We believe that our product offerings in all of these categories are generally competitive on price and features and have certain advantages and disadvantages as compared to competitors’ products. In particular, we believe that our extensive experience in software development, and the fact that our sole focus is communication service providers, enables us to create products that meet our customers’ unique business and technological requirements.
We rely on a combination of trade secret, copyright and trademark laws, nondisclosure and other contractual agreements and technical measures to protect our proprietary rights. We currently have only one registered patent in the United States and one patent application pending in Europe. We have also obtained trademark registrations for Netrac®, and our logo in the United States.
We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. As part of our confidentiality procedures, we generally enter into invention assignment and proprietary information agreements with our employees and consultants and nondisclosure agreements with our customers and distributors. We also generally limit access to the source code of our products, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary.
In addition, in particular instances we are required by our customers to place the source codes for certain of our products into escrow arrangements to ensure that customers will not be adversely affected by an interruption in our business or if we materially breach our agreement with such customer. In limited circumstances, we are required to grant to our customers access to such source code to enable them to continue to support the products purchased, in accordance with the agreed upon terms that limit the right to use such software, and without transferring any intellectual property rights in the licensed software to such customers. Such arrangements relating to our source code may increase the likelihood of misappropriation or other misuse of our intellectual property. Moreover, effective copyright and trade secret protection may be unavailable or limited in certain foreign countries, making the possibility of misappropriation of our proprietary technology more likely.
The steps we take to protect our proprietary technology may not prevent misappropriation of such technology, and such protections may not prevent competitors from developing products with functionality or features similar or superior to our products. For example, we currently have one patent application pending in Europe. If our pending patent application will be rejected, our ability to protect the proprietary information underlying such application may be limited. We believe that, because of the rapid pace of technological change in the market for our products, legal protections of our proprietary technology are less significant factors in our success than the knowledge, technical expertise, ability and experience of our employees, the frequency of product enhancements, timely introduction of new products and the quality of professional services and customer support we provide.
We develop customized solutions for certain customers to accommodate their specific requirements. Some of these customers retain certain intellectual property rights in such customized applications.
We believe that our products and trademarks do not infringe upon the proprietary rights of third parties and there are currently no pending claims to such effect. We may, however, receive future communications from third parties asserting that our products (including components we license from third parties that are embedded in our products) infringe, or may infringe, their proprietary rights. We expect that software product developers will be increasingly subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could:
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| • | be time-consuming; |
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| • | result in costly litigation and diversion of technical and management personnel; |
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| • | cause product shipment delays; |
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| • | require us to develop non-infringing technology; or |
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| • | require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all. |
In the event of a successful claim of product infringement against us and our failure or inability to develop non-infringing technology or license the infringed or similar technology, our business, financial condition and results of operations could be seriously harmed.
We rely on certain software that we license from third parties, including software that is embedded in our products or integrated with third party and internally developed software and used in our products to perform key functions. For instance, we have licensed databases from Oracle and Sybase and development tools from Sybase, InteliJ, Borland Microsoft, Business Objects, and ILOG.There can be no assurance that these third party software licenses will continue to be available to us on commercially reasonable terms or at all. In addition, to a certain extent we are dependent upon such third parties’ ability to enhance their current products and develop new products on a timely and cost-effective basis that will meet changing customer needs and respond to emerging industry standards and other technological changes.
C. Organizational Structure
A list of our subsidiaries appears in Exhibit 8 to this annual report.
D. Property, Plants and Equipment
We do not own any real property. Our principal facilities, as relocated in December 2007 and in which our corporate headquarters are located, comprise approximately 48,160 square feet of office space, and are located in Rosh Ha’ayin, Israel. The lease of such facilities is scheduled to expire in December 2014, and the annual rent is approximately $577,000.
We also lease a facility in Yokneham, Israel, used primarily as a development center, which occupies approximately 2,740 square feet. This lease is scheduled to expire in December 31, 2009.
We also lease the following facilities, used primarily as marketing and sales offices: approximately 4,135 square feet in Hoboken, New Jersey, USA; approximately 11,223 square feet in Atlanta, Georgia, USA; approximately 4,418 square feet in Lenexa, Kansas, USA; approximately 800 square feet in Sydney, Australia; approximately 1,000 square feet in San Jose, Costa Rica; approximately 1,560 square feet in South Africa and approximately 430 square feet in Sweden.
Our leasing expenses for all of our said facilities were approximately $910,000 in 2008. We expect to pay total leasing expenses for our facilities of approximately $1.1 million in 2009.
Except as noted above, we believe that the aforesaid offices and facilities are suitable and adequate for our operations as currently conducted and as currently foreseen. In the event that additional facilities are required, we believe that we could obtain such facilities at commercially reasonable rates.
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Item 4A. | UNRESOLVED STAFF COMMENTS |
Not Applicable.
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Item 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
A. Operating Results.
The following discussion of our consolidated financial condition and consolidated results of operations should be read in conjunction with the “Item 3A - Selected Financial Data” and our consolidated financial statements and notes to those statements included elsewhere in this document. This discussion contains certain forward-looking statements that involve risks, uncertainties and assumptions. As a result of many factors, including those set forth under “Item 3D - Risk Factors” and elsewhere in this document, our actual results may differ materially from those anticipated in these forward-looking statements.
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Overview
We commenced independent operations in September 1992, as a subsidiary of Team Computers and Systems Ltd., currently known as Malam - Team Ltd., an Israeli publicly traded company, after having operated as a division of Malam - Team Ltd. since 1988. We are a leading global provider of OSS and BSS for telecommunications service providers.
Product revenues consist primarily of product license fees and fees for professional services required to customize our products for our customers. Service revenues consist of fees for customization, implementation, integration, development, training, consultancy, maintenance, and customer support. In some cases, we receive commissions from hardware vendors which are accounted for as product revenues. Our usual sale to a new customer ranges from $0.5 million to $6.0 million, depending upon the scope of the network and functionality required for a specific customer application. We believe that revenues from the license, service and support of our Netrac family of products will continue to account for most of our total revenues for the foreseeable future.
Our software licenses, in most cases, require customization, integration and installation. The revenues are recognized using contract accounting on a percentage of completion method based on the relationship of labor days incurred to total estimated labor days to be incurred over the duration of the contract. Provisions for estimated losses on uncompleted contracts are made when necessary in the period in which such losses are determined in the amount of the estimated loss on the entire contract. Revenues from maintenance and support contracts are recognized over the life of these contracts, which is typically one year, or at the time when our services are rendered.
Generally, the time elapsed from when we receive an order for our products to the completion of installation range from 6 to 24 months. Under the terms of some of our contracts, we invoice our customers as we complete certain milestones, which on average occur every few months, or, in certain cases, after installation has been completed. We generally receive payment 30 to 150 days after we invoice customers. As a result, an average of five to six months passes between our performance of work and our receipt of payment.
Highlights of 2008
In 2008, total revenues were $52.3 million, compared to $45.9 million in 2007. Our operating loss was $1.1 million compated to operating income of $0.6 million in 2007 and we incurred a net loss of $2.0 million, compared to a net income of $2.9 million in 2007. We had cash and cash equivalents of approximately $25.0 million as of December 31, 2008 compared to $33.4 million as of December 31, 2008.
During the fourth quarter 2008 and the first quarter 2009, we initiated efforts to reduce our operating costs aimed at aligning our expenses to the current economic conditions. One of the steps taken was implemented in March 2009 and involved a company-wide salary reduction of approximately 5.0%.
In January 2008, we acquired Telesens LLC, a software house headquartered in the Ukraine, as part of our strategy to expand our sales platform within the CIS market. The acquisition was effected by way of a stock purchase agreement between us and the selling shareholders. Under the terms of the agreement, the aggregate purchase price is up to $2.7 million, subject to downward adjustments related to certain performance parameters, including Telesens’ actual 2007 annual turnover. The purchase price is to be paid by us in cash in three installments, as follows: (1) the first payment, of $1.0 million, was paid subsequent to the acquisition date, at closing; (2) 70.0% of the balance of the purchase price (subject to the relevant deductions) was supposed to be paid in February 2009, but due to a dispute with the selling shareholders, primarily on the size of the payment, was not paid as of yet; and (3) the remainder is scheduled to be paid in February 2010. We have pledged Telesens shares, representing 24% of the issued and outstanding Telesens shares, in favor of one of the selling shareholders to secure the said two deferred payments.
For additional details regarding the transaction and associated legal proceedings, see below under “Internal Investigation” and also under the titles “Telesens” and “Internal Investigation” in Item 8A – Legal Proceedings.
Internal Investigation
In January 2009, our Board of Directors received a written complaint of Mr. Edward Rubin, a former key shareholder of Telesens LLC who is also the current general manager of Telesens LLC, a Ukraine-based software house that was acquired by us in January 2008, alleging, among other things, that a Region Business Unit manager, or the RBU Manager, who is also the son of our Chairman and CEO, received improper commissions from Mr. Rubin with respect to the acquisition of Telesens.
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Our Audit Committee engaged Barlev Investigative Auditing to lead an internal investigation. Based on the report of the independent investigator, our Audit Committee concluded, among other things, that (1) the RBU Manager received, directly or indirectly, approximately $90,000 (while he was entitled to receive under the finder agreement he had with Mr. Rubin up to $350,000) and that he failed to disclose the said commission to us, and (2) none of our other employees, officers or directors was aware of such commission or was engaged in any improper personal conduct. Our Audit Committee also made certain recommendations to our management, including terminating the engagement with the RBU Manager immediately.
We evaluated the effects, if any, of the results of the internal investigation and related procedures on our financial results for the year ended December 31, 2008 or any other period. The investigation concluded that the misconduct of the RBU Manager in our acquisition of Telesens did not affect the terms, including purchase price, of the transaction, and therefore, we determined it should not impact the accounting for the acquisition. We are currently exploring our legal status regarding the acquisition of Telesens and Mr. Rubin.
Based, among others, on our assessment of the financial results of Telesens for the year ended December 31, 2008 and the dispute with the former shareholders of Telesens, including Mr. Rubin, we determined that indicators for impairment exist, and according to FAS 144 and FAS 142 we performed an impairment test on Telesens. Based on such assessment, the goodwill acquired in the transaction and other long-lived assets were impaired by $1.5 million. The impairment was prompted primarily by the reduced projections for Telesens, as a result of the continued deterioration in market conditions in general and the decrease in our projected income from Telesens for future periods.
For additional details, see also under the titles “Telesens” and “Internal Investigation” in Item 8A – Legal Proceedings.
Our Functional Currency
A majority of our revenues is paid to us in U.S dollars or is U.S. dollar-linked. In addition, a substantial portion of our costs is incurred in U.S. dollars. Since the U.S. dollar is the primary currency in the economic environment in which we operate, the dollar is our functional and reporting currency. Transactions and balances denominated in dollars are presented at their original amounts. Accordingly, we remeasure monetary accounts maintained in currencies other than the U.S. dollar using the foreign exchange rate at the balance sheet date in accordance with Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation,” or SFAS 52. We measure and record operational accounts and nonmonetary balance sheet accounts at the rate in effect at the date of the transaction. We report the effects of foreign currency remeasurement in current operations.
Because a substantial amount of our revenues is paid to us in U.S. dollars or is U.S. dollar-linked, and a substantial portion of our expenses is incurred in NIS, we are exposed to currency fluctuation risk. When the U.S dollar devaluates against the NIS, the cost of our operations in Israel will increase and vice versa.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates are evaluated by us on an on-going basis. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe that application of the following critical accounting policies entails the more significant judgments and estimates used in the preparation of our consolidated financial statements.
Business Combination
In January 2008, we acquired Telesens through a stock purchase agreement, which means that we acquired all the assets and assumed all the liabilities of Telesens. The acquisition was accounted in accordance with business combination accounting. In accordance with business combination accounting, we allocate the purchase price of acquired company to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. We engage third-party appraisal firm to assist us in determining the fair values of certain assets acquired and liabilities assumed. Such valuations require our management to make significant estimates and assumptions, especially with respect to intangible assets.
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Our management makes estimates of fair value based upon assumptions believed to be reasonable. These estimates are based on historical experience and information obtained from the management of the acquired company and are inherently uncertain. Critical estimates in valuing certain assets acquired and liabilities assumed include: future expected cash flows from license and service sales, maintenance agreements, customer contracts and estimated cash flows from the projects when completed, the acquired company’s brand awareness and discount rate. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over the fair value of identifiable net assets acquired in business combinations. The goodwill and the identifiable intangible assets (current technology and customer relations) on our balance sheet or that have been impaired at year end are a result of our acquisition of Telesens.
We review goodwill for potential impairment annually in the last quarter of each fiscal year and when events or changes in circumstances indicate the carrying value of the goodwill or other intangible assets may be impaired, we obtain an appraisal from an independent valuation firm to determine the amount of impairment, if any. In addition to the use of an independent valuation firm, we perform internal valuation analyses and consider other publicly available market information. At year end, we also reviewed our long-lived assets for impairment as required by FAS 144.
We perform our annual impairment analysis of goodwill as of December 31 of each year, or more often if there are indicators of impairment present. The provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” require that a two-step impairment test be performed on goodwill at the level of the reporting units. In the first step, or Step 1, we compare the fair value of each reporting unit to its carrying value. If the fair value exceeds the carrying value of the net assets, goodwill is considered not impaired, and we are not required to perform further testing. If the carrying value of the net assets exceeds the fair value, then we must perform the second step, or Step 2, of the impairment test in order to determine the implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference. To determine the fair value used in Step 1, we use discounted cash flows. If and when we are required to perform a Step 2 analysis, determining the fair value of our net assets and our off-balance sheet intangibles would require us to make judgments that involve the use of significant estimates and assumptions.
We determine fair value using widely accepted valuation techniques, including discounted cash flow. These types of analyses require us to make assumptions and estimates regarding industry economic factors and the profitability of future business strategies. It is our policy to conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as future expectations.
If our estimates or their related assumptions change in the future, we may be required to record additional impairment charges for our intangible assets. We determined, based on a valuation conducted as of December 31, 2008, that goodwill acquired in the Telesens acquisition should be impaired and that there was partial impairment of our other intangible assets, namely current technology and customer relations. The impairment was prompted primarily by the reduced projections for Telesens, as a result of the continued deterioration in market conditions in general and the decrease in our projected income from Telesens for future periods.
Revenue recognition
We derive our revenues from the sale of software licenses and from services. Our products are sold worldwide through a combination of our direct sales force and indirect sales channels. Our software licenses require significant customization, integration, installation and development services. Our services revenues consist primarily of fees derived from annual maintenance and customer support.
We recognize revenue in accordance with Statement of Position No. 81-1, “Accounting for Performance of Construction - Type and Certain Production - Type Contracts” (“SOP 81-1”), using contract accounting on a percentage of completion method based on the relation 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, we divide each project into three distinct periods: (i) a functional specification period, (ii) an implementation period and (iii) a stabilization period, as more fully described in Item 4B under “Project Installation: Maintenance and Customer Support.” A project is considered completed when the stabilization period is over.
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The percentage of completion method requires us to make estimates and assumptions regarding the resources and time required to fulfill the contracts’ obligations. We rely on our experience from other projects in making these estimates, and, in addition, use our internal project management and financial systems to track and manage the projects. Employees and project managers regularly submit updates to these systems, which are then used by executive management to monitor the projects and revise the estimates, if necessary. Historically, our estimates have been indicative of our actual results; however, there have been a few cases where we had to adjust assumptions, primarily regarding work effort.
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 unbilled contract costs, in other accounts receivable and prepaid expenses. As of December 31, 2006, 2007 and 2008, we did 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. Since 2004, no such estimated losses were identified.
Revenues from maintenance and support contracts are recognized ratably over the life of the agreement, which is typically one year, or at the time when such services are rendered.
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.
In addition, contracts executed include provisions that clearly specify the enforceable rights regarding products and 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 we expect to perform our contractual obligations under the contract and our licensees are expected to satisfy their obligations under the contract.
Tax Accounting
We are subject to income taxes in Israel, the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits, and deductions, and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as the interest and penalties related to these uncertain tax positions. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.
Effective January 1, 2007, we adopted Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, or FIN 48, an interpretation of Statement No. 109 issued by the Financial Accounting Standard Board, or FASB. FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.
We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. We believe that full valuation allowance should be provided against our deferred tax assets recorded on our consolidated balance sheets. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We will adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made.
Accounting for stock-based compensation and fair value of our common stock
We account for equity-based compensation in accordance with SFAS No. 123(R), “Share-Based Payment,” or SFAS 123(R). Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service periods. Determining the fair value of stock-based awards at the grant date requires the exercise of judgment, including the amount of stock-based awards that are expected to be forfeited. If actual forfeitures differ from our estimates, equity-based compensation expense and our results of operations would be impacted.
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We estimate the fair value of employee stock options using a Black-Scholes-Merton valuation model. The fair value of an award is affected by our stock price on the date of grant as well as other assumptions, including the estimated volatility of our stock price over the expected term of the awards, and the estimated period of time that we expect employees to hold their stock options. The risk-free interest rate assumption is based upon U.S. Treasury interest rates appropriate for the expected life of the awards. We use the historical volatility of our publicly traded stock in order to estimate future stock price trends. Our expected dividend rate is zero since we do not currently pay cash dividends on our shares and do not anticipate doing so in the foreseeable future. We used the “simplified” method to establish the expected term of the awards as allowed under SAB 110. This approach means that the expected term would be the mid-point between the vesting date and the end of the contractual term. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.
While management believes that these assumptions are appropriate, the use of different assumptions could have a material impact on the fair value of the option grant and the related recognition of share-based compensation expense in the consolidated income statement.
Impact of Recently Issued Accounting Standards
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” or SFAS No. 141(R). This Statement replaces SFAS No. 141, “Business Combinations,” or SFAS 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,” or SFAS 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.
SFAS 141(R) also amends SFAS No. 142, “Goodwill and Other Intangible Assets,” or SFAS 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. We do not expect that the adoption of SFAS 141R will have any impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” Or SFAS 160. 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. We do not expect the adoption of SFAS 160 will have a significant impact on our consolidated financial statements.
In November 2008, the FASB ratified Emerging Issues Task Force Issue No. 08-7, “Accounting for Defensive Intangible Assets,” or EITF 08-7, which clarifies the accounting for certain separately identifiable intangible assets which an acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. EITF 08-7 requires an acquirer in a business combination to account for a defensive intangible asset as a separate unit of accounting which should be amortized to expense over the period the asset diminishes in value. EITF 08-7 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. We are currently evaluating the potential impact, if any, of the adoption of EITF 08-7 on our consolidated financial statements.
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In February 2008, the FASB issued FASB Staff Position No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” and FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157”. Collectively, these Staff Positions defer the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value on a recurring basis at least annually, and amend the scope of SFAS 157. In addition, in October 2008 the FASB issued FASB Staff Position FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarified the application of how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP No. 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. As described in Note 3 to our consolidated financial statements contained elsewhere in this annual report, we adopted SFAS 157 and the related FASB staff positions except for those items specifically deferred under FSP FAS 157-2.
In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, “Determination of the Useful Life of Intangible Assets,” or FSP FAS 142-3, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, “Goodwill and Other Intangible Assets.” FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008 and early adoption is prohibited. We are currently evaluating the potential impact, if any, of the adoption of FSP FAS 142-3 on our consolidated financial statements.
