical locations in Israel to pay corporate tax at the rate of 11.5% on income of the Benefited Enterprise. The benefits period is ten years. Upon payment of dividends, the Company is required to withhold tax at source at a rate of 15% for Israeli residents and at a rate of 4% for foreign residents. |
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Generally, a company that is Abundant in Foreign Investment (as defined in the Investments Law) is entitled to an extension of the benefits period by an additional five years, depending on the rate of its income that is derived in foreign currency.
The amendment changes the definition of “foreign investment” in the Investments Law so that instead of an investment of foreign currency in the company, the definition now requires a minimal investment of NIS 5 million by foreign investors. Furthermore, such definition now also includes the purchase of shares of a company from another shareholder, provided that the company’s outstanding and paid-up share capital exceeds NIS 5 million. Such changes to the aforementioned definition are in effect retroactively from 2003.
The amendment applies to Benefited Enterprise programs in which the year of commencement of benefits under the Investments Law is 2004 or later, unless such programs received “Approved Enterprise” approval from the Investment Center on or prior to December 31, 2004 in which case the provisions of the amendment do not apply.
Taxation under Inflationary Conditions
The Income Tax Law (Inflationary Adjustments), 1985, or the Inflationary Adjustments Law, is intended to adjust the corporate tax system to the rate of inflation, i.e., to tax profits on an inflation-adjusted basis.
Under the Inflationary Adjustments Law, results for tax purposes are measured in historical cost terms and are subject to a series of adjustments based on movements in the Israel consumer price index. We are taxed under this law. The discrepancy between the change in (1) the Israel consumer price index and (2) the exchange rate of the NIS to the dollar, each year and cumulatively, may result in a significant difference between taxable income and the income denominated in dollars as reflected in our financial statements. In addition, subject to certain limitations, depreciation of fixed assets and losses carried forward are adjusted for inflation on the basis of changes in the Israel consumer price index.
The salient features of the Inflationary Adjustments Law are generally as follows:
| | (a) | A special tax adjustment for the preservation of equity whereby certain corporate assets are classified broadly into fixed (inflation immune) assets and non-fixed assets. Where a company’s equity, as defined in such law, exceeds the depreciated cost of fixed assets, a deduction from taxable income that takes into account the effect of the applicable annual rate of inflation on such excess is allowed, up to a ceiling of 70% of taxable income in any single tax year, with the unused portion permitted to be carried forward, linked to the increase in the consumer price index. If the depreciated cost of fixed assets exceeds a company’s equity, then such excess multiplied by the applicable annual rate of inflation is added to taxable income. |
| | (b) | Subject to certain limitation set forth in the Inflationary Adjustments Law, depreciation deductions on fixed assets and losses carried forward are adjusted for inflation based on the increase in the Israel consumer price index. |
On February 26 2008 the Israeli parliament approved an amendment to the Inflationary Adjustments Law which limits the applicability of such law so that it will cease to apply after the 2007 tax year.
Israeli Transfer Pricing Regulations
On November 29, 2006, Income Tax Regulations (Determination of Market Terms), 2006, promulgated under Section 85A of the Tax Ordinance, came into force (the “TP Regs”). Section 85A of the Tax Ordinance and the TP Regs generally require that all cross-border transactions carried out between related parties will be conducted on an arm’s length principle basis and will be taxed accordingly.
Law for the Encouragement of Industry (Taxes), 1969
We believe that we currently qualify as an Industrial Company within the definition of the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law. According to the Industry Encouragement Law, an Industrial Company is a company resident in Israel, at least 90% of the income of which in any tax year, determined in NIS, exclusive of income from defense loans, capital gains, interest and dividends, is derived from an Industrial Enterprise owned by it. An Industrial Enterprise is defined as an enterprise owned by an Industrial Company and whose major activity in a given tax year is industrial production activity.
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The following corporate tax benefits are available to Industrial Companies, including, among others:
| | (a) | Deduction of purchases of know-how and patents over an eight-year period for tax purposes. |
| | (b) | Deduction over a three-year period of expenses involved with the issuance and listing of shares on a recognized stock market. |
| | (c) | An election under certain conditions to file a consolidated tax return with additional related Israeli Industrial Companies that satisfy conditions set forth in the law. |
| | (d) | Accelerated depreciation rates on equipment and buildings. |
Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. No assurance can be given that we will continue to qualify as an Industrial Company or that the benefits described above will be available in the future.
Capital Gains Tax
Israeli law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located in Israel, including shares in Israeli companies by non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’s country of residence provides otherwise. The law distinguishes between the real gain and the inflationary surplus. The real gain is the excess of the total capital gain over the inflationary surplus, computed on the basis of the increase in the Israel consumer price index between the date of purchase and the date of sale.
As of January 1, 2006, generally, the Israeli tax rate applicable to capital gains derived from the sale of shares, whether listed on a stock market or not, is 20% for Israeli individuals, unless such shareholder claims a deduction for financing expenses in connection with such shares, in which case the gain will generally be taxed at a rate of 25%. Additionally, if such shareholder is considered a “significant shareholder” at any time during the 12-month period preceding such sale (i.e. such shareholder holds directly or indirectly, including jointly with others, at least 10% of any means of control in the company), the tax rate will be 25%. Israeli companies are subject to the corporate tax rate on capital gains derived from the sale of listed shares, unless such companies were not subject to the Adjustments Law (or certain regulations) as of August 10, 2005, in which case the applicable tax rate is 25%. However, the foregoing tax rates will not apply to (i) dealers in securities, and (ii) shareholders who acquired their shares prior to an initial public offering (that may be subject to a different tax arrangement).
The tax basis of our shares acquired by individuals prior to January 1, 2003 generally will be determined in accordance with the average closing share price in the three trading days preceding January 1, 2003. However, a request may be made to the tax authorities to consider the actual adjusted cost of the shares as the tax basis if it is higher than such average price. Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on a recognized stock exchange or regulated market outside of Israel, provided that such capital gains are not derived from a permanent establishment in Israel, that such shareholders are not subject to the Inflationary Adjustments Law and that such shareholders did not acquire their shares prior to the issuer’s initial public offering. However, non-Israeli corporations will not be entitled to such exemption, if Israeli residents (i) have a controlling interest of 25% or more in such non-Israeli corporation, or (ii) are the beneficiaries or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
In some instances where our shareholders may be subject to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at the source.
Under the U.S.-Israel Tax Treaty, the sale, exchange or disposition of shares by a person who holds the ordinary shares as a capital asset and who qualifies as a resident of the United States within the meaning of the U.S.- Israel Tax Treaty and who is entitled to claim the benefits afforded to such resident by the U.S.-Israel Tax Treaty will generally not be subject to the Israeli capital gains tax unless such U.S. resident holds, directly or indirectly, shares representing 10% or more of the voting power of our company during any part of the 12-month period preceding such sale, exchange or disposition. A sale, exchange or disposition of shares by a U.S. resident who holds, directly or indirectly, shares representing 10% or more of the voting power of our company at any time during such preceding 12-month period would be subject to such Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, such U.S. resident would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate to state or local taxes.
69
Tax on Dividends
Non-residents of Israel are subject to income tax on income accrued or derived from sources in Israel. On distributions of dividends other than bonus shares or stock dividends, income tax is withheld at the source at the rates: (i) 20%, or 25% for a shareholder that is considered a significant shareholder at any time during the 12-month period preceding such distribution; of (ii) 15% for dividends generated by an Approved or Benefited Enterprise (or Benefited Enterprise); unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence.
Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of shares who is a resident of the United States is 25% or 12.5% if such U.S. resident is a corporation which holds, directly or indirectly, shares representing at least 10% or more of our issued voting power during the part of the tax year which precedes the date of payment of the dividend and during the whole of its prior tax year (and additional conditions under the U.S.-Israel Tax Treaty are met). However, under the U.S.-Israel Tax Treaty dividends generated by an Approved or Benefited Enterprise are taxed at the rate of 15%.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign private issuers and fulfill the obligations with respect to such requirements by filing reports with the Securities and Exchange Commission. You may read and copy any document we file with the Securities and Exchange Commission without charge at the Securities and Exchange Commission’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Copies of such material may be obtained by mail from the Public Reference Branch of the Securities and Exchange Commission at such address, at prescribed rates. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the public reference room.
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the Securities and Exchange Commission as frequently or as promptly as United States companies whose securities are registered under the Exchange Act.
Notwithstanding the foregoing, we furnish reports with the SEC on Form 6-K containing unaudited financial information for the first three quarters of each fiscal year and we solicit proxies and furnish proxy statements for all meetings of shareholders pursuant to NASDAQ Marketplace Rule 4350(g), a copy of which proxy statement is furnished promptly thereafter with the SEC under the cover of a Current Report on Form 6-K. However, in accordance with NASDAQ Marketplace Rule 4350(a)(1), we have elected not to comply with the NASDAQ requirement to distribute an annual report to our shareholders prior to our annual meeting of shareholders. The basis for the exemption is that the generally accepted business practice in Israel, where we are incorporated, is not to distribute an annual report to shareholders. We post our Annual Report on Form 20-F on our web site (www.tti-telecom.com) as soon as practicable following the filing of the Annual Report on Form 20-F with the SEC.
I. Subsidiary Information
Not applicable.
| Item 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Since the majority of our revenues are paid in or linked to U.S. dollars, we believe that inflation and fluctuations in the NIS/U.S. dollar exchange rate have no material effect on our revenues. Inflation in Israel and U.S. dollar exchange rate fluctuations, however, have some influence on our expenses and, as a result, on our net income. The cost of our Israel operations, as expressed in U.S. dollars, is influenced by the extent to which any increase in the rate of inflation in Israel is not offset, or is offset on a lagging basis, by a devaluation of the NIS in relation to the U.S. dollar.
70
A significant portion of our expenditures are employee compensation-related. Salaries are paid in NIS. Annual salary increases during the first quarter of the year and are adjusted for changes in the Israel consumer price index through annual salary increases during the first quarter of the year and bi-annual partial adjustments. This increases salary expenses in United States dollar terms. The devaluation of the NIS against the U.S. dollar decreases employee compensation expenditures as expressed in dollars proportionally. Some of our other NIS-based expenses are either currently adjusted to U.S. dollars or are adjusted to the Israel consumer price index.
Our results of operations are adversely affected by increases in the rate of inflation in Israel when such increases are not offset, or are offset on a lagging basis, by a devaluation of the NIS against the U.S. dollar. A devaluation of the NIS in relation to the U.S. dollar will have the effect of decreasing the U.S. dollar value of our assets, mostly current assets, to the extent of the underlying value of which is NIS-based. Such a devaluation would also have the effect of reducing the dollar amount of any of our liabilities which are payable in NIS, unless such payables are linked to the dollar.
We do not presently engage in any hedging or other transactions intended to manage risks relating to foreign currency exchange rate or interest rate fluctuations. However, we may in the future undertake hedging transactions if management determines that it is necessary to offset such risks.
| Item 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
Not applicable.
PART II
| Item 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
None.
| Item 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
Modification of Rights
Not applicable.
Use of Proceeds
Not applicable.
| Item 15. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2007. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective to reasonably assure that information required to be included in our periodic reports to the Securities and Exchange Commission is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s report on internal control over financial reporting
Our management including our chief executive officer and our principal financial officer is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
71
| | — | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, |
| | — | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and |
| | — | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Our management recognizes that there are inherent limitations in the effectiveness of any system of internal control over financial reporting, including the possibility of human error and the circumvention or override of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation, and may not prevent or detect all misstatements. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.
