Our headquarters are located in Yoqneam, Israel, approximately 50 miles north of Tel Aviv. We lease approximately 16,000 square feet at our Yoqneam headquarters. We also lease 10,593 square feet of office space in Silver Spring, Maryland, approximately 4,000 square feet in Reading, U.K. and 21,500 square feet in Jassy, Romania. The office in Maryland is used primarily for supporting our customers in the United States, while the office in Jassy is used primarily for software development and for customer support. The office in Maryland is the group’s headquarters in the Americas.
Not applicable.
The following discussion and analysis is based on and should be read in conjunction with our consolidated financial statements and the related notes thereto, which are incorporated into this Annual Report by reference to our Report on Form 6-K furnished to the Securities and Exchange Commission on March 9, 2009.
We were incorporated in Israel in 1995 and started providing our enterprise software products in that year. In 1997, we introduced our billing and customer care software for Voice over IP. We have enhanced our billing solutions since then to support multiple IP services, wireless and wireline carriers and multiple play (voice, data and content) service providers. In 2008, 83.5% of our revenues were derived from providing our billing and customer care software and 16.5% were derived from providing our enterprise software. In 2008, license fees represented 32% of our revenues and services represented 68%. In 2006, no customer accounted for 10% or more of our total revenues. In 2007, one customer accounted for approximately 10% of total revenues. In 2008, no customer accounted for 10% or more of our total revenues. We expect to continue to derive sizeable revenues from a small number of changing customers.
In August 2005, we acquired Sentori Inc., a leading provider of billing and customer care solutions to tier 3 and tier 2 wireless carriers and mobile virtual network operators, or MVNOs, mainly in the United States and the Caribbean. In October 2007, we acquired the U.K.-based Omni Consulting Company Limited, which provides billing and customer care software solutions in a service bureau mode, mainly to European carriers. We evaluate acquisition opportunities based on our long-term policy of growing the scale of our business and enhancing our offering through acquisitions that are expected to enhance shareholder value.
In 2006, we experienced significant growth in revenue over 2005 driven primarily by our acquisition of Sentori in the third quarter of 2005, which strengthened our presence in the United States and in the mobile market generally. In 2007, we experienced a decrease in revenue driven primarily by changes to our business model, from short-term license deals to larger and more complex, long-term managed services agreements. As anticipated, this change resulted in revenue recognition of the majority of our licenses sold after 2006 over the length of three- to five-year periods, as opposed to revenue recognition at delivery in past years. We consider this a normal and expected development for our business as it grows and matures. In 2008, we experienced growth in revenue over 2007 driven by the acquisition of Omni Consulting Company Limited in the fourth quarter of 2007, which strengthened our presence in the United Kingdom.
In 2007, we recorded a $15.2 million impairment charge with respect to our holding of an auction rate security in the principal amount of $20.3 million. In 2008, we recorded an additional $4.2 million impairment charge with respect to this security. See below under Item 5.B – “Liquidity and Capital Resources” and Item 11 – “Quantitative and Qualitative Disclosures About Market Risk” for more information.
In July 2003, we adopted a dividend policy, according to which we declare, subject to specific board approval and applicable law, a dividend distribution once per year, in the amount of our net income from the previous year. Additionally the board approved dividend distributions in 2003, 2007, and 2008 that were subject to approvals from an Israeli Court in accordance with Section 303 of the Israeli Companies Law due to the fact that we did not have sufficient retained earnings. Since 2003 the Company distributed cash dividends of approximately $1.05 per share to its shareholders: $0.14 per share in 2003, $0.13 per share in 2004, $0.24 per share in 2005, $0.14 per share in 2006, $0.20 per share in 2007 and $0.20 per share in 2008. The board decision to approve the annual distribution is based, among other factors, on our cash position at that time, potential acquisitions and future cash needs. The board may decide to discontinue the dividend distribution in whole or in part at any time.
In September 2008, our Board of Directors authorized a plan for the repurchase of up to 2,100,000 of our ordinary shares in the open market, in an amount in cash of up to $2.8 million. As of December 31, 2008, we had repurchased 2,100,000 ordinary shares under the program at a total purchase price of approximately $1.6 million, after getting an approval by an Israeli court in accordance to the Israeli Companies Law. In February 2009, our Board of Directors authorized additional repurchase transactions of our shares in the total amount of $1.2 million pursuant to the 2008 repurchase plan. As of June 1, 2009, we have purchased an aggregate amount of 2,383,337 ordinary shares under the 2008 and 2009 programs at a total purchase price of approximately $1.8 million.
Revenues. We are paid license fees by our customers for the right to use our products, based on (1) traffic volume, which is measured by factors such as minutes per month, number of lines used, number of data sources and number of subscribers, and (2) the functionality of the system based on application modules that are added to the software. In relation to our professional services, other than maintenance services and managed services, we mainly quote a fixed price based on the type of service offered, estimated direct labor costs and the expenses that we will incur to provide these services. Fees for maintenance services are based on a fixed percentage of the license fee and are paid annually, quarterly or monthly. Fees for managed services are primarily based on the number of subscribers or customers business volume and are paid monthly.
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We primarily use two business models when we sell our solutions, the license model and the managed services model. In the license model, the customer pays a one-time implementation fee, a one-time license fee for a perpetual license limited by the traffic metrics chosen by the customer, and additional fees to expand the chosen traffic metrics limitation. In addition, we are paid maintenance fees to renew periodically the maintenance agreement at the customer discretion. In the managed services model, the customer pays a one-time implementation fee, a monthly fee that includes a periodic license (right to use), maintenance and services fees, calculated by the metrics chosen by the customer (mainly, number of subscribers).
We provide a revenue breakdown for our billing and customer care software and our enterprise call management software. We believe that this information provides a better understanding of our performance and allows investors to make a more informed judgment about our business.
Cost of Revenues. The cost of revenues consists primarily of direct labor costs and overhead expenses related to software installation and maintenance. Cost of revenues also includes, among other things, software license fees to third parties, primarily Oracle, hardware, amortization of intangible assets, packaging and shipping costs. Our cost of professional services revenues consists primarily of direct labor costs and travel expenses. Our revenues from the sale of our licenses have a higher gross margin than that from providing our professional services. We incur variable direct labor costs when we provide professional services. There is no comparable variable direct labor cost incurred when we license our software.
Research and Development Expenses. Our research and development expenses consist primarily of compensation, overhead and related costs for research and development personnel and depreciation of testing and other equipment. Research and development costs related to software products are expensed as incurred until the “technological feasibility” of the product has been established. Because of the relatively short time period between “technological feasibility” and product release, no software development costs have been capitalized. We expect to continue to make substantial investments in research and development.
Selling and Marketing Expenses. Our selling and marketing expenses consist primarily of compensation, overhead and related costs for sales and marketing personnel, the operation of international sales offices, sales commissions, marketing programs, public relations, promotional materials, travel expenses, trade shows and exhibition expenses.
General and Administrative Expenses. Our general and administrative expenses consist primarily of compensation, overhead and related costs for executives and administrative personnel, professional fees, insurance, provisions for doubtful accounts and other general corporate expenses.
Financial Income (Expenses), Net. Our financial income (expenses), net consists of impairment of auction rate securities and of other financial income (expenses), primarily interest earned on bank deposits and long term investments, gains and losses from the conversion of monetary balance sheet items denominated in non-dollar currencies into U.S. dollars, net of financing costs, loss from withdrawal of long-term bank deposits and bank charges in real terms as well as the devaluation of monetary assets and monetary liabilities.
Taxes on Income. Israeli companies are generally subject to income tax at the corporate tax rate of 27% for the 2008 tax year. Following an amendment to the Israeli Income Tax Ordinance that came into effect on January 1, 2006, the corporate tax rate has decreased to 26% for the 2009 tax year and is expected to decrease to 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. Substantially all of our facilities, however, have been granted “approved enterprise” status under the Law for the Encouragement of Capital Investments, 1959. Income derived from the approved enterprise is tax exempt for a period of ten years commencing in the first year in which we earn taxable income from the approved enterprise, since we have elected the “alternative benefits route” (involving a waiver of investment grants) and our approved enterprises are located in a preferred geographic location. In the event of distribution of cash dividends from income that was tax exempt, we would have to pay up to 25% tax in respect of the amount distributed. In February 2007, we finalized tax assessments for the tax years 2003 to 2005, which resulted in additional tax expenses in 2006 of approximately $1.5 million.
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A. Operating Results
The following discussion of our results of operations for 2006, 2007 and 2008, including the percentage data in the following table, is based upon our statements of operations contained in our financial statements for those periods, and the related notes thereto, which are incorporated into this Annual Report by reference to our Report on Form 6-K furnished to the Securities and Exchange Commission on March 9, 2009:
| Years ended December 31,
|
|---|
| 2006
| 2007
| 2008
|
|---|
| | | | |
|---|
| | | |
|---|
| | | |
|---|
| Revenues | | | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of revenues | | | | 28.3 | | | 31.4 | | | 29.7 | |
|
| |
| |
| |
| Gross profit | | | | 71.7 | | | 68.6 | | | 70.3 | |
| Research and development expenses | | | | 30.5 | | | 31.0 | | | 31.8 | |
| Selling, general and administrative expenses: | | |
| Selling and marketing expenses | | | | 18.1 | | | 20.8 | | | 19.5 | |
| General and administrative expenses | | | | 10.6 | | | 10.0 | | | 11.9 | |
| Impairment of goodwill and intangible asset | | | | | | | | | | 18.9 | |
|
| |
| |
| |
| Operating income (loss) | | | | 12.5 | | | 6.8 | | | (11.8 | ) |
| Financial income (expenses) - net | | | | (1.1 | ) | | (71.0 | ) | | (18.5 | ) |
|
| |
| |
| |
| Income (loss) before taxes on income | | | | 11.4 | | | (64.2 | ) | | (30.3 | ) |
| Taxes on income | | | | (6.8 | ) | | (0.6 | ) | | (2.7 | ) |
|
| |
| |
| |
| Net income (loss) | | | | 4.6 | | | (64.8 | ) | | (33.0 | ) |
|
| |
| |
| |
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Comparison of 2006, 2007 and 2008
Revenues
| Years ended December 31,
($ in millions)
| | |
|---|
| 2006
| 2007
| 2008
| % Change
2007 vs. 2006
| % Change
2008 vs. 2007
|
|---|
| | | | | | |
|---|
| | | | | |
|---|
| License sales | | | | 8.5 | | | 5.9 | | | 6.2 | | | (30.6 | ) | | 5.1 | |
| Professional services | | | | 11.6 | | | 12.5 | | | 13.3 | | | 7.8 | | | 6.4 | |
|
| |
| |
| |
| |
| |
| Total revenues | | | | 20.1 | | | 18.4 | | | 19.5 | | | (8.5 | ) | | 6.0 | |
|
| |
| |
| |
| |
| |
Revenues in 2007 decreased in comparison to 2006 by 8.5%, partly due to the business model shift towards more managed services deals, in which revenue is spread over a few years. Revenues in 2008 increased in comparison to 2007 by 6.0%, driven by the acquisition of Omni, which strengthened our presence in the United Kingdom. Revenues from our billing and customer care product solutions for service providers decreased from $17.2 million in 2006 to $15.4 million in 2007 and increased to $16.3 million in 2008. Revenues from our enterprise products increased from $2.9 million in 2006 to $3.1 million in 2007, and increased to $3.2 million in 2008.
Revenues from professional services as a percentage of total revenues increased from 58% in 2006 to 68% in 2007 as a result of continued growth in professional services, coupled with a decrease in license sales. In 2008, revenues from professional services remained 68% of total revenue.
The following table presents the geographic distribution of our revenues:
| Years ended December 31,
|
|---|
| 2006
| 2007
| 2008
|
|---|
| | | | |
|---|
| | | |
|---|
| | | |
|---|
| The Americas | | | | 48.1 | % | | 42.2 | % | | 40.5 | % |
| Asia Pacific and Africa | | | | 8.1 | | | 7.6 | | | 4.0 | |
| Europe | | | | 38.3 | | | 43.2 | | | 50.6 | |
| Israel | | | | 5.5 | | | 7.0 | | | 4.9 | |
|
| |
| |
| |
| Total | | | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Our sales in the Americas as a percentage of total sales decreased from 48.1% in 2006 to 42.2% in 2007 and further decreased to 40.5% in 2008. Our sales in Europe as a percentage of revenue increased from 38.3% in 2006 to 43.2% in 2007, and to 50.6% in 2008. The increase was primarily the result of the acquisition of Omni Consulting in the United Kingdom in October of 2007.
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Cost of Revenues
| Years ended December 31,
($ in millions)
| | |
|---|
| 2006
| 2007
| 2008
| % Change
2007 vs. 2006
| % Change
2008 vs. 2007
|
|---|
| | | | | | |
|---|
| | | | | |
|---|
| Total cost of revenues | | | | 5.7 | | | 5.8 | | | 5.8 | | | 1.8 | | | 0.0 | |
The increase in our cost of revenues in 2007 was primarily due to the increase in our revenues from professional services (as explained above) and due to the continued increase in employee payroll costs, driven by an increase in the cost of employment per employee as well as an increase in the total number of employees engaged in support and maintenance. Cost of revenues was unchanged in 2008.
Gross profit as a percentage of revenues decreased from 71.7% in 2006 to 68.6% in 2007, due to the increase in our revenues from professional services as a percentage of total revenues. In 2008, gross profit increased to 70.3% of revenue.