In June 2008, the FASB issued EITF No. 07-5 “Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock,” or EITF 07-5. EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of SFAS No. 133 specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. We believe adopting this statement will have no impact on our consolidated financial statements.
Results of Operations
The following table sets forth certain items from our results of operations as a percentage of total revenues for the periods indicated:
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Revenues: | | | | | | | | | | |
Product | | | 59.8 | % | | 56 | % | | 57.6 | % |
Service | | | 40.2 | | | 44 | | | 42.4 | |
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Total revenues | | | 100.0 | | | 100.0 | | | 100.0 | |
Cost of revenues: | | | | | | | | | | |
Product | | | 32.1 | | | 27.2 | | | 31.3 | |
Service | | | 20.8 | | | 18.6 | | | 15.1 | |
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Total cost of revenues | | | 52.8 | | | 45.8 | | | 46.4 | |
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Gross profit | | | 47.2 | | | 54.2 | | | 53.6 | |
Operating expenses: | | | | | | | | | | |
Research and development, net | | | 20.8 | | | 20.5 | | | 21.8 | |
Selling and marketing | | | 22.1 | | | 17.1 | | | 19.1 | |
General and administrative | | | 14.5 | | | 15.1 | | | 12.2 | |
Impairment of goodwill | | | – | | | – | | | 2.7 | |
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Total operating expenses | | | 57.4 | | | 52.7 | | | 55.8 | |
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Operating income (loss) | | | (10.2 | ) | | 1.5 | | | (2.2 | ) |
Other Income | | | 0.3 | | | 0.1 | | | – | |
Financial income, net | | | 1.4 | | | 4.7 | | | (0.9 | ) |
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Income (Loss) before income taxes | | | (8.5 | ) | | 6.3 | | | (3.1 | ) |
Income taxes (tax benefit) | | | (0.2 | ) | | (0.1 | ) | | 0.7 | |
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Net Income (Loss) attributable to common shareholders | | | (8.2 | )% | | 6.2 | % | | (3.8 | ) |
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The following table sets forth a breakdown by geographical area of our revenues (including maintenance revenues) as a percentage of total revenues for the periods indicated:
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| | Years Ended December 31, | |
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| | 2006 | | 2007 | | 2008 | |
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Sales by Geographic Areas: | | | | | | | | | | |
Israel | | | 6.9 | % | | 7.7 | % | | 8.7 | % |
North America | | | 41.0 | | | 35.1 | | | 30.0 | |
Europe | | | 26.7 | | | 35.5 | | | 43.9 | |
Australia | | | 8.1 | | | 5.7 | | | 5.6 | |
South America | | | 6.7 | | | 4.9 | | | 2.0 | |
Far East | | | 3.5 | | | 7.0 | | | 6.6 | |
Africa | | | 7.0 | | | 4.1 | | | 3.2 | |
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Total | | | 100.0 | % | | 100.0 | % | | 100.0 | % |
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Comparison of 2006, 2007 and 2008
Revenues
| | | | | | | | | | | | | | | | |
| | Year ended December 31, | | | | | |
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| | % Change | | % Change | |
($ in millions) | | 2006 | | 2007 | | 2008 | | 2006 vs. 2007 | | 2007 vs. 2008 | |
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Product sales | | $ | 27.5 | | $ | 25.7 | | $ | 30.1 | | | (6.5 | )% | | 17.1 | % |
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Services | | | 18.6 | | | 20.2 | | | 22.2 | | | 8.6 | % | | 9.9 | % |
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Total revenues | | | 46.1 | | | 45.9 | | | 52.3 | | | (0.4 | )% | | 13.9 | % |
Revenues consist primarily of product revenues, which include license fees and fees for professional services required to customize, implement and integrate our products and commissions from hardware vendors. Service revenues include fees for maintenance and customer support.
The increase in our product and service revenues compared to 2007 is mainly attributable to (1) the improvement of our sales process and our frame agreement with France Telecom; and (2) the increase in the value of the Euro against the US dollar during 2008 compared to its value during 2007. In addition, nearly $2 million of our revenues in 2008 are attributed to our new subsidiary, Telesens.
The decrease in our product revenues in 2007 compared to 2006 resulted mainly from the weakness in the amount of new orders received from our customers in the second half of 2006, which decreased our product revenues in the first two quarters of 2007. We believe such weakness was primarily attributed to the consolidation trend of our customers. Service revenues increased sequentially in 2006 and 2007 primarily due to additional maintenance contracts signed with certain customers following successful deployment of our systems in previous years and expiration of the contractual warranty period (the stabilization period).
Cost of Revenues
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| | Years ended December 31, | | | | | |
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| | % Change | | % Change | |
($ in millions) | | 2006 | | 2007 | | 2008 | | 2006 vs. 2007 | | 2007 vs. 2008 | |
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Cost of product sales | | $ | 14.8 | | $ | 12.5 | | $ | 16.3 | | | (15.5 | )% | | 30.4 | % |
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Cost of services | | | 9.6 | | | 8.5 | | | 7.9 | | | (11.5 | )% | | (7.1 | )% |
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Total cost of revenues | | | 24.4 | | | 21.0 | | | 24.2 | | | (13.9 | )% | | 15.2 | % |
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Cost of product sales revenues consists primarily of labor costs relating to customization, integration and installation of our products, license fees paid to third party vendors, depreciation of equipment, other allocated expenses, amortization of capitalized software and royalties paid to the Office of the Chief Scientist in previous years.
Cost of service revenues consists primarily of personnel costs for providing maintenance services, fees paid to third-party providers of maintenance services and third-party software vendors, personnel costs for telephone support and maintenance and other allocated expenses.
The total cost of revenues increased to $24.2 million in 2008 from $21.0 million in 2007. This increase was mainly due to the increase of sales and the increased expenses associated with the U.S dollar’s weakness compared to the NIS. Because a substantial portion of our expenses is incurred in NIS, the devaluation of the dollar against the NIS during 2008 resulted in an increase in the dollar cost of our operations in Israel.
The total cost of revenues decreased to $21.0 million in 2007 from $24.4 million in 2006, resulting from our implementation of a cost reduction plan, which included the termination of employees and measures designed to improve the efficiency of our project deleivery process. This cost reduction was reflected mainly in cost of product sales in 2007. See also the discussion in “Gross Profit” below.
Gross Profit
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| | Years ended December 31, | | | | | |
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| | % Change | | % Change | |
($ in millions) | | 2006 | | 2007 | | 2008 | | 2006 vs. 2007 | | 2007 vs. 2008 | |
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Product sales | | | 12.8 | | | 13.2 | | | 13.7 | | 3.1 | % | | 3.8 | % | |
Services | | | 9.0 | | | 11.7 | | | 14.3 | | 30.0 | % | | 22.2 | % | |
Total gross profit | | $ | 21.8 | | $ | 24.9 | | $ | 28.0 | | 14.2 | % | | 12.4 | % | |
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Gross profit as a percentage of revenues
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| | Years ended December 31, | |
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| | 2006 | | 2007 | | 2008 | |
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Product sales | | 46.3 | % | | 51.4 | % | | 45.6 | % | |
Services | | 48.4 | % | | 57.7 | % | | 64.5 | % | |
Total gross profit | | 47.2 | % | | 54.2 | % | | 53.6 | % | |
Total gross profit increased to $28.0 million in 2008 from $24.9 million in 2007. However, as a percentage of revenues, the gross profit decreased from 54.2% to 53.6%. This is mainly due to the dollar’s weakness compared to the NIS which resulted in an increase of the dollar cost of our operations in Israel.
Total gross profit increased to $24.9 million in 2007 from $21.8 million in 2006, or from 47.2% to 54.2%. The increase in gross profit resulted from our implementation of a cost reduction plan, including the improvement of project delivery efficiency, and a mixture of projects and services in 2007 that were more profitable compared to those provided during 2006.
Operating Expenses
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| | Year ended December 31, | | | | | |
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| | % Change | | % Change | |
($ in millions) | | 2006 | | 2007 | | 2008 | | 2006 vs. 2007 | | 2007 vs. 2008 | |
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Research and development, net | | $ | 9.6 | | $ | 9.4 | | $ | 11.4 | | (2.1 | )% | | 21.3 | % | |
Selling and marketing | | | 10.2 | | | 7.8 | | | 10 | | (23.5 | )% | | 28.2 | % | |
General and administrative | | | 6.7 | | | 7.0 | | | 6.4 | | 4.5 | % | | (8.6 | )% | |
Impairment of goodwill | | | – | | | – | | | 1.4 | | – | | | 100 | % | |
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Total operating expenses | | | 26.5 | | | 24.2 | | | 29.2 | | (8.7 | )% | | 20.7 | % | |
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Research and Development Expenses, Net.Research and development expenses consist primarily of compensation and related costs of employees engaged in ongoing research and development activities, subcontractors and other related costs.
| | | | | | | | | | |
| | Year ended December 31, | |
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($ in millions) | | 2006 | | 2007 | | 2008 | |
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Total cost of research and development | | $ | 9.7 | | $ | 9.4 | | $ | 11.4 | |
Less grant participations | | | 0.1 | | | – | | | – | |
Research and development, net | | | 9.6 | | | 9.4 | | | 11.4 | |
Gross research and development expenditures increased 21.3% to $11.4 million in 2008, from $9.4 million in 2007. The increase in 2008 was primarily due to the increased expenses associated with the devaluation of the US dollar against the NIS.
Gross research and development expenditures decreased 3.0% to $9.4 million in 2007, from $9.7 million in 2006. The decrease in 2007 was primarily due to implementation of a cost reduction plan and more focused research and development plans. For further information, see below under the heading “Research and Development.”
Selling and Marketing Expenses.Selling and marketing expenses consist primarily of compensation for sales and marketing personnel, as well as promotion of contract administration, traveling and entertainment expenses. Selling and marketing expenses were approximately $10.0 million, or 19.1% of total revenues, in 2008; $7.8 million, or 17.1% of total revenues, in 2007; and $10.2 million, or 22.1% of total revenues, in 2006. The increase in selling and marketing expenses in 2008 is primarily due to (1) our efforts to increase sales and to increase our market share (2) the devaluation of the US dollar against the Euro and the NIS.
General and Administrative Expenses.General and administrative expenses consist primarily of compensation for finance, human resources, general management, networks and information systems, personnel, as well as insurance, consultancy services expenses, and other expenses. General and administrative expenses decrease in 8.6% to $6.4 million, or 12.0% of our total revenues in 2008, from $7.0 million, or 15.1% of total revenues in 2007. The decrease was primarily due to lower legal expenses compared to 2007, mainly associated with our lawsuit against Hutchison UK, that was settled in 2008.
General and administrative expenses increased 4.5% to $7.0 million or 15.1% of our total revenues in 2007, from $6.7 million, or 14.5% of total revenues in 2006. The slight increase in the past two years is associated with our decision to maintain the critical mass necessary to manage and support our global business, which entailed, among others, an increase in legal expenses associated primarily with litigation as described under the heading “Item 8A – Legal Proceedings.”
Financial Income, Net.Financial income consists primarily of interest derived from cash and cash equivalents, short-term investments and foreign currency translation adjustments. Our financial expenses were $0.5 million in 2008 and our financial income was $2.2 million in 2007. This decrease was primarily due to the devaluation of the Euro against the US dollar. Because a substantial portion of our customers are paying in Euro, the devaluation of the Euro compared to the US dollar during 2008 increased our financial expenses in 2008. Our financial income increased to $2.2 million in 2007 from $0.7 million in 2006 primarily due to (1) the sale of marketable securities we held during the third quarter of 2006, that were subject to impairment and therefore offseted our financial income and (2) the devaluation of the US dollar against the Euro and the NIS.
Research and Development
We conduct our research and development operations mainly in Israel. Our research and development efforts have been financed through internal resources and grants from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, or the Chief Scientist, the BIRD Foundation and the European Union. We did not apply for such funds in 2006, 2007 and 2008.The Chief Scientist provided grants of approximately $537,000 for the year ended December 31, 2005 and approximately $54,000 for the year ended December 31, 2006. We did not obtain any grants during 2007 and 2008. Of our total research and development expenses, these grants accounted for 5.9% in 2005 and 0.6% in 2006. These grants were provided to us as part of our participation in a consortium of companies (MAGNET program) engaged in the development of a management system for large networks. We are not required to repay these MAGNET program grants, nor are we required to pay any royalties in respect thereof. See “Item 5B – Grants from the Office of the Chief Scientist”.
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We have also received royalty-bearing grants from the BIRD Foundation to be repaid at the rate of 3.5% to 5% of sales of products developed as a result of the research projects funded by the BIRD Foundation until a maximum of 150% of the U.S. dollar amount we received, linked to the United States consumer price index, is repaid. These royalty-bearing grants received for research and development are offset against our gross research and development expenditures. We paid or accrued to the BIRD Foundation insignificant amounts in the past few years and have not received grants from the BIRD Foundation since 1996.
Impairment of Goodwill and other long-lived assets
The expense of the impairment of goodwill was $1.4 million and it was recorded as a result of the annual tests required for goodwill. This resulted from the acquisition of Telesens in January 2008. The expense of the impairment of other long-lived assets was at the amount of $132,000.
Corporate Tax Rate
Israeli companies are generally subject to Corporate Tax on their taxable income at the rate of 27% for the 2008 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: 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, our facilities have been granted approved enterprise status under the Law for Encouragement of Capital Investments, 1959, or the Investments Law. Consequently, these facilities are eligible for tax benefits. We have derived, and expect to continue to derive, a substantial portion of our income from our approved enterprise facilities, as we intend to continue and file additional applications for approved enerpise in the future.
Subject to compliance with applicable requirements, the income derived from our approved enterprise facilities will be subject through 2013 to a reduced tax rate of a maximum of 25%. The actual tax rate will depend upon the percentage of non-Israeli holders of our share capital. The above benefits are conditioned upon our fulfillment of conditions stipulated by the Investments Law, the regulations promulgated thereunder and the instruments of approval for the specific investments in approved enterprises. If we fail to comply with these conditions, our benefits may be canceled and we may be required to refund the amount of benefits received, in whole or in part. 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 our Approved Enterprise programs as the undistributed tax exempt income is essentially permanent in duration.
During the years ended December 31, 2006, 2007 and 2008, we provided for a full valuation allowance against the increase in our deferred tax assets, resulting from our net operating losses carryforwards, in the amount of $1.1 million, $0.6 million and $0.5 million, respectively, because we did not believe that it is more likely than not that such deferred tax assets will be realized.
Impact of Inflation, Devaluation and Fluctuation in Currencies on Results of Operations, Liabilities and Assets
The table below sets forth the annual rate of inflation, the annual rate of devaluation (or revaluation) of the NIS against the U.S. dollar and the gap between them for the periods indicated:
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| | Year Ended December 31, | |
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| | 2008 | | 2007 | | 2006 | | 2005 | | 2004 | |
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Inflation (Deflation) | | 3.8 | % | | 3.4 | % | | (0.1 | )% | | 2.4 | % | | 1.2 | % | |
Devaluation (Revaluation) | | (1.1 | )% | | (9.0 | )% | | (8.2 | )% | | 6.8 | % | | (1.6 | )% | |
Inflation (devaluation) gap | | 4.9 | % | | 12.4 | % | | 8.1 | % | | (4.4 | )% | | 2.8 | % | |
Because exchange rates between the NIS and the dollar fluctuate continuously, exchange rate fluctuations and especially larger periodic devaluations will have an impact on our profitability and period-to-period comparisons of our results. We believe that inflation in Israel has not had a material effect on our results of operations.
For information about these risks and the methods we employ to mitigate these risks, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”
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B. Liquidity and Capital Resources
We had cash and cash equivalents, marketable securities and bank deposits of $32.5 million at December 31, 2006, $33.5 million at December 31, 2007 and $25.0 million at December 31, 2008.
Our operating activities provided (used) cash of $(2.6) million for the year ended December 31, 2006, $3.7 million for the year ended December 31, 2007 and $(4.3) million for the year ended December 31, 2008. $3.6 million out of the cash provided by operating activities in 2008 is due to the decrease in the credit balance of our related party Malam - Team Ltd.
Our capital expenditures were approximately, $1.7 million in 2006, $4.3 million in 2007 and $4.6 million in 2008. Our capital investments for improvements of leased premises were $0.02 million in 2006, $2.11 million in 2007 and $0.40 million in 2008. In 2008, our capital expenditures were approximately $4.6 million, of which $3.5 million were used for purchase of fixed assets and $1.1 million for the acquisition of our subsidiary – Telesens.
In January 2005, we issued 6,636,391 Series A Preferred Shares to investors in a private placement transaction, at a price per share of $2.20, for an aggregate investment of approximately $14.6 million (before expenses). We also issued to the investors in the private placement transaction warrants to purchase the number of ordinary shares equal to 40% of the number of Series A Preferred Shares purchased by them, exercisable for a period of six years, at an exercise price per share of $2.50.
Management believes our cash, cash equivalents reserve, as well as cash flow from our operations in 2009 will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the next twelve months.
Market Risk
We do not have any off-balance-sheet concentration of credit risk, such as foreign exchange contracts, option contracts or other foreign hedging arrangements. We may be subject to concentrations of credit risk from financial instruments, consisting principally of cash and cash equivalents, short-term bank deposits, trade and unbilled receivables. We invest our cash and cash equivalents in US$ deposits with major Israeli and U.S. banks. We believe that the financial institutions that hold our investments are financially sound, and, accordingly, minimal credit risk exists with respect to these investments.
For information on our market risk, see “Item 11 – Quantitative and Qualitative Disclosures About Market Risk.”
Grants from the Office of the Chief Scientist
The Government of Israel encourages research and development projects through the Office of Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, or the Office of the Chief Scientist, pursuant to the Law for the Encouragement of Industrial Research and Development, 1984, and the regulations promulgated thereunder, commonly referred to as the R&D Law. Grants received under such programs are generally repaid through a mandatory royalty based on revenues from products (and ancillary services) incorporating know-how developed with the grants. This government support is conditioned upon our ability to comply with certain applicable requirements and conditions specified in the Office of the Chief Scientist’s programs and with the provisions of the R&D Law.
Generally, grants from the Chief Scientist constitute up to 50% of qualifying research and development expenditures for particular approved projects. Under the terms of these Chief Scientist projects, a royalty of 3% to 5% is due on revenues from sales of products and related services that incorporate know-how developed, in whole or in part, within the framework of projects funded by the Chief Scientist. Royalty obligations are usually 100% of the dollar-linked amount of the grant, plus interest. The royalty rates applicable to our programs range from 3% to 3.5%.
The R&D Law generally requires that the product developed under a program be manufactured in Israel. However, upon a notification to the Office of the Chief Scientist a portion of up to 10% of the manufacturing volume may be performed outside of Israel. Upon the approval of the Chief Scientist, a greater portion of the manufacturing volume may be performed outside of Israel, provided that the grant recipient pays royalties at an increased rate, which may be substantial, and the aggregate repayment amount is increased up to 300% of the grant, depending on the portion of the total manufacturing volume that is performed outside of Israel. The R&D Law further permits the Chief Scientist, among other things, to approve the transfer of manufacturing rights outside Israel in exchange for an import of different manufacturing into Israel as a substitute, in lieu of the increased royalties. The R&D Law also allows for the approval of grants in cases in which the applicant declares that part of the manufacturing will be performed outside of Israel or by non-Israeli residents and the research committee is convinced that doing so is essential for the execution of the program. This declaration will be a significant factor in the determination of the Office of Chief Scientist whether to approve a program and the amount and other terms of benefits to be granted. The increased royalty rate and repayment amount will be required in such cases.