Our management including our chief executive officer and our principal financial officer assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. In conducting its assessment of internal control over financial reporting, management based its evaluation on the framework in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our management including our chief executive officer and our principal financial officer has concluded based on its assessment, that our internal control over financial reporting was effective as of December 31, 2007 based on these criteria.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report.
There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| Item 16A. | AUDIT COMMITTEE FINANCIAL EXPERT |
Our board of directors has determined that Meir Dvir, one of the members of our audit committee, qualifies as a financial expert and is independent under the applicable regulations.
In February 2004, we adopted a Code of Ethics and Business Conduct that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions, a copy of which is filed as Exhibit 11 to this annual report.
| Item 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Fees Paid to Independent Public Accountants
In the annual meeting held on December 20, 2007 our shareholders re-appointed Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, or Ernst & Young, to serve as our independent registered accounting firm until the next annual meeting. The following table sets forth, for each of the years indicated, the fees paid to Ernst & Young and the percentage of each of the fees out of the total amount paid to them.
72
| | Year Ended December 31,
|
|---|
| | 2006
| 2007
|
|---|
| Services Rendered
| Fees
| Percentages
| Fees
| Percentages
|
|---|
| | | | | |
|---|
| | | | | |
|---|
| Audit (1) | | | $ | 130,000 | | | 74 | % | $ | 135,000 | | | 63 | % |
| Audit-related (2) | | | $ | 22,000 | | | 12 | % | $ | 20,000 | | | 9 | % |
| Tax (3) | | | $ | 25,000 | | | 14 | % | $ | 45,000 | | | 21 | % |
| Other (4) | | | | - | | | - | | $ | 15,000 | | | 7 | % |
| Total | | | $ | 177,000 | | | 100 | % | $ | 215,000 | | | 100 | % |
| (1) | Audit fees consist of services that would normally be provided in connection with statutory and regulatory filings or engagements, including services that generally only the independent accountant can reasonably provide. This included audit of our annual financial statements, review of our quarterly financial results, consultations on various accounting issues and performance of local statutory audits. |
| (2) | Audit-related fees relate to assurance and associated services that are performed by the independent accountant, including: attest services that are not required by statute or regulation; accounting consultation; and consultation concerning financial accounting and reporting standards. In 2006 and 2007, most of these fees were for services relating to the Section 404 of the Sarbanes-Oxley Act of 2002 compliance process we have begun. |
| (3) | Tax fees relate to services performed by the tax division for tax compliance, planning and advice. |
| (4) | Other fees relate to the Teleses transaction. |
Pre-approval Policies and Procedures
Our audit committee approves each audit and non-audit service to be performed by our independent accountant before the accountant is engaged.
| Item 16D. | EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES |
Not applicable.
| Item 16E. | PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
None.
| Item 17. | FINANCIAL STATEMENTS |
We have responded to Item 18 in lieu of this item.
| Item 18. | FINANCIAL STATEMENTS |
The Financial Statements required by this item are found at the end of this annual report, beginning on page F-1.
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|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Consolidated Financial Statements. | |
| Index to Financial Statements | F-1 |
| Report of Independent Registered Accounting Firm | F-2 |
| Consolidated Balance Sheets | F-3 |
| Consolidated Statements of Operations | F-5 |
| Statements of Changes in Shareholders' Equity | F-6 |
| Consolidated Statements of Cash Flows | F-7 |
| Notes to Consolidated Financial Statements | F-8 |
The exhibits list required by this Item is incorporated by reference to the Exhibit Index which appears before the first exhibit filed with this document.
73
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Petach Tikva, Israel on the 31 day of March, 2008.
| | TTI TEAM TELECOM INTERNATIONAL LTD.
By: /s/ Meir Lipshes
——————————————
Meir Lipshes
Acting Chief Executive Officer |
74
EXHIBIT INDEX
| 1.1 | Second Amended and Restated Articles of Association of Registrant, as amended through December 27, 2005 (1) and Certificate of Amendment, dated August 10, 2006 (2) |
| 1.2 | Memorandum of Association of Registrant, as amended through December 29, 2004. (3) |
| 4.6 | The Registrant's Share Option Plan, dated November 15, 1996. (4) |
| 4.8 | 2004 Employee Share Option Plan, adopted December 29, 2004. (3) |
| 4.9 | Agreement, dated October 9, 1996, between the Registrant and Team. (5) |
| 4.10 | Registration Rights Agreement, dated October 22, 1996, between the Registrant and TSIL. (5) |
| 4.12 | Lease, dated February 1, 1998, between the Registrant and Team. (6) |
| 4.13 | Amendment to Lease Agreement dated September 2, 2002. (7) |
| 4.14 | Second Amendment to Lease Agreement dated July 14, 2005. (8) |
| 10.11 | Consent of Independent Auditors of the Registrant |
| 11 | Code of Ethics and Business Conduct. (9) |
| 12.1 | Certification of the Principal Executive Officer pursuant toss.302 of the Sarbanes-Oxley Act |
| 12.2 | Certification of the Principal Financial Officer pursuant toss.302 of the Sarbanes-Oxley Act |
| 13.1 | Certification of the Principal Executive Officer pursuant toss.906 of the Sarbanes-Oxley Act |
| 13.2 | Certification of the Principal Financial Officer pursuant toss.906 of the Sarbanes-Oxley Act |
| (1) | Previously filed on TTI's Form 20-F for the year ended December 31, 2005, and incorporated herein by reference. |
| (2) | Previously filed on TTI's Form 20-F for the year ended December 31, 2006, and incorporated herein by reference. |
| (3) | Previously filed on TTI's Form 20-F for the year ended December 31, 2004, and incorporated herein by reference. |
| (4) | English summary from Hebrew original was previously filed as an exhibit to TTI's Registration Statement on Form F-1 (Registration No. 333-5902), and incorporated herein by reference. |
| (5) | Previously filed as an exhibit to TTI's Registration Statement on Form F-1 (Registration No. 333-5902), and incorporated herein by reference. |
| (6) | English summary from Hebrew original was previously filed as an exhibit to TTI's annual report on Form 20-F for the fiscal year ended December 31, 1998, and incorporated herein by reference. |
| (7) | English translation from Hebrew original previously filed as an exhibit to TTI's annual report on Form 20-F for the fiscal year ended December 31, 2002, and incorporated herein by reference. |
| (8) | Previously filed on TTI's Form 20-F for the year ended December 31, 2005, and incorporated herein by reference. |
| (9) | Previously filed on TTI's Form 20-F for the year ended December 31, 2003, and incorporated herein by reference. |
75
TTI TEAM TELECOM INTERNATIONAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2007
IN U.S. DOLLARS
INDEX
- - - - - - - - - - - -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
TTI TEAM TELECOM INTERNATIONAL LTD.
We have audited the accompanying consolidated balance sheets of TTI Team Telecom International Ltd. (“the Company”) and its subsidiaries as of December 31, 2006 and 2007 and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. 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) and in accordance with generally accepted auditing standards in Israel, including those prescribed by the Auditors’ Regulations (Auditor’s Mode of Performance), 1973. 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 include 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 the Company and its subsidiaries at December 31, 2006 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles which differ in certain aspects from Israel generally accepted accounting principles, as described in Note 13 to the consolidated financial statements.
As discussed in Note 2 to the consolidated financial statements, the company adopted the provision of Statement of Financial Accounting Standard No. 123(R), “Share-Based Payment”, effective January 1, 2006.
| |
Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER |
March 31, 2008 | A Member of Ernst & Young Global |
F-2
| | | | | | | |
| | December 31, | |
| |
| |
| | 2006 | | 2007 | |
| |
| |
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| | | | | | | |
ASSETS | | | | | | | |
| | | | | | | |
CURRENT ASSETS: | | | | | | | |
Cash and cash equivalents | | $ | 31,410 | | $ | 33,408 | |
Short-term bank deposits | | | 984 | | | 98 | |
Trade receivables (net of allowance for doubtful accounts - $6,865 in 2006 and 0 in 2007) (Note 1b) | | | 4,664 | | | 8,185 | |
Unbilled receivables | | | 2,834 | | | 3,155 | |
Related parties (Note 10) | | | 373 | | | 409 | |
Other accounts receivable and prepaid expenses (Note 3) | | | 2,265 | | | 3,192 | |
| |
|
| |
|
| |
| | | | | | | |
Total current assets | | | 42,530 | | | 48,447 | |
| |
|
| |
|
| |
| | | | | | | |
LONG-TERM INVESTMENTS AND RECEIVABLES: | | | | | | | |
Long-term bank deposits | | | 97 | | | - | |
Investment in a company | | | 165 | | | 165 | |
Severance pay fund | | | 3,627 | | | 3,937 | |
Long-term trade and unbilled receivables (Note 1b) | | | 3,324 | | | - | |
| |
|
| |
|
| |
| | | | | | | |
Total long-term investments and receivables | | | 7,213 | | | 4,102 | |
| |
|
| |
|
| |
| | | | | | | |
PROPERTY AND EQUIPMENT, NET (Note 4) | | | 3,842 | | | 6,045 | |
| |
|
| |
|
| |
| | | | | | | |
Total assets | | $ | 53,585 | | $ | 58,594 | |
| |
|
| |
|
| |
The accompanying notes are an integral part of the consolidated financial statements.
F-3
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
CONSOLIDATED BALANCE SHEETS |
|
U.S. dollars in thousands, except share and per share data |
| | | | | | | |
| | December 31, | |
| | 2006 | | 2007 | |
| | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
| | | | | | | |
CURRENT LIABILITIES: | | | | | | | |
Trade payables | | $ | 2,508 | | $ | 2,364 | |
Deferred revenues | | | 8,333 | | | 4,666 | |
Related party (Note 10) | | | 40 | | | 3,932 | |
Other accounts payable and accrued expenses (Note 5) | | | 7,187 | | | 6,966 | |
| |
|
| |
|
| |
| | | | | | | |
Total current liabilities | | | 18,068 | | | 17,928 | |
| | | | | | | |
ACCRUED SEVERANCE PAY | | | 5,022 | | | 5,651 | |
| |
|
| |
|
| |
| | | | | | | |
LONG TERM LIABILITIES (Note 6a) | | | - | | | 1,579 | |
| |
|
| |
|
| |
| | | | | | | |
COMMITMENTS AND CONTINGENT LIABILITIES (Note 6) | | | | | | | |
| | | | | | | |
SHAREHOLDERS’ EQUITY (Note 8): | | | | | | | |
Share capital: | | | | | | | |
Ordinary shares of NIS 0.5 par value - | | | | | | | |
Authorized: 30,000,000 shares at December 31, 2006 and 2007; Issued and outstanding: 16,000,431 and 16,003,158 shares at December 31, 2006 and 2007, respectively | | | 2,260 | | | 2,261 | |
Preferred A shares of NIS 0.5 par value – | | | | | | | |
Authorized: 6,636,391 at December 31, 2006 and 2007; Issued and outstanding: 2,936,391 shares at December 31, 2006 and 2007: Aggregate liquidation preference of $ 6,460 at December 31, 2007 | | | 334 | | | 334 | |
Additional paid-in capital | | | 74,919 | | | 75,038 | |
Accumulated deficit | | | (47,018 | ) | | (44,197 | ) |
| |
|
| |
|
| |
| | | | | | | |
Total shareholders’ equity | | | 30,495 | | | 33,436 | |
| |
|
| |
|
| |
| | | | | | | |
Total liabilities and shareholders’ equity | | $ | 53,585 | | $ | 58,594 | |
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|
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The accompanying notes are an integral part of the consolidated financial statements.
