THIS
DOCUMENT IS A COPY OF THE ANNUAL REPORT ON FORM 20-F FILED ON JULY 1, 2008
PURSUANT TO RULE 201 OF REGULATION S-T, TEMPORARY HARDSHIP
EXEMPTION.
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
20–F
¨
|
REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE
ACT
OF 1934
|
OR
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the fiscal year ended December 31, 2007
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from
to
OR
¨
|
SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
|
Date
of
event requiring this shell company report _____________
Commission
file number 000-31215
MIND
C.T.I. LTD.
(Exact
name of Registrant as specified in its charter
and
translation of Registrant’s name into English)
ISRAEL
(Jurisdiction
of incorporation or organization)
Industrial
Park, Building #7, Yoqneam, 20692, Israel
(Address
of principal executive offices)
Itay
Barzilay
c/o
MIND
C.T.I. Ltd.
Industrial
Park, Building #7
Yoqneam,
20692, Israel
Tel:
+972-4-9936666
Securities
registered or to be registered pursuant to Section 12(b) of the
Act.
Title
of each class
|
Name
of each exchange on which registered
|
Ordinary
Shares,
|
|
nominal
value NIS 0.01 per share
|
Nasdaq
Global Market
|
Securities
registered or to be registered pursuant to Section 12(g) of the
Act.
None
(Title
of
Class)
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act.
None
(Title
of
Class)
Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report.
As
of
December 31, 2007, the Registrant had outstanding 21,594,010
Ordinary
Shares, nominal value NIS 0.01 per share.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. ¨ Yes x No
If
this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d)
of
the Securities Exchange Act of 1934. ¨
Yes
x No
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
x
Yes
¨ No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer x
|
Indicate
by check mark which basis of accounting the registrant has used to prepare
the
financial statements included in this filing:
U.S.
GAAP x
|
International
Financial Reporting Standards as issued by the International Accounting
Standards Board ¨
|
Other
¨
|
If
“Other” has been checked in response to the previous question, indicate by check
mark which financial statement item the registrant has elected to
follow.
Item
17
¨ Item
18
¨
If
this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act). ¨Yes
x
No
Unless
the context requires otherwise, “MIND”, “us”, “we” and “our” refer to MIND
C.T.I. Ltd. and its subsidiaries.
FORWARD
LOOKING STATEMENTS
Statements
in this annual report concerning our business outlook or future economic
performance; anticipated revenues, expenses or other financial items;
introductions and advancements in development of products, and plans and
objectives related thereto; and statements concerning assumptions made or
expectations as to any future events, conditions, performance or other matters,
are “forward-looking statements” as that term is defined under the United States
Federal Securities Laws. Forward-looking statements are subject to risks,
uncertainties and other factors, which could cause actual results to differ
materially from those stated in such statements. Factors that could cause or
contribute to such differences include, but are not limited to, those set forth
under “Risk Factors” in this annual report as well as those discussed elsewhere
in this annual report and in our other filings with the Securities and Exchange
Commission.
PART
I
Item
1. |
Identity
of Directors, Senior Management and
Advisers
|
Not
applicable.
Item
2. |
Offer
Statistics and Expected
Timetable
|
Not
applicable.
A. |
Selected
Financial Data
|
Except
as
otherwise indicated, all financial statements and other financial information
included in this annual report are presented solely under U.S.
GAAP.
The
following table presents selected consolidated financial data as of and for
each
of the five years in the period ended December 31, 2007. The selected
consolidated financial data presented below are derived from our audited
consolidated financial statements for these periods, and should be read in
conjunction with these financial statements and the related notes thereto.
Our
audited consolidated financial statements as of December 31, 2006 and 2007
and
for each of the three years in the period ended December 31, 2007 and the
related notes thereto are included elsewhere in this annual report. You should
read the selected financial data in conjunction with Item 5 “Operating and
Financial Review and Prospects.”
|
|
Years ended December 31,
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
(In US $ thousands, except share and per share data)
|
|
Consolidated
Statements of Operations Data:
|
|
|
|
Revenues:
|
|
|
|
Sales
of licenses
|
|
$
|
8,105
|
|
$
|
11,699
|
|
$
|
7,420
|
|
$
|
8,467
|
|
$
|
5,903
|
|
Services
|
|
|
4,831
|
|
|
6,107
|
|
|
8,181
|
|
|
11,593
|
|
|
12,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
12,936
|
|
|
17,806
|
|
|
15,601
|
|
|
20,060
|
|
|
18,447
|
|
Cost
of revenues
|
|
|
3,208
|
|
|
4,394
|
|
|
4,015
|
|
|
5,675
|
|
|
5,784
|
|
Gross
profit
|
|
|
9,728
|
|
|
13,412
|
|
|
11,586
|
|
|
14,385
|
|
|
12,663
|
|
Research
and development expenses
|
|
|
3,319
|
|
|
3,833
|
|
|
5,086
|
|
|
6,118
|
|
|
5,714
|
|
Selling,
general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing expenses
|
|
|
4,065
|
|
|
4,517
|
|
|
2,148
|
|
|
3,628
|
|
|
3,846
|
|
General
and administrative
expenses
|
|
|
1,115
|
|
|
1,857
|
|
|
1,507
|
|
|
2,135
|
|
|
1,845
|
|
Operating
income
|
|
|
1,229
|
|
|
3,205
|
|
|
2,845
|
|
|
2,504
|
|
|
1,258
|
|
Financial
income (expenses)- net
|
|
|
2,573
|
|
|
3,834
|
|
|
1,260
|
|
|
(222
|
)
|
|
2,082
|
|
Impairment
of Auction Rate Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,187
|
)
|
Income
(loss) before taxes on income
|
|
|
3,802
|
|
|
7,039
|
|
|
4,105
|
|
|
2,282
|
|
|
(11,847
|
)
|
Taxes
on income
|
|
|
169
|
|
|
162
|
|
|
43
|
|
|
1,373
|
|
|
108
|
|
Net
income (loss)
|
|
$
|
3,633
|
|
$
|
6,877
|
|
$
|
4,062
|
|
$
|
909
|
|
$
|
(11,955
|
)
|
Earnings
(loss) per ordinary share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.18
|
|
$
|
0.33
|
|
$
|
0.19
|
|
$
|
0.04
|
|
$
|
(0.55
|
)
|
Diluted
|
|
$
|
0.17
|
|
$
|
0.32
|
|
$
|
0.19
|
|
$
|
0.04
|
|
$
|
(0.55
|
)
|
Weighted
average number of ordinary shares used in computation of earnings
per
ordinary share – in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
20,732
|
|
|
21,089
|
|
|
21,431
|
|
|
21,515
|
|
|
21,586
|
|
Diluted
|
|
|
21,143
|
|
|
21,468
|
|
|
21,619
|
|
|
21,546
|
|
|
21,586
|
|
|
|
As of December 31,
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
(In US $ thousands)
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
Cash
and cash equivalents
|
|
$
|
4,391
|
|
$
|
18,687
|
|
$
|
10,174
|
|
$
|
4,771
|
|
$
|
12,390
|
|
Working
capital
|
|
|
4,006
|
|
|
18,866
|
|
|
9,471
|
|
|
28,926
|
|
|
13,441
|
|
Total
assets
|
|
|
49,979
|
|
|
55,716
|
|
|
55,652
|
|
|
53,791
|
|
|
37,726
|
|
Share
capital and additional paid-in capital
|
|
|
58,567
|
|
|
59,130
|
|
|
59,452
|
|
|
59,926
|
|
|
57,934
|
|
Total
shareholders’ equity
|
|
|
45,540
|
|
|
50,244
|
|
|
49,485
|
|
|
47,859
|
|
|
31,809
|
|
B. |
Capitalization
and Indebtedness
|
Not
applicable.
C. |
Reasons
for the Offer and Use of Proceeds
|
Not
applicable.
We
believe that the occurrence of any one or some combination of the following
factors would have a material adverse effect on our business, financial
condition and results of operations.
Risks
Relating to Our Business
We
have invested material funds in auction rate securities, whose value has been
materially impaired and may be further impaired and whose illiquidity may limit
our ability to pursue acquisitions.
At
December 31, 2007, we had an investment in the amount of $20.3 million in
auction rate securities. Auction rate securities include long-term bonds that
provide liquidity through a Dutch auction process that resets the applicable
interest rate at pre-determined calendar intervals, generally every 28 days.
This mechanism allows existing investors either to roll over their holdings,
whereby they will continue to own their respective securities, or liquidate
their holding by selling such securities at par. The auctions have historically
provided a liquid market for these securities as investors historically could
readily sell their investments at auction. With the liquidity problems recently
experienced in global credit and capital markets, certain auction rate
securities experienced multiple failed auctions, beginning in August 2007 as
the
amount of securities submitted for sale exceeded the amount of purchase orders.
The estimated fair value of our auction rate security as
of
December 31, 2007 was $5.1 million. Accordingly, we have recorded an impairment
charge for 2007 in the amount of $15.2 million in respect of our auction rate
security. If uncertainties in credit markets continue or if such markets
deteriorate further, we may incur additional impairments to our auction rate
security.
The
stated maturity of these securities is 2046. There is currently a very limited
market for these auction rate securities, and liquidation by us at this time,
if
possible, would likely be at a significant discount. Our cash and cash
equivalents as of December 31, 2007 were $12.4 million. This situation leaves
us
with limited cash resources with which to pursue our acquisition strategy.
If
market conditions require us to record any additional impairment or if our
business needs require us to liquidate all or a portion of our auction rate
securities, there could be a material adverse affect on our financial condition
and results of operations.
We
seek to expand our business through acquisitions that could result in diversion
of resources and extra expenses, and which may involve other risks that could
disrupt our business and harm our financial condition.
We
pursue
acquisitions of business, products and technologies, or the establishment of
joint venture arrangements, that could expand our business. The negotiation
of
potential acquisitions or joint ventures as well as the integration of an
acquired or jointly developed business, technology or product could cause
diversion of management's attention from the day-to-day operation of our
business. This could impair our relationships with our employees, customers,
distributors, resellers and marketing allies. Future acquisitions could result
in:
|
·
|
potentially
dilutive issuances of equity
securities;
|
|
·
|
the
incurrence of debt and contingent liabilities;
|
|
·
|
amortization
of intangible assets;
|
|
·
|
changes
in our business model and margins;
|
|
·
|
research
and development write-offs; and
|
|
·
|
other
acquisition-related expenses.
|
Future
acquisitions involve known and unknown risks that could adversely affect our
future revenues and operating results. For example:
|
·
|
we
may fail to identify acquisitions that enable us to execute our business
strategy;
|
|
·
|
we
compete with others to acquire companies. We believe that this competition
has intensified and may result in decreased availability of, or increased
prices for, suitable acquisition
candidates;
|
|
·
|
we
may not be able to obtain the necessary regulatory approvals, including
the approval of anti-competition regulatory bodies, in countries
where we
are seeking to consummate
acquisitions;
|
|
·
|
we
may ultimately fail to consummate an acquisition even if we announce
that
we plan to acquire a company;
|
|
·
|
we
may fail to successfully integrate acquisitions in accordance with
our
business strategy;
|
|
·
|
we
may not be able to retain the skilled employees and experienced management
that may be necessary to operate the businesses we acquire and, if
we
cannot retain such personnel, we may not be able to attract new skilled
employees and experienced management to replace them;
and
|
|
·
|
we
may purchase a company that has contingent liabilities that include,
among
others, known or unknown patent or product.
|
In
addition, we have limited experience with respect to negotiating an acquisition
and operating an acquired business. If future acquisitions disrupt our
operations, our business may suffer.
If
we fail to attract and retain qualified personnel we will not be able to
implement our business strategy or operate our business
effectively.
Our
products require sophisticated research and development, sales and marketing,
software programming and technical customer support. Our success depends on
our
ability to attract, train, motivate and retain highly skilled personnel within
each of these areas of expertise. Qualified personnel in these areas are in
great demand and are likely to remain a limited resource for the foreseeable
future. We cannot assure you that we will be able to retain the skilled
employees we require. In addition, the resources required to retain such
personnel may adversely affect our operating margins. The failure to retain
qualified personnel may harm our business. In particular, we maintain a large
technical and support center in Jassy, Romania and have encountered many
attempts from other technology companies to recruit our employees after we
have
trained them. If this phenomenon continues and increases, we may be forced
to
raise the salaries of our Romanian employees and our results of operations
will
be harmed.
Because
a substantial majority of our revenues are generated outside of Israel, our
results of operations could suffer if we are unable to manage international
operations effectively.
In
2006
and 2007, approximately 94% and 93% of our revenues, respectively, were
generated outside of Israel. Our sales outside of Israel are made in more than
40 countries. We currently have sales and support offices located in Silver
Spring, Maryland and in Reading, U.K. In addition, we have a technical and
support team in Jassy, Romania. We plan to establish additional facilities
in
other parts of the world, either through acquisitions or internal expansion
based on market needs. The expansion of our existing international operations
and entry into additional international markets will require significant
management attention and financial resources. Our ability to penetrate some
international markets may be limited due to different technical standards,
protocols and requirements for our products in different markets. We cannot
be
certain that our investments in establishing facilities in other countries
will
produce desired levels of revenue. In addition, conducting our business
internationally subjects us to a number of risks, including:
|
·
|
staffing
and managing foreign operations;
|
|
·
|
increased
risk of collection;
|
|
·
|
potentially
adverse tax consequences;
|
|
·
|
the
burden of compliance with a wide variety of foreign laws and regulations;
|
|
·
|
burdens
that may be imposed by tariffs and other trade barriers;
and
|
|
·
|
political
and economic instability.
|
Because
some of our customers require a lengthy approval process before they order
our
products, our sales process is often subject to delays that may decrease our
revenues and seriously harm our business.
In
2007,
we derived 83% of our revenues from the sale of software and related services
to
telecommunications service providers. Before we can sell our software to some
of
these customers, they conduct a lengthy and complex approval and purchasing
process. The following factors, among others, affect the length of the approval
process:
|
·
|
the
time required for our customers to determine and announce their
specifications;
|
|
·
|
the
time required for the customer to receive the internal approvals
necessary
in order for it to commit significant resources towards acquisition
of the
billing solution;
|
|
·
|
the
build-up of the customer's network infrastructure;
and
|
|
·
|
the
timely release of new versions of products comprising enhanced
functionality, specifically requested by the
customer.
|
Additional
delays in product approval may decrease our revenues and could seriously harm
our business and results of operations.
A
slow down in expenditures by telecommunications service providers could have
a
material adverse effect on our results of operations.
There
is
a global uncertainty with respect to the direction of the economy and the
telecommunications market. Many new and small service providers have failed
and
existing service providers have been reducing or delaying expenditures on new
equipment and applications. A continuation of such delays or a decline in
capital expenditures by telecommunications service providers may reduce our
sales and could result in additional pressure on the price of our products,
both
of which would have a material adverse effect on our operating results.
If
we are unable to compete effectively in the marketplace, we may suffer a
decrease in market share, revenues and profitability.
Competition
in our industry is intense and we expect competition to increase. We compete
both with established global billing companies such as Comverse (after the
acquisition of the Global Software Services division of CSG Systems
International by Comverse), Oracle Corporation (after the acquisition of Portal
Software by Oracle) and Convergys Corporation (after the acquisition of Geneva
Technology by Convergys) as well as with local billing companies. Some of our
competitors have greater financial, technical, sales, marketing and other
resources and greater name recognition than we do. Some of our competitors
have
a lower cost structure and compete with us on pricing. Current and potential
competitors have established, and may establish in the future, cooperative
relationships among themselves or with third parties to increase their ability
to address the needs of prospective customers. Accordingly, new competitors
or
alliances among competitors may emerge and rapidly acquire significant market
share. We cannot guarantee that we will be able to compete effectively against
current or future competitors or that competitive pressure will not harm our
financial results.
Our
backlog, revenues and operating results may vary significantly from quarter
to
quarter.
Our
backlog, revenues and operating results may vary significantly from quarter
to
quarter due to a number of factors, including the following:
|
·
|
the
timing of orders and/or deliveries for our software may be delayed
as
customers typically order and/or implement our billing and customer
care
software only after other vendors have provided the network
infrastructure, a process that is subject to delay. It is therefore
difficult for us to predict the timing of orders and/or revenue
recognition;
|
|
·
|
the
ability of our customers to expand their operations and increase
their
subscriber base, including their ability to obtain
financing;
|
|
·
|
potential
termination of long-term contracts by our customer due to lack of
financing, internal changes or any other
reason;
|
|
·
|
changes
in our pricing policies or competitive pricing by our competitors;
and
|
|
·
|
the
timing of product introductions by
competitors.
|
In
future
quarters, our operating results may be below the expectations of public market
analysts and investors, and as a result, the price of our ordinary shares may
fall.
The
customer base for our traditional wireline and wireless billing and customer
care products is characterized by small to medium size telephony carriers.
If
this market segment fails to grow, the demand for our billing and customer
care
software would diminish substantially.
Our
traditional wireline and wireless billing and customer care products target
small to medium size telephony carriers. Our growth in this field depends on
continued growth of these traditional telephony carriers. We cannot be certain
that small to medium size telephony carriers will be able to successfully
compete with large telephony carriers in existing markets or will successfully
develop in new and emerging markets. If this market segment fails to grow,
the
demand for our billing and customer care software would diminish substantially
and our business would suffer. In addition, there may never be significant
demand for new billing and customer care software by providers of traditional
services.
From
time to time, our software and the systems into which it is installed contain
undetected errors. This may cause us to experience a significant decrease in
market acceptance and use of our software products and we may be subject to
warranty and other liability.
From
time
to time, our software, as well as the systems into which it is integrated,
contain undetected errors. Because of this integration, it can be difficult
to
determine the source of the errors. Also, from time to time, hardware systems
we
resell contain certain defects or errors. As a result, and regardless of the
source of the errors, we could experience one or more of the following adverse
results:
|
·
|
diversion
of our resources and the attention of our personnel from our research
and
development efforts to address these
errors;
|
|
·
|
negative
publicity and injury to our reputation that may result in loss of
existing
or future customers; and
|
|
·
|
loss
of or delay in revenue and loss of market
share.
|
In
addition, we may be subject to claims based on errors in our software or
mistakes in performing our services. Our licenses and agreements generally
contain provisions such as disclaimers of warranties and limitations on
liability for special, consequential and incidental damages, designed to limit
our exposure to potential claims. However, not all of our contracts contain
these provisions and we cannot assure you that the provisions that exist will
be
enforceable. In addition, while we maintain product liability and professional
indemnity insurance, we cannot assure you that this insurance will provide
sufficient, or any, coverage for these claims. A product liability or
professional indemnity claim, whether or not successful, could adversely affect
our business by damaging our reputation, increasing our costs, and diverting
the
attention of our management team.
Our
business may be negatively affected by exchange rate fluctuations.
Although
most of our revenues are denominated in U.S. dollars, approximately 42% of
our
expenses are incurred in New Israeli Shekels, or NIS. As a result, we may be
negatively affected by fluctuations in the exchange rate between the Euro or
the
NIS and the U.S. dollar. For example, in 2007, the value of the U.S. dollar
decreased in relation to the NIS by 9.0%, while inflation increased by 3.4%.
As
a result, our salary expenses, which are primarily linked to the NIS, increased
in U.S. dollar terms. We cannot predict any future trends in the rate of
inflation in Israel or the rate of devaluation or appreciation of the NIS
against the U.S. dollar. If the U.S. dollar cost of our operations in Israel
increases, our U.S. dollar-measured results of operations will be adversely
affected. In addition, devaluation in the Euro or local currencies of our
customers relative to the U.S. dollar could cause customers to decrease or
cancel orders or default on payment. We may choose to limit these exposures
by
entering into hedging transactions. However, hedging transactions may not enable
us to avoid exchange-related losses, and our business may be harmed by exchange
rate fluctuations. The imposition of price or exchange controls or other
restrictions on the conversion of foreign currencies could affect our ability
to
collect payments, which in turn, could have a material adverse effect on our
results of operations and financial condition.
If
our products fail to achieve widespread market acceptance, our results of
operations will be harmed.
Our
future growth depends on the continued commercial acceptance and success of
our
products. We first introduced our billing and customer care software for Voice
over IP in 1997 and since then we have developed new versions that offer
mediation, rating, billing and customer care for multiple services. Accordingly,
we cannot be sure that our products will achieve widespread market acceptance.
Our future performance will depend on the successful development, introduction
and consumer acceptance of new and enhanced versions of our products. We are
not
certain that we will be able to develop new and enhanced products to meet
changing market needs. If our new and enhanced products are not well received
in
the marketplace, our business and results of operations will be harmed. We
cannot assure you that we will be successful in developing and marketing new
products.
We
depend
on our marketing alliances and reseller arrangements with manufacturers of
telecommunications equipment to market our products. If we are unable to
maintain our existing marketing alliances, or enter into new alliances, our
revenues and income will decline.
We
have
derived, and anticipate that we will continue to derive, a portion of our market
opportunities and revenues from our marketing alliances and reseller
arrangements with major manufacturers of telecommunications equipment, including
Alcatel, Cisco, Ericsson and Siemens, which market or recommend our products
to
their customers. Our marketing alliances and reseller arrangements with these
parties are nonexclusive and do not contain minimum sales or marketing
performance requirements. In most instances, there is no formal contractual
arrangement. As a result, these entities may terminate these arrangements
without notice, cause or penalty. There is also no guarantee that any of these
parties will continue to market our products. Our arrangements with our
resellers and marketing allies do not prevent them from selling products of
other companies, including products that compete with ours. Moreover, our
marketing allies and resellers may develop their own internal mediation, rating,
billing and customer care software products that compete with ours, or acquire
one of our competitors. If we are unable to maintain our current marketing
alliances and reseller relationships, or if these marketing allies and resellers
develop their own competing mediation, rating, billing and customer care
software products, our revenues and income will decline.
If
our software does not continue to integrate and operate successfully with the
telecommunications equipment of the leading manufacturers, we may be unable
to
maintain our existing customer base and/or generate new
sales.
The
success of our software depends upon the continued successful integration and
operation of our software with the telecommunications equipment of the leading
manufacturers. We currently target a customer base that uses a wide variety
of
network infrastructure equipment and software platforms, which are constantly
changing. In order to succeed, we must continually modify our software as new
telecommunications equipment is introduced. If our product line fails to satisfy
these demanding and rapidly changing technological challenges, our existing
customers will be dissatisfied. As a result, we may be unable to generate future
sales and our business will be materially adversely affected.
We
depend on a limited number of key personnel who would be difficult to replace.
If we lose the services of these individuals, our business will be
harmed.
Because
our market is new and evolving, the success of our business depends in large
part upon the continuing contributions of our senior management. Specifically,
continued growth and success largely depend on the managerial and technical
skills of Monica Eisinger, our President and Chief Executive Officer and one
of
our founders, and other members of senior management. Because the demand for
highly qualified senior personnel exceeds the supply of this type of personnel,
it will be difficult to replace members of our senior management if one or
more
of them were to leave us. If either Ms. Eisinger or other members of the senior
management team are unable or unwilling to continue their employment with our
company, our business will be harmed.
Our
success depends on our ability to continually develop and market new and more
technologically advanced products and enhancements.
The
market for our products and the services they are used to support is
characterized by:
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·
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rapid
technological advances like the development of new standards for
communications protocols;
|
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·
|
frequent
new service offerings and enhancements by our customers, such as
value-added IP-based services and new rating plans;
and
|
|
·
|
changing
customer needs.
|
We
believe that our future success will largely depend upon our ability to continue
to enhance our existing products and successfully develop and market new
products on a cost-effective and timely basis. We cannot assure you that we
will
be successful in developing and marketing new products that respond adequately
to technological change. Our failure to do so would have a material adverse
effect on our ability to market our own products.