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The R&D Law also provides that know-how developed under an approved research and development program may not be transferred to third parties in Israel without the approval of the Chief Scientist. Such approval is not required for the sale or export of any products resulting from such research or development. The R&D Law further provides that the know-how developed under an approved research and development program may not be transferred to any third parties outside Israel, except in certain special circumstances and subject to prior approval. The Chief Scientist may approve the transfer of Chief Scientist-funded know-how outside Israel in the following cases: (a) the grant recipient pays to the Chief Scientist a portion of the sale price paid in consideration for such Chief Scientist-funded know-how (according to certain formulas); or (b) the grant recipient receives know-how from a third party in exchange for its Chief Scientist-funded know-how; or (c) such transfer of Chief Scientist-funded know-how arises in connection with certain types of cooperation in research and development activities.
The R&D Law imposes reporting requirements with respect to certain changes in the ownership of a grant recipient. The law requires the grant recipient and its controlling shareholders and foreign interested parties to notify the Chief Scientist of any change in control of the recipient or a change in the holdings of the means of control of the recipient that results in a non-Israeli becoming an interested party directly in the recipient and requires the new interested party to undertake to the Chief Scientist to comply with the R&D Law. In addition, the rules of the Chief Scientist may require additional information or representations in respect of certain of such events. For this purpose, “control” is defined as the ability to direct the activities of a company other than any ability arising solely from serving as an officer or director of the company. A person is presumed to have control if such person holds 50% or more of the means of control of a company. “Means of control” refers to voting rights or the right to appoint directors or the chief executive officer. An “interested party” of a company includes a holder of 5% or more of its outstanding share capital or voting rights, its chief executive officer and directors, someone who has the right to appoint its chief executive officer or at least one director, and a company with respect to which any of the foregoing interested parties owns 25% or more of the outstanding share capital or voting rights or has the right to appoint 25% or more of the directors. Accordingly, any non-Israeli who acquires 5% or more of our ordinary shares will be required to notify the Chief Scientist that it has become an interested party and to sign an undertaking to comply with the R&D Law.
The funds available for the Chief Scientist grants out of the annual budget of the State of Israel have been reduced in the past and may be further reduced in the future. We cannot predict whether, if at all, we would be entitled to any future grants or the amounts of any such grants.
C. Research and Development, Patents and Licenses
Our research and development efforts are focused on enhancing our products and developing new modules to meet the evolving needs of communications service providers and equipment vendors and on improving existing products by incorporating new features, interfaces and technologies. We believe that the timely development of new modules and enhancements is essential to maintaining our competitive position in the marketplace.
We currently employ 119 employees in research and development (excluding research and development employees of Telesens). Gross research and development expenses were approximately $9.7 million, or 20.9% of our revenues, for the year ended December 31, 2006. Gross research and development expenses were approximately $9.4 million, or 20.5% of our revenues, for the year ended December 31, 2007. Gross research and development expenses were approximately $11.4 million, or 21.8% of our revenues, for the year ended December 31, 2008. For information on our research and development expenditures and grants we received, see “Item 5A – Results of Operations – Research and Development.” We anticipate that we will commit increasing amounts to research and development in future periods.
Since we received grants from the Chief Scientist, we are obligated to perform all manufacturing activities for projects subject to the grants in Israel unless we receive an approval to perform any portion of them outside of Israel. Know-how from the research and development which is used to produce these products may not be transferred to third parties without the approval of the Chief Scientist. Approval is not required for the sale or export of any products resulting from the research and development based on these grants. For further information regarding the Chief Scientist, see “Item 5B –Liquidity and Capital Resources– Grants from the Office of the Chief Scientist.”
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D. Trend Information
Spending in the global OSS market in which we operate is built on the need for service providers to support new services and network equipment. The second half of 2008 was affected by the global economic slowdown that exacerbated into a severe global recession. Consequently, the economic outlook for 2009 has worsened significantly, including in our largest markets, North America and Europe, and the global economic recession appears set to continue for some time. This severe recession affects spending in the global OSS market, including service providers’ capital expenditures, which in turn is expected to reduce our sales and increase the pressure on the price of our products and services. Each of these factors could have a material adverse effect on our operating results.
In addition, the communications service provider industry is undergoing a period of consolidation. Examples of this trend are AT&T mergers with SBC (November 2005), Bellsouth (December 2006) and Dobson (July 2007). Consolidations and mergers of the providers will result in less potential customers and less networks to monitor and manage. Furthermore, the resulting consolidation of our prospective customers may delay or cause cancellations of significant sales of our products, which could seriously harm our operating results.
Furthermore, in the past four years, there has been a trend of mergers and acquisitions in the OSS market. Examples of this trend are the IBM acquisition of Micromuse (December 2005) and of Vallemt (December 2006).This consolidation results in stronger competition from a large competitor that could threaten our market position and decrease our sales.
With regards to our product portfolio, in the past few years, we have identified a continuous requirement in the OSS market for service management solutions. This trend, along with customers’ requirements has led us to integrate service and customer oriented capabilities into our product portfolio.
During the last few years, we have seen an increasing interest from existing and potential customers in performance solutions to proactively manage network and service level availability. This trend, which we believe is associated with the nature of next generation networks, their complexity and the increased requirement for fast time-to-market, has increased the relative portion of our performance systems solutions within our current and potential business.
In 2009, we expect market growth to slow or even be negative due to to the global recession. More specifically, we expect that global IT expenditure and OSS spending will decrease and we will experience a reduction in sales, as well as downward pressure on the price of our products and services. The above scenarios would have a material adverse effect on our business, operating results and financial condition. As we are unable to predict how long the recession will last and to what extent, we are taking precautionary steps to adjust our operating expenses to expected demand while securing our ability to be competitive and maintain revenues.
For more information on trends in our industry, please see Item 4, “Information on the Company–Business Overview–Industry Background; Market Opportunity.”
E. Off-Balance Sheet Arrangements
We are not a party to any material off-balance sheet arrangements. In addition, we have no unconsolidated special purpose financing or partnership entities that are likely to create material contingent obligations.
F. Tabular Disclosure of Contractual Obligations
The following table sets forth, as of December 31, 2008, our known contractual obligations by type of obligation and for the periods indicated:
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| | Payment due by period (in thousands US$) | |
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| |
Contractual Obligations | | Total | | Less than
1 year | | 1-3 years | | 3-5 years | | More than
5 years | |
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| | | | | | | | | | | | | | | | |
Long-Term Debt | | 1,592 | | | 221 | | | 442 | | | 442 | | | 487 | | |
Operating Lease Obligations (facilities and vehicles) | | 6,066 | | | 1,391 | | | 2,385 | | | 1,527 | | | 763 | | |
Uncertain Income Tax Positions | | 120 | | | 120 | | | | | | | | | | | |
Accured Serverance Pay | | 6,412 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total | | 14,190 | | | 1,732 | | | 2,827 | | | 1,969 | | | 1,250 | | |
In addition, we obtained performance guarantees in favor of certain customers from several banks in Israel amounting to $3.1 million and $0.8 million for the years ended December 31, 2007 and 2008, respectively. We obtained other guarantees in favor of facility and car leasers from banks in Israel amounting to $0.4 million for both years ended December 31, 2007 and 2008.
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Additional contractual obligations relating to royalty commitments to the Chief Scientist and the BIRD Foundation are as set forth above in “Item 5A - Operating Results – Research and Development.”
| |
Item 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
A. Directors and Senior Management
Our directors and executive officers are as follows:
| | | | |
Name | | Age | | Position |
| |
| |
|
| | | | |
Meir Lipshes | | 63 | | Chairman of the Board, and Chief Executive Officer |
Meir Dvir* (1)(2) | | 78 | | Director |
Julie Kunstler*+(1)(2) | | 53 | | Director |
Doron Zinger*+(1)(2) | | 56 | | Director |
Ilan Toker | | 40 | | Director |
Tali Cohen - Tueg | | 38 | | Acting Chief Financial Officer |
Shachar Ebel | | 39 | | Chief Operational Officer and Chief Technology Officer |
Duby Yoely | | 48 | | Vice President Marketing and Solution Engineering |
Asaf Shirazi | | 40 | | Vice President Reaserch and Development |
Shuki Rozanski | | 43 | | Vice President Business Development |
* Designated as an “independent director” in accordance with NASDAQ Marketplace Rules.
+External director in accordance with the Companies Law.
(1) Member of audit committee
(2) Member of nomination and compensation committee
Meir Lipshes has served as our Chief Executive Officer since December 2006 and as our Chairman of board of directors since January 2005. He has served as one of our directors since we commenced independent operations in September 1992. Mr. Lipshes also served as our Chief Executive Officer from January 1996 through September 2004 and from March 2005 through November 2005 (on an interim basis). Mr. Lipshes was one of the founders, and is a current shareholder, of Team Software, or Team, our former principal shareholder. Mr. Lipshes served as Team’s President from 1972 to May 1995 and as its Chief Executive Officer from May 1995 until September 1996. Mr. Lipshes also served as acting President of Omnitek-Eichut Ltd. from November 1994 until September 1996. Mr. Lipshes has been a director of Team since 1972 and a director of Omnitek since 1979. From 1970 to 1972, he was employed in the electronics and engineering division at Motorola Israel, where he was one of the founders of the computing department. He also served as a development engineer for encoding equipment in the Signal Corps of the Israel Defense Forces. Mr. Lipshes has a degree in electronics from the Technical School of the Israeli Air Force.
Dr. Meir Dvir became a director in 1997. Since 1994, Dr. Dvir serves as President of Dea Shnia Ltd., a consulting company. Dr. Dvir additionally has held the following positions, among others: Board member of Bank Leumi Ltd. from 1999 to 2005, Board member of TAT Technologies Ltd. from 1994 to 2008, Executive Vice President of R&D and Business Development at Israel Aircraft Industries from 1985 to 1994, Director of the Aircraft Division of Israel Aircraft Industries from 1987 to 1989, Chief Operating officer of Elscint Ltd., a publicly-held Israeli high technology and defense company from 1984 to 1985, and President of Israeli Aircraft Industries from 1982 to 1983. Dr. Dvir holds a Masters Degree and a Ph.D. in physics from the Hebrew University, Israel.
Julie Kunstler became a director in August 2006. She is the managing director and founder of Portview Communications Partners, a venture capital fund. From 1990 to 2002, she was the managing director of HK Catalyst Strategy & Finance Ltd. Ms. Kunstler is also the Vice President of Business Development at Teknovus Inc., a developer of broadband access semiconductor solutions. Ms Kunstler is a director or observer for several privately-held communications technology companies, including: FiberZone Networks, Teknovus and Teranetics. Ms. Kunstler holds a BA degree in urban planning from the University of Cincinnati and an MBA degree from University of Chicago.
Doron Zinger became a director in 2004. Mr. Zinger has served as the chief executive officer of Zinger Communications Ltd., a consulting and management company, since July 2008. From 2005 to 2008 he was the chief executive officer of RiT Technologies Ltd., a NASDAQ-listed company engaged in providing physical network infrastructure control and management solutions. Mr Zinger was also a venture partner (Telecommunications) with Giza Venture Capital Fund, and a member of the Board of Directors of Vsecure Ltd. Mr. Zinger was a member of the Advisory Board of Iamba Technologies Limited until October 2004, member of the Advisory Board of Main.net communications Ltd until June 2004 and a member of the Advisory Board of Cellot until December 2004. From February through July 2000, Mr. Zinger served as Chief Executive Officer of Lambda Crossing Ltd., a start-up company engaged in the development of electro optic components for optical communications networks. From 1997 through 2000, Mr. Zinger served as President and Chief Executive Officer of VocalTec Communications Ltd., a leading company in the emerging IP telephony industry. From 1980 through 1997, Mr. Zinger held various technical, marketing and management positions at ECI Telecom Ltd., a leading provider of telecommunications equipment worldwide, including: Senior Vice President and Chief Operating Officer from 1995 through 1997, Corporate Vice President and General Manager DCME SBU from 1993 through 1995, and Director of Marketing and Sales Telecommunications Products from 1991 through 1993. Mr. Zinger received a B.Sc. degree from The Technion Israel Institute of Technology in 1975, and an MBA from Tel Aviv University in 1991. Mr. Zinger is a Major (Res.) in the Israeli Navy.
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Ilan Toker became a director in 2004. Mr. Toker is an executive of Arad Investments and Industry Development Ltd. (a company the shares of which are publicly traded on the Tel Aviv Stock Exchange), where he has served as the Chief Financial Officer since 2000. Mr. Toker is the Chief Financial Officer of Malam - Team Ltd. (a company the shares of which are publicly traded on the Tel Aviv Stock Exchange, and an affiliate company of Arad Investments and Industrial Development Ltd.) From 1997 until 2007 Mr. Toker has been the Chief Financial Officer of Isras Investment Company Ltd. (a company the shares of which are publicly traded on the Tel Aviv Stock Exchange, and an affiliate company of Arad Investments and Industrial Development Ltd.). Mr. Toker is a director in Isras Investment Company Ltd. and in Hassin Esh Ceramic Products Company (1990) Ltd. Mr. Toker holds a B.A. degree in accounting and economics and an M.B.A. degree, both from Tel Aviv University.
Tali Cohen-Tueg, Acting Chief Financial Officer since September 2008. Prior to her CFO appointment, Mrs. Cohen-Tueg served as our Controller. She joined us in 1997. From 1994 to 1997, Mrs. Cohen-Tueg worked and specialized in a CPA firm. She holds her BA degrees in Economics and Accounting from Hebrew University in Jerusalem. She is a Certified Public Accountant in Israel.
Shachar Ebel, Chief Operating Officer since July 2008 and Chief Technology Officer since 2004. Prior to joining us, Mr. Ebel held various positions in the OSS industry, including as Chief System Engineer at Ofek, a NGN telecom professional services group, and System Engineering Department Manager for OSS solutions at Telrad Networks. Mr. Ebel holds an MBA and a B.Sc in Electronics Engineering from Tel Aviv University.
Duby Yoely, Vice President Marketing and Solution Engineering from 2005, joined us in 2001 as Engineering Group Manager, responsible for telecom solutions and professional services. He has held telecom management positions since 1989, when he joined Bezeq as an engineer. After ten years at Bezeq as NMC Engineer and then manager, Mr. Yoely joined Partner Communications Company Ltd., where he started as NOC manager, taking part in building the new field of GSM operator network rollout. Mr. Yoely holds a BSc degree in electrical engineering from The Technion-Israel Institute of Technology.
Asaf Shirazi, Vice President, Research and Development from 2006, joined us in 2003, serving in several management roles in our company. Prior to joining us, Mr. Shirazi held senior R&D management positions at Verint, a leading provider of analytic software-based solutions for the security and business intelligence markets, and at Ofek, the Israeli Air Force software development unit which designs military software. Mr. Shirazi holds a BSc (double major) and MSc degree in Computer Science from The Technion-Israel Institute of Technology.
Joshua (Shuki) Rozanski rejoined us in January 2008 as Vice President, Business Development, after a brief one-year hiatus. Mr. Rozanski brings over 16 years of expertise in sales, marketing and business development within the telecommunication and hitech industries. Mr. Rozanski’s career at TTI Telecom also spanned positions as AVP Sales, managing the company sales team in EMEA, and prior to that, Director of Sales Western Europe, based in London. Before joining us in 2000, Mr. Rozanski served in senior marketing and sales positions at ECI Telecom in Israel from 1996 to 2000, including as Director of Marketing & Sales, West Europe. Mr. Rozanski also served as Senior Investment Analyst at Genesis Management and Investments and Supervisor of large-scale electronic projects for the Israeli Air Force. Mr. Rozanski holds a B.Sc in Electronics Engineering from the Jerusalem College of Technology and MBA from Bar Ilan University.
Additional Information
During 2008, our Chief Financial Officer left the company and since September 2008 Tali Cohen-Tueg has served as our Acting Chief Financial Officer. In February 2008, Lior Bergman, who served as our director since December 2004, stepped down from our board of directors.
There are no family relationships between any of the directors or members of senior management named above.
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B. Compensation
Directors
In 2008, our directors, other than Meir Lipshes, received annual compensation of approximately $20,000 each and approximately $750 (approximately $450 per telephone meetings) per board meeting or per board committee meeting in which they participate, all linked to the Israeli Consumer Price Index, or CPI. We paid our directors, other than Meir Lipshes, an aggregate amount of approximately $120,000 in 2008. Our directors, other than Meir Lipshes, will continue to receive the aforesaid compensation in 2009.
In November 2006, our board of directors authorized the grant of options to purchase up to 15,000 ordinary shares to each of our directors (except for Meir Lipshes), at an exercise price of $3.50 per share. The grant was approved by our shareholders in December 2006. However, one of our directors, Ilan Toker, decided to waive his right to these options. The options granted to the directors in 2006, in an aggregate amount of 60,000, vest over a period of 3 years and shall expire in November 2011.
Executive Officers
We pay Meir Lipshes, our Chairman and Chief Executive Officer, a monthly management fee of approximately NIS 120,000 (approximately $31,500 according to the exchange rate prevailing on December 31, 2008) linked to the CPI, plus applicable social benefits. The total compensation paid to Meir Lipshes, our Chairman and Chief Executive Officer, during 2008 was approximately $568,000 compared to approximately $415,000 in 2007. The total amount of compensation paid to Meir Lipshes during 2007 and 2008 includes pension, retirement and similar benefits. The amount paid to Meir Lipshes in 2008 also includes a bonus of $145,000. In November 2004, our board of directors authorized the grant of options to Meir Lipshes to purchase up to 75,000 ordinary shares, at an exercise price of $3 per share. The option grant to Meir Lipshes was approved by our shareholders in December 2004. All of the options granted to Meir Lipshes in November 2004 expired in October 2008.
Total compensation during 2008 to the members of senior management (consisting of 7 persons, not including Meir Lipshes) amounted to approximately $1.6 million. This amount includes approximately $0.4 million set aside by us to provide special bonuses, pension, retirement and similar benefits. These figures for compensation include approximately $0.7 million paid in 2008 to two members of senior management whom we no longer employ or which no longer serve as executive officers.
Our employment agreements with our executive officers located in Israel provide for standard Israeli benefits, including, among other things, managers’ insurance and educational fund payments. We make payments in this context as follows: pension - 5.0% of gross salary; severance pay - 8.33% of gross salary; loss of earning capacity - up to 2.5% of gross salary; and educational fund - 7.5% of gross salary. With respect to some of our employees, such payments are made based on 75% to 85% of their gross salary.
For details about grant of stock options to our directors and executive officers, see also “Item 6E – Share Ownership” below.
C. Board Practices.
We are subject to the provisions of the Israeli Companies Law and the regulations promulgated thereunder. In addition, as a NASDAQ-listed company, we are also subject to certain corporate governance standards adopted by NASDAQ.For further information, see “Item 16G – Corporate Governance.”
Board of Directors
The management of our business is vested in our board of directors, which may exercise all such powers and do all such acts as we are authorized to exercise and do, and are not, by the provisions of our articles of association or by law, required to be exercised or done by our shareholders. Our board of directors may, in its discretion, cause the Company to borrow or secure the payment of any sum or sums of money for the purposes of the Company, at such times and upon such terms and conditions in all respects as it thinks fit, and, in particular, by way of issuance of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages, charges, or other securities on the undertaking or the whole or any part of the our property, both present and future, including its uncalled or called but unpaid capital for the time being.