F-4
| | | | | | | | | | |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
| |
| |
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| |
|
Revenues (Note 11): | | | | | | | | | | |
Products | | $ | 25,317 | | $ | 27,554 | | $ | 25,722 | |
Services | | | 17,909 | | | 18,560 | | | 20,195 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Total revenues | | | 43,226 | | | 46,114 | | | 45,917 | |
| |
|
| |
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| |
|
| |
| | | | | | | | | | |
Cost of revenues: | | | | | | | | | | |
Products | | | 13,015 | | | 14,783 | | | 12,504 | |
Services | | | 9,203 | | | 9,571 | | | 8,545 | |
Impairment of capitalized software development costs | | | 177 | | | - | | | - | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Total cost of revenues | | | 22,395 | | | 24,354 | | | 21,049 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Gross profit | | | 20,831 | | | 21,760 | | | 24,868 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Operating expenses: | | | | | | | | | | |
Research and development, net (Note 12a) | | | 9,136 | | | 9,578 | | | 9,433 | |
Selling and marketing | | | 11,977 | | | 10,214 | | | 7,857 | |
General and administrative | | | 6,325 | | | 6,679 | | | 6,952 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Total operating expenses | | | 27,438 | | | 26,471 | | | 24,242 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Operating income (loss) | | | (6,607 | ) | | (4,711 | ) | | 626 | |
Other income (Note 12c) | | | - | | | 150 | | | 33 | |
Financial income, net (Note 12b) | | | 153 | | | 662 | | | 2,150 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Income (loss) before income taxes | | | (6,454 | ) | | (3,899 | ) | | 2,809 | |
Income taxes (Note 7) | | | 624 | | | (96 | ) | | (87 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net income (loss) | | | (7,078 | ) | | (3,803 | ) | | 2,896 | |
| | | | | | | | | | |
Deemed dividend associated with beneficial conversion feature of Preferred shares | | | (1,981 | ) | | - | | | - | |
Loss attributable to preferred shareholders | | | - | | | - | | | (449 | ) |
| |
|
| |
|
| |
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| |
| | | | | | | | | | |
Net income (loss) attributable to Ordinary shares | | $ | (9,059 | ) | $ | (3,803 | ) | $ | 2,447 | |
| |
|
| |
|
| |
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| |
| | | | | | | | | | |
Income (loss) per share (Note 9): | | | | | | | | | | |
Basic net income (loss) per share attributed to Ordinary shareholders | | $ | (0.72 | ) | $ | (0.20 | ) | $ | 0.15 | |
| |
|
| |
|
| |
|
| |
Diluted net income (loss) per share attributed to Ordinary shareholders | | $ | (0.72 | ) | $ | (0.20 | ) | $ | 0.15 | |
| |
|
| |
|
| |
|
| |
Weighted average number of shares used for computing basic net income (loss) per share attributed to Ordinary shareholders | | | 12,577,392 | | | 15,075,881 | | | 16,001,148 | |
| |
|
| |
|
| |
|
| |
Weighted average number of shares used for computing diluted net income (loss) per share attributed to Ordinary shareholders | | | 12,577,392 | | | 15,075,881 | | | 16,121,989 | |
| |
|
| |
|
| |
|
| |
The accompanying notes are an integral part of the consolidated financial statements.
F-5
|
TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY |
|
U.S. dollars in thousands, except share data |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of | | Share capital | | | | | | | | | | | |
| |
| |
| | Additional | | Accumulated | | | | Total | | Total | |
| | Preferred
A shares | | Ordinary
shares | | Preferred
A shares | | Ordinary
shares | | paid-in
capital | | other
loss *) | | Accumulated
deficit | | comprehensive
income (loss) | | shareholders’
equity | |
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Balance as of January 1, 2005 | | | - | | | 11,872,941 | | $ | - | | $ | 1,794 | | $ | 58,881 | | $ | (226 | ) | $ | (34,156 | ) | | | | $ | 26,293 | |
Issuance of Convertible Preferred A shares and warrants, net | | | 6,636,391 | | | | | | 754 | | | - | | | 12,584 | | | - | | | - | | | | | | 13,338 | |
Deemed dividend associated with beneficial Conversion feature of Preferred A shares | | | - | | | - | | | - | | | - | | | 1,981 | | | - | | | (1,981 | ) | | | | | - | |
conversion of Convertible Preferred A shares | | | (2,000,000 | ) | | 2,000,000 | | | (228 | ) | | 228 | | | - | | | - | | | - | | | | | | - | |
Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive loss - unrealized losses on available-for-sale marketable securities, net of impairment *) | | | - | | | - | | | - | | | - | | | - | | | (110 | ) | | - | | $ | (110 | ) | | (110 | ) |
Net loss | | | - | | | - | | | - | | | - | | | - | | | - | | | (7,078 | ) | | (7,078 | ) | | (7,078 | ) |
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Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | $ | (7,188 | ) | | | |
| | | | | | | | | | | | | | | | | | | | | | |
|
| | | | |
Balance as of December 31, 2005 | | | 4,636,391 | | | 13,872,941 | | | 526 | | | 2,022 | | | 73,446 | | | (336 | ) | | (43,215 | ) | | | | | 32,443 | |
Exercise of warrants | | | - | | | 427,490 | | | - | | | 46 | | | 1,022 | | | - | | | - | | | | | | 1,068 | |
conversion of Convertible Preferred A shares | | | (1,700,000 | ) | | 1,700,000 | | | (192 | ) | | 192 | | | - | | | - | | | - | | | | | | - | |
Share-based compensation | | | - | | | - | | | - | | | - | | | 451 | | | - | | | - | | | | | | 451 | |
Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive loss - realized gain on available-for-sale marketable securities, net of impairment *) | | | - | | | - | | | - | | | - | | | - | | | 336 | | | - | | $ | 336 | | | 336 | |
Net loss | | | - | | | - | | | - | | | - | | | - | | | - | | | (3,803 | ) | | (3,803 | ) | | (3,803 | ) |
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|
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Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | $ | (3,467 | ) | | | |
| | | | | | | | | | | | | | | | | | | | | | |
|
| | | | |
Balance as of December 31, 2006 | | | 2,936,391 | | | 16,000,431 | | | 334 | | | 2,260 | | | 74,919 | | | - | | | (47,018 | ) | | - | | | 30,495 | |
Exercise of warrants | | | - | | | 2,727 | | | - | | | 1 | | | 6 | | | - | | | - | | | - | | | 7 | |
Share-based compensation | | | - | | | - | | | - | | | - | | | 113 | | | - | | | - | | | - | | | 113 | |
Cumulative effect of FIN48 adoption | | | - | | | - | | | - | | | - | | | - | | | - | | | (75 | ) | | - | | | (75 | ) |
Net income | | | - | | | - | | | - | | | - | | | - | | | - | | | 2,896 | | $ | 2,896 | | | 2,896 | |
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|
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Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | $ | 2,896 | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
|
| | | | |
Balance as of December 31, 2007 | | | 2,936,391 | | | 16,003,158 | | $ | 334 | | $ | 2,261 | | $ | 75,038 | | | - | | $ | (44,197 | ) | | | | $ | 33,436 | |
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*) Accumulated other comprehensive income (loss) on account of unrealized gains (losses) on available-for-sale marketable securities.
The accompanying notes are an integral part of the consolidated financial statements.
F-6
|
TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
U.S. dollars in thousands |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
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| |
| |
| |
| | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | |
Net income (loss) | | $ | (7,078 | ) | $ | (3,803 | ) | $ | 2,896 | |
Adjustments required to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | |
Depreciation and amortization | | | 2,258 | | | 2,589 | | | 1,964 | |
Impairment of capitalized software development costs | | | 177 | | | - | | | - | |
Gain from sale of property and equipment | | | (157 | ) | | (73 | ) | | (221 | ) |
Amortization of premium and accretion of accrued interest on available-for-sale marketable debt securities | | | 411 | | | 1,305 | | | - | |
Accrued interest on short-term bank deposits | | | 27 | | | (23 | ) | | (4 | ) |
Accrued severance pay, net | | | (142 | ) | | 513 | | | 319 | |
Share-based compensation | | | - | | | 451 | | | 113 | |
Decrease (increase) in trade receivables, net | | | 2,855 | | | (764 | ) | | (3,521 | ) |
Decrease (increase) in unbilled receivables | | | 527 | | | (1,870 | ) | | (321 | ) |
Increase (decrease) in balance with related parties | | | (217 | ) | | 34 | | | 3,856 | |
Decrease (increase) in other accounts receivable and prepaid expenses | | | 1,047 | | | (47 | ) | | (927 | ) |
Decrease (increase) in long-term trade and unbilled receivables | | | (669 | ) | | 613 | | | 3,324 | |
Increase (decrease) in trade payables | | | (1,678 | ) | | 641 | | | (144 | ) |
Increase (decrease) in deferred revenues | | | 5,584 | | | (1,893 | ) | | (3,667 | ) |
Increase (decrease) in other accounts payable and accrued expenses | | | 1,792 | | | (276 | ) | | (502 | ) |
Landlord lease incentive | | | - | | | - | | | 499 | |
| |
|
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| |
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| | | | | | | | | | |
Net cash provided by (used in) operating activities | | | 4,737 | | | (2,603 | ) | | 3,664 | |
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| | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | |
Investment in short-term and long-term bank deposits | | | (2,487 | ) | | (188 | ) | | (2,000 | ) |
Proceeds from short-term bank deposits | | | 2,901 | | | 1,984 | | | 2,987 | |
Investment in available-for-sale marketable securities | | | (19,148 | ) | | - | | | - | |
Proceeds from sale of available-for-sale marketable securities | | | 15,540 | | | 14,744 | | | - | |
Purchase of property and equipment | | | (1,145 | ) | | (1,746 | ) | | (4,318 | ) |
Proceeds from sale of property and equipment | | | 293 | | | 117 | | | 372 | |
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| |
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Net cash provided by (used in) investing activities | | | (4,046 | ) | | 14,911 | | | (2,959 | ) |
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| | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | |
Long-term debt from landlord | | | - | | | - | | | 1,286 | |
Short-term bank credit | | | (967 | ) | | - | | | - | |
Proceeds from issuance of Convertible Preferred A shares and warrants, net | | | 12,838 | | | - | | | - | |
Exercise of warrants | | | - | | | 1,068 | | | 7 | |
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| | | | | | | | | | |
Net cash provided by financing activities | | | 11,871 | | | 1,068 | | | 1,293 | |
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| | | | | | | | | | |
Increase in cash and cash equivalents | | | 12,562 | | | 13,376 | | | 1,998 | |
Cash and cash equivalents at the beginning of the year | | | 5,472 | | | 18,034 | | | 31,410 | |
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Cash and cash equivalents at the end of the year | | $ | 18,034 | | $ | 31,410 | | $ | 33,408 | |
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Supplemental disclosure of cash flows information: | | | | | | | | | | |
Cash paid during the year for: | | | | | | | | | | |
Taxes | | $ | 171 | | $ | 1,707 | | $ | 187 | |
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Non-cash activities: | | | | | | | | | | |
Reclassification of receivables on account of Convertible Preferred A shares | | $ | 500 | | $ | - | | $ | - | |
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The accompanying notes are an integral part of the consolidated financial statements.
