As of December 31, 2003, we were no longer engaged in any operating business activity other than managing the minority holdings in StoreAge and Enargis until we disposed of our holdings in these companies and since April 2007, also providing certain management services to Witech.
The functional currency of the Company and its subsidiaries is the U.S dollar, as the U.S. dollar is the primary currency of the economic environment in which the Company and its subsidiaries have operated and expect to continue to operate in the foreseeable future. The majority of the Company’s operations are currently conducted in Israel and most of the Israeli expenses are currently paid in new Israeli shekels (“NIS”); however, most of the expenses are denominated and determined in U.S. dollars. Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with Statement of Financial Accounting Standard No. 52, “Foreign Currency Translation” (“SFAS No. 52”). All transaction gains and losses of the remeasurement of monetary balance sheet items are reflected in the statement of operations as financial income or expenses, as appropriate.
Total revenues increased by approximately 648% to $1,369,000 during the first nine months of 2007 from $183,000 during the same period in 2006. This increase is mainly attributable to the increase of systems that Witech installed during this period from 12 to 26 as well as increased revenues from systems installed in 2005 and 2006.
Marketing, General and Administrative. Marketing,general and administrative expenses consist primarily of costs relating to sales and marketing compensation, marketing and business development efforts, travel and related expenses, overhead, and administrative costs, including professional fees, communication and IT costs, and other general expenses. Marketing,general and administrative expenses increased by 268% to $2,194,000 during this period in 2007 from $597,000 during the same period in 2006. This increase was due to an overall increase in Witech’s activity, including a rise in direct sales personnel, travel expenses, management payroll expenses and legal and audit fees. We expect that our Marketing,general and administrative expenses will increase in 2008 as a result of our decision to add sales personnel and to increase our marketing expenses as part of our plan to increase the installation of our systems and to penetrate the European and Asian markets.
Operating Income (Loss). Based on the foregoing, the operating loss increased by approximately 106% to $2,528,000 for this period in 2007 from $1,227,000 for the same period in 2006.
Financial Income (Expenses), Net. For the first nine months of 2007, we had net financial expenses increase by approximately 152% to $539,000 as compared to net financial expenses of $214,000 for the same period in 2006. This increase in financial expenses is attributable primarily to an increase in debts due to the receipt of loans from IIS in an amount of $3,400,000.
Years Ended December 31, 2006 and 2005
Revenues. Total revenues increased approximately 988% to $272,000 in 2006 from $25,000 for 2005. This increase is mainly attributable to the increase in systems installed by Witech during this period from 3 to 12 as well as increased revenues from systems installed in 2005.
Cost of Revenues. Our cost of revenues increased approximately 1200% to $740,000 in 2006 from $57,000 in 2005 primarily due to the increase in the number of systems installed and operated during this period resulting in an increase in technical support, second installations, systems dismantles, operational costs and depreciation of on-ride installed systems.
Gross Loss. Gross loss increased by 1,362% to $468,000 in 2006 from $32,000 in 2005. The gross losses in these periods were due to Witech’s management’s strategic decision to install a large number of systems, regardless of profitability. The Company expects to increase its gross income in the future as a result of its management’s decision to focus on more profitable rides.
Research and Development, Net. Total research and development costs, increased by 104% to $407,000 during 2006 from $200,000 during 2005 mainly due to a one time charge at the amount of $232,000 of stock based compensation costs at September 2006 and as a result of the end of financial support received from the Government of Israel.
Marketing, General and Administrative. Marketing,general and administrative expenses increased by approximately 294% to $820,000 during 2006 from $208,000 during 2005. This increase is due to the hire of additional people in the direct sales department as well as higher marketing costs.
Operating Loss. Based on the foregoing, the operating loss increased by approximately 285% to $1,695,000 for 2006 from $440,000 in 2005.
Financial Income (Expenses), Net. For 2006, net financial expenses increased to $316,000 as compared to net financial expenses of $14,000 for 2005. This increase in financial expenses is attributable primarily to an increase in debts due to receipt of loans from a bank and others.
Loss.For 2006 our losses increased by approximately 344% to $2,016,000 compared to the loss of $454,000 for 2005, primarily due to the increase in cost of revenues, general and administrative expenses and financial expenses as specified above that was not offset by income.
IIS Historical
Nine months Ended September 30, 2007 compared to the Nine Months Ended September 30, 2006
Revenues. We had $33,000 in revenues during this period in 2007 from management fees was primarily due to our management agreement with Witech, effective April 17, 2007 compared to no revenues during this period in 2006.
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General and Administrative. General and administrative expenses consist primarily of professional fees, rent, office maintenance, payroll related expenses and liquidators’ and directors’ fees. General and administrative expenses increased by 660% to $479,000 in 2007 from $63,000 in 2006. The increase is attributable mainly to an increase in legal and accounting fees due to the filing of delinquent annual reports with the SEC and professional fees relating to the transaction with Witech as well as payments of fees to directors, the Chairman of the Board and the CEO and for directors’ and officers’ Insurance.
Financial Income, Net. In the first nine months of 2007, our financial income increased to $251,000 as compared to financial income of $8,000 for the same period in 2006. This increase in financial income is attributable to financial income earned from bank deposits of funds received in November 2006 from the sale of our holdings in StoreAge and primarily from the interest accrued on the loans to Witech.
Loss. For the nine month period ending September 30, 2007 our losses increased approximately by 273% to $205,000 compared to the loss of $55,000 for the same period in 2006, primarily due to the increase in general and administrative expenses as specified above that was not offset by income.
Years Ended December 31, 2006, 2005, and 2004
The Company had no revenues in each of the years 2004, 2005 and 2006.
In 2005 we incurred general and administrative expenses of $103,000 compared to $200,000 in 2004. This reduction was due to a reduction in all expenses, due to cessation of our operating activities during 2003 and our entry into voluntary liquidation at the end of July 2004. The main reductions were in the directors’ fees, insurance expenses and professional fees. During 2005 and 2006 the general and administrative expenses were $103,000 and $91,000, respectively, consisting mainly of liquidators’ and professional fees, rent and office maintenance as well as payroll related expenses. The expenses for 2006 also include approximately $13,000 paid to the Israeli tax authorities as a result of a VAT audit and related settlement.
Our net financial expenses in 2004 and 2005 were $4,000 and $3,000, primarily due to exchange rate conversions and open bank balances. In 2006 we had financial income of $17,000 due to the interest received on the proceeds of the sale of our holdings in StoreAge in November 2006.
We incurred non-recurring income of $4,713,000 in 2006, from the sale of all our holdings in StoreAge in November 2006 and an additional amount of $703,793 held in escrow to satisfy certain possible future claims for a period of 18 months following the closing.
In 2004, we recorded a loss of approximately $204,000 and in 2005 a loss of approximately $106,000 was realized due to no income and a continued reduction in expenses due to voluntary liquidation.
The $4,639,000 profit for 2006 primarily reflects the proceeds from the sale of our holdings in StoreAge in November 2006 and a continued reduction in general and administrative expenses due to our being in voluntary liquidation.
The Company does not expect to be profitable in the near future.
Pro Forma Combined
Nine months Ended September 30, 2007 and Year Ended December 31, 2006, on a 3/4 Basis
Revenues. Total revenues increased by approximately 571% to $1,369,000 during the first nine months of 2007 from $204,000 during the relevant period in 2006. This increase is mainly attributable to the increase of systems that Witech installed during this period (from 12 to 26) as well as the increased revenues from systems installed in 2005 and 2006. IIS did not generate any revenues in the relevant periods.
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Cost of Revenues. Cost of revenues consist primarily of technical support, second installations and systems dismantles, operational costs and depreciation of on-ride installed systems. The cost of revenues presented in the pro forma statements is attributed solely to Witech’s operations. The relevant costs increased by approximately 118% to $1,878,000 in the first nine months of 2007 from $860,000 during the relevant period in 2006, primarily due to the increase in the number of systems installed and the operational costs associated with such installations during this period.
Research and Development, Net. Research and development expenses consist primarily of salaries of Witech’s employees engaged in on-going research and development activities and other related costs. Total research and development costs, decreased by approximately 22% to $239,000 during this period in 2007 from $305,000 during the relevant period in 2006, primarily due to a one-time charge in the amount of $232,000 of stock based compensation costs accrued in September 2006. The one time charge effect was partly offset by an increase in payroll costs derived from an increase in the number of employees.
Marketing, General and Administrative. The combined marketing,general and administrative expenses increased by 190% to $2,821,000 during this period in 2007 from $973,000 during the relevant period in 2006. This increase is mainly explained by the overall increase in Witech’s activities, as well as an increase in legal and audit fees.
IIS incurred non-recurring income of $4,713,000 in 2006, from the sale of all IIS holdings in StoreAge in November 2006 and an additional amount of $703,793 held in escrow to satisfy certain possible future claims for a period of 18 months following the closing.
Operating Loss. Based on the foregoing, the operating loss increased by approximately 84% to $3,569,000 for this period in 2007 from $1,935,000 during the relevant period in 2006.
Financial Income Expenses, Net.For the first nine months of 2007, we had net financial expenses increase by 8% to $324,000 as compared to net financial expenses of $300,000 for during the relevant period in 2006.
Impact of Inflation and Exchange Rates
The dollar cost of the Company’s operations in Israel is related to the extent to which the rate of inflation in Israel is offset by the devaluation of Israeli currency in relation to the dollar without significant timing delays. The Company’s dollar costs in Israel will increase if devaluation fails to keep pace with the rate of inflation. Conversely, those costs will decrease if the rate at which Israeli currency devalues against the dollar exceeds the rate of inflation in Israel on a relatively even basis.
During 2005, 2006 and 2007 (until April 30 when the Bank of Israel ceased to publish this data), the NIS was devalued (appreciated) approximately 1.66%, 8.21% and 3.927%, respectively, against the currency basket, and approximately 6.85%, 8.21% and 8.26%, respectively, against the U.S. dollar. Our operations could be adversely affected if we are unable to guard against currency fluctuations in the future. We do not currently engage in any currency hedging transactions intended to reduce the effect of fluctuations in foreign currency exchange rates on our results of operations. We cannot guarantee that we will not enter into such transactions in the future or that such measures will adequately protect us from serious harm due to the impact of inflation in Israel.
The relationship between the Company’s assets and liabilities in Israeli currency and whether they are linked to a foreign currency or price index also affects the Company’s financial results. In the past IIS has managed its exposure in Israeli currency so that unlinked liabilities generally exceeded unlinked monetary assets in Israeli currency. The Company cannot predict whether it will be able to continue to manage its assets and liabilities in this manner in the future.
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Effective Corporate Tax Rate
The income tax obligations of IIS and Witech in Israel are based upon earnings determined for Israeli statutory purposes and not as determined from the amounts reported in dollars. Pursuant to an amendment to the income Tax Ordinance, approved by the Israeli parliament on July 25, 2005, Israeli companies are generally subject to income tax on their taxable income at the rate of 31% for the year 2006, 29% for 2007, 27% for 2008, 26% for 2009 and 25% for year 2010 and thereafter.
As of December 31, 2006, the Company has carryforward tax losses in the amount of approximately $ 41 million (and approximately $44 million at September 30, 2007), which may be carried forward and offset against taxable income in the future for an indefinite period. In addition, as of December 31, 2006, the Company has accumulated capital losses for tax purposes carryforward in a total amount of $ 38 million (and approximately $40 million at September 30, 2007), which may offset against future capital gains for tax purposes for an indefinite period. These losses have not been audited and approved by the relevant tax authorities.
As of December 31, 2006, Witech has carryforward tax losses in the amount of approximately $2,200,000 (and approximately $5,000,000 at September 30, 2007), which may be carried forward and offset against taxable income in the future for an indefinite period.
Quarterly Results
The Company’s operating results in the near future may vary significantly from quarter to quarter, in part because of the substantial changes in the Company’s structure and its recent share exchange with Witech. The Company’s operating results for any particular quarter are not necessarily indicative of any future results. The nature of the Company’s industry and business has changed, and the accelerated and unpredictable pace of new product introduction and market trends, which is expected to continue, limits management’s ability to accurately forecast short-term results of operations.
Governmental, Economic, Fiscal, Monetary or Political Factors
Our principal offices and our principal facilities and those of Witech are located in Israel, and each of us is directly affected by the political, economic and military conditions to which that country is subject. Any of Witech’s manufacturing operations would be heavily dependent upon components imported from outside of Israel. Almost all of Witech’s sales will be made outside of Israel. Accordingly, our operations and those of Witech could be materially adversely affected if major hostilities involving Israel should occur or if trade between Israel and its present trading partners were interrupted or curtailed. In addition, termination or reduction of certain governmental grants, programs and tax benefits could have a material adverse effect on Witech and us.
Political Conditions
Since the establishment of the State of Israel in 1948, a state of hostility has existed, varying in degree and intensity, between Israel and the Arab countries. While Israel has entered into peace agreements with both Egypt and Jordan and several other countries have announced their intentions to establish trade and other relations with Israel, Israel has not entered into any peace arrangement with Syria or Lebanon. During the summer of 2006, Israel was engaged in an armed conflict with Hezbollah, a Lebanese Islamist Shiite militia group and political party. This conflict involved missile strikes against civilian targets in northern Israel that resulted in economic losses. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could adversely affect our operations. Since September 2000, terrorist violence in Israel has increased significantly and negotiations between Israel and Palestinian representatives have effectively ceased. The establishment of a government in the Palestinian Authority in early 2006 by representatives of the Hamas militant group has created additional unrest and uncertainty in the region. We can give no assurance that security and political conditions will not have an impact on our business in the future. Hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could adversely affect our operations and could make it more difficult for us to raise capital.
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Despite the peace between Israel and Egypt and Jordan, some countries, companies and organizations continue to participate in a boycott of Israeli firms and others doing business with Israel or with Israeli companies. Although we are precluded from marketing our products to such countries, we believe that in the past the boycott has not had a material adverse effect on us.
All male adult citizens and permanent residents of Israel under the age of 48 are, unless exempt, obligated to perform up to 30 days of military reserve duty annually. Additionally, all such residents are subject to being called to active duty at any time under emergency circumstances. Many of our officers and employees and those of Witech are currently obligated to perform annual reserve duty. While we have operated effectively under these requirements since we began operations, we cannot assess the full impact of such requirements on our workforce or business if conditions should change, and we cannot predict the effect on us of any expansion or reduction of such obligations.
Economic Conditions
Israel’s economy has been subject to numerous destabilizing factors, including a period of rampant inflation in the early to mid-1980s, low foreign exchange reserves, fluctuations in world commodity prices, military conflicts and civil unrest. The Israeli government has, for these and other reasons, intervened in various sectors of the economy, by utilizing, among other means, fiscal and monetary policies, import duties, foreign currency restrictions and control of wages, prices and foreign currency exchange rates. In 1998, the Israeli currency control regulations were liberalized significantly and as a result Israeli residents were permitted to deal in foreign currency and non-residents of Israel were permitted to purchase and sell Israeli currency and assets. The Israeli government has periodically changed its policies in these areas. There are currently no Israeli currency control restrictions on remittances of dividends on ordinary shares or the proceeds from the sale of shares; however, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time. In addition, Israeli residents are required to file reports pertaining to specific types of actions or transactions.
B. Liquidity and Capital Resources.
The Company had current assets of approximately $952,000 on September 30, 2007, $4,710,000 on December 31, 2006, $41,000 on December 31, 2005 and $103,000 on December 31, 2004. The ratio of assets to liabilities was 3.566 on September 30, 2007, 18.046 on December 31, 2006, 0.177 on December 31, 2005 and 0.545 on December 31, 2004. The decrease in the current ratio as of September 30, 2007 was primarily due to a reduction in our cash on hand and an increase in our accounts payable and accruals due to ongoing operational expenses. The increase in the current ratio in 2006 was primarily due to the receipt of $4,713,000 from the sale of our shares in StoreAge. The decrease in the current ratio in 2004 and 2005 was mainly a result of a reduction in cash due to operating activities and the accumulation of the Liquidators’ and directors’ fees payable.
For a discussion of the primary currency in which the operations of the Company and Witech are conducted see Item 5.A., “Operating Results,” above.
In 2004, 2005 and 2006, the Company recorded a net negative cash flow from operations of approximately $88,000, $52,000 and $49,000, respectively. In January 2004 we received the final payment of the lawsuit settlement from 2003 in the amount of $110,000. Excluding this amount, the net negative cash flow from operations in 2004 would have been approximately $198,000.
The Company currently has no available lines of credit or other credit facilities.
We anticipate that our existing cash on hand, will be sufficient, at the business levels presently projected, to meet our working capital requirements, including normal capital expenditures, at least until December 31, 2008. However, Witech is dependent on receipt of financing from IIS for its future operations. We anticipate that we will need to raise additional financing in the first quarter of 2008 to maintain and expand Witech’s future. Witech currently does not have sufficient cash resources to meet its requirements in the next twelve months and without additional financing there is substantial doubt as to its ability to continue as a going concern. Any additional financing may not be available when required or at acceptable terms and may result in significant dilution to our shareholders. If financing is not available when required or is not available on acceptable terms, Witech’s business will suffer, it will need to scale back its activities and may need to cease its operations.
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C. Research and Development, Patents and Licenses, etc.
Since December 31, 2002 we have not carried out any research and/or development activities. We currently hold no patents, licenses and other intellectual property assets. Witech has a patent pending in the United States, EU and Japan for a system and method for filming and recording attractions. Witech does not license its software to third parties.
D. Trend Information.
As of December 31, 2006, we were no longer engaged in any operational business activity other than managing our minority holding in Enargis, which was disposed of in May 2007. We consummated the share exchange transaction with Witech on January 2, 2008.
Witech and the industry is witnessing an increased interest in video products for rides at amusement parks as well as an upward trend in customers’ preferences for DVDs over still photographs. However, three of the largest ride photo companies, Kodak, Colorvision and Picsolve, currently have corporate sponsorship agreements with a number of large park chains. These sponsorship agreements often give the sponsor exclusive rights for all digital media services in the parks. When supplying systems to parks with sponsorship agreements, we may have to split part of the revenues with the sponsor. These agreements may limit Witech’s potential growth into new park chains. We anticipate the need of Witech to enter into its own sponsorship agreements in the future, but it may need to wait for the current agreements to expire. Although these agreements are typically for three years, there is no assurance that the agreements will not be renewed with the current sponsors. Other than the above, we do not expect any material variation in revenue sharing arrangements with potential future customers relative to the arrangements we have with existing customers.
Although the gross margins for Witech’s sales in 2007, 2006 and 2005 were negative, this was based on a strategic decision to install a large number of systems regardless of expected profitability. Installation of a large amount of systems gave Witech the opportunity to prove that their systems would operate smoothly and out sell single photograph static systems. It also provided Witech with an understanding regarding installation, operation support and profitability. As a result of this decision, Witech gained credibility and increased its market presence. With the approval of the parks, Witech is ceasing operations of systems on rides that were not profitable in 2007 and in 2008 intends to install only systems that it believes will be profitable. Based on Witech’s experiences, Witech intends to focus its efforts on parks that have a high percentage of tourist visitors as opposed to locals as this dramatically increases the revenues from Witech’s system per ride. In addition based on its experiences , Witech is moving to regional maintenance centers in the U.S. with an aim to significantly reduce its operations costs.
For additional information please see the “Risk Factors” listed in Item 3 above and the description of Witech’s Business in Item 4 “Information on the Company C. Witech”.
E. Off-Balance Sheet Arrangements.
Neither IIS nor Witech have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
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F. Tabular Disclosure of Contractual Obligations
The following table summarizes Witech’s outstanding contractual obligations as of September 30, 2007 and the effect those obligations are expected to have on Witech’s liquidity and cash flows in future periods:
| | Payments Due by Period
|
|---|
| Contractual Obligations
| Total
| Less than
1 Year
| 1-3 Years
| 3-5 Years
| More than
5 Years
|
|---|
| | | | | | |
|---|
| | | | | | |
|---|
| | | | | | |
|---|
| Lease of facilities | | | $ | 75,000 | | $ | 75,000 | | $ | | | $ | | | $ | | |
| | | |
| Total | | | $ | 75,000 | | $ | 75,000 | | $ | | | $ | | | $ | | |
The table above reflects only payment obligations that are fixed and determinable.
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management.
The Company’s executive officers and directors are as follows:
Name
| Age
| Expiration of
office
| Number of
Shares
Beneficially
Owned
|
|---|
| | | | |
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Charles Moss - Chairman of the Board of | | | | | | | | | | | |
| the Company and Chief Executive Officer | | |
| of Witech | | | | 52 | | | 2008 | | | 1,012,141 | (1) |
| | | |
| Robi Hartman - Director and Chief | | |
| Executive Officer of the Company and | | |
| Acting Chief Financial Officer | | | | 46 | | | 2008 | | | 2,748,901 | |
| | | |
| Aharon Jacobowitz -Director | | | | 59 | | | 2008 | | | 0 | |
| | | |
| Alon Wulkan -Director | | | | 35 | | | 2008 | | | 0 | |
| | | |
| Iris Weller-Weiss - External Director | | | | 33 | | | 2010 | | | 0 | |
| | | |
| Adrian Auman(2)-External Director | | | | 53 | | | 2010 | | | 0 | |
| | | |
| David Elooz - Director and Chief | | |
| Operations Officer of Witech | | | | 35 | | | 2008 | | | 1,094,097 | |
| | | |
| Eliyahu Cohen - Director and Chief | | |
| Technology Officer of Witech | | | | 35 | | | 2008 | | | 1,010,521 | |
| | | |
| Ronen Segal - Vice President Sales of | | |
| Witech | | | | 35 | | | - | | | 1,010,521 | |
(1) Including shares of Opcom Ltd,; a company controlled by Mr. Moss.
(2) Mr. Auman replaced Mr. Phillip Stein who resigned on December 20, 2007.
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Charles Moss has acted as a director of the Company since January 2, 2008 and as Chief Executive Officer and Chairman of the Board of Witech since its formation in February 2004. He is also the founder and owner of Opcom Ltd., an Israeli fiber optic company developing custom test solutions and served as Chief Executive Officer and Chairman of the Board of this company from 1986 until February 2004. He also served on the board of directors of MaxBill during 2006. Mr. Moss holds a Bachelors of Science and Masters of Science degree from the Massachusetts Institute of Technology (MIT) in Mechanical Engineering and Materials Science.
Robi Hartman has 24 years of experience as an entrepreneur in the field of technology and as an executive for leading technology companies, with wide experience in public markets, finance and accounting. He has been the Company’s Chairman and Chief Executive Officer since the Company terminated its voluntary liquidation proceedings in April 2007 and fulfilled these duties until January 2, 2008 where at such time he began acting as the Chief Executive Officer, a Director as well as Chairman of the Board of Witech. He served as a Director of the Company from September 1998 until its entry into voluntary liquidation in July 2004, Vice Chairman of the Board from October 1998 to March 2000, Acting Chief Financial Officer from December 1998 until July 2004, and Chairman of the Board and Chief Executive Officer of the Company from March 2000 until July 2004, and joint liquidator of the Company from July 2004 until April 2007. He has also served as the Vice Chairman of the Board of Teledata Networks since the management buyout from ADC Telecommunications in February 2004 and was Chairman of StoreAge Networking Technologies from its inception in 1999 until 2006. Before joining the Company, from 1987 to 1996, Mr. Hartman was the manager of Teledata Communications Ltd., a leading supplier of advanced access solutions, beginning as a manager and advancing to the Chief Financial Officer and finally as Chief Executive Officer and President. From 1996 to 1997, Mr. Hartman was the President of VCON Telecommunications, a pioneer in PC based teleconferencing. Since 1997 he owns and manages West End Technology Investments Ltd. Mr. Hartman received his B.A. in Political Science and Economics from Bar Ilan University and his Masters in Business Administration (MBA) from Bentley College.
Aharon Jacobowitz has served as a director of the Company since the Company terminated its voluntary liquidation proceedings in April 2007. He served as a director of the Company from May 1995 until its entry into voluntary liquidation in July 2004 and as a joint-liquidator of the Company from July 2004 until April 2007. Since 1989, Mr. Jacobowitz has been a management consultant to large organizations on data processing and management issues. In addition to his consultancy business, Mr. Jacobowitz served three periods as general manager of two high-tech start up companies and the Israeli branch of Coopers and Lybrand consultancy firm. Prior to 1989, Mr. Jacobowitz was employed for 14 years in various capacities in the marketing division of IBM Israel Ltd. His main specialties are networking, midrange systems and project management. He holds a BSc in Mathematics and Physics and an MSc in computer sciences (with distinction) both from the Hebrew University of Jerusalem.
Alon Wulkan has served as a director of the Company since the Company terminated its voluntary liquidation proceedings in April 2007. During the last five years he has served in various positions in Kardan Israel Ltd. and its subsidiaries, including Vice President of Finance, economist and economic advisor and acts as a director of Kardan Trade and Retail Ltd., Tuxedo Holdings (1999) Ltd.; Kardan Securities Ltd. and Kardan Financial Holdings Ltd. Mr. Wulkan is the son-in-law of Mr. Schnur who is one of the beneficiaries of a trust that holds the shares of CDC Holdings Ltd. (the holder of approximately 5.44% of the issued and outstanding shares of the Company). Mr. Wulkan holds a BA in Social Sciences and Economics from the Open University in Israel and a Masters in Business Administration (MBA) from Tel Aviv University.
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Iris Weller-Weiss has served as a director of the Company since the Company terminated its voluntary liquidation proceedings in April 2007. She has been acting since January 2006 as the Legal Consultant & Personal Assistant to Mr. Avner Schnur. Mr. Schnur is one of the beneficiaries of a trust that holds the shares of CDC Holdings Ltd. (the holder of approximately 5.44% of the issued and outstanding shares of the Company) and a principal shareholder and director of Kardan NV, a company traded on the Amsterdam Euronext and Tel-Aviv Stock Exchange. Kardan NV is actively involved in real estate, financial services, infrastructure, communications & technologies, and the automotive industry. From 2003- 2006, Mrs. Weller was a prosecutor with the District Attorney’s Office. Between the years 1999-2002, Mrs. Weller managed the Los Angeles branch of Kelly Law Registry, a leading American legal consulting and placement firm. Mrs. Weller received her LLB degree from Haifa University School of Law and her LLM degree from UCLA School of Law. She is a member of both the Israeli Bar Association and the State Bar of California.
Adrian Auman has acted as an External Director of the Company since December 20, 2007. Mr. Auman has been Corporate Vice President for Finance and Investor Relations of Orbotech (NASDAQ:ORBK) since May 2006, prior to which he had served, since January 2000, as Director of Finance and Investor Relations and, from July 1997, has been Director of Finance. He was financial controller of the Company from October 1992 to July 1997 and was the financial controller of Orbot from 1988 until the Merger. Prior to joining Orbot, he was an audit supervisor at Kesselman & Kesselman, independent registered public accountants in Israel, from 1986 to 1988 and a tax manager at Goldstein, Golub, Kessler & Co., certified public accountants, from 1979 to 1985. Mr. Auman serves on the Board of Directors of Coreflow Ltd, which develops and sells aerochemical products and subsystems. Mr. Auman was among the founders and a member of the Board of Directors of Terem Emergency Medical Center Israel Ltd. which owns and runs 5 urgent care clinics throughout the Jerusalem region. He is a certified public accountant both in Israel and the United States and has a master’s of science degree from Pace University in New York.
David Elooz has acted as a director of the Company since January 2, 2008 and as Chief Operations Officer of Witech since February 2007. Mr. Elooz served from 2001 until 2003 as Optical Engineering Manager and Senior Systems Engineer in Chiaro Networks Ltd., an Israeli company developing and managing optical design and production of fiberoptic switches. He also served from 2003 until 2006, as Team Leader and Project Manager for Applied Materials Ltd. (a subsidiary of Applied Materials Inc.), developing new inspection tools. Mr. Elooz holds a Bachelor of Science degree in Physics from the Jerusalem College of Technology.
Eliyahu Cohen has acted as a director of the Company since January 2, 2008 and as Chief Technology Officer of Witech since its formation in February 2004. Mr. Cohen served from 2002 until joining Witech, as Projects Manager and Vice President R&D in ODF Optronics, an Israeli company developing visioning systems for the military and defense market. Mr. Cohen holds a Bachelor of Science degree in Electrical Engineering from the Jerusalem College of Technology, and a Masters Degree in Business Administration from Bar Ilan University.
Ronen Segalhas acted as the Vice President of Sales for Witech since its formation in February 2004. From 1994 to 1998 heworked for the Israeli Ministry of Defense, Advanced Technology Unit, where he was responsible for the development and integration of a data communications link with a radar system. From 1998 to October 2000 healso worked for the Israeli Navy on the integration of submarine communication systems. From November 2000 until January 2004, he was the project leader for OpTun Inc. with responsibility for development of test systems for optical components. Mr. Segal has a Bachelors of Science degree in Electro-Optical Engineering and Applied Physics, from the Jerusalem Technology College and is also a certified WiFi system engineer.
There is no family relationship between any of the persons named above.
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Although no agreement has yet been signed between Mr. Robi Hartman, CDC Holdings Ltd., Charles Moss, David Elooz, Eliyahu Cohen and Ronen Segal, such parties have informed us that they are negotiating a voting agreement. It has been agreed in principle that without derogating from the rights of any other shareholders of the Company, Hartman, CDC and their affiliates, on the one hand, and Messrs. Moss, Elooz, Cohen and Segal and their affiliates, on the other hand, shall have the right to nominate fifty percent (50%) of the nominees to the Board of Directors of the Company (excluding the “External Directors” as defined in the Israeli Companies Law)(the “IIS Directors”). These parties further agreed in principle that unless otherwise agreed between them in writing, they will take the necessary actions to cause the number of IIS Directors to be six (6). All nominees shall be submitted to the Company on a timely basis in accordance with the Company’s Articles of Association. At each meeting (or written action in lieu of a meeting) of the Company’s shareholders at or by which directors are to be elected by the shareholders, they undertake to vote all of their shares to elect as directors of the Company, all the IIS Directors nominated in the manner provided above, unless such nominee is legally disqualified from serving as a director of IIS. If an IIS Director shall cease to serve for any reason, the parties which designated such director (in accordance with the above provisions) shall have the right to designate a successor and each of the other holders of shares shall use its best efforts (to the extent it is entitled to vote) to ensure that such successor IIS Director is duly elected as a director. The parties have also undertaken to make their best efforts to (to the extent applicable) vote their shares in a manner as to ensure that an IIS Director designated by Messrs. Moss, Elooz, Cohen and Segal (initially Charles Moss) will act as Chairman of the Board of IIS and a person designated by Mr. Hartman and CDC (initially Robi Hartman) will act as the CEO of IIS. It is contemplated that this agreement shall continue until the earlier of (i) January 1, 2012, and (ii) the date upon which the shareholding of Mr. Hartman and CDC and their affiliates, on the one hand, and Messrs. Moss, Elooz, Cohen and Segal and their affiliates, on the other hand, is below 10% of the issued and outstanding share capital. The Company will not be a party to this agreement and the agreement is not expected to relate to the disposition of shares.
Except as above, there are no arrangements or understandings with any of the major shareholders, customers, suppliers or others, pursuant to which any person referred to above was selected as a director or member of senior management.
B. Compensation.
At our general meeting of the shareholders held in July 2004, Messrs. Hartman and Jacobowitz were appointed as joint liquidators with a shareholders’ approved fee of $1,000 per month (plus VAT, if applicable), to each commencing from the appointment of the liquidation and continuing until distribution of allproceeds of the liquidation to our shareholders. These fees in the aggregate amount of $58,000 were paid in May 2007. The deferral of these fees represented a significant savings in cash expenses for the Company during 2004, 2005 and 2006. In addition, our shareholders in July 2004 approved a bonus to Messrs. Hartman and Jacobowitz as liquidators depending on the per share amount distributed to our shareholders, however since the liquidation proceedings were terminated, the bonus was not payable. Our shareholders further approved that (i) we would indemnify the liquidators for any liability, costs and expenses (including legal costs and expenses) relating to claims or demands against them in their capacity as liquidators to the fullest extent permitted by applicable law and subject to the same restrictions and qualifications as currently applicable to indemnification of our directors and officers, and (ii) we would waive any liabilities, claims, demands and causes of action against the liquidators in their capacity as liquidators to the fullest extent permitted by applicable law, with the exception of actions constituting gross negligence or willful misconduct.
Effective as of April 1, 2003, all of the directors of the Company agreed to suspend their compensation until the Company either received a settlement from an ongoing lawsuit which at that time was in mediationor received proceeds from the sale/exit of StoreAge or Enargis or the raising of additional financial resources. Following settlement of this lawsuit,the directors of the Company did not take their compensation and agreed that compensation would be paid only from receipt of the proceeds from the sale/exit of our holdings in StoreAge or Enargis or the raising of additional financial resources.The amount of compensation due but unpaid to our officers and directors as of December 31, 2006 according to this arrangement was approximately $172,000 (these amounts were paid in May 2007).In addition until January 2006, Mr. Hartman received compensation from StoreAge for services he performed as Chairman of the Board of StoreAge in the amounts equal to approximately $60,000, $57,000, and $4,800 for the years 2004, 2005 and 2006, respectively. Mr. Hartman did not receive any compensation from Enargis.
No options were granted to officers or directors during the fiscal years ended December 31, 2004, 2005 and 2006 and all options issued prior to such time have expired. We have issued 2,435,000 options pursuant to our 2007 Israeli Stock Option Plan. For information on the Company’s 2007 stock option plan, see “Stock Option Plans” below.
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Effective as of April 1, 1999, StoreAge granted to Mr. Hartman in his capacity as Chairman of the Board, acting Chief Financial Officer and Secretary of StoreAge the option to purchase 310,000 non-voting ordinary shares of StoreAge at an exercise price of $0.1 per share. Effective as of January, 2006, Mr. Hartman received additional options to purchase 91,539 non-voting ordinary shares of StoreAge at an exercise price of $0.25 per share bringing the amount of his options in StoreAge to a total of 401,359 shares, constituting approximately 0.69% of the fully-diluted shares of StoreAge at the time of its sale to LSI. The net (pre tax) proceeds received by Mr. Hartman from the LSI transaction as a result of the exercise of these options was approximately $314,000, out of which approximately $45,000 is deposited in escrow for 18 months following the closing of the sale.