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Our articles of association provide for a board of directors of not less than three and not more than seven members. Each director is elected at the annual general meeting of shareholders and holds office until the election of his successor at the next annual general meeting, except for external directors (as described below).
Under NASDAQ Marketplace Rules, effective as of July 31, 2005, absent an exemption therefrom, a majority of our board of directors must qualify as independent directors within the meaning of the NASDAQ Marketplace Rules. Our board of directors determined that, other than Meir Lipshes and Ilan Toker, all of our directors qualify as independent directors under the new NASDAQ rules.
Alternate Directors
Our articles of association provide that a director may appoint, by written notice to the Company, any individual who is not a member of the board of directors, to serve as an alternate director. An external director may not appoint an alternate director, except in very limited circumstances. Any alternate director shall have all of the rights and obligations of the director appointing him or her, except the power to appoint an alternate. The alternate director may not act at any meeting at which the director appointing him or her is present and may not act as the alternate for several directors. Unless the time period or scope of any such appointment is limited by the appointing director, such appointment is effective for all purposes and for an indefinite time, but expires upon the expiration of the appointing director’s term. Notwithstanding the foregoing, a director may serve as an alternate director on any committee of our board of directors of which he or she is not already a member. At present, there are no appointments of alternate directors.
External Directors
Qualifications of External Directors
Under the Israeli Companies Law, companies incorporated under the laws of Israel whose shares have been offered to the public in or outside of Israel, are required to appoint at least two external directors. The Companies Law provides that a person may not be appointed as an external director if the person or the person’s relative, partner, employer or any entity under the person’s control, has, as of the date of the person’s appointment to serve as external director, or had, during the two years preceding the date of appointment, any affiliation with the company, any entity controlling the company or any entity controlled by the company or by this controlling entity. The term affiliation includes:
| | |
| • | an employment relationship; |
| | |
| • | business or professional relationship maintained on a regular basis; |
| | |
| • | control; and |
| | |
| • | service as an office holder. |
The Companies Law defined the term “office holder” of a company to include a director, the chief executive officer, the chief business manager, a vice president and any officer that reports directly to the chief executive officer.
Pursuant to an amendment to the Companies Law, (1) each external director must have either “accounting and financial expertise” or “professional qualifications “ (as such terms are defined in regulations promulgated under the Companies Law) and (2) at least one of the external directors must have “accounting and financial expertise.” We believe we satisfy this requirement and that each of our external directors qualifies as having the requisite “accounting and financial expertise.”
No person can serve as an external director if the person’s position or other business creates, or may create, conflict of interests with the person’s responsibilities as an external director. Until the lapse of two years from termination of office, a company may not engage an external director to serve as an office holder and cannot employ or receive services from that person, either directly or indirectly, including through a corporation controlled by that person.
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Election of External Directors
External directors are to be elected by a majority vote at a shareholders’ meeting, provided that either:
| | |
| • | including at least one third of the shares of non-controlling shareholders voted at the meeting in favor of election; or |
| | |
| • | the total number of shares voted against the election of the external director does not exceed one percent of the aggregate voting rights in the company. |
The initial term of an external director is three years and he or she may be reelected to one additional term of three years. Thereafter, our external directors may be reelected by our shareholders for additional periods of up to three years each only if the audit committee and the board of directors confirm that, in light of the external director’s expertise and special contribution to the work of the board of directors and its committees, the reelection for such additional period is beneficial to the Company. External directors may be removed from office only by the same percentage of shareholders as is required for their election, or by a court, and then only if the external directors cease to meet the statutory qualifications for their appointment or if they violate their duty of loyalty to the company.
Julie Kunstler and Doron Zinger serve as our external directors. Ms. Kunstler commenced her term as an external director in August 2006. Mr. Zinger commenced his term as an external director in April 2004 and was reelected in December 2006 for a term that commenced in April 2007.
Any committee of the board of directors must include at least one external director and the audit committee must include all of the external directors. An external director is entitled to compensation as shall be provided in regulations under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with service provided as an external director. We do not have, nor do our subsidiaries have, any directors’ service contracts granting to the directors any benefits upon termination of their employment.
Committees of the Board
Subject to the provisions of the Companies Law, our board of directors may delegate its powers to committees consisting of board members. Our board of directors established the following committees:
Audit Committee
Under the Companies Law, our board of directors is required to appoint an audit committee, comprised of at least three directors including all of the external directors, but excluding:
| | |
| • | the chairman of the board of directors; |
| | |
| • | any director who is employed by the company or provides services to the company on a regular basis; and |
| | |
| • | a controlling shareholder or its relative. |
The role of the audit committee is to examine flaws in the business management of the company, in consultation with the internal auditor and the company’s independent accountants and suggest appropriate course of action and to approve certain related-party transactions. An audit committee may not approve a related-party transaction under the Companies Law, unless at the time of approval the two external directors are serving as members of the audit committee and at least one of whom was present at the meeting in which an approval was granted.
The current members of our audit committee are Julie Kunstler and Doron Zinger, our two external directors, and Meir Dvir.
Since our ordinary shares are listed on NASDAQ, we are also subject to NASDAQ rules and listing requirements. Under current NASDAQ and SEC rules, effective as of July 31, 2005, our Audit Committee must have at least three members and generally be comprised only of independent directors, each of whom satisfies the respective “independence” requirements of the SEC and NASDAQ. In addition, current NASDAQ rules require all of the members of the Audit Committee to be financially literate and one of whom must possess accounting or related financial management expertise. Our Audit Committee satisfies the requirements of the Companies Law and the SEC and NASDAQ rules. Our Audit Committee adopted a written charter specifying the committee’s duties and responsibilities, which include, among other things, the selection and evaluation of the Company’s independent auditors.
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Compensation and Nominating Committee
Effective July 31, 2005, the NASDAQ rules require that director nominees be selected or recommended for the board’s selection either by a nominations committee composed solely of independent directors or by a majority of independent directors, subject to certain exceptions. Similarly, the compensation payable to a company’s chief executive officer and other executive officers must be approved either by a majority of the independent directors on the board or a compensation committee comprised solely of independent directors, subject to certain exceptions. Our compensation and nominating committee satisfies the requirements of the NASDAQ rules. Our compensation and nominating committee adopted a written charter specifying the committee’s duties and responsibilities, which include, among other things, the nomination of the Company’s directors. The current members of our compensation and nominating committee are Meir Dvir, Doron Zinger and Julie Kunstler.
Directors’ Service Contracts
Except for Mr. Lipshes, as described in “Item 6B. - Directors, Senior Management and Employees - Compensation”, there are no arrangements or understandings between us and any of our current directors for benefits upon termination of service.
Internal Auditor
Under the Companies Law, the board of directors must also appoint an internal auditor proposed by the audit committee. The role of the internal auditor is to examine, among other things, whether the company’s conduct complies with applicable law and orderly business procedure. Under the Companies Law, the internal auditor may be an employee of the company, but may not be an interested party, an office holder or a relative of any of the foregoing, nor may the internal auditor be the company’s independent accountant or its representative. Our internal auditor is Yardeni Gelfand & Co. C.P.A (ISR).
Indemnification and D&O Insurance
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. For more details, see in Item 10B below under the caption “Exculpation, Insurance and Indemnification of Office Holders.”
Fiduciary Duties of Office Holders
The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company. The duty of care requires an office holder to act with the level of care with which a reasonable office holder in the same position would have acted under the same circumstances.
The duty of care of an office holder includes a duty to use reasonable means to obtain:
| | |
| • | information on the advisability of a given action brought for his approval or performed by him by virtue of his position; and |
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| • | all other important information pertaining to these actions. |
The duty of loyalty of an office holder requires an office holder to act in good faith and for the benefit of the company, and includes a duty to:
| | |
| • | refrain from any conflict of interest between the performance of his duties in the company and the performance of his other duties or his personal affairs; |
| | |
| • | refrain from any activity that is competitive with the company; |
| | |
| • | refrain from exploiting any business opportunity of the company to receive a personal gain for himself or others; and |
| | |
| • | disclose to the company any information or documents relating to a company’s affairs which the office holder has received due to his position as an office holder. |
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Under the Companies Law, the approval of the board of directors is required for all compensation arrangements of office holders who are not directors. Under the Companies Law, director’s compensation arrangements require the approval of the audit committee, the board of directors and the shareholders, in that order.
Related-Party Transactions
The Companies Law requires that an office holder of a company disclose to the company, promptly and in any event no later than the board of directors meeting in which the transaction is first discussed, any personal interest that he may have and all related material information known to him, in connection with any existing or proposed transaction by the company. In the case of an extraordinary transaction, the office holder’s duty to disclose applies also to a personal interest held by:
| | |
| • | the office holder’s relatives. Relatives are defined to include the office holder’s spouse, siblings, parents, grandparents, descendants, spouse’s descendants and the spouses of any of the these people; or |
| | |
| • | any corporation in which the office holder or any of his relatives is a 5% or greater shareholder, director or general manager or in which the office holder has the right to appoint at least one director or the general manager. |
Under Israeli law, an extraordinary transaction is a transaction:
| | |
| • | other than in the ordinary course of business; |
| | |
| • | otherwise than on market terms; or |
| | |
| • | that is likely to have a material impact on the company’s profitability, assets or liabilities. |
Under the Companies Law, once an office holder complies with the above disclosure requirement, the board of directors may approve a transaction between the company and an office holder, or a third party in which an office holder has a personal interest. A transaction that is adverse to the company’s interest may not be approved.
If the transaction is an extraordinary transaction, approval of both the audit committee and the board of directors is required. Under specific circumstances, shareholder approval may also be required. A director who has a personal interest in an extraordinary transaction which is considered at a meeting of the board of directors or the audit committee generally may not be present at this meeting or vote on such transaction, unless a majority of members of the board of directors or the audit committee, as the case may be, has a personal interest. If a majority of the members of the board of directors has a personal interest, shareholder approval is also required.
D. Employees
The table below sets forth our working force presented by field of employment and geographical breakdowns, during the periods indicated*:
| | | | | | | | | | | | | | | | |
Approximate numbers of employees by category of activity | | Research
& Development
& projects | | Sales and marketing | | Management,
Finance and
Administration | | Others (Telesens)* | | Total | |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | |
2008 | | 285 | | | 28 | | | 40 | | | 119 | | | 472 | | |
2007 | | 274 | | | 35 | | | 43 | | | N/A | | | 352 | | |
2006 | | 277 | | | 42 | | | 42 | | | N/A | | | 361 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Approximate numbers of employees by geographic location | | Israel | | Americas | | Europe | | Asia | | Africa | | Australia | | Ukraine* | | Total | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
2008 | | 256 | | | 66 | | | 13 | | | 9 | | | 5 | | | 4 | | | 119 | | | 472 | | |
2007 | | 241 | | | 77 | | | 11 | | | 12 | | | 7 | | | 4 | | | N/A | | | 352 | | |
2006 | | 247 | | | 87 | | | 11 | | | 5 | | | 6 | | | 5 | | | N/A | | | 361 | | |
* The numbers shown in this table reflect nearly 119 employees that were added to our workforce as a result of the acquisition of Telesens in January 2008, out of which 13 employees from Telesens provide R&D services to TTI.
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Competition for technical personnel in the communications and computer industry is intense. Although we believe we have been able to attract talented development and other support personnel, there is a large demand for highly qualified technical personnel in Israel and competition is intense.
None of our employees are represented by a labor union and we have not experienced a work stoppage. We believe our relationship with our employees is good and that our future success will depend on a continuing ability to hire, assimilate and retain qualified employees.
Our Israeli employees. Certain provisions of the collective bargaining agreements between the Histadrut, General Federation of Labor in Israel, and the Coordination Bureau of Economic Organizations, including the Industrialists Associations, are applicable to our employees by order of the Israeli Ministry of Labor and Welfare. These provisions principally concern cost of living increases, recreation pay, social contributions and other conditions of employment. We generally provide our employees with benefits and working conditions above the required minimums.
Israeli labor laws and regulations are applicable to all of our employees in Israel. The laws principally concern matters such as paid annual vacation, paid sick days, the length of the workday, pay for overtime, insurance for work-related accidents, severance pay and other conditions of employment. Israeli law generally requires severance pay, which may be funded by manager’s insurance described below, upon the retirement or death of an employee or termination of employment without cause as defined in the law. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the United States Social Security Administration. Since January 1, 1995, such amounts also include payments for national health insurance. The payments to the National Insurance Institute are approximately 17.7% of wages up to a specified amount, of which the employee contributes approximately 67.9% and the employer contributes approximately 32.1%.
We regularly contribute to a managers’ insurance fund on behalf of our Israeli employees. This fund provides employees with a lump sum payment on account of severance pay, if legally entitled, upon termination of employment. Each employee who agrees to participate in the managers’ insurance plan contributes an amount equal to 5.0% of such employee’s salary to the pension component of such fund and the employer contributes an average of approximately 5% to 6.1% of such salary. We also allocate 8.3% of the employee’s salary on account of severance pay.
E. Share Ownership
Security Ownership of Our Directors and Executive Officers
The following table details, as of March 19, 2009,the number of our ordinary shares owned (including the shares underlying options or warrants held by such person that are exercisable within 60 days) by our directors and executive officers:
| | | | | | | |
Name and Address | | Number of
Shares
Owned | | Percent of
Shares
Outstanding | |
| |
| |
| |
| | | | | | | |
Meir Lipshes (1) | | 476,563 | | | 2.5 | % | |
All other directors and executive officers, as a group (consisting of 9 persons, other than Meir Lipshes) (2) | | 168,667 | | | * | | |
| |
* | less than 1% of our outstanding ordinary shares. |
| |
(1) | As of March 19, 2009, Malam - Team Ltd. and its wholly-owned subsidiary, Team Software Industries Ltd., beneficially owned 150,450 of our ordinary shares, representing approximately 0.8% of our outstanding share capital and voting rights. As of March 19, 2009, Meir Lipshes, the Chairman of our board of directors and our acting Chief Executive Officer, owned approximately 7.0% of Malam - Team Ltd.’s shares. Mr. Lipshes disclaims any beneficial interest in the ordinary shares owned by Team Software or Malam - Team Ltd. in us. |
| |
(2) | The number of shares owned consists solely of options exercisable into ordinary shares within 60 days. The options have exercise prices ranging from $3.5 per share to $8.0 per share, and expire between June 30, 2009 and January 10, 2011. |
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Options to Purchase Our Ordinary Shares
From time to time, we grant our employees and directors options to purchase our shares pursuant to our share option plans:
Old Plans
In November 1996, we adopted our Share Option Plan, primarily designed for employees of TTI and its subsidiaries, and, from time to time, we established and granted additional options under sub-plans. We refer to such plan and sub-plans as the Old Plans because we do not grant any additional options under such plans. As of March 18, 2008, all the granted options, 108,000 options to purchase ordinary shares at exercise prices ranging from $6.0 to $8.0 per share (the higher of $8.0 or the average of the market price in the 30 days prior to the end 12 months from the date the option was granted (i.e., the period between April 12, 2005 and May 11, 2005), are fully vested under the Old Plans.
The 2004 Plan
In December 2004, our shareholders approved the adoption of the 2004 Employee Share Option Plan, or the 2004 Plan, and the reservation of a pool of 1,000,000 ordinary shares for issuance thereunder. In August 2006, our shareholders increased this pool to a total of 1,500,000 shares. Pursuant to the 2004 Plan, primarily designed for employees of TTI and its subsidiaries, our board of directors is empowered, among other things, to designate the optionees, dates of grant and the exercise price of options granted under such plans. The terms of the 2004 Plan are described in Item 9 of our Notice and Proxy Statement for the Annual General Meeting of our shareholders held on December 29, 2004, included in our report on Form 6-K, filed with the SEC on December 2, 2004, which is incorporated herein by reference.
2008 Grants
In February 2008, we granted options exercisable into 25,000 ordinary shares at exercise prices of $3.0 per share.
We did not grant any options to our directors in 2007 and 2008.
Total Outstanding Options
The following table sets forth, as of March 31, 2009, the number of options outstanding under our Old Plans and 2004 Plan and their respective exercise prices and expiration dates:
| | | | |
Number of Options | | exercise prices (range) | | Expiration Date |
| |
| |
|
| | | | |
56,000 | | $6.0-$8.0 * | | June 30, 2009 |
| | | | |
120,000 | | $3.5 | | January 10, 2011 |
220,334 | | $3.9 | | February 13, 2011 |
29,000 | | $4.3 | | March 26, 2011 |
20,000 | | $3.0 | | November 13, 2011 |
45,000 | | $3.5 | | November 13, 2011 |
18,000 | | $3.0 | | March 27, 2012 |
25,000 | | $3.0 | | February 17, 2013 |
| | | | |
Total: 533,334** | | | | |
| |
* | The higher of $8.0 or the average of the market price in the 30 days prior to the end 12 months from the date the option was granted (i.e., the period between April 12, 2005 and May 11, 2005). |
** | Out of which options to purchase 489,000 ordinary shares are currently exercisable. |
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Item 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
A. Major Shareholders
Set forth below is information known to us concerning our shareholders that are the beneficial owners of 5% or more of outstanding ordinary shares or preferred shares as of March 19, 2009:
| | | | | | | | | | | | | | | | | | | |
Name of shareholder | | Number of
ordinary
shares held | | Percentage
of our
outstanding
ordinary
shares * | | Number of
preferred
shares held | | Percentage
of our
outstanding
preferred
shares ** | | Total
shares beneficially owned *** | | Percentage
of our
outstanding
share
capital**** | |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | |
Shlomo Eisenberg (1)(2)(3) | | 4,689,924 | | | 29.3 | % | | – | | | – | | | 4,689,924 | | | 24.8 | % | |
| | | | | | | | | | | | | | | | | | | |
Neuberger & Berman (4)(5) | | 1,180,332 | | | 7.4 | % | | 1,799,995 | | | 61.3 | % | | 3,980,325 | | | 21.0 | % | |
| | | | | | | | | | | | | | | | | | | |
Rima Management, LLC and Richard Mashaal(6) | | 1,104,705 | | | 8.3 | % | | 227,300 | | | 7.7 | % | | 1,332,005 | | | 7 | % | |
| | | | | | | | | | | | | | | | | | | |
S Squared Technology (7) | | 363,637 | | | 2.3 | % | | 909,091 | | | 30.9 | % | | 1,272,728 | | | 6.7 | % | |
* Based on an aggregate of 16,003,155 ordinary shares outstanding as of March 18, 2009.
** Based on an aggregate of 2,936,391 preferred shares outstanding as of March 18, 2009.
*** Includes shares underlying options or warrants held by such person that are exercisable within 60 days. Ordinary shares deemed beneficially owned by virtue of the right of any person or group to acquire such ordinary shares within 60 days are treated as outstanding only for purposes of determining the percent owned by such person or group.