F-7
|
TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| | |
| a. | TTI Team Telecom International Ltd. (“TTI” or “the Company”), an Israeli corporation, was incorporated in 1990 and commenced its operations in September 1992. |
| | |
| | The Company designs, develops, markets and supports network management and operations support system software for the communications industry. |
| | |
| | The Company’s Netrac family of products performs and manages functions critical to the operations of telecommunications service providers, such as fault management - monitoring equipment performance to detect and analyze failures, performance management - providing traffic analysis and quality of statistics service, configuration management - managing physical and logical connectivity within the network and security management - controlling and protecting access to data and applications. |
| | |
| | The Company has wholly-owned subsidiaries in the U.S., the Netherlands, the U.K., India, Malta, Costa-Rica, South Africa, Australia and Hong-Kong. |
| | |
| | As to principal markets and customers, see Note 11. |
| | |
| b. | Termination of agreements: |
| | |
| | On November 13, 2002, the Company received a letter of termination from a major customer, regarding an agreement signed on January 30, 2002. The customer also obtained, after a court hearing, the payment of a performance bond issued by a bank on the Company’s behalf under the agreement. On January 23, 2003, the bond in the amount of approximately £ 1 million ($1.96 million) was paid to the customer. |
| | |
| | The Company believed that this customer terminated the agreement unlawfully, and in violation of the termination provisions set out in the agreement. Over the last couple of years the parties filed claim and counter claim against each other about the termination of this agreement. |
| | |
| | In July 2007, the parties signed a settlement and release agreement under which the Company received from the customer £ 1.7 million ($3.45 million) (without admission of liability) and both parties released their claims against each other. |
| | |
| | No gain or loss has been recorded during 2007 as a result of the settlement agreement since the company maintained the above amount in previous years on its financial statements as long term receivable. |
F-8
|
TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES |
| |
| The consolidated financial statements have been prepared according to United States generally accepted accounting principles (“U.S. GAAP”), applied on a consistent basis, as follows: |
| |
| Use of estimates: |
| |
| The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. |
| |
| Financial statements in United States dollars: |
| |
| A majority of the revenues of the Company and its subsidiaries is generated in United States dollars (“dollar”). The Company’s management believes that the dollar is the primary currency of the economic environment in which the Company and its subsidiaries operate. Thus, the functional and reporting currency of the Company and its subsidiaries is the dollar. |
| |
| Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S. dollars in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation”. All transaction gains and losses of the remeasured monetary balance sheet items are reflected in the statement of operations as financial income or expenses, as appropriate. |
| |
| Principles of consolidation: |
| |
| The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated upon consolidation. |
| |
| Cash and Cash equivalents: |
| |
| Cash and cash equivalents include short-term, highly liquid investments that are readily convertible to cash with maturities of three months or less at acquisition. |
| |
| Short-term and long-term bank deposits: |
| |
| Short-term bank deposits are deposits with maturities of more than three months but less than one year. The deposits are in U.S. dollars and bear interest at an average rate of 4.01% and 4.10% for 2006 and 2007, respectively. The short-term deposits are presented at their cost, including accrued interest. |
| |
| Long-term bank deposits are deposits with maturities of more than one year, are included in long-term investments and presented at their cost. The deposits are in U.S. dollars and bear interest at an average rate of 4.10% for 2006. As of December 31, 2007 there was no long-term bank deposit. |
F-9
|
TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| Investment in another company: |
| |
| The investment in this company is stated at cost since the Company does not have the ability to exercise significant influence over operating and financial policies of the investee. |
| |
| The Company’s investment in the other company is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an investment may not be recoverable, in accordance with Accounting Principle Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” (“APB No. 18”). As of December 31, 2007, no impairment losses have been identified. |
| |
| Property and equipment: |
| |
| Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets, at the following annual rates: |
| | | | |
| | | % | |
| |
| |
| | | | |
Computers and peripheral equipment | | | 33 | |
Office furniture and equipment | | | 6 - 15 | |
Motor vehicles | | | 15 | |
Leasehold improvements | | | Over the shorter of the term of the lease | |
| | | or useful life | |
| |
| Impairment of long-lived assets: |
| |
| The long-lived assets of the Company and its subsidiaries are reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment for 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. During 2006 and 2007, no impairment was identified. |
| |
| Income taxes: |
| |
| The Company and its subsidiaries account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”. This Statement prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company and its subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. As of December 31, 2007, a full valuation allowance was provided by the Company. See Note 7j for the impact of adoption of FIN 48, Accounting for uncertainty in Income Taxes. |
F-10
|
TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| Revenue recognition: |
| |
| The Company and its subsidiaries market their products to telecommunications service providers both directly and through alliances with leading vendors of computer hardware, telecommunications equipment, test systems, and probes. The Company’s products have been licensed to various types of telecommunications operators. The Company’s software licenses require significant customization, integration, installation and development services. The Company also generates revenues from maintenance and customer support services. |
| |
| Revenues are recognized based on Statement of Position No. 81-1, “Accounting for Performance of Construction - Type and Certain Production - Type Contracts” (“SOP 81-1”), using contract accounting using the percentage of completion method based on the relationship of actual labor days incurred to total labor days estimated to be incurred over the duration of the project to which the contract relates. In general, the Company divides each project into three distinct periods: (i) a functional specification period, (ii) an implementation period and (iii) a stabilization period. A project is considered completed when the stabilization period is over. |
| |
| The Company believes that the use of the percentage of completion method is appropriate as the Company has the ability to make reasonably dependable estimates of the extent of progress towards completion, contract revenues and contract costs. In addition, contracts executed include provisions that clearly specify the enforceable rights regarding services to be provided and received by the parties to the contracts, the consideration to be exchanged and the manner and terms of settlement. |
| |
| In all cases the Company expects to perform its contractual obligations and its licensees are expected to satisfy their obligations under the contract. |
| |
| According to SOP 81-1, costs that are incurred for a specific anticipated contract prior to the existence of a persuasive evidence of an agreement are deferred, subject to evaluation of their probable recoverability, and only if the costs can be directly associated with a specific anticipated contract. Such deferred costs are recorded as pre-contract costs, in other accounts receivable and prepaid expenses. As of December 31, 2006 and 2007, the Company does not have such deferred costs. |
| |
| Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined in the amount of the estimated loss on the entire contract. As of December 31, 2006 and 2007, no such estimated losses were identified. |
| |
| Unbilled receivables include all amounts which were recognized as revenues and had not been billed as of the balance sheet date due to contractual or other arrangements with customers. |
F-11
|
TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| Estimated gross profit or loss from long-term contracts may change due to changes in estimates resulting from differences between actual performance and original forecasts. Such changes in estimated gross profit are recorded in results of operations when they are reasonably determinable by management, on a cumulative catch-up basis. |
| |
| Service revenues primarily consist of fees from maintenance and customer support. Revenues from maintenance and support contracts are recognized ratably over the term of the agreement, which is typically one year, or at the time when services are rendered. |
| |
| Deferred revenues are recognized for payments received under maintenance and support contracts in advance of the culmination of the earning process. |
| |
| Research and development costs: |
| |
| Research and development costs incurred in the process of developing product improvements or new products, are generally charged to expenses, as incurred. |
| |
| SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold Leased or Otherwise Marketed” (“SFAS No. 86”), requires capitalization of certain software development costs, subsequent to the establishment of technological feasibility. Based on the Company’s product development process, technological feasibility is established upon completion of a working model. No software development costs were capitalized in 2005, 2006 and 2007. |
| |
| Royalty and non-royalty bearing grants: |
| |
| Royalty-bearing grants from the Government of Israel and others for the funding of approved research and development projects are recognized at the time the Company is entitled to such grants on the basis of the related costs incurred and recorded as a reduction in research and development costs. |
| |
| During 2005 and 2006, the Company received non-royalty-bearing grants for its participation in the “MAGNET” project financed by the Government of Israel. In addition, in 2004 the Company received non-royalty-bearing grants from the European Union as part of participation in a consortium of companies engaged in the development of a platform for the management and control of IP over optical networks (DWDM). Grants from the European Union and “MAGNET” projects are not required to be repaid and are recognized at the time the Company is entitled to such grants on the basis of the related costs incurred and recorded as a reduction in research and development costs. |
| |
| Concentrations of credit risk: |
| |
| Financial instruments that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of cash and cash equivalents, short-term bank deposits and trade and unbilled receivables. |
F-12
|
TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| The Company’s and its subsidiaries’ cash and cash equivalents and short-term bank deposits are mainly invested in U.S. dollar deposits with major Israeli and U.S. banks. 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 and its subsidiaries’ investments are financially sound, and accordingly, minimal credit risk exists with respect to these investments. |
| |
| The Company’s revenue is generated primarily in the United States and Europe. To a lesser extent, revenue is generated in Israel, South Africa and South America. Most customers are among the largest telecommunications companies in the world. Concentration of credit risk with respect to trade and unbilled receivables is limited by ongoing credit evaluation and account monitoring procedures. The Company evaluates accounts receivable to determine if they will ultimately be collected. In performing this evaluation, significant judgments and estimates are involved, such as past experience, credit quality of the customer, age of the receivable and current economic conditions that may affect a customer’s ability to pay. An allowance for doubtful accounts is determined with respect to those specific amounts that the Company and its subsidiaries have determined to be doubtful of collection. |
| |
| The Company and its subsidiaries have no off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. |
| |
| Basic and diluted net earning (loss) per share: |
| |
| The Company applies the two class method as required by EITF No. 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128” (“EITF No. 03-6”). EITF No. 03-6 requires the income (loss) per share for each class of shares (ordinary and preferred shares) to be calculated assuming 100% of the Company’s earnings are distributed as dividends to each class of shares based on their contractual rights. |
| |
| Basic net income (loss) per share is computed based on the weighted average number of shares of Ordinary Shares outstanding during each year. Diluted net income (loss) per share is computed based on the weighted-average number of shares of common stock outstanding during the period, plus dilutive potential shares considered outstanding during the period, in accordance with Statement of Financial Standard No. 128, “Earnings Per Share”. |