If
our billing and customer care software for IP services fails to achieve market
acceptance among traditional telecommunications service providers, we may suffer
a decrease in market share, revenues and profitability.
We
believe that as the demand for IP services grows, traditional telecommunications
service providers will increasingly offer IP services to remain competitive
and
these providers will constitute a growing portion of the IP services market.
These companies already have relationships with traditional billing and customer
care software providers for their telephony services, and may wish to work
with
their current providers of billing and customer care software to enhance and
modify that software for IP services. If our billing and customer care software
for IP services fails to achieve market acceptance among traditional
telecommunications service providers, we may suffer a decrease in market share,
revenues and profitability.
If
we are unable to adequately protect our intellectual property or become subject
to a claim of infringement, our business may be materially adversely
affected.
Our
success and ability to compete depend substantially upon our internally
developed or acquired technology. Any misappropriation of our technology could
seriously harm our business. In order to protect our technology and products,
we
rely on a combination of trade secret, copyright and trademark law. Despite
our
efforts to protect our intellectual property rights, unauthorized parties may
attempt to copy or otherwise obtain and use our software or technology or to
develop software with the same functionality. Policing unauthorized use of
our
products is difficult and we cannot be certain that the steps we have taken
will
prevent misappropriation, particularly in foreign countries where the laws
may
not protect our intellectual property rights as fully as in the United
States.
If
anyone
asserts a claim against us relating to proprietary technology or information,
we
might seek to license his intellectual property or to develop non-infringing
technology. We might not be able to obtain a license on commercially reasonable
terms or on any terms. Alternatively, our efforts to develop non-infringing
technology could be unsuccessful. Our failure to obtain the necessary licenses
or other right or to develop non-infringing technology could prevent us from
selling our software and could therefore seriously harm our
business.
Breaches
in the security of the data collected by our systems could adversely affect
our
reputation and hurt our business.
Customers
rely on third-party security features to protect privacy and integrity of
customer data. Our products may be vulnerable to breaches in security due to
failures in the security mechanisms, the operating system, the hardware platform
or the networks linked to the platform. All our solutions provide web access
to
information, presenting additional security issues for our customers. Security
vulnerabilities could jeopardize the security of information stored in and
transmitted through the computer systems of our customers. A party that is
able
to circumvent our security mechanisms could misappropriate proprietary
information or cause interruptions in the operations of our customers. Security
breaches could damage our reputation and product acceptance would be
significantly harmed, which would cause our business to suffer.
We
are subject to ongoing costs and risks associated with complying with extensive
corporate governance and disclosure requirements.
As
a
foreign private issuer subject to U.S. federal securities laws, we spend a
significant amount of management time and resources to comply with laws,
regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, SEC regulations and Nasdaq
rules. Section 404 of the Sarbanes-Oxley Act requires management’s annual review
and evaluation of our internal control over financial reporting and attestations
of the effectiveness of these controls by our management and, commencing from
fiscal year 2009, by our independent registered public accounting firm. There
is
no guarantee that these efforts will result in management assurance or an
attestation by our independent registered public accounting firm that our
internal control over financial reporting is adequate in future periods. In
connection with our compliance with Section 404 and the other applicable
provisions of the Sarbanes-Oxley Act, our management and other personnel devote
a substantial amount of time, and we may need to hire additional accounting
and
financial staff, to assure that we continue to comply with these requirements.
If we are unable to implement these requirements effectively or
efficiently, or if our internal controls are found to be ineffective in future
periods, it could harm our operations, financial reporting or financial results
and could result in our being unable to obtain an unqualified report in internal
controls from our independent auditor.
Risks
Relating to the Market of our Ordinary Shares
Our
share price has fluctuated and could continue to fluctuate
significantly.
The
market for our ordinary shares, as well as the prices of shares of other
technology companies, has been volatile. The price of our ordinary shares has
fluctuated significantly since our initial public offering in August 2000.
A
number of factors, many of which are beyond our control, may cause the market
price of our ordinary shares to fluctuate significantly, such as:
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·
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fluctuations
in our quarterly revenues and earnings and those of our publicly
held
competitors;
|
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·
|
shortfalls
in our operating results from the levels forecast by securities analysts;
|
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·
|
public
announcements concerning us or our competitors;
|
|
·
|
changes
in pricing policies by us or our competitors;
|
|
·
|
market
conditions in our industry; and
|
|
·
|
the
general state of the securities market (particularly the technology
sector).
|
We
do not
control these matters and any of them may adversely affect our business
internationally. In addition, trading in shares of companies listed on the
Nasdaq Global Market in general and trading in shares of technology companies
in
particular has been subjected to extreme price and volume fluctuations that
have
been unrelated or disproportionate to operating performance. These broad market
and industry factors may depress our share price, regardless of our actual
operating results.
Substantial
sales of our ordinary shares could adversely affect our share price.
Sales
of
a substantial number of our ordinary shares could adversely affect the market
price of our ordinary shares. Given the likely volatility that exists for our
ordinary shares, such sales could cause the market price of our ordinary shares
to decline.
As
of
June 1, 2008, we had 21,594,010 outstanding ordinary shares, which were freely
tradable without restriction or further registration under the federal
securities laws unless held by our “affiliates”, as that term is defined in Rule
144 under the Securities Act. As of June 1, 2008, there were outstanding options
to purchase a total of 853,410 ordinary shares, of which 606,510 were vested.
We
were also authorized to grant options to purchase 2,472,800 additional ordinary
shares. We have filed a registration statement on Form S-8 covering all of
the
ordinary shares issuable upon the exercise of options under our stock option
plans, at which time these shares will be immediately available for sale in
the
public market, subject to the terms of the related options.
Our
ordinary shares are listed for trading in more than one market and this may
result in price variations.
Our
ordinary shares are listed for trading on the Nasdaq Global Market, or Nasdaq,
and on the Tel Aviv Stock Exchange, or TASE. Trading in our ordinary shares
on
these markets is made in different currencies (U.S. dollars on Nasdaq and New
Israeli Shekels on TASE), and at different times (resulting from different
time
zones, different trading days and different public holidays in the United States
and Israel). The trading prices of our ordinary shares on these two markets
often differ, resulting from the factors described above, as well as differences
in exchange rates. Any decrease in the trading price of our ordinary shares
on
one of these markets could cause a decrease in the trading price of our ordinary
shares on the other market.
Risks
Relating to Our Location in Israel
Potential
political, economic and military instability in Israel may harm our operating
results.
We
are
organized under the laws of the State of Israel and a substantial portion of
our
assets and our principal operations, are located in Israel. Accordingly, our
operations, financial position and operating results are directly influenced
by
economic, political and military conditions in and relating to Israel. Since
the
establishment of the State of Israel in 1948, a condition of hostility, varying
in degree and intensity, has led to security and economic problems for Israel.
Since October 2000, there has been a high level of violence between Israel
and
the Palestinians which has strained Israel’s relationship with its Arab
citizens, Arab countries and, to some extent, with other countries around the
world. Hamas, an Islamist movement responsible for many attacks against Israeli
targets, won the majority of the seats in the Parliament of the Palestinian
Authority in January 2006 and took control of the entire Gaza Strip by force
in
June 2007. These developments have led to frequent missile attacks on Israeli
towns from the Gaza Strip, further straining relations between Israel and the
Palestinian Authority. Further, in the summer of 2006, Israel fought a war
against Hezbollah, a Lebanon-based Islamist Shiite militia group, which involved
thousands of missile strikes and disrupted most day-to-day civilian activity
in
northern Israel. Any armed conflicts or political instability in the region
could negatively affect business conditions and harm our results of operations.
We cannot predict the effect on the region of the increase in the degree of
violence between Israel and the Palestinians. Furthermore, several countries
restrict business with Israel and Israeli companies, and additional countries
may restrict doing business with Israel and Israeli companies as a result of
the
recent increase in hostilities. These restrictive laws and policies may
seriously harm our operating results, financial condition or the expansion
of
our business. In addition, the current situation in Israel could adversely
affect our operations if our customers and/or strategic allies believe that
instability in the region could affect our ability to fulfill our commitments.
We
currently participate in or receive tax benefits from government programs.
These
programs require us to meet certain conditions and these programs and benefits
may be terminated or reduced in the future.
We
receive tax benefits under Israeli law for capital investments, the Law for
Encouragement of Capital Investments, 1959, as amended, or the Investments
Law,
that are designated as “Approved Enterprises”. To maintain our eligibility for
these tax benefits, we must continue to meet several conditions including making
required investments in fixed assets. If we fail to comply with these conditions
in the future, the tax benefits received could be cancelled. The termination
or
reduction of the tax benefits under the Investments Law could seriously harm
our
business, financial condition and operating results. For more information about
Approved Enterprises, see Item 10.E “Taxation – Law for the Encouragement of
Capital Investments, 1959” and Note 9 to our financial statements contained in
Item 18.
Because
we have received grants from the Office of the Chief Scientist, we are subject
to on-going restrictions that limit the transferability of our funded technology
and of our right to manufacture outside of Israel any products developed with
such technology, and certain of our large shareholders are required to undertake
to observe such restrictions.
We
have
received grants in the past from the Office of the Chief Scientist of the
Israeli Ministry of Industry, Trade and Labor. According to Israeli law,
generally, any products developed with grants from the Office of the Chief
Scientist are required to be manufactured in Israel, unless we obtain prior
approval of a governmental committee. In addition, we are prohibited from
transferring out of Israel the know-how developed with these grants, without
the
prior approval of a governmental committee. Approval is not required for the
sale or export of any products resulting from the funded know-how. Any
shareholder who becomes a controlling shareholder of our company or any
non-Israeli who becomes a direct holder of 5% or more of our outstanding
ordinary shares will be required to notify the Office of the Chief Scientist
and
to undertake to observe the law governing the grant programs of the Office
of
the Chief Scientist, the principal restrictions of which are described above
in
this paragraph.
Our
operating results may be negatively affected by the obligation of some of our
key personnel to perform military service.
Some
of
our executive officers and employees in Israel are obligated to perform military
reserve duty, which could accumulate annually from several days to up to two
months in special cases and circumstances. The length of such reserve duty
depends, among other factors, on an individual’s age and prior position in the
army. In addition, if a military conflict or war occurs, these persons could
be
required to serve in the military for extended periods of time. Our operations
could be disrupted by the absence for a significant period of one or more of
our
executive officers or key employees due to military service. Any disruption
in
our operations would harm our business.
It
may be difficult to enforce a U.S. judgment against us, our officers and
directors or to assert U.S. securities laws claims in Israel.
We
are
incorporated in the State of Israel. Substantially most of our executive
officers and directors are nonresidents of the United States, and a substantial
portion of our assets and the assets of these persons are located outside the
United States. We have been informed by our legal counsel in Israel that it
may
be difficult to bring original actions in Israel to enforce civil liabilities
under the Securities Act and the Exchange Act. Israeli courts may refuse to
hear
a claim based on a violation of U.S. securities laws because Israel is not
the
most appropriate forum to bring such a claim. In addition, even if an Israeli
court agrees to hear a claim, it may determine that Israeli law and not U.S.
law
is applicable to the claim. If U.S. law is found to be applicable, the content
of applicable U.S. law must be proved as a fact, which can be a time-consuming
and costly process. Certain matters of procedure will also be governed by
Israeli law. There is little binding case law in Israel addressing these
matters.
Subject
to specified time limitations and legal procedures, under the rules of private
international law currently prevailing in Israel, Israeli courts may enforce
a
United States final judgment in a civil matter, including judgments based upon
the civil liability provisions of the U.S. securities laws and including a
monetary or compensatory judgment in a non-civil matter, provided
that:
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·
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the
judgment is enforceable in the state in which it was
given;
|
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·
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adequate
service of process has been effected and the defendant has had a
reasonable opportunity to present his arguments and
evidence;
|
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·
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the
judgment and the enforcement thereof are not contrary to the law,
public
policy, security or sovereignty of the State of
Israel;
|
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·
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the
judgment was not obtained by fraud and does not conflict with any
other
valid judgment in the same matter between the same parties;
and
|
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·
|
an
action between the same parties in the same matter is not pending
in any
Israeli court at the time the lawsuit is instituted in the United
States
court.
|
Therefore,
it may be difficult for a shareholder, or any other person or entity, to collect
a judgment obtained in the United States against us or any of these persons,
or
to effect service of process upon these persons in the United
States.
Provisions
of Israeli law and our articles of association may delay, prevent or make
difficult a change of control and therefore may depress the price of our
stock.
Some
of
the provisions of our articles of association and Israeli law could, together
or
separately:
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discourage
potential acquisition proposals;
|
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·
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delay
or prevent a change in control; and
|
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·
|
limit
the price that investors might be willing to pay in the future for
our
ordinary shares.
|
In
particular, our articles of association provide that our board of directors
will
be divided into three classes that serve staggered three-year terms and
authorize our board of directors to adopt
protective measures to prevent or delay a coercive takeover, including without
limitation the adoption of a “Shareholder Rights Plan”.
In
addition, Israeli corporate law regulates mergers and acquisitions of shares
through tender offers, requires approvals for transactions involving significant
shareholders and regulates other matters that may be relevant to these types
of
transactions. See Item 10.B “Memorandum and Articles of Associations- Mergers
and Acquisitions under Israeli Law.” Furthermore, Israeli tax law treats
stock-for-stock acquisitions between an Israeli company and a foreign company
less favorably than does U.S. tax law. For example, Israeli tax law may subject
a shareholder who exchanges his ordinary shares for shares in another
corporation to taxation prior to the sale of the shares received in such
stock-for stock swap.
Item
4. |
Information
on the Company
|
A. |
History
and Development of the
Company.
|
General
Our
name
is MIND C.T.I. Ltd. for both legal as well as commercial purposes. We were
incorporated under the laws of the State of Israel on April 6, 1995 as a company
with limited liability, and we are subject to the Israeli Companies Law, 1999
and the regulations promulgated thereunder. Our principal executive offices
are
located at Industrial Park, Building 7, Yoqneam 20692, Israel. Our telephone
number is +972 4 993 6666. Our agent in the United States is Sentori, Inc.
and
its principal offices are located at 12211 Plum Orchard Drive, Suite 320, Silver
Spring, MD 20904, USA.
Important
Events in the Development of the Company
In
1997
we started the development and marketing of a real-time mediation and billing
solution, mainly to the Internet protocol, or IP, prepaid markets, known as
MIND-iPhonEX.
During
2005, we completed the acquisition of Sentori Inc., a U.S. leading provider
of
customer care and billing solutions to rural wireless carriers and mobile
virtual network operators, or MVNOs, mainly in the United States and the
Caribbean. We have incorporated the Sentori functionality into the MIND-iPhonEX
product line and brand the combined products under the MINDBill name. We plan
to
continue to support the Sentori product with new maintenance releases, as well
as customization requests. In addition, we will offer our existing customers
a
migration path to MINDBill.
In
October 2007, we acquired the U.K. based Omni Consulting Company Limited,
(Abacus Billing). Omni, which is now named, Mind Software Limited, provides
billing and customer care software solutions in a service bureau mode, mainly
to
European carriers
that
require complex solutions, with a strong convergent offering using web-enabled
daily reporting and billing.
This
company is based in the London metro area and has a strong methodology for
its
outsourced offering, which is supported by regulatory accreditations
from the
Office of Communication, or Ofcom, of the United Kingdom and from the
German regulatory authority for telecommunications and postal services, known
as
Reg-TP.
Principal
Capital Expenditures
During
2005, 2006 and 2007, the aggregate cash amounts of our capital expenditures
were
$0.6 million, $0.4 million and $0.4 million, respectively. These expenditures
were principally for the purchase of property and other equipment. Although
we
have no material commitments for capital expenditures, we anticipate an increase
in capital expenditures if we decide to construct a building for our office
in
Romania or if we purchase or merge with companies or purchase assets in order
to
obtain complementary technology and to expand our product offerings, customer
base and geographical presence.
B.
Business Overview
Overview
We
develop, manufacture and market real-time and off-line billing and customer
care
software for various types of communication providers, including traditional
wireline and wireless, voice over IP, or VoIP, and broadband IP network
operators, cable operators, 3G operators and mobile virtual network operators,
or MVNOs.
Our
convergent billing and customer care solution supports multiple services,
including voice, data and content services as well as both prepaid and postpaid
payment models in a single platform. Prepaid subscribers can enjoy the full
range of services offered by the provider, with their special bundles, rating
plans and limits. The prepaid solution authorizes each service and controls
each
session in real time, taking care that the balance is not exceeded. Postpaid
subscribers, including credit-limited and non-limited, retail or business
customers, represent the loyal and the higher average revenue per user, or
ARPU,
market. All services used by a postpaid subscriber appear in a single bill,
which includes all charges, including one-time, recurring and usage-related
charges. Our billing solution is unique as it includes our own integrated
real-time mediation product that provides interfaces with IP and traditional
telecommunication equipment.
The
latest version of our billing and customer care solution includes a powerful
workflow engine to support the creation and execution of business processes
such
as order management, trouble ticket and debt collection. It also includes an
integral point of sale solution that covers all dealer, store and cashier
management and sales processes. The MIND solution introduces multi-layered
architecture supporting real-time distributed processing, achieving performance,
scalability and high availability. It uses an open architecture, including
Service Oriented Architecture (SOA) and Document Oriented Architecture (DOA),
thus enabling fast and seamless integration with other systems and third party
applications. The MIND solution is built using standardized best-of-breed
object-oriented technologies such as Java and XML, and it is J2EE compatible
as
it is powered by a commercial application server.
We
also
provide professional services, primarily to our billing and customer care
customers, consisting of installation, turnkey project implementation services,
customer support, training and maintenance services, customization and project
management. Our professional services also include enhanced support options,
known as managed services, which are mainly offered to customers in the United
States and Europe and are performed from our offices. These managed services
include performing day to day billing operational tasks.
In
addition to our billing and customer care solutions, we offer three call
management systems used by organizations for call accounting, telecom expense
management, traffic analysis and fraud detection. Our traditional enterprise
software, which we call PhonEX, has been installed in over 15,000 locations
throughout the world. Our other enterprise software, which we call MEIPS, is
a
product directed towards the same market segment where IP switches are
implemented. Our latest product, PhonEX-ONE, delivers one unified solution
for
all voice communication expenses including traditional, IP and mobile telephony.
The flexible and scalable architecture of PhonEX-ONE meets the needs of large
enterprises, supporting an unlimited number of extensions and sites, it
introduces full functionality through a web browser, based on Microsoft SQL
database and enhanced by the advanced ASP.NET technology.
Our
Market Opportunity
Billing
and Customer Care Industry
Billing
and customer care are critical to telecommunications service providers as they
enable them to track and bill for usage, manage revenues and customer relations,
and launch, deploy and charge new services, marketing programs and rate plans.
The need for comprehensive billing solutions is driven by the market trend
that
requires service providers to introduce new services, to be innovative in
creating new product offerings and to optimize business processes for maximum
efficiency. We provide tier 2 and tier 3 service providers with flexible, easy
to deploy, convergent and scalable billing solutions.
From
time
to time, telecommunications service providers initiate searches for billing
solutions to replace existing ones in order to offer additional services, reduce
costs and improve service.
Also,
from time to time, new providers surface and introduce new offering to the
market or try to attract a specific targeted customer base. They build new
infrastructure or resell traffic and initiate searches for billing solutions,
mostly in a managed service model.
An
additional market opportunity is the trend towards all-IP networks, offering
multiple next generation services. New billing solutions are required to enable
the new services, and we are well positioned to support this need. As a pioneer
in VoIP billing since 1997, we have the experience and the solution portfolio
that is proven to be capable of delivering these technically demanding projects
for all-IP networks.
Mobile
Market
The
Sentori acquisition, with its existing mobile customer base, provided the
required presence to build upon and enhance our position in the mobile market
in
the United States. With our combined product - MINDBill - we are able to offer
convergent billing to the already existing customer base and to new GSM and
CDMA
operators.
A
niche
in the mobile market in which we see opportunities is rural mobile carriers.
We
have a number of such carriers as customers and we are focused on delivering
solutions that address this particular market.
Voice
over IP Industry
Many
service providers are moving towards networks in which IP-based equipment will
carry a large proportion, if not all, of their traffic. These next generation
networks, or NGNs, offer cost savings over traditional switched networks, as
well as the potential to offer new services like VoIP. We have a strong
reputation in areas such as mediation and VoIP billing, and our products are
designed to work with NGNs.
For
service providers, Voice over IP presents an opportunity to generate revenue
by
offering additional services over the new broadband networks deployed. Voice
over IP networks enable the deployment of most of the services customers receive
over traditional networks at a much lower capital cost of infrastructure and
reduced management cost of the network. As Voice over IP is distance
independent, it allows service providers to offer competitive pricing, as only
a
small portion of the traffic, if any, terminates on traditional
networks.
As
service providers deploy convergent IP networks that can offer voice, data,
video and content services, the demand for more sophisticated billing software
is expected to grow. We believe that as providers of convergent networks
continue to expand their service offerings, they will increasingly need products
that allow them to monitor and bill their subscribers based on the type and
content of services provided. As a result, we believe that this trend will
increase the demand for
sophisticated billing and customer care products for what is known as convergent
billing, such as the solutions we offer.
Providers
of multiple IP-based services typically require billing and customer care
products that can handle authentication, authorization and accounting needs
in
real-time in order to determine the types of services to which the subscriber
is
entitled, as well as any applicable limits to the availability of the services.
This real-time functionality is particularly important for prepaid billing
plans. Finally, billing and customer care software products need to be easily
adaptable to changes in the size and configuration of an IP provider's system,
to new products and services and to enable rapid growth in subscriber base.
Our
proven solutions cover all these needs, as described below.
Our
Billing and Customer Care Solution
We
develop, market and support real-time and off-line, scalable billing and
customer care software, including mediation and rating, for providers of voice,
data and content services that are designed to meet their complex,
mission-critical provisioning, authentication, authorization, accounting and
reporting needs. Our billing and customer care software provides our customers
with the following benefits:
|
·
|
Real-Time
Solution.
Service providers require a system that enables authentication,
authorization and accounting and, if needed, cut-off, all in real-time.
We
believe that the MIND solution is one of the few billing and customer
care
products that offers real-time functionality for both prepaid and
postpaid
billing plans, and that has a real-time rating engine able to support
rating of voice, data and content services simultaneously;
|
|
·
|
Mediation and Service Fulfillment.
IP and traditional networks that can offer voice, data, video and content
services are based on various network elements each of which generates
billable information. We believe that the MIND solution is one of the
few
billing and customer care products that provide real-time collection
and
correlation of various events from multiple sources that relate to
the
same session and convert them into billable records. In addition, the
MIND
solution enables end-to-end automated flow for service creation and
activation, meaning that from the order for service handled by the
customer care representative until the service activation, the activities
that need to be completed are automatically fulfilled by
MIND; |
|
·
|
Scalability.