On April 17, 2007, our shareholders approved (i) a proposal that the compensation to our external directors, Mr. Philip Stein and Ms. Iris Weller, shall be the greater of $12,000 per annum or the lowest cash compensation paid to any other of our directors of who receives cash and who is not an employee, consultant, service provider or controlling shareholder (or office holder of such controlling shareholder) of our company (the “Other Directors”), but in any case, their compensation shall not exceed the average cash compensation paid to the Other Directors, and (ii) the proposal to grant to each such external director options to purchase 45,000 of our Ordinary Shares, as a part of an incentive option plan to be adopted for all directors who are not external directors and other officers of our company, or, if greater, the lowest option compensation granted to Other Directors who receive options from our company, but in any case, not to exceed the average option compensation granted to the Other Directors, all as determined in accordance with the Israeli Companies Law and regulations. The options shall vest annually in equal shares over three years following the grant date, and the exercise price shall be equal to the exercise price of the options first granted after April 17, 2007 to any Other Director, all as may be adjusted in accordance with the Israeli Companies Law and regulations.
Mr. Stein resigned and Mr. Adrian Auman was appointed as an external director, both effective as of December 20, 2007. Mr. Auman’s compensation as approved by our shareholders on December 20, 2007 is the same as specified above. The exercise price of the options to our external directors is $0.44 per share (the same price at which options were granted to our Other Directors).
On May 15, 2007 and November 5, 2007, our board of directors and audit committee approved, subject to the shareholders approval that was given on December 20, 2007, the monthly compensation to West End Technology Investments Ltd. for the services of Mr. Hartman as our CEO in the amount (total cost to the Company) of NIS 60,000 plus VAT. In addition, in the event that the Company terminates the Agreement after April 16, 2011 (but not prior to this date), except in the case of a substantial breach, West End Technology Investments Ltd. will be paid a one-time payment equal to an additional 400% of the monthly fee. The Agreement includes confidentiality undertakings and a 12-month non-competition and non-solicitation undertaking by Mr. Hartman and West End Technology Investments Ltd. The Agreement commenced on April 17, 2007 and continues until either party terminates the Agreement at any time, at its sole discretion, by giving the other party at least 180-days advance written notice.In addition, on November 5, 2007, our board of directors and audit committee approved subject to the shareholders approval that was provided on December 20, 2007, the grant of options to purchase 15,000 Ordinary Shares of the Company to Mr. Hartman for each year in which Mr. Hartman serves as a director of the Company, commencing April 17, 2007. The exercise price of such options shall be $ 0.44 (the average closing price of the Company’s shares (as quoted by Yahoo Financial or other similar service) on the last 20 trading days, prior to the date of the shareholder resolution).
Since our general meeting of the shareholders resolved at its meeting held on April 17, 2007 to terminate the voluntary liquidation proceedings, no bonus was payable to the liquidators according to the shareholder resolution of July 2004. As such, on June 17, 2007 our Audit Committee and Board of Directors approved and on December 20, 2007, our general meeting of shareholders approved, that (i) we pay Aharon Jacobowitz a cash bonus as follows: $25,000 (plus VAT, if applicable) if the PPS (as defined below) is above $0.50 per share, $50,000 (plus VAT, if applicable) if the PPS is above $1.00 per share and $75,000 (plus VAT, if applicable) if the PPS is above $1.30 per share, and (ii) we pay Robi Hartman a cash bonus of $100,000 (plus VAT, if applicable) if the PPS is above $1.30 per share. For the purposes of this resolution “PPS” means the average closing price of our shares on the “Pink Sheets” (as quoted by Yahoo Financial or other similar service) during the twenty (20) trading days following the approval of this resolution by our general meeting of shareholders which was provided on December 20, 2007.
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The following table summarizes the terms of employment of Charles Moss, David Elooz and Eliyahu Cohen that were approved by our shareholders on December 20, 2007:
Name
| Initial Term*
| Job description**
| Basic Salary
per month in
2007 and
2008***
| Basic Salary per
month in 2009****
| Benefits
| Bonus ($)
|
|---|
| | | | | | Profit after tax
| Bonus
|
|---|
| | | | | | | | |
|---|
| | | | | | | |
|---|
| | | | | | | |
|---|
| Charles Moss | January 1, 2008- | CEO of Witech | NIS 42,000 or | NIS 44,000 or | - Managers Insurance equal to 15.83% of the Salary | $500,000-$1,000,000 | $15,000 |
| | January 31, 2011. | | $ 10,475 | $ 11,000 | - Education Fund equal to 7.5% of the Salary | $1,000,000-$1,500,000 | $37,500 |
| | | | | | - Cellular Phone | $1,500,000-$2,000,000 | $45,000 |
| | Automatically | | | | - Company car up to Category 5, provided that the cost | $2,000,000-$3,000,000 | $50,000 |
| | renewed if not | | | | of such car will not exceed NIS 4,200 per month | $3,000,000-$5,000,000 | $100,000 |
| | terminated earlier. | | | | - 4 months salary ("adjustment pay") | $5,000,000-$8,000,000 | $100,000 |
| | | | | | after February 1, 2011 in addition | $8,000,000-$10,000,000 | $200,000 |
| | Termination Notice | | | | to any statutory severance pay | >$10,000,000 | $250,000 |
| | period of at least | | | | -Vacation of 20 days per each 12-month period |
| | 120 days. | | | |
| |
| David Elooz | January 1, 2008- | COO of Witech | NIS 42,000 or | NIS 44,000 or | - Managers Insurance equal to 15.83% of the Salary | $500,000-$1,000,000 | $15,000 |
| | January 31, 2011 | | $ 10,475 | $ 11,000 | - Education Fund equal to 7.5% of the Salary | $1,000,000-$1,500,000 | $37,500 |
| | | | | | - Cellular Phone | $1,500,000-$2,000,000 | $45,000 |
| | Automatically | | | | - Company car up to Category 5, | $2,000,000-$3,000,000 | $50,000 |
| | renewed if not | | | | provided that the cost of such car | $3,000,000-$5,000,000 | $100,000 |
| | terminated earlier. | | | | will not exceed NIS 4,200 per month | $5,000,000-$8,000,000 | $100,000 |
| | | | | | - 4 months salary ("adjustment pay") | $8,000,000-$10,000,000 | $200,000 |
| | Termination Notice | | | | after February 1, 2011 in addition | >$10,000,000 | $250,000 |
| | period of at least | | | | to any statutory severance pay |
| | 120 days. | | | | - Vacation of 20 days per each |
| | | | | | 12-month period |
| |
| Eliyahu Cohen | January 1, | CTO of Witech | NIS 42,000 or | NIS 44,000 or | - Managers Insurance equal to 15.83% | $500,000-$1,000,000 | $15,000 |
| | 2008-January 31, | | $ 10,475 | $ 11,000 | of the Salary | $1,000,000-$1,500,000 | $37,500 |
| | 2011. | | | | - Education Fund equal to 7.5% of | $1,500,000-$2,000,000 | $45,000 |
| | | | | | the Salary | $2,000,000-$3,000,000 | $50,000 |
| | Automatically | | | | - Cellular Phone | $3,000,000-$5,000,000 | $100,000 |
| | renewed if not | | | | Company car up to Category 5, | $5,000,000-$8,000,000 | $100,000 |
| | terminated earlier. | | | | provided that the cost of such car | $8,000,000-$10,000,000 | $200,000 |
| | | | | | will not exceed NIS 4,200 per month | >$10,000,000 | $250,000 |
| | Termination Notice | | | | - 4 months salary ("adjustment pay") |
| | period of at least | | | | after February 1, 2011 in addition |
| | 120 days. | | | | to any statutory severance pay] |
| | | | | | - Vacation of 20 days per each |
| | | | | | 12-month period |
| | * If the total sales or profit for the previous year were less than 60% of the budget approved by the board of directors of Witech, with no obligation to pay the remaining value of the contract until the end of the initial term. Witech may terminate the employment agreement at its discretion at any time after February 1, 2008. Unless Witech exercises its right to terminate the contract under such condition, the contract shall automatically renew until terminated in accordance with the provisions of Section 7 of the employment agreement. |
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| | ** The agreement with the employee includes a Confidentiality and a 2-year Non-Competition and Non-Solicitation undertaking. |
| | *** This will be the basic salary until February 1, 2009; provided that, until additional equity or convertible debt financing is raised, the basic salary shall be reduced by 25% (and will not be increased retroactively following such financing). |
| | **** The salary from February 1, 2010 until January 31, 2011 will increase by 10% if the profit after tax in 2009 is at least $1,000,000. |
In addition, on January 2, 2008, we granted stock options to Charles Moss, David Elooz, Eliayu Cohen and Ronen Segal, to purchase 527,330 each of our Ordinary Shares at an exercise price equal to $0.44, which was the average trading price per share of the Exchange Shares during the twenty (20) trading days prior to the closing of the Exchange Agreement, vesting in eight (8) semi- annual installments as long as each such executive continues to be employed by us. These options were issued according to the capital gains route under Section 102 of the Israeli Income Ordinance or in accordance with Section 3(i) of theIsraeli Income Ordinance, as applicable.
Board Practices.
In August 1993 our articles of association were amended to provide, among other matters, for a classified board of directors. These provisions were retained with minor amendments, in the new articles of associations of the Company approved on November 19, 2000 (the “Articles of Association”). Effective as of January 2, 2008, the “classified board’ provisions of our Articles of Association were repealed and currently all directors (except for “External Directors” elected in accordance with the Israeli Companies Law) are elected at a general or special meeting of shareholders and hold office until the end of the next annual meeting or until they cease to hold office pursuant to the provisions of the Articles of Association.
During our voluntary liquidation proceedings, from July 2004 until April 2007, our board ceased to function and was replaced by the liquidators and all powers of the board of directors were exercised by the liquidators in accordance with Israeli law. In April 2007, Messrs. Hartman, Jacobowitz and Wulkan were elected as directors and, on January 2, 2008 Messrs. Moss, Elooz and Cohen were elected as additional directors. These directors will hold office until the later of the 2008 annual general meeting of shareholders or until their successors have been duly elected and qualified. Mrs. Weller-Weiss and Mr. Auman have been elected as external directors (as defined below) pursuant to the Israeli Companies Law. Under the Israeli Companies Law, the initial term of an external director is three years and may be extended for an additional three years.
Officers serve at the discretion of the board of directors, subject to the terms of any agreement between them and the Company.
There are no service contracts between the Company and any of its directors providing for benefits upon termination of engagement as directors.
External and Independent Directors
Under the Israeli Companies Law, Israeli companies whose shares have been offered to the public in or outside of Israel are required to appoint two people to serve as external directors on the board of directors of a company.
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Under the Companies Law:
| | — | An external director must either be professionally eligible or have relevant accounting and financial expertise, but at least one of the external directors must have relevant accounting and financial expertise. |
| | — | A director with accounting and financial expertise is a director who, due to his education, experience and skills, possesses capabilities relating to and understandings of, business and accounting matters and financial statements, which enable him to understand in depth the company’s financial statements and to initiate a debate regarding the manner in which the company’s financial information is presented. |
| | — | A director who meets certain professional qualifications is a director who satisfies one of the following requirements: (1) the director holds an academic degree in either economics, business administration, accounting, law or public administration, (2) the director either holds another academic degree or has obtained other high education in the company’s primary field of business or in an area that is relevant to his position, and (3) the director has at least five (5) years of experience serving in one of the following capacities or an aggregate of at least five (5) years of experience in two or more of the following capacities (a) a senior business management position of a company with a substantial scope of business, (b) a senior position in the primary field of business of the company or (c) a senior public administration position. |
| | — | The board of directors should determine the minimum number of directors having financial and accounting expertise, in addition to the external director, and in making the determination as to a director’s accounting and financial expertise, the board of directors is required to consider, among other things, the education, experience and knowledge of such person with respect to (1) accounting and internal control matters that are typical to the industry in which the company engages and to companies of similar size and complexity to those of the company, (2) the responsibilities of the company’s auditor and (3) the preparation and approval of financial statements under the Companies Law and the relevant Israeli securities 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 controlled by that person has at the date of appointment, or has had at any time during the two years preceding that date, any affiliation with the company, any entity controlling the company or any entity controlled by the company or by this controlling entity. The term “affiliation” includes:
| | — | an employment relationship; |
| | — | business or professional relationship maintained on a regular basis; |
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 if such position or other business may impair such director’s ability to serve a director. No person who is a director in one company can serve as an external director in another company, if at that time a director of the other company serves as an external director in the first company. The Companies Law further provides that if, at the time of appointment of an external director, all members of the board of directors of the company are of one gender, then the external director appointed shall be of the other gender. From April 2003 until termination of the voluntary liquidation proceedings in April 2007, we did not comply with these requirements due to the resignation of certain directors and our inability to attract additional directors. During our voluntary liquidation proceedings, from July 2004 until April 2007, our board ceased to function and was replaced by the liquidators and all powers of the board of directors were exercised by the liquidators in accordance with Israeli law.
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External directors are appointed by a majority vote at a shareholders’ meeting, provided that either: (1) the majority of shares voted at the meeting, including at least one third of the shares of non-controlling shareholders voted at the meeting, vote in favor of appointment of the director or (2) the total number of shares of non-controlling shareholders voted against the election of the director does not exceed one percent of the aggregate voting rights in the company. The initial term of an external director will be three years and may be extended for an additional three-year period. Each committee of a company’s board of directors will be required to include at least one external director and all external directors must be members of the company’s audit committee.
In addition, we are obligated under the Companies Law to establish an audit committee, at least a majority of whose members are independent of management. The audit committee should adopt a formal written audit committee charter to be reviewed annually.
An external director is entitled to consideration and to the refund of expenses, as is provided in regulations adopted under the Companies Law only and is otherwise prohibited from receiving any other consideration, directly or indirectly, in connection with the services provided as an external director. Nevertheless, the grant of an exemption from liability for breach of fiduciary duty or duty of care, an undertaking to indemnify, indemnification or insurance under the provisions of the Companies Law shall not be deemed consideration. Under the Companies Law, an external director cannot be dismissed from the office unless:
| | — | the board of directors determines that the external director no longer meets the requirements for holding such office, as set forth in the Companies Law or that the director is in breach of his or her fiduciary duties to the company and the shareholders of the company vote (by the same majority required for the appointment) to remove the external director after the external director has been given the opportunity to present his or her position; |
| | — | an Israeli court determines, upon a request of a director or a shareholder, that the director no longer meets the requirements for holding such office as set forth in the Companies Law or that the director is in breach of his or her fiduciary duties to the company; or |
| | — | the court determines, upon a request of the company or a director, shareholder or creditor of the company, that the external director is unable to fulfill his or her duty or has been convicted of certain crimes as specified in the Companies Law. |
Audit Committee
The Israeli Companies Law requires public companies to appoint an audit committee. The responsibilities of the audit committee include identifying irregularities in the management of the company’s business and approving related party transactions as required by law. An audit committee must consist of at least three directors, including every external director. The chairman of the board of directors, any director employed by or otherwise providing services to the company, and a controlling shareholder or any relative of a controlling shareholder, may not be a member of the audit committee. An audit committee may not approve an action or a transaction with a controlling shareholder, or with an office holder, unless at the time of approval two external directors are serving as members of the audit committee and at least one of the external directors was present at the meeting in which an approval was granted. Our audit committee consists of Aharon Jacobowitz, Alon Wulkan, Iris Weller-Weiss and Adrian Auman.
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The audit committee provides assistance to the board in fulfilling its legal and fiduciary obligations with respect to matters involving the accounting, auditing, financial reporting and internal control functions of the Company. In carrying out these duties, the audit committee meets at least once every fiscal quarter with management at which time, among other things, it reviews, and either approves or disapproves, the financial statements of the Company for the immediately preceding fiscal quarter and conveys its conclusions in this regard to the board. The audit committee also monitors generally the services provided by the Company’s external auditors to ensure their independence, and reviews, and either approves or disapproves, all audit and non-audit services provided by them. The Company’s external and internal auditors also report regularly to the audit committee at its meetings, and the audit committee discusses with the Company’s external auditors the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments and the clarity of disclosures in the Company’s financial statements, as and when it deems it appropriate to do so.
Under the provisions of the Sarbanes-Oxley Act of 2002, the audit committee will be responsible for the appointment, compensation, retention and oversight of the work of the Company’s external auditors. However, under Israeli law, the appointment of external auditors and their compensation require the approval of the shareholders of the Company. Pursuant to Israeli law, the shareholders may delegate the authority to determine the compensation of the external auditors to the board of directors. The compensation of the external auditors will be required to be approved by the audit committee and recommended to the shareholders or, if so authorized by the shareholders, recommended by the board and ratified by the shareholders or simply ratified by the board, as the case may be. The Company does not have a separate compensation committee.
Internal Auditor
Pursuant to the Israeli Companies Law, the board of directors must appoint an internal auditor, nominated by the audit committee. The role of the internal auditor is to examine, among other matters, whether the company’s actions comply with the law and orderly business procedure. Under the Israeli Companies Law, the internal auditor may be an employee of the company but not an office holder, or an affiliate, or a relative of an office holder or affiliate, and he or she may not be the company’s independent accountant or its representative. Our internal auditor was appointed during May 2007 and is expected to submit an audit report by the end of January 2008.
C. Employees.
As of December 31, 2007, Witech had 31 permanent employees and 8 temporary employees. During the height of the 2007 season, Witech had a total of 145 employees. Most of these were hired for 3-4 months to work in the U.S. parks. None of Witech’s employees are represented by a labor union and Witech considers its relations with its employees to be good. Witech’s U.S. subsidiary, CDRide had 1 permanent employee and 20 temporary employees.
IIS employs one person on a part-time basis, in general management and administration and Robi Hartman, the CEO is engaged on the basis of a consulting agreement.
For a description of the agreement with our CEO and Witech’s material employment agreements, see “Item 6. Directors, Senior Management and Employees – B. Compensation”.
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D. Share Ownership.
The following chart sets forth director and senior management share ownership in the Company as of January 2, 2008. Each shareholder listed below enjoys the same voting rights with respect to each share.
Name
| Title of Class
| Number of Shares
Beneficially Owned(1)
| Percentage of
Shares
Beneficially
Owned (%)(2)
| Options
| Warrants
|
|---|
| | | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| Robi Hartman | | | | Ordinary Shares | | | 2,748,901 | | | 11.89 | % | | 15,000 | (4) | | 1,092,291 | (7) |
| Aharon Jacobowitz | | | | Ordinary Shares | | | 0 | | | 0 | | | 15,000 | (4) | | 0 | |
| Alon Wulkan | | | | Ordinary Shares | | | 0 | | | 0 | | | 15,000 | (4) | | 0 | |
| Charles Moss | | | | Ordinary Shares | | | 1,012,141 | (3) | | 4.38 | % | | 527,330 | (5) | | 795 | (7) |
| David Elooz | | | | Ordinary Shares | | | 1,094,097 | | | 4.73 | % | | 527,330 | | | 0 | |
| Eliyahu Cohen | | | | Ordinary Shares | | | 1,010,521 | | | 4.37 | % | | 527,330 | | | 0 | |
| Iris Weller-Weiss | | | | Ordinary Shares | | | 0 | | | 0 | | | 45,000 | (6) | | 0 | |
| Adrian Auman | | | | Ordinary Shares | | | 0 | | | 0 | | | 45,000 | (6) | | 0 | |
| Ronen Segal | | | | Ordinary Shares | | | 1,010,521 | | | 4.37 | % | | 527,330 | (5) | | 0 | |
| * | Owns less than one percent of the Ordinary Shares outstanding. |
| (1) | Beneficial ownership by a person assumes the exercise of all options and warrants held by such person 527,330(5) that are currently exercisable or are exercisable within 60 days of such date. |
| (2) | Percentage ownership is based on 23,128,768 shares outstanding as of January 2, 2008. |
| (3) | Includes 151,958 Shares of Opcom Ltd., a company owned and controlled by Mr. Moss |
| (4) | All these options were granted in December 2007. Each of these directors will receive additional options to purchase 15,000 shares for each year in which they serve as a director of the Company, commencing April 17, 2007 and vesting of such options will occur at the end of each such year. The exercise price of all the above options is $0.44 which is the average closing price of the Company's shares in the 20 trading days preceding the approval of these options by the general meeting of the shareholders of the Company. |
| (5) | All these options were issued on January 2, 2008 at an exercise price equal to $0.44 which was the average trading price per share of the Exchange Shares during the 20 trading days prior to the closing of the Witech Exchange Agreement, vesting in eight (8) semi- annual installments as long as each such executive continues to be employed by us or Witech. |
| (6) | All these options were granted in December 2007 and vest in three equal annual installments commencing in April 17, 2008 with respect to Mrs. Weller-Weiss and December 20, 2007 with respect to Mr. Auman. The exercise price of all the above options is $0.44 which is the average closing price of the Company's shares in the 20 trading days preceding the approval of the options granted to Mr. Auman by the general meeting of the Shareholders of the Company. |
| (7) | Part of the 4,600,000 warrants to be issued following compliance with applicable Israeli and United States securities laws and regulations, we intend to issue, for no additional consideration, to all our shareholders at the record date determined for the purpose of the extraordinary general meeting held on December 20, 2007 (November 9, 2007), to the percentage holding of each such shareholder in our issued and outstanding share capital on such date. The exercise price of these warrants will be $0.44. |
Stock Option Plans
In August 1993, the Company’s employee share incentive plan (the “1993 Plan”) was approved by the board of directors and later adopted by the Company’s shareholders. The 1993 Plan permitted the grant of options to purchase Ordinary Shares to officers, directors and key employees of, and consultants to, the Company or any subsidiary of the Company. The 1993 Plan and all outstanding options issued under the 1993 Plan expired in 2003 except that the options held by Mr. Robi Hartman and Mr. Aharon Jacobowitz expired in 2006.
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On November 5, 2007, our board of directors approved the Company’s 2007 Israeli Share Option Plan (the “Plan”) and resolved to reserve 3,300,000 Ordinary Shares for issuance pursuant to the Plan. The Plan was also approved by our general meeting of shareholders on December 20, 2007.
The purpose of the Plan is to enable us to attract and retain qualified persons as employees, officers, directors, consultants, advisors and service providers and to motivate such persons by providing them with an equity participation in the Company. The Plan will expire 10 years after its adoption, unless terminated earlier by the Board of Directors.
The Plan is administered by our board of directors or a committee of our board of directors which has broad discretion, subject to certain limitations, to determine the persons entitled to receive options.
Under the Plan, the terms and conditions under which options are granted and the number of shares subject thereto shall be determined by our board of directors or a committee of our board of directors. The board of directors or such committee also has discretion to determine the nature of the consideration to be paid upon the exercise of an option under the Plan. Such consideration generally may consist of cash, but may at the discretion of our board of directors include cash and a recourse promissory note.
The Ordinary Shares acquired upon exercise of an option are subject to certain restrictions on transfer, sale or hypothecation. Options are exercisable and restrictions on disposition of shares lapse pursuant to the terms of the individual agreements under which the options were granted or the shares were issued.
Options granted under the Plan to our employees and to certain of directors may be designated as 102 Options that afford qualified optionees certain tax benefits under the Israel Income Tax Ordinance (“102 Options”). We have elected that the benefits available under the “capital gains” alternative will apply to 102 Options. Pursuant to the election made by the Company, capital gains derived by optionees arising from the sale of shares derived from the exercise of options granted to them under Section 102, will be subject to a flat capital gains tax rate of 25% (instead of the gains being taxed as salary income at the employee’s marginal tax rate). However, as a result of this election, the Company will no longer be allowed to claim as an expense for tax purposes the amounts credited to such employees as a benefit when the related capital gains tax is payable by them, as the Company was previously entitled to do. The Company may change its election from time to time, as permitted by the Tax Ordinance. There are various conditions that must be met in order to qualify for these benefits, including registration of the options in the name of a trustee (the “Trustee”) for each of the employees who is granted options. Each option, and any ordinary shares acquired upon the exercise of the option, must be held by the Trustee for a period commencing on the date of grant and ending no earlier than 24 months after the date of grant.
In December 2007 the Company issued stock options to purchase 2,435,000 of its Ordinary Shares at an exercise price of $0.44.
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders.
During the period from January 1, 2004 through December 31, 2006, Mr. Hartman purchased an aggregate of 1,377,757 Ordinary Shares of the Company in open-market transactions.
Pursuant to the Exchange Agreement, on January 2, 2008, we issued 11,552,229 of our Ordinary Shares to the shareholders of Witech.
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The following table sets forth, as of January 2, 2008, the number of Ordinary Shares of the Company owned by all persons known to the Company to beneficially own 5% or more of the Company’s Ordinary Shares. The Company’s major shareholders do not have different voting rights.
Name and Address
| Number of Ordinary Shares
Beneficially Owned
| Percentage of
Ordinary Shares
Beneficially Owned(1)
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Nimrod Fund Ltd. | | | | | | | | |
| Sir Francis Drake Drive C725 | | |
| Roadtown, Tortola, | | |
| British Virgin Islands | | | | 1,595,559 | (2) | | 6.9 | % |
| | | |
| CDC Holdings Ltd. | | |
| c/o Fiduciaire Equity Trust A.G. | | |
| Address: 22 rue de Villereuse, P.O. Box | | |
| 6135, 1211 Geneva 6, Switzerland | | | | 1,258,225 | (3) | | 5.44 | % |
| | | |
| Robi Hartman | | |
| c/o I.I.S Intelligent Information Systems | | |
| Limited | | |
| 33 Jabotinsky Street | | |
| Ramat Gan, Israel | | | | 2,748,901 | (4) | | 11.89 | % |
| (1) | Percentage ownership is based on 23,128,768 shares outstanding as of January 2, 2008. |
| (2) | Issued on January 2, 2008, at the closing of the Exchange Agreement in consideration for the transfer of shares in Witech to the Company. |
| (3) | As reported on Schedule 13G filed with the Securities & Exchange Commission, dated January 14, 2002. |
| (4) | As reported on Schedule 13D filed with the Securities & Exchange Commission, dated January 24, 2007. |
As of December 31, 2007, approximately 90% of the outstanding Ordinary Shares of the Company were held of record by approximately 50 holders registered on the books of the Company’s United States transfer agent with addresses in the United States. The Company believes that a majority of its Ordinary Shares are beneficially owned by non-United States persons. To the extent known to the Company, the Company is not directly or indirectly owned or controlled by another corporation, by any foreign government or by any other natural or legal person.
B. Related Party Transactions.
In February 2001, a portion of our office space located in Ramat Gan, Israel was leased from West End, a company that is owned by Robi Hartman, the Company’s Chief Executive Officer and Chairman. As of April 1, 2003, this lease was assumed by Enargis which sublet 35% of the premises to us at an annual cost of approximately $12,000 which was reduced by 50% to $6,000 per annum with effect from August 2004, following our entry into voluntary liquidation proceedings in July 2004. The other 50%, $6,000, was deferred until receipts of the proceeds from the sale of either StoreAge or Enargis. These deferred amounts were paid in May 2007 following termination of our voluntary liquidation proceedings. As of November 2005, we became a direct tenant of West End. Following termination of the Company’s voluntary liquidation proceedings in April 2007, the amount of office space used increased from 35% to 50% of the premises and the annual cost also increased to $1,450 per month due to the larger space (the cost per square meter remained the same according to the original agreement).
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Effective as of January 2006, Mr. Hartman received additional options to purchase 91,539 non-voting ordinary shares of StoreAge at an exercise price of $0.25 per share bringing the amount of his options in StoreAge to a total of 401,359 shares, constituting approximately 0.69% of the outstanding shares of StoreAge on a fully diluted basis. See: “Item 6. Directors, Senior Management and Employees. B. Compensation”. These options vested and were exercised at the time of the sale of StoreAge to LSI. For compensation due to the liquidators in the voluntary liquidation and our officers and directors, see “Item 6 – Directors, Senior Management and Employees”.
On May 23, 2007, considering the bleak business prospects of Enargis and the costs involved in maintaining our shareholding in Enargis (particularly audit costs), we, together with all the other shareholders of Enargis, transferred all our shares in Enargis to West End Technology Investments Ltd. for no consideration other than the assumption by West End of all Enargis’ liabilities.
On June 17, 2007, our Audit Committee and Board of Directors approved and on December 20, 2007, at a general meeting, our shareholders approved that (i) we will pay Mr. Aharon Jacobowitz a cash bonus according to the following: $25,000 (plus VAT, if applicable) if the PPS (as defined below) is above $0.50 per share, $50,000 (plus VAT, if applicable) if the PPS is above $1.00 per share and $75,000 (plus VAT, if applicable) if the PPS is above $1.30 per share, and (ii) we will pay Robi Hartman a cash bonus of $100,000 (plus VAT, if applicable) if the PPS is above $1.30 per share. For the purposes of this resolution “PPS” shall mean the average closing price of our shares on the “Pink Sheets” (as quoted by Yahoo Financial or other similar service) during the twenty (20) trading days following the approval of the resolution by our general meeting of shareholders (which was given on December 20, 2007).
For a description of the agreements with our directors and our CEO see "Item 6. Directors, Senior Management and Employees - B. Compensation".
Out of the initial $1,500,000 loan provided by us to Witech, $200,000 was used to repay a loan provided in February 2007 by a company whose beneficial shareholders are affiliated with the beneficial shareholders of CDC Holdings Ltd., which holds 5.44% of our issued and outstanding share capital.
Our Board of Directors decided in May 2007 in a resolution that was amended and supplemented in November 2007 that, subject to and following compliance with applicable Israeli and United States securities laws and regulations, we intend to issue, for no additional consideration, to all our shareholders at the record date determined for the purpose of the extraordinary general meeting held on December 20, 2007 (November 9, 2007), warrants to purchase an aggregate of 4,600,000 of our Ordinary Shares, on a pro-rata basis according to the percentage holding of each such shareholder in our issued and outstanding share capital on such record date. The exercise price of each warrant shall be $0.44 (the average trading price per share of our Ordinary Shares during the twenty trading days prior to the closing of the Witech Exchange Agreement). The warrants will be exercisable for cash or on a cash-less exercise basis. These warrants will be exercisable until the earlier of (i) five years from the date of issuance, and (ii) the closing of a Transaction. A “Transaction” shall mean either (i) the merger of our Company into another company in which our Company is not the surviving entity, or (ii) the purchase of all or substantially all of the shares of our Company. These warrants will be non-transferable and non-exercisable until all applicable Israeli and United States securities laws and regulations have been complied with in connection with the warrants and the underlying shares, including without limitation, that a registration statement covering the issuance of the underlying shares is declared effective by the SEC.
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At an extraordinary general meeting of shareholders on December 20, 2007, the shareholders authorized the procurement of directors and officers liability coverage of up to $10 million per event and up to $10 million per annum, with an annual premium not to exceed $100,000. We procured an insurance policy, effective until December 2008 with the above coverage for an annual premium of $68,000.
At an extraordinary general meeting of shareholders on December 20, 2007, the shareholders approved indemnification and exculpation agreements with our directors and office holders in a total amount for all directors and office holders (in excess of the insurance proceeds received) that shall not exceed to US$2,500,000, or such greater sum as shall, from time to time, be approved by our shareholders.
Item 8. FINANCIAL INFORMATION
A. Statements and Other Financial Information.
See pages F-1 – F-75 of the Company’s financial statements.
Legal Proceedings
The Company is not a party to any litigation that would, individually or in the aggregate, have a material adverse effect on the Company or its business, and is not aware that any such litigation is threatened.
Dividends
The Company has not declared or paid dividends on its Ordinary Shares since 1989, and does not intend to declare or pay any dividends to its shareholders in the foreseeable future.
B. Significant Changes.
With the exception of the Exchange Agreement pursuant to which we acquired all the issued and outstanding shares of Witech, in consideration for the issuance of 11,552,229 of our ordinary shares on January 2, 2007 (see Item 4. INFORMATION ON THE COMPANY – A. Share Exchange Agreement with Witech), there have been no material changes in our business or Witech’s business since September 30, 2007.
Item 9. THE OFFER AND THE LISTING
The Ordinary Shares of the Company have been traded in the over-the-counter market in the United States since the Company’s initial public offering on November 8, 1984. The Ordinary Shares originally traded under the symbol IISLF and now trade under the symbol IISLF.PK. From January 22, 1985 to March 17, 1999, the Ordinary Shares traded on the Nasdaq National Market (“Nasdaq”). From March 18, 1999 until January 22, 2003, the Ordinary Shares traded on the Nasdaq SmallCap Market. From January 23, 2003 until August 23, 2004, the Company’s Ordinary Shares traded on the OTC Bulletin Board. Since August 24, 2004, the Company’s Ordinary Shares have traded on the Pink Sheets Electronic Quotation Service (“Pink Sheets”).
The following table sets forth, for the periods indicated, the annual high and low closing sales price quotes of the Ordinary Shares as reported by Nasdaq, by the OTC Bulletin Board or by the Pink Sheets since January 23, 2003, for the five most recent full financial years and the quarterly high and low closing sales price quotes for the three most recent full financial years. The table also sets forth the high and low closing sales price quotes of the Ordinary Shares as reported by the Pink Sheet s for the most recent six months.