**** Based on an aggregate of 18,939,546 ordinary and preferred shares outstanding as of March 18, 2009.
| |
(1) | Shlomo Eisenberg holds 1,069,530 ordinary shares, 67,468 ordinary shares through a wholly owned corporation, and his wife, Tirza Eisenberg, holds 175,000 ordinary shares. In addition, Mr. Eisenberg, directly and indirectly (through a wholly owned corporation), owns approximately 14% of Malam - Team Ltd. and is also a member of the controlling group of shareholders of Arad Investments and Industrial Development Ltd. Therefore, Mr. Eisenberg may be deemed to beneficially own the ordinary shares held by Arad, Malam - Team Ltd. and Team Software Industries Ltd. (see below). Mr. Eisenberg disclaims any such beneficial ownership. |
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(2) | Arad, directly and indirectly (through a wholly owned corporation), holds 3,227,476 ordinary shares. In addition, Arad owns approximately 50% of Malam - Team Ltd. and, therefore, may be deemed to beneficially own the ordinary shares held by Malam - Team Ltd. and Team Software. Arad disclaims any such beneficial ownership. Arad is an Israeli company whose shares are publicly traded on the Tel Aviv Stock Exchange. |
| |
(3) | Team Software holds 145,150 ordinary shares. Malam - Team Ltd. holds 5,300 ordinary shares. Since Malam - Team Ltd. holds 100% of the issued and outstanding shares of Team Software, it may be deemed to beneficially own the ordinary shares held by Team Software. Malam - Team Ltd., an Israeli company whose shares are publicly traded on the Tel Aviv Stock Exchange, is a large computer vendor in Israel. In addition, as of March 19, 2009, Meir Lipshes, the Chairman of our board of directors and CEO, owned approximately 7% of Malam - Team Ltd.’s shares. Mr. Lipshes disclaims any beneficial ownership. As of March 19, 2009, Meir Lipshes owned approximately 2.5% of our outstanding shares directly. |
| |
(4) | As of May 9, 2006, based on a Schedule 13D/A filed by Neuberger & Berman with the SEC on May 25, 2006. Neuberger Berman, L.L.C., a Delaware limited liability company (“NB LLC”), serves as the investment adviser to LibertyView Special Opportunities Fund, L.P., a Delaware limited partnership (“LV Opportunities”), LibertyView Funds, L.P., a Delaware limited partnership (“LV Funds”), and certain other investment funds and accounts (together with LV Opportunities and LV Funds, the “Funds”). Neuberger Berman, Inc., a Delaware corporation (“NB Inc.”), serves as the sole owner and managing member of NB LLC. NB LLC may be deemed to beneficially own the ordinary shares directly held by the Funds and NB Inc. may be deemed to control NB LLC by virtue of its position as the sole owner and managing member of NB LLC. The 3,980,325 shares reported as beneficially owned by NB LLC include 1,180,332 ordinary shares, 1,799,995 Series A Preferred Shares, and 999,999 warrants to purchase ordinary shares which are exercisable within 60 days. |
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(5) | LV Opportunities holds 1,363,635 Series A Preferred Shares, and warrants to purchase 545,454 ordinary shares which are exercisable within 60 days, with an exercise price of $2.50 per share. LV Funds holds 909,090 Series A Preferred Shares, and warrants to purchase 363,636 ordinary shares which are exercisable within 60 days, with an exercise price of $2.50 per share. |
| |
(6) | As of December 31, 2007, based on a Schedule 13G filed by Rima Management, LLC and Richard Mashaal with the SEC on February 13, 2008. The Schedule 13G indicates that Rima Management, LLC and Richard Mashaal share voting and dispositive power as to the 1,332,005ordinary shares (comprised of 227,300 Series A Preferred Shares and 90,920 warrants to purchase ordinary shares which are exercisable within 60 days, with an exercise price of $2.5 per share). |
| |
(7) | As of December 31, 2008, based on a Schedule 13G/A filed by S Squared Technology, LLC with the SEC on February 2, 2009. The Schedule 13G/A indicates that S Squared Technology LLC, or SST, holds a total of 991,283 ordinary shares (out of which 708,059 Series A Preferred Shares and and warrants to purchase 283,224 ordinary shares which are exercisable within 60 days, with an exercise price of $2.50 per share) and S Squared Technology Partners, LP, or SSTP, beneficially owns 281,445 ordinary shares (out of which 201,032 Series A Preferred Shares, and warrants to purchase 80,413 ordinary shares which are exercisable within 60 days, with an exercise price of $2.50 per share). Seymour L. Goldblatt, the President of each of SST and SSTP, and Kenneth A. Goldblatt, who beneficially own a majority of the interests in SST disclaim beneficially ownership of the ordinary shares held by SST and SSTP. |
Significant changes in percentage ownership by major shareholders during last three years
In January 2005, Team Software transferred 5,200,000 of our ordinary shares held thereby to Malam - Team Ltd., its parent company, such that Malam - Team Ltd. held 5,200,020 or our ordinary shares directly and 762,530 of our ordinary shares through Team Software. In April 2005, Malam - Team Ltd. distributed to its shareholders 5,166,062 ordinary shares, such that immediately following the distribution, Malam - Team Ltd. 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 Malam - Team Ltd., 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, Malam - Team Ltd. distributed additional 453,822 of our ordinary shares to its shareholders.
Voting Rights
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 19, 2009, approximately 56% of all Series A Preferred Shares issued have been converted into ordinary shares.
Record Holders
As of March 19, 2009, there were approximately 34 record holders of our ordinary shares, of which 15 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 19, 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.
B. Related Party Transactions
Sale of Products; Services
Since the commencement of our operations in 1992, Malam - - Team Ltd., 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 Malam - Team Ltd.. This relationship is reflected in an agreement between us and Malam - Team Ltd. dated October 1996. Malam - Team Ltd. 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 Malam - Team Ltd. from these sales less the cost to Malam - Team Ltd.. In connection with these sales, we recorded commissions of approximately $502,000 in 2007 and $364,000 in 2008. We have not recorded any commissions in 2006.
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In addition, Malam - Team Ltd. provided us certain administrative services, including computer servicing, salary administration, automotive fleet maintenance, legal counsel and basic insurance coverage, and we reimbursed Malam - Team Ltd. for the actual cost of such services. We recorded expenses for such services of $160,000 in 2006 and $164,000 in 2007. In 2008, we relocated our offices to Rosh Ha’ayin and therefore Malam - Team Ltd. no longer provides us administrative services and we did not record any expenses for such services in 2008.
Since 1992, we have also purchased fixed assets, such as computer hardware, from Malam - Team Ltd. and Omnitek-Eichut Ltd. (“Omnitek-Eichut”), a subsidiary of Malam - - Team Ltd. The payments made by us to Malam - Team Ltd. and Omnitek-Eichut in respect of such asset purchases were, in the aggregate, approximately $352,000 in 2006, $437,000 in 2007 and $249,000 in 2008. 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.
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 Malam - Team Ltd. 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 $1.2 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.
Compensation to Directors
With respect to compensation including options granted to our directors, see Item 6B under the caption “Compensation to Directors.”
C. Interests of Experts and Counsel
Not applicable.
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Item 8. | FINANCIAL INFORMATION |
A. Consolidated Statements and Other Financial Information
Financial Statements
See Item 18.
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Legal Proceedings
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, an agreement in principle was reached and memorandum of understanding outlining such agreement was executed. A motion seeking preliminary approval of the settlement from the court was filed on April 14, 2008 and an order preliminary approving the settlement and setting a hearing on September 11, 2008 was filed on May 29, 2008. The hearing was held on September 11, 2008 and the court entered a final judgment approving the settlement and dismissing the action with prejudice. More than 30 days have elapsed from the date of entry of the final judgment has and accordingly, the time to appeal from the final judgment has expired. The settlement is being paid by the directors and officers insurance of the Company.
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 and demanded reimbursement for the additional withholding tax from Mr. Eisenberg. In August 2008 the court ruled in our favor and ordered that Mr. Eisenberg will pay us the amount of approximately NIS 1.7 million (approximately $ 459,000), including linkage differentials and interest and including attorney fees. In October 2008 Mr. Eisenberg appealed to the district court. A preliminary hearing in the district court is scheduled for September 16, 2009.
Internal Investigation
On January 26, 2009, our Board of Directors received a written complaint of Mr. Eduard Rubin, a former key shareholder of Telesens LLC who also serves as the general manager of Telesens LLC, a Ukraine-based software house that was acquired by us in January 2008, alleging, among other things, that Mr. Moti Lipshes, a Region Business Unit manager, or the RBU Manager, who is also the son of Mr. Meir Lipshes, the Chairman of our Board of Directors and our Chief Executive Officer, received improper commissions from Mr. Rubin with respect to the acquisition of Telesens.
Our Audit Committee engaged Barlev Investigative Auditing, an Israeli accounting firm with significant experience in investigating improper business conduct, to lead an internal investigation. Based, among other things, on the report of the independent investigator, the Audit Committee concluded that (1) a finder fee agreement between Mr. Rubin and the RBU manager was entered into in September 2006, whereby the RBU manager agreed to assist and promote a sale of Telesens to a third party in consideration for a finder fee; (2) in early 2007, the RBU manager introduced Telesens to the senior management of TTI Telecom as a potential acquisition target, and in December 2007, we entered into a definitive agreement to acquire Telesens from its two shareholders, including Mr. Rubin; (3) neither the RBU manager nor Mr. Rubin informed us of the said finder fee agreement; and (4) the evidence obtained and reviewed in the investigation did not establish any wrongdoing or improper personal conduct by Mr. Meir Lipshes, the Chairman of our Board of Directors and our Chief Executive Officer, or any other employees, officers or directors of TTI Telecom, and the Audit Committee continues to have full confidence in the integrity of the current management team.
In light of its conclusions, the Audit Committee made the following recommendations, as endorsed by our Board of Directors and performed by our management, (1) to instruct management to terminate the engagement with the RBU Manager immediately and examine all other legal remedies available to the Company under the circumstances; (2) to instruct management to explore the legal status of the Company regarding Telesens and Mr. Rubin under the circumstances; and (3) to instruct management to prepare and present to the Audit Committee a report regarding the clarity of the existing prohibition on personnel and contractors of the company from engaging in improper personal gain, and to suggest remedial measures if needed.
57
We intend to pursue all legal remedies available under the circumstances against the RBU manager, Telesnes and its selling shareholders. In addition, at the recommendation of our Audit Committee, we are in the process of taking a number of steps designed to improve and safeguard against the recurrence of improper conduct. These steps include clarifying the existing prohibition in our Code of Ethics on receiving improper personal gain and establishing a company-wide educational program.
We also evaluated and concluded that the results of the internal investigation and related procedures do not have any impact on our financial results for the year ended December 31, 2008 or any other period (other than the expenses associated with such investigation), and that the investigation did not reveal any material weakness in our internal controls over financial reporting.
Telesens
Under the terms of the stock purchase agreement with the shareholders of Telesens, the aggregate purchase price is up to $2.7 million, subject to downward adjustments related to certain performance parameters, including Telesens’ actual 2007 annual turnover. The purchase price was to be paid by us in cash in three installments, as follows: (1) the first payment, of $1.0 million, was paid at closing; (2) 70.0% of the balance of the purchase price (subject to the relevant deductions) was supposed to be paid in February 2009; and (3) the remainder is scheduled to be paid in February 2010.
In early 2009, we engaged in discussions with Mr. Rubin, one of the selling shareholders of Telesens, with respect to our demand, in accordance with the purchase agreement, to make downward adjustments to the purchase price based on the performance parameters of Telesnes. In light of, among others, the objection of the selling shareholders to our demands and the internal investigation that was ongoing at the time, we have determined to hold the payment of the second installment, scheduled for February 2009, until resolution of these matters. On March 21, 2009, Mr. Rubin notified us that the selling shareholders initiated legal proceedings against us in Ukraine with respect to the purchase agreement. According to Mr. Rubin’s notice, the lawsuit alleges, among others, that we have breached the purchase agreement by not making the timely and full payment of the second installment. Accordingly, the plaintiffs seek to rescind the transaction, such that the selling shareholders will receive their shares of Telesens, and seek additional damages of approximately $500,000. If and when we are served with the lawsuit, we intend to vigorously defend our position. However, given the preliminary stage of this matter, we cannot predict the ultimate outcome of this matter at this time. In the event of an unfavorable resolution, we may be required to pay damages and other costs which could have an adverse effect on our results of operations and financial condition.
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, 2008, except as otherwise disclosed in this annual report.
58
| |
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 | |
| |
| |
| |
| | | | | | | |
2004: | | | | | | | |
Full Year | | $ | 6.40 | | $ | 1.71 | |
2005: | | | | | | | |
Full Year | | $ | 3.58 | | $ | 1.84 | |
2006: | | | | | | | |
Full Year | | $ | 5.50 | | $ | 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 | |
| | | | | | | |
2008: | | | | | | | |
Full Year | | $ | 2.42 | | $ | 0.53 | |
| | | | | | | |
First Quarter | | | 2.42 | | | 1.83 | |
Second Quarter | | | 2.27 | | | 1.86 | |
Third Quarter | | | 2.09 | | | 1.36 | |
Fourth Quarter | | | 1.36 | | | 0.53 | |
| | | | | | | |
Most Recent Six Months | | | | | | | |
September 2008 | | | 1.70 | | | 1.36 | |
October 2008 | | | 1.36 | | | 1.00 | |
November 2008 | | | 1.00 | | | 0.53 | |
December 2008 | | | 0.74 | | | 0.59 | |
January 2009 | | | 0.67 | | | 0.57 | |
February 2009 | | | 0.72 | | | 0.56 | |
March 2009 (through March 27, 2009) | | | 0.62 | | | 0.52 | |
On March 27, 2009, the last reported closing sale price of our ordinary shares on the NASDAQ National Market was $0.62 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.
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Item 10. | ADDITIONAL INFORMATION |
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
The following is a summary description of certain provisions of our Memorandum of Association and Articles of Association, and certain relevant provisions of the Israel Companies Law which apply to us. This description is only a summary and does not purport to be complete and is qualified by reference to the full text of the Memorandum and Articles, which are incorporated by reference as exhibits to this Annual Report, and to Israeli law.
59
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.
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.
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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 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 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; |
| | |
| • | 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 also be paid in kind, i.e., through the distribution of assets or shares, debentures, or debentures stock of our company or of other companies. However, in such event, we will be required to obtain the approval of our shareholders in addition to the declaration required by our board of directors.
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.
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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 one third (33 1/3 %) 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.
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:
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| • | 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 |
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| • | 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.
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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:
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| • | a breach of his duty of care to us or to another person; |
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| • | 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 |
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| • | 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:
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| • | 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 |
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| • | 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:
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| • | 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; |
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| • | a breach by the office holder of his duty of care if the breach was done intentionally or recklessly; |
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| • | any act or omission done with the intent to derive an illegal personal benefit; or |
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| • | any fine levied against the office holder. |
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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.
Conclusion
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.
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.
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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 federal, 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.
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 may apply (currently through the end of 2010) to dividends received by 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.
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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, and such U.S. holder makes an appropriate election. 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 31-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, Treasury regulations 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.
Passive Foreign Investment Companies
We would be a passive foreign investment company, or PFIC, if:
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| • | 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 |
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| • | 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.
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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.
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.
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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 27% for the 2008 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: 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.
Following a temporary order and an additional amendment to the Tax Ordinance, which came into effect on January 1, 2009, an Israeli corporation may elect a 5% rate of corporate tax (instead of 25%) for income from dividend distributions received from a foreign subsidiary which is used in Israel in 2009, or within one year after actual receipt of the dividend, whichever is later. The 5% tax rate is subject to various conditions, which include conditions with regard to the identity of the corporation that distributes the dividends, the source of the dividend, the nature of the use of the dividend income, and the period during which the dividend income will be used in Israel.
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.
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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. The years limitation does not apply to the exemption 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, 2008 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 are 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.
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.
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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.
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:
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| • | 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. |
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| • | 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. |
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.
Inflationary Adjustments Law
Under the Income Tax (Inflationary Adjustments) Law, 1985, results for tax purposes were measured in real terms in accordance with the changes in the Israeli Consumer Price Index, or the Israeli CPI. Accordingly, until 2002, results for tax purposes were measured in terms of earnings in NIS after certain adjustments for increases in the Israeli CPI. Commencing in fiscal year 2003, we have elected to measure our taxable income and file our 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. Such an election obligated us for three years. Accordingly, commencing with fiscal year 2003, results for tax purposes are measured in terms of earnings in dollars. We filed for one-year extensions in 2006 and 2007. Beginning January 1, 2008, the Inflationary Adjustments Law was repealed.
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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.
The following corporate tax benefits are available to Industrial Companies, including, among others:
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| (a) | Deduction of purchases of know-how and patents over an eight-year period for tax purposes. |
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| (b) | Deduction over a three-year period of expenses involved with the issuance and listing of shares on a recognized stock market. |
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| (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. |
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| (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 Income Tax Law (Inflationary Adjustments), 1985 (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).
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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 (in which case a partial exemption may be available). 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.
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 by an Israeli company to non-residents of Israel, other than bonus shares or stock dividends, income tax is applicable 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.
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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.
I. Subsidiary Information
Not applicable.
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Item 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
A majority of our revenues are paid in U.S dollars and Euro 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. However, the revenues that are paid in Euro are influenced by fluctuations in the Euro / U.S dollar exchange rate, devaluaion of the Euro compared to the U.S dollar decreases our revenues.
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.
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Item 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
Not applicable.
PART II
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Item 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
None.
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Item 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
Modification of Rights
Not applicable.
Use of Proceeds
Not applicable.
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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, 2008. 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:
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| · | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, |
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| · | 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 |
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| · | 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, 2008. 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, 2008 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, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
74
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Item 16. | RESERVED |
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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 our directors and employees, including our 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.
For details regarding a violation of our Code of Ethics, see Item 8A – Legal Proceedings – Internal Investigation.
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Item 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Fees Paid to Independent Public Accountants
In the annual meeting held on December 30, 2008 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.
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| | Year Ended December 31, | |
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| | 2007 | | 2008 | |
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Services Rendered | | Fees | | Percentages | | Fees | | Percentages | |
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Audit (1) | | $ | 135,000 | | 63 | % | | $ | 190,000 | | 83 | % | |
Audit-related (2) | | $ | 20,000 | | 9 | % | | $ | 38,000 | | 17 | % | |
Tax (3) | | $ | 45,000 | | 21 | % | | | – | | – | | |
Other (4) | | $ | 15,000 | | 7 | % | | | – | | – | | |
Total | | $ | 215,000 | | 100 | % | | $ | 228,000 | | 100 | % | |
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(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. |
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(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 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. In 2008, most of these fees were for audit services related to Telesens acquisition. |
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(3) | Tax fees relate to services performed by the tax division for tax compliance, planning and advice. |
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(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.
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Item 16D. | EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES |
Not applicable.
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Item 16E. | PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
None.
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Item 16F. | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT |
Not applicable.
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Item 16G. | CORPORATE GOVERNANCE |
We are a foreign private issuer whose ordinary shares are listed on the NASDAQ Global Market. As such, we are required to comply with U.S. federal securities laws, including the Sarbanes-Oxley Act, and the NASDAQ rules, including the NASDAQ corporate governance requirements. The NASDAQ rules provide that foreign private issuers may follow home country practice in lieu of certain qualitative listing requirements subject to certain exceptions and except to the extent that such exemptions would be contrary to U.S. federal securities laws, so long as the foreign issuer discloses that it does not follow such listing requirement and describes the home country practice followed in its reports filed with the SEC. except that, as permitted under NASDAQ rules, we follow Israeli practices in certain areas. Below is a concise summary of the significant ways in which our corporate governance practices differ from the corporate governance requirements of NASDAQ applicable to domestic U.S. listed companies:
The NASDAQ rules require that an issuer have a quorum requirement for shareholders meetings of at least one-third of the outstanding shares of the issuer’s common voting stock. We comply with this requirement, except that have chosen to follow home country practice with respect to the quorum requirements of an adjourned shareholders meeting. Our articles of association, as permitted under the Israeli Companies Law and Israeli practice, provide that the quorum requirements for an adjourned meeting are the presence of a minimum of two shareholders present in person. In addition, we have chosen to follow our home country practice in lieu of the requirements of NASDAQ Rule 4350(b)(1)(A), relating to an issuer’s furnishing of its annual report to shareholders. However, 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.