Our billing solutions are designed to be easily adapted to changes
in the
size and configuration of a service provider's network. They enable
the
network of a service provider to grow from accommodating a small
number of
subscribers to a large number of subscribers, primarily through the
addition of hardware. This feature allows a service provider to expand
its
infrastructure and its subscriber base without the need to redesign
or
replace its billing and customer care software. The scalability of
our
software is important since many service providers begin with a relatively
small subscriber base and experience rapid growth. For example, we
designed and provided a billing and customer care solution for China
Unicom, which started offering Voice over IP services in 1999. When
China
Unicom first deployed our software in May 1999, it was capable of
supporting one million users. Our software was upgraded to support
five
million users in November 1999, 20 million users in June 2000 and
30
million users in June 2001. Increases in the potential number of
users
have been, and future increases will be, accomplished without the
need to
modify or replace our installed
software;
|
|
·
|
Improved
Time to Market.
Our billing solutions are modular, extensible software products based
on
software architecture designed for easy adaptability and implementation.
These features allow each of our customers to tailor our products
to meet
their individual needs in terms of the number of subscribers serviced
and
the variety of services provided. In addition our products can be
customized relatively quickly, enabling our customers to improve
their
time to market as they initially implement their networks and, later,
as
they add and modify the services they
provide.
|
Our
Strategy
Our
objective is to be a leader in the market for convergent billing and customer
care software for tier 2 and tier 3 service providers and to maintain and
increase profitability. We believe that the strategic acquisitions, of Sentori
in August 2005 and of Omni Consulting in October 2007 strengthened our presence
in the U.S. and European markets.
As
we
increase our focus on end-to-end billing solutions for tier 2 and tier 3 service
providers, projects are now generally more complex in nature, with revenue
recognized over longer periods. These factors typically extend the recognition
period of both license and service revenue streams and have some balance sheet
impacts. We consider this a normal and expected development for our business
as
it grows and matures. In the last three years we significantly increased our
professional services team to support the growth in services offered to
customers. Our long-term business model contemplates that licenses, maintenance
and services will each represent 30-40% of revenues and gross margins will
be
approximately 70%. The key elements of our strategy to become a leader in the
market for convergent billing and customer care software for tier 2 and tier
3
service providers include:
|
·
|
Leverage
our brand name recognition and technical expertise.
We were one of the first to provide billing and customer care software
for
IP telephony, introducing MIND-iPhonEX in 1997. We believe that our
early
position in the market and our reputation for offering high quality,
reliable billing and customer care software has provided us with
significant brand name recognition among Voice over IP providers.
The
acquired Sentori customer base, team and technology have provided
us with
significant brand name recognition in the mobile market. We intend
to
leverage our reputation, brand name and recognition in the wireline
and
wireless markets;
|
|
·
|
Enhance
alliances with industry leaders.
We have established cooperative relationships with leading manufacturers
of telecommunications and hardware equipment and system integrators.
We
team with these industry leaders in marketing activities, as well
as in
the research and development and implementation stages of product
development and enhancement. Our alliances allow us to broaden our
marketing capabilities significantly, support new features offered
by
equipment vendors as these features are introduced to the market,
and
maintain our technology leadership over our competitors. We intend
to
continue to leverage these alliances in order to solidify and expand
our
market presence.
|
|
·
|
Maintain
and expand our technological expertise.
We believe that our reputation in the market is due in large part
to our
technological expertise. We make significant investments in our research
and development to continually enhance our products to meet the changing
needs in the telecom industry. We intend to continue our commitment
to
technology, both to enhance our existing products and to develop
new
products for growing markets;
|
|
·
|
Expand
professional services opportunities.
As our projects are of larger scale and as convergent service offerings
become more complex, our customers increasingly require consulting
services, especially for customization, as well as for project management,
installation and training, technical support and maintenance. This
provides us with the opportunity to increase our revenue base from
existing customers. We have begun to capitalize on this opportunity
and,
as a result, fees from providing professional services have increased;
and
|
|
·
|
Expand
offering through acquisitions.
We evaluate acquisition opportunities pro-actively, based on our long-term
policy of growing the scale of our business and enhancing our offering,
through acquisitions, which will enhance shareholder value. Our active
pursuit is for business lines that provide the majority of the following
criteria: existing customer base, channels and partners, presence in
complementary geographic areas or markets and proven complementary
technology. We will pursue such an opportunity if we estimate that
it will
provide an additional step towards tier 2 market leadership and
that the acquisition will be accretive to our income within two or
three
quarters. |
Our
Products and Services
Billing
and Customer Care Solutions
Our
billing solutions include real-time and off-line mediation, provisioning,
rating, billing and customer care products for voice, data, video and content
services that meet the mission-critical needs of convergent IP, Wireline and
Wireless service providers and is interoperable with the telecommunications
equipment of major manufacturers.
Our
highly functional and adaptable products enable our customers to quickly deploy
new services as well as to rapidly grow and add new services. Our solutions
support both prepaid billing plans, in which customers prepay for the services,
or postpaid billing plans, in which customers pay for the services after using
them, on the basis of either limited or unlimited credit lines. The key
functionalities of our solutions are as follows:
|
·
|
Mediation.
Our
mediation platform provides real-time and batch event collection
interfacing with the content, data, service delivery and routing
network
elements. It incorporates an intelligent processing engine to correlate,
aggregate, merge and filter raw events into a single valuable usage
event;
|
|
·
|
Provisioning.
Provisioning involves setting up the ability of a subscriber to use
services. The customer database includes information regarding customers'
personal data, identification parameters and the services provided.
This
information can be provided in real time or on demand to any external
system, such as network elements and legacy billing solutions. The
data
provided includes service parameters such as enabled features and
quantitative limits;
|
|
·
|
Authentication.
Our real-time mediation module authenticates subscribers who dial
into the
network to use the service. Authentication is based on a number of
methods, including user codes, passwords and caller line identification.
The identification information is passed to the system, where the
subscriber is authenticated and then permitted to use the
service;
|
|
·
|
Authorization.
Our systems authorize a particular usage, among other ways, by reviewing
the type of service to determine whether the service is permitted
or by
reviewing the existing balance, pre-rating the service, using the
rating
engine described below and calculating the resulting cut-off time,
if any,
of the call or data session;
|
|
·
|
Accounting.
When each session is completed, the rating engine described below
is used
to determine the amount to be charged to the subscriber and update
the
balance of the account in real-time. In addition, the usage detail
records
are stored for invoicing and
reporting;
|
|
·
|
Interconnect
Billing.
The networks operated by our customers are typically interconnected
with
the networks of other telecommunications service providers.
Interconnecting providers need to charge other providers for carrying
each
other's services over their networks. Our billing solutions generate
reports that enable providers to bill for traffic and services that
are
being transported across their networks by other
providers;
|
|
·
|
Roaming.
Our solutions support the ability to provide services to visiting
subscribers, on the one hand, and to roam subscribers in other networks,
on the other hand. Our billing system provides the ability to define
and
manage the required roaming contract terms and the applicable tariff
plan
(IOT) for each roaming partner;
|
|
·
|
Virtual
Providers.
MIND offers a solution that enables a carrier to have resellers of
traffic
under different brand names, while it is still managed from the same
billing platform, as a separated entity known as Virtual Provider.
This
model enables the carriers that own the networks, to lease its network
equipment and its billing system to other providers.
|
|
·
|
Call
Shops.
In order to place a long-distance/international call, a person may
come to
a special calling center, also known as a call shop. The call shop
policy
may require that the person make a deposit before calling, the remaining
amount being returned after the invoice is generated. MIND’s billing
solution supports the special business model for call shops, including
fast and reliable Web access and customized reports for profit and
loss;
|
|
·
|
Multiple
Services and Products Support.
Our billing solutions allow service providers to take advantage of
their
convergent networks by providing their customers with advanced voice,
data, content and video services. The MIND Product Catalog allows
service
providers to bundle groups of services into tailor-made packages
for which
they can offer special rates, discounts and promotions. There are
different classes of customers with respect to the availability,
bandwidth, and quality of service requirements for these services.
Our
billing solutions offer an easy way to define these services, combine
them
into products, and rate each service and product
differently;
|
|
·
|
Rating.
Our billing solutions include a real-time and flexible rating engine
that
allows service providers to offer subscribers a wide variety of billing
plans. This flexibility also allows service providers to set different
tariff parameters. For example, our billing and customer care software
can
support different rates for various content and video streaming services
and for different customer groups, rates based on the day of the
week and
time of the day and rates based on the origin and destination of
the call.
International service providers may define rates in different currencies
using the product's multi-currency
functionality;
|
|
·
|
Invoicing.
Our billing solutions include a high-capacity invoice server that
handles
all stages of invoice generation. It supports multiple billing cycles
and
bill production on demand. The invoice includes the customer details
and
information, such as usage details, monthly recurring charges, discounts
and taxes, which are gathered throughout the billing period. This
module
creates the original bills to be printed locally or exported to bill
printing service bureaus, using a customizable invoice layout.
|
|
·
|
Subscriber
Web Interface.
Our billing solutions include a user-friendly subscriber web interface
that allows subscribers to resolve billing inquiries themselves.
Individual customers can obtain real time information about their
account,
including details of calls made that have not yet been invoiced,
like the
time, destination, length and cost of each call. The subscriber can
also
browse invoices, call details and payment history records. This feature
is
convenient for subscribers and efficient for service providers as
it
reduces service costs;
|
|
·
|
Customer
Support Representative Web Interface.
Our billing solutions include a user-friendly customer support
representative web interface that allows operators of the system
to
perform customer care from any location. This feature is of particular
significance to service providers who have remote operations centers
and
are required to provide support of their system in more than one
location;
|
|
·
|
Point
of Sale (POS). The
POS is aimed mostly at the wireless retail market, enabling operators
to
offer their products and services in retail stores and manage the
process
within our enhanced solutions. POS is fully integrated into MIND
Billing
and Customer Care solutions, allowing operators to seamlessly offer
services and accessories for new and existing customers and even
to
non-subscribers. POS integrates with external systems, such as credit
card
clearinghouses, external taxation engines and address validation
systems.
POS includes two modules working together:
|
Resource
Management Module – a
comprehensive inventory system that supports the operator’s chain of warehouses
as well as his stores. It automates the management and tracking of the equipment
sold to subscribers. The solution keeps track and manages the equipment by
serial number, status, and location, providing the flow management from purchase
orders, through the reception of the items shipped, the distribution of the
items to the stores and the allocation of the items to the customers. It also
supports inventory management functions such as on-hand-counts and catalogue
management.
Sales
Module –
an
easy
to use cashier station that supports all service activations, phone and
accessory sales through one interface on a single receipt. The Sales module
enables all payment methods such as cash, check and credit card. It provides
full control of the cashier devices such as cash drawer, credit card swipe,
bar
code reader and ribbon printer. Sales module interacts with the Resource
Management module to show the sales clerk available items for sale in the store
warehouse, to assign sold items to customer accounts and to enable track of
items, such as returns and repairs.
|
·
|
Business
Processes Environment. Customer
care and billing processes are one of the most significant practices
to
drive business performance. These processes are fundamental for bringing
innovative and competitive ways of delivering products and services
to
market. MIND’s automated business processes engine allows operators to
meet the challenges they confront in today’s business environment. The
business processes workflow implemented by the engine provides business
intelligence behind day-to-day operations. The engine also automates
the
interaction with network elements and third party software. This
is done
in accordance with a uniquely defined set of business rules determined
by
the customer. MIND
is offering in its deployments tailored, fully automated, order management
processes, trouble tickets and debt collection processes.
|
The
flexible and robust account creation order management process handles the orders
from the customer’s contact, through registration, package selection,
provisioning and activation. The order management process involves different
users from various departments (such as supervisor approval of the contract
and
technician test), integration with external legacy systems (such as inventory),
interaction with third party services (such as address validation) and more.
MINDBill uses its inherent workflow capabilities to tailor an order management
process that meets the operator’s business model;
|
·
|
Call
Management and Traffic Analysis Reports
(CMS module). The CMS module allows service providers to generate
reports
and graphic analyses of usage activity. These reports contain information
regarding peak hours, usage loads to different destinations, the
number of
sessions per minute for a specific gateway or group of gateways,
the
duration of sessions and other parameters. These features enable
service
providers to analyze subscriber behavior and use the information
to
improve their marketing and business development strategies. In addition,
the traffic analyses reports assist service providers in planning
the
growth and development of their
networks;
|
|
·
|
Fraud
Detection.
Our billing solutions include a fraud detection tool that enables
detection of “stolen” calls and telephone misuse. It detects, locates and
warns of any suspicious activity by activating alarms. It is easily
customized to suit the needs of each service provider and allows
a
provider to build fraud inquiries based on a defined set of parameters.
When these specific parameters are violated, alarms at four different
alarm levels may be activated. Different actions may be implemented
at
each level. For instance, the operator may be alerted to possible
fraud
via e-mail, fax, pager, audio or visual
alarms;
|
Enterprise
Software
Our
enterprise products, known as PhonEX, MEIPS (our solution for IP switches)
and
PhonEX-ONE, are used by corporations for telecom expense management, call
accounting, traffic analysis and fraud detection. PhonEX and MEIPS are call
management systems that collect, record and store all call information in a
customized database. The systems:
|
· |
allow
customers to generate near real-time reports on the enterprise's
telephone
use;
|
|
· |
produce
sophisticated reports and graphics for easy and effective analysis
of call
activity; and
|
|
· |
allow
customers to allocate telephone expenses to specific departments,
individual clients or projects.
|
These
functions allow organizations to more effectively manage their
telecommunications resources. The systems are easy to install and configure,
user-friendly and compatible with any switchboard system, traditional or IP.
The
systems perform call management and traffic analysis as well as fraud management
in the same manner as our billing solutions. In addition, the systems are
multi-lingual and multi-currency, which means that reports can be generated
in
any currency defined in the system, or in two currencies
simultaneously.
PhonEX-ONE,
delivers one unified solution for management of all telecom expenses, including
traditional voice, IP voice and data, and mobile telephony. The flexible and
scalable architecture of PhonEX-ONE meets the needs of large enterprises,
supporting an unlimited number of extensions and sites. PhonEX-ONE
provides tools to monitor, budget and manage voice traffic in order to achieve
maximum control over telecommunication expenses.
Some of
its major advantages are:
|
· |
Fully
web based solution. The
PhonEX-ONE fully web-based solution enables managers and users to
conveniently access their telecom expenses management system anytime
and
from anywhere, using a web browser without decreasing their control
over
the traffic;
|
|
· |
User
centric. The
PhonEX-ONE user-centric architecture provides a consolidated solution
for
the collection, analysis, reporting, and managing of all the
telecommunication and data traffic
expenses;
|
|
· |
Multi-site
solution.
The PhonEX-ONE scales to support large multi-site organizations using
voice and data equipment from multiple vendors. PhonEX ONE supports
complex hierarchies on which any employee can be associated to any
branch
of the organization and under a separate matrix to any corporate
department;
|
|
· |
ASP.NET
and MS-SQL database.
PhonEX-ONE is designed using the Microsoft .Net technology and has
extensive configuration capabilities using XML files with server
– client
interaction;
|
|
· |
Certification
by IP switch vendors.
PhonEX-ONE is interoperable and certified on a timely manner with
new
releases of IP switch vendors, including Cisco, 3 COM and
Avaya;
|
|
·
|
Enhanced
security. PhonEX-ONE
security management includes user authentication, security group
restrictions, event log monitoring and encryption methodology of
data base
entries. This management tool enables a secure and easy control over
the
system;
|
|
· |
Modular
architecture supporting high scalability.
The PhonEX-ONE’s scalable system architecture supports an unlimited number
of sites and extensions;
|
|
· |
Guard
and Alerter. The
PhonEX-ONE Guard and Alerter provide sophisticated tools for fraud
prevention, alerting on phone misuse, budget surpass, possible toll
fraud
or other abnormal behaviors within the organization;
and
|
|
· |
Multilingual
and multicurrency.
The built in support of multiple languages and multiple currencies
enables
telecom expense management for multinational
organizations.
|
We
intend
to further develop and market these products as the emerging market for Voice
over IP systems for enterprises grows.
Professional
Services
We
provide professional services to our customers, consisting primarily of project
management, customization, installations, customer support, training and
maintenance services. As our projects become more complex, more customers
require customization services to add specialized features to their systems.
We
typically incorporate additional or specialized features developed for a
particular customer into future versions of our products. We also offer enhanced
support options, called managed services, which are mainly offered to customers
in the United States and Europe and are performed from our offices. The managed
services include performing day to day billing operational tasks. The managed
services contracts are usually for a term of three to five years and are paid
on
a monthly basis.
Technology
Our
software products are based on an open architecture, which was developed using
industry standard application server programming interfaces that enables it
to
readily integrate with other software applications. These application program
interfaces create an object-oriented, multi-layered architecture that supports
a
distributed environment. Our object-oriented technology enables the design
and
implementation of software utilizing reusable business objects rather than
complex procedural codes. Our layered architecture organizes these business
objects to optimize the interface between the user and the application. We
implement our software in a distributed configuration. This allows various
modules to be installed on different servers to support the system’s scalability
and security. We believe that our technology allows us to offer products with
the following benefits:
|
· |
fast
integration and interoperability with telecommunications equipment
of
major manufacturers, legacy systems and external
software;
|
|
· |
modular
architecture that allows our products to be easily scalable and enables
us
to customize our software relatively
quickly;
|
|
· |
reliable
products that support high availability of the service for
mission-critical applications. Our automatic fail-over mechanism
ensures
minimal loss of service in case of a component failure;
and
|
|
· |
security
at all levels of the architecture. Each user of the system may be
assigned
to different security groups. Service providers are therefore able
to
determine and audit access to the system. In addition, firewalls
can be
installed to prevent unauthorized access to the
system.
|
Our
software products are based on multiple-tier architecture, consisting of the
following tiers:
|
·
|
Client
Application Tier: This is the top tier graphic user interface between
the
user and the application. It includes client applications for customer
registration, customer care and billing administration. In addition,
it
includes Web service interfaces that enable external applications
to
interact with the business tier;
|
|
·
|
Business
Object Tier: This tier includes the business logic and rules of the
system. This tier manages accounts, services, events and tariffs.
It
includes an object request broker that facilitates the transfer of
information requested by the client application tier from the database
tier;
|
|
·
|
Database
Tier: This tier includes the Oracle database server and management
software where the actual billing and customer care information is
stored.
|
Sales
and Marketing
Sales
Billing
and Customer Care Solutions
We
conduct our sales and marketing activities primarily directly as well as through
our marketing alliances with leading network equipment vendors and systems
integrators. These marketing allies and resellers provide us with a global
extension of our direct sales force and are a significant source of leads and
referrals. We also engage in joint marketing activities with our allies,
including joint responses to requests for proposals, sharing booths in trade
shows, distributing each others’ marketing information and cross links and
references to web sites. We believe that these relationships also help validate
our technology and facilitate broad market acceptance of our
software.
Our
contracts with our marketing allies, distributors and resellers are
non-exclusive, do not contain minimum sales or marketing performance
requirements and may be terminated at any time with notice.
Enterprise
Software
We
conduct our sales and marketing activities primarily directly, by our sales
force located in the MIND offices in the United States, the United Kingdom
and
Israel, as well as through appointed distributors and resellers through out
the
world. We engage with our system integrators and PBX equipment vendors for
global marketing activities and responses to tenders.
Marketing
Our
marketing programs are focused on creating awareness, interest and preference
for our products and services. We engage in a variety of marketing activities,
including:
|
· |
participating
in industry trade shows and special events;
|
|
· |
conducting
ongoing public and press relations programs;
and
|
|
· |
conducting
training seminars for vendors and system
integrators.
|
Principal
Markets
The
following table shows our revenues for each of the past three years classified
by activity and geographic region.
|
|
Years
ended December 31,
(in
thousands of US $)
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
The
Americas (total)
|
|
|
5,556
|
|
|
9,643
|
|
|
7,779
|
|
Sale
of Licenses
|
|
|
2,870
|
|
|
4,854
|
|
|
2,647
|
|
Services
|
|
|
2,686
|
|
|
4,789
|
|
|
5,132
|
|
Asia
Pacific and Africa (total)
|
|
|
2,702
|
|
|
1,619
|
|
|
1,409
|
|
Sale
of Licenses
|
|
|
1,724
|
|
|
575
|
|
|
579
|
|
Services
|
|
|
978
|
|
|
1,044
|
|
|
830
|
|
Europe
(total)
|
|
|
6,285
|
|
|
7,693
|
|
|
7,975
|
|
Sale
of Licenses
|
|
|
2,503
|
|
|
2,769
|
|
|
2,349
|
|
Services
|
|
|
3,782
|
|
|
4,924
|
|
|
5,626
|
|
Israel
(total)
|
|
|
1,058
|
|
|
1,105
|
|
|
1,284
|
|
Sale
of Licenses
|
|
|
323
|
|
|
269
|
|
|
328
|
|
Services
|
|
|
735
|
|
|
836
|
|
|
956
|
|
Total
|
|
|
15,601
|
|
|
20,060
|
|
|
18,447
|
|
Sale
of Licenses
|
|
|
7,420
|
|
|
8,467
|
|
|
5,903
|
|
Services
|
|
|
8,181
|
|
|
11,593
|
|
|
12,544
|
|
Customers
Billing
and Customer Care Solutions
We
currently provide traditional telecommunications service providers, Internet
telephony service providers and Internet service providers with our billing
and
customer care software. MINDBill, MIND-iPhonEX, VeraBill, Abacus and the Sentori
product line have been installed for a large base of customers worldwide,
including:
|
· |
traditional
telecommunications service providers that also offer IP services
including
VoIP or/and data, such as China United Telecommunications Corp. (China
Unicom), Romtelecom S.A., Singapore Telecommunications Limited (SingTel),
Sri Lanka Telecom, Telecom Colombia, and
VTI;
|
|
· |
traditional
wireline telephony providers, such as Moldtelecom, Teledome and Telefonia
Bonairiano;
|
|
· |
wireless
telephony providers, such as KDDI
America, Inc., Mobi PCS, Inc., Pocket Communications,
and Revol;
|
|
· |
3rd
generation (3G) mobile operators that provide broadband mobile IP
services, such as H3G Italy; and
|
Enterprise
Software
Our
enterprise software has been installed at over 16,000 locations throughout
the
world, for customers that include international banking firms, government
agencies and other small to very large organizations.
Competition
Billing
and Customer Care Solutions
Competition
in the market for billing and customer care software is intense and we expect
competition to continue to be strong. We compete with many local companies
and
worldwide companies such as Comverse (after the acquisition of the Global
Software Services division of CSG Systems International by Comverse), Oracle
Corporation (after the acquisition of Portal Software by Oracle) and Convergys
Corporation (after the acquisition of Geneva Technology by
Convergys).
We
believe that our competitive advantage is based on:
|
· |
our
ability to rapidly deploy a complete turn-key product based solution;
|
|
· |
our
solutions’ functionality, which includes billing, customer care,
mediation, provisioning, rating for multiple services and
prepaid IP functionality;
|
|
· |
our
proven platform and our many years of wireless and IP experience
to
satisfy customer requirements; and
|
|
· |
our
flexibility to meet customer requirements in a short time frame.
|
Some
of
our competitors have greater financial, technical, sales, marketing and other
resources and greater name recognition than we do. Some of our competitors
have
lower cost structure and compete with us on pricing. Current and potential
competitors have established, and may establish in the future, cooperative
relationships among themselves or with third parties to increase their ability
to address the needs of prospective customers. Accordingly, new competitors
or
alliances among competitors may emerge and rapidly acquire significant market
share and their solutions could achieve greater market acceptance than our
solutions.