Operating Expenses
| Years ended December 31,
($ in millions)
| | |
|---|
| 2006
| 2007
| 2008
| % Change
2007 vs. 2006
| % Change
2008 vs. 2007
|
|---|
| | | | | | |
|---|
| | | | | |
|---|
| Research and development | | | | 6.1 | | | 5.7 | | | 6.2 | | | (6.6 | ) | | 8.8 | |
| Selling and marketing | | | | 3.6 | | | 3.8 | | | 3.8 | | | 5.6 | | | 0.0 | |
| General and administrative | | | | 2.1 | | | 1.8 | | | 2.3 | | | (14.3 | ) | | 27.8 | |
| Impairment of goodwill and another | | |
| intangible asset | | | | - | | | - | | | 3.7 | | | - | | | NA | |
|
| |
| |
| |
| |
| |
| Total operating expenses | | | | 11.8 | | | 11.3 | | | 16.0 | | | (4.2 | ) | | 41.6 | |
Research and Development. We make substantial investment in research and development to maintain our advanced technology and add functionality to our products. The decrease in our research and development expenses in 2007 by 6.6% was primarily due to a decrease in outsourcing cost. Research and development expenses increased in 2008 by 8.8% primarily due to an increase in the cost attributable to payroll and related expenses of our employees engaged in research and development resulting from an increase in the salary per employee and an increase in the total number of employees engaged in research and development. The increase was partially offset by deferred charges. Research and development expenses as a percentage of revenues slightly increased from 30.5% in 2006 to 31.0% in 2007 and to 31.8% in 2008 due to a decrease in revenue in excess of the decrease of research and development expenses in 2007 and an increase in research and development expenses in 2008 in excess of the increase in revenue.
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Selling and Marketing Expenses. Selling and marketing expenses slightly increased from $3.6 million in 2006 to $3.8 million in 2007 due to an increase of our global sales team, and remained roughly the same in 2008. Selling and marketing expenses as a percentage of revenues increased from 18.1% in 2006 to 20.8% in 2007 due to the decrease in revenue, and decreased to 19.5% in 2008 due to the increase in revenue.
General and Administrative Expenses. General and administrative expenses decreased from $2.1 million in 2006 to $1.8 million in 2007 and increased to $2.3 million in 2008. The increase between 2007 and 2008 was primarily due to the acquisition of Omni and to an increase in professional services expenses, mainly legal.
Impairment of Goodwill and another Intangible Asset. During 2008, following impairment tests for the value of goodwill and other intangible assets, we recorded an impairment charge of $3.7 million, out of which $2.3 million relate to Omni’s acquisition and $1.4 million relate to Sentori’s acquisition.
Financial Expenses. Financial expenses increased from $0.2 million in 2006 to $13.1 million in 2007 primarily due to the other-than-temporary impairment in the value of our holding in auction rate securities investment in the amount of $15.2 million offset mainly by financial income from interest. In 2008, financial expenses were $3.6 million due to an impairment of auction rate securities in the amount of $4.2 million offset mainly by financial income from interest that was lower than in 2007 due to lower global interest rates. See Item 5.B “Liquidity and Capital Resources” and Item 11 “Quantitative and Qualitative Disclosures About Market Risk” for more information.
Corporate Tax Rate
The general corporate tax rate in Israel is 31% for the 2006 tax year, 29% for the 2007 tax year and 27% for the 2008 tax year. Following an amendment to the Israeli Income Tax Ordinance that came into effect on January 1, 2006, the corporate tax rate decreased to 26% for the 2009 tax year and is expected to decrease to 25% for the 2010 tax year and thereafter. However, 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. Our expected effective tax rate, however, was 3% in 2006 (before taking in consideration the one-time tax expenses in 2006 resulting from the finalization of the tax assessment for tax years 2003 to 2005), 2% in 2007, and 2% in 2008. We experienced the lower expected effective tax rates in 2006, 2007 and 2008 primarily because of tax reductions to which we are entitled under Israel’s Law for Encouragement of Capital Investments, 1959. We cannot assure you that such tax benefits will be available for us in the future at their current levels or at all. In February 2007 we finalized tax assessments for the tax years 2003 to 2005 which resulted in an additional tax expense in 2006 of approximately $1.5 million. We cannot assure you that the low effective tax rates in 2006, 2007 and 2008 will be available for us in the future. For more information about the taxes to which we are subject, see above under the caption “Overview–Taxes on Income” and below under Item 10.E “Taxation.”
Critical Accounting Policies
To improve understanding of our financial statements, it is important to obtain some degree of familiarity with our critical or principal accounting policies. These policies are described in note 1 to the consolidated financial statements, which are incorporated into this Annual Report by reference to our Report on Form 6-K furnished to the Securities and Exchange Commission on March 9, 2009. We review our accounting policies annually to ensure that the financial statements developed, in part, on the basis of these accounting policies provide complete, accurate and transparent information concerning the financial condition of our company. As part of this process, we reviewed the selection and application of our critical accounting policies and financial disclosures as of December 31, 2008, and we believe that the consolidated financial statements present fairly, in all material respects, the consolidated financial position of our company as of that date.
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In preparing our financial statements in accordance with generally accepted accounting policies in the United States of America, our management must often make estimates and assumptions which may affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures as of the date of the financial statements and during the reporting period. Some of those judgments can be subjective and complex, and consequently actual results may differ from those estimates. For any given individual estimate or assumption made by our management, there may be alternative estimates or assumptions which are also reasonable. However, we believe that given the facts and circumstances before our management at the time of making the relevant judgments, estimates or assumptions, it is unlikely that applying any such other reasonable judgment would cause a material adverse effect on the consolidated results of operations, financial position or liquidity for the periods presented in the consolidated financial statements.
We are also subject to risks and uncertainties that may cause actual results to differ from estimates and assumptions, such as changes in the economic environment, competition, customer claims, foreign exchange, taxation and governmental programs. Certain of these risks, uncertainties and assumptions are discussed under the heading “Forward-Looking Statements” and in Item 3.D “Risk Factors”.
We consider our most significant accounting policies to be those discussed below:
Revenue Recognition. We apply the provisions of Statement of Position 97-2 of the American Institute of Certified Public Accounts (“SOP 97-2”), “Software Revenue Recognition” and Statement of Position 81-1 (“SOP 81-1”) “Accounting for performance of construction type and certain production type contracts”, as follows:
| | i) | Sales of licenses: Revenue from sale of products is recognized when delivery has occurred, persuasive evidence of an arrangement exists, the sales price is fixed or determinable and collection is probable. Customization of the product, if any, is performed before delivery occurs. If collection is not considered probable, revenue is recognized when the fee is collected. |
| | We generally do not grant a right of return on products sold to customers, distributors and resellers. In the event the right of return is granted, revenue is recognized after such right has expired. |
| | ii) | Services: The services we provide consist of implementation, training, hardware installation, maintenance, support, managed services and project management. |
| | All services except managed services are priced on a fixed price basis and are recognized ratably over the period in which the services are provided except services which are recognized under the percentage-of-completion method as described below. |
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| | Products are mainly supplied with maintenance for a period of one year from delivery. When revenue on sale of the products is recognized, we defer a portion of the sales price and recognize it as maintenance and support service revenue ratably over the above period. The portion of the sales price that is deferred is determined based on the fair value of the service as priced in transactions in which we render solely maintenance and support services. |
| | Where the services are considered essential to the functionality of the software products, both the software product revenue and the revenue related to the integration and implementation services are recognized under the percentage-of-completion method in accordance with SOP 81-1. We generally determine the percentage-of-completion by comparing the labor performed to date to the estimated total labor required to complete the project. When the estimate indicates that a loss will be incurred, such loss is recorded in the period identified. Significant judgments and estimates are involved in determining the percent complete of each contract. Different assumptions could yield materially different results. |
| | iii) | Managed Services: Revenues from managed services include a monthly fee for services and for right of use and are recorded as service revenues and license revenues, respectively. The monthly fee is based mainly on the number of subscribers or customer’s business volume and the agreements include a minimum monthly charge. These revenues are recognized on a monthly basis. Where customization services are sold together with a managed services contract, and vendor specific objective evidence of fair value for the managed services portion cannot be determined, the customization sales price is being deferred and is recognized over the entire contract term, commencing the deployment finalization. Accordingly, the expenses accrued during the implementation and customization period are deferred and presented in our balance sheet as deferred charges, net. |
Provision for Doubtful Accounts. The provision for doubtful accounts is for estimated losses resulting from the inability of our customers to make required payments. We regularly evaluate the adequacy of this provision by taking into account variables such as past experience, age of the receivable balance, and current economic conditions that may affect a customer’s ability to pay. The use of different estimates or assumptions could produce different provision balances. If collection is not probable at the time the transaction is consummated, we do not recognize revenue until cash collection. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional provision for doubtful accounts may be required.
Long-term Investment. We account for our investment in auction rate securities in accordance with SFAS No. 115,“Accounting for Certain Investments in Debt and Equity Securities”, and in accordance with SFAS No. 157, “Fair Value Measurements”. SFAS 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, SFAS 157 establishes a three-tier value hierarchy, as set forth below, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
| | — | Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. |
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| | — | Level 2 – Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. |
| | — | Level 3 – Valuations based on unobservable inputs which are supported by little or no market activity and significant to the overall fair value measurement. |
As of December 31, 2008, our investment in auction rate securities is reported at fair value under Level 3 of fair value hierarchy provisions of SFAS No. 157. Due to the lack of availability of observable market quotes on our investment in auction rate securities, the fair value was estimated by Houlihan Smith & Company, an investment advisor, based on a valuation model. The investment advisor’s model considered the structure of the security, the quality of the collateral and the default risks, and the liquidity determinants affecting the security.
Declines in fair value that are considered other-than-temporary are charged to earnings and those that are considered temporary are reported as a component of other comprehensive income in stockholders’ equity. We have concluded that the decline in value of our auction rate securities was other-than-temporary and recorded an impairment charge of $4.2 million for the year ended December 31, 2008. The valuation of our investment is subject to uncertainties that are difficult to predict. Factors that may impact valuation include changes to credit ratings of the securities as well as the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral values, discount rates, counterparty risk and ongoing strength and quality of market credit and liquidity. The estimated market value of our holding in auction rate securities at December 31, 2008 was approximately $0.9 million and at June 1, 2009 was approximately $55,000. This will likely require another impairment charge in the second quarter of 2009.
The credit and capital markets have continued to be uncertain in 2009. If uncertainties in these markets continue, these markets deteriorate further or the securities we hold are further downgraded, we may incur additional impairments to our investment portfolio.
Impairment of Goodwill and Other Intangible Assets. We test our goodwill for impairment using a fair value approach at the reporting unit level, on an annual basis, or more frequently if events or circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying value.
The goodwill impairment test is a two-step test. In the first step, we compare the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, we must perform the second step in order to determine the implied fair value of the reporting unit’s goodwill and compare it to the carrying value of the reporting unit’s goodwill. The activities in the second step include valuing the tangible and intangible assets and liabilities of the impaired reporting unit based on their fair value and determining the fair value of the impaired reporting unit’s goodwill based upon the residual of the summed identified tangible and intangible assets and liabilities.
In performing our impairment tests related to goodwill, we determine the fair value of our reporting units using the discounted cash flow approach. The discounted cash flow approach uses a reporting unit’s projections of estimated operating results and cash flows and applies a weighted-average cost of capital that reflects current market conditions. The evaluation of goodwill requires us to use significant judgments and estimates, including but not limited to projected future revenues and expenses, changes in operating margins, cash flows, and estimates of future capital expenditures. Our estimates may differ from actual results due to, among other things, economic conditions, changes to our business model, or changes in operating performance. Significant differences between these estimates and actual results could result in future impairment charges and could materially affect our future financial results.
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Taxes on Income.
Substantially all of our production facilities in Israel have been granted Approved Enterprise status under the Law for the Encouragement of Capital Investments, 1959. Income we have derived from the Approved Enterprise is tax exempt. In the event of distribution of cash dividends from tax-exempt income, we are required to pay up to 25% tax in respect of the amount distributed. For more information about Approved Enterprises, see Item 10.E “Taxation – Law for the Encouragement of Capital Investments, 1959” and Note 9 to our financial statements, which are incorporated into this Annual Report by reference to our Report on Form 6-K furnished to the Securities and Exchange Commission on March 9, 2009.
In previous years, we did not provide for deferred taxes because we intended to reinvest the amounts of all such income and not to distribute dividends from such income. Commencing 2003, we changed our policy with regard to distribution of dividends out of earnings derived from tax-exempt income.
Due to the accumulated tax losses and since we do not have approved enterprise taxable income, no additional tax liability will be incurred by us as a result of dividend distribution from the balance of undistributed income.
Recently Issued Accounting Pronouncements.
Recently issued accounting pronouncements are described in note 1 paragraph to the consolidated financial statements, which are incorporated into this Annual Report by reference to our Report on Form 6-K furnished to the Securities and Exchange Commission on March 9, 2009.
Our Functional Currency
The currency of the primary economic environment in which we operate is the U.S. dollar with the exception of our U.K. subsidiary. In 2008, approximately 95% of our revenues were derived from sales outside Israel, the majority of which were denominated in U.S. dollars. In addition, most of our marketing costs are incurred outside Israel, primarily in U.S. dollars. Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Balances in non-dollar currencies are remeasured into U.S. dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. For non-dollar transactions and other items reflected in our income statements, the following exchange rates are used:
| — | for transactions, exchange rates at the transaction dates or average rates; and |
| — | for other items (derived from non-monetary balance sheet items such as depreciation and amortization or similar items), historical exchange rates. |
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The resulting currency transaction gains or losses are reported as financial income or expenses as appropriate.
The functional currency of our U.K. subsidiary is the Great British Pound. We consolidate this subsidiary’s financial results into our financial statements, based on translation into U.S. dollars in accordance with Statement of Financial Accounting Standards (“FAS”) 52 of the Financial Accounting Standards Board of the United States (“FASB”). Assets and liabilities are translated at year-end exchange rates, while operating results items are translated at periodically average exchange rates during the year. Differences resulting from translation are presented in shareholders’ equity.