| |
| For the years ended December 31, 2005 and 2006 all outstanding options and warrants were excluded from the calculations of diluted net income (loss) per share, since they would have an anti-diluted effect. For the year ended December 31, 2007, all outstanding options have been excluded from the calculation of the diluted earning per share. |
F-13
|
TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| Accounting for stock-based compensation: |
| |
| On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options under the Company’s stock plans based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). |
| |
| SFAS 123(R) requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statement of operations. Prior to the adoption of SFAS 123(R), the Company accounted for equity-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). |
| |
| No stock-based employee compensation costs were recognized in the Statement of Operations in the year ended December 31, 2005, as all options granted in that period had an exercise price equal or higher then the market value of the underlying ordinary share on the date of grant. |
| |
| The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. Under that transition method, compensation cost recognized in the year ended December 31, 2007 and 2006, includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). As required by the modified prospective method results for prior periods have not been restated. The Company recognized compensation expenses for the value of these awards, which has graded vest on the accelerated attribution method over the requisite service period of each of the award, net of estimated forfeitures. Estimated forfeitures were based on actual historical pre-vesting forfeitures. |
| |
| The fair value for options granted in 2005, 2006 and 2007 is amortized over their vesting period and is estimated at the date of grant using a Black-Scholes options pricing model with the following weighted average assumptions: |
F-14
|
TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | | | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
Employee stock options | | 2005 | | 2006 | | 2007 | |
| |
| |
| |
| |
| | | | | | | | | | |
Expected volatility | | 57 | % | | 45 | % | | 45 | % | |
Risk-free interest | | 4.5 | % | | 5 | % | | 5 | % | |
Dividend yield | | 0 | % | | 0 | % | | 0 | % | |
Expected life of up to (years) | | 2.6 | | | 3.4 | | | 3.5 | | |
| |
| The computation of expected volatility is based on realized historical stock price volatility of the Company. The Company used the “simplified” method to establish the expected term of the awards as allowed under SAB 107. The interest rate for period within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. |
| |
| The Company recognizes these compensation costs net of a forfeiture rate for only those shares expected to vest on accelerated attribution basis over the requisite service period of the award, which is generally the option vesting term of one to three years. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. |
| |
| The pro forma information regarding net loss per share required by SFAS No. 123 has been determined as if the Company accounted for its stock-based compensation plans under the fair value method. Had compensation cost for its stock-based compensation plans been determined in accordance with SFAS No. 123, its net loss and loss per share would have been reduced to the pro forma amounts indicated below: |
| | | | |
| | Year ended
December 31,
2005 | |
| |
| |
| | | | |
Net loss, as reported | | $ | (9,059 | ) |
Add: Stock-based employee compensation intrinsic value | | | - | |
Deduct: Stock-based compensation expense determined under fair value method | | | (81 | ) |
| |
|
| |
| | | | |
Pro forma net loss | | $ | (9,140 | ) |
| |
|
| |
| | | | |
Basic and diluted net loss per share, as reported | | $ | (0.72 | ) |
| |
|
| |
| | | | |
Basic and diluted net loss per share, pro forma | | $ | (0.73 | ) |
| |
|
| |
| |
| Fair value of financial instruments: |
| |
| The following methods and assumptions were used by the Company and its subsidiaries in estimating their fair value disclosures for financial instruments: |
| |
| The carrying amount reported in the balance sheet for cash and cash equivalents, short-term bank credit, trade receivables, unbilled receivables, trade payables and related parties approximates their fair value due to the short-term maturities of such instruments. |
F-15
|
TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| Severance pay: |
| |
| The Company’s liability for severance pay is calculated pursuant to Israel’s Severance Pay Law based on the most recent salary of the employees multiplied by the number of years of employment, as of the balance sheet date. Employees are entitled to one month’s salary for each year of employment or a portion thereof. The Company’s liability for all of its employees is fully provided by monthly deposits with insurance policies and by an accrual. |
| |
| The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israel’s Severance Pay Law or labor agreements. The value of the deposited funds is based on the cash surrendered value of these policies, and includes immaterial profits. |
| |
| Severance pay expenses for the years ended December 31, 2005, 2006 and 2007 were $961, $1,236 and $964, respectively. |
| |
| Advertising expenses: |
| |
| Advertising expenses are charged to the statements of operations as incurred. Advertising expenses for the years ended December 31, 2005, 2006 and 2007 were $64, $110 and $140, respectively. |
| |
| Comprehensive income (loss): |
| |
| The Company accounts for comprehensive income in accordance with SFAS No. 130, “Reporting Comprehensive Income”. This Statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income generally represents all changes in shareholders’ equity during the period except those resulting from investments by, or distributions to, shareholders. The Company determined that their only item of comprehensive income relates to unrealized losses on available-for-sale marketable securities. |
F-16
|
TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| Impact of recently issued accounting standards: |
| |
| In December 2007, the FASB issued SFAS 141(R), Business Combinations (“SFAS No. 141(R)”). This Statement replaces SFAS 141, Business Combinations (“SFAS No. 141”), and requires an acquirer to recognize the assets acquired, the liabilities assumed, including those arising from contractual contingencies, any contingent consideration, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. SFAS 141(R) also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS 141(R)). In addition, SFAS 141(R)’s requirement to measure the noncontrolling interest in the acquiree at fair value will result in recognizing the goodwill attributable to the noncontrolling interest in addition to that attributable to the acquirer. SFAS 141(R) amends SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”), to require the acquirer to recognize changes in the amount of its deferred tax benefits that are recognizable because of a business combination either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. |
| |
| It also amends SFAS 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), to, among other things, provide guidance on the impairment testing of acquired research and development intangible assets and assets that the acquirer intends not to use. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company does not expect that the adoption of SFAS 141R will have any impact on its consolidated financial statements. |
| |
| In December 2007, the FASB issued SFAS 160 (“SFAS No. 160”), Noncontrolling Interests in Consolidated Financial Statements. SFAS 160 amends Accounting Research Bulletin 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 also changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective for fiscal periods, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company does not expect the adoption of SFAS No. 160 will have significant impact on its consolidated financial statement. |
F-17
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| In September 2006, the FASB issued Statement No. 157, “Fair value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements. The provisions of SFAS 157 are effective for the Company beginning January 1, 2008. The FASB issued a FASB Staff position to defer the effective date of SFAS 157 for one year for all nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company does not except the adoption will have material impact on its consolidated financial statements. |
| |
| In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. The provisions of SFAS 159 are effective for the Company beginning January 1, 2008. The Company does not expect the adoption of SFAS 159 will have an impact on its consolidated financial statements. |
| |
NOTE 3:- | OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES |
| | | | | | | |
| | December 31, | |
| |
| |
| | 2006 | | 2007 | |
| |
| |
| |
| | | | | | | |
Landlord (1) | | $ | - | | $ | 1,339 | |
Prepaid expenses | | | 1,059 | | | 1,083 | |
employees | | | 313 | | | 300 | |
Government authorities | | | 376 | | | - | |
Others | | | 517 | | | 470 | |
| |
|
| |
|
| |
| | | | | | | |
| | $ | 2,265 | | $ | 3,192 | |
| |
|
| |
|
| |
| | |
| (1) | Receivable with respect to investments in the new leased office in Israel that according to the agreement should be reimbursed by the landlord. See also Note 6a. |
F-18
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 4:- | PROPERTY AND EQUIPMENT, NET |
| | | | | | | |
| | December 31, | |
| |
| |
| | 2006 | | 2007 | |
| |
| |
| |
| | | | | | | |
Cost: | | | | | | | |
Computers and peripheral equipment | | $ | 14,224 | | $ | 15,070 | |
Office furniture and equipment | | | 1,439 | | | 1,721 | |
Motor vehicles | | | 4,422 | | | 4,237 | |
Leasehold improvements | | | 3,527 | | | 5,638 | |
| |
|
| |
|
| |
| | | | | | | |
| | | 23,612 | | | 26,666 | |
| |
|
| |
|
| |
Accumulated depreciation: | | | | | | | |
Computers and peripheral equipment | | | 12,886 | | | 13,818 | |
Office furniture and equipment | | | 945 | | | 1,055 | |
Motor vehicles | | | 2,815 | | | 2,268 | |
Leasehold improvements | | | 3,124 | | | 3,480 | |
| |
|
| |
|
| |
| | | | | | | |
| | | 19,770 | | | 20,621 | |
| |
|
| |
|
| |
| | | | | | | |
Depreciated cost | | $ | 3,842 | | $ | 6,045 | |
| |
|
| |
|
| |
| |
| Depreciation expenses for the years ended December 31, 2005, 2006 and 2007 were $2,154, $2,589 and $1,964, respectively. |
| |
NOTE 5:- | OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
| | | | | | | |
| | December 31, | |
| |
| |
| | 2006 | | 2007 | |
| |
| |
| |
| | | | | | | |
Employees and payroll accruals | | $ | 4,621 | | $ | 4,467 | |
Accrued expenses | | | 1,721 | | | 1,701 | |
Government authorities | | | 567 | | | 494 | |
Others | | | 278 | | | 304 | |
| |
|
| |
|
| |
| | | | | | | |
| | $ | 7,187 | | $ | 6,966 | |
| |
|
| |
|
| |
| |
NOTE 6:- | COMMITMENTS AND CONTINGENT LIABILITIES |
| | |
| a. | Lease commitments: |
| | |
| | The Company and its subsidiaries rent their facilities and motor vehicles under various operating lease agreements, which expire on various dates, the latest of which is in 2014. |
| | |
| | In March 2007, the Company signed a new lease agreement in Israel. Under this agreement the Company leases, starting December 2007 a new facility for its principal office. The lease is scheduled to expire in December 2014 and the annual rent is approximately $825. |
F-19
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 6:- | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.) |
| | |
| | Aggregate minimum rental commitments under non-cancelable leases at December 31, 2007 are as follows: |
| | | | | | | | | | |
Year ended December 31, | | Facilities | | Motor
vehicles | | Total | |
| |
| |
| |
| |
| | | | | | | | | | |
2008 | | | 1,363 | | | 48 | | | 1,411 | |
2009 | | | 1,191 | | | 26 | | | 1,217 | |
2010 | | | 1,177 | | | 8 | | | 1,185 | |
2011 | | | 1,082 | | | - | | | 1,082 | |
2012 | | | 825 | | | - | | | 825 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
| | $ | 5,638 | | $ | 82 | | $ | 5,720 | |
| |
|
| |
|
| |
|
| |
| | |
| | Facility lease expenses for the years ended December 31, 2005, 2006 and 2007 were $1,657, $1,432 and $1,409, respectively. |
| | |
| | Motor vehicle lease expenses for the years ended December 31, 2005, 2006 and 2007 were approximately $122, $106 and $102, respectively. |
| | |
| | In December 2007, the Company relocated its offices in Israel. |
| | |
| | The new lease term will be 7 years and the Company will have the option to extend the lease period for additional 3 years. The monthly payments will be between $32 to $36. According to the agreement the Company made leasehold improvements that were funded partly by a loan from the landlord and partly by landlord incentives. The leasehold improvements were recorded as leasehold improvement assets and they are being amortized over the shorter of their economic lives or the lease term. |
| | |
| | The incentives from the landlord were recorded as deferred rent and amortized as reductions to lease expense over the lease term in accordance with SFAS 13 and the response to Question 2 of FASB Technical Bulletin 88-1 (“FTB 88-1”), Issues Relating to Accounting for Leases. |
| | |
| | The loan from the landlord was recorded at its estimated fair value using discounted cash flow method. The loan bears no interest. |
| | |