Enterprise
Software
Our
main
competitors in the market for enterprise software products include Avotus
Corporation and Veramark Technologies, Inc. To compete effectively, companies
must be able to offer adequate technical support and ongoing product development
and customization services. In addition, multinational companies prefer call
accounting systems that can be installed at their various offices throughout
the
world, and therefore require call accounting products that are multilingual
and
support the local telecommunication requirements. The principal factors upon
which we compete are customer support, ease of use, compatibility with major
switchboard systems and IP switches and the multi-lingual and multi-currency
nature of our system.
Israeli
Office of the Chief Scientist
Under
the
Israeli Law for the Encouragement of Industrial Research and Development, 1984,
or the Research and Development Law, research and development programs which
meet specified criteria and are approved by the Office of the Chief Scientist
are eligible for grants of up to 50% of certain approved expenditures, in
exchange for the payment of royalties from the sale of products (and any
ancillary services) incorporating or based upon know-how developed in accordance
with such programs, until the repayment in full of the dollar linked amount
of
the grants received. We have received grants in the past from the Office of
the
Chief Scientist and have repaid them.
Even
after repayment in full of royalty obligations, the Research and Development
Law
and prohibits the transfer of the funded know-how outside of Israel without
the
prior approval of the Office of the Chief Scientist. Further, the Research
and
Development Law generally requires that the manufacture of products
incorporating or based upon funded know-how be performed in Israel.
The
Research and Development Law contains reporting requirements with respect to
certain changes in the ownership of a grant recipient. The Research and
Development Law requires the grant recipient and its controlling shareholders
and interested parties to notify the Office of the Chief Scientist of any change
in control of the recipient or a change in the holdings of the means of control
of the recipient that results in a non-Israeli becoming an interested party
directly in the recipient and requires the new interested party to undertake
to
the Office of the Chief Scientist to comply with the provisions of the Research
and Development Law. For this purpose, "control" is defined as the ability
to direct the activities of a company other than any ability arising solely
from
serving as an officer or director of the company. A person is presumed to
have control if such person holds 50% or more of the means of control of a
company. "Means of control" refers to voting rights and the right to
appoint directors or the chief executive officer. An "interested party" of
a company includes a holder of 5% or more of its outstanding share capital
or
voting rights, its chief executive officer and directors, someone who has the
right to appoint its chief executive officer or at least one director, and
a
company with respect to which any of the foregoing interested parties owns
25%
or more of the outstanding share capital or voting rights or has the right
to
appoint 25% or more of the directors. Accordingly, any non-Israeli who
acquires directly 5% or more of our ordinary shares will be required to notify
the Office of the Chief Scientist that it has become an interested party and
to
sign an undertaking to comply with the Research and Development
Law.
C. |
Organizational
Structure
|
Set
forth
below is a list of our significant subsidiaries:
|
·
|
Mind
Software Limited, a wholly owned subsidiary, incorporated in the
United
Kingdom;
|
|
·
|
Sentori
Inc., a wholly owned subsidiary, incorporated in the State of Delaware;
|
|
· |
MIND
C.T.I. Inc., a wholly owned subsidiary, incorporated in the State
of New
Jersey;
|
|
· |
MIND
Software SRL., a wholly owned subsidiary, incorporated in Romania;
and
|
|
· |
Dirot
Comp SRL., a wholly owned subsidiary, incorporated in
Romania.
|
D. |
Property,
Plant and Equipment
|
Our
headquarters are located in Yoqneam, Israel, approximately 50 miles north of
Tel
Aviv. We lease approximately 16,000 square feet at our Yoqneam headquarters.
We
also lease 10,593 square feet of office space in Silver Spring, Maryland,
approximately 4,000 square feet in Reading, U.K. and 21,500 square feet in
Jassy, Romania. The office in Maryland is used primarily for supporting our
customers in the United States, while the office in Jassy is used primarily
for
software development and for customer support. The office in Maryland is the
group’s headquarters in the Americas. We are currently considering purchasing or
constructing a building for our office in Romania.
Item
4A. |
Unresolved
Staff Comments
|
Not
applicable.
Item
5. |
Operating
and Financial Review and
Prospects
|
The
following discussion and analysis is based on and should be read in conjunction
with our consolidated financial statements, including the related notes,
contained in Item 18.
Overview
We
were
incorporated in Israel in 1995 and started providing our enterprise software
products in that year. In 1997, we introduced our billing and customer care
software for Voice over IP. We have enhanced our billing solutions since then
to
support multiple IP services, wireless and wireline carriers and multiple play
(voice, data and content) service providers. In 2007, 83.7% of our revenues
were
derived from providing our billing and customer care software and 16.3% were
derived from providing our enterprise software. In 2007, license fees
represented 32.1% of our revenues and professional services represented 67.9%.
In 2005 and 2006, no customer accounted for 10% or more of our total revenues.
In 2007, one customer accounted for approximately 10% of total revenues. We
expect to continue to derive sizeable revenues from a small number of changing
customers.
In
August
2005, we acquired Sentori Inc., a leading provider of billing and customer
care
solutions to tier 3 and tier 2 wireless carriers and mobile virtual network
operators, or MVNOs, mainly in the United States and the Caribbean. In October
2007, we acquired the U.K.-based Omni Consulting Company Limited, which provides
billing and customer care software solutions in a service bureau mode, mainly
to
European carriers. We evaluate acquisition opportunities pro-actively, based
on
our long-term policy of growing the scale of our business and enhancing our
offering through acquisitions that are expected to enhance shareholder
value.
In
2006
we experienced significant growth in revenue over 2005 driven primarily by
our
acquisition of Sentori in the third quarter of 2005, which strengthened our
presence in the United States and in the mobile market generally. In 2007 we
experienced a decrease in revenue driven primarily by changes to our business
model, from short-term license deals to larger and more complex, long-term
managed services agreements. As anticipated, this change resulted in revenue
recognition of the majority of our licenses sold after 2006 over the length
of
three- to five-year periods, as opposed to revenue recognition at delivery
in
past years. We consider this a normal and expected development for our business
as it grows and matures. In the last three years we significantly increased
our
professional services team to support the growth in services offered to
customers.
We
recorded a $15.2 million impairment charge for the year ended December 31,
2007
with respect to our holding in auction rate securities in the principal amount
of $20.3 million. See below under Item 5.B - “Liquidity and Capital Resources”
and Item 11 – “Quantitative and Qualitative Disclosures About Market Risk” for
more information.
In
July
2003, we adopted a dividend policy, according to which we declare, subject
to
specific board approval and applicable law, a dividend distribution once per
year, in the amount of our net income from the previous year. Additionally
the
board approved dividend distributions in 2003, 2007, and 2008 that were subject
to approvals from an Israeli Court in accordance with Section 303 of the Israeli
Companies Law due to the fact that we did not have sufficient retained earnings.
Since 2003 the Company distributed cash dividends of approximately $1.05 per
share to its shareholders: $0.14 per share in 2003, $0.13 per share in 2004,
$0.24 per share in 2005, $0.14 per share in 2006, $0.20 per share in 2007 and
$0.20 per share in 2008. The board decision to approve the annual distribution
is based, among other factors, on our cash position at that time, potential
acquisitions and future cash needs. The board may decide to discontinue the
dividend distribution in whole or in part at any time.
Revenues.
We are
paid license fees by our customers for the right to use our products, based
on
(1) traffic volume, which is measured by factors such as minutes per month,
number of lines used, number of data sources and number of subscribers, and
(2)
the functionality of the system based on application modules that are added
to
the software. In relation to our professional services, other than maintenance
services and managed services, we mainly quote a fixed price based on the type
of service offered, estimated direct labor costs and the expenses that we will
incur to provide these services. Fees for maintenance services are based on
a
fixed percentage of the license fee and are paid annually, quarterly or monthly.
Fees for managed services are primarily based on the number of subscribers
and
are paid monthly.
We
primarily use two business models when we sell our solutions, the license model
and the managed services model. In the license model, the customer pays a
one-time implementation fee, a one-time license fee for a perpetual license
limited by the traffic metrics chosen by the customer, and additional fees
to
expand the chosen traffic metrics limitation. In addition, we are paid
maintenance fees to renew periodically the maintenance agreement at the customer
discretion. In the managed services model, the customer pays a one-time
implementation fee, a monthly fee that includes a periodic license (right to
use), maintenance and services fees, calculated by the metrics chosen by the
customer (mainly, number of subscribers).
We
provide a revenue breakdown for our billing and customer care software and
our
enterprise call management software. We believe that this information provides
a
better understanding of our performance and allows investors to make a more
informed judgment about our business.
Cost
of Revenues.
The
cost of revenues consists primarily of direct labor costs and overhead expenses
related to software installation and maintenance. Cost of revenues also
includes, among other things, software license fees to Oracle, hardware,
amortization of intangible assets, packaging and shipping costs. Our cost of
professional services revenues consists primarily of direct labor costs and
travel expenses. Our revenues from the sale of our licenses have a higher gross
margin than that from providing our professional services. We incur variable
direct labor costs when we provide professional services. There is no comparable
variable direct labor cost incurred when we license our software.
Research
and Development Expenses.
Our
research and development expenses consist primarily of compensation, overhead
and related costs for research and development personnel and depreciation of
testing and other equipment. Research and development costs related to software
products are expensed as incurred until the “technological feasibility” of the
product has been established. Because of the relatively short time period
between “technological feasibility” and product release, no software development
costs have been capitalized. We expect to continue to make substantial
investments in research and development.
Selling
and Marketing Expenses. Our
selling expenses consist primarily of compensation, overhead and related costs
for sales and marketing personnel, the operation of international sales offices,
sales commissions, marketing programs, public relations, promotional materials,
travel expenses, trade shows and exhibition expenses.
General
and Administrative Expenses. Our
general and administrative expenses consist primarily of compensation, overhead
and related costs for executives and administrative personnel, accounting,
professional fees, insurance, provisions for doubtful accounts and other general
corporate expenses.
Financial
Income (Expenses), Net.
Our
financial income (expenses), net consists primarily of interest earned on bank
deposits, gains and losses from the conversion of monetary balance sheet items
denominated in non-dollar currencies into U.S. dollars, net of financing costs,
loss from withdrawal of long-term bank deposits and bank charges in real terms
as well as the devaluation of monetary assets and monetary
liabilities.
Taxes
on Income.
Israeli
companies are generally subject to income tax at the corporate tax rate of
34%
for the 2005 tax year, 31% for the 2006 tax year and 29% for the 2007 tax year.
Following an amendment to the Israeli Income Tax Ordinance that came into effect
on January 1, 2006, the corporate tax rate has decreased to 27% for the 2008
tax
year and is expected to decrease to 26% for the 2009 tax year and 25% for the
2010 tax year and thereafter. However, Israeli Companies are generally subject
to capital gains tax at a rate of 25% for capital gains, other than gains
deriving from the sale of listed securities, derived after January 1, 2003.
Substantially all of our facilities, however, have been granted “approved
enterprise” status under the Law for the Encouragement of Capital Investments,
1959. Income derived from the approved enterprise is tax exempt for a period
of
ten years commencing in the first year in which we earn taxable income from
the
approved enterprise, since we have elected the “alternative benefits route”
(involving a waiver of investment grants) and our approved enterprises are
located in a preferred geographic location. In the event of distribution of
cash
dividends from income that was tax exempt, we would have to pay up to 25% tax
in
respect of the amount distributed. In February 2007, we finalized tax
assessments for the tax years 2003 to 2005, which resulted in additional tax
expenses in 2006 of approximately $1.5 million.
The
following discussion of our results of operations for 2005, 2006 and 2007,
including the percentage data in the following table, is based upon our
statements of operations contained in our financial statements for those
periods, and the related notes, included in this annual report:
|
|
Years
ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
Revenues
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of revenues
|
|
|
25.7
|
|
|
28.3
|
|
|
31.4
|
|
Gross
profit
|
|
|
74.3
|
|
|
71.7
|
|
|
68.6
|
|
Research
and development expenses
|
|
|
32.6
|
|
|
30.5
|
|
|
31.0
|
|
Selling,
general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing expenses
|
|
|
13.8
|
|
|
18.1
|
|
|
20.8
|
|
General
and administrative expenses
|
|
|
9.7
|
|
|
10.6
|
|
|
10.0
|
|
Operating
Income
|
|
|
18.2
|
|
|
12.5
|
|
|
6.8
|
|
Financial
income (expenses) - net
|
|
|
8.1
|
|
|
(1.1
|
)
|
|
(71.0
|
)
|
Income
(loss) before taxes on income
|
|
|
26.3
|
|
|
11.4
|
|
|
(64.2
|
)
|
Taxes
on income
|
|
|
0.3
|
|
|
6.8
|
|
|
0.6
|
|
Net
income (loss)
|
|
|
26.0
|
|
|
4.6
|
|
|
(64.8
|
)
|
Comparison
of 2005, 2006 and 2007
Revenues
|
|
Years
ended December 31,
($
in millions)
|
|
%
Change
|
|
%
Change
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2006 vs. 2005
|
|
2007 vs. 2006
|
|
License
sales
|
|
|
7.4
|
|
|
8.5
|
|
|
5.9
|
|
|
14.9
|
|
|
(30.6
|
)
|
Professional
services
|
|
|
8.2
|
|
|
11.6
|
|
|
12.5
|
|
|
41.5
|
|
|
7.8
|
|
Total
revenues
|
|
|
15.6
|
|
|
20.1
|
|
|
18.4
|
|
|
28.8
|
|
|
(8.5
|
)
|
Revenues
in 2006 increased in comparison to 2005 by 28.8%, mainly because of the
acquisition of Sentori, which strengthened our presence in the United States
and
in the mobile market generally. Revenues in 2007 decreased by 8.5%, partly
due
to the business model shift towards more managed services deals, in which
revenue is spread over a few years. Revenues from our billing and customer
care
product solutions for service providers increased from $12.7 million in 2005
to
$17.2 million in 2006 and decreased to $15.4 million in 2007. Revenues from
our
enterprise products remained roughly flat from 2005 to 2006 at $2.9 million,
and
increased to $3.1 million in 2007.
Revenues
from professional services as a percentage of total revenues increased from
53%
in 2005 to 58% in 2006 as a result of our focus on larger deals, which are
often
of a more complex nature and require more professional services. In 2007,
revenues from professional services increased to 68% of total revenues as a
result of continued growth in professional services, coupled with a decrease
in
license sales.
The
following table presents the geographic distribution of our
revenues:
|
|
Years
ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
The
Americas
|
|
|
35.6
|
%
|
|
48.1
|
%
|
|
42.2
|
%
|
Asia
Pacific and Africa
|
|
|
17.3
|
|
|
8.1
|
|
|
7.6
|
|
Europe
|
|
|
40.3
|
|
|
38.3
|
|
|
43.2
|
|
Israel
|
|
|
6.8
|
|
|
5.5
|
|
|
7.0
|
|
Total
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Our
sales
in the Americas as a percentage of total sales increased from 35.6% in 2005
to
48.1% in 2006 as the result of our acquisition of Sentori in the third quarter
of 2005, which strengthened our presence in the United States and in the mobile
market generally. In 2007 our sales in the Americas decreased to 42.2% out
of
total sales. Our sales in Europe as a percentage of revenue decreased from
40.3%
in 2005 to 38.3% in 2006, and increased to 43.2% in 2007, primarily as a result
of the acquisition of Omni Consulting in the United Kingdom in October of
2007.
Cost
of Revenues.
|
|
Years
ended December 31,
($
in millions)
|
|
%
Change
|
|
%
Change
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2006 vs. 2005
|
|
2007 vs. 2006
|
|
Total
cost of revenues
|
|
|
4.0
|
|
|
5.7
|
|
|
5.8
|
|
|
42.5
|
|
|
1.8
|
|
The
increase in our cost of revenues in 2006 and in 2007 was primarily due to the
increase in our revenues from professional services (as explained above) and
due
to the continued increase in employee payroll costs, driven by an increase
in
the cost of employment per employee as well as an increase in the total number
of employees engaged in support and maintenance.
Gross
profit as a percentage of revenues decreased from 74.3% in 2005 to 71.7% in
2006
and to 68.6% in 2007, due to the increase in our revenues from professional
services as a percentage of total revenues as well as the increase in employee
payroll costs (as explained above).
Operating
Expenses
|
|
Years
ended December 31,
($
in millions)
|
|
%
Change
|
|
%
Change
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2006 vs. 2005
|
|
2007 vs. 2006
|
|
Research
and development
|
|
|
5.1
|
|
|
6.1
|
|
|
5.7
|
|
|
19.6
|
|
|
(6.6
|
)
|
Selling
and
marketing
|
|
|
2.1
|
|
|
3.6
|
|
|
3.8
|
|
|
71.4
|
|
|
5.6
|
|
General
and administrative
|
|
|
1.5
|
|
|
2.1
|
|
|
1.8
|
|
|
40.0
|
|
|
(14.3
|
)
|
Total
operating expenses
|
|
|
8.7
|
|
|
11.8
|
|
|
11.3
|
|
|
35.6
|
|
|
(4.2
|
)
|
Research
and Development. We
make
substantial investment in research and development to maintain our advanced
technology and add functionality to our products. The increase in 2006 in our
research and development expenses was primarily due to an increase in the cost
attributable to payroll and related expenses of our employees engaged in
research and development resulting from an increase in the salary per employee
and an increase in the total number of employees engaged in research and
development. The decrease in 2007 by 6.6% was primarily due to a decrease in
outsourcing cost. Research and development expenses as a percentage of revenues
slightly decreased from 32.6% in 2005 to 30.5% in 2006 and slightly increased
to
31.0% in 2007 due to an increase in revenues in excess of the increase in
research and development expenses in 2006 and a decrease in revenue in excess
of
the decrease of research and development expenses in 2007.
Selling
and Marketing Expenses.
Selling
and marketing expenses increased from $2.1 million in 2005 to $3.6 million
in
2006 mainly due to a significant increase of our sales teams (especially in
the
United States as a result of the acquisition of Sentori), and due to an increase
in commission expenses as the result of the increase in revenues and slightly
further increased to $3.8 million in 2007 due to an increase of our global
sales
team. Selling and marketing expenses as a percentage of revenues increased
from
13.8% in 2005 to 18.1% in 2006 due to an increase in selling and marketing
expenses in excess of the increase of revenues and further increased to 20.8%
in
2007 due to the decrease in revenue.
General
and Administrative Expenses. General
and administrative expenses increased from $1.5 million in 2005 to $2.1 million
in 2006 and decreased to $1.8 million in 2007. The increase between 2005 and
2006 was mainly due to additional professional services, mainly
legal.
Financial
Income (Expenses). Financial
income decreased from $1.3 million in 2005 to financial expenses of ($0.2)
million in 2006. This decrease resulted mainly from a one-time penalty in the
amount of approximately $1.33 million for premature withdrawal of two of our
three deposits. Financial expenses in 2007 amounted to ($13.1) million primarily
due to the other-than-temporary impairment in the value of our holding in
auction rate securities investment in the amount of $15.2 million. See Item
5.B
“Liquidity and Capital Resources” and Item 11 – “Quantitative and Qualitative
Disclosures About Market Risk” for more information.
Corporate
Tax Rate
The
general corporate tax rate in Israel is 34% for the 2005 tax year, 31% for
the
2006 tax year and 29% for the 2007 tax year. Following an amendment to the
Israeli Income Tax Ordinance that came into effect on January 1, 2006, the
corporate tax rate has decreased to 27% for the 2008 tax year and is expected
to
decrease to 26% for the 2009 tax year and 25% for the 2010 tax year and
thereafter. However, Israeli companies are generally subject to capital gains
tax at a rate of 25% for capital gains, other than gains deriving from the
sale
of listed securities, derived after January 1, 2003. Our effective tax rate,
however, was 1% in 2005, 3% in 2006 and 2% in 2007 (before taking in
consideration the one-time tax expenses in 2006 resulting from the finalization
of the tax assessment for tax years 2003 to 2005). We experienced the lower
effective tax rates in 2004 and 2005 primarily because of tax reductions to
which we are entitled under Israel’s Law for Encouragement of Capital
Investments, 1959. In February 2007 we finalized tax assessments for the tax
years 2003 to 2005 which resulted in an additional tax expense in
2006
of approximately $1.5 million. We cannot assure you that the low effective
tax
rates in 2005, 2006 and 2007 will be available for us in the future. For more
information about the taxes to which we are subject, see above under the caption
“Overview—Taxes on Income” and below under Item 10.E “Taxation.”
Critical
Accounting Policies
To
improve understanding of our financial statements, it is important to obtain
some degree of familiarity with our critical or principal accounting policies.
These policies are described in note 1 to the consolidated financial statements
contained in Item 18. We review our accounting policies annually to ensure
that
the financial statements developed, in part, on the basis of these accounting
policies provide complete, accurate and transparent information concerning
the
financial condition of our company. As part of this process, we reviewed the
selection and application of our critical accounting policies and financial
disclosures as of December 31, 2007, and we believe that the consolidated
financial statements contained in Item 18 present fairly, in all material
respects, the consolidated financial position of our company as of that
date.
In
preparing our financial statements in accordance with generally accepted
accounting policies in the United States of America, our management must often
make estimates and assumptions which may affect the reported amounts of assets,
liabilities, revenues, expenses and related disclosures as of the date of the
financial statements and during the reporting period. Some of those judgments
can be subjective and complex, and consequently actual results may differ from
those estimates. For any given individual estimate or assumption made by our
management, there may be alternative estimates or assumptions which are also
reasonable. However, we believe that, given the facts and circumstances before
our management at the time of making the relevant judgments, estimates or
assumptions, it is unlikely that applying any such other reasonable judgment
would cause a material adverse effect on the consolidated results of operations,
financial position or liquidity for the periods presented in the consolidated
financial statements included in this annual report.
We
are
also subject to risks and uncertainties that may cause actual results to differ
from estimates and assumptions, such as changes in the economic environment,
competition, customer claims, foreign exchange, taxation and governmental
programs. Certain of these risks, uncertainties and assumptions are discussed
under the heading “Forward-Looking Statements” and in Item 3.D – “Risk
Factors”.
We
consider our most significant accounting policies to be those discussed
below:
Revenue
Recognition. We
apply
the provisions of Statement of Position 97-2 of the American Institute of
Certified Public Accounts (“SOP 97-2”), “Software Revenue Recognition” and
Statement of Position 81-1 (“SOP 81-1”) “Accounting for performance of
construction type and certain production type contracts”, as
follows:
i)
Sales of licenses:
Revenue
from sale of products is recognized when delivery has occurred, persuasive
evidence of an arrangement exists, the sales price is fixed or determinable
and
collection is probable. Customization of the product, if any, is performed
before delivery occurs. If collection is not considered probable, revenue is
recognized when the fee is collected.
We
generally do not grant a right of return on products sold to customers,
distributors and resellers. In the event the right of return is granted, revenue
is recognized after such right has expired.
ii)
Services: The
services we provide consist of implementation, training, hardware installation,
maintenance, support, managed services and project management.
All
services are priced on a fixed price basis and are recognized ratably over
the
period in which the services are provided except services which are recognized
under the percentage-of-completion method as described below.
Revenues
from managed services include a monthly fee for services and for right of use
and are recorded as service revenues and license revenues, respectively. The
monthly fee is based on number of subscribers and the agreements include a
minimum monthly charge. These revenues are recognized on a monthly
basis.
Products
are mainly supplied with maintenance and support services for a period of one
year from delivery. When revenue on sale of the products is recognized, we
defer
a portion of the sales price and recognize it as maintenance and support service
revenue ratably over the above period. The portion of the sales price that
is
deferred is determined based on the fair value of the service as priced in
transactions in which we render solely maintenance and support
services.