Impact of Foreign Currency Fluctuations on Results of Operations
The U.S. dollar cost of our operations is influenced by the extent to which any inflation in Israel is offset, on a lagging basis, or is not offset by the devaluation of the NIS in relation to the U.S. dollar. When the rate of inflation in Israel exceeds the rate of devaluation of the NIS against the U.S. dollar, companies experience increases in the U.S. dollar cost of their operations in Israel. Unless offset by a devaluation of the NIS against the U.S. dollar, inflation in Israel or weakening of the U.S. dollar in global markets will have a negative effect on our profitability as we receive payment in U.S. dollars for most of our sales while we incur a portion of our expenses, principally salaries and related personnel expenses, in NIS.
The following table presents information about the rate of inflation in Israel, the rate of devaluation of the NIS against the U.S. dollar, and the rate of inflation of Israel adjusted for the devaluation:
Years ended December 31,
| Israeli Inflation
Rate
| Israeli
Devaluation Rate
| Israel Inflation
Adjusted for
Devaluation
|
|---|
| | | | |
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| 2004 | | | | 1.2 | | | (1.6 | ) | | 2.8 | |
| 2005 | | | | 2.4 | | | 6.8 | | | (4.4 | ) |
| 2006 | | | | (0.1 | ) | | (8.2 | ) | | 8.1 | |
| 2007 | | | | 3.4 | | | (9.0 | ) | | 12.4 | |
| 2008 | | | | 3.8 | | | (1.1 | ) | | 4.9 | |
We cannot assure you that we will not be materially and adversely affected in the future if inflation in Israel exceeds the devaluation of the NIS against the U.S. dollar or if the timing of the devaluation lags behind inflation in Israel.
A devaluation of the NIS in relation to the U.S. dollar has the effect of reducing the U.S. dollar amount of any of our expenses or liabilities which are payable in NIS, unless these expenses or payables are linked to the U.S. dollar. This devaluation also has the effect of decreasing the U.S. dollar value of any asset, which consists of NIS or receivables payable in NIS, unless the receivables are linked to the U.S. dollar. Conversely, any increase in the value of the NIS in relation to the U.S. dollar has the effect of increasing the U.S. dollar value of any unlinked NIS assets and the U.S. dollar amounts of any unlinked NIS liabilities and expenses. Because exchange rates between the NIS and the U.S. dollar fluctuate continuously, exchange rate fluctuations and especially larger periodic devaluations will have an impact on our profitability and period-to-period comparisons of our results. The effects of foreign currency re-measurements are reported in our consolidated financial statements in current operations.
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| B. | Liquidity and Capital Resources |
Since our inception, we have financed our operations mainly through cash generated by operations. We supplemented this source by two private rounds of equity financing, the first in 1997 (with a follow-on in 1999) and the second in 2000 and our initial public offering in 2000, which raised total net proceeds in the amount of $44.3 million.
As of December 31, 2008, we had approximately $9.7 million in cash and cash equivalents and $0.9 million in long-term investment, and our working capital was $9.7 million. In our opinion, our working capital is sufficient for our requirements for the foreseeable future.
Net Cash Provided by/Used in Operating Activities. Net cash provided by operating activities in 2006 was $0.6 million, attributable to our net income of $0.9 million and non-cash related items, net, in the amount of $1.6 million, offset by a net increase in operating assets and liabilities items in the amount of $1.9 million. Net cash provided by operating activities in 2007 was $4.7 million, attributable to our net loss of $11.9 million and non-cash related items, net, in the amount of $16.5 million, and to a net decrease in operating assets and liabilities items in the amount of $0.1 million. Net cash provided by operating activities in 2008 was $4.1 million, attributable to our net loss of $6.4 million and non-cash related items, net, in the amount of $9.5 million, and to a net decrease in operating assets and liabilities items in the amount of $1.0 million.
Cash Deposits. In March 2002, we deposited most of our cash in structured, callable time deposits. Under the arrangements with the banks, whether or not the deposits bore interest depended upon the prevailing U.S. dollar LIBOR rate. Interest was payable in respect of days during which the rate was within a certain range and no interest was payable in respect of days during which it exceeded the range. Until May 2005, we achieved relatively high interest rates of over 7% per annum. Starting in May 2005, due to the increase of the six-month LIBOR rate, the deposits did not bear interest, causing our financial income to decrease substantially starting in the third quarter of 2005. In the second quarter of 2006, we withdrew two of our three structured deposits accounts in the amount of $20 million. The financial expenses arising from the early redemption of these two deposits were $1.33 million. In the fourth quarter of 2006, the third and last structured deposit in the amount of $10 million was released with no penalty.
In December 2006, we purchased marketable debentures in the amount of $10 million with a stated term of 54 months. The debentures were presented in our balance sheet as investment and other non-current assets. In December 2007, we withdrew the debentures prior to their maturity for a total consideration amount of $9.996 million.
We hold an investment in the principal amount of $20.3 million in an auction rate security, or the Security, which is secured by collateralized debt obligations. Consistent with our investment guidelines, the Security held by us had AAA credit rating at the time of the purchase. With the liquidity stress experienced in credit markets the Security held by us has experienced multiple failed auctions and hence became illiquid. In addition, the rating of the Security has been downgraded, and as of June 1, 2009 it is rated Ca by Moody’s, and CC by Standard & Poor’s. We are continuing to receive monthly interest payments on this security based on the stated terms.
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The estimated market value of the Security as of December 31, 2008, was $0.9 million, which reflects a $19.4 million decline in value of the principal investment. We have concluded that this decline in value is other-than-temporary and hence recorded a $15.2 million impairment charge for the year ended December 31, 2007, and a $4.2 million impairment charge for the year ended December 31, 2008. This impairment had, and the ongoing illiquidity of the Security continues to have, a material adverse affect on our liquidity and capital resources. Under current conditions of multiple failed auctions, the Security is illiquid and as such is presented under long-term investments on our balance sheet. If uncertainties in credit markets continue or if such markets deteriorate further, we may incur additional impairments to our investment in the Security. Any future impairment may have a material adverse affect on our liquidity and capital resources.
In accordance with our existing cash management policy, all our funds – with the exception of the auction rate securities – are currently invested in bank deposits, certificate of deposits, and money market funds, with maturities of less than 12 months.
Net Cash Provided by/Used in Investing Activities. During 2006, 2007 and 2008, our principal investment activity was the purchase/sale of marketable debentures. In 2007 we used $5.0 million for the acquisition of Omni Consulting.
Net Cash Provided by/Used in Financing Activities. In 2006, our financing activities used $2.9 million due to cash dividend of $3.0 million, offset by $0.1 million in proceeds from the exercise of employee stock options. In 2007, our financing activities used $4.2 million due to a cash dividend of $4.3 million, offset by $0.1 million in proceeds from the exercise of employee stock options. In 2008, our financing activities used $5.9 million due to a cash dividend of $4.3 million and the repurchase of shares in the amount of $1.6 million.
Capital Expenditures. During 2006, 2007, and 2008, the aggregate cash amount of our capital expenditures was $0.4 million in each of those years. These expenditures were principally for the purchase of property and other equipment. Although we have no material commitments for capital expenditures, we anticipate an increase in capital expenditures if we decide to construct a building for our office in Romania or if we purchase or merge with companies or purchase assets in order to obtain complementary technology and to expand our product offerings, customer base and geographical presence.
Cash Dividends. Since 2003 the Company distributed aggregated cash dividends of approximately $1.05 per share to its shareholders: $0.14 per share in 2003, $0.13 per share in 2004, $0.24 per share in 2005, $0.14 per share in 2006, $0.20 per share in 2007, and $0.20 per share in 2008. For information about our dividend policy, please see Item 8 “Financial Information–Dividend Policy.”
Share Repurchase. As of June 1, 2009, we have repurchased an aggregate amount of 2,383,337 ordinary shares under the 2008 share repurchase plan, at a total purchase price of approximately $1.8 million. We have authority, as of June 1, 2009 to use additional approximately $1.0 million for share repurchases under the 2008 plan.
| C. | Research and Development, Patents and Licenses, etc. |
We believe that significant investment in research and development is essential for maintaining and expanding our technological expertise in the market for billing and customer care software and to our strategy of being a leading provider of new and innovative convergent billing products. We work closely with our partners, customers and distribution channels, who provide significant feedback for product development and innovation.
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We have invested significant time and resources to create a structured process for undertaking research and product development. We believe that the method that we use for our product development and testing is well suited for identifying market needs, addressing the activities required to release new products, and bringing development projects to market successfully. Our product development activities also include the release of new versions of our products. Although we expect to develop new products internally, we may, based upon timing and cost considerations, acquire or license technologies or products from third parties.
Our research and development personnel include engineers and software developers with experience in the development and design of billing and customer care software. As of December 31, 2008, our research and development department consisted of 195 employees out of a total of 322 employees.
Our billing and customer care solutions target tier 2 and tier 3 service providers. The need for comprehensive billing solutions is driven by the market trend that requires service providers to introduce new services more rapidly, to be innovative in creating new product offers and to optimize business processes for maximum efficiency. In this environment, flexible and stable billing software is seen as business critical. If a system fails, or service quality is degraded, it can be highly detrimental to both a carrier’s ability to collect revenue and to its customer relations.
In our experience, the active markets lately are in the U.S. the rural mobile carriers that offer simple plans, mainly pay-as-you-go with either prepaid or pay-in-advance policies, the service providers worldwide that move towards IP networks and offer multiple services, and existing carriers that search for replacement of billing solutions as they diversify their offering and seek a convergent platform.
Integrating voice and data in enterprise switches (the IP private branch exchanges, or IP PBX’s) is a trend in which we are participating. Our goal is to develop marketing and sales relationships with the vendors of IP PBX’s such as Avaya, Cisco Systems and 3Com under which our enterprise software will be sold together with these vendors’ systems. This requires us to develop new sales channels with the distributors of IP PBX’s. This process is time consuming and requires the investment of some resources to conclude the necessary agreements and to certify and train these new channel partners.
| E. | Off-balance Sheet Arrangements |
We do not have any off-balance sheet arrangements.
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| F. | Tabular Disclosure of Contractual Obligations |
| Payment due by period
|
|---|
Contractual Obligations
| Total
| Less than 1
year
| 1-3 years
| 3-5 years
| More than 5
years
|
|---|
| | | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| Long-Term Debt Obligations | | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Capital (Finance) Lease Obligations | | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Operating Lease Obligations | | | $ | 585,000 | | $ | 562,000 | | $ | 23,000 | | | 0 | | | 0 | |
| Purchase Obligations | | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Other Long-Term Liabilities | | |
| Reflected on our Balance Sheet | | |
| under U.S. GAAP | | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | | | $ | 585,000 | | $ | 562,000 | | $ | 23,000 | | | 0 | | | 0 | |
| Item 6. | | Directors, Senior Management and Employees |
| A. | Directors and Senior Management |
The following table sets forth certain information regarding our directors and executive officers as of the date of filing of this annual report:
Name
| Age
| Position
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Monica Eisinger | 51 | President, Chairperson of the Board of Directors and Chief Executive Officer |
| Itay Barzilay | 35 | Chief Financial Officer |
| Doron Segal | 44 | Vice President - Engineering and Chief Technology Officer |
| Tal Shain | 41 | Vice President - Professional Services |
| Danny Engle | 40 | Vice President - Sales for North America |
| Amnon Neubach | 65 | Director |
| Mihail Rotenberg | 56 | Director |
| Menahem Shalgi | 59 | Director |
| Shmuel Arvatz | 46 | Director |
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The background of each of our directors and executive officers is as follows:
Monica Eisinger. Ms. Eisinger founded our company and has been President, Chairperson and Chief Executive Officer of our company since inception. Prior to founding MIND, Ms. Eisinger served as an information systems consultant to Raphael, the Israeli Armaments Industry and directed over 40 projects. Ms. Eisinger holds a B.Sc. degree in Computer Science and a M.Sc. degree in Telecommunications (with expertise in Voice and Data Integration over the Ethernet) from the Technion, Israel Institute of Technology.
Itay Barzilay. Mr. Barzilay has served as our Chief Financial Officer since May 2008. From 2003 to 2008, he held several financial management positions at Avaya Inc. From 2000 to 2002, he served as an auditor and as a corporate finance consultant at the Israeli affiliate of Ernst & Young. Mr. Barzilay is a certified public accountant in Israel and holds a B.A. degree in Accounting and Economics from Tel Aviv University and an M.B.A. degree from New York University, Stern School of Business.
Doron Segal. Mr. Segal has served as our Chief Technology Officer since October 2004 and as our Vice President of Engineering since July 2007. Prior thereto, he worked for eight years at Comverse, at which he held a number of positions including Assistant Vice President with responsibility for product requirement definition and product level design. Mr. Segal holds an M.Sc. degree in Computer Science from Bar Ilan University and a B.Sc. degree in Physics, Mathematics & Computer Science from the Hebrew University.
Danny Engle. Mr. Engle is Vice President of North American Sales for MIND Software Inc. (formerly Sentori Inc.). Mr. Engle joined Sentori in 2003 as Director of Sales, and later became Sentori’s Vice President of North American Sales. Prior to joining Sentori, Mr. Engle was District Manager at Siebel Systems, a leading CRM solutions provider; Director of Sales for SOTAS, a leading provider of network efficiency maximization tools for communication service providers. Mr. Engle holds a B.S. degree in Business Administration from the University of Texas.
Tal Shain Mr. Shain joined our company in June 1999 and has served as our Vice President of Professional Services since February 2006. Prior thereto, Mr. Shain served as our R&D Manager in Romania and Chief Architect. Mr. Shain holds a B.Sc. degree in Computer Engineering from the Technion, Israel Institute of Technology.
Amnon Neubach. Mr. Neubach has served as an external director of our company since February 2001. From 2001 until 2003, Mr. Neubach served as Chairman of the Board of Pelephone Communications Ltd. Mr. Neubach has served as an economic consultant to several companies in the private sector since 1997. From 1995 to 1997, Mr. Neubach served as country advisor to Goldman Sachs in Israel, and from 1990 to 1994 he served as the Minister of Economic Affairs in the Israeli Embassy in Washington, D.C. Currently Mr. Neubach serves as a director of Delta Ltd., Direct Insurance Ltd. and Aspen Ltd. Mr. Neubach also serves as the Chairman of the Board of two privately held companies. Mr. Neubach holds a B.A. degree in Economics and Business Administration and an M.A. degree in Economics, both from Bar Ilan University.