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Item 17. | FINANCIAL STATEMENTS |
We have responded to Item 18 in lieu of this item.
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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. | |
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Index to Financial Statements | F - 1 |
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Report of Independent Registered Accounting Firm | F - 2 |
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Consolidated Balance Sheets | F - 3 |
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Consolidated Statements of Operations | F - 5 |
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Statements of Changes in Shareholders’ Equity | F - 6 |
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Consolidated Statements of Cash Flows | F - 7 |
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Notes to Consolidated Financial Statements | F - 9 |
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.
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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 Rosh Ha’ayin, Israel on the 31 day of March, 2009.
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| TTI TEAM TELECOM INTERNATIONAL LTD. |
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| By: | /s/ Meir Lipshes |
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| Meir Lipshes |
| Chief Executive Officer |
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EXHIBIT INDEX
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Exhibit
No. | | Exhibit |
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| 1.1 | | | Second Amended and Restated Articles of Association of Registrant, as amended through December 27, 2005 (1); Certificate of Amendment, dated August 10, 2006 (2); and amendment, effective June 19, 2008 (3) |
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| 1.2 | | | Memorandum of Association of Registrant, as amended through December 29, 2004. (4) |
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| 4.6 | | | The Registrant’s Share Option Plan, dated November 15, 1996. (5) |
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| 4.8 | | | 2004 Employee Share Option Plan, adopted December 29, 2004. (4) |
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| 4.9 | | | Agreement, dated October 9, 1996, between the Registrant and Team. (6) |
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| 4.10 | | | Registration Rights Agreement, dated October 22, 1996, between the Registrant and TSIL. (6) |
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| 4.12 | | | Lease, dated February 1, 1998, between the Registrant and Team. (7) |
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| 4.13 | | | Amendment to Lease Agreement dated September 2, 2002. (8) |
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| 4.14 | | | Second Amendment to Lease Agreement dated July 14, 2005. (9) |
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| 8 | | | Subsidiaries |
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| 10.11 | | | Consent of Independent Auditors of the Registrant |
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| 11 | | | Code of Ethics and Business Conduct. (10) |
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| 12.1 | | | Certification of the Principal Executive Officer pursuant to §302 of the Sarbanes-Oxley Act |
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| 12.2 | | | Certification of the Principal Financial Officer pursuant to §302 of the Sarbanes-Oxley Act |
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| 13.1 | | | Certification of the Principal Executive Officer pursuant to §906 of the Sarbanes-Oxley Act |
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| 13.2 | | | Certification of the Principal Financial Officer pursuant to §906 of the Sarbanes-Oxley Act |
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(1) | Previously filed on TTI’s Form 20-F for the year ended December 31, 2005, and incorporated herein by reference. |
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(2) | Previously filed on TTI’s Form 20-F for the year ended December 31, 2006, and incorporated herein by reference. |
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(3) | Previously filed as Item 2 of TTI’s Proxy Statement filed on Report of Foreign Private Issuer on Form 6-K submitted to the SEC on May 5, 2008, and incorporated herein by reference. |
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(4) | Previously filed on TTI’s Form 20-F for the year ended December 31, 2004, and incorporated herein by reference. |
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(5) | 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. |
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(6) | Previously filed as an exhibit to TTI’s Registration Statement on Form F-1 (Registration No. 333-5902), and incorporated herein by reference. |
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(7) | 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. |
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(8) | 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. |
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(9) | Previously filed on TTI’s Form 20-F for the year ended December 31, 2005, and incorporated herein by reference. |
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(10) | Previously filed on TTI’s Form 20-F for the year ended December 31, 2003, and incorporated herein by reference. |
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TTI TEAM TELECOM INTERNATIONAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008
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, 2007 and 2008 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, 2008. 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, 2007 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles which differ in certain aspects from International Financial Reporting Standard (“IFRS”) and with the provisions of the Israeli Securities Regulations (Preparation of Annual Financial Statements), 1993 as described in Note 15).
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Tel-Aviv, Israel | | KOST FORER GABBAY & KASIERER | |
March 31, 2009 | | A Member of Ernst & Young Global | |
F - 2
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TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
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CONSOLIDATED BALANCE SHEETS |
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U.S. dollars in thousands |
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| | December 31, | |
| |
| |
| | 2007 | | 2008 | |
| |
| |
| |
| | | | | | | |
ASSETS | | | | | | | |
| | | | | | | |
CURRENT ASSETS: | | | | | | | |
Cash and cash equivalents | | $ | 33,408 | | $ | 24,957 | |
Short-term bank deposits | | | 98 | | | – | |
Trade receivables (net of allowance for doubtful accounts - $0 and $105 at December 31, 2007 and 2008, respectively) | | | 8,185 | | | 10,032 | |
Unbilled receivables | | | 3,155 | | | 3,215 | |
Related party (Note 12) | | | 409 | | | 459 | |
Other accounts receivable and prepaid expenses (Note 3) | | | 3,192 | | | 2,305 | |
| |
|
| |
|
| |
| | | | | | | |
Total current assets | | | 48,447 | | | 40,968 | |
| |
|
| |
|
| |
| | | | | | | |
LONG-TERM INVESTMENTS AND RECEIVABLES: | | | | | | | |
Investment in a company | | | 165 | | | 165 | |
Severance pay fund | | | 3,937 | | | 3,836 | |
| |
|
| |
|
| |
| | | | | | | |
Total long-term investments and receivables | | | 4,102 | | | 4,001 | |
| |
|
| |
|
| |
| | | | | | | |
PROPERTY AND EQUIPMENT, NET (Note 4) | | | 6,045 | | | 7,283 | |
| |
|
| |
|
| |
| | | | | | | |
OTHER INTENGIBLE ASSETS (Note 5) | | | – | | | 149 | |
| |
|
| |
|
| |
| | | | | | | |
Total assets | | $ | 58,594 | | $ | 52,401 | |
| |
|
| |
|
| |
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, | |
| |
| |
| | 2007 | | 2008 | |
| |
| |
| |
| | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
| | | | | | | |
CURRENT LIABILITIES: | | | | | | | |
Trade payables | | $ | 2,364 | | $ | 2,284 | |
Deferred revenues | | | 4,666 | | | 3,648 | |
Related party (Note 12) | | | 3,932 | | | 420 | |
Other accounts payable and accrued expenses (Note 7) | | | 6,966 | | | 6,787 | |
| |
|
| |
|
| |
| | | | | | | |
Total current liabilities | | | 17,928 | | | 13,139 | |
| |
|
| |
|
| |
| | | | | | | |
ACCRUED SEVERANCE PAY | | | 5,651 | | | 6,412 | |
| |
|
| |
|
| |
| | | | | | | |
LONG TERM LIABILITY (Note 8b) | | | 1,579 | | | 1,372 | |
| |
|
| |
|
| |
| | | | | | | |
COMMITMENTS AND CONTINGENT LIABILITIES (Note 8) | | | | | | | |
| | | | | | | |
SHAREHOLDERS’ EQUITY (Note 10): | | | | | | | |
Share capital: | | | | | | | |
Ordinary shares of NIS 0.5 par value -
Authorized: 30,000,000 shares at December 31, 2007 and 2008; Issued and outstanding: 16,003,158 shares at December 31, 2007 and 2008 | | | 2,261 | | | 2,261 | |
Preferred A shares of NIS 0.5 par value –
Authorized: 6,636,391 at December 31, 2007 and 2008; Issued and outstanding: 2,936,391 shares at December 31, 2007 and 2008: Aggregate liquidation preference of $6,460 at December 31, 2008 | | | 334 | | | 334 | |
Additional paid-in capital | | | 75,038 | | | 75,251 | |
Accumulated other comprehensive loss | | | – | | | (170 | ) |
Accumulated deficit | | | (44,197 | ) | | (46,198 | ) |
| |
|
| |
|
| |
| | | | | | | |
Total shareholders’ equity | | | 33,436 | | | 31,478 | |
| |
|
| |
|
| |
| | | | | | | |
Total liabilities and shareholders’ equity | | $ | 58,594 | | $ | 52,401 | |
| |
|
| |
|
| |
The accompanying notes are an integral part of the consolidated financial statements.
F - 4
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
|
CONSOLIDATED STATEMENTS OF OPERATIONS |
|
U.S. dollars in thousands, except share and per share data |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2006 | | 2007 | | 2008 | |
| |
| |
| |
| |
| | | | | | | | | | |
Revenues (Note 13): | | | | | | | | | | |
Products | | $ | 27,554 | | $ | 25,722 | | $ | 30,134 | |
Services | | | 18,560 | | | 20,195 | | | 22,152 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Total revenues | | | 46,114 | | | 45,917 | | | 52,286 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Cost of revenues: | | | | | | | | | | |
Products | | | 14,783 | | | 12,504 | | | 16,381 | |
Services | | | 9,571 | | | 8,545 | | | 7,865 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Total cost of revenues | | | 24,354 | | | 21,049 | | | 24,246 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Gross profit | | | 21,760 | | | 24,868 | | | 28,040 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Operating expenses: | | | | | | | | | | |
Research and development, net (Note 14a) | | | 9,578 | | | 9,433 | | | 11,407 | |
Selling and marketing | | | 10,214 | | | 7,857 | | | 9,996 | |
General and administrative | | | 6,679 | | | 6,952 | | | 6,351 | |
Impairment of goodwill | | | – | | | – | | | 1,401 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Total operating expenses | | | 26,471 | | | 24,242 | | | 29,155 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Operating income (loss) | | | (4,711 | ) | | 626 | | | (1,115 | ) |
Other income (Note 14c) | | | 150 | | | 33 | | | – | |
Financial income (expenses), net (Note 14b) | | | 662 | | | 2,150 | | | (515 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Income (loss) before income taxes | | | (3,899 | ) | | 2,809 | | | (1,630 | ) |
Income taxes (Note 9) | | | (96 | ) | | (87 | ) | | 371 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net income (loss) | | | (3,803 | ) | | 2,896 | | | (2,001 | ) |
| | | | | | | | | | |
Loss attributable to preferred shareholders | | | – | | | (449 | ) | | – | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net income (loss) attributable to ordinary shareholders | | $ | (3,803 | ) | $ | 2,447 | | $ | (2,001 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Earning (loss) per share (Note 11): | | | | | | | | | | |
Basic and diluted net earning (loss) per share attributed to Ordinary shareholders | | $ | (0.20 | ) | $ | 0.15 | | $ | (0.13 | ) |
| |
|
| |
|
| |
|
| |
Weighted average number of shares used for computing basic net earning (loss) per share attributed to Ordinary shareholders | | | 15,075,881 | | | 16,001,148 | | | 16,003,158 | |
| |
|
| |
|
| |
|
| |
Weighted average number of shares used for computing diluted net earning (loss) per share attributed to Ordinary shareholders | | | 15,075,881 | | | 16,121,989 | | | 16,003,158 | |
| |
|
| |
|
| |
|
| |
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 | | Ordinary | | Preferred | | Ordinary | | paid-in | | other | | Accumulated | | comprehensive | | shareholders’ | |
| | A shares | | shares | | A shares | | shares | | capital | | loss | | deficit | | income (loss) | | equity | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of January 1, 2006 | | | 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 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
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 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
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 | |
Write-off of accruals for stock issuance costs | | | – | | | – | | | – | | | – | | | 146 | | | – | | | – | | | – | | | 146 | |
Share-based compensation | | | – | | | – | | | – | | | – | | | 67 | | | – | | | – | | | – | | | 67 | |
Foreign currency translation adjustment | | | – | | | – | | | – | | | – | | | – | | | (170 | ) | | – | | $ | (170 | ) | | (170 | ) |
Net loss | | | – | | | – | | | – | | | – | | | – | | | – | | | (2,001 | ) | $ | (2,001 | ) | | (2,001 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | $ | (2,171 | ) | | | |
| | | | | | | | | | | | | | | | | | | | | | |
|
| | | | |
Balance as of December 31, 2008 | | | 2,936,391 | | | 16,003,158 | | $ | 334 | | $ | 2,261 | | $ | 75,251 | | $ | (170 | ) | $ | (46,198 | ) | | | | $ | 31,478 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | | | |
|
| |
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, | |
| |
| |
| | 2006 | | 2007 | | 2008 | |
| |
| |
| |
| |
| | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | |
Net income (loss) | | $ | (3,803 | ) | $ | 2,896 | | $ | (2,001 | ) |
Adjustments required to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | |
Depreciation and amortization | | | 2,589 | | | 1,964 | | | 2,272 | |
Impairment of goodwill and other assets | | | – | | | – | | | 1,533 | |
Gain from sale of property and equipment | | | (73 | ) | | (221 | ) | | (210 | ) |
Amortization of premium and accretion of accrued interest on available-for-sale marketable debt securities | | | 1,305 | | | – | | | – | |
Accrued severance pay, net | | | 513 | | | 319 | | | 862 | |
Share-based compensation | | | 451 | | | 113 | | | 67 | |
Increase in trade receivables, net | | | (764 | ) | | (3,521 | ) | | (1,444 | ) |
Increase in unbilled receivables | | | (1,870 | ) | | (321 | ) | | (116 | ) |
Increase (decrease) in balance with related parties | | | 34 | | | 3,856 | | | (3,562 | ) |
Decrease (increase) in other accounts receivable and prepaid expenses | | | (47 | ) | | (927 | ) | | 819 | |
Decrease in long-term trade and unbilled receivables | | | 613 | | | 3,324 | | | – | |
Increase (decrease) in trade payables | | | 641 | | | (144 | ) | | (504 | ) |
Decrease in deferred revenues | | | (1,893 | ) | | (3,667 | ) | | (1,018 | ) |
Decrease in other accounts payable and accrued expenses | | | (276 | ) | | (3 | ) | | (1,044 | ) |
Accrued interest on long-term liability and short-term bank deposits | | | (23 | ) | | (4 | ) | | 22 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net cash provided by (used in) operating activities | | | (2,603 | ) | | 3,664 | | | (4,324 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | |
Investment in short-term and long-term bank deposits | | | (188 | ) | | (2,000 | ) | | – | |
Proceeds from short-term bank deposits | | | 1,984 | | | 2,987 | | | 99 | |
Proceeds from sale of available-for-sale marketable securities | | | 14,744 | | | – | | | – | |
Purchase of property and equipment | | | (1,746 | ) | | (4,318 | ) | | (3,533 | ) |
Proceeds from sale of property and equipment | | | 117 | | | 372 | | | 542 | |
Acquisition of subsidiary (Note 1) | | | – | | | – | | | (1,071 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net cash provided by (used in) investing activities | | | 14,911 | | | (2,959 | ) | | (3,963 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | |
Proceeds from (repayment of) long-term debt from landlord | | | – | | | 1,286 | | | (144 | ) |
Exercise of warrants | | | 1,068 | | | 7 | | | – | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net cash provided by (used in) financing activities | | | 1,068 | | | 1,293 | | | (144 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Translation differences from cash balance of subsidiary | | | – | | | – | | | (20 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Increase (decrease) in cash and cash equivalents | | | 13,376 | | | 1,998 | | | (8,451 | ) |
Cash and cash equivalents at the beginning of the year | | | 18,034 | | | 31,410 | | | 33,408 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Cash and cash equivalents at the end of the year | | $ | 31,410 | | $ | 33,408 | | $ | 24,957 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Supplemental disclosure of cash flows information: | | | | | | | | | | |
Cash paid during the year for: | | | | | | | | | | |
Taxes | | $ | 1,707 | | $ | 187 | | $ | 427 | |
| |
|
| |
|
| |
|
| |
The accompanying notes are an integral part of the consolidated financial statements.