Where
the
services are considered essential to the functionality of the software products,
both the software product revenue and the revenue related to the integration
and
implementation services are recognized under the percentage-of-completion method
in accordance with SOP 81-1. We generally determine the percentage-of-completion
by comparing the costs incurred to date to the estimated total costs required
to
complete the project. When the estimate indicates that a loss will be incurred,
such loss is recorded in the period identified. Significant judgments and
estimates are involved in determining the percent complete of each contract.
Different assumptions could yield materially different results.
Provision
for Doubtful Accounts. The
provision for doubtful accounts is for estimated losses resulting from the
inability of our customers to make required payments. We regularly evaluate
the
adequacy of this provision by taking into account variables such as past
experience, age of the receivable balance, and current economic conditions
that
may affect a customer’s ability to pay. The use of different estimates or
assumptions could produce different provision balances. If collection is not
probable at the time the transaction is consummated, we do not recognize revenue
until cash collection. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional provision for doubtful accounts may be required.
Long-term
Investment.
We account for our investment in auction rate securities in accordance
with SFAS No. 115, “Accounting
for Certain Investments in Debt and Equity Securities.”
At
December 31, 2007, our long-term investment was reported at fair value. Due
to the lack of availability of observable market quotes on our investment in
auction rate securities, the fair value was estimated by Houlihan Smith &
Company, an investment advisor, based on a valuation model and an internal
analysis by management of other-than-temporary impairment factors. The
investment advisor’s model considered the structure of the security, the quality
of the collateral and the default risks, and the liquidity determinants
affecting the security.
Declines
in fair value that are considered other-than-temporary are charged to earnings
and those that are considered temporary are reported as a component of other
comprehensive income in stockholders’ equity. We have concluded that the decline
in value of our auction rate securities was other-than-temporary and recorded
an
impairment charge of $15.2 million for the year ended December 31,
2007.
The
valuation of our investment portfolio is subject to uncertainties that are
difficult to predict. Factors that may impact valuation include changes to
credit ratings of the securities as well as the underlying assets supporting
those securities, rates of default of the underlying assets, underlying
collateral values, discount rates, counterparty risk and ongoing strength and
quality of market credit and liquidity. The estimated market value of our
holding in auction rate securities at December 31, 2007 was approximately
$5.1 million.
The
credit and capital markets have continued to deteriorate in 2008. If
uncertainties in these markets continue, these markets deteriorate further
or
the securities we hold are further downgraded, we may incur additional
impairments to our investment portfolio.
Taxes
on Income.
Substantially
all of our production facilities in Israel have been granted Approved Enterprise
status under the Law for the Encouragement of Capital Investments, 1959. Income
we have derived from the Approved Enterprise is tax exempt. In the event of
distribution of cash dividends from tax-exempt income, we are required to pay
up
to 25% tax in respect of the amount distributed. For more information about
Approved Enterprises, see Item 10.E “Taxation – Law for the Encouragement of
Capital Investments, 1959” and Note 9 to our financial statements contained in
Item 18.
In
previous years, we did not provide for deferred taxes because we intended to
reinvest the amounts of all such income and not to distribute dividends from
such income. Commencing 2003, we changed our policy with regard to distribution
of dividends out of earnings derived from tax-exempt income.
Due
to
the accumulated tax losses and since we do not have approved enterprise taxable
income, no additional tax liability will be incurred by us as a result of
dividend distribution from the balance of undistributed income.
Recently
Issued Accounting Pronouncements.
Recently
issued accounting pronouncements are described in note 1 paragraph t to the
consolidated financial statements contained in Item 18.
Our
Functional Currency
The
currency of the primary economic environment in which we operate is the U.S.
dollar. In 2007, approximately 93% of our revenues were derived from sales
outside Israel, which were denominated primarily in U.S. dollars. In addition,
most of our marketing costs are incurred outside Israel, primarily in U.S.
dollars. Transactions and balances originally denominated in U.S. dollars are
presented at their original amounts. Balances in non-dollar currencies are
remeasured into U.S. dollars using historical and current exchange rates for
non-monetary and monetary balances, respectively. For non-dollar transactions
and other items reflected in our income statements, the following exchange
rates
are used:
|
·
|
for
transactions, exchange rates at the transaction dates or average
rates;
and
|
|
·
|
for
other items (derived from non-monetary balance sheet items such as
depreciation and amortization or similar items), historical exchange
rates.
|
The
resulting currency transaction gains or losses are reported as financial income
or expenses as appropriate.
Impact
of Foreign Currency Fluctuations on Results of Operations
The
U.S.
dollar cost of our operations is influenced by the extent to which any inflation
in Israel is offset, on a lagging basis, or is not offset by the devaluation
of
the NIS in relation to the U.S. dollar. When the rate of inflation in Israel
exceeds the rate of devaluation of the NIS against the U.S. dollar, companies
experience increases in the U.S. dollar cost of their operations in Israel.
Unless offset by a devaluation of the NIS against the U.S. dollar, inflation
in
Israel or weakening of the U.S. dollar in global markets will have a negative
effect on our profitability as we receive payment in U.S. dollars for most
of
our sales while we incur a portion of our expenses, principally salaries and
related personnel expenses, in NIS.
The
following table presents information about the rate of inflation in Israel,
the
rate of devaluation of the NIS against the U.S. dollar, and the rate of
inflation of Israel adjusted for the devaluation:
Years
ended
December 31,
|
|
Israeli
Inflation
Rate
|
|
Israeli
Devaluation
Rate
|
|
Israel Inflation
Adjusted
for
Devaluation
|
|
2002
|
|
|
6.5
|
|
|
7.3
|
|
|
(0.8
|
)
|
2003
|
|
|
(1.9
|
)
|
|
(7.6
|
)
|
|
5.7
|
|
2004
|
|
|
1.2
|
|
|
(1.6
|
)
|
|
2.8
|
|
2005
|
|
|
2.4
|
|
|
6.8
|
|
|
(4.4
|
)
|
2006
|
|
|
(0.1
|
)
|
|
(8.2
|
)
|
|
8.1
|
|
2007
|
|
|
3.4
|
|
|
(9.0
|
)
|
|
12.4
|
|
We
cannot
assure you that we will not be materially and adversely affected in the future
if inflation in Israel exceeds the devaluation of the NIS against the U.S.
dollar or if the timing of the devaluation lags behind inflation in
Israel.
A
devaluation of the NIS in relation to the U.S. dollar has the effect of reducing
the U.S. dollar amount of any of our expenses or liabilities which are payable
in NIS, unless these expenses or payables are linked to the U.S. dollar. This
devaluation also has the effect of decreasing the U.S. dollar value of any
asset, which consists of NIS or receivables payable in NIS, unless the
receivables are linked to the U.S. dollar. Conversely, any increase in the
value
of the NIS in relation to the U.S. dollar has the effect of increasing the
U.S.
dollar value of any unlinked NIS assets and the U.S. dollar amounts of any
unlinked NIS liabilities and expenses. Because exchange rates between the NIS
and the U.S. dollar fluctuate continuously, exchange rate fluctuations and
especially larger periodic devaluations will have an impact on our profitability
and period-to-period comparisons of our results. The effects of foreign currency
re-measurements are reported in our consolidated financial statements in current
operations.
B. |
Liquidity
and Capital Resources
|
Since
our
inception, we have financed our operations mainly through cash generated by
operations. We supplemented this source by two private rounds of equity
financing, the first in 1997 (with a follow-on in 1999) and the second in 2000
and our initial public offering in 2000, which raised total net proceeds in
the
amount of $44.3 million.
As
of
December 31, 2007, we had approximately $12.4 million in cash and cash
equivalents and $5.1 million in long-term investment, and our working capital
was $13.4 million. In our opinion, our working capital is sufficient for our
requirements for the foreseeable future.
Net
Cash Provided by/Used in Operating Activities.
Net
cash provided by operating activities in 2005 was $0.9 million, attributable
to
our net income of $4.1 million and non-cash related items, net, in the amount
of
$0.8 million, offset by a net increase in operating assets and liabilities
items
in the amount of $4.0 million. Net cash provided by operating activities in
2006
was $0.6 million, attributable to our net income of $0.9 million and non-cash
related items, net, in the amount of $1.6 million, offset by a net increase
in
operating assets and liabilities items in the amount of $1.9 million. Net cash
provided by operating activities in 2007 was $4.7 million, attributable to
our
net income (before impairment of long-term investment) of $3.2 million and
non-cash related items, net, in the amount of $1.3 million, and to a net
decrease in operating assets and liabilities items in the amount of $0.1
million.
Cash
Deposits.
In
March 2002, we deposited most of our cash in structured, callable time deposits.
Under the arrangements with the banks, whether or not the deposits bore interest
depended upon the prevailing U.S. dollar LIBOR rate. Interest was payable in
respect of days during which the rate was within a certain range and no interest
was payable in respect of days during which it exceeded the range. Until May
2005, we achieved relatively high interest rates of over 7% per annum. Starting
in May 2005, due to the increase of the six-month LIBOR rate, the deposits
did
not bear interest, causing our financial income to decrease substantially
starting in the third quarter of 2005. In the second quarter of 2006, we
withdrew two of our three structured deposits accounts in the amount of $20
million. The financial expenses arising from the early redemption of these
two
deposits were $1.33 million. In the fourth quarter of 2006, the third and last
structured deposit in the amount of $10 million was released with no penalty.
In
December 2006, we purchased marketable debentures in the amount of $10 million
with a stated term of 54 months. The debentures were presented in our balance
sheet as investment and other non-current assets. In December 2007, we withdrew
the debentures prior to their maturity for a total consideration amount of
$9.996 million.
We
hold
an investment in the principal amount of $20.3 million in auction rate
securities (hereafter – the "Security"), which are secured by collateralized
debt obligations. Consistent with our investment guidelines, the Security held
by us had AAA credit rating at the time of the purchase. With the liquidity
stress experienced in credit markets the Security held by us at December 31,
2007 have experienced multiple failed auctions and hence became illiquid. In
addition, the rating of the Security has been downgraded, and as of June 26,
2008 it is rated Ba1 by Moody’s and on CreditWatch with negative implications,
and rated BBB by Standard & Poor’s. We are continuing to receive monthly
interest payments on this security based on the stated terms.
The
estimated market value of the Security as of December 31, 2007 was $5.1 million,
which reflects a $15.2 million decline in value of the principal investment.
We
have concluded that this decline in value is other-than-temporary and hence
recorded a $15.2 million impairment charge for the year ended December 31,
2007.
This impairment had, and the ongoing illiquidity of the Security continues
to
have, a material adverse affect on our liquidity and capital resources. In
2006,
the Security was presented as current assets under marketable securities on
our
balance sheet, given the liquidity provided by the auction mechanism. Under
current conditions of multiple failed auctions, the Security is illiquid and
as
such has been reclassified from current assets to investments and non-current
assets and is presented under long-term investments on our balance sheet as
of
December 31, 2007. If uncertainties in credit markets continue or if such
markets deteriorate further, we may incur additional impairments to our
investment in the Security. Any future impairment may have a material adverse
affect on our liquidity and capital resources.
In
accordance with our existing cash management policy, all our funds – with the
exception of the auction rate securities - are currently invested in short-term
bank deposits.
Net
Cash Provided by/Used in Investing Activities.
During
2005, 2006 and 2007, our principal investment activity was long-term bank
deposits and marketable debentures. In 2005 we also used $4.2 million for the
acquisition of Sentori, Inc. In 2007 we used $5.0 million for the acquisition
of
Omni Consulting.
Net
Cash Provided by/Used in Financing Activities.
In
2005, our financing activities used $4.8 million due to a cash dividend of
$5.1
million, offset by $0.3 million in proceeds from the exercise of employee stock
options. In 2006, our financing activities used $2.9 million due to cash
dividend of $3.0 million, offset by $0.1 million in proceeds from the exercise
of employee stock options. In 2007, our financing activities used $4.2 million
due to a cash dividend of $4.3 million, offset by $0.1 million in proceeds
from
the exercise of employee stock options.
Capital
Expenditures.
During
2005, 2006 and 2007 the aggregate cash amounts of our capital expenditures
were
$0.6 million, $0.4 million, and $0.4 million, respectively. These expenditures
were principally for the purchase of property and other equipment. Although
we
have no material commitments for capital expenditures, we anticipate an increase
in capital expenditures if we decide to construct a building for our office
in
Romania or if we purchase or merge with companies or purchase assets in order
to
obtain complementary technology and to expand our product offerings, customer
base and geographical presence.
Cash
Dividends.
Since
2003 the Company distributed aggregated cash dividends of approximately $1.05
per share to its shareholders: $0.14 per share in 2003, $0.13 per share in
2004,
$0.24 per share in 2005, $0.14 per share in 2006, $0.20 per share in 2007,
and
$0.20 per share in 2008. For information about our dividend policy, please
see
Item 8 – “Financial Information—Dividend Policy.”
C. |
Research
and Development, Patents and Licenses,
etc.
|
We
believe that significant investment in research and development is essential
for
maintaining and expanding our technological expertise in the market for billing
and customer care software and to our strategy of being a leading provider
of
new and innovative convergent billing products. We work closely with our
partners, customers and distribution channels, who provide significant feedback
for product development and innovation.
We
have
invested significant time and resources to create a structured process for
undertaking research and product development. We believe that the method that
we
use for our product development and testing is well suited for identifying
market needs, addressing the activities required to release new products, and
bringing development projects to market successfully. Our product development
activities also include the release of new versions of our products. Although
we
expect to develop new products internally, we may, based upon timing and cost
considerations, acquire or license technologies or products from third parties.
Our
research and development personnel include engineers and software developers
with experience in the development and design of billing and customer care
software. As of December 31, 2007, our research and development department
consisted of 173 employees out of a total of 323 employees.
Our
billing and customer care solutions target tier 2 and tier 3 service providers.
The need for comprehensive billing solutions is driven by the market trend
that
requires service providers to introduce new services more rapidly, to be
innovative in creating new product offers and to optimize business processes
for
maximum efficiency. In this environment, flexible and stable billing software
is
seen as business critical. If a system fails, or service quality is degraded,
it
can be highly detrimental to both a carrier’s ability to collect revenue and to
its customer relations.
In
our
experience, the active markets lately are in the U.S. the rural mobile carriers
that offer simple plans, mainly pay-as-you-go with either prepaid or
pay-in-advance policies, the service providers worldwide that move towards
IP
networks and offer multiple services, and existing carriers that search for
replacement of billing solutions as they diversify their offering and seek
a
convergent platform.
Integrating
voice and data in enterprise switches (the IP private branch exchanges, or
IP
PBX's) is a trend in which we are participating. Our goal is to develop
marketing and sales relationships with the vendors of IP PBX's such as Avaya,
Cisco Systems and 3Com under which our enterprise software will be sold together
with these vendors’ systems. This requires us to develop new sales channels with
the distributors of IP PBX's. This process is time consuming and requires the
investment of some resources to conclude the necessary agreements and to certify
and train these new channel partners.
E. |
Off-balance
Sheet Arrangements
|
We
do not
have any off-balance sheet arrangements.
F. |
Tabular
Disclosure of Contractual
Obligations
|
|
|
Payment due by period
|
|
Contractual
Obligations
|
|
Total
|
|
Less than 1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than 5 years
|
|
Long-Term
Debt Obligations
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Capital
(Finance) Lease Obligations
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Operating
Lease Obligations
|
|
$
|
1,375,000
|
|
$
|
782,000
|
|
$
|
593,000
|
|
|
0
|
|
|
0
|
|
Purchase
Obligations
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Other
Long-Term Liabilities Reflected on our Balance Sheet under U.S.
GAAP
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Total
|
|
$
|
1,375,000
|
|
$
|
782,000
|
|
$
|
593,000
|
|
|
0
|
|
|
0
|
|
Item
6. |
Directors,
Senior Management and
Employees
|
A. |
Directors
and Senior Management
|
The
following table sets forth certain information regarding our directors and
executive officers as of the date of filing of this annual report:
Name
|
|
Age
|
|
Position
|
Monica
Eisinger
|
|
50
|
|
President,
Chairperson of the Board of Directors and Chief Executive
Officer
|
Itay
Barzilay
|
|
34
|
|
Chief
Financial Officer
|
Doron
Segal
|
|
43
|
|
Vice
President – Engineering and Chief Technology Officer
|
Tal
Shain
|
|
40
|
|
Vice
President – Professional Services
|
Sagee
Aran
|
|
44
|
|
Vice
President – Sales for Asia Pacific and Africa and - Enterprise
Solutions
|
Danny
Engle
|
|
39
|
|
Vice
President – Sales for North America
|
Ronen
Levy
|
|
37
|
|
Vice
President- Business Development
|
Amnon
Neubach
|
|
64
|
|
Director
|
Mihail
Rotenberg
|
|
55
|
|
Director
|
On
June
16, 2008, our Board of Directors resolved to
convene
our 2008 annual general meeting on August 18, 2008
and
resolved further that the agenda of the meeting will include the election of
additional external directors.
The
background of each of our directors and executive officers is as follows:
Monica
Eisinger.
Ms.
Eisinger founded our company and has been President, Chairperson and Chief
Executive Officer of our company since inception. Prior to founding MIND, Ms.
Eisinger served as an information systems consultant to Raphael, the Israeli
Armaments Industry and directed over 40 projects. Ms. Eisinger holds a B.Sc.
degree in Computer Science and a M.Sc. degree in Telecommunications (with
expertise in Voice and Data Integration over the Ethernet) from the Technion,
Israel Institute of Technology.
Itay
Barzilay.
Mr.
Barzilay has served as our Chief Financial Officer since May 2008. From 2003
to
2008, he held several financial management positions at Avaya Inc. From 2000
to
2002, he served as an Auditor and as a Corporate Finance Consultant at the
Israeli affiliate of Ernst & Young. Mr. Barzilay is a Certified Public
Accountant and holds a B.A. degree in Accounting and Economics from Tel Aviv
University and an M.B.A. degree from New York University, Stern School of
Business.
Doron
Segal.
Mr.
Segal has served as our Chief Technology Officer since October 2004 and as
our
Vice President of Engineering since July 2007.
Prior
thereto, he worked for eight years at Comverse, at which he held a number of
positions including Assistant Vice President with responsibility for product
requirement definition and product level design. Mr. Segal holds an M.Sc. degree
in Computer Science from Bar Ilan University and a B.Sc. degree in Physics,
Mathematics & Computer Science from the Hebrew University.
Sagee
Aran.
Mr.
Aran joined our company in March 2000 and has served as our Vice President
of
Sales for Asia Pacific and Africa since November 2003 and as our Vice President
of Enterprise Solutions from the beginning of 2006. Prior to that, Mr. Aran
served as our Vice President of Professional Services. Prior to joining our
company, he worked for seven years at HISH Ltd., a company specializing in
process engineering and management, at which he held a number of positions
including Operations Manager and International Sales and Marketing Manager.
Mr.
Aran holds a B.Sc. degree in Engineering from the Technion, Israel Institute
of
Technology.
Danny
Engle.
Mr.
Engle is Vice President of North American Sales for Sentori. Mr. Engle joined
Sentori in 2003 as Director of Sales, and later became Sentori’s Vice President
of North American Sales. Prior to joining Sentori, Mr. Engle was District
Manager at Siebel Systems, a leading CRM solutions provider; Director of Sales
for SOTAS, a leading provider of network efficiency maximization tools for
communication service providers. Mr. Engle holds a B.S. degree in Business
Administration from the University of Texas.
Tal
Shain
Mr.
Shain joined our company in June 1999 and has served as our Vice President
of
Professional Services since February 2006. Prior thereto, Mr. Shain served
as
our R&D Manager in Romania and Chief Architect. Mr. Shain holds a B.Sc.
degree in Computer Engineering from the Technion, Israel Institute of
Technology.
Ronen
Levy. Mr.
Levy
has served as our Vice President of Business Development since June 2008. From
2006 to 2007, Mr. Levy held a number of key positions, including Business
Manager EMEA and APAC at Viola Networks Ltd. From 2002 to 2003, he served as
Corporate Development Director at Bezeq International Ltd. Mr. Levy holds a
B.A.
degree in Economics and an M.B.A. degree, both from Tel Aviv
University.
Amnon
Neubach.
Mr.
Neubach has served as an external director of our company since February 2001.
From 2001 until 2003, Mr. Neubach served as Chairman of the Board of Pelephone
Communications Ltd. Mr. Neubach has served as an economic consultant to several
companies in the private sector since 1997. From 1995 to 1997, Mr. Neubach
served as country advisor to Goldman Sachs in Israel, and from 1990 to 1994
he
served as the Minister of Economic Affairs in the Israeli Embassy in Washington,
D.C. Currently Mr. Neubach serves as a director of Delta Ltd., Direct Insurance
Ltd. and Aspen Ltd. Mr. Neubach also serves as the Chairman of the Board of
two
privately held companies. Mr. Neubach holds a B.A. degree in Economics and
Business Administration and an M.A. degree in Economics, both from Bar Ilan
University.
Mihail
Rotenberg.
Mr.
Rotenberg has served as a director of our company since May 2008. He is the
founder of BreezeCOM Ltd., which merged to become Alvarion Ltd., a wireless
broadband pioneer and the leading provider of WiMAX. Mr. Rotenberg served as
the
Chief Executive Officer of BreezeCOM from 1993 to 2000. From 2000 to 2005 Mr.
Rotenberg served as President and CEO of Accessnet SA, a wireless internet
service provider in Romania, which was sold in 2005 to Clearwire Inc. Mr.
Rotenberg holds a Ph.D. degree from Polytechnic University, Bucharest,
Romania.
B. |
Compensation
of Directors and Executive Officers
|
The
aggregate direct remuneration paid to all persons who served in the capacity
of
director or executive officer during 2007 was approximately $1.1 million,
including approximately $94,000 that was set aside for pension and retirement
benefits. This does not include amounts expended by us for automobiles made
available to our officers or expenses, including business, travel, professional
and business association dues and expenses, reimbursed to officers, and do
not
include equity based compensation expenses.
During
2007, options to purchase 12,000 ordinary shares were granted to our directors
and executive officers under our option plans.
Our
shareholders in a meeting held on April 7, 2005, resolved to grant each of
our
five directors (at that time) options to purchase 18,000 ordinary shares. The
exercise price of the options is $3.82, which was equal to the per share closing
price of our ordinary shares on the Nasdaq Global Market on the trading date
immediately preceding the shareholders meeting approving the grant. The options
vested in three equal annual installments on February 1, 2006, 2007 and 2008
and
will expire on February 8, 2012. The shareholders also approved to pay each
non-executive director an annual fee of $8,000 and a participation fee of $400
per meeting, which is the same amount of fees that was paid to our external
directors until mid 2008. Pursuant to a recent amendment to the regulations
under the Israeli Companies Law governing the compensation of external
directors, on May 14, 2008, our Board of Directors resolved that, commencing
on
July 1, 2008, each of our external directors will be entitled to receive an
annual fee of NIS 42,600 (approximately $12,500) and a participation fee of
NIS
2,200 (approximately $650) per meeting, which is equal to the median rate for
companies of our size set forth in the regulations.
Board
of Directors
Our
board
is divided into three classes of directors, denominated Class I, Class II and
Class III. The term of Class II will expire in 2008, Class III in 2009 and
Class
I in 2010. Monica Eisinger is a member of Class I, Mihail Rotenberg is a member
of Class II, and currently there is no director who is a member of Class III.