Mihail Rotenberg. Mr. Rotenberg has served as a director of our company since May 2008. He is the founder of BreezeCOM Ltd., which merged to become Alvarion Ltd., a wireless broadband pioneer and the leading provider of WiMAX. Mr. Rotenberg served as the Chief Executive Officer of BreezeCOM from 1993 to 2000. From 2000 to 2005 Mr. Rotenberg served as President and CEO of Accessnet SA, a wireless internet service provider in Romania, which was sold in 2005 to Clearwire Inc. Mr. Rotenberg holds a Ph.D. degree from Polytechnic University, Bucharest, Romania.
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Menahem Shalgi. Mr. Shalgi has served as an external director of our company since April 2005. Mr. Shalgi served at Amdocs as Vice President of Business Development and M&A from 1998 to 2003 and as Vice President and Executive Account Manager from 1993 to 1998. From 1991 to 1993, Mr. Shalgi served as the Chief Executive Officer of WIZTEC Ltd. Prior thereto, Mr. Shalgi served at Amdocs since 1985, at which he held a number of positions. Currently Mr. Shalgi serves as a director in Pilat Media PLC in the UK and he is the chairman of Afterdox, an investment house in Israel. Mr. Shalgi holds a B.A. degree in Economics and Statistics from Tel-Aviv University and a M.Sc. degree in Computer Sciences from Weizmann Institute for Science.
Shmuel Arvatz. Mr. Arvatz has served as an external director of our company since August 2008. Mr. Arvatz serves as the Chief Financial Officer of ClickSoftware Technologies Ltd. Prior to his position at ClickSoftware, he served as the Chief Financial Officer at Shrem, Fudim, Kelner Technologies Ltd., a leading investment house in Israel. He also served as Executive Vice President and Chief Financial Officer of Tecnomatix Technologies Ltd. (NASDAQ: TCNO), a leading provider of software e-manufacturing solutions. Between 1990 and 1999, Mr. Arvatz served as Vice President and Chief Financial Officer at ADC Israel Ltd. (previously Teledata Communications Ltd.). He holds a B.A. degree in accounting and economics from Bar-Ilan University and is a certified public accountant in Israel.
| B. | Compensation of Directors and Executive Officers |
The aggregate direct remuneration paid to all persons who served in the capacity of director or executive officer during 2008 was approximately $1.3 million, including approximately $100,000 that was set aside for pension and retirement benefits. This does not include amounts expensed by us for automobiles made available to our officers or expenses, including business, travel, professional and business association dues and expenses, reimbursed to officers, and do not include equity based compensation expenses.
During 2008, options to purchase 160,000 ordinary shares were granted to our executive officers under our option plans.
Our shareholders in a meeting held on April 7, 2005, resolved to grant each of our five directors (at that time) options to purchase 18,000 ordinary shares. The exercise price of the options is $3.82, which was equal to the per share closing price of our ordinary shares on the Nasdaq Global Market on the trading date immediately preceding the shareholders meeting approving the grant. The options vested in three equal annual installments on February 1, 2006, 2007 and 2008 and will expire on February 8, 2012. The shareholders also approved to pay each non-executive director an annual fee of $8,000 and a participation fee of $400 per meeting, which is the same amount of fees that was paid to our external directors until mid 2008. Pursuant to an amendment to the regulations under the Israeli Companies Law governing the compensation of external directors, on May 14, 2008, our Board of Directors resolved that, commencing on July 1, 2008, each of our external directors will be entitled to receive an annual fee of NIS 42,600 (approximately $12,500) and a participation fee of NIS 2,200 (approximately $650) per meeting, which is equal to the median rate for companies of our size set forth in the regulations. On June 16, 2008, our Board of Directors resolved that the remuneration of those external directors who will be classified by the Board as expert external director will be 20% more than the remuneration of the ordinary external directors. On August 19, 2008, our Board of Directors resolved to classify Amnon Neubach and Shmuel Arvatz, who qualify as our accounting and financial experts, as expert external directors.
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Board of Directors
Our board is divided into three classes of directors, denominated Class I, Class II and Class III. The term of Class III will expire in 2009, Class I in 2010 and class II in 2011. Monica Eisinger is a member of Class I, Mihail Rotenberg is a member of Class II, and currently there is no director who is a member of Class III. At each annual general meeting of shareholders, directors will be elected by a simple majority of the votes cast for a three-year term to succeed the directors whose terms then expire. There is no legal limit on the number of terms that may be served by directors who are not external directors. Our external directors are not members of any class.
The initial term of an external director is three years and may be extended for one additional term of three years. Thereafter, an external director may be reelected by our shareholders for additional periods of up to three years each in certain circumstances described below. Mr. Neubach was re-elected to a third term as an external director on August 28, 2007. Mr. Menahem Shalgi was re-elected to a second term as an external director on August 18, 2008. Under the Companies Law, our board of directors must determine the minimum number of directors having financial and accounting experience, as defined in the regulations, which our board of directors should have. In determining the number of directors required to have such expertise, the board of directors must consider, among other things, the type and size of the company and the scope and complexity of its operations. Our board of directors has determined that we require one director with the requisite financial and accounting expertise and that Mr. Amnon Neubach and Shmuel Arvatz have such expertise.
External Directors
Under the Companies Law, companies incorporated under the laws of Israel whose shares are listed for trading on a stock exchange or have been offered to the public in or outside of Israel are required to appoint two external directors. External directors are required to possess professional qualifications as set out in regulations promulgated under the Companies Law. 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 an external director, or had, during the two years preceding that date, any affiliation with:
| | — | any entity controlling the company; or |
| | — | any entity controlled by the company or by its controlling entity. |
The term affiliation includes:
| | — | an employment relationship; |
| | — | a business or professional relationship maintained on a regular basis; |
| | — | service as an office holder. |
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The Companies Law defines 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.
No person can serve as an external director if the person’s position or other business creates, or may create, conflict of interests with the person’s responsibilities as an external director or may otherwise interfere with the person’s ability to serve as an external director.
Until the lapse of two years from termination of office, a company may not engage an external director to serve as an office holder and cannot employ or receive services from that person, either directly or indirectly, including through a corporation controlled by that person.
As mentioned above, the initial term of an external director is three years and may be extended for one additional term of three years. Thereafter, an external director may be reelected by our shareholders for additional periods of up to three years each only if our audit committee and our 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 are to be elected by a majority vote at a shareholders’ meeting, provided that either:
| | — | at least one third of the shares of non-controlling shareholders voted at the meeting vote in favor of the election; or |
| | — | the total number of shares of non-controlling shareholders voted against the election of the external director does not exceed one percent of the aggregate voting rights in the company. |
| | 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. Each committee of a company’s board of directors that exercises a power of the board of directors is required to include at least one external director, except for the audit committee, which is required to include all the external directors. |
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; and |
| | — | a controlling shareholder or a relative of a controlling shareholder and any director employed by the company or who provides services to the company on a regular basis. |
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Under the Companies Law, the role of the audit committee is to examine flaws in the management of the company’s business, in consultation with the internal auditor and the company’s independent accountants, suggest remedial measures, and to approve specified related party transactions. Our audit committee consists of all our external directors and Mr. Mihail Rotenberg.
The approval of the audit committee is required to effect specified actions and transactions with office holders, controlling shareholders and entities in which they have a personal interest. An audit committee may not approve an action or a transaction with related parties or with its office holders unless at the time of approval at least two external directors are serving as members of the audit committee and at least one of who was present at the meeting in which any approval was granted.
Under the Nasdaq rules, our audit committee assists the board in fulfilling its responsibility for oversight of the quality and integrity of our accounting, auditing and financial reporting practices and financial statements and the independence qualifications and performance of our independent auditors. Our audit committee also has the authority and responsibility to oversee our independent auditors, to recommend for shareholder approval the appointment and, where appropriate, replacement of our independent auditors and to pre-approve audit engagement fees and all permitted non-audit services and fees. We have adopted an audit committee charter, which sets forth the qualifications, powers and responsibilities of our audit committee.
Our audit committee also serves as (i) our compensation committee, authorized to determine the compensation of our executive officers, (ii) our nominations committee, authorized to recommend all director nominees for the selection of the board of directors, provided that no such recommendation is required in cases, if any, where the right to nominate a director legally belongs to a third party, and (iii) our qualified legal compliance committee, responsible for investigating reports, made by attorneys appearing and practicing before the SEC in representing us, of perceived material violations of U.S. federal or state securities laws, breaches of fiduciary duty or similar violations by us or any of our agents.
All the members of our audit committee are “independent directors” under the Nasdaq rules and meet the additional qualifications for membership on an audit committee.
Internal Auditor
Under the Companies Law, the board of directors must appoint an internal auditor proposed by the audit committee. The role of the internal auditor is to examine, inter alia, whether the company’s actions comply with the law and orderly business procedure. The internal auditor 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. The Companies Law defines the term “interested party” to include a person who holds 5% or more of the company’s outstanding share capital or voting rights, a person who has the right to appoint one or more directors or the general manager, or any person who serves as a director or as the general manager. Doron Cohen C.P.A., from the accounting firm of Fahn – Kanne & Co. Grant Thornton Israel, serves as our internal auditor.
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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 includes a duty to use reasonable means to obtain:
| | — | information on the advisability of a given action brought for his approval or performed by him by virtue of his position; and |
| | — | all other important information pertaining to these actions. |
The duty of loyalty of an office holder includes a duty to:
| | — | refrain from any conflict of interest between the performance of his duties in the company and 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. |
Disclosure of Personal Interest of an Office Holder
The Companies Law requires that an office holder of a company disclose to the company any personal interest that he may have and all related material information known to him, in connection with any existing or proposed transaction by the company. The disclosure is required to be made promptly and in any event no later than the board of directors meeting in which the transaction is first discussed. If the transaction is an extraordinary transaction, the office holder must also disclose any personal interest held by:
| | — | the office holder's spouse, siblings, parents, grandparents, descendants, spouse's descendants and the spouses of any of these people; or |
| | — | any corporation in which the office holder is a 5% or greater shareholder, director or general manager or in which he has the right to appoint at least one director or the general manager. |
Under Israeli law, an extraordinary transaction is a transaction:
| | — | other than in the ordinary course of business; |
| | — | otherwise than on market terms; or |
| | — | that is likely to have a material impact on the company's profitability, assets or liabilities. |
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Approval of Related Party Transactions
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 a transaction that 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 the matter, unless a majority of the members of the board of directors or the audit committee, as the case may be, has a personal interest in the matter. If a majority of members of the board of directors have a personal interest therein, shareholder approval is also required.
Disclosure of Personal Interests of a Controlling Shareholder
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 owns 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights, but excluding a shareholder whose power derives solely from his or her position on the board of directors or any other position with the company. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and the engagement of a controlling shareholder as an office holder 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 of the shares voted on the matter, provided that either:
| | — | at least one-third of the shares of shareholders who have no personal interest in the transaction and who vote on the matter vote in favor thereof; or |
| | — | the shareholders who have no personal interest in the transaction who vote against the transaction do not represent more than one percent of the voting rights in the company. |
Shareholders generally have the right to examine any document in the company’s possession pertaining to any matter that requires shareholder approval. If this information is made public in Israel or elsewhere, we will file the information with the Securities and Exchange Commission in the United States.
For information concerning the direct and indirect personal interests of an office holder and principal shareholders in specified transactions with us, see Item 7.B “Related Party Transactions.”
Remuneration of Members of the Board of Directors
Under the Companies Law, no director may be paid any remuneration by the company for his services as director except as may be approved by our audit committee, board of directors and shareholders. Our external directors are entitled to consideration and reimbursement of expenses only as provided in regulations promulgated under the Companies Law and are otherwise prohibited from receiving any other consideration, directly or indirectly, in connection with their service as external directors. The compensation paid to our directors is described above in Item 6.B. Our directors are not entitled to benefits upon termination of service.
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Executive Officers
Our executive officers are appointed by our board of directors and serve at the discretion of our board of directors. We maintain written employment agreements with our executive officers. Each agreement terminates upon 30 days’ written notice and provides for standard terms and conditions of employment. All of our executive officers have agreed not to compete with us for 12 months (or 24 months in the case of Monica Eisinger) following the termination of their employment with us. Monica Eisinger is entitled to severance pay upon termination of her employment by either her or us (other than by us for cause) and to receive, during each month of the six-month period following termination of her employment by us, or by her for cause, an amount of salary and benefits equal to her former monthly salary and other benefits. Under recent Israeli case law, the non-competition undertakings of employees may not be enforceable.
The numbers and breakdowns of our employees as of the end of the past three years are set forth in the following table:
| As of December 31,
|
|---|
| 2006
| 2007
| 2008
|
|---|
| | | | |
|---|
| | | |
|---|
| | | |
|---|
| Approximate numbers of employees by geographic location | | | | | | | | | | | |
| Israel | | | | 101 | | | 81 | | | 67 | |
| Romania | | | | 200 | | | 198 | | | 226 | |
| United States | | | | 16 | | | 13 | | | 16 | |
| United Kingdom | | | | - | | | 31 | | | 13 | |
|
| |
| |
| |
| Total workforce | | | | 317 | | | 323 | | | 322 | |
|
| |
| |
| |
| Approximate numbers of employees by category of activity | | |
| General and administration | | | | 19 | | | 18 | | | 20 | |
| Research and development | | | | 182 | | | 173 | | | 195 | |
| Professional services and customer support | | | | 87 | | | 106 | | | 90 | |
| Sales and marketing | | | | 29 | | | 26 | | | 17 | |
|
| |
| |
| |
| Total workforce | | | | 317 | | | 323 | | | 322 | |
|
| |
| |
| |
We are subject to Israeli labor laws and regulations with respect to our Israeli employees. These laws principally concern matters such as paid annual vacation, paid sick days, length of the work day and work week, minimum wages, pay for overtime, insurance for work-related accidents and severance payments upon the retirement or death of an employee or termination of employment under specified circumstances. The severance payments may be funded, in whole or in part, through Managers’ Insurance or a Pension Fund, as described below. The payments to the Managers’ Insurance fund or Pension Fund toward severance amount to 8.3% of wages. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the U.S. Social Security Administration. Since January 1, 1995, these amounts also include payments for health insurance. The payments to the National Insurance Institute amount to approximately 17.4% of wages, of which the employee contributes approximately two-thirds and the employer contributes approximately one-third. Our general practice in Israel is to contribute funds on behalf of all of our employees to Managers’ Insurance or a Pension Fund. Each employee who agrees to participate in the Managers’ Insurance plan contributes 5.0% of his or her base salary and we contribute 13.3% or 13.8%. Each employee who agrees to participate in the Pension Fund contributes 5.0% or 6.5% of his or her base salary and we contribute 13.3% or 14.8%. Another savings plan we offer some of our employees, although not legally required, is known as the Advanced Studies Fund. Each employee who agrees to participate in the Advanced Studies fund contributes up to 2.5% of base salary and we contribute up to 7.5%.