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| High
| Low
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Year ended December 31, 2003 | | | $ | 0.92 | | $ | 0.31 | |
| Year ended December 31, 2004 | | | $ | 0.73 | | $ | 0.09 | |
| Year ended December 31, 2005 | | | $ | 0.15 | | $ | 0.09 | |
| Year ended December 31, 2006 | | | $ | 0.36 | | $ | 0.09 | |
| Year ended December 31, 2007 | | | $ | 0.85 | | $ | 0.30 | |
| | | |
| 2005 | | |
| First Quarter | | | $ | 0.15 | | $ | 0.09 | |
| Second Quarter | | | $ | 0.12 | | $ | 0.09 | |
| Third Quarter | | | $ | 0.14 | | $ | 0.10 | |
| Fourth Quarter | | | $ | 0.13 | | $ | 0.10 | |
| | | |
| 2006 | | |
| First Quarter | | | $ | 0.22 | | $ | 0.10 | |
| Second Quarter | | | $ | 0.12 | | $ | 0.9 | |
| Third Quarter | | | $ | 0.11 | | $ | 0.9 | |
| Fourth Quarter | | | $ | 0.36 | | $ | 0.10 | |
| | | |
| Most Recent Six Months | | |
| | | |
| July 2007 | | | $ | 0.55 | | $ | 0.42 | |
| August 2007 | | | $ | 0.51 | | $ | 0.32 | |
| September 2007 | | | $ | 0.4 | | $ | 0.3 | |
| October 2007 | | | $ | 0.44 | | $ | 0.32 | |
| November 2007 | | | $ | 0.64 | | $ | 0.35 | |
| December 2007 | | | $ | 0.50 | | $ | 0.32 | |
The foregoing prices reflect inter-dealer quotations without retail mark-ups, mark-downs or commissions and may not represent actual transactions.
Item 10. ADDITIONAL INFORMATION
A. Share Capital.
At our shareholders meeting held on December 20, 2007 our registered share capital was increased to 50,000,000 Ordinary Shares of NIS 0.003 par value each.
On January 2, 2008, with the closing of the acquisition of all the issued and outstanding shares of Witech, we issued 11,552,229 of our Ordinary Shares to the shareholders of Witech. See “Item 4.INFORMATION ON THE COMPANY. – A. Share Exchange Agreement”.
For the issuance of share options, see “Item 10 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES – E. Stock Option Plans”.
In November 2007, we issued notes convertible into Ordinary Shares and warrants to purchase 331,000 of our Ordinary Shares. See C. Material Contracts – Convertible Note Financing” below in this section.
Other than the above, we have not issued any other shares or options or other convertible securities in the last three fiscal years.
B. Memorandum and Articles of Association.
Objects and Purposes in the Company’s Articles of Association
The Company’s objects and purposes are specified in its Memorandum of Association filed as Exhibit 3.2 to Registration Statement No. 33-62862 dated August 10, 1993 (the “Memorandum”).
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Provisions Regarding Directors
Pursuant to article 54(b) of our Articles of Association, a transaction entered into by the Company in which a director of the Company has a personal interest, directly or indirectly, will be valid in respect of the Company and the given director only if approved by the Company’s board of directors and, if such transactions are “irregular transactions” as defined in the Israeli Companies Law, approved in accordance with the requirements of the Israeli Companies Law.
An “irregular transaction” pursuant to the Israeli Companies Law is defined as a transaction which is not in the ordinary course of business, a transaction which is not under ordinary market conditions or any transaction which might substantially affect the profitability of the Company, its assets and liabilities.
The Israeli Companies Law provides that a director who has a personal interest in a given transaction of the Company, brought for approval of the board of directors, shall not be present and/or vote at that meeting. Article 55 of the Company’s Articles of Association, provides that a director who has a personal interest in a matter which is brought for discussion before the board of directors may participate in said discussion, provided that he shall neither vote in nor attend discussions concerning the approval of the activities or the arrangements. If said director did vote or attend as aforesaid, the approval given to the aforesaid activity or arrangements shall be invalid.
Pursuant to article 72 of the Company’s Articles of Association, at any meeting of the board of directors at which a quorum is present, the board will have the authority to exercise all or part of the authorities, power of attorney and discretion invested at such time in the directors or regularly exercised by them. With respect to legal quorum at our board meetings, the Israeli Companies Law provides that, unless determined otherwise by the Company, a legal quorum at the board meetings shall consist of the majority of the board members. We have not decided otherwise and therefore, the legal quorum at our board meeting will consist of the majority of the board members.
Any transaction concerning compensation to a director requires the approval by the board of directors, the audit committee and the shareholders of the Company.
The board of directors may from time to time, in its discretion, cause the Company to borrow or secure the payment of any sum or sums of money for the purpose of the Company. Additionally, the Company may secure or provide for the repayment of such sum or sums in such manner, at such times and upon such terms and conditions in all respects as it sees fit including but not limited to, by the issuance of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages, charges or other securities on the undertaking, or the whole or any part of the property of the Company, both present and future, including units uncalled or called but unpaid capital for the time being.
There is no mandatory retirement age for the directors under our Articles of Association or the Companies Law.
There is no requirement concerning the number of shares one individual must hold in order to qualify him or her as a director under our Articles of Association or the Israeli Companies law.
Dividends
Subject to any preferential, deferred, qualified or other rights, privileges or conditions attached to any special class of shares with regard to dividends, the profits of the Company available for dividend and resolved to be distributed shall be applied in payment of dividends upon the shares of the Company in proportion to the amount paid up or credited as paid up per the nominal value thereon respectively. Unless not otherwise specified in the conditions of issuance of the shares, all dividends with respect to shares which were not fully paid up within a certain period, for which dividends were paid, shall be paid proportionally to the amounts paid or credited as paid on the nominal value of the shares during any portion of the above-mentioned period.
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The board of directors may declare a dividend to be paid to the shareholders according to their rights and interests in the profits, and may fix the record date for eligibility and the time for payment.
The board of directors may from time to time pay to the shareholders on account of the next forthcoming dividend such interim dividends as, in their judgment, the position of the Company justifies.
A transfer of shares shall not pass the right to any dividend declared thereon after such transfer and before the registration of the transfer.
There is no time limit after which dividend entitlement lapses according to our Articles of Association or the Companies Law.
The board of directors may determine that, a dividend may be paid, wholly or partially, by the distribution of specific assets of the Company or by distribution of paid up shares, debentures or debenture stock or any other securities of the Company or of any other companies or in any one or more of such ways in the manner and to the extent permitted by the Companies Law.
Terms of Directors
Effective as of January 2, 2008, the “classified board” provisions of our Articles of Association were cancelled and currently all directors (except for “External Directors” elected in accordance with the Israeli Companies Law) are elected at a general or special meeting of shareholders and hold office until the end of the next annual meeting or until they cease to hold office pursuant to the provisions of the Articles. For a detailed description of the provisions relating to External Directors see “Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES – Board Practices”.
Votes of Shareholders
Our shareholders have one vote for each share held on all matters submitted to a vote of shareholders. Except as otherwise provided in our Articles of Association, any resolution at a general meeting shall be deemed adopted if approved by the holders of a majority of the voting rights in the Company represented at the meeting in person or by proxy and voting thereon. In the case of an equality of votes, either on a show of hands or a poll, the chairman of the meeting shall not be entitled to a further or casting vote.
At all general meetings, a resolution put to a vote at the meeting shall be decided on a show of hands unless, before or upon the declaration of the result of the show of hands, a poll in writing be demanded by the chairman (being a person entitled to vote), or by at least two shareholders present, in person or by proxy, holding at least 5% of the issued share capital of the Company and, unless a poll be so demanded, a declaration by the chairman of the meeting that a resolution has been carried, or has been carried unanimously or by a particular vote, or lost, or not carried by a particular vote, shall be conclusive, and an entry to that effect in the minute book of the Company shall be conclusive evidence thereof, without proof of the number or proportion of the votes recorded in favor of or against such resolution.
If a poll be demanded in manner aforesaid, it shall be taken forthwith, and the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. The demand of a poll shall not prevent the continuance of a meeting for the transaction of any business other than the question on which a poll has been demanded.
Any shareholder which is not a natural person may, by resolution of its directors or other governing body, authorize such person as it thinks fit to act as its representative at a general meeting, and the person so authorized to the satisfaction of the Company shall be entitled to exercise the same powers on behalf of such entity, which he represents as the entity could exercise if it were an individual shareholder.
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Subject to any rights or restrictions for the time being attached to any class or classes of shares, every shareholder shall have one vote for each share of which he is the holder, whether on a show of hands or on a poll. Our Articles of Association do not permit cumulative voting and it is not mandated by Israeli law. Votes may be given either personally or by proxy. A proxy need not be a shareholder of the Company. If any shareholder is a lunatic, idiot, or non compos mentis, he may vote by his committee, receiver, curator bonis or other legal curator, and such last mentioned persons may give their votes either personally or by proxy. If two or more persons are jointly entitled to a share then, in voting upon any question, the vote of the senior person who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other registered holders of the share and, for this purpose seniority shall be determined by the order in which the names stand in the shareholder register.
The instrument appointing a proxy shall be in writing in the usual common form, or such form as may be approved by the board of directors, and shall be signed by the appointor or by his attorney duly authorized in writing or, if the appointor is a corporation, the corporation shall vote by its representative, appointed by an instrument duly signed by the corporation. The instrument appointing a proxy shall be deemed to include authorization to demand a poll or to vote on a poll on behalf of the appointor.
A vote given in accordance with the terms of an instrument of proxy shall be valid notwithstanding the previous death or insanity of the principal, or revocation of the proxy, or transfer of the share in respect of which the vote is given, unless an intimation in writing of the death, revocation or transfer shall have been received at the office before the commencement of the meeting or adjourned meetings at which the proxy is used.
The instrument appointing a proxy shall be deposited at the registered office of the Company or at such other place or places, whether in Israel or elsewhere, as the board of directors may from time to time, either generally or in a particular case or class of cases prescribe, at least forty eight (48) hours before the time appointed for holding the meeting or adjourned meeting at which the person named in such instrument proposes to vote. Otherwise, the person so named shall not be entitled to vote in respect thereof, but no instrument appointing a proxy shall be valid after the expiration of twelve months from the date of its execution.
Subject to the provisions of the Companies Law, a resolution in writing (approved by letter, telex, facsimile or otherwise) by all the shareholders, in person or by proxy, for the time being entitled to vote at a general meeting of the Company, shall be as valid and as effectual as a resolution adopted by a general meeting duly convened, held and constituted for the purpose of passing such resolution.
A shareholder will be entitled to vote at the meetings of the Company by several proxies appointed by him, provided that each proxy shall be appointed with respect to different shares held by the appointing shareholder. Every proxy so appointed on behalf of the same shareholder shall be entitled to vote as he sees fit.
Further Rights and Preferences of the Ordinary Shares
In the event of sale or the undertaking of the Company, the board or the liquidator on a winding up, as the case may be, subject to the authorization by a majority vote at a meeting of shareholders, may distribute to our shareholders all assets remaining after payment of the Company’s liabilities.
Our Articles of Association permit, subject to the Israeli Companies Law, the issue of redeemable shares and to redeem the same according to terms and conditions determined by the Company. Our Articles of Association do not include provisions related to sinking funds.
According to our Articles of Association no person shall be entitled to vote at any general meeting (or be counted as a part of the quorum thereof) unless all calls then payable by him in respect of his shares in the Company shall have been paid. The Israeli Companies Law provides that a company is entitled to determine within its articles a provision allowing the board to place a call on the shares, in the event that the consideration for such shares, in full or in part, have not been paid on time and in accordance with the agreeable terms set out in the given agreement or the articles of association of the company.
According to our Articles of Association, there are no discriminating provisions against any existing or prospective holders of shares of the Company as a result of a shareholder holding a substantial number of shares.
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Modification of Class Rights
If, at any time, the share capital is divided into different classes of shares, the rights attached to any class (unless otherwise provided by the terms of issuance of the shares of that class) may be varied with the consent in writing of the holders of all the issued shares of that class, or with the sanction of a majority vote at a meeting of the shareholders passed at a separate meeting of the holders of the shares of the class. The provisions of our Articles of Association relating to general meetings shall apply, mutatis mutandis, to every such separate general meeting. Any holder of shares of the class present in person or by proxy may demand a secret poll.
Unless otherwise provided by the conditions of issuance, the enlargement of an existing class of shares, or the issuance of additional shares thereof, shall not be deemed to modify or abrogate the rights attached to the previously issued shares of such class or of any other class. These conditions provide for the minimum shareholder approvals permitted by the Israeli Companies Law.
General Meetings
General meetings shall be held at least once in every calendar year at such time, not being more than fifteen months after the holding of the last preceding general meeting, and at such time and place as may be determined by the board of directors.
The board of directors may, whenever it deems necessary, and shall upon such requisition in writing as is provided by Section 63(b) of the Companies Law, convene a general meeting. Any such request must state the purposes for which the meeting is to be called, be signed by the requesting shareholders, and must be deposited at the registered office of the Company. Such request may consist of several documents in like form, each signed by one or more requesting shareholder(s).
Unless a longer period for notice is prescribed by the Companies Law, at least ten (10) days and not more than sixty (60) days notice of any general meeting shall be given, specifying the place, the day and the hour of the meeting and, in the case of special business, the nature of such business, shall be given in the manner hereinafter mentioned, to such shareholders as are under the provisions of the Company’s Articles of Association, entitled to receive notices from the Company. Notices shall be given by mail or by personal delivery to every registered shareholder of the Company, to his address as described in the shareholders register of the Company or such other address as designated by him in writing for this purpose. The accidental omission to give such notice to, or the non receipt of such notice by, any such shareholder shall not invalidate any resolution passed or proceeding held at any such meeting and, with the unanimous consent of the shareholders entitled to receive notice of meetings, a meeting may be convened upon a shorter notice or without notice, and generally in such manner as such shareholders may approve. Such consent may be given at the meeting or retroactively after the meeting. If a shareholder has not provided the Company with an address for the delivery of notices, the shareholder shall be deemed to have waived his right to receive such notices.
Only shareholders of record as reflected on the Company’s share register at the close of business on the date fixed by the board of directors as the record date determining the then shareholders who will be entitled to vote, shall be entitled to notice of, and to vote, in person or by proxy, at a general meeting and any postponement or adjournment thereof.
Quorum at General Meetings
No business shall be transacted at any general meeting unless a quorum is present when the meeting proceeds to business. The quorum at any Meeting shall be two shareholders present in person or by proxy, holding or representing at least twenty five percent (25%) of the total voting rights in the Company. A company being a shareholder shall be deemed to be personally present for the purpose of the Company’s Articles of Association if represented by its representative duly authorized in accordance with Article 42 of the Company’s Articles of Association.
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If, within half an hour from the time appointed for the holding of a general meeting, a quorum is not present, the meeting shall stand adjourned to the same day in the next week at the same time and place, or any time and hour as the board of directors shall designate and state in a notice to the shareholders entitled to vote at the original meeting, and if, at such adjourned meeting, a quorum is not present within half an hour from the time appointed for holding the meeting any two shareholders present in person or by proxy shall constitute a quorum. Notwithstanding the aforesaid, if a general meeting was convened at the demand of shareholders as permitted by Section 63(b) of the Companies Law, then a quorum at such adjourned meeting shall be present only if one or more shareholders are present who hold in the aggregate at least 5% of the issued share capital of the Company and at least 1% of the voting rights in the Company or one or more shareholders who hold in the aggregate at least 5% of the voting rights in the Company.
Restrictions on Shareholders Rights to Own Securities
The Memorandum and Articles of Association of the Company do not restrict in any way the ownership of Ordinary Shares by residents or nonresidents, except with respect to subjects of countries which are in a state of war with Israel, and neither the Memorandum and Articles of Association nor Israeli law restricts the voting rights of residents or nonresidents.
Potential Issues that Could Delay a Merger
A merger of the Company requires the approval of the board of directors and the general meeting of shareholders, in accordance with the provisions of the Israeli Companies Law. See also “Anti-Takeover Provisions; Merger and Acquisitions under Israeli Law”.
Requirement of Disclosure of Shareholder Ownership
There are no provisions of our Memorandum or Articles of Association governing the ownership threshold above which shareholder ownership must be disclosed.
Approval of Related Party Transactions Under Israeli Law
The Companies Law codifies the fiduciary duties that “office holders,” including directors and executive officers, owe to a company. An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires an office holder to act at a level of care that a reasonable office holder in the same position would employ under the same circumstances. The duty of loyalty includes avoiding any conflict of interest between the office holder’s position in the company and his personal affairs, avoiding any competition with the company, avoiding exploiting any business opportunity of the company in order to receive personal gain for the office holder or others, and disclosing to the company any information or documents relating to the company’s affairs which the office holder has received due to his position as an office holder. Each person listed as a director or executive officer in the table under “Directors, Senior Management and Employees–Directors and Senior Management” above is an office holder. Under the Companies Law, all arrangements as to compensation of office holders who are not directors require approval of our board of directors, and the compensation of office holders who are directors must be approved by our audit committee, board of directors and shareholders.
The Companies Law requires that an office holder promptly disclose any personal interest that he or she may have and all related material information known to him or her, in connection with any existing or proposed transaction by us. In addition, if the transaction is an extraordinary transaction, that is, a transaction other than in the ordinary course of business, other than on market terms, or likely to have a material impact on the company’s profitability, assets or liabilities, 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 the foregoing, or by any corporation in which the office holder or a relative is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one director or the general manager. Some transactions, actions and arrangements involving an office holder (or a third party in which an office holder has an interest) must be approved by the board of directors or as otherwise provided for in a company’s articles of association, as not being adverse to the company’s interest. In some cases, such a transaction must be approved by the audit committee and by the board of directors itself (with further shareholder approval required in the case of extraordinary transactions). An office holder who has a personal interest in a matter, which is considered at a meeting of the board of directors or the audit committee, may not be present during the board of directors or audit committee discussions and may not vote on this matter, unless the majority of the members of the board or the audit committee have a personal interest, as the case may be.
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The Companies Law also provides that some transactions between a public company and a controlling shareholder, or transactions in which a controlling shareholder of the company has a personal interest but which are between a public company and another entity, require the approval of the board of directors and of the shareholders.
Once the officer or controlling shareholder complies with these disclosure requirements, the company may approve the transaction in accordance with the provisions of the Companies Law and its articles of association. Generally, the approval of the majority of the disinterested members of the audit committee and the board of directors is required. If audit committee approval is required for a transaction with an interested party, an officer or a controlling shareholder, such approval may not be given unless, at the time the approval was granted two members of the audit committee were external directors and at least one of them was present at the meeting at which the audit committee decided to grant the approval. Shareholder approval may also be required if the transaction is an exceptional transaction. An exceptional 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. In such event, the principal terms of such transaction must be disclosed in a notice to the shareholders which will include all substantive documents relating to the transaction.
Moreover, the audit committee, the board of directors and shareholders must approve an extraordinary transaction with a controlling shareholder or the terms of compensation of a controlling shareholder. The shareholder approval for an extraordinary transaction must include at least one-third of the shareholders who have no personal interest in the transaction and are present at the meeting. Shareholders without this one-third approval can approve the transaction, if the total shareholdings of those shareholders who have no personal interest and voted against the transaction do not represent more than one percent of the voting rights in the company.
If the transaction is with an officer or with a third party in which the officer or the controlling shareholder has a personal interest, the approval must confirm that the transaction is not adverse to the company’s interest. Shareholders must also approve all compensation paid to directors in whatever capacity, company’s undertaking to indemnify a director or indemnification under a permit to indemnify and any transaction in which a majority of the board members have a personal interest. An officer with a personal interest in any matter may not be present at any committee or board of directors meeting where such matter is being approved, and may not vote thereon, unless the majority of the members of the committee or of the board of directors have a personal interest in such approval.
However, under the Companies Regulations (Relief From Related Party Transactions), 5760-2000, promulgated under the Companies Law and amended in January 2002, certain transactions between a company and its controlling shareholder(s) do not require shareholder approval. In addition, pursuant to the recent amendment to these regulations, certain directors’ compensation and employment arrangements do not require the approval of the shareholders if both the audit committee and the board of directors approve that such arrangements are for the benefit of the company.
If the director or the office holder is a controlling shareholder of the company then the employment and compensation arrangement of such director or office holder does not require the approval of the shareholders if it meets certain criteria.
The above relief shall not apply if one or more shareholders, holding at least 1% of the issued and outstanding share capital of the company or of the company’s voting rights objects to the grant of such relief, providing that such objection is submitted to the company in writing not later than seven (7) days from the date of the filing of a report regarding the adoption of such resolution by the company pursuant to the requirements of the Israeli Securities Law. If such objection is duly and timely submitted then the compensation arrangement of the directors will require shareholders’ approval as detailed above.
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Indemnification of Directors and Officers
The Companies Law provides that an Israeli company cannot exculpate an office holder from liability with respect to a breach of his duty of loyalty, but may exculpate in advance an office holder from his liability to the company, in whole or in part, with respect to a breach of his duty of care. Our articles of association provide that, subject to any restrictions imposed by corporate law, we may enter into a contract for the insurance of the liability of any of our office holders with respect to:
| | — | a breach of his duty of care to us or to another person; |
| | — | 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 in respect of an act performed by him in his capacity as an office holder. |
In addition, we may indemnify an office holder against:
| | — | a financial liability imposed on him in favor of another person by any judgment, including a settlement or an arbitrator’s award approved by a court in respect of an act performed in his capacity as an office holder; and |
| | — | reasonable litigation expenses, including attorneys’ fees, expended by such office holder or charged to him by a court, in proceedings we institute against him or instituted on our behalf or by another person, or in a criminal charge from which he was acquitted, all in respect of an act performed in his capacity as an office holder. |
These provisions are specifically limited in their scope by the Companies Law, which provides that a company may not indemnify an office holder, nor enter into an insurance contract which would provide coverage for any monetary liability incurred as a result of certain improper actions.
Pursuant to 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, in specified circumstances, by our shareholders.
At an extraordinary general meeting of shareholders in December 2007, the shareholders authorized the procurement of directors and officers liability coverage of up to $10 million per event and up to $10 million per annum, with an annual premium not to exceed $100,000. We procured an insurance policy, effective until December 2008 with the above coverage for an annual premium of $68,000.
At an extraordinary general meeting of shareholders in December 2007, the shareholders approved indemnification and exculpation agreements with our directors and office holders in a total amount for all directors and office holders (in excess of the insurance proceeds received) that shall not exceed US$2,500,000, or such greater sum as shall, from time to time, be approved by our shareholders.
Anti-Takeover Provisions; Mergers and Acquisitions under Israeli Law
Pursuant to the Companies Law, if following any acquisition of shares of a public company or of a class of shares of a public company the acquiror will hold 90% or more of the company’s shares or 90% of any class of the company’s shares, respectively, then the acquiror must make a tender offer for all of the remaining shares or the particular class of shares of the company. In the event that 5% or more of the shareholders have not responded favorably to a tender offer, the offeror may not purchase more than 90% of that class of shares. Furthermore, the Companies Law provides that as long as a shareholder in a public company holds more than 90% of the company’s shares or of a class of shares, such shareholder shall be precluded from purchasing any additional shares of that type.
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The Companies Law further provides that if following the tender offer such acquiring shareholder holds more than 95% of the outstanding shares of any class, the holders of all the remaining shares will be obligated to transfer such shares to the acquiror at the tender offer price. This entails the possibility of additional delay and the imposition of further approval requirements at the court’s discretion. The Companies Law requires that each company that is party to a merger approve the transaction by a vote of the board of directors and by a vote of the majority of its outstanding shares, generally excluding shares voted by the other party to the merger or any person holding at least 25% of the other party to the merger, at a shareholders’ meeting called for this purpose. In addition, in certain cases court approval of a merger may be required. Upon the request of a creditor to either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be completed unless at least 50 days have passed from the time that a proposal for approval of the merger has been filed with the Israeli Registrar of Companies, certain notification and information have been provided to debtors and at least 30 days have passed from the shareholders approval of the merging companies.
The Companies Law also provides that an open market acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a holder of 25% of the voting rights in the company. This rule does not apply if there already is another holder of 25% of the voting rights in the company. Similarly, the Companies Law provides that an open market acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become the holder of 45% of the voting rights in the company. This rule does not apply if another party already holds more than 45% of the voting rights in the company. Regulations promulgated under the Companies Law provide that these tender offer requirements do not apply to companies whose shares are listed for trading on a stock exchange outside of Israel only if, according to the laws in the country in which its shares are traded there is either a limitation on the acquisition of a specified percentage of control in the Company or the acquisition of a specified percentage of control requires the purchaser to also make a tender offer to the public.
The Companies Law extends the disclosure requirements applicable to an officer of the Company to a shareholder that holds 25% or more of the voting rights in a public company, including an Israeli company that is publicly traded outside of Israel such as on the OTC Bulletin Board. Certain transactions between a public company and a 25% shareholder, or transactions in which a 25% shareholder of the company has a personal interest but which are between a public company and another entity, require the approval of the board of directors and of the shareholders. Moreover, an extraordinary transaction with a 25% shareholder or the terms of compensation of a 25% shareholder must be approved by the audit committee, the board of directors and shareholders. The shareholder approval for an extraordinary transaction must include at least one third of the shareholders who have no personal interest in the transaction and are present at the meeting; the transaction can be approved by shareholders without this one third approval, if the total share holdings of those who vote against the transaction do not represent more than 1% of the voting rights in the company.
The Israeli Companies Ordinance requires that certain transactions, actions and arrangements be approved as provided for in the Company’s Articles of Association, by the Company’s board of directors, by the audit committee and/or by the Company’s shareholders. The vote required by the audit committee and the board for approval of such matters, in each case, is a majority of the disinterested directors participating in a duly convened meeting.
Changes in Capital
The Company’s Memorandum and Articles of Association do not impose any conditions governing changes in capital that are more stringent than required by the Israeli Companies Law.
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C. Material Contracts.
Sale of shares in StoreAge
In October 2006 all shareholders of StoreAge, including us, signed a share purchase agreement (the “SPA”) with LSI for the sale of all issued and outstanding shares of StoreAge to LSI. In November 2006, the sale was closed and LSI paid us gross proceeds of $5,416,692 ($0.862 per share) for all our shares, out of which 13%, $703,793 or $0.112 per share is held in escrow to satisfy certain possible future claims for a period of 18 months following the closing (see below in this Item). At the time of this closing, we held 12.68% of the issued and outstanding share capital of StoreAge (10.89% on a fully diluted basis). This additional dilution resulted from the issuance of warrants to the Israeli venture lending fund that provided a $4,000,000 loan to StoreAge in March 2006 (that was repaid by LSI) and the increase of shares reserved for options pursuant to StoreAge’s incentive share option plans. See “Item 4C. Business Overview – Sale of StoreAge”.
In the framework of the SPA, we did not make any representations and warranties regarding StoreAge and its subsidiaries, these representation and warranties were made only by StoreAge. We were required to make certain representations and warranties regarding ourselves and the ownership of our shares. The representations and warranties of StoreAge and the sellers, including ourselves, contained in the SPA shall survive the closing for 18 months until May 21, 2008; provided, however, that (i) the representations and warranties made with respect to capitalization and ownership of shares shall survive indefinitely, and (ii) the representations and warranties with respect to tax liabilities shall survive until the expiration of the applicable statute of limitations.
In the event of any breach of any representation, warranty or covenant by StoreAge or a seller, including ourselves, the liability of the sellers is limited to their pro-rata share of the funds in escrow; with the exception of representations and warranties regarding capitalization, taxation and due ownership of the shares in which case the total liability of each seller will not exceed the aggregate consideration received by such seller for such seller’s shares sold pursuant to the SPA.
The SPA provides that the Seller will have no liability for breaches of representations and warranties (until the aggregate amount of all losses to the purchaser as a result of such breaches equals or exceeds $500,000 (the “Threshold”), whereupon LSI shall be entitled to indemnification with respect to all such losses including the amount of the Threshold; except that (i) the Threshold shall not apply with respect to losses arising or resulting from breaches of the representations and warranties regarding due ownership of the shares, and (ii) the threshold for tax liabilities is $50,000.
To date to the best of our knowledge no claim has been made against the funds in escrow.
Transfer of Shares in Enargis
On May 23, 2007, considering the bleak business prospects of Enargis and the costs involved in maintaining our shareholding in Enargis, we, together with all the other shareholders of Enargis, transferred all our shares in Enargis to West End Technology Investments Ltd. for no consideration other than the assumption by West End of all Enargis’ liabilities (see Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions).
Intention to issue warrants
On November 5, 2007 our Board of Directors approved, subject to and following compliance with applicable Israeli and United States securities laws and regulations, its intention to issue, for no additional consideration, to all our shareholders at the record date determined for the purpose of the shareholders meeting convened to approved the Exchange Agreement (November 9, 2007), warrants to purchase an aggregate of 4,600,000 of our Ordinary Shares, on a pro-rata basis according to the percentage holding of each such shareholder in our issued and outstanding share capital on such record date. This includes the warrants to purchase 2,300,000 Ordinary Shares that we decided to issue in May 2007. The exercise price of each warrant shall be $0.44 (the average trading price per share of our Ordinary Shares during the twenty trading days prior to the closing of the Exchange Agreement). The warrants will be exercisable for cash or on a cash-less exercise basis. These warrants will be exercisable until the earlier of (i) five years from the date of issuance, and (ii) the closing of a Transaction. A “Transaction” shall mean either (i) the merger of the Company into another company in which the Company is not the surviving entity, or (ii) the purchase of all or substantially all of our shares. These warrants will be non-transferable and non-exercisable until all applicable Israeli and United States securities laws and regulations have been complied with in connection with the warrants and the underlying shares, including without limitation, that a registration statement covering the issuance of the underlying shares is declared effective by the SEC.
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Witech Exchange Agreement
For a description of the Witech Exchange Agreement that was signed on November 5, 2007 and closed on January 2, 2008, see “Item 4. Information on the Company – A. Share Exchange Agreement”.
Agreements with Directors and Officers
For a description of the agreements with directors and officers of the Company see "Item 6. Directors, Senior Management and Employees - B. Compensation".
Convertible Note Financing
In November 2007, we entered into definitive agreements with private investors for the issuance of convertible notes in the principal amount of $1,655,000, out of which $827,500 was invested in November 2007 and the remaining $827,500 was invested in January 2007 following the closing of the Witech Exchange Agreement. The principal amount of the notes will accrue interest at the rate of 8% compounded annually and principal and interest will be repaid in 12 equal quarterly installments commencing 36 months from issuance. Unpaid principal and interest may at the option of the purchasers be converted into our Ordinary Shares at a price of $0.65 per share, subject to a broad-based weighted average ratchet anti-dilution adjustment in the event of issuance of equity-related securities at a lower price, subject to certain exceptions. We shall have the right to redeem the principal amount and interest of the notes that have not been converted into shares, in whole or in part, between December 31 and January 31 of each year commencing December 31, 2008 or at the closing of a Transaction at a 20% premium per year, or a pro-rata portion of a year if redeemed in the event of a Transaction. The notes are secured by a floating charge on our assets, subordinated only to bank financing in an amount not to exceed $500,000.
We also issued to the purchasers of the notes warrants exercisable for 331,000 Ordinary Shares at the price per share of $0.44 (equal to the average trading price per share of the shares of IIS during the 20 trading days prior to the closing of the Exchange Agreement), until the earlier of: (i) five years from issuance, and (ii) the closing of a merger of the Company into another company in which the Company is not the surviving entity or the purchase of all or substantially all of the shares of the Company. The warrants will be exercisable for cash or on a cash-less exercise basis. In the event that within 6 months from the date of issuance of the notes, the Company raises financing from the issuance of convertible loans or notes or similar securities with terms more favorable to the purchasers thereof than those granted to the purchasers, the notes and warrants will be automatically amended to provide for such favorable terms.
D. Exchange Controls.
The Memorandum and Articles of Association of the Company do not restrict in any way the ownership of Ordinary Shares by nonresidents, except with respect to subjects of countries which are in a state of war with Israel, and neither the Memorandum and Articles of Association nor Israeli law restricts the voting rights of nonresidents. The Israeli Currency Control Law, 1978 imposes certain limitations concerning foreign currency transactions and transactions between Israeli and non-Israeli residents, which limitations may be regulated or waived by the Controller of Foreign Exchange at the Bank of Israel, through “general” and “special” permits. In May 1998, a new “general permit” was issued pursuant to which substantially all transactions in foreign currency are permitted. Any dividends or other distributions paid in respect of Ordinary Shares and any amounts payable upon the dissolution, liquidation or winding up of the affairs of a company, as well as the proceeds of any sale in Israel of the company’s securities to an Israeli resident are freely repatriable into non-Israeli currencies (including U.S. dollars) at the rate of exchange prevailing at the time of conversion, provided that any Israeli income tax owing has been paid on (or withheld from) such payments. Because exchange rates between the NIS and most foreign currencies fluctuate continuously, non-Israeli shareholders will be subject to any such currency fluctuation during the period from when such dividend is declared through the date payment is made in U.S. dollars.
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E. Taxation.
The following is a summary of the current tax structure applicable to companies in Israel which may be relevant to our shareholders and us. To the extent that the summary is based on new tax legislation yet to be judicially or administratively interpreted, we cannot be sure that the views expressed will accord with any future interpretation by the Israeli tax authorities or courts.
The discussion is not intended, and should not be taken, as legal or professional tax advice and is not exhaustive of all possible tax considerations. Accordingly, you should consult your tax advisor as to the particular tax consequences of an investment in our Ordinary Shares.
General Corporate Tax Structure
On July 24, 2002, the Israeli Knesset enacted income tax reform legislation, commonly referred to as the “2003 Tax Reform”. The 2003 Tax Reform has introduced fundamental and comprehensive changes into Israeli tax laws. Most of the legislative changes took effect on January 1, 2003. The 2003 Tax Reform has introduced a transition from a primarily territorial-based tax system to a personal-based system of taxation with respect to Israeli residents. The 2003 Tax Reform has also resulted in significant amendments to the international taxation provisions, and new provisions concerning the taxation of capital markets. Under the 2003 Tax Reform legislation the Ordinary Shares are no longer regarded and defined as “foreign traded securities” and thus certain associated Israeli tax aspects will accordingly be subject to change as discussed below.