At
each annual general meeting of shareholders, directors will be elected by a
simple majority of the votes cast for a three-year term to succeed the directors
whose terms then expire. There is no legal limit on the number of terms that
may
be served by directors who are not external directors. Our external directors
are not members of any class.
The
initial term of an external director is three years and may be extended for
one
additional term of three years. Thereafter, an external director may be
reelected by our shareholders for additional periods of up to three years each
in certain circumstances described below. Mr. Neubach was re-elected to a third
term as an external director on August 28, 2007. Mr. Zamir Bar-Zion’s second
term as an external director expired on June 27, 2008. Under the Companies
Law,
our board of directors must determine the minimum number of directors having
financial and accounting experience, as defined in the regulations, which our
board of directors should have. In determining the number of directors required
to have such expertise, the board of directors must consider, among other
things, the type and size of the company and the scope and complexity of its
operations. Our board of directors has determined that we require one director
with the requisite financial and accounting expertise and that Mr. Amnon Neubach
has such expertise.
External
Directors
Under
the
Companies Law, companies incorporated under the laws of Israel whose shares
are
listed for trading on a stock exchange or have been offered to the public in
or
outside of Israel are required to appoint two external directors. External
directors are required to possess professional qualifications as set out in
regulations promulgated under the Companies Law. The Companies Law provides
that
a person may not be appointed as an external director if the person or the
person’s relative, partner, employer or any entity under the person’s control
has, as of the date of the person’s appointment to serve as an external
director, or had, during the two years preceding that date, any affiliation
with:
|
·
|
any
entity controlling the company; or
|
|
·
|
any
entity controlled by the company or by its controlling
entity.
|
The
term
affiliation includes:
|
·
|
an
employment relationship;
|
|
·
|
a
business or professional relationship maintained on a regular basis;
|
|
·
|
service
as an office holder.
|
The
Companies Law defines the term “office holder” of a company to include a
director, the chief executive officer, the chief business manager, a vice
president and any officer that reports directly to the chief executive
officer.
No
person
can serve as an external director if the person's position or other business
creates, or may create, conflict of interests with the person's responsibilities
as an external director or may otherwise interfere with the person's ability
to
serve as an external director.
Until
the
lapse of two years from termination of office, a company may not engage an
external director to serve as an office holder and cannot employ or receive
services from that person, either directly or indirectly, including through
a
corporation controlled by that person.
As
mentioned above, the initial term of an external director is three years and
may
be extended for one additional term of three years. Thereafter, an external
director may be reelected by our shareholders for additional periods of up
to
three years each only if our audit committee and our board of directors confirm
that, in light of the external director’s expertise and special contribution to
the work of the board of directors and its committees, the reelection for such
additional period is beneficial to the Company.
External
directors are to be elected by a majority vote at a shareholders' meeting,
provided that either:
|
·
|
at
least one third of the shares of non-controlling shareholders voted
at the
meeting vote in favor of the election;
or
|
|
·
|
the
total number of shares of non-controlling shareholders voted against
the
election of the external director does not exceed one percent of
the
aggregate voting rights in the
company.
|
External
directors may be removed from office only by the same percentage of shareholders
as is required for their election, or by a court, and then only if the external
directors cease to meet the statutory qualifications for their appointment
or if
they violate their duty of loyalty to the company. Each committee of a company's
board of directors that exercises a power of the board of directors is required
to include at least one external director, except for the audit committee,
which
is required to include all the external directors.
Audit
Committee
Under
the
Companies Law, our board of directors is required to appoint an audit committee,
comprised of at least three directors including all of the external directors,
but excluding:
|
·
|
the
chairman of the board of directors;
and
|
|
·
|
a
controlling shareholder or a relative of a controlling shareholder
and any
director employed by the company or who provides services to the
company
on a regular basis.
|
Under
the
Companies Law, the role of the audit committee is to examine flaws in the
management of the company’s business, in consultation with the internal auditor
and the company's independent accountants, suggest remedial measures, and to
approve specified related party transactions. Our audit committee consists
of
our external directors and Mr. Mihail Rotenberg.
The
approval of the audit committee is required to effect specified actions and
transactions with office holders, controlling shareholders and entities in
which
they have a personal interest. An audit committee may not approve an action
or a
transaction with related parties or with its office holders unless at the time
of approval at least two external directors are serving as members of the audit
committee and at least one of who was present at the meeting in which any
approval was granted.
Under
the
Nasdaq rules, our audit committee assists the board in fulfilling its
responsibility for oversight of the quality and integrity of our accounting,
auditing and financial reporting practices and financial statements and the
independence qualifications and performance of our independent auditors. Our
audit committee also has the authority and responsibility to oversee our
independent auditors, to recommend for shareholder approval the appointment
and,
where appropriate, replacement of our independent auditors and to pre-approve
audit engagement fees and all permitted non-audit services and fees. We have
adopted an audit committee charter, which sets forth the
qualifications, powers and responsibilities of our audit
committee.
Our
audit committee also serves as (i) our
compensation committee, authorized to determine the compensation
of our executive officers, (ii) our
nominations committee, authorized to recommend all director
nominees for the selection of the board of directors, provided that no such
recommendation is required in cases, if any, where the right to nominate a
director legally belongs to a third party, and (iii) our qualified legal
compliance committee, responsible for investigating reports, made by attorneys
appearing and practicing before the SEC in representing us, of perceived
material violations of U.S. federal or state securities laws, breaches of
fiduciary duty or similar violations by us or any of our agents.
All
the
members of our audit committee are “independent directors” under the Nasdaq
rules and meet the additional qualifications for membership on an audit
committee.
Internal
Auditor
Under
the
Companies Law, the board of directors must appoint an internal auditor proposed
by the audit committee. The role of the internal auditor is to examine, inter
alia, whether the company's actions comply with the law and orderly business
procedure. The internal auditor may not be an interested party, an office
holder, or a relative of any of the foregoing, nor may the internal auditor
be
the company's independent accountant or its representative. The Companies Law
defines the term “interested party” to include a person who holds 5% or more of
the company’s outstanding share capital or voting rights, a person who has the
right to appoint one or more directors or the general manager, or any person
who
serves as a director or as the general manager. The accounting firm of Deloitte
Touche Tohmatsu serves as our internal auditor.
Fiduciary
Duties of Office Holders
The
Companies Law imposes a duty of care and a duty of loyalty on all office holders
of a company. The duty of care requires an office holder to act with the level
of care with which a reasonable office holder in the same position would have
acted under the same circumstances. The duty of care includes a duty to use
reasonable means to obtain:
|
·
|
information
on the advisability of a given action brought for his approval or
performed by him by virtue of his position; and
|
|
·
|
all
other important information pertaining to these
actions.
|
The
duty
of loyalty of an office holder includes a duty to:
|
·
|
refrain
from any conflict of interest between the performance of his duties
in the
company and the performance of his other duties or his personal affairs;
|
|
·
|
refrain
from any activity that is competitive with the
company;
|
|
·
|
refrain
from exploiting any business opportunity of the company to receive
a
personal gain for himself or others;
and
|
|
·
|
disclose
to the company any information or documents relating to a company's
affairs which the office holder has received due to his position
as an
office holder.
|
Disclosure
of Personal Interest of an Office Holder
The
Companies Law requires that an office holder of a company disclose to the
company any personal interest that he may have and all related material
information known to him, in connection with any existing or proposed
transaction by the company. The disclosure is required to be made promptly
and
in any event no later than the board of directors meeting in which the
transaction is first discussed. If the transaction is an extraordinary
transaction, the office holder must also disclose any personal interest held
by:
|
·
|
the
office holder's spouse, siblings, parents, grandparents, descendants,
spouse's descendants and the spouses of any of these people;
or
|
|
·
|
any
corporation in which the office holder is a 5% or greater shareholder,
director or general manager or in which he has the right to appoint
at
least one director or the general
manager.
|
Under
Israeli law, an extraordinary transaction is a transaction:
|
·
|
other
than in the ordinary course of business;
|
|
·
|
otherwise
than on market terms; or
|
|
·
|
that
is likely to have a material impact on the company's profitability,
assets
or liabilities.
|
Approval
of Related Party Transactions
Once
an
office holder complies with the above disclosure requirement, the board of
directors may approve a transaction between the company and an office holder,
or
a third party in which an office holder has a personal interest. A transaction
that is adverse to the company's interest may not be approved.
If
the
transaction is an extraordinary transaction, approval of both the audit
committee and the board of directors is required. Under specific circumstances,
shareholder approval may also be required. A director who has a personal
interest in a transaction that is considered at a meeting of the board of
directors or the audit committee generally may not be present at this meeting
or
vote on the matter, unless a majority of the members of the board of directors
or the audit committee, as the case may be, has a personal interest in the
matter. If a majority of members of the board of directors have a personal
interest therein, shareholder approval is also required.
Disclosure
of Personal Interests of a Controlling Shareholder
Under
the
Companies Law, the disclosure requirements, which apply to an office holder,
also apply to a controlling shareholder of a public company. A controlling
shareholder is a shareholder who has the ability to direct the activities of
a
company, including a shareholder that owns 25% or more of the voting rights
if
no other shareholder owns more than 50% of the voting rights, but excluding
a
shareholder whose power derives solely from his or her position on the board
of
directors or any other position with the company. Extraordinary transactions
with a controlling shareholder or in which a controlling shareholder has a
personal interest, and the engagement of a controlling shareholder as an office
holder or employee, require the approval of the audit committee, the board
of
directors and the shareholders of the company, in that order. The shareholder
approval must be by a majority of the shares voted on the matter, provided
that
either:
|
·
|
at
least one-third of the shares of shareholders who have no personal
interest in the transaction and who vote on the matter vote in favor
thereof; or
|
|
·
|
the
shareholders who have no personal interest in the transaction who
vote
against the transaction do not represent more than one percent of
the
voting rights in the company.
|
Shareholders
generally have the right to examine any document in the company's possession
pertaining to any matter that requires shareholder approval. If this information
is made public in Israel or elsewhere, we will file the information with the
Securities and Exchange Commission in the United States.
For
information concerning the direct and indirect personal interests of an office
holder and principal shareholders in specified transactions with us, see Item
7.B “Related Party Transactions.”
Remuneration
of Members of the Board of Directors
Under
the
Companies Law, no director may be paid any remuneration by the company for
his
services as director except as may be approved by our audit committee, board
of
directors and shareholders. Our external directors are entitled to consideration
and reimbursement of expenses only as provided in regulations promulgated under
the Companies Law and are otherwise prohibited from receiving any other
consideration, directly or indirectly, in connection with their service as
external directors. The compensation paid to our directors is described above
in
Item 6.B. Our directors are not entitled to benefits upon termination of
service.
Executive
Officers
Our
executive officers are appointed by our board of directors and serve at the
discretion of our board of directors. We maintain written employment agreements
with our executive officers. Each agreement terminates upon 30 days’ written
notice and provides for standard terms and conditions of employment. All of
our
executive officers have agreed not to compete with us for 12 months (or 24
months in the case of Monica Eisinger) following the termination of their
employment with us. Monica Eisinger is entitled to severance pay upon
termination of her employment by either her or us (other than by us for cause)
and to receive, during each month of the six-month period following termination
of her employment by us, or by her for cause, an amount of salary and benefits
equal to her former monthly salary and other benefits. Under recent Israeli
case
law, the non-competition undertakings of employees may not be
enforceable.
The
numbers and breakdowns of our employees as of the end of the past three years
are set forth in the following table:
|
|
As of December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
Approximate
numbers of employees by geographic location
|
|
|
|
|
|
|
|
Israel
|
|
|
99
|
|
|
101
|
|
|
81
|
|
Romania
|
|
|
159
|
|
|
200
|
|
|
198
|
|
United
States
|
|
|
23
|
|
|
16
|
|
|
13
|
|
United
Kingdom
|
|
|
-
|
|
|
-
|
|
|
31
|
|
China
|
|
|
3
|
|
|
-
|
|
|
-
|
|
Total
workforce
|
|
|
284
|
|
|
317
|
|
|
323
|
|
Approximate
numbers of employees by category of activity
|
|
|
|
|
|
|
|
|
|
|
General
and administration
|
|
|
17
|
|
|
19
|
|
|
18
|
|
Research
and development
|
|
|
162
|
|
|
182
|
|
|
173
|
|
Professional
services and customer support
|
|
|
78
|
|
|
87
|
|
|
106
|
|
Sales
and marketing
|
|
|
27
|
|
|
29
|
|
|
26
|
|
Total
workforce
|
|
|
284
|
|
|
317
|
|
|
323
|
|
We
are
subject to Israeli labor laws and regulations with respect to our Israeli
employees. These laws principally concern matters such as paid annual vacation,
paid sick days, length of the work day and work week, minimum wages, pay for
overtime, insurance for work-related accidents and severance payments upon
the
retirement or death of an employee or termination of employment under specified
circumstances. The severance payments may be funded, in whole or in part,
through Managers’ Insurance or a Pension Fund, as described below. The payments
to the Managers’ Insurance fund or Pension Fund toward severance amount to 8.3%
of wages. Furthermore, Israeli employees and employers are required to pay
predetermined sums to the National Insurance Institute, which is similar to
the
U.S. Social Security Administration. Since January 1, 1995, these amounts also
include payments for health insurance. The payments to the National Insurance
Institute amount to approximately 17.4% of wages, of which the employee
contributes approximately two-thirds and the employer contributes approximately
one-third. Our general practice in Israel is to contribute funds on behalf
of
all of our employees to Managers’ Insurance or a Pension Fund. Each employee who
agrees to participate in the Managers’ Insurance plan contributes 5.0% of his or
her base salary and we contribute 13.3%. Each employee who agrees to participate
in the Pension Fund contributes 5.0% or 5.5% of his or her base salary and
we
contribute 14.3%. Another savings plan we offer some of our employees, although
not legally required, is known as the Advanced Studies Fund. Each employee
who
agrees to participate in the Advanced Studies fund contributes 2.5% of his
or
her base salary and we contribute 7.5%.
Furthermore,
by order of the Israeli Ministry of Labor and Welfare, all employers and
employees are subject to provisions of collective bargaining agreements between
the Histadrut, Federation of Labor, and the Coordination Bureau of Economic
Organizations in Israel. These provisions principally concern cost of living
increases, recreation pay, commuting expenses and other conditions of
employment. We provide our employees with benefits and working conditions above
the required minimums. Our employees are not represented by a labor union.
To
date, we have not experienced any work stoppages and our relationships with
our
employees are good.
As
of
June 1, 2008, Monica Eisinger beneficially owned 4,200,888, or 19.4%, of our
ordinary shares. This includes vested options to acquire 18,000 ordinary shares
at an exercise price of $3.82, which expire on February 8, 2012. None of our
other directors or members of senior management beneficially owns 1% or more
of
our ordinary shares.
We
have
established stock option plans to provide for the issuance of options to our
directors, officers and employees. Under the plans, options to purchase our
ordinary shares may be issued from time to time to our directors, officers
and
employees at exercise prices and on other terms and conditions as determined
by
our board of directors. Our board of directors determines the exercise price
and
the vesting period of options granted.
The
option plans permit the issuance of options to acquire up to 4,306,000 ordinary
shares. As of June 1, 2008, options to purchase 853,410 ordinary shares were
outstanding and options for 979,790 ordinary shares had been exercised. The
options vest over three to five years, primarily commencing on the date of
grant. Generally, options not previously exercised will expire approximately
five to seven years after they are granted. Our board of directors elected
the
capital gains treatment afforded under Section 102 of the Israeli Income Tax
Ordinance [New Version], 1961, or the Tax Ordinance, in respect of options
awarded under our Israeli option plan after January 1, 2003. Accordingly, gains
derived from options awarded after January 1, 2003, and held by a trustee for
at
least two years from the end of the tax year in which they were awarded (or
in
some cases for 30 months from the date of grant), will generally be taxed as
capital gains at a rate of 25%, and we will generally not be entitled to
recognize an expense for the award of such options. For grants of options made
on or after January 1, 2006, the aforesaid minimum holding period by the trustee
is two years from the date of grant of the options. On April 13, 2004, our
annual general meeting resolved to extend our share option plans until December
31, 2010.
Item
7. |
Major
Shareholders and Related Party
Transactions
|
The
following table sets forth certain information regarding the beneficial
ownership of our ordinary shares as of June 30, 2008, unless otherwise
specified, by each person who is known to own beneficially more than 5% of
the
outstanding ordinary shares.
Name
of
Beneficial
Owners
|
|
Total
Shares Beneficially Owned
|
|
Percentage
of
Ordinary
Shares (1)
|
|
Monica
Eisinger
|
|
|
4,200,888
|
(2)
|
|
19.4
|
%(1)
|
Lloyd
I. Miller, III
|
|
|
1,270,850
|
|
|
5.9
|
% |
______________________
(1)
|
Based
on 21,594,010 ordinary shares outstanding on June 1,
2008.
|
(2)
|
Includes
18,000 ordinary shares issuable upon the exercise of vested
options
|
As
of
June 1, 2008, there were nine holders of record of our ordinary shares in the
United States who collectively held less than 1% of our outstanding ordinary
shares. In addition to this amount, there were also 12,475,374 shares held
by
the Depositary Trust Company in the United States. The number of record holders
in the United States is not representative of the number of beneficial holders
nor is it representative of where such beneficial holders are resident since
many of these ordinary shares were held of record by brokers or other nominees.
B. |
Related
Party Transactions
|
None.
C. |
Interests
of Experts and Counsel
|
Not
applicable.
Item
8. |
Financial
Information
|
Financial
Statements
See
Item
18.
Legal
Proceedings
On
February 20, 2008, we filed a Statement of Claim with the Financial Industry
Regulatory Authority and commenced arbitration against Credit Suisse Securities
(LLC) and certain employees thereof that invested these funds on our behalf.
The
claim alleges, among other things, that
the
bank was supposed to invest the funds in highly liquid, highly safe, 28-day
auction-rate securities, but -- without our authorization -- invested the funds
in collateralized debt obligations (CDOs). In particular, the claim alleges
that
the bank invested the funds in a security called "Mantoloking CDO" without
telling us that this was a CDO investment until after the purchase had already
occurred. The claim also describes how, after the fact, the bank advised that
the security, which has a stated maturity date in the year 2046, had been rolled
"due to failed auction".
Our
claim
includes causes of action for fraud, violation of various NASD rules (including
the NASD's suitability rule), violation of Section 10(b) of the U.S. Securities
Exchange Act and SEC Rule 10b-5, negligent misrepresentation, breach of
fiduciary duty, conversion, misappropriation and breach of contract. The claim
seeks, among other things, damages and other relief from all of the respondents,
including return of all the funds plus compensatory and punitive damages. We
intend to pursue the arbitration vigorously. The arbitration, however, has
just
begun and no predictions of possible outcomes can be made at this time.
Dividend
Policy
According
to our dividend policy adopted in 2003, we plan to distribute a cash dividend
once in each calendar year in an amount equal to our net profits for the
preceding calendar year, if any. The new policy commenced in 2004 with respect
to our net profits for 2003. Each dividend under the policy is subject to board
approval and the requirements of applicable law. Our board of directors plans
to
declare the annual dividend when it approves the applicable year-end financial
statements. There is no guarantee that we will have net profits in any given
year, even if we have operating profit in that year.
Item
9. |
The
Offer and Listing
|
A. |
Offer
and Listing Details
|
Our
ordinary shares have been quoted on the Nasdaq Global Market under the symbol
MNDO since August 8, 2000 and on the Tel Aviv Stock Exchange under the symbol
MIND since July 11, 2002.
The
following table sets forth, for the periods indicated, the high and low closing
prices of our ordinary shares as reported on the Nasdaq Global
Market. The
table
contains actual prices in U.S. dollars, without adjustment for dividends paid
on
our ordinary shares.
Period
|
|
High
|
|
Low
|
|
Last
six months:
|
|
|
|
|
|
May
2008
|
|
|
1.25
|
|
1.17
|
April
2008
|
|
|
1.28
|
|
|
1.15
|
|
March
2008
|
|
|
1.63
|
|
|
1.17
|
|
February
2008
|
|
|
2.25
|
|
|
1.66
|
|
January
2008
|
|
|
2.39
|
|
|
2.00
|
|
December
2007
|
|
|
2.47
|
|
|
2.21
|
|
|
|
|
|
|
|
|
|
Last
nine quarters:
|
|
|
|
|
|
|
|
Q1
2008
|
|
|
2.39
|
|
|
1.17
|
|
Q4
2007
|
|
|
2.52
|
|
|
2.21
|
|
Q3
2007
|
|
|
2.81
|
|
|
2.25
|
|
Q2
2007
|
|
|
3.05
|
|
|
2.66
|
|
Q1
2007
|
|
|
3.02
|
|
|
2.59
|
|
Q4
2006
|
|
|
2.83
|
|
|
2.47
|
|
Q3
2006
|
|
|
2.66
|
|
|
2.37
|
|
Q2
2006
|
|
|
3.18
|
|
|
2.40
|
|
Q1
2006
|
|
|
3.38
|
|
|
2.59
|
|
Period
|
|
High
|
|
Low
|
|
Last
five years:
|
|
|
|
|
|
|
|
2007
|
|
|
3.05
|
|
|
2.21
|
|
2006
|
|
|
3.38
|
|
|
2.37
|
|
2005
|
|
|
5.64
|
|
|
2.56
|
|
2004
|
|
|
6.33
|
|
|
3.86
|
|
2003
|
|
|
6.34
|
|
|
1.24
|
|
The
following table sets forth, for the periods indicated, the high and low closing
prices of our ordinary shares as reported on the Tel Aviv Stock Exchange. The
table contains actual prices in NIS, without adjustment for dividends paid
on
our ordinary shares.
Period
|
|
High
|
|
Low
|
|
Last
six months:
|
|
|
|
|
|
May
2008
|
|
|
4.28
|
|
3.67
|
April
2008
|
|
|
4.53
|
|
|
4.07
|
|
March
2008
|
|
|
5.95
|
|
|
3.84
|
|
February
2008
|
|
|
8.49
|
|
|
6.17
|
|
January
2008
|
|
|
9.44
|
|
|
7.42
|
|
December
2007
|
|
|
9.75
|
|
|
8.87
|
|
|
|
|
|
|
|
|
|
Last
nine quarters:
|
|
|
|
|
|
|
|
Q1
2008
|
|
|
9.44
|
|
|
3.84
|
|
Q4
2007
|
|
|
10.21
|
|
|
8.87
|
|
Q3
2007
|
|
|
12.24
|
|
|
9.94
|
|
Q2
2007
|
|
|
12.40
|
|
|
10.72
|
|
Q1
2007
|
|
|
12.97
|
|
|
10.76
|
|
Q4
2006
|
|
|
12.27
|
|
|
10.74
|
|
Q3
2006
|
|
|
11.51
|
|
|
10.69
|
|
Q2
2006
|
|
|
14.59
|
|
|
10.40
|
|
Q1
2006
|
|
|
15.55
|
|
|
11.79
|
|
|
|
|
|
|
|
|
|
Last five years:
|
|
|
|
|
|
|
|
2007
|
|
|
12.97
|
|
|
8.87
|
|
2006
|
|
|
15.55
|
|
|
10.40
|
|
2005
|
|
|
24.92
|
|
|
11.66
|
|
2004
|
|
|
28.54
|
|
|
17.03
|
|
2003
|
|
|
27.94
|
|
|
5.00
|
|
Not
applicable
Our
ordinary shares are quoted on the Nasdaq Global Market under the symbol MNDO,
and on the Tel-Aviv Stock Exchange under the symbol MIND.