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Furthermore, by order of the Israeli Ministry of Labor and Welfare, all employers and employees are subject to provisions of collective bargaining agreements between the Histadrut, Federation of Labor, and the Coordination Bureau of Economic Organizations in Israel. These provisions principally concern cost of living increases, recreation pay, commuting expenses and other conditions of employment. We provide our employees with benefits and working conditions above the required minimums. Our employees are not represented by a labor union. To date, we have not experienced any work stoppages and our relationships with our employees are good.
As of June 1, 2009, Monica Eisinger beneficially owned 4,200,888, or 21.9%, of our ordinary shares. This includes vested options to acquire 18,000 ordinary shares at an exercise price of $3.82, which expire on February 8, 2012. None of our other directors or members of senior management beneficially owns 1% or more of our ordinary shares.
We have established stock option plans to provide for the issuance of options to our directors, officers and employees. Under the plans, options to purchase our ordinary shares may be issued from time to time to our directors, officers and employees at exercise prices and on other terms and conditions as determined by our board of directors. Our board of directors determines the exercise price and the vesting period of options granted.
The option plans permit the issuance of options to acquire up to 4,306,000 ordinary shares. As of June 1, 2009, options to purchase 939,900 ordinary shares were outstanding and options for 979,790 ordinary shares had been exercised. The options vest over three to five years, primarily commencing on the date of grant. Generally, options not previously exercised will expire approximately five to seven years after they are granted. Our board of directors elected the capital gains treatment afforded under Section 102 of the Israeli Income Tax Ordinance [New Version], 1961, or the Tax Ordinance, in respect of options awarded under our Israeli option plan after January 1, 2003. Accordingly, gains derived from options awarded after January 1, 2003, and held by a trustee for at least two years from the end of the tax year in which they were awarded (or in some cases for 30 months from the date of grant), will generally be taxed as capital gains at a rate of 25%, and we will generally not be entitled to recognize an expense for the award of such options. For grants of options made on or after January 1, 2006, the aforesaid minimum holding period by the trustee is two years from the date of grant of the options. On April 13, 2004, our annual general meeting resolved to extend our share option plans until December 31, 2010.
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| Item 7. | | Major Shareholders and Related Party Transactions |
The following table sets forth certain information regarding the beneficial ownership of our ordinary shares as of June 1, 2009, unless otherwise specified, by each person who is known to own beneficially more than 5% of the outstanding ordinary shares.
Name of
Beneficial Owners
| Total Shares Beneficially
Owned
| Percentage of
Ordinary Shares(1)
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Monica Eisinger | | | | 4,200,888 | (2) | | 21.9 | %(1) |
| Lloyd I. Miller, III | | | | 1,746,460 | (3) | | 9.1 | %(1) |
| (1) | Based on 19,210,673 ordinary shares outstanding on June 1, 2009. |
| (2) | Includes 18,000 ordinary shares issuable upon the exercise of vested options |
| (3) | Based on a Schedule 13G/A filed with the SEC on February 12, 2009, Mr. Miller has sole voting and dispositive power with respect to 281,329 ordinary shares as a manager of a limited liability company that is the general partner of a certain limited partnership and has shared voting and dispositive power with respect to 1,465,131 ordinary shares as an investment advisor to the trustee of certain family trusts. |
As of June 1, 2009, there were nine holders of record of our ordinary shares in the United States who collectively held less than 1% of our outstanding ordinary shares. In addition to this amount, there were also 11,494,223 shares held by the Depositary Trust Company in the United States. 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.
| B. | Related Party Transactions |
None.
| C. | Interests of Experts and Counsel |
Not applicable.
| Item 8. | | Financial Information |
Financial Statements
See Item 18.
Legal Proceedings
On February 20, 2008, we filed a Statement of Claim with the Financial Industry Regulatory Authority and commenced arbitration against Credit Suisse Securities (LLC) and certain employees thereof that invested funds on our behalf. The claim alleges, among other things, that the bank was supposed to invest the funds in highly liquid, highly safe, 28-day auction-rate securities, but – without our authorization – invested the funds in collateralized debt obligations (CDOs). In particular, the claim alleges that the bank invested the funds in a security called “Mantoloking CDO” without telling us that this was a CDO investment until after the purchase had already occurred. The claim also describes how, after the fact, the bank advised that the security, which has a stated maturity date in the year 2046, had been rolled “due to failed auction”.
Our Amended Statement of Claim, which was filed on February 9, 2009, includes causes of action for fraud, violation of various NASD rules (including the NASD’s suitability rule), violation of Section 10(b) of the U.S. Securities Exchange Act and SEC Rule 10b-5 (fraud and unsuitability), failure to supervise, conversion, misappropriation and breach of contract. The claim seeks, among other things, damages and other relief from all of the respondents, including return of all the funds plus compensatory and punitive damages. We intend to pursue the arbitration vigorously. The arbitration hearing that was originally scheduled for June 2009 was postponed until November – December 2009, but no predictions of the timing of a resolution or possible outcomes can be made at this time.
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Dividend Policy
According to our dividend policy adopted in 2003, we plan to distribute a cash dividend once in each calendar year in an amount equal to our net profits for the preceding calendar year, if any. The new policy commenced in 2004 with respect to our net profits for 2003. Each dividend under the policy is subject to board approval and the requirements of applicable law. Our board of directors plans to declare the annual dividend when it approves the applicable year-end financial statements. There is no guarantee that we will have net profits in any given year, even if we have operating profit in that year.
| Item 9. | | The Offer and Listing |
| A. | Offer and Listing Details |
Our ordinary shares have been quoted on the Nasdaq Global Market under the symbol MNDO since August 8, 2000 and on the Tel Aviv Stock Exchange under the symbol MIND since July 11, 2002.
The following table sets forth, for the periods indicated, the high and low closing prices of our ordinary shares as reported on the Nasdaq Global Market.The table contains actual prices in U.S. dollars, without adjustment for dividends paid on our ordinary shares.
Period
| High
| Low
|
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Last six months: | | | | | | | | |
| May 2009 | | | | 1.09 | | | 0.96 | |
| April 2009 | | | | 0.97 | | | 0.81 | |
| March 2009 | | | | 0.81 | | | 0.59 | |
| February 2009 | | | | 0.73 | | | 0.59 | |
| January 2009 | | | | 0.83 | | | 0.69 | |
| December 2008 | | | | 0.85 | | | 0.63 | |
| | | |
| Last nine quarters: | | |
| Q1 2009 | | | | 0.83 | | | 0.59 | |
| Q4 2008 | | | | 1.13 | | | 0.63 | |
| Q3 2008 | | | | 1.19 | | | 0.97 | |
| Q2 2008 | | | | 1.28 | | | 0.99 | |
| Q1 2008 | | | | 2.39 | | | 1.17 | |
| Q4 2007 | | | | 2.52 | | | 2.21 | |
| Q3 2007 | | | | 2.81 | | | 2.25 | |
| Q2 2007 | | | | 3.05 | | | 2.66 | |
| Q1 2007 | | | | 3.02 | | | 2.59 | |
| | | |
| Last five years: | | | | | | | | |
| 2008 | | | | 2.39 | | | 0.63 | |
| 2007 | | | | 3.05 | | | 2.21 | |
| 2006 | | | | 3.38 | | | 2.37 | |
| 2005 | | | | 5.64 | | | 2.56 | |
| 2004 | | | | 6.33 | | | 3.86 | |
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The following table sets forth, for the periods indicated, the high and low closing prices of our ordinary shares as reported on the Tel Aviv Stock Exchange. The table contains actual prices in NIS, without adjustment for dividends paid on our ordinary shares.
Period
| High
| Low
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Last six months: | | | | | | | | |
| May 2009 | | | | 4.39 | | | 3.96 | |
| April 2009 | | | | 4.29 | | | 3.31 | |
| March 2009 | | | | 3.54 | | | 2.51 | |
| February 2009 | | | | 2.98 | | | 2.60 | |
| January 2009 | | | | 3.20 | | | 2.60 | |
| December 2008 | | | | 3.33 | | | 2.37 | |
| | | |
| Last nine quarters: | | |
| Q1 2009 | | | | 3.54 | | | 2.51 | |
| Q4 2008 | | | | 4.01 | | | 2.37 | |
| Q3 2008 | | | | 4.22 | | | 3.16 | |
| Q2 2008 | | | | 4.53 | | | 3.23 | |
| Q1 2008 | | | | 9.44 | | | 3.84 | |
| Q4 2007 | | | | 10.21 | | | 8.87 | |
| Q3 2007 | | | | 12.24 | | | 9.94 | |
| Q2 2007 | | | | 12.40 | | | 10.72 | |
| Q1 2007 | | | | 12.97 | | | 10.76 | |
| | | |
| Last five years: | | |
| 2008 | | | | 9.44 | | | 2.37 | |
| 2007 | | | | 12.97 | | | 8.87 | |
| 2006 | | | | 15.55 | | | 10.40 | |
| 2005 | | | | 24.92 | | | 11.66 | |
| 2004 | | | | 28.54 | | | 17.03 | |
Not applicable.
Our ordinary shares are quoted on the Nasdaq Global Market under the symbol MNDO, and on the Tel-Aviv Stock Exchange under the symbol MIND.
Not applicable.
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Not applicable.
Not applicable.
| Item 10. | | Additional Information |
Not applicable.
| B. | Memorandum and Articles of Associations |
Objects and Purposes
We were first registered under Israeli law on April 6, 1995 as a private company, and on August 8, 2000 became a public company. Our registration number with the Israeli registrar of companies is 51-213448-7. The full details of our objects and purposes can be found in Section 2 of our Memorandum of Association filed with the Israeli registrar of companies. Among the objects and purposes stipulated are the following: “to engage in any kind of commercial and/or productive business and to engage in any action or endeavor which the company’s managers consider to be beneficial to the company.”
Transfer of Shares and Notices
Fully paid ordinary shares are issued in registered form and may be freely transferred pursuant to our articles of association unless such transfer is restricted or prohibited by another instrument. Unless otherwise prescribed by law, we will provide at least 21 calendar days’ prior notice of any general shareholders meeting.
Election of Directors
The ordinary shares do not have cumulative voting rights in the election of directors. Thus, the holders of ordinary shares conferring more than 50% of the voting power have the power to elect all the directors, to the exclusion of the remaining shareholders. Our board is divided into three classes of directors serving staggered three-year terms, in addition to our external directors, who are not members of any class.
According to the Israeli Companies Law, the term of a director commences upon his election, unless the company’s articles of association permit a later effective date. In order to allow our shareholders to elect a director for a term that commences on a later effective date, our shareholders amended our articles of association on April 7, 2005.
Dividend and Liquidation Rights
Dividends on our ordinary shares may be paid only out of profits and other surplus, as defined in the Companies Law, as of our most recent financial statements or as accrued over a period of two years, whichever is higher, unless otherwise approved by a court order. Our board of directors is authorized to declare dividends, provided that there is no reasonable concern that the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion to their respective holdings. Dividend or liquidation right may be affected by the grant of preferential dividends or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future.
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Voting, Shareholders’ Meetings and Resolutions
Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders.
These voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future.
We have two types of general shareholders meetings: the annual general meetings and extraordinary general meetings. These meetings may be held either in Israel or in any other place the board of directors determines. An annual general meeting must be held in each calendar year, but not more than 15 months after the last annual general meeting. Our board of directors may convene an extraordinary meeting, from time to time, at its discretion and is required to do so upon the request of shareholders holding at least 5% of our ordinary shares.
The quorum required for an ordinary meeting of shareholders consists of at least two shareholders present in person or by proxy who hold or represent between them at least 25% of the outstanding voting shares, unless otherwise required by applicable rules. Nasdaq generally requires a quorum of 33-1/3%, but we have an exemption from that requirement and instead follow the generally accepted business practice for companies in Israel. A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time and place or any time and place as the Chairman may designate with the consent of the shareholders voting on the matter adjourned. At such reconvened meeting, the required quorum consists of any two members present in person or by proxy, unless otherwise required by applicable rules.
Under the Companies Law, unless otherwise provided in the articles of association or applicable law, all resolutions of the shareholders require a simple majority of the shares present, in person or by proxy, and voting on the matter. However, our articles of association require approval of 75% of the shares present and voting to remove directors or change the structure of our staggered board of directors.
We file annual reports on Form 20-F electronically with the SEC and post a copy on our website.