A relatively short time after the 2003 Tax Reform, the Knesset approved on July 25, 2005, the second and third readings of the Income Tax Ordinance Amendment (No. 147 and Ad Hoc Provision) Law, 2005 (hereafter – the 2005 Amendment). The 2005 amendment was an additional update of corporate tax rates that were previously determined in the 2003 Tax Reform, and determines that the rate of corporate tax will be reduced from January 1, 2006. Consequently income not eligible for “Approved Enterprise” benefits was taxed in 2006 at the regular corporate rate of 31% and in 2007 is taxed at a regular corporate tax rate of 29%. The tax rate will be reduced in subsequent tax years as follows: in 2008 27%, in 2009 26% and in 2010 and thereafter 25%.
However, the effective tax rate payable by a company that derives income from an “Approved Enterprise” may be considerably less. We currently have no facilities which have received Approved Enterprise status.
The tax reform also substantially changed the system of taxation of capital gains. Capital gains tax is reduced to 25%, except with respect to capital gains from marketable securities, with transitional provisions for assets acquired prior to January 1, 2003. For further discussion see below “Capital Gains Tax”.
Tax Benefits Under the Law for the Encouragement of Industry (Taxes), 1969
Pursuant to the Law for the Encouragement of Industry (Taxes), 1969, also known as the Industry Encouragement Law, an Industrial Company is a company resident in Israel, if at least 90% of the income of which, in a given tax year, determined in Israeli currency (exclusive of income from some government loans, capital gains, interest and dividends), is derived from an Industrial Enterprise owned by it. An “Industrial Enterprise” is defined as an enterprise whose major activity in a given tax year is industrial production activity.
Under the Industry Encouragement Law, Industrial Companies are entitled to the following preferential corporate tax benefits:
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| | — | amortization of purchases of know-how and patents over an eight-year period for tax purposes; |
| | — | the right to elect to file under specified conditions a consolidated tax return with additional related Israeli Industrial Companies; and |
| | — | accelerated depreciation rates on equipment and buildings. |
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. We no longer qualify as an Industrial Company.
Taxation Under Inflationary Conditions
The Income Tax Law (Inflationary Adjustments), 1985, generally referred to as the Inflationary Adjustments Law, represents an attempt to overcome the problems presented to a traditional tax system by an economy undergoing rapid inflation. The Inflationary Adjustments Law is highly complex. Its features which may be material to us can be summarized as follows:
| | — | There is a special tax adjustment for the preservation of equity whereby corporate assets are classified broadly into fixed assets and non-fixed assets. Where a company’s equity, as defined in such law, exceeds the depreciated cost of fixed assets, a deduction from taxable income that takes into account the effect of the applicable annual rate of inflation on such excess is allowed up to a ceiling of 70% of taxable income in any single tax year, with the unused portion permitted to be carried forward on a linked basis. If the depreciated cost of fixed assets exceeds a company’s equity, then such excess multiplied by the applicable annual rate of inflation is added to taxable income. |
| | — | Subject to specific limitations, depreciation deductions on fixed assets and losses carried forward are adjusted for inflation based on the increase in the consumer price index (“CPI”). |
Capital Gains Tax
Capital gains tax is imposed on the disposal of capital assets by an Israeli resident, and on the disposal of such assets by a non- Israel resident if those assets are: (i) located in Israel; (ii) are shares or a right to a share in an Israeli resident corporation; or (iii) rights in a foreign corporation, the majority of whose assets is directly or indirectly, rights to assets located in Israel (with respect to the applicable portion of the capital gain). The Israeli Tax Ordinance distinguishes between “Real Gain” and the “Inflationary Surplus”. Real Gain is the excess of the total capital gain over Inflationary Surplus computed generally on the basis of the increase in the Israeli CPI between the date of purchase and the date of disposal.
The capital gain accrued by individuals on the sale of an asset purchased on or after January 1, 2003 will be taxed at the rate of up to 20%. However, if the individual shareholder is a “Controlling Shareholder” (i.e., a person who holds, directly or indirectly, alone or together with others, 10% or more of one of the Israeli resident company’s means of control at the time of sale or at any time during the preceding 12-month period) such gain will be taxed at the rate of 25%. In addition, capital gain derived by an individual claiming deduction of financing expenses in respect of such gain will be taxed at the rate of up to 25%. The real capital gain derived by corporation will be generally subject to tax at the rate of 25%. However, the real capital gain derived from the sale of securities, as defined in Section 6 of the Inflationary Adjustment Law, by a corporation, which was subject upon December 31, 2005 to the provisions of Section 6 of the Inflationary Adjustment Law, will be taxed at the corporate tax rate (29% in 2007).
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The capital gains accrued at the sale of an asset purchased prior to January 1, 2003 will be subject to tax at a blended rate. The marginal tax rate for individuals (up to 48% in 2007) and the regular corporate tax rate for corporations (29% in 2007) will be applied to the gain amount which bears the same ratio to the total gain realized as the ratio which the holding period commencing at the acquisition date and terminating on January 1, 2003 bears to the total holding period. The remainder of the gain realized will be subject to capital gains tax at the rates applicable to an asset purchased after January 1, 2003 (see aforementioned). With respect to traded securities detailed rules apply. Individual and corporate shareholders dealing in securities in Israel are taxed at the tax rates applicable to business income (in 2007 – 29% tax rate for a corporation and a marginal tax rate of up to 48% for an individual).
Notwithstanding the foregoing, if the shareholder is a non-Israeli resident, then such taxation is subject to the provisions of any applicable double tax treaty. Moreover, capital gains derived from the sale of the Ordinary Shares by a non-Israeli shareholder may be exempt under the Israeli income tax ordinance from Israeli taxation provided the following cumulative conditions are met: (i) the Shares were purchased upon or after the registration of the Ordinary Shares at the stock exchange, (ii) the seller does not have a permanent establishment in Israel to which the derived capital gain is attributed, and (iii) if the seller is a corporation, less than 25% of its means of control are held by Israeli resident shareholders. In addition, the sale of the Shares may be exempt from Israeli capital gains tax under an applicable tax treaty. Thus, the U.S.-Israel Double Tax Treaty (“the US Treaty”) exempts U.S. resident from Israeli capital gain tax in connection with such sale, provided that: (i) the U.S. resident controlled, either directly or indirectly, less than 10% of an Israeli resident company’s voting power at any time within the 12–month period preceding such sale; (ii) the seller, if being an individual, is present in Israel for a period or periods of less than 183 days during the taxable year; and (iii) the capital gain from the sale was not derived through a permanent establishment of the U.S. resident in Israel.
Either the seller, the Israeli stockbrokers or financial institution through which the sold securities are held is obliged, subject to the above mentioned exemptions, to withhold tax upon the sale of securities from the real capital gain at the rate of 25% in respect of a corporation and 20% in respect of an individual
Generally, a detailed return, including a computation of the tax due, should be submitted to the Israeli Tax Authority, within 30 days of the completion of a transaction and advanced payment amounting to the tax liability arising from the capital gain is due. At the sale of traded securities, detailed rules apply, by which,inter alia, the aforementioned detailed return, upon fulfillment of certain conditions, may not be submitted and the advanced payment should not be paid if all tax due was withheld at the source according to applicable provisions of the Israeli income tax ordinance and regulations promulgated thereunder.Capital gains arealso reportable on the annual income tax return.
Dividends
The following Israeli tax consequences shall apply in the event of actual payment of any dividends on ordinary shares.
Income from dividends in 2007 and thereafter, other than bonus shares (stock dividends), to Israeli residents who purchased our Shares will generally be subject to an income tax rate of 20% for individuals, or 25% if the dividends recipient is a Controlling Shareholder (as defined above) and will be exempt from income tax for Israeli corporations (as long as the corporation did not generate income from an approved enterprise).
Non-residents of Israel (both individuals and corporations) are subject to income tax on income accrued or derived from sources in Israel, including dividends from Israeli corporations. The distribution of dividends, other than bonus shares (stock dividends), sourced from non-Approved Enterprise income, to non-residents of Israel will generally be subject to income tax at a rate of 20% (or 25% for a shareholder that is considered a Controlling Shareholder (as described above) by way of a tax withholding, unless a lower rate is stipulated by a treaty between Israel and the shareholder’s country of residence.
Generally, under the US 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 US Treaty) will be 25%. Due to the fact that a tax rate of 25% is higher than the maximum Israeli tax rate on dividends pursuant to the 2005 Amendment, the maximum tax rate should be 20%. However, when a U.S. tax resident corporation is the recipient of the dividend, the rate on a dividend out of regular (sourced from non-Approved Enterprise income) profits may be reduced to 12.5% under the treaty, where the following conditions are met:
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| (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 tax 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 components. |
Otherwise, the usual rates as described above would apply.
In addition, if an Individual shareholder is considered a Controlling Shareholder (as defined above) at any time during the 12-month period preceding such sale, 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%.
United States Federal Income Tax Consequences
TO ENSURE COMPLIANCE WITH THE REQUIREMENTS IMPOSED BY THE INTERNAL REVENUE SERVICE, WE INFORM YOU THAT ANY TAX STATEMENT HEREIN IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY TAX-RELATED PENALTIES UNDER THE UNITED STATES INTERNAL REVENUE CODE. ANY TAX STATEMENT HEREIN WAS WRITTEN IN CONNECTION WITH THE MARKETING OR PROMOTION OF THE TRANSACTIONS OR MATTERS TO WHICH THE STATEMENT RELATES. EACH TAXPAYER SHOULD SEEK ADVICE BASED ON THE TAXPAYER’S PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.
The following is a summary of selected material U.S. Federal income tax consequences that apply to U.S. Holders (as defined below) who hold Ordinary Shares as capital assets. This summary is based on the United States Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations promulgated thereunder, judicial and administrative interpretations thereof, and the U.S.-Israel Tax Treaty, all as in effect on the date hereof and all of which are subject to change either prospectively or retroactively. This summary does not address all tax considerations that may be relevant with respect to an investment in Ordinary Shares. This summary does not account for the specific circumstances of any particular investor, such as:
| | — | certain insurance companies, |
| | — | investors liable for alternative minimum tax, |
| | — | tax exempt organizations, |
| | — | non-resident aliens of the U.S. or taxpayers whose functional currency is not the U.S. dollar, |
| | — | persons who hold the Ordinary Shares through partnerships or other pass-through entities, |
| | — | investors that actually or constructively own 10 percent or more of our voting shares, |
| | — | investors holding Ordinary Shares as part of a straddle, hedge, conversion transaction, or other integrated investment; and |
| | — | regulated investment companies. |
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This summary does not address the effect of any U.S. Federal taxation other than U.S. Federal income taxation. In addition, this summary does not include any discussion of state, local or foreign taxation.
Shareholders are urged to consult their tax advisors regarding the foreign and United States Federal, state and local tax considerations of an investment in Ordinary Shares.
For purposes of this summary, a “U.S. Holder” is a shareholder which is:
| | — | an individual who is a citizen or, for U.S. Federal income tax purposes, a resident of the United States; |
| | — | a corporation (including any entity treated as a corporation for U.S. Federal income tax purposes) created or organized in or under the laws of the United States or any political subdivision thereof; |
| | — | an estate whose income is subject to U.S. Federal income tax regardless of its source; or |
| | (a) | a court within the United States is able to exercise primary supervision over administration of the trust; |
| | (b) | one or more United States persons have the authority to control all substantial decisions of the trust; or |
| | (c) | it has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a U.S. person. |
Taxation of Dividends
The gross amount of any distributions received with respect to Ordinary Shares, including the amount of any Israeli taxes withheld therefrom, will constitute dividends under U.S. Federal income tax purposes, to the extent of our current and accumulated earnings and profits as determined for U.S. Federal income tax principles. Shareholders will be required to include this amount of dividends in gross income as ordinary income. Subject to the discussion below under the heading “Passive Foreign Investment Companies”, distributions in excess of our earnings and profits will be treated as a non taxable return of capital to the extent of a shareholder’s tax basis in the Ordinary Shares and any amount in excess of such shareholder’s tax basis, will be treated as gain from the sale of Ordinary Shares. See “Disposition of Ordinary Shares” below for the discussion on the taxation of capital gains. Dividends will not qualify for the dividends received deduction generally available to corporations under Section 243 of the Code.
Dividends that we pay in NIS, including the amount of any Israeli taxes withheld therefrom, will be included in a shareholder’s income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day such dividends are received. A U.S. Holder who receives payment in NIS and converts NIS into U.S. dollars at an exchange rate other than the rate in effect on such day may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss. U.S. Holders should consult their own tax advisors concerning the U.S. tax consequences of acquiring, holding and disposing of NIS.
66
Any Israeli withholding tax imposed on such dividends will be a foreign income tax eligible for credit against a U.S. Holder’s U.S. federal income tax liability, subject to certain limitations set out in the Code (or, alternatively, for deduction against income in determining such tax liability). The limitations set out in the Code include computational rules under which foreign tax credits allowable with respect to specific classes of income cannot exceed the U.S. federal income taxes otherwise payable with respect to each such class of income. Dividends generally will be treated as foreign source passive income or financial services income for United States foreign tax credit purposes. Foreign income taxes exceeding the credit limitation for the year of payment or accrual may be carried back for two taxable years and forward for five taxable years in order to reduce U.S. federal income taxes, subject to the credit limitation applicable in each of such years. Other restrictions on the foreign tax credit include a prohibition on the use of the credit to reduce liability for the U.S. individual and corporation alternative minimum taxes by more than 90%. A U.S. Holder will be denied a foreign tax credit with respect to Israeli income tax withheld from dividends received on the Ordinary Shares to the extent such U.S. Holder has not held the Ordinary Shares for at least 16 days of the 30-day period beginning on the date which is 15 days before the ex dividend date or to the extent such U.S. Holder is under an obligation to make related payments with respect to substantially similar or related property. Any days during which a U.S. Holder has substantially diminished its risk of loss on the Ordinary Shares are not counted toward meeting the 16-day holding period required by the statute. The rules relating to the determination of the foreign tax credit are complex, and shareholders should consult with their personal tax advisors to determine whether and to what extent they would be entitled to this credit.
Dividends received by an individual shareholder from U.S. corporations and certain qualified foreign corporations are taxed at the same rate applicable to net capital gain income. As such, the maximum rate applicable to dividend income received by an individual shareholder from a U.S. corporation and certain qualified foreign corporations has generally been reduced to 15%. However, an individual shareholder will not qualify for this lower rate if such shareholder does not hold a share of stock for more than 60 days during the 120 day period beginning 60 days before the ex-dividend date. Additionally, the reduced rate is not available for dividends to the extent that the individual shareholder is obligated to make related payments (whether pursuant to a short sale or otherwise) with respect to positions in substantially similar or related property. Special rules will apply in determining an individual shareholder’s foreign tax credit limitation in the case of dividends which qualify for the lower rate.
A foreign corporation is a “qualified foreign corporation” if it is not a foreign personal holding company, a foreign investment company or a passive foreign investment company for the taxable year of the corporation in which the dividend is paid, or the preceding taxable year and either (i) is eligible for the benefits of a comprehensive income tax treaty with the United States which the United States Treasury Department determines is satisfactory for purposes of the new provision and which includes an exchange of information program, or (ii) the stock of the foreign corporation is readily tradable on an established securities market in the United States.
The reduced rate applicable to dividend distributions shall not apply to taxable years beginning after December 31, 2008.
Dispositions of Ordinary Shares
If a shareholder sells or otherwise disposes of Ordinary Shares, such shareholder will recognize gain or loss for U.S. Federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other disposition and the adjusted tax basis of such Ordinary Shares. Subject to the discussion below under the heading “Passive Foreign Investment Companies,” such gain or loss generally will be capital gain or loss and will be long term capital gain or loss if a shareholder has held the Ordinary Shares for more than one year at the time of the sale or other disposition. In general, any gain that a shareholder recognizes on the sale or other disposition of Ordinary Shares will be U.S. source for purposes of the foreign tax credit limitation; losses, will generally be allocated against U.S. source income. Under the U.S.-Israel Treaty, gain on the disposition of Ordinary Shares may be treated as Israeli source, if the shareholder has held 10% or more of the voting power of the company at any time during the 12 months preceding the date of disposition. Deduction of capital losses is subject to certain limitations under the Code.
In the case of a cash basis U.S. Holder who receives NIS in connection with the sale or disposition of Ordinary Shares, the amount realized will be based on the U.S. dollar value of the NIS received with respect to the Ordinary Shares as determined on the settlement date of such exchange. A U.S. Holder who receives payment in NIS and converts NIS into United States dollars at a conversion rate other than the rate in effect on the settlement date may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss.
67
An accrual basis U.S. Holder may elect the same treatment required of cash basis taxpayers with respect to a sale or disposition of Ordinary Shares, provided that the election is applied consistently from year to year. Such election may not be changed without the consent of the Internal Revenue Service (the “IRS”). In the event that an accrual basis U.S. Holder does not elect to be treated as a cash basis taxpayer (pursuant to the Treasury regulations applicable to foreign currency transactions), such U.S. Holder may have a foreign currency gain or loss for U.S. federal income tax purposes because of differences between the U.S. dollar value of the currency received prevailing on the trade date and the settlement date. Any such currency gain or loss would be treated as ordinary income or loss and would be in addition to gain or loss, if any, recognized by such U.S. Holder on the sale or disposition of such Ordinary Shares.
Passive Foreign Investment Companies
For U.S. Federal income tax purposes, we will be considered a passive foreign investment company (“PFIC”) for any taxable year in which either (i) 75% or more of our gross income is passive income, or (ii) at least 50% of the average value of all of our assets for the taxable year produce or are held for the production of passive income. For this purpose, passive income includes dividends, interest, royalties, rents, annuities and the excess of gains over losses from the disposition of assets which produce passive income. If we were determined to be a PFIC for U.S. Federal income tax purposes, highly complex rules would apply to U.S. Holders owning Ordinary Shares. Accordingly, shareholders are urged to consult their tax advisors regarding the application of such rules.
Based on our current and projected income, assets and activities, we believe that we may be considered a PFIC for periods prior to the acquisition of Witech.
If we are treated as a PFIC for any taxable year, then, unless a shareholder elects either to treat such shareholder’s investment in Ordinary Shares as an investment in a “qualified electing fund” (a “QEF election”) or to “mark to market” such shareholder’s Ordinary Shares, as described below:
| | — | the shareholder would be required to allocate income recognized upon receiving certain dividends or gain recognized upon the disposition of Ordinary Shares ratably over the holding period for such Ordinary Shares; |
| | — | the amount allocated to each year during which we are considered a PFIC other than the year of the dividend payment or disposition would be subject to tax at the highest individual or corporate tax rate, as the case may be, and an interest charge would be imposed with respect to the resulting tax liability allocated to each such year; |
| | — | gain recognized upon the disposition of Ordinary Shares would be taxable as ordinary income; and |
| | — | the shareholder would be required to make an annual return on IRS Form 8621 regarding distributions received with respect to ordinary shares and any gain realized on such shareholder’s Ordinary Shares. |
If a shareholder makes either a timely QEF election or a timely mark to market election in respect of such shareholder’s Ordinary Shares, the shareholder would not be subject to the rules described above. If a shareholder makes a timely QEF election, the shareholder would be required to include in such shareholder’s income for each taxable year such shareholder’s pro rata share of our ordinary earnings as ordinary income and such shareholder’s pro rata share of our net capital gain as long term capital gain, whether or not such amounts are actually distributed to the shareholder. A shareholder would not be eligible to make a QEF election unless we comply with certain applicable information reporting requirements.
68
Alternatively, if a shareholder elects to “mark to market” such shareholder’s Ordinary Shares, the shareholder will generally include in income any excess of the fair market value of the Ordinary Shares at the close of each tax year over such shareholder’s adjusted basis in the Ordinary Shares. If the fair market value of the Ordinary Shares had depreciated below the shareholder’s adjusted basis at the close of the tax year, the shareholder may generally deduct the excess of the adjusted basis of the Ordinary Shares over its fair market value at that time. However, such deductions generally would be limited to the net mark to market gains, if any, that the shareholder included in income with respect to such Ordinary Shares in prior years. Income recognized and deductions allowed under the mark to market provisions, as well as any gain or loss on the disposition of Ordinary Shares with respect to which the mark to market election is made, is treated as ordinary income or loss. For these purposes, stock will be treated as “marketable stock” for which a “mark-to-market” election can be made if (i) it is a class of stock which trades on a national securities exchange that is registered with the Securities and Exchange Commission or on a national market system established pursuant to Section 11A of the Securities Exchange Act of 1934 and (ii) which is regularly traded on such exchanges or markets, other than in de minimis quantities, on at least 15 days during each calendar quarter. However, it is unclear under current law whether shares being traded in the over-the-counter market qualify as “marketable stock” for these purposes. Shareholders are urged to consult their own tax advisors concerning their ability to make a “mark-to-market” election.
Backup Withholding and Information Reporting
Payments in respect of Ordinary Shares may be subject to information reporting to the IRS and U.S. backup withholding tax. Under the backup withholding rules, a shareholder may be subject to backup withholding at the rate of 28%. Backup withholding will not apply, however, if a shareholder (i) is a corporation or falls within certain exempt categories, and demonstrates the fact when so required, or (ii) furnishes a correct taxpayer identification number and makes any other required certification. Any amount withheld under these rules may be credited against a shareholder’s federal income tax liability.
Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited against a U.S. holder’s U.S. tax liability, and a U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS.
Any U.S. holder who holds 10% or more in vote or value of our Ordinary Shares will be subject to certain additional United States information reporting requirements.
U.S. Gift and Estate Tax
An individual U.S. holder of Ordinary Shares will be subject to U.S. gift and estate taxes with respect to Ordinary Shares in the same manner and to the same extent as with respect to other types of personal property.
F. Dividends and Paying Agents.
Not applicable.
G. Statements by Experts.
Kesselman & Kesselman, an Israeli independent registered public accounting firm, a member of PricewaterhouseCoopers, have audited our consolidated financial statements for the years ended December 31, 2004, 2005 and 2006. We have included our financial statements in this Shell Company Report on Form 20-F in reliance on Kesselman & Kesselman’s report, given on their authority as experts in accounting and auditing.
H. Documents on Display.
The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and, accordingly, it files reports and other information with the Securities and Exchange Commission (the “SEC”). Individuals can inspect and copy those reports and other information at the public reference facilities maintained by the SEC at 100 F. Street, N.E., Room 1580, Washington, D.C. 20549 and at the SEC’s regional offices. For more information on its public reference facilities, you can call the SEC at 1-800-SEC-0330. You can obtain copies of such material at prescribed rates from the Public Reference Section of the SEC. Individuals can also obtain reports and other information from the Internet site maintained by the SEC at http://www.sec.gov.
69
In addition, documents referred to in this Form 20-F filing are available, at no cost, upon request from Robi Hartman, Chief Executive Officer, I.I.S. Intelligent Information Systems Limited, 33 Jabotinsky Street, Ramat Gan, Israel (Tel. 972-3-751-0007).
I. Subsidiary Information.
Not applicable.
Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the financial position of the Company is routinely subjected to a variety of risks, including market risk associated with interest rate movements and currency rate movements on non-U.S. dollar denominated assets and liabilities. The Company regularly assesses these risks and has established policies and business practices to protect against the adverse effects of these and other potential exposures. As a result, the Company does not anticipate material losses in these areas.
For purposes of specific risk analysis, the Company uses sensitivity analysis to determine the impacts that market risk exposures may have on the fair values of the Company’s financial instruments. The financial instruments included in the sensitivity analysis consist of all of the Company’s cash and cash equivalents.
To perform sensitivity analysis, the Company assesses the risk of loss in fair values from the impact of hypothetical changes in interest rates and foreign currency exchange rates on market sensitive instruments. The market values for interest risk are computed based on the present value of future cash flows as impacted by the changes in rates attributable to the market risk being measured. The discount rates used for the present value computations were selected based on market interest rates in effect at December 31, 2006. The market values for foreign exchange risk are computed based on spot rates in effect at December 31, 2006. The market values that result from these computations are compared to the market values of these financial instruments at September 30, 2007. The differences in this comparison are the hypothetical gains or losses associated with each type of risk.
The results of the sensitivity analysis are as follows:
Interest Rate Risk: A 10% decrease or a 10% increase in the levels of interest rates with all other variables held constant would not materially affect the earnings, cash flow and fair value of the Company’s near-term financial condition or results of operations.
Foreign Currency Exchange Rate Risk: A 10% movement in levels of foreign currency exchange rates against the U.S. dollar with all other variables held constant would not materially affect the earnings, cash flow and fair value of the Company’s near-term financial condition or results of operations.
Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
70
Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
Item 15. CONTROLS AND PROCEDURES
Not applicable.
Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Not applicable.
Item 16B. CODE OF ETHICS
Not applicable.
Item 16C. AUDIT FEES AND SERVICES
Not applicable.
Item 16D. EXEMPTIONS FROM THE LISTING REQUIREMENTS AND STANDARDS FOR AUDIT COMMITTEE
Not applicable.
Item 16E PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATES AND PURCHASERS
Not applicable.
PART III
Item 17. FINANCIAL STATEMENTS
Not applicable.
Item 18. FINANCIAL STATEMENTS
Attached. See Item 19(a).
71
Item 19. FINANCIAL STATEMENTS AND EXHIBITS
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| (a) | Index to Financial Statements of the Company: | Page |
| |
| | Report of Independent Auditors on |
| | Financial Statements of the Company | F-3 |
| |
| | Balance Sheets at December 31, 2006 and 2005 | F-4 |
| |
| | Statements of Operations for the years ended |
| | December 31, 2006, 2005 and 2004 | F-5 |
| |
| | Statements of Changes in Shareholders' Equity (capital deficiency) |
| | for the years ended December 31, 2006, 2005 and 2004 | F-6 |
| |
| | Statements of Cash Flows for the years ended |
| | December 31, 2006, 2005 and 2004 | F-7 |
| |
| | Notes to the Financial Statements | F-8 - F-20 |
| |
| (b) | Index to Condensed Financial Statements of the Company: | |
| |
| | Condensed balance sheets - September 30, 2007 and December 31, 2006 | F-23 |
| |
| | Condensed statements of operations for the periods of nine months |
| | ended September 30, 2007 and 2006 | F-24 |
| |
| | Condensed Statements of cash flows for the periods of nine months |
| | ended September 30, 2007 and 2006 | F-25 |
| |
| | Notes to financial statements | F-26 - F-32 |
| |
| (c) | Index to Audited Financial Statements of Witech |
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| | Report of Independent Registered Public Accounting Firm | F-35 |
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| | Balance sheets at December 31, 2006 and 2005 | F-36 |
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| | Statements of operations for the years ended December 31, 2006 and 2005 | F-37 |
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| | Statements of changes in shareholders' equity (capital deficiency) for the years |
| | ended December 31, 2006 and 2005 | F-38 |
| |
| | Statements of cash flows for the years ended December 31, 2006 and 2005 | F-39 |
| |
| (d) | Index to Condensed Consolidated Unaudited Financial Statements of Witech: | F-60 |
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| | Condensed balance sheets - September 30, 2007 and December 31, 2006 | F-61 |
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| | Condensed statements of operations for nine month periods ended September 30, 2007 |
| | and 2006 | F-62 |
| |
| | Condensed statements of cash flows for the nine month periods ended September 30, 2007 |
| | and 2006 | F-63 |
| |
| | Notes to financial statements | F-64 - F-69 |
72
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
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SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Shell Company Report on its behalf.
| | I.I.S. INTELLIGENT INFORMATION
SYSTEMS LIMITED
(Registrant)
By: /s/ Robi Hartman
——————————————
Robi Hartman, Chief Executive Officer and Acting Chief
Financial Officer (Principal Executive Officer and
Principal Financial and Accounting Officer) |
Date: January 10, 2008
74
Index to Exhibits:
Exhibit No.:
| 1.1 | | Memorandum of Association of the Company.* |
| 1.2 | | Articles of Association of the Company, Amended and Restated as of November 19, 2000. ** |
| 2.1 | | Securities Purchase Agreement between the Company and the Purchasers listed therein dated as of November 12, 2007. |
| 4.1 | | Summary English Translation from the original Hebrew of a Lease Agreement entered into between the Company and West End Technology Investments Ltd., for office space located at 33 Jabotinsky Street, Ramat Gan, Israel, dated January 30, 2001. *** |
| 4.2 | | Share Purchase Agreement between LSI Logic Corporation, StoreAge Networking Technologies Ltd. and the Purchasers listed therein dated as of October 25, 2006. |
| 4.4 | | Share Exchange Agreement between the Company, Witech Communications Ltd., and the Shareholders of Witech Communications Ltd. dated November 5, 2007, and the amendment dated January 2, 2008. |
| 4.5 | | Indemnification Agreement between the Company, Witech Communications Ltd., the Shareholders of Witech Communications Ltd. and Charles Moss as the Shareholder Representative dated November 5, 2007. |
| 4.6 | | 2007 Stock Option Plan |
| 4.7 | | Form of Indemnification Agreement with directors and officers |
| 8.1 | | List of significant subsidiaries of the Company. |
| 99.1 | | Consent of Independent Auditors |
* Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement No. 33-62862 dated August 10, 1993.
** Incorporated by reference to the corresponding exhibit to the Company’s Annual Report on Form 20-F for the year ended December 31, 2000.
*** Incorporated by reference to the corresponding exhibit to the Company’s Annual Report on Form 20-F for the year ended December 31, 2001.
75
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
TABLE OF CONTENTS
The amounts are stated in U.S. dollars ($) in thousands.
F - 2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders of
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
We have audited the balance sheets of I.I.S. Intelligent Information Systems Limited (the “Company”) as of December 31, 2006 and 2005 and the statements of operations, of changes in shareholders’ equity (capital deficiency) and of cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company’s Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above, present fairly, in all material respects, the financial position of the Company as of December 31, 2006 and 2005 and the results of its operations and cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
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| Tel-Aviv, Israel | Kesselman & Kesselman |
| August 29, 2007 | Certified Public Accountant (Isr.) |
| | A member of PricewaterhouseCoopers |
| | International Limited |
F - 3
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
BALANCE SHEETS
(U.S. dollars in thousands)
| December 31
|
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| 2006
| 2005
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| A s s e t s | | | | | | | | |
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| Current assets: | | |
| Cash and cash equivalents | | | $ | 4,705 | | $ | 41 | |
| Accounts receivable - related parties | | | | 5 | | | | |
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| | | |
| T o t a l current assets | | | | 4,710 | | | 41 | |
|
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| |
| | | |
| Funds in respect of employee rights upon retirement | | | | 3 | | | 2 | |
|
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| | | |
| T o t a l assets | | | $ | 4,713 | | $ | 43 | |
|
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| | | |
| Liabilities and shareholders' equity | | |
| (net of capital deficiency) | | |
| | | |
| Current liabilities - | | |
| accounts payable and accruals | | | $ | 261 | | $ | 232 | |
|
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| | | |
| Long-term liabilities - | | |
| liability for employee rights upon retirement | | | | 5 | | | 3 | |
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| T o t a l liabilities | | | | 266 | | | 235 | |
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| Commitments and contingent liabilities, note 4 | | |
| | | |
| Shareholders' equity (capital deficiency): | | |
| Ordinary shares of NIS 0.003 par value at | | |
| December 31, 2006 and 2005: | | |
| Authorized - 16,666,667 shares; | | |
| Issued and outstanding - 11,576,539 shares | | | | 55 | | | 55 | |
| Additional paid-in capital | | | | 41,417 | | | 41,417 | |
| Accumulated deficit | | | | (37,025 | ) | | (41,664 | ) |
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| T o t a l shareholders' equity (capital deficiency) | | | | 4,447 | | | (192 | ) |
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| T o t a l liabilities and shareholders' equity | | |
| (net of capital deficiency) | | | $ | 4,713 | | $ | 43 | |
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| —————————————— | —————————————— |
| Robi Hartman | Aharon Jacobowitz |
| Chairman of the Board, | Director |
| Chief Executive Officer | |
| and Chief Financial Officer | |
The accompanying notes are an integral part of the financial statements.
F - 4
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
STATEMENTS OF OPERATIONS
(U.S. dollars in thousands, except share and per share data)
| Year ended December 31
|
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| 2006
| 2005
| 2004
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| General and administrative expenses | | | $ | (91 | ) | $ | (103 | ) | $ | (200 | ) |
| Capital gain from disposal of investment | | | | 4,713 | | | | | | | |
| Financial income (expenses)- net | | | | 17 | | | (3 | ) | | (4 | ) |
|
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| Net income (loss) | | | $ | 4,639 | | $ | (106 | ) | $ | (204 | ) |
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| Net income (loss) per share of ordinary shares - | | |
| Basic and diluted | | | $ | 0.40 | | $ | (0.01 | ) | $ | (0.02 | ) |
|
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| Weighted average number of ordinary shares used in | | |
| computing income (loss) per ordinary shares | | |
| (in thousands) - | | |
| Basic and diluted | | | | 11,577 | | | 11,577 | | | 11,577 | |
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The accompanying notes are an integral part of the financial statements.
F - 5
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
STATEMENTS OF SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
(U.S dollars in thousands, except share data)
| Ordinary shares
| | | |
|---|
| Number of
shares
| Amount
| Additional
paid-in capital
| Accumulated
deficit
| Total shareholders'
equity (capital
deficiency)
|
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| Balance as of January 1, 2004 | | | | 11,576,539 | | $ | 55 | | $ | 41,417 | | $ | (41,354 | ) | $ | 118 | |
| | | |
| Change during 2004 - | | |
| Net loss | | | | | | | | | | | | | (204 | ) | | (204 | ) |
|
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| | | |
| Balance as of December 31, 2004 | | | | 11,576,539 | | | 55 | | | 41,417 | | | (41,558 | ) | | (86 | ) |
| | | |
| Change during 2005 - | | |
| Net loss | | | | | | | | | | | | | (106 | ) | | (106 | ) |
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| | | |
| Balance as of December 31, 2005 | | | | 11,576,539 | | | 55 | | | 41,417 | | | (41,664 | ) | | (192 | ) |
| | | |
| Change during 2006 - | | |
| Net income | | | | | | | | | | | | | 4,639 | | | 4,639 | |
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| Balance as of December 31, 2006 | | | | 11,576,539 | | $ | 55 | | $ | 41,417 | | $ | (37,025 | ) | $ | 4,447 | |
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The accompanying notes are an integral part of the financial statements.