| | As of December 31, 2007, the Company’s leasehold improvements assets are in an amount of $2,093 of which $498 were funded by landlord incentives and $1,286 as landlord loan. |
F-20
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 6:- | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.) |
| | | |
| | The loan from the landlord was recorded at its estimated fair value using discounted cash flow method Present Value in accounting measurements. As a result, the loan bears no interest. If that information is not available without undue cost and effort, an entity may use its own estimates of fair value. In this case the company took interest of 9.58% which represents the company market condition. |
| | | |
| | As of December 31, 2007, the Company’s leasehold improvements are in an amount of $2,093 thousand of which $498 were funded by landlord incentives and $1,286 as loan. |
| | | |
| b. | Royalty commitments: |
| | |
| | Under the Company’s research and development agreements with the Office of the Chief Scientist (“OCS”) and the Binational Industrial Research and Development Foundation (“BIRD-F”), and pursuant to applicable laws, the Company is required to pay royalties at the rate of 3%-5% of sales of products developed with funds provided by the OCS and BIRD-F, up to an amount equal to 100%-150% of the research and development grants (dollar-linked) received from the OCS and BIRD-F. The obligation to pay these royalties is contingent on actual sales of the products and, in the absence of such sales, no payment is required. Royalties payable with respect to grants received under programs approved by the OCS after January 1, 1999, are subject to interest on the U.S. dollar-linked value of the total grants received at the annual rate of LIBOR applicable to U.S. dollar deposits. Royalties payable with respect to grants received from BIRD-F are linked to the Consumer Price Index in the United States. |
| | |
| | The Company has paid or accrued royalties relating to the repayment of such grants in the amount of $ 10, $ 2 and $0.6 for the years ended December 31, 2005, 2006 and 2007, respectively. The amounts were recorded in the cost of revenues. |
| | |
| | As of December 31, 2007, the Company has an outstanding contingent obligation to pay royalties in the amount of approximately $ 2,743 in respect of these grants. Management believes that none of its product sales is currently subject to OCS and BIRD-F royalties payment. |
F-21
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 6:- | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.) |
| | |
| c. | Guarantees: |
| | |
| | The Company has obtained performance guarantees in favor of certain customers from several banks in Israel amounting to $1,809 and $3,109 for the years ended December 31, 2006 and 2007, respectively. |
| | |
| | The Company has obtained other guarantees in favor of facility and car leases from bank in Israel amounting to $62 and $409 for the years ended December 31, 2006 and 2007, respectively. |
| | |
| d. | Litigation: |
| | |
| | Securities class action: |
| | |
| | A shareholder’s class action lawsuit was filed in September 2004 against the Company, Team Software Industries Ltd. and certain of the Company’s executive officers. The lawsuit purports to be a class action filed on behalf of persons who held the Company’s shares during the period between February 6, 2002 and November 14, 2002. The complaint alleges that material misrepresentations and omissions concerning the Company’s operations and performance artificially inflated the Company’s stock price, causing damages to investors. |
| | |
| | The Company filed a motion to dismiss the complaint which motion was granted by an opinion dated October 6, 2006. The opinion dismissed the amended and consolidated complaint but granted plaintiff the right to file a second amended and consolidated complaint. The second amended and consolidated complaint was filed in November 9, 2006. The Company filed a motion to dismiss the second amended and consolidated complaint in January 10, 2007, which motion was denied with respect to the Company by order dated May 2007. The Company filed an answer to the second amended and consolidated complaint which denied its material allegations. A mediation to explore the possibility of resolving this matter was held in November 2007. An agreement in principle was reached and memorandum of understanding outlining such agreement was executed in December 2007. The Company is now in the process of preparing the documents and seeking approval of the court necessary to finalize the settlement, which is being paid by the Company’s directors and officer’s insurance carrier. |
| | |
| e. | In April 2006, in connection with the Company’s cancellation of a purchase order from Embarcadero Technologies Inc (Embarco). Embarcadero filed a lawsuit against the Company in the San Francisco Superior Court, alleging among other things, breach of contract and intentional misrepresentation. The Company answered and counterclaimed for negligent and intentional misrepresentation based on false representation made by Embarcadero’s salesperson. Mediation of this case during January 2007 did not resolve the dispute. In April 2007, the parties signed a settlement and release agreement under which the Company paid Embarcadero $90 (without admission of liability) and both parties releases their claims against each other. |
| | |
| f. | Dispute with respect to balance with related party shareholder, See Note 10b. |
F-22
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| | |
| a. | Measurement of taxable income: |
| | |
| | Under the Income Tax (Inflationary Adjustments) Law, 1985 (“the Israeli law”), results for tax purposes in Israel are measured in real terms, in accordance with the changes in the Israeli Consumer Price Index (“Israeli CPI”). Accordingly, until 2006, results for tax purposes were measured in terms of earnings in NIS after certain adjustments for increases in the Israeli CPI. Commencing in taxable year 2007, the Company has elected to measure its taxable income and file its tax return under the Israeli Income Tax Regulations (Principles Regarding the Management of Books of Account of Foreign Invested Companies and Certain Partnerships and the Determination of Their Taxable Income), 1986. |
| | |
| b. | Corporate tax rates: |
| | |
| | Taxable income of Israeli companies is subject to tax at the rate of 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter. |
| | |
| c. | Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (“the law”): |
| | |
| | Most of the Company’s production facilities in Israel have been granted “approved enterprise” status under five separate investment programs and, as such, are entitled to tax benefits, under the above law. According to the law, the Company has elected the “alternative benefits track”, and has waived Government grants, in return for a tax exemption. |
| | |
| | Upon the Company’s Initial Public Offering that occurred in 1996, the Company became a “foreign investment Company” for the purposes of the aforementioned law. Accordingly, the Company is entitled to up to 10-year period of benefits. Income derived from the Company’s investment programs, is tax-exempt for the first two to four years and is entitled to a reduced tax rate of 10% to 25%, during the remaining benefit period of five to eight years (subject to the percentage of foreign ownership in each tax year). |
| | |
| | The investments under the Company’s five approved investments programs were incurred since 1992. |
| | |
| | As of December 31, 2007 the benefit periods of the first and the second programs were expired. The benefit periods of the third and forth programs will expire in 2009 and 2011 respectively. The benefit period of the fifth program has not yet commenced and will end in 2013. |
| | |
| | The period of tax benefits detailed above is subject to limits of 12 years from the year of commencement of production, or 14 years from the date of granting the approval, whichever is earlier. |
F-23
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 7:- | INCOME TAXES (Cont.) |
| | |
| | The entitlement to the above benefits is conditional upon the Company’s fulfilling the conditions stipulated by the above law, regulations published hereunder and the instruments of approval for the specific investments in the “approved enterprise”. In the event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the amount of the benefits, in whole or in part, including interest. As of December 31, 2007, management believes that the Company is meeting all of the aforementioned conditions. |
| | |
| | Income from sources other than the “approved enterprise” will be subject to the statutory Israeli corporate tax rate. If the retained tax-exempt income were distributed, it would be taxed at the corporate tax rate applicable to such profits as if the Company had not chosen the alternative tax benefits (rate of 10% - 25% based on the percentage of foreign ownership in the Company’s shares) on the gross amount distributed. In addition, these dividends will be subject to a 15% withholding tax. The Company’s Board of Directors has determined that such tax-exempted income will not be distributed as dividends. Accordingly, no deferred income taxes have been provided on income attributable to the Company’s Approved Enterprise programs as the undistributed tax exempt income is essentially permanent in duration. The Company intends to reinvest its tax exempt income and not to distribute such income as a dividend. |
| | |
| | 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 law by setting criteria for the approval of a facility as a beneficiary enterprise, such as provisions generally requiring that at least 25% of the beneficiary 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. |
| | |
| | However, 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 deferred tax liability with respect to such tax-exempt income. |
| | |
| d. | Tax loss carryforwards: |
| | |
| | Net operating loss carryforwards as of December 31, 2007 are standing In Israel, the U.S. and the U.K amount to $ 34,140, $ 11,348 and $ 11,508, respectively. Other jurisdiction in which the Company operates has immaterial effect. |
| | |
| | Net operating losses in Israel, and the UK may be carried forward indefinitely. Net operating losses in the U.S. may be carried forward through periods which will expire in the years 2023-2027. |
F-24
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 7:- | INCOME TAXES (Cont.) |
| | |
| | Utilization of U.S. net operating losses may be subject to substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization. |
| | |
| e. | Deferred tax assets: |
| | |
| | Deferred tax assets reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company and its subsidiaries deferred tax assets are as follows: |
| | | | | | | |
| | December 31, | |
| |
| |
| | 2006 | | 2007 | |
| |
| |
| |
| | | | | | | |
Reserves and allowances | | $ | 6,178 | | $ | 5,733 | |
Net operating loss carryforward - foreign | | | 8,357 | | | 7,791 | |
Net operating loss carryforward - domestic | | | 7,541 | | | 8,535 | |
| |
|
| |
|
| |
| | | | | | | |
Total deferred tax assets before valuation allowance | | | 22,076 | | | 22,059 | |
Valuation allowance | | | 22,076 | | | 22,059 | |
| |
|
| |
|
| |
| | | | | | | |
Deferred tax asset | | $ | - | | $ | - | |
| |
|
| |
|
| |
| | |
| | The Company and its subsidiaries have provided valuation allowance in respect of deferred tax assets resulting from the tax loss carry forward. Management currently believes that it is more likely than not that the deferred tax regarding these tax loss carryforward and other temporary differences will not be realized. |
| | |
| | |
| f. | Reconciliation of the theoretical tax expenses:
|
| | A reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory rate applicable in Israel to income of the Company and the actual income tax as reported in the statements of operations, is as follows: |
F-25
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 7:- | INCOME TAXES (Cont.) |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
| |
| |
| |
| |
| | | | | | | | | | |
Income (loss) before taxes, as reported in the consolidated statements of operations | | $ | (6,454 | ) | $ | (3,899 | ) | $ | 2,809 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Statutory tax rate | | | 34 | % | | 31 | % | | 29 | % |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
| | | | | | | | | | |
Theoretical tax benefit on the above amount at the Israeli statutory tax rate: | | $ | (2,194 | ) | $ | (1,209 | ) | $ | 815 | |
Tax adjustment in respect of foreign subsidiaries different tax rates | | | 123 | | | (84 | ) | | 69 | |
Deferred taxes on losses for which a valuation allowance was provided | | | 1,855 | | | 1,066 | | | 598 | |
| | | | | | | | | | |
Temporary Differences | | | - | | | 590 | | | (1,573 | ) |
Taxes in respect of prior years | | | 448 | | | (333 | ) | | - | |
Tax withholdings and credits | | | 176 | | | 18 | | | (274 | ) |
Other | | | 216 | | | (144 | ) | | 278 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Income taxes (tax benefit), as reported in the statements of operations | | $ | 624 | | $ | (96 | ) | $ | (87 | ) |
| |
|
| |
|
| |
|
| |
| | |
| g. | In October 2006, the Company has signed a settlement agreement with the Israeli Tax Authority (“ITA”) under which the company will pay to the ITA an amount $780 with regard to the corporate tax assessment for the years 2000 – 2002. This agreement is final and concluded the ITA tax assessments for these years. The Company paid an amount of $780 during December 2006. The remaining tax accrual previously recorded was reversed against income from taxes.