Duties of Shareholders
Under the Companies Law, each and every shareholder has a duty to act in good faith in exercising his rights and fulfilling his obligations towards the company and other shareholders and to refrain from abusing his power in the company, such as in voting in the general meeting of shareholders on the following matters:
| | — | any amendment to the articles of association; |
| | — | an increase of the company's authorized share capital; |
| | — | approval of certain actions and transactions which require shareholder approval. |
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In addition, each and every shareholder has the general duty to refrain from depriving rights of other shareholders. Furthermore, any controlling shareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder vote and any shareholder that, pursuant to the provisions of the articles of association, has the power to appoint or to prevent the appointment of an office holder in the company or any other power toward the company is under a duty to act in fairness towards the company. The Companies Law does not describe the substance of this duty of fairness. These various shareholder duties, which typically do not apply to shareholders of U.S. companies, may restrict the ability of a shareholder to act in what the shareholder perceives to be its own best interests.
Restrictions on Non-Israeli Residents
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.
Mergers and Acquisitions under Israeli Law
The Companies Law includes provisions that allow a merger transaction and requires that each company that is party to a merger approve the transaction by its board of directors and a vote of the majority of its shares, voting on the proposed merger at a shareholders’ meeting. For purposes of the shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if a majority of the shares held by parties other than the other party to the merger, or by any person who holds 25% or more of the shares or the right to appoint 25% or more of the directors of the other party, vote against the merger. Upon the request of a creditor of either party of 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 (i) 50 days have passed from the time that a proposal of the merger has been filed by each party with the Israeli Registrar of Companies and (ii) 30 days have passed since the merger was approved by the shareholders of each party.
The Companies Law also provides that an acquisition of shares of public company must be made by means of tender offer if as a result of the acquisition the purchaser would become a 25% or more shareholder of the company and there is no 25% or more shareholder in the company. In addition, an acquisition of shares of a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% or more shareholder of the company and there is no 45% or more shareholder in the company. These requirements do not apply if the acquisition (i) is made in a private placement that received shareholder approval, (ii) was from a 25% shareholder of the company and resulted in the acquirer becoming a 25% shareholder of the company or (iii) was from a 45% shareholder of the company and resulted in the acquirer becoming a 45% 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 offer and (ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer.
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If as a result of an acquisition of shares the acquirer will hold more than 90% of a company’s outstanding shares, the Companies Law requires that the acquisition be made by means of a tender offer for all of the outstanding shares. If as a result of a full tender offer the acquirer would own more than 95% of the outstanding shares, then all the shares that the acquirer offered to purchase will be transferred to it. The 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 as a result of a full tender offer the acquirer would own 95% or less of the outstanding shares, then the acquirer may not acquire shares 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 does U.S. tax law. For example, Israeli tax law subjects 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.
Modification of Class Rights
Our articles of association provide that the rights attached to any class (unless otherwise provided by the terms of such class), such as voting, rights to dividends and the like, may be varied by a shareholders resolution, subject to the approval of the holders of a majority of the issued shares of that class.
Board of Directors
According to the Companies Law and our articles of association, the oversight of the management of our business is vested in our board of directors. The board of directors may exercise all such powers and may take all such actions that are not specifically granted to our shareholders. As part of its powers, our board of directors may cause the company to borrow or secure payment of any sum or sums of money, at such times and upon such terms and conditions as it thinks fit, including the grants of security interests on all or any part of the property of the company.
A resolution proposed at any meeting of the board of directors shall be deemed adopted if approved by a majority of the directors present and voting on the matter. For additional information, please see Item 6.C “Board Practices”.
Exculpation of Office Holders
Under the Companies Law, an Israeli company may not exempt an office holder from liability for a breach of his duty of loyalty, but may exempt in advance an office holder from his liability to the company, in whole or in part, for a breach of his duty of care (except in connection with distributions) provided the articles of association of the company allow it to do so. Our articles allow us to exempt our office holders to the fullest extent permitted by law.
Insurance of Office Holders
Our articles of association provide that, subject to the provisions of the Companies Law, we may enter into a contract for the insurance of the liability of any of our office holders, with respect to an act performed in the capacity of an office holder for:
| | — | a breach of his duty of care to us or to another person; |
| | — | a breach of his duty of loyalty to us, provided that the office holder acted in good faith and had reasonable cause to assume that his act would not prejudice our interests; or |
| | — | a financial liability imposed upon him in favor of another person. |
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Indemnification of Office Holders
Our articles of association provide that we may indemnify an office holder against the following obligations and expenses imposed on or incurred by the office holder with respect to an act performed in the capacity of an office holder:
| | — | a financial obligation imposed on him in favor of another person by a court judgment, including a settlement or an arbitrator’s award approved by the 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; |
| | — | reasonable litigation expenses, including attorneys’ fees, expended by the office holder as a result of an investigation or proceeding instituted against him by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against him and either (A) concluded without the imposition of any financial liability in lieu of criminal proceedings or (B) concluded with the imposition of a financial liability in lieu of criminal proceedings but relates to a criminal offense that does not require proof of criminal intent; and |
| | — | reasonable litigation expenses, including attorneys’ fees, expended by the office holder or charged to him by a court in connection with: |
| | — | proceedings we institute against him or instituted on our behalf or by another person; |
| | — | a criminal charge from which he was acquitted; or |
| | — | a criminal proceeding in which he was convicted of an 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, or enter into an insurance contract, which would provide coverage for any monetary liability incurred as a result of any of the following:
| | — | a breach by the office holder of his duty of loyalty unless, with respect to indemnification or insurance coverage, the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; |
| | — | a breach by the office holder of his duty of care if the breach was done intentionally or recklessly; |
| | — | any act or omission done with the intent to derive an illegal personal benefit; or |
| | — | any fine levied against the office holder. |
In addition, under the Companies Law, indemnification of, and procurement of insurance coverage for, our office holders must be approved by our audit committee and our board of directors and, if the beneficiary is a director, by our shareholders.
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We have agreed to exempt from liability and indemnify our office holders to the fullest extent permitted under the Companies Law. We have obtained directors and officers liability insurance for the benefit of our office holders.
None.
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 certain transactions. However, legislation remains in effect, pursuant to which currency controls can be imposed by administrative action at any time.
Israeli Tax Considerations
The following is a summary of the current tax structure applicable to companies in Israel, with special reference to its effect on us. Note that this tax structure and any resulting benefit may not apply for any income derived by our foreign subsidiaries, which subsidiaries may be taxed according to tax laws applicable to their country of residence. The following also contains a discussion of the material Israeli tax consequences to persons purchasing our ordinary shares. To the extent that the discussion is based on tax legislation, which has not been subject to judicial or administrative interpretation, we cannot assure you that the tax authorities or courts will accept the views expressed in the discussion in question.
Prospective purchasers of our ordinary shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of ordinary shares, including, in particular, the effect of any foreign, state or local taxes.
General Corporate Tax Structure
The general rate of corporate tax in Israel to which Israeli companies are subject is 27% for the 2008 tax year. Following an amendment to the Israeli Income Tax Ordinance that came into effect on January 1, 2006, the corporate tax rate has decreased to 26% for the 2009 tax year and is expected to decrease to 25% for the 2010 tax year and thereafter. The general rate of capital gains tax in Israel to which Israeli companies are subject is 25%, for capital gains derived after January 1, 2003 other than gains deriving from the sale of listed securities (regarding the last statement, it relates only to assets that were purchased after 1.1.03. If the asset was purchased before 1.1.03, and sold after said date, the applicable tax rate will be determined according to a blended tax rate of 25% and the corporate tax rate that was in force on the date of the sale (based on a linear calculation)). However, the effective tax rate payable by a company which derives income from an “Approved Enterprise” (as defined below) may be considerably less, as further discussed below.
Following a Temporary Order, which came into effect on January 1, 2009, and will expire at the end of one year, an Israeli corporation may elect a 5% rate of corporate tax (instead of 25%) for dividend distributions received in 2009 from a foreign subsidiary, which is used in Israel either 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.
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Law for the Encouragement of Capital Investments, 1959
General
The Law for Encouragement of Capital Investments, 1959, or the Investments Law, as in effect until 2005, provided that upon application to the Investment Center of the Ministry of Industry and Trade of the State of Israel, a proposed capital investment in eligible facilities may be designated as an “Approved Enterprise”. Please see discussion below regarding an amendment to the Investments Law.
Each certificate of approval for an Approved Enterprise relates to a specific investment program delineated both by its financial scope, including its capital sources, and by its physical characteristics, such as the equipment to be purchased and utilized pursuant to the program. The tax benefits derived from any such certificate of approval relate only to taxable income derived from the specific Approved Enterprise. Tax benefits under the Investments Law will 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 of royalties, provided that such income is generated within the Approved Enterprise’s ordinary course of business. If a company has more than one approval or only a portion of its capital investments are approved, its effective tax rate is the result of a weighted combination of the applicable rates. The benefits under the Investments Law are usually 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 maximum rate of 25%, rather than the regular corporate tax rate, for the benefit period. That income is eligible for further reductions in tax rates depending on the percentage of the foreign investment in the company’s share capital (conferring rights to profits, voting and appointment of directors) and the percentage of its combined share and loan capital owned by non-Israeli residents (“foreign investment level”). The tax rate is:
| | — | 20% if the foreign investment level is 49% or more but less than 74%; |
| | — | 15% if the foreign investment level is 74% or more but less than 90%; and |
| | — | 10% if the foreign investment level is 90% or more. |
The lowest level of foreign investment during the tax year will be used to determine the relevant tax rate for that year. These tax benefits are granted for a limited period not exceeding seven years, or ten years for a company whose foreign investment level exceeds 25% from the first year in which the Approved Enterprise has taxable income.
The period of benefits may in no event, however, exceed the lesser of 12 years from the year in which production commenced and 14 years from the year of receipt of Approved Enterprise status.
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.
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The Alternative Route
A company owning an Approved Enterprise may elect to receive, in lieu of certain grants available to an Approved Enterprise, an alternative package of benefits. Under the alternative package, the company’s undistributed income derived from an Approval Enterprise will be exempt from tax for a period of between two and ten years from the first year of taxable income, depending on the geographic location of the Approved Enterprise within Israel, and the company will be eligible for the tax benefits under the Investments Law for the remainder of the benefit period.
General Requirements by the Investment Center
The benefits available to an Approved Enterprise are conditional upon compliance with the conditions stipulated in the Investments Law and related regulations and the criteria set forth in the specific certificate of approval. In the event that a company violates these conditions, in whole or in part, it may be required to refund all or a portion of its tax benefits, linked to the Israeli consumer price index and interest. These conditions include:
| | — | adhering to the business plan contained in the application to the Investment Center; |
| | — | financing at least 30% of the investment in property, plant and equipment with the proceeds of the sale of shares; |
| | — | filing regular reports with the Investment Center with respect to the Approved Enterprise; and |
| | — | obtaining the approval of the Investment Center for changes in the ownership of a company. |
The Company’s Approved Enterprises
Most of our manufacturing facilities in Yoqneam have been granted the status of Approved Enterprise. Since our manufacturing facilities are located in an area that was designated by the State of Israel as “Development Area A” at the time of the approval of our three existing Approved Enterprises, and since we elected to receive the alternative package of benefits (involving waiver of investment grants), our income derived from each Approved Enterprise is tax exempt for a period of ten years commencing in the first year in which we earn taxable income from each Approved Enterprise. To date, we have three Approved Enterprises. The period of tax benefits of the first approved enterprise, which commenced operations in 1995, expired at the end of 2004. The period of tax benefits in respect of the second approved enterprise entitled to the said benefits commenced in 2000 and will expire at the end of 2009. The period of tax benefits in respect of the third approved enterprise has not yet commenced.
Dividends Taxation
When dividends are distributed from the Approved Enterprise, they are generally considered to be attributable to the entire enterprise and their effective tax rate is a result of a weighted combination of the applicable tax rates. A company that has elected the alternative package of benefits is not obliged to distribute exempt retained profits, and may generally decide from which year’s profits to declare dividends. In the event that we pay a cash dividend from income that is derived from our Approved Enterprises pursuant to the alternative package of benefits, which income would otherwise be tax-exempt, we would be required to pay tax on the amount of income distributed as dividends at the rate which would have been applicable if we had not elected the alternative package of benefits, that rate is generally 10% to 25%, depending upon the extent of foreign investment in the Company, and to withhold at source on behalf of the recipient of the dividend an additional 15% of the amount distributed.
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In March 2007, we distributed to our shareholders approximately $4.3 million. Since, at that time we had insufficient retained earnings, the dividend was distributed after obtaining an approval by an Israeli court in accordance with Section 303 of the Israeli Companies Law. According to a pre-ruling received from the Israeli Tax Authority, tax was withheld at a rate of 20%. This pre-ruling applies only to this particular dividend and not to future dividends, if any.
In April 2008, we distributed to our shareholders approximately $4.3 million. Since, at that time we had insufficient retained earnings, the dividend was distributed after obtaining an approval by an Israeli court in accordance with Section 303 of the Israeli Companies Law. According to a pre-ruling received from the Israeli Tax Authority, tax was withheld at a rate of 20%. This pre-ruling applies only to this particular dividend and not to future dividends, if any.
Amendment of the Investments Law
On April 1, 2005, an amendment to the Investments Law came into effect. Pursuant to the amendment, a company’s facility will be granted the status of “Approved Enterprise” 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 will be responsible for an Approved Enterprise under the alternative package of benefits, referred to as a Benefited Enterprise. 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 simply 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 minimal investment in manufacturing assets for the Benefited Enterprise and having completed a cooling-off period from the company’s previous year of commencement of benefits under the Investments Law.
Pursuant to the amendment, a company with a Benefited Enterprise is entitled, in each tax year, to accelerated depreciation for the manufacturing assets used by the Benefited Enterprise and to certain tax benefits, provided that no more than 12 to 14 years have passed since the beginning of the year of commencement of benefits under the Investments Law. The tax benefits granted to a Benefited Enterprise, as they apply to us, are determined according one of the following new tax routes:
| | — | 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; and |
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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 changed 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 retroactive from 2003.
The amendment applies to Approved Enterprise programs in which the year of commencement of benefits under the Investments Law is 2004 or later, unless such programs received approval from the Investment Center on or prior to December 31, 2004, in which case the provisions of the amendment will not apply.