F - 6
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
STATEMENTS OF CASH FLOWS
(U.S dollars in thousands)
| Year ended December 31
|
|---|
| 2006
| 2005
| 2004
|
|---|
| | | | |
|---|
| | | |
|---|
| | | |
|---|
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | |
| Net income (loss) | | | $ | 4,639 | | $ | (106 | ) | $ | (204 | ) |
| Adjustments required to reconcile net income (loss) to net cash | | |
| used in operating activities: | | |
| Write-off of fixed assets | | | | | | | | | | 9 | |
| Changes in accrued liability for employee rights | | |
| upon retirement | | | | 2 | | | 1 | | | (7 | ) |
| Loss (gain) on amounts funded in respect of employee | | |
| rights upon retirement | | | | (1 | ) | | | | | 3 | |
| Capital gain from disposal of investment | | | | (4,713 | ) | | | | | | |
| Changes in operating assets and liabilities: | | |
| Decrease (increase) in accounts receivable | | | | (5 | ) | | 10 | | | 130 | |
| Increase (decrease) in accounts payable and accruals | | | | 29 | | | 43 | | | (19 | ) |
|
| |
| |
| |
| Net cash used in operating activities | | | | (49 | ) | | (52 | ) | | (88 | ) |
|
| |
| |
| |
| | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | |
| | | |
| Proceeds from disposal of investment | | | | 4,713 | | | | | | | |
| Proceeds from a restricted deposit | | | | | | | | | | 48 | |
|
| |
| |
| |
| | | |
| Net cash provided by investing activities | | | | 4,713 | | | -,- | | | 48 | |
|
| |
| |
| |
| | | |
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | | 4,664 | | | (52 | ) | | (40 | ) |
| | | |
| BALANCE OF CASH AND CASH EQUIVALENTS | | |
| AT BEGINNING OF YEAR | | | | 41 | | | 93 | | | 133 | |
|
| |
| |
| |
| | | |
| BALANCE OF CASH AND CASH EQUIVALENTS | | |
| AT END OF YEAR | | | $ | 4,705 | | $ | 41 | | $ | 93 | |
|
| |
| |
| |
The accompanying notes are an integral part of the consolidated financial statements.
F - 7
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS
| NOTE 1 | – | SIGNIFICANT ACCOUNTING POLICIES: |
| | Through December 2002, I.I.S. Intelligent Information Systems Limited. (“the Company”) designed, developed and provided enterprise storage solutions for the Internet Small Computer Systems Interface (“iSCSI”). The Company’s products were customized software implementation projects for the development and integration of iSCSI interface into existing storage devices and a family of comprehensive IP storage testing tools, for iSCSI protocol analysis of SAN devices. Due to the slow down associated with the iSCSI revenues resulting from the delays in the adoption of the iSCSI protocol, the Company decided to cease its iSCSI operations in December 2002. |
| | As of December 31, 2003, the Company is no longer engaged in any operational business activity other than managing its holdings in StoreAge Networking Technologies Ltd. (“StoreAge”) and Enargis Storage Solutions Ltd. (“Enargis”) (see below). |
| | On July 29, 2004, the Company’s shareholders resolved to place the Company in a voluntary liquidation. |
| | On April 17, 2007, the Company’s general meeting of shareholders duly approved the termination of the Company’s voluntary liquidation. |
| | Since the voluntary liquidation was not considered imminent, these financial statements are presented on a going-concern basis. |
| | The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). |
| | The currency of the primary economic environment in which the operations of the Company are conducted is the U.S. dollar (“dollar”; “$”). Most of the Company’s expenses are incurred in dollars. The Company’s deposits are mostly in dollars. Thus, the functional currency of the Company is the dollar. |
| | Transactions and balances originally denominated in dollars are presented at their original amounts. Balances in non-dollar currencies are translated into dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. Non-dollar transactions reflected in the statements of operations are translated into dollars using exchange rates at the transaction dates or average rates. Currency transaction gains or losses are carried to financial income or expenses, as appropriate. |
F - 8
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
| NOTE 1 | – | SIGNIFICANT ACCOUNTING POLICIES (continued): |
| | 4) | Use of estimates in preparation of financial statements |
| | The preparation of financial statements in conformity with generally accepted accounting policies (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. |
| | The Company considers all highly liquid investments, which are comprised of short-term bank deposits with an original maturity date of up to three months) that are not restricted as to withdrawal or use, to be cash equivalents. |
| | The Company accounts for income taxes in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. Deferred taxes are determined utilizing the asset and liability method, based on the estimated future tax effects of differences between the financial accounting and tax bases of assets and liabilities under the applicable tax laws. Deferred tax balances are computed using the tax rates expected to be in effect at time when these differences reverse. |
| | Valuation allowances in respect of the deferred tax assets are provided when it is more likely than not that all or a portion of the deferred income tax assets will not be realized. The Company has provided a full valuation allowance with respect to its deferred tax assets. |
| | d. | Investments in associated companies |
| | Investments in associated companies are investments in companies held to the extent of 20% or more which the Company can exercise significant influence over operating and financial policy. |
| | As the Company has not guaranteed obligations and not otherwise committed to provide further financial support for any of the associated companies, the Company discontinued applying the equity method when the investment account was reduced to zero. |
F - 9
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
| NOTE 1 | – | SIGNIFICANT ACCOUNTING POLICIES(continued): |
| | e. | Net income (loss) per share |
| | Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during the year. |
| | Diluted net income (loss) per share are computed by dividing net income (loss) by the weighted average number of shares outstanding during the year, taking into account the potential dilution that could occur upon the exercise of options granted under employee stock option plans, using the treasury stock method. In the years ended December 31, 2006, 2005 and 2004 all outstanding stock options have been excluded from the calculation of the diluted net income (loss) per share since their effect was anti-dilutive. |
| | The diluted loss per share does not include options of the Company in the amount of 372,671, 406,550 and 406,550 for the years 2006, 2005 and 2004, respectively. |
| | f. | Accounting for stock based compensation |
| | Prior to January 1, 2006, the Company accounted for employee share-based compensation under the intrinsic value model in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. Under APB 25, compensation expense is based on the difference, if any, on the date of the grant of a stock option, between the fair value of the shares underlying the option and the exercise price of the option. The Company did not disclose pro forma data, as required by SFAS 123, “Accounting for Stock-Based Compensation”(“SFAS 123”), as amended by FAS 148, assuming it had accounted for employee share option grants using the fair value-based method defined in SFAS 123, since the effect on net loss and net loss per share assuming it had applied the fair value recognition provisions is immaterial. |
| | The Company adopted SFAS No. 123 (Revised 2004), “Shared-Based Payment” (“SFAS 123R”) as of January 1, 2006, using the modified prospective application transition method, as permitted by SFAS 123R. Under such transition method, the Company’s financial statements for periods prior to the effective date of SFAS 123R have not been restated. The adoption of SFAS 123R, for the year ended December 31, 2006 had no effect on the financial statements of the Company. |
| | g. | Concentration of credit risks |
| | Financial instruments that subject the Company to credit risk consist primarily of cash and cash equivalents, which are deposited in major financial institutions. |
F - 10
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
| NOTE 1 | – | SIGNIFICANT ACCOUNTING POLICIES (continued): |
| | h. | Newly issued and recently adopted accounting pronouncements: |
| | In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes –an interpretation of FAS 109". This financial interpretation clarifies the accounting for uncertainty in income taxes, and prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on various related matters such as de-recognition, interest and penalties and disclosure. The provisions of FIN 48 are effective for fiscal years beginning January 1, 2007. The Company is currently evaluating the impact of adopting FIN 48 on its financial statements and results of operations. |
| | In September 2006, the FASB issued FAS 157, “Fair Value Measurements”. This standard establishes a framework for measuring fair value and expands related disclosure requirements; however, it does not require any new fair value measurement. The provisions of SFAS 157 are effective for fiscal years beginning January 1, 2008. The Company is currently evaluating the impact of adopting of SFAS 157 on its financial statements and results of operations. |
| | In September 2006, the SEC issued Staff Accounting Bulletin (SAB) 108, which expresses the Staff’s views regarding the process of quantifying financial statement misstatements. The bulletin was effective as of the year beginning January 1, 2006. The implementation of this bulletin is not expected to have an impact on the Company’s financial statements. |
| | In February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This standard permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The provisions of SFAS 159 are effective for fiscal years beginning January 1, 2008. The Company is currently evaluating the impact of adopting SFAS 159 on its financial position, cash flows and results of operations. The Company does not expect the impact to have a material effect on its financial position, cash flows and results of operations. |
| | i. | Impairment in value of long-lived assets |
| | Under FAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”(“FAS 144”), the Company reviews long-lived assets, to be held and used, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Under FAS 144, if the sum of the expected future cash flows (undiscounted and without interest charges) of the long-lived assets is less than the carrying amount of such assets, an impairment loss would be recognized, and the assets are written down to their estimated fair values. |
| | During the fiscal year 2004, the Company abandoned some of its office furniture and equipment. Accordingly, the Company recorded an impairment charge in the amount of $9. |
F - 11
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
| NOTE 2 | – | CERTAIN TRANSACTIONS AND INVESTMENTS |
| | On March 31, 2003, the Company transferred iSCSI activities to a newly formed company –Enargis. Following such transfer, the Company held 25% in Enargis. The carrying amount of the investment in Enargis following the transaction amounted to approximately $20,000, equaling the carrying amount of assets transferred, and was subsequently reduced to zero during the year ended December 31, 2003 due to the Company’s share in Enargis losses. |
| | On May 15, 2007, the Company, together with all the other shareholders of Enargis, transferred all of its 25% holdings in Enargis to West End Technology Investments Ltd. a company controlled by the CEO and Chairman of the Board) for no consideration. |
| | As of January 1, 2004 and through October 2005, the Company held 38.9% of StoreAge. StoreAge is an Israeli company, which is engaged in the development and marketing of products based on its SAN Virtualization technology. |
| | In October 2005, all classes of preferred shares of StoreAge and outstanding bridge loans were converted into ordinary shares of StoreAge. Following this conversion the Company held 13% of the issued and ordinary shares of StoreAge. |
| | The carrying amount of the investment in StoreAge was reduced to zero during the year ended December 31, 2002 due to the Company’s share in StoreAge’s losses. |
| | In March 2006, the Company’s holdings in Storage were diluted to 12.68% due to share issuance by StoreAge to a third party. |
| | In October 2006 all the shareholders of StoreAge, including the Company, signed a share purchase agreement with LSI Logic Corporation (“LSI”) for the sale of all issued and outstanding shares of StoreAge to LSI. The Company’s share of the proceeds received upon the closing of the transaction in November 2006, was $5,416,692.of which $703,793 is held in escrow to satisfy certain possible future claims for a period of 18 months following the closing. |
| | The Company recognized the cash portion received in the amount of $4,712,899 as a gain on the sale. |
F - 12
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
| NOTE 2 | – | CERTAIN TRANSACTIONS AND INVESTMENTS (continued): |
| | c. | Memorandum Of Agreement (“MOA”) with Witech Communications Ltd. (“Witech”) |
| | On February 20, 2007, the Company signed a MOA with Witech with respect to a contemplated merger between the Company and Witech, under which the Company is to acquire full control and ownership of Witech, in consideration of 50% of the Company’s shares. In addition, the Company is to provide certain loans to Witech (see below). The closing of the merger with Witech is subject to numerous terms and conditions, among others: satisfaction, in the sole discretion of the Company, the Company’s due diligence requirements, including technical, financial and legal diligence, the signing of mutually acceptable Final Agreements containing additional provisions customary in transactions of this type, obtaining of a ruling from the Israeli Tax Authority confirming that the Merger will be tax-free subject to reasonable conditions set forth therein, the mutual execution of employment agreements between the Company and the senior management of Witech who will become the Company’s employees, the termination of the Company’s voluntary liquidation proceedings, the approval of the Company’s Board of Directors and general meeting of shareholders. In addition and without derogating from the aforesaid, the Company shall not be obligated to consummate the contemplated transaction if at any time before the consummation of the merger of Witech with and into the Company there is any effect, change, event, circumstance or condition which, when considered with all other effects, changes, events, circumstances or conditions, has or would reasonably be expected to have a material adverse effect on the business, assets (including intangible assets), prospects (including due to the loss or resignation, or notice of loss or resignation, of key employees of Witech and its subsidiary), results of operations or financial condition of Witech and its subsidiary taken together as a whole. If the Tax Ruling is subject to unreasonable conditions, the Company and Witech will negotiate in good faith an alternative structure for the transaction. |
| | From April 2007 through August 2007, according to the MOA, the Company provided loans to Witech in the total amount of $3,200,000. The above mentioned loans bear an annual interest rate of LIBOR plus 5%, whilst in the event that the merger is not consummated, the interest on the loans will be increased to LIBOR plus 10% (or the maximum rate permitted by law, whichever is lower) retroactively to the date it was provided to Witech. |
| | If the merger is not consummated, Witech may have difficulty in repaying the loans provided by the Company and, if Witech is in default, the Company may not be able to recoup its loans through exercise of the charge on Witech’s assets. |
F - 13
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
| NOTE 3 | – | EMPLOYEE RIGHTS UPON RETIREMENT |
| | Israeli law generally requires payment of severance pay and/or pensions upon dismissal of an employee or upon termination of employment in certain other circumstances. The severance pay liabilities are fully provided for in these financial statements, as if it was payable at each balance sheet date on an undiscounted basis, based upon the number of years of service and the most recent monthly salary of the Company’s employee. |
| NOTE 4 | – | COMMITMENTS AND CONTINGENT LIABILITIES: |
| | a. | Effective as of April 1, 2003, all of the directors of the Company agreed to suspend their compensation until the Company either received a settlement from an ongoing lawsuit which at that time was in mediation or received proceeds from the sale/exit of StoreAge or Enargis or the raising of additional financial resources. Following settlement of the lawsuit, the directors of the Company did not take this compensation and agreed that this compensation would be paid only from receipt of proceeds from the sale/exit of its holdings in StoreAge or Enargis or the raising of additional financial resources. The amount of compensation due but unpaid to the Company’s officers and directors as of December 31, 2006 according to this arrangement is approximately $172,000. This amount was accrued in the financial statements in “accounts payable and accruals” and was paid in May 2007. |
| | b. | At the Company’s general meeting of shareholders held in July 2004, Messrs. Hartman and Jacobowitz were appointed as joint liquidators and the shareholders approved a fee of $1,000 per month (plus VAT, if applicable), to each of them commencing from the appointment of the liquidation and until distribution of all proceeds of the liquidation to the Company’s shareholders. The amount of compensation due but unpaid to the Company’s liquidators as of December 31, 2006 according to this arrangement is approximately $58,000. This amount was accrued in the financial statement in “accounts payable and accruals” and was paid in May 2007. |
| | c. | In addition to (b) above, the Company’s shareholders approved that (i) Mr. Jacobowitz will receive an additional bonus as follows: $25,000 (plus VAT, if applicable) if the gross proceeds received by the Company’s shareholders as a result of the liquidation of the net assets of the Company (hereinafter – the “Gross Proceeds”) are above $0.50 per share, $50,000 (plus VAT, if applicable) if the Gross Proceeds are above $1.00 per share and $75,000 (plus VAT, if applicable) if the Gross Proceeds are above $1.30 per share, and (ii) Mr. Hartman will receive an additional bonus of $100,000 (plus VAT, if applicable) if the Gross Proceeds are above $1.30 per share. |
| | Since the Company terminated its voluntary liquidation, the Company’s audit committee and board have approved on June 17, 2007, subject to shareholder approval, that these bonuses will be calculated and paid based on the share price of the Company’s shares in the twenty trading days following the approval of this resolution by the general meeting of the shareholders of the Company (if such approval is given). |
| | The Company has not included any provision for the additional bonus to the liquidators in its financial statements. |
F - 14
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
| NOTE 4 | – | COMMITMENTS AND CONTINGENT LIABILITIES(continued): |
| | d. | In February 2001, a portion of the Company’s office space located in Ramat Gan, Israel was leased from West End Technology Investments Ltd. (“West End”), a company that is owned by Robi Hartman, the Company’s Chief Executive Officer and Chairman of the Board. As of April 1, 2003, this lease was assumed by Enargis which sublet 35% of the premises to the Company at an annual cost of approximately $12,000. As of December 31, 2005, an amount of $14.5 thousands was postponed until receipts of proceeds from sale of StoreAge or Enargis, and was paid in May 2007, following the termination of the Company voluntary liquidation proceedings. The financial statements include provisions for the aforesaid postponed rent payments. As of November 2005, the sub-lease was transferred back to West End. Following termination of the voluntary liquidation proceedings in April 2007, the Company increased its sublease from 35% to 50% of the premises. The annual cost increased, proportionally, based on the original agreement, with a cap of $3,000 per month (on an average) and will be valid until the later of (1) the merger with Witech or (2) December 31, 2007. |
| | e. | A claim was filed against NetWiz Ltd. (a former subsidiary of the Company) in respect of a breach of a lease agreement. As part of the agreement for the sale of NetWiz, the Company agreed to assume the liabilities in respect of the above claim. |
| | On June 8, 2004, the Company reached a settlement agreement with the plaintiff in terms of which the Company accepted to pay a final and conclusive payment of $39,000 to the plaintiff, in consideration for the mutual waiver of all claims between the parties. The Company recorded a provision in the amount of $39,000 in respect of this claim in the year ended December 31, 2003. |
F - 15
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
| NOTE 5 | – | SHAREHOLDERS’ EQUITY: |
| | The Company’s shares are traded on the OTC Bulletin Board in the United States. |
| | The ordinary shares confer upon the holders the right to receive notices of, participate and vote in the general meetings of the Company, the right to receive dividends, if and when declared by the board of directors and the right to receive, upon liquidation, a pro rata share of any remaining assets. |
| | Under the Company’s 1993 Stock Option Plan (“the Plan”), options may be granted to officers, directors, employees and consultants of the Company. Pursuant to the Plan, the Company reserved for issuance 1,192,929 ordinary shares. The exercise price of the options granted under the plan may not be less than 85% of the fair market value of the Company’s ordinary shares on the date of grant. The options vested primarily up to 3-4 years. |
| | No options were exercised during the years ended December 31, 2006, 2005 and 2004. The Plan expired in 2003. The options of the liquidators of the Company expired during 2006; all other outstanding options issued under the Plan have either been expired or forfeited in previous years. |
| | Following is a summary of the status of the Company’s stock option plan and related information: |
| | Year ended December 31
|
|---|
| | 2006
| 2005
| 2004
|
|---|
| | Amount of
options
| Weighted
average
exercise price
| Amount of
options
| Weighted
average
exercise price
| Amount
of options
| Weighted
average
exercise price
|
|---|
| | | | | | | |
|---|
| | | | | | | |
|---|
| Outstanding at the beginning of | | |
| the year | | | | 406,550 | | $ | 3.63 | | | 406,550 | | $ | 3.63 | | | 781,762 | | $ | 4.67 | |
| | | |
| Forfeited and cancelled | | | | (406,550 | ) | $ | 3.63 | | | | | | | | | (375,212 | ) | $ | 5.81 | |
| |
| | | |
| | | |
| | | |
| Outstanding at the end of the year | | | | -;- | | | | | | 406,550 | | $ | 3.63 | | | 406,550 | | $ | 3.63 | |
| |
| | | |
| | | |
| | | |
| Exercisable at the end of the year | | | | -;- | | | | | | 406,550 | | $ | 3.63 | | | 406,550 | | $ | 3.63 | |
| |
| | | |
| | | |
| | | |
| | All of the outstanding and exercisable options at December 31, 2005 and 2004 expired in November 2006. |
| | The intrinsic value of the outstanding and exercisable options at December 31, 2005 and 2004 is zero. |
F - 16
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
| | a) | Measurement of results for tax purposes under the Income Tax (Inflationary Adjustments) Law, 1985 (the“inflationary adjustments law”) |
| | Under the inflationary adjustments law, results for tax purposes are measured in real terms, having regard to the changes in the Israeli consumer price index (“CPI”). The Company is taxed under this law. |
| | The income of the Company is taxed at the statutory rate. In July 2004, an amendment to the Income Tax Ordinance was enacted. One of the provisions of this amendment is that the corporate tax rate is to be gradually reduced from 36%to 30%, in the following manner: the rate for 2004 will be 35%, in 2005 – 34%, in 2006 – 32%, and in 2007 and thereafter – 30%. In August 2005, a further amendment (No. 147) was published, which makes a further revision to the corporate tax rates prescribed by Amendment No. 140. As a result of the aforementioned amendments, the corporate tax rates for 2004 and thereafter are as follows: 2004 – 35%, 2005 – 34%, 2006 – 31%, 2007 – 29%, 2008 – 27%, 2009 – 26% and for 2010 and thereafter – 25%. |
| | Capital gains are taxed at a reduced rate of 25% of the capital gains derived after January 1, 2003 and at the regular corporate tax rate on the gains derived through the aforementioned date. |
| | The deferred income taxes are composed as follows: |
| | December 31
|
|---|
| | 2006
| 2005
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Provided for: | | | | | | | | |
| Operating loss carryforward | | | $ | 10,308 | | $ | 9,397 | |
| Capital loss carryforward | | | | 9,390 | | | 8,628 | |
| In respect of investments | | | | 5 | | | 1,060 | |
| |
| |
| |
| | | |
| Total | | | | 19,703 | | | 19,085 | |
| Less - valuation allowance | | | | (19,703 | ) | | (19,085 | ) |
| |
| |
| |
| | | |
| | | | | -;- | | | -;- | |
| |
| |
| |
| | The deferred tax assets are computed at the tax rates of 25% as of December 31, 2006 and 2005. |
F - 17
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
| | d) | Taxes included in the statement of operations in year ended December 31, 2004 are in respect of previous years. |
| | As of December 31, 2006, the Company has carryforward tax losses in the amount of approximately $41 million which may be carried forward and offset against taxable income in the future for an indefinite period (December 31, 2005 – $38 million). |
| | In addition, as of December 31, 2006, the Company has accumulated carryforward capital losses in a total amount of approximately $38 million, which may be offset against future capital gain for tax purposes (December 31, 2005 – $35 million). |
| | Under the inflationary adjustments law (see a. above), carryforward losses are linked to the Israeli CPI. |
| | Tax assessments for the Company are considered final through the year ended December 31, 2001. |
| | g) | Reconciliation of the theoretical tax expenses to actual tax expenses: |
| | Year ended December 31
|
|---|
| | 2006
| 2005
| 2004
|
|---|
| | U.S. dollar in thousands
|
|---|
| | | | |
|---|
| | | | |
|---|
| Income (loss) before taxes, as reported in the | | | | | | | | | | | |
| statements of operations | | | $ | 4,639 | | $ | (106 | ) | $ | (211 | ) |
| |
| |
| |
| |
| Theoretical income on taxes (tax benefit) at the | | |
| statutory rate (31%, 34%, 35% for the years ended | | |
| December 31, 2006, 2005 and 2004, respectively) | | | $ | 1,438 | | $ | (36 | ) | $ | (74 | ) |
| Utilization of tax losses carryforward | | | | (1,375 | ) | | 14 | | | 104 | |
| Difference between the basis of measurement of | | |
| loss reported for tax purposes and the basis of | | |
| measurement of loss for financial reporting | | |
| purposes | | | | (66 | ) | | 23 | | | 21 | |
| Special allowance, net of non deductible expenses | | | | | | | (1 | ) | | (50 | ) |
| Other | | | | 3 | | | | | | (1 | ) |
| |
| |
| |
| |
| | | | | -;- | | | -;- | | | -,- | |
| |
| |
| |
| |
F - 18
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
| NOTE 7 | – | SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION: |
| | | December 31
|
|---|
| | | 2006
| 2005
|
|---|
| | | U.S. dollar in thousands
|
|---|
| | | | |
|---|
| | | | |
|---|
| a. | Accounts payable and accruals: | | | | | | | | |
| | Payroll and related expenses | | | $ | 1 | | $ | 1 | |
| | Accrued expenses | | | | 254 | | | 226 | |
| | Other | | | | 6 | | | 5 | |
| | |
| |
| |
| | | | | $ | 261 | | $ | 232 | |
| | |
| |
| |
| | | Year ended December 31
|
|---|
| | | 2006
| 2005
| 2004
|
|---|
| | | U.S. dollar in thousands
|
|---|
| | | | | |
|---|
| | | | | |
|---|
| b. | General and administrative expenses: | | | | | | | | | | | |
| | Liquidators fees | | | $ | 24 | | $ | 24 | | $ | 10 | |
| | Directors fees | | | | | | | | | | 71 | |
| | Payroll and related expenses | | | | 12 | | | 12 | | | 32 | |
| | Rent and office maintenance | | | | 19 | | | 16 | | | 19 | |
| | Professional fees | | | | 7 | | | 23 | | | 42 | |
| | Capital loss from write-off of fixed assets | | | | | | | | | | 9 | |
| | Other | | | | 29 | | | 28 | | | 17 | |
| | |
| |
| |
| |
| | | | | $ | 91 | | $ | 103 | | $ | 200 | |
| | |
| |
| |
| |
| | | | |
| c. | Financial income (expenses) - net: | | |
| | Interest income | | | $ | 19 | | $ | 1 | | $ | 3 | |
| | Other | | | | (2 | ) | | (4 | ) | | (7 | ) |
| | |
| |
| |
| |
| | | | | $ | 17 | | $ | (3 | ) | $ | (4 | ) |
| | |
| |
| |
| |
F - 19
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)
| NOTE 8 | – | RELATED PARTIES – TRANSACTIONS AND BALANCES: |
| | a. | Transactions with related parties: |
| | Year ended December 31
|
|---|
| | 2006
| 2005
| 2004
|
|---|
| | U.S. dollar in thousands
|
|---|
| | | | |
|---|
| | | | |
|---|
| Rent and office maintenance (1) | | | $ | 19 | | $ | 16 | | $ | 19 | |
| |
| |
| |
| |
| Administrative expenses (2) | | | | -,- | | $ | 8 | | $ | 16 | |
| |
| |
| |
| |
| | (2) To Storage, in respect of services received until April 2005. |
| | b. | Related party balances: |
| | December 31
|
|---|
| | 2006
| 2005
|
|---|
| | U.S. dollar in thousands
|
|---|
| | | |
|---|
| | | |
|---|
| Accounts receivable | | | $ | 5 | | | -,- | |
| |
| |
| |
| | c. | Under the Company’s 1993 Stock Option Plan (see note 4b), the Company granted the CEO of the Company, on November 30, 2000, 356,550 options with exercise price of $3.63 as follows: |
| | 55,600 of the options had no vesting terms, the remaining options vested annually in four equal batches, from March 22, 2001 until March 21, 2004. All options expired on November 30, 2006. |
F - 20
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli Corporation)
INTERIM FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2007
(Unaudited)
F - 21
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli Corporation)
INTERIM FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2007
(Unaudited)
TABLE OF CONTENTS
The amounts are stated in U.S dollars, ($) in thousands.
F - 22
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli Corporation)
CONDENSED BALANCE SHEETS
(U.S dollars in thousands)
| September 30,
2007
| December 31,
2006
|
|---|
| (Unaudited)
| (Audited)
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| A s s e t s | | | | | | | | |
| CURRENT ASSETS: | | |
| Cash and cash equivalents | | | $ | 881 | | $ | 4,705 | |
| Accounts receivable - other | | | | 71 | | | 5 | |
|
| |
| |
| T o t a l current assets | | | | 952 | | | 4,710 | |
|
| |
| |
| FIXED ASSETS | | | | 1 | |
| LONG-TERM ASSETS: | | |
| Loans (see note 2) | | | | 3,566 | |
| Funds in respect of employee rights upon retirement | | | | 5 | | | 3 | |
|
| |
| |
| T o t a l long-term assets | | | | 3,571 | | | 3 | |
|
| |
| |
| | | | $ | 4,524 | | $ | 4,713 | |
|
| |
| |
| Liabilities and shareholders' equity | | |
| CURRENT LIABILITIES - | | |
| accounts payable and accruals | | | $ | 267 | | $ | 261 | |
|
| |
| |
| LONG-TERM LIABILITIES: | | |
| Provision for uncertain tax position (see note 1d) | | | | 14 | | | | |
| Liability for employee rights upon retirement | | | | 5 | | | 5 | |
|
| |
| |
| T o t a l long-term liabilities | | | | 19 | | | 5 | |
|
| |
| |
| T o t a l liabilities | | | | 286 | | | 266 | |
|
| |
| |
| CONTINGENT LIABILITY (note 3) | | |
| SHAREHOLDERS' EQUITY: | | |
| Ordinary shares of NIS 0.003 par value at | | |
| December 31, 2006 and September 30 2007: | | |
| authorized - 16,666,667 shares; | | |
| issued and outstanding - 11,576,539 shares | | | | 55 | | | 55 | |
| Additional paid in capital | | | | 41,417 | | | 41,417 | |
| Accumulated deficit | | | | (37,234 | ) | | (37,025 | ) |
|
| |
| |
| T o t a l shareholders' equity | | | | 4,238 | | | 4,447 | |
|
| |
| |
| | | | $ | 4,524 | | $ | 4,713 | |
|
| |
| |
The accompanying notes are an integral part of these condensed financial statements.
F - 23
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli Corporation)
CONDENSED STATEMENTS OF OPERATIONS
(U.S dollars in thousands, except share and per share data)
| Nine Months
Ended September 30,
|
|---|
| 2007
| 2006
|
|---|
| ( U n a u d i t e d )
|
|---|
| | | |
|---|
| | |
|---|
| INCOME FROM MANAGEMENT FEE | | | $ | 33 | | | | |
| GENERAL AND ADMINISTRATIVE EXPENSES | | | | (479 | ) | $ | (63 | ) |
| FINANCIAL INCOME - net | | | | 251 | | | 8 | |
|
| |
| |
| LOSS BEFORE TAX ON INCOME | | | | (195 | ) | | (55 | ) |
| TAX ON INCOME | | | | 10 | | | | |
|
| |
| |
| NET LOSS FOR THE PERIOD | | | $ | (205 | ) | $ | (55 | ) |
|
| |
| |
| | | |
| NET LOSS PER SHARE- | | |
| basic and diluted: | | | $ | (0.02 | ) | $ | (0.01 | ) |
|
| |
| |
| | | |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - | | |
| basic and diluted | | | | 11,576,539 | | | 11,576,539 | |
|
| |
| |
The accompanying notes are an integral part of these condensed financial statements.
F - 24
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli Corporation)
CONDENSED STATEMENTS OF CASH FLOWS
(U.S dollars in thousands)
| Nine Months
Ended September 30,
|
|---|
| 2007
| 2006
|
|---|
| ( U n a u d i t e d )
|
|---|
| | | |
|---|
| | |
|---|
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
| Net loss for the period | | | $ | (205 | ) | $ | (55 | ) |
| Adjustments required to reconcile net loss to net cash used in | | |
| operating activities: | | |
| Accumulated financial income on loans | | | | (166 | ) | | | |
| Changes in accrued liability for employee rights upon retirement | | | | | | | 1 | |
| Gain on amounts funded in respect of employee rights upon | | |
| Retirement | | | | (2 | ) | | | |
| Taxes on income | | | | 10 | | | | |
| Changes in operating assets and liabilities: | | |
| Increase in accounts receivable | | | | (66 | ) | | (6 | ) |
| Increase in accounts payable and accruals | | | | 6 | | | 22 | |
|
| |
| |
| Net cash used in operating activities | | | | (423 | ) | | (38 | ) |
|
| |
| |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | |
| Purchase of fixed assets | | | | (1 | ) | | | |
| Loans granted | | | | (3,400 | ) | | | |
|
| | | |
| Net cash used in investing activities | | | | (3,401 | ) | | | |
|
| | | |
| | | |
| DECREASE IN CASH AND CASH EQUIVALENTS | | | | (3,824 | ) | | (38 | ) |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | | | | 4,705 | | | 41 | |
|
| |
| |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | | | $ | 881 | | $ | 3 | |
|
| |
| |
The accompanying notes are an integral part of these condensed financial statements.