|
| h. | Taxes on income are comprised as follows: |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
| |
| |
| |
| |
| | | | | | | | | | |
Current taxes | | $ | - | | $ | 219 | | $ | (87 | ) |
Taxes in respect of prior years | | | 624 | | | (315 | ) | | - | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
| | $ | 624 | | $ | (96 | ) | $ | (87 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Domestic | | $ | 754 | | $ | (248 | ) | $ | (274 | ) |
Foreign | | | (130 | ) | | 152 | | | 187 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
| | $ | 624 | | $ | (96 | ) | $ | (87 | ) |
| |
|
| |
|
| |
|
| |
F-26
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 7:- | INCOME TAXES (Cont.) |
| | |
| i. | Income (loss) before taxes is comprised as follows: |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
| |
| |
| |
| |
| | | | | | | | | | |
Domestic | | $ | (6,914 | ) | $ | (1,319 | ) | $ | 4,877 | |
Foreign | | | 460 | | | (2,580 | ) | | (2,068 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
| | $ | (6,454 | ) | $ | (3,899 | ) | $ | 2,809 | |
| |
|
| |
|
| |
|
| |
| | |
| j. | In July 2006, the FASB issued FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. The recently issued literature also provides guidance on derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 also includes guidance concerning accounting for income tax uncertainties in interim periods and increases the level of disclosures associated with any income tax uncertainties. |
| | |
| | FIN 48 is effective for fiscal years beginning after December 15, 2006. The differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption will be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. |
| | |
| | The Company adopted the provisions of FIN 48 as of January 1, 2007. The impact of adopting FIN 48 was insignificant impact on the Company’s consolidated financial statements in the total estimated amount of $75. The effect of the adoption after January 1, 2007 has increased the income tax expense in the total estimated amount of $17. |
| | |
| | Interest associated with uncertain income tax positions and penalties expense are classified as income tax expenses. The Company has not recorded any material interest or penalties during any of the years presented. |
| | |
| | A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows: |
| | | | |
Gross unrecognized tax benefits at January 1, 2007 | | $ | 75 | |
Increases in tax positions for current year | | | 17 | |
| |
|
| |
| | | | |
Gross unrecognized tax benefits at December 31, 2007 | | $ | 92 | |
| |
|
| |
F-27
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 8:- | SHAREHOLDERS’ EQUITY |
| | | |
| a. | The Company’s Ordinary shares have been listed for trade on the NASDAQ National Market since TTI’s initial public offering (“IPO”) on December 4, 1996, under the symbol TTIL. |
| | |
| | In 1999 and 2000, the Company effected two additional secondary offerings. |
| | |
| | The Ordinary shares confer upon their holders the right to receive notice to participate and vote in the Company’s general meeting and the right to receive dividends, if declared. |
| | |
| b. | On November 29, 2004, the Company entered into definitive agreements (“the Agreements”) to obtain $14,600 in equity financing, through the sale of 6,636,391 of Series A Convertible Preferred shares in a private placement to institutional investors (“the Preferred shares”). The Preferred shares are convertible into 6,636,391 Ordinary shares. In addition, holders of the Preferred shares were granted one warrant to purchase 0.4 Ordinary shares at an exercise price of $2.50 per share for each Preferred share owned at any time until January 2011 (“the Warrants”). The closing of the investment took place on January 3, 2005. |
| | |
| | The rights of the holders of the Preferred shares include, among other things, the following rights that are subject to certain limitations as described in the TTI’s articles: |
| | |
| | 1) | Standard anti dilution provisions; |
| | | |
| | 2) | Preference in the event of liquidation of the Company; |
| | | |
| | 3) | Veto rights over certain material actions by the Company; |
| | | |
| | 4) | The right to nominate one member of the Company’s Board of Directors. |
| | | |
| | As part of the agreement, the Company issued warrants to purchase up to 2,654,556 of its ordinary shares. The warrants are exercisable for a period of six years, at an exercise price of $2.5 per share. Through December 31, 2007 430,217 warrants were converted into the same number of the Company’s ordinary shares. |
| | |
| | In addition, as part of the Agreement, the placement agent of the investment was granted warrants exercisable for the purchase of up to 371,678 of the Company’s Ordinary shares. The placement agent’s warrants are exercisable at a price per Ordinary share of $2.64, at any time until January 2009. As of December 31, 2007, none of these warrants were converted into the Company’s Ordinary shares. |
| | |
| | In connection with the issuance of the Preferred shares and the Warrants, the Company has applied EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments,” (“EITF 00-27”) which resulted in the recognition of $1,981 related to the beneficial conversion feature on the Preferred shares. The Company accounted for the beneficial conversion feature as a deemed dividend to the preferred shareholders of $1,981 and was credited to additional paid-in capital. |
F-28
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 8:- | SHAREHOLDERS’ EQUITY (Cont.) |
| | |
| | According to the Agreements, the investors have the right to receive payment for liquidated damages if a registration statement on Form F-3 is not declared effective within 90 days (or 120 days in the event the U.S. Securities and Exchange Commission conducts a review) following the closing of the private placement transaction. The Company obtained effectiveness of the registration statement on May 24, 2005. Therefore, since May 4, 2005, the Company has been accruing liquidated damages at a rate equal to 2% of each investor’s investment in the Company for each 30 day period, or pro rata for any portion thereof, during the period for which the registration statement was not declared effective. The Company paid liquidated damages at a total amount of $194, which were recorded in the second quarter of 2005 as general and administrative expenses. |
| | |
| | During the year ended December 31, 2006, an amount of 1,700,000 Preferred shares were converted into the same number of the Company’s Ordinary shares. As of December 31, 2007 none of the Preferred shares were converted into the Company’s Ordinary shares and none of the Warrants had been exercised into Ordinary shares, and also Subsequent to balance sheet date. |
| | |
| c. | Share options: |
| | |
| | Employee Share Option Plans: |
| | |
| | In 1996, the Board of Directors of the Company adopted share option plans (as amended “the Old Plans”). As of December 31, 2007 108,000 options are outstanding and exercisable under the Old Plan. At the Company’s annual general shareholders’ meeting in December 2004, it was decided that there was no intention to grant any more options from the Old Plan and it was resolved to approve the 2004 share option plan (“the New Plan”), pursuant to which 1,000,000 Ordinary shares were reserved for issuance. In August 2006, an additional amount of 500,000 shares were reserved for issuance under the New Plan. |
| | |
| | The Board of Directors is empowered, among other things, to designate the options, dates of grant and the exercise price of options. Unless otherwise decided by the Board, the options will vest over a period of one to three years of employment, and will be non-assignable. |
| | |
| | Pursuant to the New Plan, as of December 31, 2007, an aggregate of 867,333 options of the Company are still available for future grant. |
| | |
| | Each option granted under the Plans to employees expires no later than five years from the date of the grant. Any options which are canceled or forfeited before expiration become available for future grants. |
F-29
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 8:- | SHAREHOLDERS’ EQUITY (Cont.) |
| | |
| | A summary of the stock option activities in 2005, 2006 and 2007 is as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2005 | | Year ended December 31, 2006 | | Year ended December 31, 2007 | |
| |
| |
| |
| |
| | Amount
of options | | Weighted
average
exercise price | | Amount
Of options | | Weighted
average
exercise
price | | Amount
of
options | | Weighted average
exercise
price | | Weighted
average
remaining contractual
term | | Aggregate intrinsic value | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding at beginning of year | | | 374,133 | | $ | 10.13 | | | 390,333 | | $ | 4.55 | | | 1,049,000 | | $ | 3.97 | | | | | $ | - | |
Granted | | | 200,000 | | $ | 3.50 | | | 755,500 | | $ | 3.78 | | | 18,000 | | $ | 3.00 | | | | | $ | - | |
Exercised | | | - | | $ | - | | | - | | $ | - | | | - | | $ | - | | | | | $ | - | |
Forfeited | | | (82,000 | ) | $ | 7.00 | | | (93,500 | ) | $ | 4.23 | | | (185,004 | ) | $ | 3.71 | | | | | $ | - | |
Expired | | | (101,800 | ) | $ | 21.02 | | | (3,333 | ) | $ | 20 | | | (141,329 | ) | $ | 3.63 | | | | | $ | - | |
| |
|
| | | | |
|
| |
|
| |
|
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding at end of year | | | 390,333 | | $ | 4.55 | | | 1,049,000 | | $ | 3.97 | | | 740,667 | | $ | 4.03 | | | 2.76 | | $ | - | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Options exercisable at end of year | | | 113,499 | | $ | 5.05 | | | 266,330 | | $ | 4.78 | | | 375,336 | | $ | 4.51 | | | 2.23 | | $ | - | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | |
| | The aggregate intrinsic value in the tables above represents the total intrinsic value (the difference between the Company’s closing stock price on the last trading day of December 2007 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2007. This amount change based on the fair market value of the Company’s stock. The share price as of December 31, 2007 is lower than the exercise price of all the changes during the year and therefore aggregate intrinsic value was not calculated. |
F-30
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 8:- | SHAREHOLDERS’ EQUITY (Cont.) |
| | |
| | The weighted-average grant-date fair value of options granted during the years 2005, 2006 and 2007 was $0, $1.45 and $1.13. |
| | |
| | Compensation expenses (income) related to options granted to employees were recorded to research and development expenses, sales and marketing and general and administrative expenses, as follows: |
| | | | | | | |
| | Year ended December 31, | |
| |
| |
| | | 2006 | | | 2007 | |
| |
|
| | |
| |
| | | | | | | |
Cost of sales | | $ | 229 | | $ | 54 | |
Research and development expenses | | | 102 | | | 29 | |
Sales and marketing | | | 84 | | | 17 | |
General and administrative expenses | | | 36 | | | 13 | |
| |
|
| |
|
| |
| | | | | | | |
| | $ | 451 | | $ | 113 | |
| |
|
| |
|
| |
| | |
| | As of December 31, 2007, there was $146 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted to employees under the Company’s stock option plans. That cost is expected to be recognized over a weighted-average period of 1.16 years. |
| | |
| | The options outstanding as of December 31, 2007 have been separated into exercise prices, as follows: |
| | | | | | | | | | | | | | | | |
Exercise
price | | Options
outstanding
as of
December 31,
2007 | | Weighted
average
remaining
contractual
life | | Weighted
average
exercise
price | | Options
exercisable
as of
December 31,
2007 | | Weighted
average
exercise
price of
exercisable
options | |
| |
| |
| |
| |
| |
| |
| | | | | years | | | | | | | | | | |
| | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | |
$ 3.0 | | | 115,000 | | | 1.92 | | $ | 3.0 | | | 83,666 | | | | |
$ 3.5 | | | 240,000 | | | 3.22 | | $ | 3.5 | | | 86,666 | | | | |
$ 3.9 | | | 248,667 | | | 3.12 | | $ | 3.9 | | | 87,336 | | | | |
$ 4.3 | | | 29,000 | | | 3.25 | | $ | 4.3 | | | 9,668 | | | | |
$ 6.0-8.0 | | | 108,000 | | | 1.5 | | $ | 7.0 | | | 108,000 | | | | |
| |
|
| | | | | | | |
|
| | | | |
| | | | | | | | | | | | | | | | |
| | | 740,667 | | | 2.76 | | $ | 4.03 | | | 375,336 | | $ | 4.51 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | |
| d. | Dividends: |
| | |
| | In the event that cash dividends are declared in the future, such dividends will be paid in NIS or in foreign currency subject to any statutory limitations. |
| | |
| e. | Subsequent to the balance sheet date, the Company’s Board of Directors granted additional 25,000 options to employees. The exercise price of the options is the shares par value. The options expire 5 years from the date of grant. |
F-31
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 9:- | EARNINGS PER SHARE |
| |
| The following table sets forth the computation of basic and diluted earnings per share: |
| | | | | | | | | | |
| | Years ended December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
| |
| |
| |
| |
| | | | | | | | | | |
Net income (loss) attributable to Ordinary shares | | $ | (9,059 | ) | $ | (3,803 | ) | $ | 2,447 | |
| |
|
| |
|
| |
|
| |
Weighted average number of shares used for computing basic net income (loss) per share attributed to Ordinary shareholders | | | 12,577,392 | | | 15,075,881 | | | 16,001,148 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Dilutive affect: | | | | | | | | | | |
Employee stock options | | | *)- | | | *)- | | | 120,841 | |
Preferred shares as converted | | | *)- | | | *)- | | | *)- | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Weighted average number of shares used for computing diluted net income (loss) per share attributed to Ordinary shareholders | | | 12,577,392 | | | 15,075,881 | | | 16,121,989 | |
| |