Not
applicable
Not
applicable
Not
applicable
Item
10. |
Additional
Information
|
Not
applicable
B. |
Memorandum
and Articles of
Associations
|
Objects
and Purposes
We
were
first registered under Israeli law on April 6, 1995 as a private company, and
on
August 8, 2000 became a public company. Our registration number with the Israeli
registrar of companies is 51-213448-7. The full details of our objects and
purposes can be found in Section 2 of our Memorandum of Association filed with
the Israeli registrar of companies. Among the objects and purposes stipulated
are the following: “to engage in any kind of commercial and/or productive
business and to engage in any action or endeavor which the company’s managers
consider to be beneficial to the company.”
Transfer
of Shares and Notices
Fully
paid ordinary shares are issued in registered form and may be freely transferred
pursuant to our articles of association unless such transfer is restricted
or
prohibited by another instrument. Unless otherwise prescribed by law, we will
provide at least 21 calendar days' prior notice of any general shareholders
meeting.
Election
of Directors
The
ordinary shares do not have cumulative voting rights in the election of
directors. Thus, the holders of ordinary shares conferring more than 50% of
the
voting power have the power to elect all the directors, to the exclusion of
the
remaining shareholders. Our board is divided into three classes of directors
serving staggered three-year terms, in addition to our external directors,
who
are not members of any class.
According
to the Israeli Companies Law, the term of a director commences upon his
election, unless the company's articles of association permit a later effective
date. In order to allow our shareholders to elect a director for a term that
commences on a later effective date, our shareholders amended our articles
of
association on April 7, 2005.
Dividend
and Liquidation Rights
Dividends
on our ordinary shares may be paid only out of profits and other surplus, as
defined in the Companies Law, as of our most recent financial statements or
as
accrued over a period of two years, whichever is higher, unless otherwise
approved by a court order. Our board of directors is authorized to declare
dividends, provided that there is no reasonable concern that the dividend will
prevent us from satisfying our existing and foreseeable obligations as they
become due. In the event of our liquidation, after satisfaction of liabilities
to creditors, our assets will be distributed to the holders of ordinary shares
in proportion to their respective holdings. Dividend or liquidation right may
be
affected by the grant of preferential dividends or distribution rights to the
holders of a class of shares with preferential rights that may be authorized
in
the future.
Voting,
Shareholders' Meetings and Resolutions
Holders
of ordinary shares have one vote for each ordinary share held on all matters
submitted to a vote of shareholders.
These
voting rights may be affected by the grant of any special voting rights to
the
holders of a class of shares with preferential rights that may be authorized
in
the future.
We
have
two types of general shareholders meetings: the annual general meetings and
extraordinary general meetings. These meetings may be held either in Israel
or
in any other place the board of directors determines. An annual general meeting
must be held in each calendar year, but not more than 15 months after the last
annual general meeting. Our board of directors may convene an extraordinary
meeting, from time to time, at its discretion and is required to do so upon
the
request of shareholders holding at least 5% of our ordinary shares.
The
quorum required for an ordinary meeting of shareholders consists of at least
two
shareholders present in person or by proxy who hold or represent between them
at
least 25% of the outstanding voting shares, unless otherwise required by
applicable rules. Nasdaq generally requires a quorum of 33-1/3%, but we have
an
exemption from that requirement and instead follow the generally accepted
business practice for companies in Israel. A meeting adjourned for lack of
a
quorum generally is adjourned to the same day in the following week at the
same
time and place or any time and place as the Chairman may designate with the
consent of the shareholders voting on the matter adjourned. At such reconvened
meeting, the required quorum consists of any two members present in person
or by
proxy, unless otherwise required by applicable rules.
Under
the
Companies Law, unless otherwise provided in the articles of association or
applicable law, all resolutions of the shareholders require a simple majority
of
the shares present, in person or by proxy, and voting on the matter. However,
our articles of association require approval of 75% of the shares present and
voting to remove directors or change the structure of our staggered board of
directors.
We
have
obtained an exemption from Nasdaq’s requirement to send an annual report to
shareholders prior to our annual general meetings. We file annual reports on
Form 20-F electronically with the SEC and post a copy on our
website.
Duties
of Shareholders
Under
the
Companies Law, each and every shareholder has a duty to act in good faith in
exercising his rights and fulfilling his obligations towards the company and
other shareholders and to refrain from abusing his power in the company, such
as
in voting in the general meeting of shareholders on the following
matters:
|
·
|
any
amendment to the articles of
association;
|
|
·
|
an
increase of the company's authorized share
capital;
|
|
·
|
approval
of certain actions and transactions which require shareholder
approval.
|
In
addition, each and every shareholder has the general duty to refrain from
depriving rights of other shareholders. Furthermore, any controlling
shareholder, any shareholder who knows that it possesses the power to determine
the outcome of a shareholder vote and any shareholder that, pursuant to the
provisions of the articles of association, has the power to appoint or to
prevent the appointment of an office holder in the company or any other power
toward the company is under a duty to act in fairness towards the company.
The
Companies Law does not describe the substance of this duty of fairness. These
various shareholder duties, which typically do not apply to shareholders of
U.S.
companies, may restrict the ability of a shareholder to act in what the
shareholder perceives to be its own best interests.
Restrictions
on Non-Israeli Residents
The
ownership or voting of our ordinary shares by non-residents of Israel, except
with respect to citizens of countries which are in a state of war with Israel,
is not restricted in any way by our memorandum of association or articles of
association or by the laws of the State of Israel.
Mergers
and Acquisitions under Israeli Law
The
Companies Law includes provisions that allow a merger transaction and requires
that each company that is party to a merger approve the transaction by its
board
of directors and a vote of the majority of its shares, voting on the proposed
merger at a shareholders’ meeting. For purposes of the shareholder vote, unless
a court rules otherwise, the merger will not be deemed approved if a majority
of
the shares held by parties other than the other party to the merger, or by
any
person who holds 25% or more of the shares or the right to appoint 25% or more
of the directors of the other party, vote against the merger. Upon the request
of a creditor of either party of the proposed merger, the court may delay or
prevent the merger if it concludes that there exists a reasonable concern that
as a result of the merger, the surviving company will be unable to satisfy
the
obligations of any of the parties to the merger. In addition, a merger may
not
be completed unless at least (i) 50 days have passed from the time that a
proposal of the merger has been filed by each party with the Israeli Registrar
of Companies and (ii) 30 days have passed since the merger was approved by
the
shareholders of each party.
The
Companies Law also provides that an acquisition of shares of public company
must
be made by means of tender offer if as a result of the acquisition the purchaser
would become a 25% or more shareholder of the company and there is no 25% or
more shareholder in the company. In addition, an acquisition of shares of a
public company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 45% or more shareholder of the company
and there is no 45% or more shareholder in the company. These requirements
do
not apply if the acquisition (i) is made in a private placement that received
shareholder approval, (ii) was from a 25% shareholder of the company and
resulted in the acquirer becoming a 25% shareholder of the company or (iii)
was
from a 45% shareholder of the company and resulted in the acquirer becoming
a
45% shareholder of the company. The tender offer must be extended to all
shareholders, but the offeror is not required to purchase more than 5% of the
company's outstanding shares, regardless of how many shares are tendered by
shareholders. The tender offer may be consummated only if (i) at least 5% of
the
company’s outstanding shares will be acquired by the offer or and (ii) the
number of shares tendered in the offer exceeds the number of shares whose
holders objected to the offer.
If
as a
result of an acquisition of shares the acquirer will hold more than 90% of
a
company’s outstanding shares, the Companies Law requires that the acquisition be
made by means of a tender offer for all of the outstanding shares. If as a
result of a full tender offer the acquirer would own more than 95% of the
outstanding shares, then all the shares that the acquirer offered to purchase
will be transferred to it. The law provides for appraisal rights if any
shareholder files a request in court within three months following the
consummation of a full tender offer. If as a result of a full tender offer
the
acquirer would own 95% or less of the outstanding shares, then the acquirer
may
not acquire shares that will cause his shareholding to exceed 90% of the
outstanding shares.
Finally,
Israeli tax law treats stock-for-stock acquisitions between an Israeli company
and a foreign company less favorably than does U.S. tax law. For example,
Israeli tax law subjects a shareholder who exchanges his ordinary shares for
shares in another corporation to taxation prior to the sale of the shares
received in such stock-for-stock swap.
Modification
of Class Rights
Our
articles of association provide that the rights attached to any class (unless
otherwise provided by the terms of such class), such as voting, rights to
dividends and the like, may be varied by a shareholders resolution, subject
to
the approval of the holders of a majority of the issued shares of that
class.
Board
of Directors
According
to the Companies Law and our articles of association, the oversight of the
management of our business is vested in our board of directors. The board of
directors may exercise all such powers and may take all such actions that are
not specifically granted to our shareholders. As part of its powers, our board
of directors may cause the company to borrow or secure payment of any sum or
sums of money, at such times and upon such terms and conditions as it thinks
fit, including the grants of security interests on all or any part of the
property of the company.
A
resolution proposed at any meeting of the board of directors shall be deemed
adopted if approved by a majority of the directors present and voting on the
matter. For additional information, please see Item 6.C “Board Practices”.
Exculpation
of Office Holders
Under
the
Companies Law, an Israeli company may not exempt an office holder from liability
for a breach of his duty of loyalty, but may exempt in advance an office holder
from his liability to the company, in whole or in part, for a breach of his
duty
of care (except in connection with distributions) provided the articles of
association of the company allow it to do so. Our articles allow us to exempt
our office holders to the fullest extent permitted by law.
Insurance
of Office Holders
Our
articles of association provide that, subject to the provisions of the Companies
Law, we may enter into a contract for the insurance of the liability of any
of
our office holders, with respect to an act performed in the capacity of an
office holder for:
|
·
|
a
breach of his duty of care to us or to another
person;
|
|
·
|
a
breach of his duty of loyalty to us, provided that the office holder
acted
in good faith and had reasonable cause to assume that his act would
not
prejudice our interests; or
|
|
·
|
a
financial liability imposed upon him in favor of another
person.
|
Indemnification
of Office Holders
Our
articles of association provide that we may indemnify an office holder against
the following obligations and expenses imposed on or incurred by the office
holder with respect to an act performed in the capacity of an office
holder:
|
·
|
a
financial obligation imposed on him in favor of another person by
a court
judgment, including a settlement or an arbitrator’s award approved by the
court; such indemnification may be approved (i) after the liability
has
been incurred or (ii) in advance, provided that our undertaking to
indemnify is limited to events that our board of directors believes
are
foreseeable in light of our actual operations at the time of providing
the
undertaking and to a sum or criterion that our board of directors
determines to be reasonable under the circumstances;
|
|
·
|
reasonable
litigation expenses, including attorneys’ fees, expended by the office
holder as a result of an investigation or proceeding instituted against
him by a competent authority, provided that such investigation or
proceeding concluded without the filing of an indictment against
him and
either (A) concluded without the imposition of any financial liability
in
lieu of criminal proceedings or (B) concluded with the imposition
of a
financial liability in lieu of criminal proceedings but relates to
a
criminal offense that does not require proof of criminal intent;
and
|
|
·
|
reasonable
litigation expenses, including attorneys' fees, expended by the office
holder or charged to him by a court in connection
with:
|
|
·
|
proceedings
we institute against him or instituted on our behalf or by another
person;
|
|
·
|
a
criminal charge from which he was acquitted;
or
|
|
·
|
a
criminal proceeding in which he was convicted of an offense that
does not
require proof of criminal intent.
|
Limitations
on Exculpation, Insurance and Indemnification
The
Companies Law provides that a company may not exculpate or indemnify an office
holder, or enter into an insurance contract, which would provide coverage for
any monetary liability incurred as a result of any of the
following:
|
·
|
a
breach by the office holder of his duty of loyalty unless, with respect
to
indemnification or insurance coverage, the office holder acted in
good
faith and had a reasonable basis to believe that the act would not
prejudice the company;
|
|
·
|
a
breach by the office holder of his duty of care if the breach was
done
intentionally or recklessly;
|
|
·
|
any
act or omission done with the intent to derive an illegal personal
benefit; or
|
|
·
|
any
fine levied against the office
holder.
|
In
addition, under the Companies Law, indemnification of, and procurement of
insurance coverage for, our office holders must be approved by our audit
committee and our board of directors and, if the beneficiary is a director,
by
our shareholders.
We
have
agreed to exempt from liability and indemnify our office holders to the fullest
extent permitted under the Companies Law. We have obtained directors and
officers liability insurance for the benefit of our office holders.
None.
There
are
currently no Israeli currency control restrictions on payments of dividends
or
other distributions with respect to our ordinary shares or the proceeds from
the
sale of the shares, except for the obligation of Israeli residents to file
reports with the Bank of Israel regarding certain transactions. However,
legislation remains in effect, pursuant to which currency controls can be
imposed by administrative action at any time.
Israeli
Tax Considerations
The
following is a summary of the current tax structure applicable to companies
in
Israel, with special reference to its effect on us. Note that this tax structure
and any resulting benefit may not apply for any income derived by our foreign
subsidiaries, which subsidiaries may be taxed according to tax laws applicable
to their country of residence. The following also contains a discussion of
the
material Israeli tax consequences to persons purchasing our ordinary shares.
To
the extent that the discussion is based on tax legislation, which has not been
subject to judicial or administrative interpretation, we cannot assure you
that
the tax authorities or courts will accept the views expressed in the discussion
in question.
Prospective
purchasers of our ordinary shares should consult their own tax advisors as
to
the United States, Israeli or other tax consequences of the purchase, ownership
and disposition of ordinary shares, including, in particular, the effect of
any
foreign, state or local taxes.
General
Corporate Tax Structure
The
general rate of corporate tax in Israel to which Israeli companies are subject
is 31% for the 2006 tax year and 29% for the 2007 tax year. Following an
amendment to the Israeli Income Tax Ordinance that came into effect on January
1, 2006, the corporate tax rate has decreased to 27% for the 2008 tax year
and
is expected to decrease to 26% for the 2009 tax year and 25% for the 2010 tax
year and thereafter. The general rate of capital gains tax in Israel to which
Israeli companies are subject is 25%, for capital gains derived after January
1,
2003 other than gains deriving from the sale of listed securities (regarding
the
last statement, it relates only to assets that were purchased after 1.1.03.
If
the asset was purchased before 1.1.03, and sold after said date, the applicable
tax rate will be determined according to a blended tax rates of 25% and the
corporate tax rate that was in force on the date of the sale (based on a linear
calculation)). However, the effective tax rate payable by a company which
derives income from an “Approved Enterprise” (as defined below) may be
considerably less, as further discussed below.
Law
for the Encouragement of Capital Investments, 1959
General
The
Law
for Encouragement of Capital Investments, 1959, or the Investments Law, as
in
effect until 2005, provided that upon application to the Investment Center
of
the Ministry of Industry and Trade of the State of Israel, a proposed capital
investment in eligible facilities may be designated as an “Approved Enterprise”.
Please see discussion below regarding an amendment to the Investments Law.
Each
certificate of approval for an Approved Enterprise relates to a specific
investment program delineated both by its financial scope, including its capital
sources, and by its physical characteristics, such as the equipment to be
purchased and utilized pursuant to the program. The tax benefits derived from
any such certificate of approval relate only to taxable income derived from
the
specific Approved Enterprise. Tax benefits under the Investments Law will also
apply to income generated by a company from the grant of a usage right with
respect to know-how developed by the Approved Enterprise, income generated
from
royalties, and income derived from a service which is auxiliary to such usage
right of royalties, provided that such income is generated within the Approved
Enterprise’s ordinary course of business. If a company has more than one
approval or only a portion of its capital investments are approved, its
effective tax rate is the result of a weighted combination of the applicable
rates. The benefits under the Investments Law are usually not available with
respect to income derived from products manufactured outside of Israel.
Taxable
income of a company derived from an Approved Enterprise is subject to corporate
tax at the maximum rate of 25%, rather than the regular corporate tax rate,
for
the benefit period. That income is eligible for further reductions in tax rates
depending on the percentage of the foreign investment in the company's share
capital (conferring rights to profits, voting and appointment of directors)
and
the percentage of its combined share and loan capital owned by non-Israeli
residents (“foreign investment level”). The tax rate is:
|
·
|
20%
if the foreign investment level is 49% or more but less than
74%;
|
|
·
|
15%
if the foreign investment level is 74% or more but less than 90%;
and
|
|
·
|
10%
if the foreign investment level is 90% or
more.
|
The
lowest level of foreign investment during the tax year will be used to determine
the relevant tax rate for that year. These tax benefits are granted for a
limited period not exceeding seven years, or ten years for a company whose
foreign investment level exceeds 25% from the first year in which the Approved
Enterprise has taxable income.
The
period of benefits may in no event, however, exceed the lesser of 12 years
from
the year in which production commenced and 14 years from the year of receipt
of
Approved Enterprise status.
The
Investments Law also provides that an Approved Enterprise is entitled to
accelerated depreciation on its property and equipment that are included in
an
approved investment program.
The
Alternative Route
A
company
owning an Approved Enterprise may elect to receive, in lieu of certain grants
available to an Approved Enterprise, an alternative package of benefits. Under
the alternative package, the company's undistributed income derived from an
Approval Enterprise will be exempt from tax for a period of between two and
ten
years from the first year of taxable income, depending on the geographic
location of the Approved Enterprise within Israel, and the company will be
eligible for the tax benefits under the Investments Law for the remainder of
the
benefit period.
General
Requirements by the Investment Center
The
benefits available to an Approved Enterprise are conditional upon compliance
with the conditions stipulated in the Investments Law and related regulations
and the criteria set forth in the specific certificate of approval. In the
event
that a company violates these conditions, in whole or in part, it may be
required to refund all or a portion of its tax benefits, linked to the Israeli
consumer price index and interest. These conditions include:
|
·
|
adhering
to the business plan contained in the application to the Investment
Center;
|
|
·
|
financing
at least 30% of the investment in property, plant and equipment with
the
proceeds of the sale of shares;
|
|
·
|
filing
regular reports with the Investment Center with respect to the Approved
Enterprise; and
|
|
·
|
obtaining
the approval of the Investment Center for changes in the ownership
of a
company.
|
The
Company’s Approved Enterprises
Most
of
our manufacturing facilities in Yoqneam have been granted the status of Approved
Enterprise. Since our manufacturing facilities are located in an area that
was
designated by the State of Israel as “Development Area A” at the time of the
approval of our three existing Approved Enterprises, and since we elected to
receive the alternative package of benefits (involving waiver of investment
grants), our income derived from each Approved Enterprise is tax exempt for
a
period of ten years commencing in the first year in which we earn taxable income
from each Approved Enterprise. To date, we have three Approved Enterprises.
The
period of tax benefits of the first approved enterprise, which commenced
operations in 1995, expired at the end of 2004. The period of tax benefits
in
respect of the second approved enterprise entitled to the said benefits
commenced in 2000 and will expire at the end of 2009. The period of tax benefits
in respect of the third approved enterprise has not yet commenced.
Dividends
Taxation
When
dividends are distributed from the Approved Enterprise, they are generally
considered to be attributable to the entire enterprise and their effective
tax
rate is a result of a weighted combination of the applicable tax rates. A
company that has elected the alternative package of benefits is not obliged
to
distribute exempt retained profits, and may generally decide from which year’s
profits to declare dividends. In the event that we pay a cash dividend from
income that is derived from our Approved Enterprises pursuant to the alternative
package of benefits, which income would otherwise be tax-exempt, we would be
required to pay tax on the amount of income distributed as dividends at the
rate
which would have been applicable if we had not elected the alternative package
of benefits, that rate is generally 10% to 25%, depending upon the extent of
foreign investment in the Company, and to withhold at source on behalf of the
recipient of the dividend an additional 15% of the amount distributed.
In
March
2007, we distributed to our shareholders approximately $4.3 million. Since,
at
that time we had insufficient retained earnings, the dividend was distributed
after obtaining an approval by an Israeli court in accordance with Section
303
of the Israeli Companies Law. According to a pre-ruling received from the
Israeli Tax Authority, tax was withheld at a rate of 20%. This pre-ruling
applies only to this particular dividend and not to future dividends, if any.
Amendment
of the Investments Law
On
April
1, 2005, an amendment to the Investments Law came into effect. Pursuant to
the
amendment, a company’s facility will be granted the status of “Approved
Enterprise” only if it is proven to be an industrial facility (as defined in the
Investments Law) that contributes to the economic independence of the Israeli
economy and is a competitive facility that contributes to the Israeli gross
domestic product. The amendment provides that the Israeli Tax Authority and
not
the Investment Center will be responsible for an Approved Enterprise under
the
alternative package of benefits, referred to as a Benefited Enterprise. A
company wishing to receive the tax benefits afforded to a Benefited Enterprise
is required to select the tax year from which the period of benefits under
the
Investment Law are to commence by simply notifying the Israeli Tax Authority
within 12 months of the end of that year. In order to be recognized as owning
a
Benefited Enterprise, a company is required to meet a number of conditions
set
forth in the amendment, including making
a
minimal investment in manufacturing assets for the Benefited Enterprise and
having completed a cooling-off period of no less than two to four years from
the
company’s previous year of commencement of benefits under the Investments
Law.
Pursuant
to the amendment, a company with a Benefited Enterprise is entitled, in each
tax
year, to accelerated depreciation for the manufacturing assets used by the
Benefited Enterprise and to certain tax benefits, provided that no more than
12
to 14 years have passed since the beginning of the year of commencement of
benefits under the Investments Law. The tax benefits granted to a Benefited
Enterprise, as they apply to us, are determined according one of the following
new tax routes:
|
· |
Similar
to the currently available alternative route, exemption from corporate
tax
on undistributed income for a period of two to ten years, depending
on the
geographic location of the Benefited Enterprise within Israel, and
a
reduced corporate tax rate of 10 to 25% for the remainder of the
benefits
period, depending on the level of foreign investment in each year.
Benefits may be granted for a term of from seven to ten years, depending
on the level of foreign investment in the company. If the company
pays a
dividend out of income derived from the Benefited Enterprise during
the
tax exemption period, such income will be subject to corporate tax
at the
applicable rate (10%-25%). The company is required to withhold tax
at the
source at a rate of 15% from any dividends distributed from income
derived
from the Benefited Enterprise; and
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A
special tax route enabling companies owning facilities in certain
geographical locations in Israel to pay corporate tax at the rate
of 11.5%
on income of the Benefited Enterprise. The benefits period is ten
years.
Upon payment of dividends, the company is required to withhold tax
at
source at a rate of 15% for Israeli residents and at a rate of 4%
for
foreign residents.
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Generally,
a company that is “abundant in foreign investment” (as defined in the
Investments Law) is entitled to an extension of the benefits period by an
additional five years, depending on the rate of its income that is derived
in
foreign currency.
The
amendment changed the definition of “foreign investment” in the Investments Law
so that instead of an investment of foreign currency in the company, the
definition now requires a minimal investment of NIS 5 million by foreign
investors. Furthermore, such definition now also includes the purchase of shares
of a company from another shareholder, provided that the company’s outstanding
and paid-up share capital exceeds NIS 5 million. Such changes to the
aforementioned definition are retroactive from 2003.
The
amendment applies to Approved Enterprise programs in which the year of
commencement of benefits under the Investments Law is 2004 or later, unless
such
programs received approval from the Investment Center on or prior to December
31, 2004, in which case the provisions of the amendment will not
apply.