F - 25
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli Corporation)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES:
| | Through December 2002, I.I.S. Intelligent Information Systems Limited. (“the Company”) designed, developed and provided enterprise storage solutions for the Internet Small Computer Systems Interface (“iSCSI”). Due to the slow down associated with the iSCSI revenues resulting from the delays in the adoption of the iSCSI protocol, the Company decided to cease its iSCSI operations in December 2002. |
| | On July 29, 2004, the Company’s shareholders resolved to place the Company in a voluntary liquidation. |
| | On February 20, 2007, the Company signed a memorandum of agreement (“MOA”) with Witech Communications Ltd. (“WTC”) with respect to a contemplated merger between the Company and WTC, under which the Company is to acquire full control and ownership of WTC, in consideration of 50% of the Company’s shares. |
| | On April 17, 2007, the Company’s general meeting of shareholders duly approved the termination of the Company’s voluntary liquidation. |
| | On November 5, 2007, the Company signed a Share Exchange Agreement (the “Exchange Agreement”) with WTC shareholders for the acquisition of all the outstanding shares of WTC in exchange for the issuance of Company shares, representing approximately 50% of the Company’s shares. |
| | On December 20, 2007, the general shareholders meeting of IIS approved the Exchange Agreement. The closing of the transaction was on January 2, 2008. For additional information see note 5a. |
| | As of September 30, 2007, the Company is no longer engaged in any operational business other than providing managing services to WTC for a fixed fee amounting to $6,000 per month. |
| | The accompanying unaudited condensed financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and Article 10 of Regulation S-X under the Securities Exchange Act of 1934. These condensed financial statements and notes thereto are unaudited and should be read in conjunction with the Company’s audited financial statements included in the Company’s Annual Report on Form 20-F for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on August 31, 2007. |
| | In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2007, are not necessarily indicative of the results that may be expected for the year ended December 31, 2007. |
F - 26
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli Corporation)
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES(continued):
| | Basic and diluted loss per share was computed by dividing net loss by the weighted average number of shares outstanding during the period. |
| | d. | Accounting for uncertainty in income taxes: |
| | Effective January 1, 2007, the Company adopted FIN 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FAS 109", which was issued in June 2006. FIN 48 clarifies the accounting for uncertainty in income taxes, and prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company’s accounting policy, pursuant to the adoption of FIN 48, is to classify interest and penalties recognized in the financial statements relating to uncertain tax positions, under provision for income taxes. Changes in judgment as to recognition or measurement of tax positions can materially affect the estimate of the effective tax rate and consequently, affect the net loss of the Company. |
| | As a result of the implementation of FIN 48, the Company recognized $4 thousands as a long-term liability for unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007 balance of accumulated deficit. During the nine months ended September 30, 2007, the Company recorded an increase of its unrecognized tax benefits of $10 thousands. Both amounts would result in a reduction of the Company’s effective tax rate, if recognized. |
| | As of the date of adoption, the tax years that remain subject to examination by tax authorities are between years 2002 and 2006. |
| | e. | Recently issued accounting pronouncements: |
| | In September 2006, the FASB issued FAS 157, “Fair Value Measurements.” This standard establishes a framework for measuring fair value and expands related disclosure requirements; however, it does not require any new fair value measurement. As applicable to the Company, this standard will be effective as of the year beginning January 1, 2008. The Company is currently evaluating the impact that the adoption of FAS 157 would have on its financial statements. |
| | In February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This standard permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. As applicable to the Company, this standard will be effective as of the year beginning January 1, 2008. The Company is currently evaluating the impact that the adoption of FAS 159 would have on its financial statements. |
F - 27
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli Corporation)
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTE 2 – LOANS:
| | a. | On April 23, 2007 and May 28, 2007, the Company signed loan agreements with WTC to grant an aggregate principal amount of $3,000,000 to WTC. The loans bear an annual interest rate of LIBOR plus 5%, whilst in the event that the Exchange Agreement with WTC is not consummated, the interest on the loan will be increased to LIBOR plus 10% retroactively to the date it was granted. The maturity date was determined as the earlier of (i) 90 days following the termination of the exchange agreement (ii) January 20, 2008. |
| | In connection with these loans, WTC issued promissory notes to the Company. According to these promissory notes, the Company has the right at any time following an event of default, as defined in the agreement, or in the event that the exchange agreement is not consummated, to convert any unpaid amount into fully-paid up and duly issued shares of WTC at a pre-conversion fully-diluted valuation of $ 5,000,000. |
| | The amount of interest included in financial income on behalf of these loans represents an interest of LIBOR plus 10%. |
| | b. | On August 8, 2007 and on September 9, 2007, the Company signed two loan agreements with WTC to grant principal amount of $200,000 each to WTC. The loans bear an interest rate of 1.5% per month. According to those agreements, the maturity date is December 16, 2007, whilst after the balance sheet date the maturity date was lengthened by additional three months. In addition, for every month or part thereof that the principal amount for each loan (including interest) or part thereof shall be outstanding, the Company will be entitled to newly issued ordinary shares of WTC equal to 0.0259% of the issued and outstanding share capital of WTC, on a fully diluted basis. According to the alternative settlement of the above mentioned shares as stipulated in the loan agreements, due to the fact that the exchange agreement was closed prior to issuance of the shares, the amount of shares of the Company that the shareholders of WTC received in such exchange agreement has been reduced by 3,000 shares for every month or part thereof that the principal amount (including interest) or part thereof has been outstanding. |
| | The loans are secured by a pledge over the shares of WTC held by certain shareholders. |
| | The fair value of WTC’s shares to which the Company is entitled has been included in these financial statements as financial income based on the price of the Company’s shares at September 30, 2007, according to the conversion rate ratio established in the exchange agreement. |
NOTE 3 – CONTINGENT LIABILITY
| | At the Company’s general meeting of shareholders held in July 2004, Messrs. Hartman and Jacobowitz were appointed as joint liquidators and the shareholders approved a fee of $1,000 per month (plus VAT, if applicable), to each of them commencing from the appointment of the liquidation and until distribution of all proceeds of the liquidation to the Company’s shareholders. In addition, the Company’s shareholders approved that (i) Mr. Jacobowitz will receive an additional bonus as follows: $25,000 (plus VAT, if applicable) if the gross proceeds received by the Company’s shareholders as a result of the liquidation of the net assets of the Company (hereinafter – the “Gross Proceeds”) are above $0.50 per share, $50,000 (plus VAT, if applicable) if the Gross Proceeds are above $1.00 per share and $75,000 (plus VAT, if applicable) if the Gross Proceeds are above $1.30 per share, and (ii) Mr. Hartman will receive an additional bonus of $100,000 (plus VAT, if applicable) if the Gross Proceeds are above $1.30 per share. |
F - 28
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli Corporation)
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTE 3 – CONTINGENT LIABILITY (continued):
| | Since the Company terminated its voluntary liquidation, the Company’s audit committee and board of directors have approved on June 17, 2007, subject to shareholder approval, that these bonuses will be calculated and paid based on the average closing share price of the Company’s shares in the twenty trading days following the approval of this resolution by the general meeting of the shareholders. On December 20, 2007 the general shareholders meeting approved the abovementioned bonuses. |
| | The Company has not provided for the additional bonus to the liquidators in its financial statements as, at balance sheet date, it was contingent upon conditions as detailed above. |
| | Based on the share price from December 20, 2007 until the date of issuance these condensed financial statements, no bonus would be paid. |
NOTE 4 – RELATED PARTIES – TRANSACTIONS:
| | a. | Sale of the investment in Enargis |
| | On March 31, 2003, the Company transferred iSCSI activities to a newly formed company –Enargis. Following such transfer, the Company held 25% in Enargis with the remaining shares held by the Company’s Chief Executive Officer (“CEO”) and Chairman of the Board. On May 23, 2007, the Company transferred all of its 25% holdings in Enargis, together with all the other shareholders of Enargis, to West End Technology Investments Ltd. (“West End”), a company owned by the CEO and Chairman of the Board, for no consideration. The carrying amount of the investment in Enargis at the transaction date was zero. |
| | b. | Rent agreement between the Company and West End |
| | In February 2001, a portion of the Company office space located in Ramat Gan, Israel was leased from West End. As of April 1, 2003, this lease was assumed by Enargis which sublet 35% of the premises to us at an annual cost of approximately $12,000 which was reduced by 50% to $6,000 per annum with effect from August 2004, following our entry into voluntary liquidation proceedings in July 2004. The other 50%, $6,000, was postponed to until receipts of proceeds from the sale of StoreAge or Enargis. These amounts were paid only in May 2007 following termination of our voluntary liquidation proceedings. As of November 2005, the Company became a direct tenant of West End. Following termination of the Company’s voluntary liquidation proceedings in April 2007, the rent increased from 35% to 50% of the premises and annual cost according to the original agreement, amounting to $1,450 per month. |
| | c. | As to Consulting Agreement with West End- refer to Note 5f. |
NOTE 5 – SUBSEQUENT EVENTS:
| | On December 20, 2007, the Company’s general shareholders meeting approved an Exchange Agreement with WTC and its shareholders for the acquisition of all the outstanding shares of WTC in exchange for the issuance of 11,522,229 shares of the Company to the shareholders of WTC, representing approximately 50% of the issued and outstanding shares of the Company less those shares due to the Company by virtue of the loan agreement between the Company and WTC (see also note 2b). Following the transaction, WTC will become a wholly owned subsidiary of the Company. According to the agreement, the Company will grant stock options to the senior management and shareholders of WTC to purchase an aggregate of 2,300,000 shares of the Company at an exercise price equal to the average trading share price during the twenty (20) trading days prior to the Closing (0.44$), vesting in eight (8) semi- annual installments as long as each such executive continues to be employed by the Company. It is intended that these options will be issued according to the capital gain track, stipulated by Section 102 of the Israeli Income Tax Ordinance. |
F - 29
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli Corporation)
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTE 5 – SUBSEQUENT EVENTS (continued):
| | Pursuant to terms thereof, the Company is not allowed to claim, as an expense for tax purposes, the amounts credited to employees as a benefit, including amounts recorded as salary benefits in the Company’s accounts, in respect of options granted to employees under the plan – with the exception of the work-income benefit component, if any, determined on the grant date. |
| | In addition, according to the agreement , the Company will increase the shares reserved for issuance to directors, employees, consultants and service providers of the Company and its subsidiaries pursuant to its incentive stock option plans by an additional 1,000,000 shares so that the total amount of shares reserved for issuance pursuant to such plan will be 3,300,000. In addition, the Company will issue to all registered shareholders of the Company as of November 9, 2007 (the “record date”) warrants to purchase an aggregate of 4,600,000 Ordinary Shares of the Company, on a pro-rata basis according to the percentage holding of each such shareholder in the issued and outstanding share capital of the Company on such record date . These warrants will be exercisable until the earlier of (i) five years from the date of issuance, and (ii) the closing of a Transaction. A “Transaction” means each of (i) merger, acquisition or reorganization of IIS with one or more other entities in which IIS is not the surviving entity, or (ii) a sale of all or substantially all of the assets or shares of IIS. The exercise price of each warrant shall be the average trading price per share of the Company’s Ordinary Shares during the twenty trading days prior to the Closing (0.44$). These warrants will be non-transferable and non-exercisable until all applicable Israeli and United States securities laws and regulations have been complied with in connection with the warrants and the underlying shares, including without limitation, that a registration statement covering the underlying shares is declared effective by the United States Securities and Exchange Commission. |
| | The closing of the Exchange Agreement was subject to the Company shareholders’ approval and certain additional customary closing conditions. The closing of the transaction was on January 2, 2008. |
| | On December 20, 2007, the Company’s general meeting of shareholders approved that the compensation of any director of the Company who is not anemployee, consultant or service provider to the Company or any of its subsidiaries, shall be $12,000 per annum. All directors will be granted options to purchase 15,000 ordinary shares of the Company, per annum as long as such person acts as a director of the Company. These compensations will be granted retroactively for the period from April 17, 2007. |
| | The Company also granted to each of the two external directors of the Company options to purchase 45,000 ordinary shares of the Company. The options shall vest annually in equal shares over three years following the grant date. |
F - 30
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli Corporation)
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTE 5 – SUBSEQUENT EVENTS(continued):
| | The exercise price of the above options shall be equal to the average closing price of the Company’s shares on the last 20 trading days prior to December 20, 2007 (0.44$). |
| | The Company has included a provision for the cash compensation in these financial statements. |
| | As to options granted to the CEO and Chairman of the Board, see f. below. |
| | c. | Issuance of convertible notes and warrants |
| | On November 15, 2007, the Company announced that it has signed definitive agreements with private investors (the “purchasers”) for the issuance of convertible notes in the principal amount of $1,655,000, out of which $827,500 was invested in November 2007 and the remaining 50% was invested on January 7, 2008. The principal amount of the notes will accrue an annual interest rate of 8%. The principal amount and interest will be repaid in 12 equal quarterly installments commencing 36 months from issuance. Unpaid principal and interest may at the option of the purchasers be converted into ordinary shares at a price of $0.65 per share, subject to certain conditions. The Company shall have the right to redeem the principal amount and interest of the notes that have not been converted into shares, in whole or in part, between December 31 and January 31 of each year commencing December 31, 2008 or at the closing of a Transaction (which is defined as either the merger of the Company into another company or the purchase of all shares of the Company) at a 20% premium per year, or a pro-rata portion of a year if redeemed in the event of a Transaction. The notes are secured by a floating charge on the assets of the Company, subordinated only to bank financing in an amount not to exceed $500,000. |
| | The Company also issued to the purchasers of the notes warrants exercisable for 331,000 ordinary shares at the price per share equal to the average trading share price of the Company during the 20 trading days prior to the closing of the Exchange Agreement (0.44$), until the earlier of: (i) five years from issuance, and (ii) the closing of a Transaction as defined above. |
| | On October 7, 2007 and on November 5, 2007, the Company signed loan agreements with WTC to grant an aggregate amount of $1,200,000 to WTC, at the same terms as the loans referred in note 2b. |
| | e. | Increase of Registered Share Capital |
| | On December 20, 2007, the Company’s general meeting of shareholders approved theincrease of the registered share capital of the Company by NIS 100,000 consisting of 33,333,334 Ordinary Shares of NIS 0.003 par value each, so that following such increase the registered share capital of the Company shall consist of NIS 150,000 divided into 50,000,000 Ordinary Shares of NIS 0.003 par value each. |
| | f. | Consulting Agreement with West End |
| | On May 15, 2007 and November 5, 2007 the audit committee and the board of directors approved, subject to shareholders approval that was given on December 20, 2007 an agreement with West End. According to the agreement the CEO and Chairman of the board will provide to the Company consulting services for a monthly fee of NIS 60,000 (approximately $15,000). The effective date of the agreement is April 17, 2007. |
F - 31
I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli Corporation)
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
NOTE 5 – SUBSEQUENT EVENTS(continued):
| | Further approved on the same general meeting of shareholders to grant the CEO and Chairman of the board options to purchase 15,000 Ordinary Shares of the Company, per annum for each year in which he serves as a director of the Company, commencing April 17, 2007. The exercise price of such options shall be equal to the average closing share price on the last 20 trading days prior to December 20, 2007 (0.44$). |
F - 32
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
F - 33
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2006
TABLE OF CONTENTS
The amounts are stated in U.S. dollars ($) in thousands.
F - 34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders of
WITECH COMMUNICATIONS LTD
We have audited the consolidated balance sheets of Witech Communications Ltd (the “Company”) and its subsidiary as of December 31, 2006 and 2005 and the related consolidated statements of operations, of changes in shareholders’ equity (capital deficiency) and of cash flows for each of the two years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company’s Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the financial position of the Company and its subsidiary as of December 31, 2006 and 2005 and the consolidated results of their operations and cash flows for each of the two years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has net losses for the period from inception (February 1, 2004) through December 31, 2006 of $2,746 thousand, as well as negative cash flow from operating activities. Presently the Company does not have sufficient cash resources to meet its requirements in the twelve months following January 10, 2008. These reasons raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| |
|---|
| |
|---|
| |
|---|
| |
|---|
| |
|---|
| Tel-Aviv, Israel | Kesselman & Kesselman |
| January 10, 2008 | Certified Public Accountant (Isr.) |
| | A member of PricewaterhouseCoopers |
| | International Limited |
| |
F - 35
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands)
| December 31,
|
|---|
| 2006
| 2005
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| A s s e t s | | | | | | | | |
| CURRENT ASSETS: | | |
| Cash and cash equivalents | | | $ | 31 | | $ | 20 | |
| Restricted bank deposit | | | | 31 | |
| Accounts receivable | | | | 101 | | | 110 | |
|
| |
| |
| T o t a l current assets | | | | 163 | | | 130 | |
|
| |
| |
| FUNDS IN RESPECT OF EMPLOYEE RIGHTS UPON RETIREMENT | | | | 43 | | | 15 | |
| FIXED ASSETS, net | | | | 757 | | | 143 | |
|
| |
| |
| T o t a l assets | | | $ | 963 | | $ | 288 | |
|
| |
| |
| | | |
| Liabilities and shareholders' equity | | |
| (net of capital deficiency) | | |
| CURRENT LIABILITIES: | | |
| Credit from banks and current maturities of long term loans | | | $ | 469 | | $ | 21 | |
| Accounts payable and accruals: | | |
| Trade payables | | | | 92 | | | 23 | |
| Other | | | | 475 | | | 56 | |
|
| |
| |
| T o t a l current liabilities | | | | 1,036 | | | 100 | |
|
| |
| |
| LONG-TERM LIABILITIES: | | |
| Loans (net of current maturities): | | |
| Bank loans | | | | 137 | | | | |
| Other loans and convertible loans | | | | 801 | | | 90 | |
| Warrants issued to a bank | | | | 131 | | | | |
| Liability for employee rights upon retirement | | | | 67 | | | 28 | |
|
| |
| |
| T o t a l long-term liabilities | | | | 1,136 | | | 118 | |
|
| |
| |
| T o t a l liabilities | | | | 2,172 | | | 218 | |
|
| |
| |
| COMMITMENTS, see note 5 | | |
| SHAREHOLDERS' EQUITY (CAPITAL | | |
| DEFICIENCY): | | |
| Ordinary shares of NIS 0.1 par value at | | |
| December 31, 2006 and 2005: | | |
| authorized - 500,000 shares; | | |
| issued and outstanding 25,000 shares and 2,000 shares, | | |
| respectively | | | | 1 | | | * | |
| Additional paid-in capital | | | | 1,536 | | | 800 | |
| Accumulated deficit | | | | (2,746 | ) | | (730 | ) |
|
| |
| |
| T o t a l shareholders' equity (capital deficiency) | | | $ | (1,209 | ) | $ | 70 | |
|
| |
| |
| T o t a l liabilities and shareholders' equity | | |
| (net of capital deficiency) | | | $ | 963 | | $ | 288 | |
|
| |
| |
——————————————
Charles Moss
Chairman of the Board
and Chief Executive Officer | ——————————————
Yifat Zommer
Chief Financial Officer |
* Represents an amount of less than $1,000.
The accompanying notes are an integral part of the financial statements.
F - 36
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. dollars in thousands, except share and per share data)
| Year ended December 31,
|
|---|
| 2006
| 2005
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| REVENUES | | | $ | 272 | | $ | 25 | |
| COST OF REVENUES | | | | 740 | | | 57 | |
|
| |
| |
| GROSS LOSS | | | | (468 | ) | | (32 | ) |
| RESEARCH AND DEVELOPMENT EXPENSES, net | | | | 407 | | | 200 | |
| SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | | | | 820 | | | 208 | |
|
| |
| |
| OPERATING LOSS | | | | (1,695 | ) | | (440 | ) |
| FINANCIAL EXPENSES, net | | | | 316 | | | 14 | |
|
| |
| |
| LOSS BEFORE TAXES ON INCOME | | | | (2,011 | ) | | (454 | ) |
| TAXES ON INCOME | | | | (5 | ) | | | |
|
| |
| |
| NET LOSS | | | $ | (2,016 | ) | $ | (454 | ) |
|
| |
| |
| | | |
| NET LOSS PER SHARE - | | |
| basic and diluted | | | $ | (105.4 | ) | $ | (29.4 | ) |
|
| |
| |
| WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES | | |
| USED IN COMPUTING LOSS PER | | |
| ORDINARY SHARES- | | |
| basic and diluted | | | | 19,125 | | | 15,421 | |
|
| |
| |
| | |
The accompanying notes are an integral part of the financial statements.
F - 37
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
(U.S dollars in thousands, except share data)
| Ordinary shares
| Additional
paid-in
capital
| Accumulated
deficit
| Total
shareholders'
equity (capital
deficiency)
|
|---|
| Number of
shares**
| Amount
|
|---|
| | | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| Balance as of January 1, 2005 | | | | 2,000 | | | * | | $ | 230 | | $ | (276 | ) | $ | (46 | ) |
| | | |
| Changes during 2005: | | |
| Issuance of share capital | | | | | | | * | | | 570 | | | | | | 570 | |
| Net loss | | | | | | | | | | | | | (454 | ) | | (454 | ) |
|
| |
| |
| |
| |
| |
| | | |
| Balance as of December 31, 2005 | | | | 2,000 | | | * | | | 800 | | | (730 | ) | | 70 | |
| | | |
| Changes during 2006: | | |
| Stock based compensation | | | | | | | | | | 233 | | | | | | 233 | |
| Stock split | | | | 18,000 | | $ | 1 | | | (1 | ) | | | | | | |
| Shares issued to be held by the Company | | | | 5,000 | | | | | | | | | | | | | |
| Issuance of share capital | | | | | | | * | | | 418 | | | | | | 418 | |
| Conversion of a loan into shares | | | | | | | | | | 86 | | | | | | 86 | |
| Net loss | | | | | | | | | | | | | (2,016 | ) | | (2,016 | ) |
|
| |
| |
| |
| |
| |
| | | |
| Balance as of December 31, 2006 | | | | 25,000 | | $ | 1 | | $ | 1,536 | | $ | (2,746 | ) | $ | (1,209 | ) |
|
| |
| |
| |
| |
| |
| | | | | |
| * | Represents an amount of less than $1,000. |
| ** | Including shares issued to the Company, for no consideration, in the amount of 720 shares and 3,362 shares as of January 1, 2005 and December 31, 2006, respectively, see note 6. |
The accompanying notes are an integral part of the financial statements.
F - 38
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S dollars in thousands)
| Year ended December 31,
|
|---|
| 2006
| 2005
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
| Net loss | | | $ | (2,016 | ) | $ | (454 | ) |
| Adjustments required to reconcile net loss to net cash used | | |
| in operating activities: | | |
| Depreciation | | | | 197 | | | 32 | |
| Changes in accrued liability for employee rights | | |
| upon retirement | | | | 39 | | | 27 | |
| Gain on amounts funded in respect of employee | | |
| rights upon retirement | | | | (7 | ) | | (2 | ) |
| Share based compensation | | | | 233 | | | | |
| Accrued interest in respect of loans received | | | | 229 | | | * | |
| Changes in operating assets and liabilities: | | |
| Decrease (increase) in accounts receivable | | | | 9 | | | (99 | ) |
| Increase in accounts payable and accruals | | | | 497 | | | 31 | |
|
| |
| |
| Net cash used in operating activities | | | | (819 | ) | | (465 | ) |
|
| |
| |
| | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | |
| Purchase of fixed assets | | | | (827 | ) | | (156 | ) |
| Investment grants relating to fixed assets | | | | 16 | | | 24 | |
| Investment in a restricted bank deposit | | | | (31 | ) |
| Amounts funded in respect of employee rights upon | | |
| Retirement | | | | (21 | ) | | (12 | ) |
|
| |
| |
| Net cash used in investing activities | | | | (863 | ) | | (144 | ) |
|
| |
| |
| | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | |
| Short-term credit from banks - net | | | | 43 | | | (33 | ) |
| Long term loans received from a bank and warrants issued | | |
| to a bank | | | | 400 | | | | |
| Long term convertible loans received from others | | | | 156 | | | 90 | |
| Long term loans received from others | | | | 685 | | | | |
| Issuance of share capital | | | | 409 | | | 570 | |
|
| |
| |
| Net cash provided by financing activities | | | | 1,693 | | | 627 | |
|
| |
| |
| INCREASE IN CASH AND CASH | | |
| EQUIVALENTS | | | | 11 | | | 18 | |
| | | |
| BALANCE OF CASH AND CASH EQUIVALENTS | | |
| AT BEGINNING OF YEAR | | | | 20 | | | 2 | |
|
| |
| |
| BALANCE OF CASH AND CASH EQUIVALENTS | | |
| AT END OF YEAR | | | $ | 31 | | $ | 20 | |
|
| |
| |
| | | |
| Supplementary information on financing | | |
| activities not involving cash flows: | | |
| Conversion of a loan into ordinary shares | | | $ | 86 | | | | |
|
| | | |
| Issuance of shares to an employee as a settlement of a | | |
| liability | | | $ | 9 | | | | |
|
| | | |
| | |
* Represents an amount of less than $1,000.
The accompanying notes are an integral part of the consolidated financial statements.
F - 39
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES:
| | Witech Communications Ltd. (the “Company”) was established in Israel in 2004. The Company operates in one operating segment – development and manufacture of wireless video technology, and provides wireless video solutions for diverse commercial applications system. The system, marketed currently captures dynamic videos, for installation on roller coasters and other thrill rides in amusement parks. The revenue of the Company is derived from the sale of CDs and other media products to roller coasters riders, which were filmed by the Company’s systems. The Company and its subsidiary (the “Group”) has signed contracts with amusement parks according to which it was granted the right to operate the systems in the said parks and it entitled to a percentage of revenue from the sale of CDs. The sales in the US, which represent the majority of the company’s sales, are done through a wholly owned subsidiary, CDRide Corp. (“CDRide”) which was established in June 2005 and registered in the state of Delaware |
| | On February 20, 2007, the Company signed a Memorandum Of Agreement (“MOA”) with I.I.S Intelligent Information Systems Limited (“IIS”) with respect to a contemplated merger between the Company and IIS, under which IIS is to acquire full control and ownership of the Company, in consideration of approximately 50% of IIS’s shares. |
| | On November 5, 2007, the Company signed a Share Exchange Agreement (the “Exchange Agreement”) with IIS shareholders for the acquisition of all the outstanding shares of the Company in exchange for the issuance of IIS’s shares. See also note 11b. |
| | On December 20, 2007, IIS’s general shareholders meeting approved the Exchange Agreement with the Company and it’s shareholders for the acquisition of all the outstanding shares of the Company in exchange for the issuance of 11,552,226 shares of IIS to the shareholders of the Company, representing approximately 50% of the issued and outstanding shares of IIS less those shares due to IIS by virtue of the loan agreement between IIS and the Company. |
| | The closing of the transaction was on January 2, 2008. For additional information see note 11b. |
| | The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has accumulated net losses for the period from inception (February 1, 2004) through December 31, 2006 of $2,746 thousand, as well as negative cash flow from operating activities. Presently, the Company does not have sufficient cash resources to meet its requirements in the twelve months following January 10, 2008, the date of issuance of these consolidated financial statements. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management is in the process of evaluating various financing alternatives as the Company will need to finance future operating expenses, research and development activities and general and administrative expenses through fund raising in the public or private equity markets. Among these alternatives the Company is relying on the additional financing from IIS, see also note 11. Although there is no assurance that the Company will be successful with those initiatives, management is confident that it will be able to secure the necessary financing as a result of ongoing financing discussions with third party investors and existing shareholders. |
F - 40
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES(continued):
| | These financial statements do not include any adjustments that may be necessary should the Company be unable to continue as a going concern. The Company’s continuation as a going concern is dependent on its ability to obtain additional financing as may be required and ultimately to attain profitability. |
| | The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). |
| | The currency of the primary economic environment in which the operations of the Group are conducted is the U.S. dollar (“dollar”; “$”). Almost all of the Group’s income is incurred in dollars. Thus, the functional currency of the Group is the dollar. |
| | Transactions and balances originally denominated in dollars are presented at their original amounts. Balances in non-dollar currencies are translated into dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. Non-dollar transactions reflected in the statements of operations are translated into dollars using exchange rates at the transaction dates or average rates. Currency transaction gains or losses are carried to financial income or expenses, as appropriate. |
| | 4) | Use of estimates in preparation of financial statements |
| | The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. |
| | b. | Principles of consolidation |
| | 1) | The consolidated financial statements include the accounts of the Company and its subsidiary. |
| | 2) | Intercompany balances and transactions were eliminated in consolidation. |
F - 41
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES(continued):
| | The Group considers all highly liquid investments, which are comprised of short-term bank deposits with an original maturity date of up to three months that are not restricted as to withdrawal or use, to be cash equivalents. |
| | Fixed assets are stated at cost, net of accumulated depreciation and of related investment grants received from the Office of the Chief Scientist of the Ministry of Industry and Trade of Israel (the “OCS”) (see also note 5d) in the amount of $28,540 and $20,287 at December 31, 2006 and 2005, respectively. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets at the following annual rates: |
| | %
|
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Computers and peripheral equipment | | | | 33 | |
| Office furniture and equipment | | | | 7 | |
| Installed systems | | | | 33 | |
| | |
| | Direct labor and overhead costs related to the construction and installation of fixed assets that are required to bring the asset to its intended use, are capitalized to the extend that it is expected that they are to generate economic future benefits. The direct payroll and related costs of employees that are related to construction and installation activities are capitalized based on specific time devoted to these activities where identifiable. |
| | Maintenance and repairs are charged to expenses as incurred and improvements are capitalized. |
| | The Group accounts for income taxes in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. Deferred taxes are determined utilizing the asset and liability method, based on the estimated future tax effects of differences between the financial accounting and tax bases of assets and liabilities under the applicable tax laws. Deferred tax balances are computed using the tax rates expected to be in effect at time when these differences reverse. |
| | Valuation allowances in respect of the deferred tax assets are provided when it is more likely than not that all or a portion of the deferred income tax assets will not be realized. The Group has provided a full valuation allowance with respect to its deferred tax assets as it expects that it is more likely than not that it will not have taxable income in the foreseeable future. |
| | The Group does not provide for deferred taxes with respect to the difference between the book value and the tax basis of investments in its non – Israeli subsidiary, as the Company does not expect such temporary differences to be reversed in the foreseeable future. |
F - 42
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES(continued):
| | Paragraph 9(f) of SFAS 109 “Accounting for Income Taxes”, prohibits the recognition of deferred tax liabilities or assets that arise from differences between the financial reporting and tax bases of assets and liabilities that are measured from local currency into dollars using historical exchange rates, and that result from changes in exchange rates or indexing for tax purposes. Consequently, the aforementioned differences were not reflected in the computation of deferred tax assets and liabilities. |
| | Revenues from sales of CDs and other media products to roller coaster riders, which were filmed by the Company’s systems, are recognized at the point of sale on a net basis pursuant to EITF 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent”, based on the percentage stated in the agreements with the amusement parks ( see also note 1 a (1)). |
| | g. | Research and development: |
| | Research and development costs are expensed as incurred and consist primarily of personnel, facilities, equipment, and supplies for research and development activities. Grants received from the OCS are recognized when the grant becomes receivable, provided there is reasonable assurance that the Company will comply with the conditions attached to the grant and there is reasonable assurance the grant will be received. The grant is deducted from the related research and development expenses as the costs are incurred. See also note 5d. |
| | Basic and diluted net loss per share is computed by dividing net loss attributed to ordinary shares for the period by the weighted average number of ordinary shares outstanding during the period after giving retroactive effect to the stock split effected on February 20, 2006, see note 6a(3). The calculation of diluted net loss per share excludes potential additional ordinary shares issuable upon the conversion of stock options, warrants and convertible loans as their effect was anti-dilutive. |
| | i. | Accounting for share – based compensation: |
| | Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-based Payment” (“FAS 123(R)”). FAS 123(R) supersedes APB 25 and related interpretations and amends Statement of Financial Accounting Standards No. 95, “Statement of Cash Flows” (“FAS 95”). FAS 123(R) requires awards classified as equity awards be accounted for using the grant-date fair value method. The fair value of share-based payment transactions is recognized as an expense over the requisite service period, net of estimated forfeitures. |
F - 43
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES (continued):
| | j. | Fair value of financial instruments: |
| | In view of their nature, the fair value of the financial instruments included in the working capital of the Company is usually identical or close to their carrying value. The carrying amounts of the Company’s long-term assets, long-term loan payable, and other long-term liabilities approximate their fair value. |
| | k. | Concentration of credit risks: |
| | Financial instruments that subject the Group to credit risk consist primarily of cash and cash equivalents, which are deposited in major financial institutions in Israel and the U.S.. |
| | Accordingly, the Group’s cash and cash equivalents balances do not represent a substantial concentration of credit risks at December 31, 2006. |
| | l. | Impairment in value of long-lived assets: |
| | Under FAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”(“FAS 144”), the Group reviews long-lived assets, to be held and used, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Under FAS 144, if the sum of the expected future cash flows (undiscounted and without interest charges) of the long-lived assets is less than the carrying amount of such assets, an impairment loss would be recognized, and the assets are written down to their estimated fair values. |
| | As of December 31, 2006 the Group has not recorded any impairment charges relating to its long lived assets. |
| | Cost related to advertising and promotion of products, which amounted to $83 thousand and $337 thousand for the years ended December 31, 2005 and 2006, respectively, are charged to selling, general and administrative expenses as incurred. |
| | n. | Newly issued and recently adopted accounting pronouncements: |
| | In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes –an interpretation of FAS 109". This financial interpretation clarifies the accounting for uncertainty in income taxes, and prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on various related matters such as de-recognition, interest and penalties and disclosure. The provisions of FIN 48 are effective for fiscal years beginning January 1, 2007. The adoption of this interpretation had the effect of increase in the accumulated deficit of $10 thousand. |
F - 44
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES (continued):
| | In September 2006, the FASB issued FAS 157, “Fair Value Measurements”. This standard establishes a framework for measuring fair value and expands related disclosure requirements; however, it does not require any new fair value measurement. The provisions of SFAS 157 are effective for fiscal years beginning January 1, 2008. The Group is currently evaluating the impact of adopting of SFAS 157 on its consolidated financial statements and results of operations. |
| | In September 2006, the SEC issued Staff Accounting Bulletin (SAB) 108, which expresses the Staff’s views regarding the process of quantifying financial statement misstatements. The bulletin was effective as of the year beginning January 1, 2006. The implementation of this bulletin had no impact on the Group’s financial statements. |
| | In February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This standard permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The provisions of SFAS 159 are effective for fiscal years beginning January 1, 2008. The Group is currently evaluating the impact of adopting SFAS 159 on its financial position, cash flows and results of operations. |
NOTE 2 – FIXED ASSETS:
| | a. | Composition of assets, grouped by major classifications, is as follows: |
| | December 31
|
|---|
| | 2006
| 2005
|
|---|
| | U.S. dollars in thousands
|
|---|
| | | |
|---|
| | | |
|---|
| Cost: | | | | | | | | |
| Computers and peripheral equipment | | | $ | 41 | | $ | 39 | |
| Office furniture and equipment | | | | 10 | | | 2 | |
| Installed systems | | | | 941 | | | 123 | |
| Systems under construction | | | | | | | 17 | |
| |
| |
| |
| | | | | 992 | | | 181 | |
| Less - accumulated depreciation | | | | (235 | ) | | (38 | ) |
| |
| |
| |
| Net carrying amount | | | $ | 757 | | $ | 143 | |
| |
| |
| |
| | | |
| | b. | Depreciation expenses totaled $197 and $32 for the years ended December 31, 2006 and 2005, respectively. |
| | c. | As for pledges – see note 5a. |
F - 45
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 – LOANS AND CONVERTIBLE LOANS:
| | December 31
|
|---|
| | 2006
| 2005
|
|---|
| | U.S. dollars in thousands
|
|---|
| | | |
|---|
| | | |
|---|
| Loans from a bank (see d. below) | | | $ | 326 | | | | |
| Loans from others* (see f. and h.. below) | | | | 293 | | | | |
| Convertible loans from others (see e. and h. below) | | | | 724 | | $ | 90 | |
| |
| |
| |
| | | | | 1,343 | | | 90 | |
| Less - current maturities (see note 8b) | | | | (405 | ) | | | |
| |
| |
| |
| | | | $ | 938 | | $ | 90 | |
| |
| |
| |
| | | |
| | * | Including loan from Opcom Ltd (“Opcom”), a company controlled and owned by the CEO and shareholder of the Company in the amount of $61 thousand. |
| | b. | Classified by currency of repayment, linkage terms and interest rates, the total amount of the liabilities (before deduction of current maturities) is as follows: |
| | December 31
|
|---|
| | 2006
| 2005
|
|---|
| Currency
| Interest
rates
| Amount
|
|---|
| | %
| U.S. dollars in thousands
|
|---|
| | | | |
|---|
| U.S. dollars | | | | 11.8%-42.5%** | | $ | 923 | | $ | 90 | |
| U.S. dollars | | | | Libor+5% | | | 326 | | | | |
| New Israeli Shekels | | | | 12% | | | 94 | | | | |
| | | |
| |
| |
| | | | | | | $ | 1,343 | | $ | 90 | |
| | | |
| |
| |
| | | | |
** Mainly 40.5%.
| | c. | The loans (net of current maturities) mature in the following years after the balance sheet dates: |
| | December 31
|
|---|
| | 2006
| 2005
|
|---|
| | U.S. dollars in thousands
|
|---|
| | | |
|---|
| | | |
|---|
| Second year | | | $ | 693 | | $ | 90 | |
| Third year | | | | 187 | | | | |
| Fourth year | | | | 58 | | | | |
| |
| |
| |
| | | | $ | 938 | | $ | 90 | |
| |
| |
| |
| | | |
F - 46
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 – LOANS AND CONVERTIBLE LOANS (continued):
| | d. | On June 21, 2006 and July 3, 2006, the Company was granted loans from Mizrahi-Tefahot bank (“the Bank”) in an aggregate amount of $400,000. The loans bear a stated effective annual interest rate of Libor+5%. The principal amount will be repaid in 12 monthly installments commencing 12 months from grant date. The interest of one of the loans will be repaid in 24 months, commencing one month from the grant date, and the other loan’s interest will be repaid with the principal installments. |
| | On the dates the loans were received, the Company granted the Bank warrants to purchase 4% of the then outstanding Company’s share capital, on a fully diluted basis, for no consideration, exercisable any time for a period of 6 years commencing at grant date. |
| | The bank has also received a PUT option to sell back to the Company those warrants for the amount of $400,000. The PUT option may be exercised, in whole or in part, at the end of 4 years after grant date and in accordance with the provisions stated in the agreements. |
| | Based on APB 14 “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants” the allocation of the proceeds from the bank has been based on allocation of full fair value to the warrant and the residual proceeds to the loans. The warrant is classified as a liability under “Warrants issued to a bank” and measured subsequently at fair value with changes in fair value recognized in profit and loss. |
| | As to the modification of the terms of the warrants subsequent to December 31, 2006, see note 11g. |
| | On January 10, 2006 and February 5, 2006, the Company was granted loans in the amount of $100,000 and $50,000, respectively from two lenders. These loans bear an effective annual interest rate of 40.5%. The principal amount and interest will be repaid in 4 annual installments commencing 12 months from grant date. |
| | According to the terms of the loans, should the Company not be able to repay the first installment, the lenders will be entitled to choose to either convert the said installment into the Company’s shares or postpone the payment in consideration for an additional interest. In case that the Company will not be able to repay the loans, each installment will be converted into a certain percentage of the Company’s share capital, at the date of conversion. |
| | When the final installment is due, the lender has the right to receive shares comprising a certain percentage of the Company’s issued shares, in lieu of $50,000 and $25,000, respectively, which will be deducted from the final payment. |
| | The amount of the installments may be adjusted according to a formula detailed in the agreements based on certain operational indexes of the Company. In any case, the total amount of repayment will not be less than $150,000 and $75,000, respectively. |
| | On January 20, 2007 an amount of approximately 71,000$ ($50,000 principal and $21,000 interest out of $100,000 loan) was converted into 311 shares of the Company. The conversion rights on the $50,000 loan and on the remaining $50,000 out of the $100,000 loan were cancelled on the date of the closing.