|
| |
|
| |
|
| |
| |
NOTE 10:- | RELATED PARTIES TRANSACTIONS AND BALANCES |
| |
| Composition: |
| | | | | | | |
| | December 31, | |
| |
| |
| | 2006 | | 2007 | |
| |
| |
| |
| | | | | | | |
Balances between Team and the Company (see a below) | | $ | (40 | ) | $ | (3,932 | ) |
| |
|
| |
|
| |
| | | | | | | |
Balance with related party shareholder (see b below) | | $ | 373 | | $ | 409 | |
| |
|
| |
|
| |
| | |
| a. | Transactions and with Team: |
| | |
| | Transactions between Team and its affiliates and the Company: |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
| |
| |
| |
| |
|
Revenues: | | | | | | | | | | |
Commissions on product sales and payment for services | | $ | 93 | | $ | - | | $ | 502 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
General and administrative expenses: | | | | | | | | | | |
Rent and maintenance | | $ | 1,379 | | $ | 1,160 | | $ | 1,402 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Administrative and management services | | $ | 169 | | $ | 160 | | $ | 164 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Purchase of equipment | | $ | 398 | | $ | 352 | | $ | 437 | |
| |
|
| |
|
| |
|
| |
F-32
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 10:- | RELATED PARTIES TRANSACTIONS AND BALANCES (Cont.) |
| | |
| | On April 19, 2005, Team Software Industries Ltd., a wholly-owned subsidiary of Team Computers and System Ltd. (“Team”), a public company listed for trade on the Tel-Aviv Stock exchange, has distributed to its shareholders Ordinary shares of the Company that it owned, such that immediately following the distribution, Team held approximately 4.6% of the Company’s outstanding share capital. |
| | |
| | As of December 31, 2007, Team holds 0.79% of the Company’s outstanding share capital. |
| | |
| | Since the commencement of the Company’s operations in 1992, Team has, from time to time, paid the Company commissions in respect of sales by the Company of certain products represented and sold by Team. This relationship is reflected in an agreement between the Company and Team dated October 1996 (“the Agreement”). Team generally pays the Company a commission at the rate of 15% of the sales price of these products, up to a maximum of 50% of the amount received by Team from these sales less the cost to Team. |
| | |
| | Since 1992, the Company has also purchased property and equipment, such as computer hardware, from Team and Omnitek-Eichut Ltd. (“Omnitek-Eichut”), a subsidiary of Team. The Company pays Team and Omnitek-Eichut prices for these assets that are no less favorable to the Company than those it could obtain from unrelated third parties. |
| | |
| | In addition, Team supplies the Company with hardware, related software and support services for such hardware for the Company’s projects, in accordance with the agreement referred to above. Under the agreement between the Company and Team, the Company is required to pay for such hardware, related software and support services when it receives payment from its customers. |
| | |
| b. | Balance with related party shareholder: |
| | |
| | During the years 1998 to 2000, the Company granted Mr. Shlomo Eisenberg (“Mr. Eisenberg”), the former chairman of the board of directors and a major shareholder of the Company, an aggregate of 105,000 options to purchase ordinary shares of the Company. In the years 2001 and 2002, Mr. Eisenberg exercised a portion of his options (“the Options”) and the Company withheld Israeli income tax from income realized by Mr. Eisenberg upon the exercise of the Options, as required under law. |
| | |
| | At the end of 2005, the Company underwent a tax deductions audit by the Israeli Tax Authority (“ITA”). As a result of such audit, the ITA assessed an additional NIS 1.5 million ($390 as of December 31, 2007) in withholding taxes with respect to income derived by Mr. Eisenberg from the exercise of the Options. Following consultation with the Company’s tax advisors, the Company paid the additional withholding tax amount assessed in the audit. The Company was informed that it is required to collect such additional tax from Mr. Eisenberg otherwise such additional amount will be viewed as a benefit received by Mr. Eisenberg from the Company, resulting in additional withholding tax being charged to the Company as a result of the grant of such benefit. |
F-33
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 10:- | RELATED PARTIES TRANSACTIONS AND BALANCES (Cont.) |
| | |
| | The Company filed a NIS 1.6 million ($416 as of December 31, 2007) lawsuit and demanded reimbursement for the additional withholding tax from Mr. Eisenberg. Based on an advice from Israeli council, the Company believes that it is entitled to such reimbursement. However, the Company cannot assure that the court will accept such view if this matter were brought before it. The trial took place in September 2007 and the Company is now in a process of submitting written summations. |
| | |
NOTE 11:- | GEOGRAPHIC INFORMATION AND SELECTED STATEMENTS OF OPERATIONS DATA |
| | |
| a. | Summary information about geographic areas: |
| | |
| | The Company operates in one reportable segment (see Note 1 for a brief description of the Company’s business). The following data is presented in accordance with Statement of Financial Accounting Standard No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). The total revenues are attributed to geographic areas based on the location of the end customer. |
| | |
| | The following presents total revenues and long-lived assets as of and for the years ended December 31, 2005, 2006 and 2007: |
| | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
| |
| |
| |
| |
| | Total
revenues | | Long-lived
assets | | Total
revenues | | Long-lived
assets | | Total
revenues | | Long-lived
assets | |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | |
Israel | | $ | 3,065 | | $ | 4,249 | | $ | 3,199 | | $ | 3,217 | | $ | 3,516 | | $ | 5,596 | |
North America | | | 17,004 | | | 453 | | | 18,929 | | | 600 | | | 16,118 | | | 397 | |
Europe | | | 11,536 | | | 4 | | | 12,331 | | | 4 | | | 16,320 | | | 2 | |
Australia | | | 2,466 | | | 23 | | | 3,724 | | | 20 | | | 2,598 | | | 35 | |
South America | | | 3,551 | | | - | | | 3,085 | | | - | | | 2,251 | | | 14 | |
Far East | | | 1,999 | | | - | | | 1,626 | | | 1 | | | 3,217 | | | 1 | |
South Africa | | | 3,605 | | | - | | | 3,220 | | | - | | | 1,897 | | | - | |
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| | $ | 43,226 | | $ | 4,729 | | $ | 46,114 | | $ | 3,842 | | $ | 45,917 | | $ | 6,045 | |
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| b. | Major customers data as a percentage of total revenues: |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2005 | | 2006 | | 2007 | |
| |
| |
| |
| |
| | | | | | | | | | |
Customer A | | 14 | % | | 13 | % | | 15 | % | |
Customer B | | 2 | % | | 5 | % | | 7 | % | |
Customer C | | 0 | % | | 1 | % | | 6 | % | |
Customer D | | 4 | % | | 5 | % | | 6 | % | |
F-34
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| | |
NOTE 12:- | SELECTED STATEMENTS OF OPERATIONS DATA |
| | |
| a. | Research and development, net: |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
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| | 2005 | | 2006 | | 2007 | |
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Total cost | | $ | 9,166 | | $ | 9,632 | | $ | 9,433 | |
Less - grants and participations | | | 30 | | | 54 | | | - | |
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Research and development, net | | $ | 9,136 | | $ | 9,578 | | $ | 9,433 | |
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| | Year ended December 31, | |
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| | 2005 | | 2006 | | 2007 | |
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Financial income, net | | | | | | | | | | |
Foreign currency translation adjustments | | $ | (646 | ) | $ | 41 | | $ | 985 | |
Loss from sale of marketable securities | | | - | | | (838 | ) | | - | |
Other than temporary decline in fair value of marketable securities | | | (301 | ) | | (329 | ) | | - | |
Interest and other | | | 1,100 | | | 1,788 | | | 1,165 | |
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Financial income, net | | $ | 153 | | $ | 662 | | $ | 2,150 | |
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| c. | Other income: |
| | |
| | The Company filed a claim against Ness Technologies Ltd. (“Ness”) regarding a Purchase Order from the ministry of defense for IDF. The Company claimed that it has a valid agreement with Ness to perform this project jointly and that Ness unlawfully decided to perform the said project without the Company. The Company did not record a provision for this claim. |
| | |
| | In November 2006, the Company has signed a settlement agreement with Ness according to which Ness will pay the Company a sum of $150 in 3 equal installments, to be received up until December 31, 2007 as a full and final settlement including the dismissal of the claim filed by Ness. |
F-35
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 13:- | RECONCILIATION TO ISRAELI GAAP |
| | |
| The consolidated financial statements of the Company have been prepared in accordance with U.S. GAAP. Had the consolidated financial statements been prepared in accordance with Israeli GAAP, the effects on the financial statements would have been as follows: |
| |
| a. | Effect on the statement of operations: |
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| | Year ended December 31, 2006 | |
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| | As reported | | Adjustments | | As per Israeli GAAP *) | |
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Net loss | | $ | (3,803 | ) | $ | (2,204 | ) | $ | (6,007 | ) |
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Basic and diluted net loss attributed to shareholders | | $ | (0.20 | ) | $ | (0.18 | ) | $ | (0.38 | ) |
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| | Year ended December 31, 2007 | |
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| | As reported | | Adjustments | | As per Israeli GAAP *) | |
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Net income (loss) | | $ | 2,896 | | $ | (5,774 | ) | $ | (2,878 | ) |
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Basic and diluted net loss attributed to shareholders | | $ | 0.15 | | $ | (0.30 | ) | $ | (0.15 | ) |
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| | *) | Amounts in NIS presented in accordance with Israeli GAAP for all periods were translated into U.S. dollars according to the average exchange rate in the corresponding period. |
| |
| b. | Effect on the balance sheet: |
| | | | | | | | | | |
| | Year ended December 31, 2006 | |
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| | As reported | | Adjustments | | As per Israeli GAAP *) | |
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Total equity | | $ | 30,495 | | $ | 272 | | $ | 30,767 | |
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| | Year ended December 31, 2007 | |
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| | As reported | | Adjustments | | As per Israeli GAAP *) | |
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Total equity | | $ | 33,436 | | $ | 699 | | $ | 34,135 | |
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| *) | Amounts in NIS presented in accordance with Israeli GAAP were translated into U.S. dollars according to the exchange rate at the end of the corresponding period. |
F-36
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| |
NOTE 13:- | RECONCILIATION TO ISRAELI GAAP (Cont.) |
| | | |
| c. | Material adjustments: |
| | |
| | The abovementioned adjustments result primarily from the differences between U.S. GAAP and Israeli GAAP, as follows: |
| | | |
| | 1. | According to US GAAP, the net income used to compute the net income per share is the net income attributed to Ordinary shareholders after deducting the deemed dividend associated with the beneficial conversion feature of the Preferred shares. According to Israeli GAAP, the net loss used to compute the net loss per share is not affected by the deemed dividend and the Preferred shares are included in the computation of the basic net loss per share. |
| | | |
| | 2. | According to U.S. GAAP, the Company’s management believes that the dollar is the primary currency of the economic environment in which the Company and its subsidiaries operate. Thus, the functional and reporting currency of the Company and its subsidiaries is the dollar. Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation”. All transaction gains and losses of the remeasured monetary balance sheet items are reflected in the statement of operations as financial income or expenses, as appropriate. In Israel, no directives were determined for reporting based on functional currency. Since the Company does not comply with Section 29a to Opinion 36 of the Institute of Certified Public Accountants in Israel, the Company reports according to Standard 12 and 13 of the Israel Accounting Standards Board in reported NIS. |
| | | |
NOTE 14:- | SUBSEQUENT EVENTS |
| | | |
| | In 2007 the Company signed a definitive agreement to acquire Telesens LLC, a software house headquartered in Ukraine. Telesens has been developing, implementing and promoting software solutions and related professional services for the telecommunications market since 1998. The agreement closed in the beginning of January 2008. |
| | |
| | Under the terms of the agreement, the aggregate purchase price will be up to $2.7 million, subject to downward adjustments related to amongst other, actual 2007 annual turnover and certain other performance parameters based on 2008 and 2009 operations. The consideration will be paid in cash over a three-year period. |
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F-37
.