As a result of the amendment, tax-exempt income that will be generated under the provisions of the amendment will subject the Company to taxes upon distribution or liquidation. Therefore, if the Company holds a Benefited Enterprise it may be required to record deferred tax liability with respect to such tax-exempt income.
Law for the Encouragement of Industry (Taxes), 1969
Under the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law, a company qualifies as an “Industrial Company” if it is resident in Israel and at least 90% of its income in a given tax year, determined in NIS, exclusive of income from capital gains, interest and dividends, is derived from Industrial Enterprises owned by that company. An “Industrial Enterprise” is defined as an enterprise whose major activity in a particular tax year is industrial production activity.
Industrial Companies qualify (based on tax regulations) for accelerated depreciation rates for machinery, equipment and buildings used by an Industrial Enterprise. An Industrial Company owning an Approved Enterprise, as described above, may choose between the above depreciation rates and the depreciation rates available to Approved Enterprises.
Pursuant to the Industry Encouragement Law, an Industrial Company is also entitled to amortize the purchase price of know-how and patents over a period of eight years beginning with the year in which such rights were first used.
In addition, an Industrial Company is entitled to deduct over a three-year period expenses involved with the issuance and listing of shares on a stock exchange and has the right, under certain conditions, to elect to file a consolidated tax return with related Israeli Industrial Companies that satisfy conditions set forth in the law.
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Eligibility for the benefits under the law is not subject to receipt of prior approval from any governmental authority. We believe that we currently qualify as an Industrial Company within the definition of the Industry Encouragement Law. However, the definition may be amended from time to time and the Israeli tax authorities, which reassess our qualifications annually, may determine that we no longer qualify as an Industrial Company. As a result of either of the foregoing, the benefits described above might not be available in the future.
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 “Transfer Pricing Regulations”). Section 85A of the Tax Ordinance and the Transfer Pricing Regulations 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.
Capital Gains Tax on the Sale of our Ordinary Shares
General
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 real gain and inflationary surplus. The inflationary surplus is equal to the increase in the purchase price of the relevant asset attributable to the increase in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate, between the date of purchase and the date of sale. The real gain is the excess of the total capital gain over the inflationary surplus.
Israeli Residents
Generally, the 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 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 Inflationary Adjustments Law (or certain regulations) at the time of publication of the aforementioned amendment to the Tax Ordinance that came into effect on January 1, 2006, in which case the applicable tax rate is 25%. However, the foregoing tax rates will not apply to: (i) dealers in securities; and (ii) shareholders who acquired their shares prior to an initial public offering (that may be subject to a different tax arrangement).
The tax basis of shares acquired prior to January 1, 2003 will be determined in accordance with the average closing share price in the three trading days preceding January 1, 2003. However, a taxpayer may elect the actual adjusted cost of the shares as the tax basis provided he can provide sufficient proof of such adjusted cost.
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Non-Residents of Israel
Non-Israeli residents are generally exempt from Israeli capital gains tax on any gains derived from the sale of shares publicly traded on the TASE, provided such gains are not derived from a permanent establishment of such shareholders in Israel, and 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 attributed to a permanent establishment in Israel and that such shareholders are not subject to the Israeli Income Tax (Inflationary Adjustment) Law, 5745-1985 and did not acquire their shares prior to the issuer’s initial public offering. However, non-Israeli corporations will not be entitled to such exemption if Israeli residents (i) have a controlling interest of 25% or more in such non-Israeli corporation, or (ii) are the beneficiaries of or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
Furthermore, under the Tax Treaty Between the Government of the United States of America and the Government of the State of Israel with Respect to Taxes on Income, known as the U.S.-Israel Tax Treaty, a holder of ordinary shares who holds the ordinary shares as a capital asset and who qualifies as a U.S. resident 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 be generally exempted from Israeli capital gains tax on the sale, exchange or disposition of ordinary shares unless: (i) the holder owned, directly or indirectly, 10% or more of our voting power at any time during the 12-month period before the sale, exchange or disposition; or (ii) the capital gains from such sale, exchange or disposition can be allocated to a permanent establishment in Israel.
In some instances where our shareholders may be liable 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. However, such residents would be permitted to claim a credit for such taxes against 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.
A non-resident of Israel who receives dividend income or that realizes capital gains derived from the sale of our ordinary shares, from which tax was withheld at the source, is generally exempted from the duty to file tax returns in Israel with respect to such income, provided such income was not derived from a business conducted in Israel by the taxpayer and the taxpayer has no other taxable sources of income in Israel.
Dividend Taxation
Income Taxes on Dividends Distributed by the Company to Israeli Residents
The distribution of dividend income to Israeli residents will generally be subject to income tax at a rate of 20% for individuals and will be exempt from income tax for corporations. The portion of dividends paid out of profits earned under an Approved Enterprise tax status of the Company, to both individuals and corporations, is subject to withholding tax at the rate of 15% (in excess of the corporate tax paid by the company when the dividend is paid of these profits – up to 25% tax).
In addition, if an Individual Israeli shareholder is considered a “significant shareholder” at any time during the 12-month period preceding such distribution, i.e., such shareholder holds directly or indirectly, including with others, at least 10% of any means of control in the company, the tax rate on the dividend (not source from Approved Enterprise income) will be 25%. The withholding tax by the Company on such dividend would remain 20%.
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Income Taxes on Dividends Distributed by the Company to Non-Israeli Residents
Subject to the provisions of applicable tax treaties, dividend distributions from regular profits (non-Approved Enterprise) by the Company to a non-resident shareholder are generally subject to withholding tax of 20%. The portion of dividends paid out of profits earned under an Approved Enterprise tax status of the Company is subject to withholding tax at the rate of 15% (in excess of the corporate tax paid by the company when the dividend is paid of these profits – up to 25% tax).
Generally, under the U.S-Israel Tax Treaty the maximum rate of withholding tax on dividends paid to a shareholder who is a resident of the United States (as defined in the U.S. – Israel Tax Treaty) will be 25%. However, when a U.S. tax resident corporation is the recipient of the dividend, the withholding tax rate on a dividend out of regular (non-Approved Enterprise) profits may be reduced to 12.5% under the U.S-Israel Tax Treaty, where the following conditions are met:
| (a) | the recipient corporation owns at least 10% of the outstanding voting rights of the Company for all of the period preceding the dividend during the Company’s current and prior taxable year; and |
| (b) | generally not more than 25% of the gross income of the paying corporation for its prior tax year consists of certain interest and dividend income. |
| | Otherwise, the usual rates apply. |
United States Federal Income Tax Considerations
Subject to the limitations described in the next paragraph, the following discussion describes the material United States federal income tax consequences of the purchase, ownership and disposition of the ordinary shares to a U.S. holder.
A U.S. holder is:
| | — | an individual citizen or resident of the United States; |
| | — | a corporation or another entity taxable as a corporation created or organized under the laws of the United States or any political subdivision thereof; |
| | — | an estate, the income of which is includable in gross income for United States federal income tax purposes regardless of its source; or |
| | — | a trust, if a United States court is able to exercise primary supervision over its administration and one or more United States persons who have the authority to control all substantial decisions of the trust. |
Unless otherwise specifically indicated, this summary does not consider United States tax consequences to a person that is not a U.S. holder and considers only U.S. holders that will own the ordinary shares as capital assets.
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This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended, referred to as the Code, current and proposed Treasury regulations promulgated under the Code, and administrative and judicial interpretations of the Code, all as in effect today and all of which are subject to change, possibly with a retroactive effect. This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular U.S. holder based on the U.S. holder’s particular circumstances, like the tax treatment of U.S. holders who are broker-dealers or who own, directly, indirectly or constructively, 10% or more of our outstanding voting shares, U.S. holders holding the ordinary shares as part of a hedging, straddle or conversion transaction, U.S. holders whose functional currency is not the U.S. dollar, insurance companies, tax-exempt organizations, financial institutions and persons subject to the alternative minimum tax, who may be subject to special rules not discussed below. Additionally, the tax treatment of persons who hold the ordinary shares through a partnership or other pass through entity is not considered, nor are the possible application of U.S. federal estate or gift taxes or any aspect of state, local or non-U.S. tax laws.
You are advised to consult your own tax advisor with respect to the specific tax consequences to you of purchasing, holding or disposing of the ordinary shares.
Distributions on the Ordinary Shares
Subject to the discussion below under “Passive Foreign Investment Company Status”, a distribution paid by us with respect to the ordinary shares to a U.S. holder will be treated as ordinary income to the extent that the distribution does not exceed our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. The amount of any distribution which exceeds these earnings and profits will be treated first as a non-taxable return of capital reducing the U.S. holder’s tax basis in its ordinary shares to the extent thereof, and then as capital gain from the deemed disposition of the ordinary shares.
Dividends paid by us in NIS will be included in the income of U.S. holders at the dollar amount of the dividend, based upon the spot rate of exchange in effect on the date of the distributions. U.S. holders will have a tax basis in the NIS for U.S. federal income tax purposes equal to that U.S. dollar value. Any subsequent gain or loss in respect of the NIS arising from exchange rate fluctuations will be taxable as ordinary income or loss and will be U.S. source income or loss.
Subject to the limitations set forth in the Code, U.S. holders may elect to claim as a foreign tax credit against their U.S. federal income tax liability the Israeli income tax withheld from dividends received in respect of the ordinary shares. The limitations on claiming a foreign tax credit include among others, computation rules under which foreign tax credits allowable with respect to specific classes of income cannot exceed the U.S. federal income payable with respect each such class. In this regard, dividends paid by us will generally be foreign source “passive income” for U.S. foreign tax credit purposes or, in the case of a financial services entity, “financial services income.” U.S. holders that do not elect to claim a foreign tax credit may instead claim a deduction for the Israeli income tax withheld. The rules relating to foreign tax credits are complex, and you should consult your own tax advisor to determine whether and to what extent you would be entitled to this credit.
Disposition of Ordinary Shares
Subject to the discussion below under “Passive Foreign Investment Company Status”, upon the sale or exchange of the ordinary shares, a U.S. holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized on the sale or exchange and the U.S. holder’s tax basis in the ordinary shares. The gain or loss recognized on the sale or exchange of the ordinary shares generally will be long-term capital gain or loss if the U.S. holder held the ordinary shares for more than one year at the time of the sale or exchange.
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Gain or loss recognized by a U.S. holder on a sale, exchange or other disposition of ordinary shares generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes.
Passive Foreign Investment Company Status
Generally, a foreign corporation is treated as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for any tax year if, in such tax year, either (i) 75% or more of its gross income is passive in nature, referred to as the “Income Test”, or (ii) the average percentage of its assets during such tax year which produce, or are held for the production of, passive income (determined by averaging the percentage of the fair market value of its total assets which are passive assets as of the end of each quarter of such year) is 50% or more, referred to as the “Asset Test”.
There is no definitive method prescribed in the Code, U.S. Treasury Regulations or administrative or judicial interpretations thereof for determining the value of a foreign corporation’s assets for purposes of the Asset Test. However, the legislative history of the U.S. Taxpayer Relief Act of 1997, referred to as the 1997 Act, indicates that for purposes of the Asset Test, “the total value of a publicly-traded foreign corporation’s assets generally will be treated as equal to the sum of the aggregate value of its outstanding stock plus its liabilities”. It is unclear under current interpretations of the 1997 Act whether other approaches could be employed to determine the value of our assets. Based on application of the approach of the 1997 Act, there is a reasonable likelihood that we may not be deemed a PFIC starting 2003. A separate determination must be made each year as to whether we are a PFIC. As a result, our PFIC status may change.
If we are treated as a PFIC for U.S. federal income tax purposes for any year during a U.S. holder’s holding period of ordinary shares and the U.S. holder does not make a QEF election or a “mark-to-market” election (both as described below), any gain recognized by the U.S. holder upon the sale of ordinary shares (or the receipt of certain distributions) would be treated as ordinary income. This income generally would be allocated over a U.S. holder’s holding period with respect to our ordinary shares. The amount allocated to prior years will be subject to tax at the highest tax rate in effect for that year and an interest charge would be imposed on the amount of deferred tax on the income allocated to prior taxable years.
Although we generally will be treated as a PFIC as to any U.S. holder if we are a PFIC for any year during the U.S. holder’s holding period, if we cease to satisfy the requirements for PFIC classification, the U.S. holder may avoid the consequences of PFIC classification for subsequent years if he elects to recognize gain based on the unrealized appreciation in the ordinary shares through the close of the tax year in which we cease to be a PFIC. Additionally, if we are treated as a PFIC, a U.S. holder who acquires ordinary shares from a decedent would be denied the normally available step-up in tax basis for these ordinary shares to fair market value at the date of death and instead would have a tax basis equal to the decedent’s tax basis in these ordinary shares.
A U.S. holder who beneficially owns shares of a PFIC must file Form 8621 (Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund) with the U.S. Internal Revenue Service for each tax year in which he holds shares in a PFIC. This form describes any distributions received with respect to these shares and any gain realized upon the disposition of these shares.
For any tax year in which we are treated as a PFIC, a U.S. holder may elect to treat his, her or its ordinary shares as an interest in a qualified electing fund, referred to as a QEF election. In that case, the U.S. holder would be required to include in income currently his proportionate share of our earnings and profits in years in which we are a PFIC regardless of whether distributions of our earnings and profits are actually distributed to the U.S. holder. Any gain subsequently recognized upon the sale by the U.S. holder of his ordinary shares, however, generally would be taxed as capital gain and the denial of the basis step-up at death described above would not apply.
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A shareholder may make a QEF election with respect to a PFIC for any taxable year of the shareholder. A QEF election is effective for the year in which the election is made and all subsequent taxable years of the shareholder. Procedures exist for both retroactive elections and the filing of protective statements. A U.S. holder making the QEF election must make the election on or before the due date, as extended, for the filing of the shareholder’s income tax return for the first taxable year to which the election will apply.
A U.S. holder must make a QEF election by completing Form 8621 and attaching it to their U.S. federal income tax return, and must satisfy additional filing requirements each year the election remains in effect. We will provide to each shareholder, upon request, the tax information required to make a QEF election and to make subsequent annual filings.