See h. below in respect of postponement of repayment date. |
F - 47
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 – LOANS AND CONVERTIBLE LOANS (continued):
| | 2) | On November 30, 2005 the Company was granted a loan in the amount of $90,206 by a lender. The loan bears an effective annual interest rate of 11.8%. The principal amount and interest will be repaid 24 months after the grant date. According to the terms of the loan the lender may convert the loan into the Company’s shares at an increasing conversion ratio as a factor of time. |
| | See h. below in respect of postponement of repayment date. |
| | On January 2, 2008, the date of the closing, the conversion rights on the loans were cancelled. |
| | 3) | On February 8, 2006 the Company was granted a loan by the CEO and a shareholder of the Company in an amount of approximately $28,000. The loan is denominated in NIS and linked to the dollar and bears effective annual interest rate of 12%. The principal amount and interest will be repaid not later than the end of 2008. |
| | According to the terms of the loan the lender may convert the loan into the Company’s shares at a price of $136 per share. |
| | On November 1, 2007 an amount of approximately 40,000$ was converted into 684 shares of the Company. |
| | 4) | On May 16, 2006 the Company was granted loans in the total amount of $360,000 by a group of lenders. The loans bear an effective annual interest rate of 14.33%. The principal amount and interest will be repaid 18 months after the grant date. According to the terms of the loan the lender may convert the loan into the Company’s shares. |
| | On December 30, 2007, the loans were converted into 1,838 shares of the Company. At time of the conversion, the conversion conditions were changed such that the conversion rate was changed from 4% to approximately 6%. |
| | f. | On December 15, 2006, a loan was received by the Company from a lender on March 23, 2006 in the amount of $59,957 and the accumulated interest on such loan and the accumulated interest on the loan described in e(2) above were converted into 365 shares of the Company. See also note 6a(6). The above amount of approximately $86,000 was classified as equity on the date of conversion. |
| | g. | As to pledges – see note 5a. |
| | h. | On November 5, 2007, the repayment date of loans in the total amount of $630,000 (including loans described in e(1) and e(2) above) have been postponed until IIS raises at least $6 million in equity or convertible debt financing ($1.655 million of this amount has already been raised). |
NOTE 4 – EMPLOYEE RIGHTS UPON RETIREMENT
| | Israeli law generally requires payment of severance pay and/or pensions upon dismissal of an employee or upon termination of employment in certain other circumstances. The severance pay liabilities are fully provided for in these consolidated financial statements, as if it was payable at each balance sheet date on an undiscounted basis, based upon the number of years of service and the most recent monthly salary of the Company’s employee. |
| | The amounts funded are presented as non-current assets. The severance pay expenses were $21 thousand and $12 thousand in the years ended December 31, 2006 and 2005, respectively. |
F - 48
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 – COMMITMENTS:
| | a. | The Company has on-going collateral including rights derived from, on all its assets, and fixed collateral on its share capital and goodwill. The collateral is to the benefit of the Bank. |
| | b. | The Company has fixed collateral on its share capital, goodwill and all its assets to other lenders. |
| | c. | In February 2007 the Company signed an agreement for the lease of its facilities for a period of one year ending on March 1, 2008. The monthly rental payments are in the amount of $6,600. In addition, the Company has agreed to pay a monthly amount of $900 in respect of management and maintenance fee. Lease expenses totaled to $55 thousand and $5 thousand for the years ended December 31, 2006 and 2005. |
| | The Company is committed to pay royalties to the Government of Israel at a rate of 3%-5% of the proceeds from sales of products in the research and development expenses of which the Government of Israel participated by way of grants. The commitment is determined on a product-by-product basis, in an amount not to exceed the total of the grants received (dollar linked) with an additional of an annual interest based on Libor. |
| | As of December 31, 2006, the Company has outstanding contingent obligations to pay royalties in the amount of $133 thousands in respect of future sales of products derived from such research and development. |
| | e. | On January 23, 2007, the Company signed an agreement which settles the finder’s fee (subject to closing) in respect of the share exchange agreement with IIS. According to the agreement with the finder, the Company will pay in cash 2.25% of $4,900,000, which represents the estimated balance of cash in IIS at that date, and 4.7% of the ordinary shares of the Company which were converted into 545,270 IIS shares. |
NOTE 6 – SHAREHOLDERS’ EQUITY:
| | Number of shares
|
|---|
| | Authorized
| Issued and paid
|
|---|
| | December 31,
2006 and 2005
| December 31
|
|---|
| | 2006
| 2005
|
|---|
| | | | |
|---|
| Ordinary shares of NIS 0.1 par value | | | | 500,000 | | | 25,000 | | | 2,000 | |
| |
| |
| |
| |
| | | | |
| | 2) | During the year 2005, the Company issued 469 ordinary shares of NIS 0.1 par value that were held by the Company in consideration of $570 thousands. |
| | 3) | On February 20, 2006, the Company executed a stock split by distributing, prorata, to its shareholders 18,000 ordinary shares of NIS 0.1 par value, for no consideration. |
F - 49
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 – SHAREHOLDERS’ EQUITY(continued):
| | 4) | On September 1, 2006, the Company issued 5,000 ordinary shares of NIS 0.1 par value for no consideration to be held by the Company. |
| | 5) | During the year 2006, the Company issued (including shares granted to an employee – see b(2) below) 3,477 ordinary shares of NIS 0.1 par value that were held by the Company in consideration of $418 thousands. |
| | 6) | On December 15, 2006, a loan and accumulated interest in a total amount of $86 thousands was converted into 365 ordinary shares of NIS 0.1 par value of the Company, (see also note 3f.). |
| | 1) | As to the Company’s option plan – see note 11f. |
| | 2) | On June 28, 2006, and August 31, 2006, 800 and 233 shares that were held by the Company, respectively, were granted to an employee at par value and $9,227, respectively. The fair value of the above shares on the grant dates, based on the Company’s estimates is $233,000. |
| | c. | As to convertible loans and warrants issued – see notes 3d and 3e. |
NOTE 7 – TAXES:
| | a) | Corporate taxation in Israel: |
| | 1) | Measurement of results for tax purposes under the Income Tax (Inflationary Adjustments) Law, 1985 (the “inflationary adjustments law”) |
| | Under the inflationary adjustments law, results for tax purposes are measured in real terms, having regard to the changes in the Israeli consumer price index (“CPI”). The Company is taxed under this law. |
| | The income of the Company is taxed at the statutory rate. The corporate tax rates for 2005 and thereafter, as amended in August 2005 are as follows: 2005 – 34%, 2006 – 31%, 2007 – 29%, 2008 – 27%, 2009 – 26% and for 2010 and thereafter – 25%. |
| | b) | Subsidiary outside Israel – CDRide |
| | The subsidiary that is incorporated outside of Israel is assessed for tax under the tax laws in the U.S. The principal tax rate applicable to the subsidiary is 40%. |
| | The taxes on income for the year ended December 31, 2006, is in respect of the Company’s subsidiary. |
F - 50
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 – TAXES(continued):
| | The deferred income taxes are composed as follows: |
| | December 31
|
|---|
| | 2006
| 2005
|
|---|
| | U.S. dollar in thousand
|
|---|
| | | |
|---|
| | | |
|---|
| Provided for: | | | | | | | | |
| Operating loss carryforward | | | $ | 550 | | $ | 125 | |
| Provisions for employee related obligations | | | | 20 | | | 8 | |
| |
| |
| |
| | | |
| Total | | | | 570 | | | 133 | |
| Less - valuation allowance | | | | (570 | ) | | (133 | ) |
| |
| |
| |
| | | |
| | | | | -;- | | | -;- | |
| |
| |
| |
| | The deferred tax assets are computed at the tax rates of 25% as of December 31, 2006 and 2005. |
| | d) | Carryforward tax losses |
| | As of December 31, 2006, the Company has carryforward tax losses in the amount of approximately $2.22 million which may be carried forward and offset against taxable income in the future for an indefinite period (December 31, 2005 – $0.5 million). |
| | Under the inflationary adjustments law (see a. above), carryforward losses are linked to the Israeli Consumer Price Index. |
| | The Company and its subsidiary have not yet been assessed for tax purposes since incorporation. |
| | f) | The components of profit (loss) before income taxes are as follows: |
| | Year ended December 31
|
|---|
| | 2006
| 2005
|
|---|
| | U.S. dollar in thousand
|
|---|
| | | |
|---|
| | | |
|---|
| United States | | | $ | 13 | | $ | 1 | |
| Israel | | | | (2,024 | ) | | (455 | ) |
| |
| |
| |
| | | | $ | (2,011 | ) | $ | (454 | ) |
| |
| |
| |
| | | |
F - 51
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 – TAXES(continued):
| | g) | Reconciliation of the theoretical tax expenses to actual tax expenses : |
| | Year ended December 31
|
|---|
| | 2006
| 2005
|
|---|
| | U.S. dollar in thousand
|
|---|
| | | |
|---|
| | | |
|---|
| Loss before taxes, as reported in the | | | | | | | | |
| statements of operations | | | $ | (2,011 | ) | $ | (454 | ) |
| |
| |
| |
| Theoretical tax benefit at the statutory rate | | |
| (31% and 34% for the years ended | | |
| December 31, 2006 and 2005, respectively) | | | $ | (623 | ) | $ | (154 | ) |
| Changes in taxes in respect of tax losses incurred | | |
| in the reported year for which deferred taxes | | |
| were not created | | | | 475 | | | 111 | |
| Difference between the basis of measurement of | | |
| loss reported for tax purposes and the basis of | | |
| measurement of loss for financial reporting | | |
| purposes | | | | 41 | | | (2 | ) |
| Special allowance, net of non deductible expenses | | | | 107 | | | 45 | |
| Other | | | | 5 | | | | |
| |
| |
| |
| | | | $ | 5 | | | -;- | |
| |
| |
| |
| | | |
F - 52
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 – SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:
| | | December 31
|
|---|
| | | 2006
| 2005
|
|---|
| | | U.S. dollar in thousands
|
|---|
| | | | |
|---|
| | | | |
|---|
| a. | | | Accounts receivable: | | | | | | | | |
| | | | Government authorities | | | $ | 26 | | $ | 9 | |
| | | | OCS | | | | 36 | | | 63 | |
| | | | Others | | | | 39 | | | 38 | |
| | |
| |
| |
| | | | | | | $ | 101 | | $ | 110 | |
| | |
| |
| |
| b. | | | Credit from banks and current maturities of | | |
| | | | long term loans : | | |
| | | | Short-term credit from banks | | | $ | 64 | | $ | 21 | |
| | | | Current maturities of long-term loans: | | |
| | | |
| | | | From a bank | | | | 189 | | | | |
| | | | From others | | | | 216 | | | | |
| | |
| |
| |
| | | | | | | $ | 469 | | $ | 21 | |
| | |
| |
| |
| | | |
| c. | | | Accounts payables and accruals: | | |
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| | | | |
|---|
| 1) | | | Trade payable: | | | | | | | | |
| | | | Open accounts | | | $ | 36 | | $ | 8 | |
| | | | Checks and notes payable | | | | 56 | | | 15 | |
| | |
| |
| |
| | | | | | | $ | 92 | | $ | 23 | |
| | |
| |
| |
| | | |
| 2) | | | Other: | | | | | | | | |
| | | | Payroll and related expenses | | | $ | 250 | | $ | 41 | |
| | | | Accrued expenses | | | | 147 | | | 5 | |
| | | | Related party | | | | 66 | | | | |
| | | | Other | | | | 12 | | | 10 | |
| | |
| |
| |
| | | | | | | $ | 475 | | $ | 56 | |
| | |
| |
| |
| | | | |
F - 53
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9 – RELATED PARTIES – TRANSACTIONS AND BALANCES:
| | a. | Transactions with related parties: |
| | Year ended December 31
|
|---|
| | 2006
| 2005
|
|---|
| | U.S. dollar in thousands
|
|---|
| | | |
|---|
| | | |
|---|
| Management fees (see c. below) | | | $ | 43 | | $ | 5 | |
| |
| |
| |
| Financing expenses | | | | -,- | | $ | 3 | |
| |
| |
| |
| | | |
| | b. | Related party balances: |
| | December 31
|
|---|
| | 2006
| 2005
|
|---|
| | U.S. dollar in thousands
|
|---|
| | | |
|---|
| | | |
|---|
| Current liabilities - presented under "Credit | | | | | | | | |
| from banks and loans" - "Current | | |
| maturities of long term loans from others" | | | $ | 11 | | $ | 3 | |
| |
| |
| |
| Current liabilities - presented under | | |
| "Accounts payable and accruals" - "Other | | |
| payable" | | | $ | 66 | | $ | 1 | |
| |
| |
| |
| Long-term liabilities - presented under | | |
| "Loans" - "Other" (see also note 3a and | | |
| note 3e(3)) | | | $ | 94 | | | -,- | |
| |
| |
| |
| | | |
| | c. | On December 31, 2006 and December 31, 2005 the Company signed an agreement with Opcom to receive management fees for management services granted to the Company and participation in the Company’s operational expenses in the amount of $43,000 in the year ended December 31, 2006 and $5,000 in the year ended December 31, 2005. |
F - 54
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 – SEGMENT INFORMATION:
| | The Group operates in one reportable segment. |
| | Disaggregated financial data is provided below as follows: (1) revenues by geographic area and tangible long-lived assets by geographic location; and (2) revenues from principal customers: |
| | 1) | Geographic and by products information: |
| | Revenues are attributed to geographic areas based on the location of the customer. The following is a summary of revenues by geographic area: |
| | Year ended December 31
|
|---|
| | 2006
| 2005
|
|---|
| | U.S. dollar in thousands
|
|---|
| | | |
|---|
| | | |
|---|
| USA and Canada | | | $ | 262 | | $ | 15 | |
| Israel | | | | 10 | | | 10 | |
| |
| |
| |
| | | | $ | 272 | | $ | 25 | |
| |
| |
| |
| | | |
| | Tangible long-lived assets by geographic location are as follows: |
| | December 31
|
|---|
| | 2006
| 2005
|
|---|
| | U.S. dollar in thousands
|
|---|
| | | |
|---|
| | | |
|---|
| USA and Canada | | | $ | 736 | | $ | 96 | |
| Israel | | | | 21 | | | 47 | |
| |
| |
| |
| | | | $ | 757 | | $ | 143 | |
| |
| |
| |
| | | |
| | 2) | Revenues from principal customers - revenues from single customers each of which exceeds 10% of total revenues in the relevant year: |
| | Year ended December 31
|
|---|
| | 2006
| 2005
|
|---|
| | | |
|---|
| | | |
|---|
| | | |
|---|
| Customer A | | | | 28 | % | | -;- | |
| |
| |
| |
| Customer B | | | | 22 | % | | -;- | |
| |
| |
| |
| Customer C | | | | 12 | % | | -;- | |
| |
| |
| |
| Customer D | | | | 12 | % | | 60 | % |
| |
| |
| |
| Customer E | | | | 4 | % | | 40 | % |
| |
| |
| |
| | | |
F - 55
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 – SUBSEQUENT EVENTS:
| | a. | Asto MOA and the assignment of the Exchange Agreement see note 1a(1). |
| | b. | On December 20, 2007, the IIS’s general shareholders meeting approved the Exchange Agreement with the Company and all its shareholders of the Company for the acquisition of all the outstanding shares of the Company in exchange for the issuance of 11,552,226 shares of IIS to the shareholders of the Company, representing approximately 50% of the issued and outstanding shares of IIS less those shares due to IIS by virtue of the loan agreement between IIS and the Company. Following the transaction, the Company will become a wholly owned subsidiary of IIS. According to the agreement, IIS will grant stock options to the senior management and shareholders of the Company to purchase an aggregate of 2,300,000 shares of IIS at an exercise price equal to the average trading share price during the twenty (20) trading days prior to the Closing, vesting in eight (8) semi – annual installments as long as each such executive continues to be employed by IIS. |
| | In addition, according to the agreement , IIS will increase the shares reserved for issuance to directors, employees, consultants and service providers of IIS and its subsidiaries pursuant to its incentive stock option plans by an additional 1,000,000 shares so that the total amount of shares reserved for issuance pursuant to such plan will be 3,300,000. |
| | In addition, IIS will issue to all registered shareholders of IIS as of November 9, 2007 (the “record date”) warrants to purchase an aggregate of 4,600,000 Ordinary Shares of IIS nominal value NIS 0.003 per share, on a pro-rata basis according to the percentage holding of each such shareholder in the issued and outstanding share capital of IIS on such record date. These warrants will be exercisable until the earlier of (i) five years from the date of issuance, and (ii) the closing of a Transaction. A “Transaction” means each of (i) merger, acquisition or reorganization of IIS with one or more other entities in which IIS is not the surviving entity, or (ii) a sale of all or substantially all of the assets or shares of IIS. The exercise price of each warrant shall be the average trading price per share of IIS’s Ordinary Shares during the twenty trading days prior to the Closing. These warrants will be non-transferable and non-exercisable until all applicable Israeli and United States securities laws and regulations have been complied with in connection with the warrants and the underlying shares, including without limitation, that a registration statement covering the underlying shares is declared effective by the United States Securities and Exchange Commission. |
| | c. | On April 23, 2007 and May 28, 2007, IIS signed loan agreements with the Company to grant an aggregate principal amount of $3,000,000 to the Company. The loans bear an annual interest rate of LIBOR plus 5%, whilst in the event that the Exchange Agreement with IIS is not consummated, the interest on the loan will be increased to LIBOR plus 10% retroactively to the date it was granted. The maturity date was determined as the earlier of (i) 90 days following the termination of the exchange agreement (ii) January 20, 2008. |
| | In connection with these loans, the Company issued promissory notes to IIS. According to these promissory notes, IIS has the right at any time following an event of default, as defined in the agreement, or in the event that the exchange agreement is not consummated, to convert any unpaid amount into fully-paid up and duly issued shares of the Company at a pre-conversion fully-diluted valuation of $5,000,000. |
F - 56
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 – SUBSEQUENT EVENTS(continued):
| | d. | On August 8, 2007 and on September 9, 2007, IIS signed two loan agreements with the Company to grant principal amounts of $200,000 each to the Company. The loans bear an interest rate of 1.5% per month. According to the original agreements, the maturity date is December 16, 2007, whilst in December 2007 the maturity date was lengthened by additional three months. In addition, for every month or part thereof that the principal amount for each loan (including interest) or part thereof shall be outstanding, IIS will be entitled to newly issued ordinary shares of the Company equal to 0.0259% of the issued and outstanding share capital of the Company, on a fully diluted basis. According to the alternative settlement of the above mentioned shares as stipulated in the loan agreements, due to the fact that the exchange agreement was closed prior to issuance of the shares, the amount of shares of IIS that the shareholders of the Company received in such exchange agreement has been reduced by 3,000 shares for every month or part thereof that the principal amount (including interest) or part thereof has been outstanding. |
| | The loans are secured by a pledge over the shares of the Company held by certain shareholders. |
| | On October 7, 2007 and on November 5, 2007, The Company signed loan agreements with IIS to receive an aggregate amount of $1,200,000 to the Company, at the same terms as the loan referred above. |
| | e. | Subsequent to December 31, 2006, loans in a total amount of $576 thousands were converted into 3,275 ordinary shares of NIS 0.1 par value of the Company, from which 1,434 ordinary shares were held by the Company. In addition the Company issued 1,434 ordinary shares of NIS 0.1 par value in respect of finder’s fee and additional 35 ordinary shares in respect of a short term loan received and repaid during the year 2007. In addition the Company issued 2,417 ordinary shares of NIS 0.1 par value that were held by the Company, in consideration of $484 thousands. |
| | In January 2007, the Company issued 492 ordinary shares of NIS 0.1 par value for no consideration to be held by the Company. |
| | f. | In August 2007 the Company approved an employee share option plan (hereafter – the Plan), according to which employees and service providers of the Company will receive up to 1,000 options, which could be exercised into NIS 0.1 par value of Company’s ordinary shares. The ordinary shares that will be issued following the exercise of the options will be equal in rights to the Company’s ordinary shares immediately upon their allocation. |
| | The share option plan is subject to the capital gain track stipulated by the section 102 of the Israeli Income Tax Ordinance. Pursuant to the terms thereof, the Company is not allowed to claim, as an expense for tax purposes, the amounts credited to employees as a benefit, including amounts recorded as salary benefits in the Company’s accounts, in respect of options granted to employees under the Plan – with the exception of the work-income benefit component, if any, determined on the grant date. |
| | In September 2007, the Company granted, according to the Plan, 1,000 options to employees, at an exercise price of NIS 0.1 per share. All of the options vested immediately. All of the options were exercised until the approval of these financial statements. The Company estimated that the fair value of the options on the date of grant is approximately $122,000 |
| | The Company issued 1,000 ordinary shares of NIS 0.1 par value for the exercise of the above options. |
F - 57
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 – SUBSEQUENT EVENTS(continued):
| | g. | On December 31, 2007, the Company and the Bank signed a Notice And Agreement Of Exercise And Redemption (“the Notice”) in respect of the two loans received from the Bank in 2006 (see note 3d). According to the Notice, The Bank will receive 610 ordinary shares of the Company and will redeem and convert the rest of the warrants into a one-time payment of $200,000. Upon the fulfillments of these terms, the Bank will have no further rights under the warrants. |
| | The Company allocated the above shares on December 31, 2007 and paid the amount of $200,000 on December 16, 2007. |
| | On that day the Company received a new loan from the Bank in the amount of the payment, which bears an effective annual interest rate of Libor+5% and will be repaid in 12 monthly installments commencing July 2008. |
F - 58
WITECH COMMUNICATIONS LTD
(An Israeli Corporation)
INTERIM FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2007
(Unaudited)
F - 59
WITECH COMMUNICATIONS LTD
(An Israeli Corporation)
INTERIM FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2007
(Unaudited)
TABLE OF CONTENTS
The amounts are stated in U.S dollars, ($) in thousands.
F - 60
WITECH COMMUNICATIONS LTD
(An Israeli Corporation)
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S dollars in thousands)
| September 30,
2007
| December 31,
2006
|
|---|
| (Unaudited)
| (Audited)
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| A s s e t s | | | | | | | | |
| CURRENT ASSETS: | | |
| Cash and cash equivalents | | | $ | 82 | | $ | 31 | |
| Restricted bank deposit | | | | 64 | | | 31 | |
| Accounts receivable - other | | | | 599 | | | 101 | |
| Inventory | | | | 35 | | | | |
|
| |
| |
| Total current assets | | | | 780 | | | 163 | |
|
| |
| |
| FUNDS IN RESPECT OF EMPLOYEE RIGHTS UPON | | |
| RETIREMENT | | | | 92 | | | 43 | |
| FIXED ASSETS, net | | | | 2,305 | | | 757 | |
|
| |
| |
| | | | $ | 3,177 | | $ | 963 | |
|
| |
| |
| Liabilities net of capital deficiency | | |
| CURRENT LIABILITIES: | | |
| Credit from banks and loans including current maturities | | |
| of long term loans | | | $ | 4,033 | | $ | 469 | |
| Accounts payable and accruals: | | |
| Trade payable | | | | 435 | | | 92 | |
| Other | | | | 1,090 | | | 475 | |
|
| |
| |
| T o t a l current liabilities | | | | 5,558 | | | 1,036 | |
|
| |
| |
| LONG TERM LIABILITIES: | | |
| Loans (net of current maturities): | | |
| Bank loans | | | $ | 47 | | $ | 137 | |
| Other loans | | | | 787 | | | 801 | |
| Warrants issued to a bank | | | | 167 | | | 131 | |
| Provision for uncertain tax position (see note 1c) | | | | 60 | | | | |
| Liability for employee rights upon retirement | | | | 139 | | | 67 | |
|
| |
| |
| T o t a l long-term liabilities | | | | 1,200 | | | 1,136 | |
|
| |
| |
| T o t a l liabilities | | | | 6,758 | | | 2,172 | |
|
| |
| |
| CAPITAL DEFICIENCY: | | |
| Ordinary shares of NIS 0.1 par value at | | |
| September 30, 2007 and December 31, 2006: | | |
| authorized - 500,000 shares; | | |
| issued and outstanding - 26,492 shares and 25,000 shares, | | |
| respectively | | | | 1 | | | 1 | |
| Additional paid-in capital | | | | 2,318 | | | 1,536 | |
| Accumulated deficit | | | | (5,900 | ) | | (2,746 | ) |
|
| |
| |
| Total capital deficiency | | | | (3,581 | ) | | (1,209 | ) |
|
| |
| |
| T o t a l liabilities net of capital deficiency | | | $ | 3,177 | | $ | 963 | |
|
| |
| |
The accompanying notes are an integral part of these condensed financial statements.
F - 61
WITECH COMMUNICATIONS LTD
(An Israeli Corporation)
CONDENSED STATEMENTS OF OPERATIONS
(U.S dollars in thousands, except share and per share data)
| Nine months
ended September 30,
|
|---|
| 2007
| 2006
|
|---|
| (Unaudited)
|
|---|
| | | |
|---|
| | |
|---|
| REVENUES | | | $ | 1,369 | | $ | 183 | |
| COST OF REVENUES | | | | 1,573 | | | 452 | |
|
| |
| |
| GROSS LOSS | | | | (204 | ) | | (269 | ) |
| RESEARCH AND DEVELOPMENT EXPENSES, net | | | | 239 | | | 361 | |
| SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | | | | 2,085 | | | 597 | |
|
| |
| |
| OPERATING LOSS | | | | (2,528 | ) | | (1,227 | ) |
| FINANCIAL EXPENSES, net | | | | 539 | | | 214 | |
|
| |
| |
| LOSS BEFORE TAXES ON INCOME | | | | (3,067 | ) | | (1,441 | ) |
| TAXES ON INCOME | | | | 77 | | | 4 | |
|
| |
| |
| NET LOSS FOR THE PERIOD | | | $ | (3,144 | ) | $ | (1,445 | ) |
|
| |
| |
| | | |
| NET LOSS PER SHARE- basic and diluted | | | $ | (127.6 | ) | $ | (77.2 | ) |
|
| |
| |
| | | |
| WEIGHTED AVERAGE NUMBER OF ORDINARY | | |
| SHARES USED IN COMPUTING LOSS PER SHARES | | |
| basic and diluted | | | | 24,641 | | | 18,707 | |
|
| |
| |
The accompanying notes are an integral part of these condensed financial statements.
F - 62
WITECH COMMUNICATIONS LTD
(An Israeli Corporation)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S dollars in thousands)
| Nine months
ended September 30
|
|---|
| 2007
| 2006
|
|---|
| (Unaudited)
|
|---|
| | | |
|---|
| | |
|---|
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
| Net loss for the period | | | $ | (3,144 | ) | $ | (1,445 | ) |
| Adjustments required to reconcile net loss to net cash used in operating activities: | | |
| Depreciation | | | | 481 | | | 113 | |
| Changes in accrued liability for employee rights upon retirement | | | | 72 | | | 30 | |
| Gain on amounts funded in respect of employee rights upon retirement | | | | (2 | ) | | (6 | ) |
| Share based compensation | | | | 122 | | | 233 | |
| Changes in provision for uncertain tax position | | | | 50 | | | | |
| Accrued interest in respect of loans received | | | | 370 | | | 116 | |
| Changes in operating assets and liabilities: | | |
| Increase in accounts receivable | | | | (498 | ) | | (50 | ) |
| Increase in accounts payable and accruals | | | | 827 | | | 416 | |
| Increase in inventory | | | | (35 | ) | | (5 | ) |
| Net cash used in operating activities | | | | (1,757 | ) | | (598 | ) |
|
| |
| |
| | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | |
| Purchase of plant and equipment | | | | (1,898 | ) | | (755 | ) |
| Investment grants relating to fixed assets | | | | | | | 16 | |
| Investment in a restricted bank deposit | | | | (33 | ) | | (30 | ) |
| Amounts funded in respect of employee rights upon retirement | | | | (47 | ) | | (15 | ) |
|
| |
| |
| Net cash used in investing activities | | | | (1,978 | ) | | (784 | ) |
|
| |
| |
| | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | |
| Credit from banks - net | | | | (64 | ) | | (21 | ) |
| Long-term loans received from a bank and warrants issued to a bank | | | | 70 | | | 424 | |
| Short-term loans received from others | | | | 3,400 | | | 797 | |
| Issuance of share capital | | | | 484 | | | 204 | |
| Repayment of long-term loans | | | | (104 | ) | | | |
|
| |
| |
| Net cash provided by financing activities | | | | 3,786 | | | 1,404 | |
|
| |
| |
| | | |
| INCREASE IN CASH AND CASH EQUIVALENTS | | | | 51 | | | 22 | |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | | | | 31 | | | 20 | |
|
| |
| |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | | | $ | 82 | | $ | 42 | |
|
| |
| |
| | | |
| Supplementary information on financing activities not involving cash flows: | | |
| Long-term credit received for the purchase of fixed assets | | | $ | 131 | | $ | 69 | |
|
| |
| |
| Conversion of long term loans into ordinary shares | | | $ | 176 | | | | |
|
| | | |
| Payment of a liability to an employee in the form of shares | | | | | | $ | 9 | |
| | |
| |
| | |
The accompanying notes are an integral part of these condensed financial statements.