F - 7
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
|
CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
U.S. dollars in thousands |
| | | | | | | | |
| | | Year ended December 31, | |
| | |
| |
| | | 2007 | | 2008 | |
| | |
| |
| |
| | | | | | | | |
(a) | Non - cash activities: | | | | | | | |
| | | | | | | | |
| Return of issuance costs | | $ | – | | $ | 146 | |
| | |
|
| |
|
| |
| | | | | | | | |
| Accrual for the second payment account of the acquisition of Telesens | | $ | – | | $ | 630 | |
| | |
|
| |
|
| |
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 1:- | GENERAL |
| | |
| 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, Hong-Kong and Ukraine. |
| | |
| | As to principal markets and customers, see Note 13. |
| | |
| b. | Acquisitions of a subsidiaries: |
| | |
| | In January 2008, the Company acquired Telesens LLC (“Telesens”), a software house headquartered in the Ukraine with a presence in the CIS (Commonwealth of Independent States) market. Under the terms of the agreement, the aggregate purchase price is up to $2,700, subject to downward adjustments. Such adjustments are mainly based on Telesens results of operations during 2007, 2008 and 2009. The purchase price will be paid over 3 annual payments. |
| | |
| | Telesens results of operations have been included in the Company’s consolidated financial statements since the acquisition date. |
| | |
| | Until the balance sheet date, the Company paid on account of the acquisition $1,150. In addition, at December 31, 2008 the Company accrued additional $630 on account of the second payment for the seller that should have been executed in February 2009 (see also discussion below about the dispute with the seller of Telesens subsequent to the balance sheet date). Future payments are subject to potential downward adjustments and can not be determined at this point therefore they will account for as they occur. All deductions should be concluded at the end of 2009. |
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 1:- | GENERAL (Cont.) |
| |
| | The acquisition was accounted for under the purchase method of accounting and, accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their relative fair values as of the acquisition date, as follows: |
| | | | |
Trade receivables | | $ | 365 | |
Other accounts receivable | | | 60 | |
Property and equipment | | | 239 | |
Customer relations | | | 244 | |
Contracts in progress | | | 230 | |
Current Technology | | | 51 | |
Trade payables | | | (541 | ) |
Deferred revenues | | | (61 | ) |
Other current liabilities | | | (207 | ) |
Deferred tax liabilities | | | (80 | ) |
Goodwill (a) | | | 1,401 | |
| |
|
| |
| | | | |
| | $ | 1,701 | |
| |
|
| |
| | | |
| | (a) | As discussed above goodwill includes $630 on account of the second payment for the seller that should have been executed in February 2009. |
| | | |
| | The value assigned to the tangible assets, intangible assets and liabilities has been determined as follows: |
| | | |
| | 1. | Telesens current assets and liabilities were recorded at their carrying amounts. The carrying amounts of the current assets and liabilities were reasonable proxies for their market values due to their short term maturity. |
| | | |
| | 2. | The value assigned to the customer-relations and current technology intangibles amounted to $295. The fair value of these intangibles is determined using the Income Approach. |
| | | |
| | 3. | Contracts in progress - The amount allocated to contracts in progress was based on the estimated fair value of these contracts at the acquisition date. The fair value assigned to these contracts is based on the remaining amounts to be billed under the contracts, reduced by the estimated cost to complete the contracts and an allowance for normal profit related to the activities that will be performed by the Company after the acquisition. |
| | | |
| | 4. | The Company recorded a deferred tax liability of $80 for the difference between the assigned values and the tax bases of the customer-relations and technology intangible assets. The deferred tax liability was decreased and as of December 31, 2008 amounts to $37. |
| | | |
| | (b) | On January 26, 2009, the Board of Directors of the Company received a written complaint, from the former shareholder and current general manager of Telesens, alleging improper commissions were made with respect to the acquisition of Telesens (See also note 8f). As a result of these allegations and the related investigation, the Company decided to hold February 2009 payment on account of Telesens acquisition. |
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 1:- | GENERAL (Cont.) |
| | |
| | Consequently, as discussed above, the goodwill impairment in 2008 includes $630 that is resulting from the accrual of on account of the second payment for the seller that should have been executed in February 2009. |
| | |
| . | The Company, based on the results of the investigation (as described in Note 8f), concluded that the improprieties with respect to the Company’s acquisition of Telesens did not affect the terms, including purchase price, of the transaction, and therefore should not impact the accounting of the acquisition. |
| | |
| c. | Pro forma financial information: |
| | |
| | The following table for the year ended December 31, 2007 presents certain combined unaudited statements of income data as if the acquisition of Telesens had occurred on January 1, 2007, after giving effect to purchase accounting adjustments, including amortization of identifiable intangible assets: |
| | | | |
| | Year ended | |
| | December 31, 2007 | |
| |
| |
| | Unaudited | |
| |
| |
| | | |
| | | | |
Revenues | | $ | 47,922 | |
| |
|
| |
| | | | |
Net income | | $ | 1,675 | |
| |
|
| |
| | | | |
Earnings per share: | | | | |
Basic | | $ | 0.09 | |
| |
|
| |
Diluted | | $ | 0.09 | |
| |
|
| |
| | |
| | The pro forma financial information is not necessarily indicative of the combined results that would have been attained had the acquisitions taken place at the beginning of 2007, nor is it necessarily indicative of future results. |
| | |
| d. | Termination of agreements: |
| | |
| | In July 2007, the Company signed a settlement and release agreement with a former customer, under which the Company received from the customer £ 1,700 ($3,450) (without admission of liability) and both parties waived 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 - 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 |
| |
| 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: |
| |
| The accompanying financial statements have been prepared in U.S. dollar. |
| |
| A majority of the revenues of the Company and most of 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 most of its subsidiaries operate. Thus, the functional and reporting currency of the Company and most of 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”. |
| |
| The functional currency of the Company’s subsidiary in Ukraine has been determined to be the local currency, the Hryvnia. Accordingly, assets and liabilities of this entity are translated at year-end exchange rates and income and expenses are translated using average exchange rates for the year. Translation adjustments are shown under “foreign currency translation adjustments”, a component of accumulated other comprehensive loss, in the consolidated statements of changes in shareholders’ equity. |
| |
| 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 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 4.10% for 2007. The short-term deposits are presented at their cost, including accrued interest. As of December 31, 2008 the Company has no short-term bank deposits. |
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.) |
| |
| Investment in a 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 FASB Staff Position (FSP) No. SFAS 115-1 (FSP 115-1) and SFAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. As of December 31, 2008, 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 and other 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. As of December 31, 2008 the Company recorded impairment loss in the amount of $132 related to such assets. |
| |
| 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, 2008, a full valuation allowance was provided by the Company. See Note 9j for the impact of adoption of FIN 48, Accounting for uncertainty in Income Taxes, in 2007. |
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.) |
| |
| 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, 2007 and 2008, 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, 2007 and 2008, 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. |
| |
| The Company identifies short-term projects (“STP”) and accounts for such projects, under SOP 81-1, using the completed contract method. As of December 31, 2008 the Company capitalized $46, in prepaid expenses, related to costs of STP in progress that are being accounted for under completion contract method. |
| |
| 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. |
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.) |
| |
| 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 2006, 2007 and 2008. |
| |
| Royalty bearing grants: |
| |
| Royalty-bearing grants from the Government of Israel 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. |
| |
| 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 and trade and unbilled receivables. |
| |
| The Company’s and its subsidiaries’ cash and cash equivalents 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. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk. |
| |
| The Company’s trade receivables are geographically diversified primarily between the United States and Europe. To a lesser extent, in Israel, India, 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. |
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.) |
| |
| 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 earning (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. |
| |
| In compliance with EITF 03-6, the series of preferred shares are not participating securities in losses, and therefore are not included in the computation of net loss per share. |
| |
| Basic net earning (loss) per share is computed based on the weighted average number of shares of Ordinary Shares outstanding during each year. Diluted net earning (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 year ended December 31, 2006 all outstanding options and warrants were excluded from the calculations of diluted net earning (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. For the year ended December 31, 2008 all outstanding options and warrants were excluded from the calculations of diluted net earning (loss) per share, since they would have an anti-diluted effect. |
| |
| Accounting for stock-based compensation: |
| |
| The Company accounts for stock-based compensation in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 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 an expense over the requisite service periods in the Company’s consolidated income statements. |
| |
| The fair value for options granted in 2006, 2007 and 2008 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: |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
Employee stock options | | 2006 | | 2007 | | 2008 | |
| |
| |
| |
| |
| | | | | | | | | | |
Expected volatility | | 45 | % | | 45 | % | | 45 | % | |
Risk-free interest | | 5 | % | | 5 | % | | 4 | % | |
Dividend yield | | 0 | % | | 0 | % | | 0 | % | |
Expected life of up to (years) | | 3.4 | | | 3.5 | | | 3.5 | | |
| |
| The Company recognizes these compensation costs net of a forfeiture rate for only those shares expected to vest on accelerated attribution basis, rather than a straight-line method 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. |
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.) |
| | |
| The Company selected the Black-Scholes-Merton option pricing model as the most appropriate fair value method for its stock-options awards and values restricted stock based on the market value of the underlying shares at the date of grant. The option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term. |
| | |
| The computation of expected volatility is based on realized historical stock price volatility of the Company. 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 has historically not paid dividends and has no foreseeable plans to pay dividends. In December 2007, the SEC staff issued Staff Accounting Bulletin No. 110 (“SAB 110”), which became effective on January 1, 2008. SAB 110 amends Staff Accounting Bulletin No. 107 (“SAB 107”), Share-Based Payment. SAB 110 expresses the views of the SEC staff regarding the use of a “simplified” method in developing an estimate of expected term of “plain vanilla” share options in accordance with FASB Statement No. 123(R), Share-Based Payment. Under the “simplified” method, the expected term is calculated as the midpoint between the vesting date and the end of the contractual term of the option. The use of the “simplified” method, which was first described in SAB 107, was scheduled to expire on December 31, 2007. SAB 110 extends the use of the “simplified” method for “plain vanilla” awards in certain situations. The SEC staff does not expect the “simplified” method to be used when sufficient information regarding exercise behavior, such as historical exercise data or exercise information from external sources, becomes available. The adoption of SAB 110 did not have any effect on the Company’s financial statements. |
| | |
| Fair value of financial instruments: |
| | |
| The Company adopted the provision of FASB Statement 157 “Fair Value Measurements and certain related FASB staff positions (“Statement 157”) on January 1, 2008. Statement 157 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. |
| | |
| Statement 157 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Statement 157 establishes three levels of inputs that may be used to measure fair value: |
| | |
| - | Level 1: quoted prices in active markets for identical assets or liabilities; |
| - | Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or |
| - | Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
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.) |
| |
| The actual value at which such financial assets could actually be sold or settled with a willing buyer or seller may differ from such estimated fair values depending on a number of factors including, but not limited to, current and future economic conditions, the quantity sold or settled, the presence of an active market and the availability of a willing buyer or seller. |
| |
| As of December 31, 2008 the Company has only deposits which are highly liquid investments that are readily convertible to cash with maturities of three months or less at acquisition. |
| |
| 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, 2006, 2007 and 2008 were $1,236, $964 and $1,820, respectively. |
| |
| Advertising expenses: |
| |
| Advertising expenses are charged to the statements of operations as incurred. Advertising expenses for the years ended December 31, 2006, 2007 and 2008 were $110, $140 and $382, 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. |
| |
| Accumulated other Comprehensive loss: |
| |
| Accumulated other Comprehensive income is the sum of net loss and all other non-owner changes in equity, such as foreign currency translation adjustments. |
| | | | |
| | Accumulated other
comprehensive loss | |
| |
| |
| | | | |
Balance as of December 31, 2007 | | $ | – | |
Foreign currency translation adjustments | | | 170 | |
| |
|
| |
| | | | |
Balance as of December 31, 2008 | | $ | 170 | |
| |
|
| |
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 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| Other Intangible Assets: |
| |
| Intangible assets acquired in a business combination, should be amortized over their useful life using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up, in accordance with Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets”, (“SFAS No. 142”). Acquired technology is amortized using proportional over 5 years, and customer relations is amortized over 8 years. |
| |
| Goodwill: |
| |
| Goodwill represents excess of the costs over the net assets of businesses acquired. Under Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) goodwill, is not amortized. |
| |
| SFAS No. 142 requires goodwill to be tested for impairment at least annually or between annual tests in certain circumstances, and written down when impaired. Goodwill attributable to each of the reporting units is tested for impairment by comparing the fair value of each reporting unit with its carrying value. Fair value is determined, using discounted cash flows, market multiples and market capitalization. Significant estimates used in the methodologies include estimates of future cash flows, future short-term and long-term growth rates, weighted average cost of capital and estimates of market multiples for each of the reportable units. See Note 6 for the impairment losses that have been recorded. |
| |
| The Company concluded that it operates in two reporting units for goodwill Impairment test. The reporting units one Telesens and the rest of the Company. The definition of the reporting unit is stated on Paragraph 30 of SFAS 142. Telesens is identified as a reporting unit since it has independent economic characteristics and discrete financial information available. All goodwill was assigned to Telesens reporting unit. |
| |
| 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. |
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 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| 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. |
| |
| In November 2008, the FASB ratified Emerging Issues Task Force Issue No. 08-7, “Accounting for Defensive Intangible Assets”. EITF 08-7 clarifies the accounting for certain separately identifiable intangible assets which an acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. EITF 08-7 requires an acquirer in a business combination to account for a defensive intangible asset as a separate unit of accounting which should be amortized to expense over the period the asset diminishes in value. EITF 08-7 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company is currently evaluating the potential impact, if any, of the adoption of EITF 08-7 on its consolidated financial statement. |
| |
| In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, “Determination of the Useful Life of Intangible Assets”. FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets”. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008 and early adoption is prohibited. The Company is currently evaluating the potential impact, if any, of the adoption of FAS 142-3 on its consolidated financial statement. |
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 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| |
| In February 2008, the FASB issued FASB Staff Position No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” and FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157”. Collectively, the Staff Positions defer the effective date of Statement 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities except for items that are recognized or disclosed at fair value on a recurring basis at least annually, and amend the scope of Statement 157. In addition, in October 2008 the FASB issued FASB Staff Position FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”, which clarified the application of how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP No. 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. |
| |
| In June 2008, the FASB issued EITF No. 07-5 “Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of SFAS No. 133 specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. The Company believes adopting this statement will have no impact on the consolidated financial statements. |
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 3:- | OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES |
| | | | | | | |
| | December 31, | |
| |
| |
| | 2007 | | 2008 | |
| |
| |
| |
| | | | | | | |
Landlord (1) | | $ | 1,339 | | $ | – | |
Prepaid expenses | | | 1,083 | | | 1,306 | |
Employees | | | 300 | | | 119 | |
Government authorities | | | – | | | 203 | |
Advances to Suppliers | | | 235 | | | 312 | |
Others | | | 235 | | | 365 | |
| |
|
| |
|
| |
| | | | | | | |
| | $ | 3,192 | | $ | 2,305 | |
| |
|
| |
|
| |
| | |
| (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 8b. |
| |
NOTE 4:- | PROPERTY AND EQUIPMENT, NET |
| | | | | | | |
| | December 31, | |
| |
| |
| | 2007 | | 2008 | |
| |
| |
| |
| | | | | | | |
Cost: | | | | | | | |
Computers and peripheral equipment | | $ | 15,070 | | $ | 16,874 | |
Office furniture and equipment | | | 1,721 | | | 2,204 | |
Motor vehicles | | | 4,237 | | | 4,654 | |
Leasehold improvements | | | 5,638 | | | 2,600 | |
| |
|
| |
|
| |
| | | | | | | |
| | | 26,666 | | | 26,332 | |
| |
|
| |
|
| |
Accumulated depreciation: | | | | | | | |
Computers and peripheral equipment | | | 13,818 | | | 15,291 | |
Office furniture and equipment | | | 1,055 | | | 1,253 | |
Motor vehicles | | | 2,268 | | | 2,083 | |
Leasehold improvements | | | 3,480 | | | 422 | |
| |
|
| |
|
| |
| | | | | | | |
| | | 20,621 | | | 19,049 | |
| |
|
| |
|
| |
| | | | | | | |
Depreciated cost | | $ | 6,045 | | $ | 7,283 | |
| |
|
| |
|
| |
| |
| Depreciation expenses for the years ended December 31, 2006, 2007 and 2008 were $2,589, $1,964 and $2,202, respectively. |
F - 22
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| | |
NOTE 5:- | OTHER ASSETS, NET |
| | |
| a. | Intangible assets acquired in 2008 (see note 1): |
| | | | |
| | December 31, | |
| | 2008 | |
| |
| |
| | | | |
Cost: | | | | |
Customer relations | | $ | 244 | |
Current Technology | | | 51 | |
| |
|
| |
| | | | |
| | | 295 | |
| |
|
| |
Accumulated amortization (including write downs): | | | | |
Customer relations (including $82 write downs) | | | 120 | |
Current Technology (including $17 write downs) | | | 26 | |
| |
|
| |
| | | | |
| | | 146 | |
| |
|
| |
| | | | |
Depreciated cost | | $ | 149 | |
| |
|
| |
| |
| Estimated amortization expenses for the year ended December 31, 2009 is in amount of $149. |
| | |
NOTE 6:- | GOODWILL |
| |
| The changes in the carrying amount of goodwill for the year ended December 31, 2008, are as follows: |
| | | | |
| | December 31, | |
| | 2008 | |
| |
| |
| | | | |
Goodwill acquired during the year (see also note 1) | | $ | 1,401 | |
Impairment losses | | | (1,401 | ) |
| |
|
| |
| | | | |
Balance as of December 31, 2008 | | $ | – | |
| |
|
| |
| |
| Telesens was determined to be a separate reporting unit. As discussed in more details in note 1, the goodwill impairment includes $630 that is related to the second payment on account of the acquisition that should have been executed in February 2009. |
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:- | OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
| | | | | | | |
| | December 31, | |
| |
| |
| | 2007 | | 2008 | |
| |
| |
| |
| | | | | | | |
Employees and payroll accruals | | $ | 4,467 | | $ | 4,257 | |
Accrued expenses | | | 1,701 | | | 969 | |
Government authorities | | | 494 | | | 605 | |
Accrual for the second payment account of the acquisition of Telesens | | | – | | | 630 | |
Others | | | 304 | | | 326 | |
| |
|
| |
|
| |
| | | | | | | |
| | $ | 6,966 | | $ | 6,787 | |
| |
|
| |
|
| |
| | |
NOTE 8:- | COMMITMENTS AND CONTINGENT LIABILITIES |
| | |
| a. | Aggregate minimum rental commitments under non-cancelable leases at December 31, 2008 are as follows: |
| | | | | | | | | | |
Year ended December 31, | | Facilities | | Motor
vehicles | | Total | |
| |
| |
| |
| |
| | | | | | | | | | |
2009 | | | 1,297 | | | 94 | | | 1,391 | |
2010 | | | 1,255 | | | 49 | | | 1,304 | |
2011 | | | 1,082 | | | – | | | 1,082 | |
2012 | | | 763 | | | – | | | 763 | |
2013 | | | 763 | | | – | | | 763 | |
2014 | | | 763 | | | – | | | 763 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
| | $ | 5,923 | | $ | 143 | | $ | 6,066 | |
| |
|
| |
|
| |
|
| |
| | |
| | Facility lease expenses for the years ended December 31, 2006, 2007 and 2008 were $ 1,432, $1,409 and $910, respectively. |
| | |
| | Motor vehicle lease expenses for the years ended December 31, 2006, 2007 and 2008 were approximately $106, $102 and $140, respectively. |
| | |
| b. | In December 2007, the Company relocated its offices in Israel. The term of the lease is 7 years and the Company has the option to extend the lease period for additional 3 years. 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. |
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 8:- | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.) |
| | |
| | As of December 31, 2008, the Company’s leasehold improvements assets are in an amount of $1,593 of which $428 were funded by landlord incentives and $1,165 as landlord loan. |
| | |
| | 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 discounted the cash flows using annual rate of 9.58% which represents the company market condition. |