As an alternative to a QEF election, a U.S. holder generally may elect to mark his ordinary shares to market annually, recognizing ordinary income or loss (subject to certain limitations) equal to the difference between the fair market value of his ordinary shares and the adjusted tax basis of his ordinary shares. Losses would be allowed only to the extent of net mark-to-market gain accrued under the election. If a mark-to-market election with respect to ordinary shares is in effect on the date of a U.S. holder’s death, the normally available step-up in tax basis to fair market value will not be available. Rather, the tax basis of the ordinary shares in the hands of a U.S. holder who acquired them from a decedent will be the lesser of the decedent’s tax basis or the fair market value of the ordinary shares.
The implementation of many aspects of the Code’s PFIC rules requires the issuance of regulations which in many instances have yet to be promulgated and which may have retroactive effect. We cannot be sure that any of these regulations will be promulgated or, if so, what form they will take or what effect they will have on the foregoing discussion.
Accordingly, and due to the complexity of the PFIC rules, U.S. holders should consult their own tax advisors regarding our status as a PFIC for each year and the eligibility, manner and advisability of making a QEF election or a mark-to-market election, and the effect of these elections on the calculation of the amount of foreign tax credit that may be available to a U.S. holder.
Backup Withholding
A U.S. holder may be subject to backup withholding at rate of 28% with respect to dividend payments and receipt of the proceeds from the disposition of the ordinary shares. Backup withholding will not apply with respect to payments made to certain exempt recipients, such as corporations and tax-exempt organizations, or if a U.S. holder provides a tax payer identification number (or certifies that he has applied for a taxpayer identification number), certifies that such holder is not subject to backup withholding or otherwise establishes an exemption. Backup withholding is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a U.S. holder, or alternatively, the U.S. holder may be eligible for a refund of any excess amounts withheld under the backup withholding rules, in either case, provided that the required information is furnished to the Internal Revenue Service.
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Non-U.S. Holders of Ordinary Shares
Except as provided below, a non-U.S. holder of ordinary shares except certain former U.S. citizens and long-term residents of the United States generally will not be subject to U.S. federal income or withholding tax on the receipt of dividends on, and the proceeds from the disposition of, an ordinary share, unless such item is effectively connected with the conduct by the non-U.S. holder of a trade or business in the United States or, in the case of a resident of a country which has an income tax treaty with the United States, such item is attributable to a permanent establishment in the United States or, in the case of an individual, a fixed place of business in the United States. In addition, gain recognized by an individual non-U.S. holder will be subject to tax in the United States if the non-U.S. holder is present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met.
Non-U.S. holders will not be subject to information reporting or backup withholding with respect to the payment of dividends on ordinary shares unless the payment is made through a paying agent, or an office of a paying agent, in the United States. Non-U.S. holders generally will be subject to information reporting and, under regulations generally effective January 1, 2001, to backup withholding at a rate of 31% with respect to the payment within the United States of dividends on the ordinary shares unless the holder provides its taxpayer identification number, certifies to its foreign status, or otherwise establishes an exemption.
Non-U.S. holders generally will be subject to information reporting and backup withholding at a rate of 31% on the receipt of the proceeds from the disposition of the ordinary shares to, or through, the United States office of a broker, whether domestic or foreign, unless the holder provides a taxpayer identification number, certifies to its foreign status or otherwise establishes an exemption. Non-U.S. holders will not be subject to information reporting or backup withholding with respect to the receipt of proceeds from the disposition of the ordinary shares by a foreign office of a broker; provided, however, that if the broker is a U.S. person or a “U.S. related person,” information reporting (but not backup withholding) will apply unless the broker has documentary evidence in its records of the non-U.S. holder’s foreign status or the non-U.S. holder certifies to its foreign status under penalties of perjury or otherwise establishes an exemption. For this purpose, a “U.S. related person” is a broker or other intermediary that maintains one or more enumerated U.S. relationships. Backup withholding is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a U.S. holder, or alternatively, the U.S. holder may be eligible for a refund of any excess amounts withheld under the backup withholding rules, in either case, provided that the required information is furnished to the Internal Revenue Service.
| F. | Dividends and paying agents |
Not applicable.
Not applicable.
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, or SEC. You may read and copy any document we file, including any exhibits, with the SEC without charge at the SEC’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 SEC at such address, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Certain of our SEC filings are also available to the public at the SEC’s website at http://www.sec.gov.
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You may request a copy of our SEC filings, at no cost, by e-mailing toinvestor@mindcti.com and upon said request copies will be sent by e-mail. A copy of each report submitted in accordance with applicable U.S. law is available for review at our principal executive offices.
Not applicable.
| Item 11. | | Quantitative and Qualitative Disclosures about Market Risk |
Market risk represents the risk of changes in the value of our financial instruments as a result of fluctuations in foreign currency exchange rates.
The following table sets forth our consolidated balance sheet exposure with respect to change in foreign currency exchange rates as of December 31, 2008.
Currency
| Current
Monetary Assets
(Liabilities)-net
|
|---|
| (In US $ thousands) |
|---|
| | |
|---|
| |
|---|
| |
|---|
| NIS | | | | 128 | |
| Euro | | | | 2,656 | |
| Romanian Ron | | | | 89 | |
| Other non-dollar currencies | | | | 617 | |
|
| |
| | | | | 3,490 | |
|
| |
Our annual expenses paid in NIS are approximately $6 million. Accordingly, we estimate that a hypothetical increase of the value of the NIS against the U.S. dollar by 1% would result in an increase in our operating expenses by approximately $60,000 for the year ended December 31, 2008.
At December 31, 2008, we held investments in auction rate securities called “Mantoloking CDO 2006 LTD SER 2006-1A Class A-2, ISIN#US564616AB6", or the Security, in the principal amount of $20.3 million. The stated maturity of the Security is 2046. For a general description of certain types of auction rate securities, see Item 3.D “Risk Factors” above. While the liquidity of the Security has been significantly impacted by market conditions, we continue to receive interest payments every month. The estimated market value of the Security at December 31, 2008 was approximately $0.9 million, which reflects a $19.4 million adjustment to the principal value of $20.3 million (see also note 10(c) to our consolidated financial statements, which are incorporated into this Annual Report by reference to our Report on Form 6-K furnished to the Securities and Exchange Commission on March 9, 2009).
As of June 1, 2009 the Security was rated Ca by Moody’s and CC by Standard & Poor’s.
As of December 31, 2008, we did not hold any derivative financial instruments for either trading or non-trading purposes.
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| Item 12. | | Description of Securities Other Than Equity Securities |
Not applicable.
PART II
| Item 13. | | Defaults, Dividend Arrearages and Delinquencies |
Not applicable.
| Item 14. | | Material Modifications to the Rights of Security Holders and Use of Proceeds |
The effective date of our first registration statement, filed on Form F-1 under the Securities Act of 1933 (No. 333-12266) relating to the initial public offering of our ordinary shares, was August 7, 2000. Net proceeds to us were $29.9 million. From the time of receipt through December 31, 2008, the proceeds were used for acquisitions, investments in marketable securities and debentures, and dividend payments.
| Item 15T. | | Controls and Procedures |
Disclosure Controls and Procedures
We performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2008. The evaluation was performed with the participation of our senior management and under the supervision and with the participation of our chief executive officer and chief financial officer. Based on this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective to alert them on a timely basis to material information required to be included in our periodic reports with the SEC.
Management’s Annual Report on Internal Control over Financial Reporting
Our management, including our chief executive officer and chief financial officer, is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act. Our internal control system was designed to provide reasonable assurance to our management and our board of directors regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurances with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may decline.
Our management (with the participation of our chief executive officer and chief financial officer) conducted an evaluation, pursuant to Rule 13a-15(c) under the Securities Exchange Act, of the effectiveness, as of the end of the period covered by this Annual Report, of our internal control over financial reporting based on the criteria set forth inInternal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of this evaluation, management assessed the effectiveness of our internal control over financial reporting as at December 31, 2008 and concluded that our internal control over financial reporting was effective as of December 31, 2008.
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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.
Changes in Financial Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during 2008 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
| Item 16A. | | Audit Committee Financial Expert |
Our board of directors has designated Mr. Amnon Neubach as our “audit committee financial expert” as defined by the SEC rules.
In April 2004, our board of directors adopted our Code of Ethics, a code that applies to all of our directors and employees.
| Item 16C. | | Principal Accountant Fees and Services |
In the annual meeting held in April 2009, our shareholders appointed Brightman Almagor Zohar, certified public accountants in Israel and a member of Deloitte Touche Tohmatsu, as our independent auditor until the close of next year’s annual general meeting, in place of our previous independent auditor, Kesselman & Kesselman, certified public accountants in Israel and a member of PricewaterhouseCoopers International Limited. Kesselman & Kesselman���s reports on our financial statements for the past two years did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. Since January 2007, there were no disagreements with Kesselman & Kesselman on any matter of accounting principles or practices, financial statement disclosure, or audit scope or procedure, which agreements, if not resolved to the satisfaction of Kesselman & Kesselman, would have caused it to make a reference to the subject matter of the disagreement in connection with its report.
Kesselman & Kesselman billed the following fees to us for professional services in each of the last two fiscal years:
| Years ended December 31,
|
|---|
| 2007
| 2008
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| Audit Fees | | | $ | 75,000 | | $ | 95,000 | |
| | | |
| Audit-Related Fees | | | | 0 | | | 0 | |
| | | |
| Tax Fees | | | | 5,000 | | | 5,000 | |
| | | |
| All Other Fees | | | | 0 | | | 0 | |
|
| |
| |
| | | |
| Total | | | $ | 80,000 | | $ | 100,000 | |
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Tax Fees. Services comprising fees disclosed under this category includes: preparation of original and amended tax returns; claims for refund; tax advice and assistance related to: dividend distribution, approved enterprise and tax audits and appeals.
Our audit committee’s policy is to approve each audit and non-audit service to be performed by our independent accountant before the accountant is engaged.
| Item 16D. | | Exemptions from the Listing Standards for Audit Committees |
Not applicable.
| Item 16E. | | Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
In September 2008, our Board of Directors authorized a plan for the repurchase of up to 2,100,000 of our ordinary shares in the open market, in an amount in cash of up to $2.8 million. As of December 31, 2008, we had repurchased 2,100,000 ordinary shares under the program at a total purchase price of approximately $1.6 million, after getting an approval by an Israeli court in accordance to the Israeli Companies Law. In February 2009, our Board of Directors authorized additional repurchase transactions of our shares in the total amount of $1.2 million pursuant to the 2008 repurchase plan. As of June 1, 2009, we have purchased an aggregate amount of 2,383,337 ordinary shares under the 2008 and 2009 programs at a total purchase price of approximately $1.8 million.
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During the fiscal year ended December 31, 2008, we made the following share repurchases pursuant to our share repurchase program:
Period
| Total Number of
Shares Purchased
| Average Price
Paid per Share
| Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
| Maximum Number of Shares
that May Yet Be
Purchased Under the
Plans or Programs
|
|---|
| | | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| Month #1 (November | | |
| 26 to November 30) | | | | 403,200 | | $ | 0.84 | | | 403,200 | | | 1,696,800 | |
| | | |
| Month #2 (December | | |
| 1 to December 31) | | | | 1,696,800 | | $ | 0.76 | | | 2,100,000 | | | 0 | |
| | | |
| Total | | | | 2,100,000 | | $ | 0.78 | | | 2,100,000 | | | 0 | |
| Item 16F. | | Change in Registrant’s Certifying Accountant |
Not applicable.
| Item 16G. | | Corporate Governance |
We follow the Companies Law, the relevant provisions of which are summarized in this annual report, rather than comply with the Nasdaq requirement relating to the quorum for shareholder meetings, as described in Item 10.B “Additional Information – Memorandum and Articles of Association – Voting, Shareholders’ Meetings and Resolutions.” In addition, we are exempt from Nasdaq’s requirement to send an annual report to shareholders prior to our annual general meetings. Instead, we file annual reports on Form 20-F electronically with the SEC and post a copy on our website.
PART III
| Item 17. | | Financial Statements |
Not applicable.
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| Item 18. | | Financial Statements |
Our consolidated financial statements and related auditors’ report for the year ended December 31, 2008 are hereby incorporated into this Annual Report by reference to our Report on Form 6-K furnished to the Securities and Exchange Commission on March 9, 2009.
The following exhibits are filed as part of this Annual Report:
| 1.1* | | Memorandum of Association, as amended |
| 1.2*** | | Articles of Association, as amended |
| 4.1** | | MIND 1998 Share Option Plan |
| 4.2** | | MIND 2000 Share Option Plan |
| 11** | | Code of Ethics and Business Conduct |
| 12.1 | | Certification of Principal Executive Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant toss.302 of the Sarbanes-Oxley Act |
| 12.2 | | Certification of Principal Financial Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant toss.302 of the Sarbanes-Oxley Act |
| 13.1 | | Certification of Principal Executive Officer pursuant to 18 U.S.C.ss.1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act |
| 13.2 | | Certification of Principal Financial Officer pursuant to 18 U.S.C.ss.1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act |
| 15.1 | | Consent of Houlihan Smith & Company |
| * | Incorporated by reference to MIND C.T.I. Ltd.‘s Annual Report on Form 20-F for the fiscal year ended December 31, 2002 (Commission file number 000-31215). |
| ** | Incorporated by reference to MIND C.T.I. Ltd.‘s Annual Report on Form 20-F for the fiscal year ended December 31, 2003 (Commission file number 000-31215). |
| *** | Incorporated by reference to MIND C.T.I. Ltd.‘s Annual Report on Form 20-F for the fiscal year ended December 31, 2005 (Commission file number 000-31215). |
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SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the undersigned to sign this annual report on its behalf.
| | MIND CTI LTD.
By: /s/Monica Eisinger
——————————————
Monica Eisinger
President & CEO
Date: June 29, 2009 |
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