F - 63
WITECH COMMUNICATIONS LTD
(An Israeli Corporation)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES:
| | Witech Communications Ltd. (the “Company”) was established in Israel in 2004. The Company operates in one operating segment – development and manufacture of wireless video technology, and provides wireless video solutions for diverse commercial applications system. The system, marketed currently captures dynamic videos, for installation on roller coasters and other thrill rides in amusement parks. The revenues of the company derive from the sale of CDs and other media products to roller coasters riders, which were filmed by the Company’s systems. The Company and its subsidiary (the “Group”) has signed contracts with amusement parks according to which it was granted the right to operate the systems in the said parks and entitled to a percentage of revenue from the sale of CDs. The sales in the US, which represent the majority of the company’s sales, are done through a wholly owned subsidiary, CDRide Corp. (“CDRide”) which was established in June 2005 and registered in the state of Delaware |
| | On February 20, 2007, the Company signed a Memorandum Of Agreement (“MOA”) with I.I.S Intelligent Information Systems Limited (“IIS”) with respect to a contemplated merger between the Company and IIS, under which IIS is to acquire full control and ownership of the Company, in consideration of 50% of IIS’s shares. |
| | On November 5, 2007, the Company signed a Share Exchange Agreement (the “Exchange Agreement”) with IIS for the acquisition of all the outstanding shares of the Company in exchange for the issuance of IIS shares. |
| | On December 20, 2007, the general shareholders meeting of IIS approved the Exchange Agreement. The closing of the transaction was on January 2, 2008. For additional information see note 4b. |
| | The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has accumulated net losses for the period from inception (February 1, 2004) through September 30, 2007 of $5,900 thousand, as well as negative cash flow from operating activities. Presently, the Company does not have sufficient cash resources to meet its requirements in the twelve months following January 10, 2008, the date of issuance of these condensed consolidated financial statements. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management is in the process of evaluating various financing alternatives as the Company will need to finance future operating expenses, research and development activities and general and administrative expenses through fund raising in the public or private equity markets. Among these alternatives the Company is relying on the additional financing from IIS, see also note 2. Although there is no assurance that the Company will be successful with those initiatives, management is confident that it will be able to secure the necessary financing as a result of ongoing financing discussions with third party investors and existing shareholders. |
| | These condensed consolidated financial statements do not include any adjustments that may be necessary should the Company be unable to continue as a going concern. The Company’s continuation as a going concern is dependent on its ability to obtain additional financing as may be required and ultimately to attain profitability. |
F - 64
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES(continued):
| | The accompanying unaudited condensed consolidatedfinancial statements of the Company and its subsidiary (“the Group”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and Article 10 of Regulation S-X under the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. These condensed consolidated financial statements and notes thereto are unaudited and should be read in conjunction with the Company’s audited financial statements included in the Company’s Annual Report for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on January 10, 2008. |
| | In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 2007, are not necessarily indicative of the results that may be expected for the year ended December 31, 2007. |
| | c. | Accounting for uncertainty in income taxes |
| | Effective January 1, 2007, the Group adopted FIN 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FAS 109", which was issued in June 2006. FIN 48 clarifies the accounting for uncertainty in income taxes, and prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Group’s accounting policy, pursuant to the adoption of FIN 48, is to classify interest and penalties recognized in the financial statements relating to uncertain tax positions, under provision for income taxes. Changes in judgement as to recognition or measurement of tax positions can materially affect the estimate of the effective tax rate and consequently, affect the net loss of the Group. |
| | As of the date of adoption, the tax years that remain subject to examination by tax authorities are between years 2004 and 2006. As a result of the implementation of FIN 48, the Group recognized $10 thousands as a long-term liability for unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007 balance of accumulated deficit. During the nine months ended September 30, 2007, the Company recorded an increase of its unrecognized tax benefits of $50 thousands. Both amounts would result a reduction of the Group’s effective tax rate, if recognized. |
| | d. | Recently issued accounting pronouncements: |
| | In September 2006, the FASB issued FAS 157, “Fair Value Measurements.” This standard establishes a framework for measuring fair value and expands related disclosure requirements; however, it does not require any new fair value measurement. As applicable to the Group, this standard will be effective as of the year beginning January 1, 2008. The Company is currently evaluating the impact that the adoption of FAS 157 would have on its consolidated financial statements. |
| | In February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This standard permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. As applicable to the Group, this standard will be effective as of the year beginning January 1, 2008. The Company is currently evaluating the impact that the adoption of FAS 159 would have on its consolidated financial statements. |
F - 65
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 – LOANS:
| | a. | On April 23, 2007 and May 28, 2007, the Company signed loan agreements with IIS to receive an aggregate principal amount of $3,000,000 from IIS. The loans bear an annual interest rate of LIBOR plus 5%, whilst in the event that the Exchange Agreement with IIS is not consummated, the interest on the loan will be increased to LIBOR plus 10% retroactively to the date it was granted. The maturity date was determined as the earlier of (i) 90 days following the termination of the exchange agreement (ii) January 20, 2008. |
| | In connection with these loans, the Company issued promissory notes to IIS. According to these promissory notes, IIS has the right at any time following an event of default, as defined in the agreement, or in the event that the Exchange agreement is not consummated, to convert any unpaid amount into fully-paid up and duly issued shares of the Company at a pre-conversion fully-diluted valuation of $5,000,000. |
| | The loan agreements include certain covenants. The Company satisfied the respective covenants as at December 31, 2006 and September 30, 2007. |
| | The interest accrued in respect of these loans is calculated base on LIBOR plus 10%. |
| | b. | On August 8, 2007 and on September 9, 2007, the Company signed two loan agreements with IIS to receive principal amounts of $200,000 each from IIS. The loans bear an interest rate of 1.5% per month. According to those agreements, the maturity date is December 16, 2007, whilst after the balance sheet date the maturity date was lengthened by additional three months. In addition, for every month or part thereof that the principal amount (including interest) or part thereof shall be outstanding, IIS will be entitled to newly issued ordinary shares of the company equal to 0.0259% of the Company’s issued and outstanding share capital, on a fully diluted basis. According to the alternative settlement of the above mentioned shares as stipulated in the loan agreements, due to the fact that the exchange agreement was closed prior to issuance of the shares, the amount of shares of IIS that the shareholders of the Company received in such exchange agreement has been reduced by 3,000 shares for every month or part thereof that the principal amounts (including interest) or part thereof has been outstanding. |
| | The loans are secured by a pledge over the shares of the Company held by certain shareholders. The fair value of the Company’s shares to which IIS is entitled has been included in these condensed consolidatedfinancial statements as a liability and as financial expenses, based on the price of IIS’s shares at September 30, 2007, according to the ratio established in the Exchange Agreement. |
| | c. | 1) | On January 10, 2006 and February 5, 2006, the Company was granted loans in the amount of $100,000 and $50,000, respectively from two lenders. These loans bear an effective annual interest rate of 40.5%. The principal amount and interest will be repaid in 4 annual installments commencing 12 months from grant date. |
| | According to the terms of the loans, should the Company not be able to repay the first installment, the lenders will be entitled to choose to either convert the said installment into the Company’s shares or postpone the payment in consideration for an additional interest. In case that the Company will not be able to repay the loans, each installment will be converted into a certain percentage of the Company’s share capital, at the date of conversion. |
| | When the final installment is due, the lender has the right to receive shares comprising a certain percentage of the Company’s issued shares, in lieu of $50,000 and $25,000, respectively, which will be deducted from the final payment. |
F - 66
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 – LOANS(continued):
| | The amount of the installments may be adjusted according to a formula detailed in the agreements based on certain operational indexes of the Company. In any case, the total amount of repayment will not be less than $150,000 and $75,000, respectively. |
| | On January 20, 2007 an amount of approximately 71,000$ ($50,000 principal and $21,000 interest out of $100,000 loan) was converted into 311 shares of the Company. The conversion rights on the $50,000 loan and on the remaining $50,000 out of the $100,000 loan were cancelled on the date of the closing. |
| | See d. below in respect of postponement of repayment date. |
| | 2) | On November 30, 2005 the Company was granted a loan in the amount of $90,206 by a lender. The loan bears an effective annual interest rate of 11.8%. The principal amount and interest will be repaid 24 months after the grant date. According to the terms of the loan the lender may convert the loan into the Company’s shares at an increasing conversion ratio as a factor of time. |
| | See d. below in respect of postponement of repayment date. |
| | On January 2, 2008, the date of the closing, the conversion rights on the loans were cancelled. |
| | 3) | On February 8, 2006 the Company was granted a loan by the CEO and shareholder of the Company in an amount of approximately $28,000. The loan is denominated in NIS and linked to the dollar and bears effective annual interest rate of 12%. The principal amount and interest will be repaid not later than the end of 2008. |
| | According to the terms of the loan the lender may convert the loan into the Company’s shares at a price of $136 per share. |
| | On November 1, 2007 an amount of approximately $40,000 was converted into 684 shares of the Company. |
| | 4) | On May 16, 2006 the Company was granted loans in the total amount of $360,000 by a group of lenders. The loans bear an effective annual interest rate of 14.33%. The principal amount and interest will be repaid 18 months after the grant date. According to the terms of the loan the lender may convert the loan into the Company’s shares. |
| | On December 30, 2007, the loans were converted into 1,838 shares of the Company. At time of the conversion, the conversion conditions were changed such that the conversion rate was changed from 4% to approximately 6%. |
| | d. | On November 5, 2007, the repayment date of loans in the total amount of $630,000 (including loans described in c(1) and c(2) above) have been postponed until IIS raises at least $6 million in equity or convertible debt financing ($1.655 million of this amount has already been raised). |
NOTE 3 – SHAREHOLDERS’ EQUITY
| | In the nine months ended September 30, 2007, loans in a total amount of $176 thousands were converted into 753 ordinary shares of NIS 0.1 par value of the Company. |
| | In addition, 2,417 ordinary shares of NIS 0.1 par value that were held by the Company were issued by the Company in consideration of $484 thousands. |
F - 67
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 – SHAREHOLDERS’ EQUITY(continued):
| | In August 2007 the Company approved an employee share option plan (hereafter – the Plan), according to which employees and service providers of the Company will receive up to 1,000 options, which each one could be exercised into one NIS 0.1 par value of Company’s ordinary shares. The ordinary shares that will be issued following the exercise of the options will be equal in rights to the Company’s ordinary shares immediately upon their allocation. |
| | The share option plan is subject to the capital gain track stipulated by the section 102 of the Israeli Income Tax Ordinance. Pursuant to the terms thereof, the Company is not allowed to claim, as an expense for tax purposes, the amounts credited to employees as a benefit, including amounts recorded as salary benefits in the Company’s accounts, in respect of options granted to employees under the Plan – with the exception of the work-income benefit component, if any, determined on the grant date. |
| | In September 2007, the Company granted, according to the Plan, 1,000 options to employees, at an exercise price of NIS 0.1 per share. All of options vested immediately. All of the options were exercised until the approval of these financial statements. The Company estimated that the fair value of the options on the date of grant is approximately $122,000. |
| | The Company issued 1,000 ordinary shares of NIS 0.1 par value each for the exercise of the above options. |
NOTE 4 – SUBSEQUENT EVENTS:
| | a. | As to MOA and the assignment of the Exchange Agreement see note 1a(1). |
| | b. | On December 20, 2007, the IIS’s general shareholders meeting approved the Exchange Agreement with the Company and all its shareholders for the acquisition of all the outstanding shares of the Company in exchange for the issuance of 11,552,229 shares of IIS to the shareholders of the Company, representing approximately 50% of the issued and outstanding shares of IIS less those shares due to IIS by virtue of the loan agreement between IIS and the Company. Following the transaction, the Company will become a wholly owned subsidiary of IIS. According to the agreement, IIS will grant stock options to the senior management and shareholders of the Company to purchase an aggregate of 2,300,000 shares of IIS at an exercise price equal to the average trading share price during the twenty (20) trading days prior to the Closing, vesting in eight (8) semi – annual installments as long as each such executive continues to be employed by IIS. |
| | In addition, according to the agreement , IIS will increase the shares reserved for issuance to directors, employees, consultants and service providers of IIS and its subsidiaries pursuant to its incentive stock option plans by an additional 1,000,000 shares so that the total amount of shares reserved for issuance pursuant to such plan will be 3,300,000. |
| | In addition, IIS will issue to all registered shareholders of IIS as of November 9, 2007 (the “record date”) warrants to purchase an aggregate of 4,600,000 Ordinary Shares of IIS nominal value NIS 0.003 per share, on a pro-rata basis according to the percentage holding of each such shareholder in the issued and outstanding share capital of IIS on such record date. These warrants will be exercisable until the earlier of (i) five years from the date of issuance, and (ii) the closing of a Transaction. A “Transaction” means each of (i) merger, acquisition or reorganization of IIS with one or more other entities in which IIS is not the surviving entity, or (ii) a sale of all or substantially all of the assets or shares of IIS. The exercise price of each warrant shall be the average trading price per share of IIS’s Ordinary Shares during the twenty trading days prior to the Closing. |
F - 68
WITECH COMMUNICATIONS LTD
(An Israeli corporation)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4 – SUBSEQUENT EVENTS(continued):
| | These warrants will be non-transferable and non-exercisable until all applicable Israeli and United States securities laws and regulations have been complied with in connection with the warrants and the underlying shares, including without limitation, that a registration statement covering the underlying shares is declared effective by the United States Securities and Exchange Commission. |
| | c. | On October 7, 2007 and on November 5, 2007, IIS signed loan agreements with the Company to an aggregate amount of $1,200,000 to the Company, at the same terms as the loans referred to in note 2b. |
| | d. | Subsequent to September 30, 2007, loans in a total amount of $400 thousands were converted into 2,522 ordinary shares of NIS 0.1 par value of the Company, from which 684 ordinary shares were held by the Company. In addition the Company issued 1,434 ordinary shares of NIS 0.1 par value in respect of finder’s fee and additional 35 ordinary shares in respect of a short term loan received and repaid during the year 2007. |
| | e. | On December 31, 2007, the Company and Mizrahi-Tefahot bank(“the Bank”) signed a Notice And Agreement Of Exercise And Redemption (“the Notice”) in respect of the two loans received from the Bank in 2006. According to the Notice, The Bank will receive 610 ordinary shares of the Company and will redeem and convert the rest of the warrants into a one-time payment of $200,000. Upon the fulfillments of these terms, the Bank will have no further rights under the warrants. |
| | The Company allocated the above shares on December 31, 2007 and paid the amount of $200,000 on December 16, 2007. |
| | On that day the Company received a new loan from the Bank in the amount of the payment, which bears an effective annual interest rate of Libor+5% and will be repaid in 12 monthly installments commencing July 2008. |
F - 69
UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL STATEMENTS
The statements contained in this section may be deemed to be forward-looking statements within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. Forward-looking statements are typically identified by the words “believe,” “expect,” “anticipate,” “intend,” “estimate” and similar expressions. These forward-looking statements are based largely on management’s expectations and are subject to a number of uncertainties. Actual results could differ materially from these forward-looking statements. Neither IIS nor Witech undertake any obligation to update publicly or revise any forward-looking statements.
The unaudited condensed combined pro forma statements of operations combine the consolidated statements of operations of Witech and IIS giving the effect to the Share Exchange Agreement (the “Exchange Agreement”) as if the Exchange Agreement occurred on January 1, 2006. The unaudited condensed combined pro forma balance sheet combines the consolidated balance sheets of Witech and IIS giving the effect to the Exchange Agreement as if the Exchange Agreement occurred on September 30, 2007.
The unaudited pro forma condensed combined financial statements were prepared using the purchase method of accounting. The allocation of the purchase price as reflected in these pro forma combined condensed financial statements has been based upon preliminary estimates of the fair value of assets acquired and liabilities assumed as of the date of the Exchange Agreement. Management, with the assistance of independent valuation specialists, is currently assessing the fair values of the tangible and intangible assets acquired and liabilities assumed. This preliminary allocation of the purchase price is dependent upon certain estimates and assumptions, which are preliminary and have been made solely for the purpose of developing such pro forma condensed combined financial statements.
A final determination of the fair values of Witech’s assets and liabilities, will be based on the actual net tangible and intangible assets of Witech that exist as of the date of completion of the Exchange Agreement and such valuations could change significantly upon the completion of further analyses and asset valuations from those used in the combined condensed pro forma financial statements presented below, and could result in a material change in amortization of acquired intangible assets.
The unaudited pro forma combined condensed financial statements are not necessarily and should not be assumed to be an indication of the results that would have been achieved had the transaction been completed as of the dates indicated or that may be achieved in the future. The unaudited pro forma combined condensed financial statements should be read in conjunction with the respective historical financial statements and the notes thereto of both IIS and Witech, which are incorporated by reference into this Registration Statement.
F - 70
PRO FORMA FINANCIAL DATA
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2007
(U.S. dollars in thousands, except share and share data)
| IIS
| Witech
| Adjustments
| Note
| Pro forma
|
|---|
| | | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| Revenues | | | | 33 | | | 1,369 | | | (33 | ) | | (1) | | | 1,369 | |
| Cost of revenues | | | | | | | 1,573 | | | 305 | | | (2) | | | 1,878 | |
|
| |
| |
| | | |
| |
| Gross income (loss) | | | | 33 | | | (204 | ) | | (338 | ) | | | | | (509 | ) |
| Research and development expenses, net | | | | | | | 239 | | | | | | | | | 239 | |
| Selling, general and administrative, expenses | | | | 479 | | | 2,085 | | | 257 | | | (1),(2),(7) | | | 2,821 | |
|
| |
| |
| | | |
| |
| Operating loss | | | | (446 | ) | | (2,528 | ) | | (595 | ) | | | | | (3,569 | ) |
| Financial income (expenses), net | | | | 251 | | | (538 | ) | | (38 | ) | | (3) | | | (325 | ) |
|
| |
| |
| | | |
| |
| Loss before taxes on income | | | | (195 | ) | | (3,066 | ) | | (633 | ) | | | | | (3,894 | ) |
| Taxes on income (tax benefit) | | | | 10 | | | 77 | | | (125 | ) | | (4) | | | (38 | ) |
|
| |
| |
| | | |
| |
| Net loss for the period | | | | (205 | ) | | (3,143 | ) | | (508 | ) | | | | | (3,856 | ) |
|
| |
| |
| | | |
| |
| | | |
Net loss per share of ordinary shares-
Basic and diluted | | | | (0.02 | ) | | | | | | | | (6) | | | (0.17 | ) |
|
| | | | | | | |
| |
| | | |
| Weighted average number of ordinary | | |
| shares used in computing loss per | | |
| ordinary share- | | |
| basic and diluted | | | | 11,576 | | | | | | | | | (6) | | | 23,129 | |
|
| | | | | | | |
| |
See accompanying notes to unaudited pro forma financial statements of the Combined Group.
F - 71
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
For the Year Ended December 31, 2006
(U.S. dollars in thousands, except share and share data)
| IIS
| Witech
| Adjustments
| Note
| Pro forma
|
|---|
| | | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| Revenues | | | | | | | 272 | | | | | | | | | 272 | |
| Cost of revenues | | | | | | | 740 | | | 407 | | | (2) | | | 1,147 | |
| | |
| |
| | | |
| |
| Gross loss | | | | | | | (468 | ) | | (407 | ) | | | | | (875 | ) |
| Research and development expenses, net | | | | | | | 407 | | | | | | | | | 407 | |
| Selling, general and administrative expenses | | | | 91 | | | 820 | | | 387 | | | (2),(7) | | | 1,298 | |
|
| |
| |
| | | |
| |
| Operating loss | | | | (91 | ) | | (1,695 | ) | | (794 | ) | | | | | (2,580 | ) |
| Capital gain from disposal of investment | | | | 4,713 | | | | | | | | | | | | 4,713 | |
| Financial income (expenses), net | | | | 17 | | | (316 | ) | | (101 | ) | | (3) | | | (400 | ) |
|
| |
| |
| | | |
| |
| Income (loss) before taxes on income | | | | 4,639 | | | (2,011 | ) | | (895 | ) | | | | | 1,733 | |
| Taxes on income (tax benefit) | | | | | | | 5 | | | (166 | ) | | (4) | | | (161 | ) |
|
| |
| |
| | | |
| |
| Net income (loss) for the period | | | | 4,639 | | | (2,016 | ) | | (729 | ) | | | | | 1,894 | |
|
| |
| |
| | | |
| |
| | | |
| Net income per share of ordinary | | |
| shares- basic and diluted | | | | 0.40 | | | | | | | | | (6) | | | 0.08 | |
|
| | | | | | | |
| |
| | | |
Weighted average number of ordinary
shares used in computing income per
ordinary shares: | | |
| Basic | | | | 11,576 | | | | | | | | | (6) | | | 23,129 | |
|
| | | | | | | |
| |
| Diluted | | | | 11,576 | | | | | | | | | (6) | | | 25,675 | |
|
| | | | | | | |
| |
F - 72
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
As of September 30, 2007
(U.S. dollars in thousands)
| IIS
| Witech
| Adjustments
| Note
| Pro forma
|
|---|
| | | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| Assets | | | | | | | | | | | | | | | | | |
| Current assets: | | |
| Cash and cash equivalents | | | | 881 | | | 82 | | | 1,655 | | | (f) | | | 2,618 | |
| Restricted bank deposit | | | | | | | 64 | | | | | | | | | 64 | |
| Accounts receivables - other | | | | 71 | | | 599 | | | (35 | ) | | (a) | | | 635 | |
| Inventory | | | | | | | 35 | | | | | | | | | 35 | |
|
| |
| |
| | | |
| |
| T o t a l current assets | | | | 952 | | | 780 | | | 1,620 | | | | | | 3,352 | |
|
| |
| |
| | | |
| |
| Fixed assets, net | | | | 1 | | | 2,305 | | | | | | | | | 2,306 | |
|
| |
| | | | | |
| |
| Long term assets: | | |
| Loans | | | | 3,566 | | | | | | (3,566 | ) | | (a) | | | | |
| Funds in respect of employee rights | | |
| upon retirement | | | | 5 | | | 92 | | | | | | | | | 97 | |
|
| |
| |
| | | |
| |
| | | | | 3,571 | | | 92 | | | (3,566 | ) | | | | | 97 | |
|
| |
| |
| | | |
| |
| Intangible assets and goodwill: | | |
| Goodwill | | | | | | | | | | 4,176 | | | (c) | | | 4,176 | |
| Other intangible assets | | | | | | | | | | 6,135 | | | (b) | | | 6,135 | |
| | | | |
| | | |
| |
| | | | | | | | | | | 10,311 | | | | | | 10,311 | |
| | | | |
| | | |
| |
| Total assets | | | $ | 4,524 | | $ | 3,177 | | $ | 8,365 | | | | | $ | 16,066 | |
|
| |
| |
| | | |
| |
F - 73
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
As of September 30, 2007
(U.S. dollars in thousands)
| IIS
| Witech
| Adjustments
| Note
| Pro forma
|
|---|
| | | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| | | | | |
|---|
| Liabilities and shareholders' equity | | | | | | | | | | | | | | | | | |
| (Net of capital deficiency) | | |
| Current liabilities: | | |
| Credit from banks and current | | |
| maturities of long term loans | | | $ | 469 | | | 4,033 | | | (3,516 | ) | | (a),(g) | | | 517 | |
| Accounts payable and accruals: | | |
| Trade payables | | | | 92 | | | 435 | | | (7 | ) | | (a) | | | 428 | |
| Other | | | | 267 | | | 1,090 | | | 82 | | | (a),(h) | | | 1,439 | |
|
| |
| |
| | | |
| |
| T o t a l current liabilities | | | | 267 | | | 5,558 | | | (3,441 | ) | | | | | 2,384 | |
|
| |
| |
| | | |
| |
| Long-term liabilities: | | |
| Loans (net of current maturities): | | |
| Bank loans | | | | 137 | | | 47 | | | 150 | | | (g) | | | 197 | |
| Other loans and convertible loans | | | | 801 | | | 787 | | | 1,655 | | | (f) | | | 2,442 | |
| Warrants issued to a bank | | | | 131 | | | 167 | | | (167 | ) | | (g) | | | | |
| Deferred income tax liability | | | | | | | | | | 1,534 | | | (d) | | | 1,534 | |
| Provision for uncertain tax position | | | | 14 | | | 60 | | | | | | | | | 74 | |
| Liability for employee rights upon | | |
| retirement | | | | 5 | | | 139 | | | | | | | | | 144 | |
|
| |
| |
| | | |
| |
| Total long-term liabilities | | | | 19 | | | 1,200 | | | 3,172 | | | | | | 4,391 | |
|
| |
| |
| | | |
| |
| Total liabilities | | | | 286 | | | 6,758 | | | (269 | ) | | | | | 6,775 | |
|
| |
| |
| | | |
| |
| Shareholders' equity (capital Deficiency): | | |
| Ordinary shares | | | | 55 | | | 1 | | | (1 | ) | | (e) | | | 55 | |
| Additional paid-in capital | | | | 41,417 | | | 2,317 | | | 3,269 | | | (e) | | | 47,003 | |
| Accumulated deficit | | | | (37,234 | ) | | (5,899 | ) | | 5,366 | | | (e),(h),(g) | | | (37,767 | ) |
|
| |
| |
| | | |
| |
| Total shareholders' equity (capital | | |
| deficiency) | | | | 4,238 | | | (3,581 | ) | | 8,634 | | | | | | 9,291 | |
|
| |
| |
| | | |
| |
| Total liabilities and shareholders' equity | | |
| (net of capital deficiency) | | | $ | 4,524 | | $ | 3,177 | | $ | 8,365 | | | | | $ | 16,066 | |
|
| |
| |
| | | |
| |
F - 74
NOTES TO UNAUDITED CONDENSED COMBINED
PRO FORMA FINANCIAL STATEMENTS
(in thousands, share prices and per share amounts)
On February 20, 2007, the Company and Witech signed a Memorandum Of Agreement (“MOA”) with respect to a contemplated merger between the Company and Witech, under which the Company is to acquire full control and ownership of Witech, in consideration of 50% of the Company’s shares.
On November 5, 2007, the Company signed a Exchange Agreement with Witech for the acquisition of all the outstanding shares of Witech in exchange for the issuance of the Company’s shares.
According to the agreement, the Company will grant stock options to the senior management and shareholders of Witech to purchase an aggregate of 2,300,000 shares of the Company at an exercise price equal to the average trading share price during the twenty (20) trading days prior to the closing of the transaction, vesting in eight (8) semi – annual installments as long as each such executive continues to be employed by the Company.
In addition, the Company notified that, subject to and following compliance with applicable Israeli and United States securities laws and regulations, it intends to issue to all registered shareholders of the Company as of November 9, 2007 (the “record date”) warrants to purchase an aggregate of 4,600,000 Ordinary Shares of the Company, with a nominal value of NIS 0.003 per share, on a pro-rata basis according to the percentage holding of each such shareholder in the issued and outstanding share capital of the Company on such record date. These warrants will be exercisable until the earlier of (i) five years from the date of issuance, and (ii) the closing of a Transaction. A “Transaction” means each of (i) merger, acquisition or reorganization of the Company with one or more other entities in which the Company is not the surviving entity, or (ii) a sale of all or substantially all of the assets or shares of the Company. The exercise price of each warrant shall be the average trading price per share of the Company’s Ordinary Shares during the twenty trading days prior to the Closing.
On December 20, 2007, the Company’s general shareholders meeting approved the Exchange Agreement with Witech and all its shareholders for the acquisition of all the outstanding shares of Witech in exchange for the issuance of 11,552,229 shares of the Company to the shareholders of Witech, representing approximately 50% of the issued and outstanding shares of the Company less those shares due to the Company by virtue of the loan agreement between the Company and Witech. Following the transaction, Witech will become a wholly owned subsidiary of the Company. The closing of the transaction was on January 2, 2008.
The measurement date for the purpose of determining the purchase price was November 5, 2007, the date of the Exchange Agreement, this due to the fact that there has been a substantive change in the consideration when compared with the original terms agreed upon in the MOA. The total consideration for the acquisition, calculated based upon the average of the closing prices per share for the period two days before through two days after the announcement of the Exchange Agreement, net of the estimated fair value of the warrants (see below), and estimated transaction costs, is $5.3 million.
These unaudited condensed combined pro forma financial statements reflect a preliminary allocation of the purchase price as if the transaction had been completed on January 1, 2006 with respect to the statements of operations, and on September 30, 2007, with respect to the balance sheet. The pro forma combined condensed statements of operations do not include any non-recurring charges directly attributable to the transaction. The pro forma adjustments are based on preliminary estimates, which may change as additional information is obtained.
Adjustments to unaudited combined condensed pro forma balance sheet as of September 30, 2007
| (a) | Elimination of inter-company loans and other balances which amounted to $3,601. |
| (b) | Fair value of identifiable intangible assets acquired. |
| (c) | The estimated purchase price of $5.3 million has been calculated and preliminarily assigned to the net tangible and intangible assets acquired as follows: |
F - 75
| U.S. dollars in thousands
|
|---|
| | | |
|---|
| | |
|---|
| | |
|---|
| | |
|---|
| Number of IIS shares issued to Witech's shareholders | | | | 11,552,229 | | | | |
| Multiplied by IIS's average stock price for the period two business days before and | | |
| through the two business days after the November 5, 2007 Exchange Agreement date, net of | | |
| the estimated fair value of the warrants | | | $ | 0.45 | | | | |
|
| | | |
| | | | | | | $ | 5,198 | |
| Estimated transactions costs | | | | | | | 130 | |
| | |
| |
| Estimated purchase price | | | | | | $ | 5,328 | |
| | |
| |
| | | |
| The preliminary allocation of the estimated purchase price based on the estimated fair | | |
| values of Witech's assets acquired and liabilities assumed in the acquisition is as | | |
| follows: | | |
| Net tangible assets (1) | | | | | | $ | (5,115 | ) |
| Identifiable intangible assets (3) | | | | | | | 6,135 | |
| In-process research and development (2) | | | | | | | 132 | |
| Goodwill (3) | | | | | | | 4,176 | |
| Total purchase price | | | | | | $ | 5,328 | |
| (1) | Net tangible assets of Witech include, in addition to the carrying amount of net tangible assets as of September 30, 2007, deferred income taxes. No adjustments have been made to the carrying value of tangible assets of Witech. Such adjustments would change the allocation of the purchase consideration to goodwill. |
| (2) | The amount allocated to in-process research and development represents an estimate of the fair value of purchased in-process research projects that, as of the closing date of the Exchange Agreement, will not have reached technological feasibility and have no alternative future use. The preliminary estimate of in-process research and development is $132,000. Because this expense is directly attributable to the acquisition and will not have a continuing impact, it is not reflected in the unaudited condensed combined pro forma statements of operations. However, this item will be recorded as a charge against income in the period in which the transaction occurs. The amount of in-process research and development is subject to change and will be finalized upon valuation. |
| | For every incremental $100 thousands increase to the amount allocated to in-process research and development expense, there will be a $100 thousand decrease to net income in the period in which the transaction occurs. Additionally, goodwill will also each decrease by $100 thousands. |
| (3) | The excess of the purchase price over the estimated fair value of identifiable net assets acquired, has been classified as goodwill. Amortization of intangible assets which comprises of developed technology, existing contracts and brand name, has been provided over an estimated useful life of 7-13 years using a straight-line method. The amount of intangible assets, estimated useful life and amortization methodology are subject to the completion of an evaluation. Assuming a tax rate of 25%, for every additional $1 million allocated to intangible assets, goodwill will decrease by $750 thousands and non-current deferred income tax liabilities will increase by $250 thousands. |
F - 76
| (d) | Deferred income tax liabilities provided in respect of identifiable intangible assets acquired. |
| (e) | Elimination of all components of Witech’s capital deficiency and the issuance of the shares as part of the consideration in the transaction. |
| (f) | Convertible loan received in contemplation of the transaction. |
| (g) | Redemption and conversion of warrants in the amount of $167 thousand, resulting in the increase of accumulated deficit in the amount of $117 thousand and a new loan received to finance such redemption, in the amount of $200 thousand, of which $50 thousand are classified as a current liability. |
| (h) | Finders’ fees payable in connection with the closing of the transaction, in the amount of $284 thousand, of which $110 thousand is outstanding, and classified as other payables. |
Adjustments to unaudited combined condensed pro forma statements of operations
| | (1) | Elimination of inter-company management fee. |
| | (2) | Amortization of intangible assets established as part of the purchase price allocation in connection with the acquisition. Intangible assets are amortized on a straight-line basis over their estimated useful lives of 7-13 years. The amount of intangible assets, estimated useful life and amortization methodology are subject to the completion of an evaluation. Assuming a useful life of 7-13 years, straight-line amortization and a tax rate of 25%, for every additional $1 million allocated to intangible assets, net income will decrease by $81 thousands and $61 thousands in the year ended December 31, 2006 and the nine months ended September 30, 2007, respectively. |
| | (3) | Additional interest on convertible loan and loan received, amounting to $115 thousand and $132 thousand in the year ended December 31, 2006 and the nine months ended September 30, 2007, respectively, less add back of interest on loans converted, amounting to $77 thousand and $31 thousand in the year ended December 31, 2006 and the nine months ended September 30, 2007, respectively, in contemplation of the transaction, |
| | (4) | Reflecting the tax effect of the pro forma adjustments relating to the amortization of intangible assets, using the applicable tax rates. |
| | (5) | The unaudited pro forma condensed combined financial information gives effect to the issuance of 11.6 million IIS shares. |
| | (6) | The calculation of the weighted average number of ordinary shares for pro forma basic earnings per ordinary shares gives effect to the issuance of approximately 11.5 million IIS shares in the transaction, assuming these were issued on January 1, 2006. The calculation of the weighted average number of ordinary shares issued in pro forma diluted earnings per ordinary share gives effect to the issuance of approximately 11.6 million ordinary shares issued in the transaction and the dilutive effect of approximately $1.6 million convertible securities issued assuming these were issued on January 1, 2006. |
| | (7) | Stock based compensation regarding stock options granted to Witech’s senior management and shareholders. The fair market value of such IIS stock options issued was determined using the Black-Scholes option pricing model with the following assumptions: stock price of $0.32 (date of closing); dividend yield of 0%; expected volatility of 86%; risk-free interest rate of 3.88%; and an expected life of 6.1 years. Stock based compensation expenses amounted to $92 thousand and $129 thousand in the year ended December 31, 2006 and the nine months ended September 30, 2007, respectively. |
F - 77