| | |
| c. | 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 $2, $0.6 and $4 for the years ended December 31, 2006, 2007 and 2008, respectively. The amounts were recorded in the cost of revenues. |
| | |
| | As of December 31, 2008, the Company has an outstanding contingent obligation to pay royalties in the amount of approximately $2,738 in respect of these grants. Management believes that none of its product sales is currently subject to OCS and BIRD-F royalties payment. |
| | |
| d. | Guarantees: |
| | |
| | The Company has obtained performance guarantees in favor of certain customers from several banks in Israel amounting to $3,109 and $841 for the years ended December 31, 2007 and 2008, respectively. |
| | |
| | The Company has obtained other guarantees in favor of facility and car leases from bank in Israel amounting to $409 and $426 for the years ended December 31, 2007 and 2008, respectively. |
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 8:- | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.) |
| | |
| e. | 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 on November 9, 2006. The Company filed a motion to dismiss the second amended and consolidated complaint on 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. A motion seeking preliminary approval of the settlement from the court was filed on April 14, 2008 and a preliminary order approving the settlement and setting a hearing on September 11, 2008 was filed on May 29, 2008. The hearing was held on September 11, 2008 and the court entered a final judgment approving the settlement and dismissing the action with prejudice. More than 30 days have elapsed from the date of entry of the final judgment has and accordingly, the time to appeal from the final judgment has expired. The settlement is being paid by the insurance of the Company of directors and officers. |
| | |
| f. | Allegation for Improperness with respect to Telesens Acquisition: |
| | |
| | On January 26, 2009, the Board of Directors of the Company received a written complaint of Mr. Eduard Rubin (“Mr. Rubin”), a former key shareholder of Telesens, who also serves as the general manager of Telesens LLC (see also Note 1), alleging, among other things, that Mr. Moti Lipshes, an RBU (Region Business Unit) manager in the Company (the “RBU Manager”), who is also the son of Mr. Meir Lipshes, the Chairman and CEO of the Company, received improper commissions from Mr. Rubin with respect to the acquisition of Telesens. |
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 8:- | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.) |
| | |
| | The Audit Committee of the Company has engaged Barlev Investigative Auditing to lead an internal investigation. Based on the report of the independent investigator, the Audit Committee concluded, among other things, that the allegations are not frivolous and that the RBU Manager received up to $90 (while he was entitled to receive under the agreement he had with Mr. Rubin to $350) and that he failed to disclose the said commission to the Company, but also concluded that none of the other employees, officers or directors of the Company was aware of such commission or was engaged in any improper personal conduct. The Audit Committee instructed the Company to take certain actions, which have been taken, including to terminate the engagement with the RBU Manager immediately and to prepare and present a report regarding the clarity of the existing prohibition on personnel and contractors of the company from engaging in improper personal gain, and to suggest remedial measures if needed. The Company intends to pursue all legal remedies available under the circumstances against the RBU Manager, and it also exploring the legal status of the Company regarding Telesens and Mr. Rubin under the circumstances. Due to the preliminary stage of the process currently the Company cannot estimate the outcome of the dispute with these parties |
| | |
| | On March 21, 2009, Mr. Rubin sent the Company a notification that he initiated legal proceeding against the Company with respect to the stock purchase agreement signed between the parties. Mr. Rubin demand to cancel the stock purchase agreement, to received the shares of Telesens back and to receive additional compensation of the amount of up to approximately $500. The Company is the preliminary stage of assessing the claim and reviewing the related documents. Currently, the Company can not estimate the outcome of this claim. |
| | |
| g. | Dispute with respect to balance with related party shareholder, See Note 12b. |
| | |
| | |
| | |
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 9:- | INCOME TAXES |
| | |
| 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 2007, results for tax purposes were measured in terms of earnings in NIS after certain adjustments for increases in the Israeli CPI. Beginning January 1, 2008, the Inflationary Adjustments Law was repealed. |
| | |
| b. | Corporate tax rates: |
| | |
| | Taxable income of Israeli companies is subject to tax at the rate of 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, 2008 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. |
| | |
| | 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, 2008, management believes that the Company is meeting all of the aforementioned conditions. |
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 9:- | INCOME TAXES (Cont.) |
| | |
| | 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. The Period of tax benefits for a new Privileged Enterprise commences in the “Year of Commencement”. This year is the later of: (1) the tear is which taxable income is first generated by the Company, or (2) a year selected by the Company for commencement, on the condition that the Company meets certain provisions provided by the Law (“Year of Election”). |
| | |
| | If a Company requested the Alternative Package of benefits for an Approved Enterprise under the old law before the 2005 amendment, it is precluded from filing a Year of Election notice for a Privileged Enterprise for two years after the year in which the Approved Enterprise was activated. |
| | |
| | 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, 2008 in Israel, the U.S. and the U.K amount to $46,397, $11,737 and $8,376, 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. |
| | |
| | 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. |
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 9:- | INCOME TAXES (Cont.) |
| | |
| 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, | |
| |
| |
| | 2007 | | 2008 | |
| |
| |
| |
| | | | | | | |
Reserves and allowances | | $ | 5,733 | | $ | 3,529 | |
Net operating loss carryforward - foreign | | | 7,791 | | | 6,503 | |
Net operating loss carryforward - domestic | | | 8,535 | | | 11,599 | |
| |
|
| |
|
| |
| | | | | | | |
Total deferred tax assets before valuation allowance | | | 22,059 | | | 21,631 | |
Valuation allowance | | | 22,059 | | | 21,631 | |
| |
|
| |
|
| |
| | | | | | | |
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 - 30
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| | |
NOTE 9:- | INCOME TAXES (Cont.) |
| | |
| 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: |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2006 | | 2007 | | 2008 | |
| |
| |
| |
| |
| | | | | | | | | | |
Income (loss) before taxes, as reported in the consolidated statements of operations | | $ | (3,899 | ) | $ | 2,809 | | $ | (1,630 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Statutory tax rate | | | 31 | % | | 29 | % | | 27 | % |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Theoretical tax benefit on the above amount at the Israeli statutory tax rate: | | $ | (1,209 | ) | $ | 815 | | $ | (440 | ) |
Tax adjustment in respect of foreign subsidiaries different tax rates | | | (84 | ) | | 69 | | | 29 | |
Deferred taxes on losses for which a valuation allowance was provided | | | 1,066 | | | 598 | | | 547 | |
Nondeductible impairment charges | | | – | | | – | | | 418 | |
Temporary Differences | | | 590 | | | (1,573 | ) | | 337 | |
Taxes in respect of prior years | | | (333 | ) | | – | | | (15 | ) |
Tax withholdings and credits | | | 18 | | | (274 | ) | | 174 | |
Other | | | (144 | ) | | 278 | | | (679 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Income taxes (tax benefit), as reported in the statements of operations | | $ | (96 | ) | $ | (87 | ) | $ | 371 | |
| |
|
| |
|
| |
|
| |
| | |
| 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, | |
| |
| |
| | 2006 | | 2007 | | 2008 | |
| |
| |
| |
| |
| | | | | | | | | | |
Current taxes | | $ | 219 | | $ | (87 | ) | $ | 386 | |
Taxes in respect of prior years | | | (315 | ) | | – | | | (15 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
| | $ | (96 | ) | $ | (87 | ) | $ | 371 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Domestic | | $ | (248 | ) | $ | (274 | ) | $ | 127 | |
Foreign | | | 152 | | | 187 | | | 244 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
| | $ | (96 | ) | $ | (87 | ) | $ | 371 | |
| |
|
| |
|
| |
|
| |
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:- | INCOME TAXES (Cont.) |
| | |
| i. | Income (loss) before taxes is comprised as follows: |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2006 | | 2007 | | 2008 | |
| |
| |
| |
| |
| | | | | | | | | | |
Domestic | | $ | (1,319 | ) | $ | 4,877 | | $ | (4,388 | ) |
Foreign | | | (2,580 | ) | | (2,068 | ) | | 2,758 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
| | $ | (3,899 | ) | $ | 2,809 | | $ | (1,630 | ) |
| |
|
| |
|
| |
|
| |
| | |
| 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 $45. |
| | |
| | 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: |
| | | | |
| | December 31,
2008 | |
| |
| |
| | | | |
Gross unrecognized tax benefits at January 1, 2008 | | $ | 92 | |
Increases in interest and penalties related to tax positions | | | 13 | |
Increases in tax positions for current year | | | 25 | |
Lapse in statute of limitations | | | (10 | ) |
| |
|
| |
| | | | |
Gross unrecognized tax benefits at December 31, 2008 | | $ | 120 | |
| |
|
| |
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:- | 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. |
| | | |
| | 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, 2008, 430,217 warrants were exercised 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, 2008, none of these warrants were converted into the Company’s Ordinary shares. |
| | | |
| | In 2005, 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 deemed dividend of $1,981 related to the beneficial conversion feature on the Preferred shares. |
| | | |
| | 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. |
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:- | SHAREHOLDERS’ EQUITY (Cont.) |
| | |
| | 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. During 2008 none of the Preferred shares were converted into the Company’s Ordinary shares and none of the Warrants had been exercised into Ordinary shares. |
| | |
| 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, 2008 94,000 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, 2008, an aggregate of 1,014,333 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 - 34
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| | |
NOTE 10:- | SHAREHOLDERS’ EQUITY (Cont.) |
| | |
| | A summary of the stock option activities in 2006, 2007 and 2008 is as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2006 | | Year ended December 31, 2007 | | Year ended December 31, 2008 | |
| |
| |
| |
| |
| | 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 | | | 390,333 | | $ | 4.55 | | | 1,049,000 | | $ | 3.97 | | | 740,667 | | $ | 4.03 | | | | | | | |
Granted | | | 755,500 | | $ | 3.78 | | | 18,000 | | $ | 3.00 | | | 25,000 | | $ | 3.00 | | | | | | | |
Exercised | | | – | | $ | – | | | – | | $ | – | | | – | | $ | – | | | | | | | |
Forfeited | | | (93,500 | ) | $ | 4.23 | | | (185,004 | ) | $ | 3.71 | | | (46,667 | ) | $ | 3.56 | | | | | | | |
Expired | | | (3,333 | ) | $ | 20 | | | (141,329 | ) | $ | 3.63 | | | (139,335 | ) | $ | 3.61 | | | | | | | |
| |
|
| | | | |
|
| |
|
| |
|
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding at end of year | | | 1,049,000 | | $ | 3.97 | | | 740,667 | | $ | 4.03 | | | 579,665 | | $ | 4.21 | | | 2.05 | | $ | – | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Options exercisable at end of year | | | 266,330 | | $ | 4.78 | | | 375,336 | | $ | 4.51 | | | 410,669 | | $ | 4.47 | | | 1.83 | | $ | – | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | |
| | 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 2008 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, 2008. This amount changes based on the fair market value of the Company’s stock. The share price as of December 31, 2008 is lower than the exercise price of all the changes during the year and therefore aggregate intrinsic value was not calculated. |
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 10:- | SHAREHOLDERS’ EQUITY (Cont.) |
| | |
| | The weighted-average grant-date fair value of options granted during the years 2006, 2007 and 2008 was $1.45, $1.09 and $1.18, respectively. |
| | |
| | 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, | |
| |
| |
| | 2007 | | 2008 | |
| |
| |
| |
| | | | | | | |
Cost of sales | | $ | 54 | | $ | 30 | |
Research and development expenses | | | 29 | | | 18 | |
Sales and marketing | | | 17 | | | 13 | |
General and administrative expenses | | | 13 | | | 6 | |
| |
|
| |
|
| |
| | | | | | | |
| | $ | 113 | | $ | 67 | |
| |
|
| |
|
| |
| | |
| | As of December 31, 2008, there was $22 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 0.91 years. |
| | |
| | The options outstanding as of December 31, 2008 have been separated into exercise prices, as follows: |
| | | | | | | | | | | | | | | | | |
Exercise
price | | Options outstanding
as of
December 31, 2008 | | Weighted average remaining contractual life | | Weighted average
exercise
price | | Options exercisable
as of
December 31, 2008 | | Weighted average exercise price of exercisable options | |
| |
| |
| |
| |
| |
| |
| | | | | | years | | | | | | | | | | |
| | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
$ | 3.0 | | | 63,000 | | | 3.48 | | $ | 3.0 | | | 19,331 | | | | |
$ | 3.5 | | | 165,000 | | | 2.26 | | $ | 3.5 | | | 123,332 | | | | |
$ | 3.9 | | | 228,665 | | | 2.12 | | $ | 3.9 | | | 154,670 | | | | |
$ | 4.3 | | | 29,000 | | | 2.23 | | $ | 4.3 | | | 19,336 | | | | |
$ | 6.0-8.0 | | | 94,000 | | | 0.5 | | $ | 7.0 | | | 94,000 | | | | |
| | |
|
| | | | | | | |
|
| | | | |
| | | | | | | | | | | | | | | | | |
| | | | 579,665 | | | 1.83 | | $ | 4.21 | | | 410,669 | | $ | 4.47 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
| | |
| 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. |
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 11:- | EARNINGS PER SHARE |
| |
| The following table sets forth the computation of basic and diluted earnings per share: |
| | | | | | | | | | |
| | Years ended December 31, | |
| |
| |
| | 2006 | | 2007 | | 2008 | |
| |
| |
| |
| |
| | | | | | | | | | |
Net income (loss) attributable to ordinary shareholders | | $ | (3,803 | ) | $ | 2,447 | | $ | (2,001 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Weighted average number of shares used for computing basic net earning (loss) per share attributed to Ordinary shareholders | | | 15,075,881 | | | 16,001,148 | | | 16,003,158 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Dilutive affect: | | | | | | | | | | |
Employee stock options | | | *) – | | | 120,841 | | | *) – | |
| |
|
| |
|
| |
|
| |
Preferred shares as converted | | | *) – | | | *) – | | | *) – | |
| |
|
| |
|
| |
|
| |
Weighted average number of shares used for computing diluted net earning (loss) per share attributed to Ordinary shareholders | | | 15,075,881 | | | 16,121,989 | | | 16,003,158 | |
| |
|
| |
|
| |
|
| |
| | |
| *) | Anti dilutive |
| | |
NOTE 12:- | RELATED PARTIES TRANSACTIONS AND BALANCES |
| | |
| Composition: |
| | | | | | | |
| | December 31, | |
| |
| |
| | 2007 | | 2008 | |
| |
| |
| |
| | | | | | | |
Balances between Team and the Company (see a below) | | $ | (3,932 | ) | $ | (420 | ) |
| |
|
| |
|
| |
| | | | | | | |
Balance with related party shareholder (see b below) | | $ | 409 | | $ | 459 | |
| |
|
| |
|
| |
| | |
| a. | Transactions and with Team: |
| | |
| | Transactions between Team and its affiliates and the Company: |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2006 | | 2007 | | 2008 | |
| |
| |
| |
| |
| | | | | | | | | | |
Revenues: | | | | | | | | | | |
Commissions on product sales and payment for services | | $ | – | | $ | 502 | | $ | 364 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
General and administrative expenses: | | | | | | | | | | |
Rent and maintenance | | $ | 1,160 | | $ | 1,402 | | $ | – | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Administrative and management services | | $ | 160 | | $ | 164 | | $ | – | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Purchase of equipment | | $ | 352 | | $ | 437 | | $ | 249 | |
| |
|
| |
|
| |
|
| |
F - 37
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| | | |
NOTE 12:- | 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, 2008, 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 1,500 ($411 as of December 31, 2008) 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 - 38
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| | |
NOTE 12:- | RELATED PARTIES TRANSACTIONS AND BALANCES (Cont.) |
| | |
| | The Company filed a NIS 1,600 lawsuit and demanded reimbursement for the additional withholding tax from Mr. Eisenberg. On August 12, 2008 the court rendered a judgment which accepted the Company’s lawsuit in its entirety and determined that Mr. Eisenberg will pay the Company the amount of NIS 1,745(approximately $459), including linkage differentials and interest, including attorney fees. On October 26, 2008, Mr. Eisenberg appealed on such judgment to the district court. A preliminary hearing on that matter in the district court is scheduled for September 16, 2009. |
| | |
NOTE 13:- | 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, 2006, 2007 and 2008: |
| | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2006 | | 2007 | | 2008 | |
| |
| |
| |
| |
| | Total
revenues | | Long-lived
assets | | Total
revenues | | Long-lived
assets | | Total
revenues | | Long-lived
assets | |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | |
Israel | | $ | 3,199 | | $ | 3,217 | | $ | 3,516 | | $ | 5,596 | | $ | 4,566 | | $ | 6,826 | |
North America | | | 18,929 | | | 600 | | | 16,118 | | | 397 | | | 15,677 | | | 342 | |
Europe | | | 12,331 | | | 4 | | | 16,320 | | | 2 | | | 20,998 | | | 1 | |
Eastern Europe | | | – | | | – | | | – | | | – | | | 1,953 | | | 84 | |
Australia | | | 3,724 | | | 20 | | | 2,598 | | | 35 | | | 2,902 | | | 21 | |
South America | | | 3,085 | | | – | | | 2,251 | | | 14 | | | 1,040 | | | – | |
Far East | | | 1,626 | | | 1 | | | 3,217 | | | 1 | | | 3,432 | | | 1 | |
Africa | | | 3,220 | | | – | | | 1,897 | | | – | | | 1,718 | | | 8 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | |
| | $ | 46,114 | | $ | 3,842 | | $ | 45,917 | | $ | 6,045 | | $ | 52,286 | | $ | 7,283 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | |
| b. | Major customers data as a percentage of total revenues: |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2006 | | 2007 | | 2008 | |
| |
| |
| |
| |
| | | | | | | | | | |
Customer A | | 13 | % | | 15 | % | | 18 | % | |
Customer B | | 11 | % | | 7 | % | | 11 | % | |
Customer C | | 7 | % | | 6 | % | | 10 | % | |
Customer D | | 6 | % | | 6 | % | | 5 | % | |
F - 39
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| | |
NOTE 14:- | SELECTED STATEMENTS OF OPERATIONS DATA |
| | |
| a. | Research and development, net: |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2006 | | 2007 | | 2008 | |
| |
| |
| |
| |
| | | | | | | | | | |
Total cost | | $ | 9,632 | | $ | 9,433 | | $ | 11,407 | |
Less - grants and participations | | | 54 | | | – | | | – | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Research and development, net | | $ | 9,578 | | $ | 9,433 | | $ | 11,407 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
| | Year ended December 31, | |
| |
| |
| | 2006 | | 2007 | | 2008 | |
| |
| |
| |
| |
| | | | | | | | | | |
Financial income (expense), net | | | | | | | | | | |
Foreign currency translation adjustments | | $ | 41 | | $ | 985 | | $ | (774 | ) |
Loss from sale of marketable securities | | | (838 | ) | | – | | | – | |
Other than temporary decline in fair value of marketable securities | | | (329 | ) | | – | | | – | |
Interest and others | | | 1,788 | | | 1,165 | | | 259 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Financial income, net | | $ | 662 | | $ | 2,150 | | $ | (515 | ) |
| |
|
| |
|
| |
|
| |
| | |
| 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 - 40
|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
| | |
NOTE 15:- | RECONCILIATION TO IFRS |
| | |
| 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 IFRS, 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 | | Year ended
December 31 | |
| | 2007 | | 2008 | |
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Net income (loss) as reported, under U.S. GAAP | | $ | 2,896 | | $ | (2,001 | ) |
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Reconciling item for IFRS reporting: | | | | | | | |
Accrued severance pay | | | 25 | | | 618 | |
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Net income (loss) according to IFRS *) | | $ | 2,921 | | $ | (1,383 | ) |
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| | *) | Amounts in NIS presented in accordance with IFRS were translated into U.S. dollars according to the exchange rate at the end of the corresponding period. |
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| | Year ended
December 31 | | Year ended
December 31 | |
| | 2007 | | 2008 | |
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Diluted net income (loss) attributed to shareholders as reported, under U.S. GAAP | | $ | 0.15 | | $ | (0.13 | ) |
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Reconciling item for IFRS reporting | | | – | | | 0.04 | |
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Diluted net income (loss) attributed to shareholders according to IFRS *) | | $ | 0.15 | | $ | (0.09 | ) |
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| | According to U.S. GAAP, under FAS 128 “Earnings per Share”, the number of incremental shares to be included in the denominator for year-to-date diluted EPS should be determined by computing a year-to-date weighted average of the number of incremental shares included in each quarterly diluted EPS computation (assuming all periods were profitable). According to IAS 33 “Earnings per Share” the incremental shares included in year-to-date diluted EPS weighted average would be computed using the average market price of shares for the year-to-date period. This item had no impact on the earning per share for the years ended December 31, 2007 and 2008. |
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|
TTI TEAM TELECOM INTERNATIONAL LTD. |
AND ITS SUBSIDIARIES |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
U.S. dollars in thousands, except per share data |
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NOTE 15:- | RECONCILIATION TO IFRS (Cont.) |
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| b. | Shareholders’ equity differences: |
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| | December 31 | | December 31 | |
| | 2007 | | 2008 | |
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Shareholders’ equity as reported, under U.S. GAAP | | $ | 33,436 | | $ | 31,478 | |
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Reconciling item for IFRS reporting: | | | | | | | |
Accrued severance pay | | | 489 | | | 1,107 | |
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Shareholders’ equity according to IFRS *) | | $ | 33,925 | | $ | 32,585 | |
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| | *) | Amounts in NIS presented in accordance with IFRS were translated into U.S. dollars according to the exchange rate at the end of the corresponding period. |
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| c. | Material adjustments: |
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| | The abovementioned adjustments result primarily from the differences between U.S. GAAP and IFRS, as follows: |
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| | According to U.S. GAAP, the cash surrendered value of such insurance policies should be presented in the balance sheet as long-term investments and the full severance pay liability should be presented in the balance sheet. According to IAS 19, “Employee Benefits”, the Company’s benefit plan is considered a defined benefit plan, and therefore, the severance pay liability is required to be calculated on an actuarial basis. The actuarial calculation takes into consideration future salary increases, the rates of employee turnover, and the estimated timing of payments. |
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