As
a
result of the amendment, tax-exempt income that will be generated under the
provisions of the amendment will subject the Company to taxes upon distribution
or liquidation. Therefore, if the Company holds a Benefited Enterprise it may
be
required to record deferred tax liability with respect to such tax-exempt
income.
Law
for the Encouragement of Industry (Taxes), 1969
Under
the
Law for the Encouragement of Industry (Taxes), 1969, or the Industry
Encouragement Law, a company qualifies as an “Industrial Company” if it is
resident in Israel and at least 90% of its income in a given tax year,
determined in NIS, exclusive of income from capital gains, interest and
dividends, is derived from Industrial Enterprises owned by that company. An
“Industrial Enterprise” is defined as an enterprise whose major activity in a
particular tax year is industrial production activity.
Industrial
Companies qualify (based on tax regulations) for accelerated depreciation rates
for machinery, equipment and buildings used by an Industrial Enterprise. An
Industrial Company owning an Approved Enterprise, as described above, may choose
between the above depreciation rates and the depreciation rates available to
Approved Enterprises.
Pursuant
to the Industry Encouragement Law, an Industrial Company is also entitled to
amortize the purchase price of know-how and patents over a period of eight
years
beginning with the year in which such rights were first used.
In
addition, an Industrial Company is entitled to deduct over a three-year period
expenses involved with the issuance and listing of shares on a stock exchange
and has the right, under certain conditions, to elect to file a consolidated
tax
return with related Israeli Industrial Companies that satisfy conditions set
forth in the law.
Eligibility
for the benefits under the law is not subject to receipt of prior approval
from
any governmental authority. We believe that we currently qualify as an
Industrial Company within the definition of the Industry Encouragement Law.
However, the definition may be amended from time to time and the Israeli tax
authorities, which reassess our qualifications annually, may determine that
we
no longer qualify as an Industrial Company. As a result of either of the
foregoing, the benefits described above might not be available in the future.
Taxation
Under Inflationary Conditions
The
Income Tax (Inflationary Adjustment) Law, 1985, commonly referred to as the
Inflationary Adjustments Law, attempts to overcome some of the problems
presented to a traditional tax system by rapid inflation. The Inflationary
Adjustments Law provides tax deductions and adjustments to depreciation
deduction and tax loss carry forwards to mitigate the effects resulting from
an
inflationary economy. Our taxable income is determined under this
law. The
Inflationary Adjustments Law features, which may be material to us, can be
summarized as follows:
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There
is a special tax adjustment for the preservation of equity whereby
some
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.
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· |
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.
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The
Israeli Income Tax Ordinance and regulations promulgated thereunder allow
“Foreign-Invested Companies,” which maintain their accounts in U.S. dollars in
compliance with the regulations to adjust their tax returns based on exchange
rate fluctuations of the NIS against the U.S. dollar rather than changes in
the
Israeli consumer price index, or CPI, in lieu of the principles set forth by
the
Inflationary Adjustments Law. For these purposes, a Foreign-Invested Company
is
a company more than 25% of the share capital of which in terms of rights to
profits, voting and appointment of directors, and of the combined share capital
of which including shareholder loans and capital notes, is held by persons
who
are not residents of Israel. A company that elects to measure its results for
tax purposes based on the U.S. dollar exchange rate cannot change the election
for a period of three years following the election. We adjust our tax returns
based on the changes in the Israeli CPI. Because we qualify as a
“Foreign-Invested Company,” we are entitled to measure our results for tax
purposes on the basis of changes in the exchange rate of the U.S. dollar in
future tax years.
On
February 26, 2008, the Israeli parliament approved an amendment to the
Inflationary Adjustments Law, which limits the applicability of such law so
that
it will cease to apply after the 2007 tax year.
Israeli
Transfer Pricing Regulations
On
November 29, 2006, Income Tax Regulations (Determination of Market Terms),
2006,
promulgated under Section 85A of the Tax Ordinance, came into force (the
“Transfer Pricing Regulations”). Section 85A of the Tax Ordinance and the
Transfer Pricing Regulations generally require that all cross-border
transactions carried out between related parties will be conducted on an arm’s
length principle basis and will be taxed accordingly.
Capital
Gains Tax on the Sale of our Ordinary Shares
General
Israeli
law generally imposes a capital gains tax on the sale of any capital
assets
by
residents of Israel, as defined for Israeli tax purposes, and on the sale
of
assets
located in Israel, including shares in Israeli companies, by non-residents
of
Israel, unless a specific exemption is available or unless a tax treaty between
Israel and the shareholder’s country of residence provides otherwise. The law
distinguishes between real gain and inflationary surplus. The inflationary
surplus is equal to the increase in the purchase price of the relevant asset
attributable to the increase in the Israeli consumer price index or, in certain
circumstances, a foreign currency exchange rate, between the date of purchase
and the date of sale. The real gain is the excess of the total capital gain
over
the inflationary surplus.
Israeli
Residents
Generally,
the tax rate applicable to capital gains derived from the sale of shares,
whether listed on a stock market or not, is 20% for Israeli individuals, unless
such shareholder claims a deduction for financing expenses in connection with
such shares, in which case the gain will generally be taxed at a rate of 25%.
Additionally, if such shareholder is considered a “significant shareholder” at
any time during the 12-month period preceding such sale, i.e.,
such
shareholder holds directly or indirectly, including with others, at least 10%
of
any means of control in the company, the tax rate will be 25%. Israeli companies
are subject to the corporate tax rate on capital gains derived from the sale
of
listed shares, unless such companies were not subject to the Inflationary
Adjustments Law (or certain regulations) at the time of publication of the
aforementioned amendment to the Tax Ordinance that came into effect on January
1, 2006, in which case the applicable tax rate is 25%. However, the foregoing
tax rates will not apply to: (i) dealers in securities; and (ii) shareholders
who acquired their shares prior to an initial public offering (that may be
subject to a different tax arrangement).
The
tax
basis of shares acquired prior to January 1, 2003 will be determined in
accordance with the average closing share price in the three trading days
preceding January 1, 2003. However, a taxpayer may elect the actual adjusted
cost of the shares as the tax basis provided he can provide sufficient proof
of
such adjusted cost.
Non-Residents
of Israel
Non-Israeli
residents are generally exempt from Israeli capital gains tax on any gains
derived from the sale of shares publicly traded on the TASE, provided such
gains
are not derived from a permanent establishment of such shareholders in Israel,
and are exempt from Israeli capital gains tax on any gains derived from the
sale
of shares of Israeli companies publicly traded on a recognized stock exchange
or
regulated market outside of Israel, provided that such capital gains are not
attributed to a permanent establishment in Israel and that such shareholders
are
not subject to the Inflationary Adjustments Law and did not acquire their shares
prior to the issuer’s initial public offering. However, non-Israeli corporations
will not be entitled to such exemption if Israeli residents (i) have a
controlling interest of 25% or more in such non-Israeli corporation, or (ii)
are
the beneficiaries of or is entitled to 25% or more of the revenues or profits
of
such non-Israeli corporation, whether directly or indirectly.
Furthermore,
under the Tax Treaty Between the Government of the United States of America
and
the Government of the State of Israel with Respect to Taxes on Income, known
as
the U.S.-Israel Tax Treaty, a holder of ordinary shares who holds the ordinary
shares as a capital asset and who qualifies as a U.S. resident within the
meaning of the U.S.-Israel Tax Treaty and who is entitled to claim the benefits
afforded to such resident by the U.S.-Israel Tax Treaty will be generally
exempted from Israeli capital gains tax on the sale, exchange or disposition
of
ordinary shares unless: (i) the holder owned, directly or indirectly, 10% or
more of our voting power at any time during the 12-month period before the
sale,
exchange or disposition; or (ii) the capital gains from such sale, exchange
or
disposition can be allocated to a permanent establishment in
Israel.
In
some
instances where our shareholders may be liable to Israeli tax on the sale of
their ordinary shares, the payment of the consideration may be subject to the
withholding of Israeli tax at the source. However, such residents would be
permitted to claim a credit for such taxes against U.S. federal income tax
imposed with respect to such sale, exchange or disposition, subject to the
limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel
Tax
Treaty does not relate to state or local taxes.
A
non-resident of Israel who receives dividend income or that realizes capital
gains derived from the sale of our ordinary shares, from which tax was withheld
at the source, is generally exempted from the duty to file tax returns in Israel
with respect to such income, provided such income was not derived from a
business conducted in Israel by the taxpayer and the taxpayer has no other
taxable sources of income in Israel.
Dividend
Taxation
Income
Taxes on Dividends Distributed by the Company to Israeli Residents
The
distribution of dividend income to Israeli residents will generally be subject
to income tax at a rate of 20% for individuals and will be exempt from income
tax for corporations. The portion of dividends paid out of profits earned under
an Approved Enterprise tax status of the Company, to both individuals and
corporations, is subject to withholding tax at the rate of 15% (in excess of
the
corporate tax paid by the company when the dividend is paid of these profits
–
up to 25% tax).
In
addition, if an Individual Israeli shareholder is considered a “significant
shareholder” at any time during the 12-month period preceding such distribution,
i.e., such shareholder holds directly or indirectly, including with others,
at
least 10% of any means of control in the company, the tax rate on the dividend
(not source from Approved Enterprise income) will be 25%. The withholding tax
by
the Company on such dividend would remain 20%.
Income
Taxes on Dividends Distributed by the Company to Non-Israeli
Residents
Subject
to the provisions of applicable tax treaties, dividend distributions from
regular profits (non-Approved Enterprise) by the Company to a non-resident
shareholder are generally subject to withholding tax of 20%. The portion of
dividends paid out of profits earned under an Approved Enterprise tax status
of
the Company is subject to withholding tax at the rate of 15% (in excess of
the
corporate tax paid by the company when the dividend is paid of these profits
–
up to 25% tax).
Generally,
under the U.S-Israel Tax Treaty the maximum rate of withholding tax on dividends
paid to a shareholder who is a resident of the United States (as defined in
the
U.S. – Israel Tax Treaty) will be 25%. However, when a U.S. tax resident
corporation is the recipient of the dividend, the withholding tax rate on a
dividend out of regular (non-Approved Enterprise) profits may be reduced to
12.5% under the U.S-Israel Tax Treaty, where the following conditions are
met:
(a)
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the
recipient corporation owns at least 10% of the outstanding voting
rights
of the Company for all of the period preceding the dividend during
the
Company’s current and prior taxable year;
and
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(b)
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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.
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Otherwise,
the usual rates apply.
United
States Federal Income Tax Considerations
Subject
to the limitations described in the next paragraph, the following discussion
describes the material United States federal income tax consequences of the
purchase, ownership and disposition of the ordinary shares to a U.S.
holder.
A
U.S.
holder is:
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an
individual citizen or resident of the United
States;
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·
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a
corporation or another entity taxable as a corporation created or
organized under the laws of the United States or any political subdivision
thereof;
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an
estate, the income of which is includable in gross income for United
States federal income tax purposes regardless of its source;
or
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a
trust, if a United States court is able to exercise primary supervision
over its administration and one or more United States persons who
have the
authority to control all substantial decisions of the
trust.
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Unless
otherwise specifically indicated, this summary does not consider United States
tax consequences to a person that is not a U.S. holder and considers only U.S.
holders that will own the ordinary shares as capital assets.
This
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended, referred to as the Code, current and proposed Treasury regulations
promulgated under the Code, and administrative and judicial interpretations
of
the Code, all as in effect today and all of which are subject to change,
possibly with a retroactive effect. This discussion does not address all aspects
of U.S. federal income taxation that may be relevant to any particular U.S.
holder based on the U.S. holder's particular circumstances, like the tax
treatment of U.S. holders who are broker-dealers or who own, directly,
indirectly or constructively, 10% or more of our outstanding voting shares,
U.S.
holders holding the ordinary shares as part of a hedging, straddle or conversion
transaction, U.S. holders whose functional currency is not the U.S. dollar,
insurance companies, tax-exempt organizations, financial institutions and
persons subject to the alternative minimum tax, who may be subject to special
rules not discussed below. Additionally, the tax treatment of persons who hold
the ordinary shares through a partnership or other pass through entity is not
considered, nor are the possible application of U.S. federal estate or gift
taxes or any aspect of state, local or non-U.S. tax laws.
You
are
advised to consult your own tax advisor with respect to the specific tax
consequences to you of purchasing, holding or disposing of the ordinary
shares.
Distributions
on the Ordinary Shares
Subject
to the discussion below under “Passive Foreign Investment Company Status”, a
distribution paid by us with respect to the ordinary shares to a U.S. holder
will be treated as ordinary income to the extent that the distribution does
not
exceed our current and accumulated earnings and profits, as determined for
U.S.
federal income tax purposes. The amount of any distribution which exceeds these
earnings and profits will be treated first as a non-taxable return of capital
reducing the U.S. holder's tax basis in its ordinary shares to the extent
thereof, and then as capital gain from the deemed disposition of the ordinary
shares.
Dividends
paid by us in NIS will be included in the income of U.S. holders at the dollar
amount of the dividend, based upon the spot rate of exchange in effect on the
date of the distributions. U.S. holders will have a tax basis in the NIS for
U.S. federal income tax purposes equal to that U.S. dollar value. Any subsequent
gain or loss in respect of the NIS arising from exchange rate fluctuations
will
be taxable as ordinary income or loss and will be U.S. source income or
loss.
Subject
to the limitations set forth in the Code, U.S. holders may elect to claim as
a
foreign tax credit against their U.S. federal income tax liability the Israeli
income tax withheld from dividends received in respect of the ordinary shares.
The limitations on claiming a foreign tax credit include among others,
computation rules under which foreign tax credits allowable with respect to
specific classes of income cannot exceed the U.S. federal income payable with
respect each such class. In this regard, dividends paid by us will generally
be
foreign source “passive income” for U.S. foreign tax credit purposes or, in the
case of a financial services entity, “financial services income.” U.S. holders
that do not elect to claim a foreign tax credit may instead claim a deduction
for the Israeli income tax withheld. The rules relating to foreign tax credits
are complex, and you should consult your own tax advisor to determine whether
and to what extent you would be entitled to this credit.
Disposition
of Ordinary Shares
Subject
to the discussion below under “Passive Foreign Investment Company Status”, upon
the sale or exchange of the ordinary shares, a U.S. holder generally will
recognize capital gain or loss in an amount equal to the difference between
the
amount realized on the sale or exchange and the U.S. holder's tax basis in
the
ordinary shares. The gain or loss recognized on the sale or exchange of the
ordinary shares generally will be long-term capital gain or loss if the U.S.
holder held the ordinary shares for more than one year at the time of the sale
or exchange.
Gain
or
loss recognized by a U.S. holder on a sale, exchange or other disposition of
ordinary shares generally will be treated as U.S. source income or loss for
U.S.
foreign tax credit purposes.
Passive
Foreign Investment Company Status
Generally,
a foreign corporation is treated as a passive foreign investment company, or
PFIC, for U.S. federal income tax purposes for any tax year if, in such tax
year, either (i) 75% or more of its gross income is passive in nature,
referred to as the “Income Test”, or (ii) the average percentage of its assets
during such tax year which produce, or are held for the production of, passive
income (determined by averaging the percentage of the fair market value of
its
total assets which are passive assets as of the end of each quarter of such
year) is 50% or more, referred to as the “Asset Test”.
There
is
no definitive method prescribed in the Code, U.S. Treasury Regulations or
administrative or judicial interpretations thereof for determining the value
of
a foreign corporation’s assets for purposes of the Asset Test. However, the
legislative history of the U.S. Taxpayer Relief Act of 1997, referred to as
the
1997 Act, indicates that for purposes of the Asset Test, “the total value of a
publicly-traded foreign corporation's assets generally will be treated as equal
to the sum of the aggregate value of its outstanding stock plus its
liabilities”. It is unclear under current interpretations of the 1997 Act
whether other approaches could be employed to determine the value of our assets.
Based on application of the approach of the 1997 Act, there is a reasonable
likelihood that we may not be deemed a PFIC starting 2003. A separate
determination must be made each year as to whether we are a PFIC. As a result,
our PFIC status may change.
If
we are
treated as a PFIC for U.S. federal income tax purposes for any year during
a
U.S. holder’s holding period of ordinary shares and the U.S. holder does not
make a QEF election or a “mark-to-market“ election (both as described below),
any gain recognized by the U.S. holder upon the sale of ordinary shares (or
the
receipt of certain distributions) would be treated as ordinary income. This
income generally would be allocated over a U.S. holder’s holding period with
respect to our ordinary shares. The amount allocated to prior years will be
subject to tax at the highest tax rate in effect for that year and an interest
charge would be imposed on the amount of deferred tax on the income allocated
to
prior taxable years.
Although
we generally will be treated as a PFIC as to any U.S. holder if we are a PFIC
for any year during the U.S. holder’s holding period, if we cease to satisfy the
requirements for PFIC classification, the U.S. holder may avoid the consequences
of PFIC classification for subsequent years if he elects to recognize gain
based
on the unrealized appreciation in the ordinary shares through the close of
the
tax year in which we cease to be a PFIC. Additionally, if we are treated as
a
PFIC, a U.S. holder who acquires ordinary shares from a decedent would be denied
the normally available step-up in tax basis for these ordinary shares to fair
market value at the date of death and instead would have a tax basis equal
to
the decedent’s tax basis in these ordinary shares.
A
U.S.
holder who beneficially owns shares of a PFIC must file Form 8621 (Return by
a
Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund)
with the U.S. Internal Revenue Service for each tax year in which he holds
shares in a PFIC. This form describes any distributions received with respect
to
these shares and any gain realized upon the disposition of these
shares.
For
any
tax year in which we are treated as a PFIC, a U.S. holder may elect to treat
his, her or its ordinary shares as an interest in a qualified electing fund,
referred to as a QEF election. In that case, the U.S. holder would be required
to include in income currently his proportionate share of our earnings and
profits in years in which we are a PFIC regardless of whether distributions
of
our earnings and profits are actually distributed to the U.S. holder. Any gain
subsequently recognized upon the sale by the U.S. holder of his ordinary shares,
however, generally would be taxed as capital gain and the denial of the basis
step-up at death described above would not apply.
A
shareholder may make a QEF election with respect to a PFIC for any taxable
year
of the shareholder. A QEF election is effective for the year in which the
election is made and all subsequent taxable years of the shareholder. Procedures
exist for both retroactive elections and the filing of protective statements.
A
U.S. holder making the QEF election must make the election on or before the
due
date, as extended, for the filing of the shareholder’s income tax return for the
first taxable year to which the election will apply.
A
U.S.
holder must make a QEF election by completing Form 8621 and attaching it to
their U.S. federal income tax return, and must satisfy additional filing
requirements each year the election remains in effect. We will provide to each
shareholder, upon request, the tax information required to make a QEF election
and to make subsequent annual filings.
As
an
alternative to a QEF election, a U.S. holder generally may elect to mark his
ordinary shares to market annually, recognizing ordinary income or loss (subject
to certain limitations) equal to the difference between the fair market value
of
his ordinary shares and the adjusted tax basis of his ordinary shares. Losses
would be allowed only to the extent of net mark-to-market gain accrued under
the
election. If a mark-to-market election with respect to ordinary shares is in
effect on the date of a U.S. holder’s death, the normally available step-up in
tax basis to fair market value will not be available. Rather, the tax basis
of
the ordinary shares in the hands of a U.S. holder who acquired them from a
decedent will be the lesser of the decedent’s tax basis or the fair market value
of the ordinary shares.
The
implementation of many aspects of the Code’s PFIC rules requires the issuance of
regulations which in many instances have yet to be promulgated and which may
have retroactive effect. We cannot be sure that any of these regulations will
be
promulgated or, if so, what form they will take or what effect they will have
on
the foregoing discussion.
Accordingly,
and due to the complexity of the PFIC rules, U.S. holders should consult their
own tax advisors regarding our status as a PFIC for each year and the
eligibility, manner and advisability of making a QEF election or a
mark-to-market election, and the effect of these elections on the calculation
of
the amount of foreign tax credit that may be available to a U.S.
holder.
Backup
Withholding
A
U.S.
holder may be subject to backup withholding at rate of 28% with respect to
dividend payments and receipt of the proceeds from the disposition of the
ordinary shares. Backup withholding will not apply with respect to payments
made
to certain exempt recipients, such as corporations and tax-exempt organizations,
or if a U.S. holder provides a tax payer identification number (or certifies
that he has applied for a taxpayer identification number), certifies that such
holder is not subject to backup withholding or otherwise establishes an
exemption. Backup withholding is not an additional tax and may be claimed as
a
credit against the U.S. federal income tax liability of a U.S. holder, or
alternatively, the U.S. holder may be eligible for a refund of any excess
amounts withheld under the backup withholding rules, in either case, provided
that the required information is furnished to the Internal Revenue
Service.
Non-U.S.
Holders of Ordinary Shares
Except
as
provided below, a non-U.S. holder of ordinary shares except certain former
U.S.
citizens and long-term residents of the United States generally will not be
subject to U.S. federal income or withholding tax on the receipt of dividends
on, and the proceeds from the disposition of, an ordinary share, unless such
item is effectively connected with the conduct by the non-U.S. holder of a
trade
or business in the United States or, in the case of a resident of a country
which has an income tax treaty with the United States, such item is attributable
to a permanent establishment in the United States or, in the case of an
individual, a fixed place of business in the United States. In addition, gain
recognized by an individual non-U.S. holder will be subject to tax in the United
States if the non-U.S. holder is present in the United States for 183 days
or
more in the taxable year of the sale and certain other conditions are
met.
Non-U.S.
holders will not be subject to information reporting or backup withholding
with
respect to the payment of dividends on ordinary shares unless the payment is
made through a paying agent, or an office of a paying agent, in the United
States. Non-U.S. holders generally will be subject to information reporting
and,
under regulations generally effective January 1, 2001, to backup withholding
at
a rate of 31% with respect to the payment within the United States of dividends
on the ordinary shares unless the holder provides its taxpayer identification
number, certifies to its foreign status, or otherwise establishes an
exemption.
Non-U.S.
holders generally will be subject to information reporting and backup
withholding at a rate of 31% on the receipt of the proceeds from the disposition
of the ordinary shares to, or through, the United States office of a broker,
whether domestic or foreign, unless the holder provides a taxpayer
identification number, certifies to its foreign status or otherwise establishes
an exemption. Non-U.S. holders will not be subject to information reporting
or
backup withholding with respect to the receipt of proceeds from the disposition
of the ordinary shares by a foreign office of a broker; provided, however,
that
if the broker is a U.S. person or a “U.S. related person,” information reporting
(but not backup withholding) will apply unless the broker has documentary
evidence in its records of the non-U.S. holder's foreign status or the non-U.S.
holder certifies to its foreign status under penalties of perjury or otherwise
establishes an exemption. For this purpose, a “U.S. related person” is a broker
or other intermediary that maintains one or more enumerated U.S. relationships.
Backup withholding is not an additional tax and may be claimed as a credit
against the U.S. federal income tax liability of a U.S. holder, or
alternatively, the U.S. holder may be eligible for a refund of any excess
amounts withheld under the backup withholding rules, in either case, provided
that the required information is furnished to the Internal Revenue
Service.
F. |
Dividends
and paying agents
|
Not
applicable.
Not
applicable.
We
are
subject to the informational requirements of the Securities Exchange Act of
1934, as amended, applicable to foreign private issuers and fulfill the
obligations with respect to such requirements by filing reports with the
Securities and Exchange Commission, or SEC. You may read and copy any document
we file, including any exhibits, with the SEC without charge at the SEC’s public
reference room at 100 F Street, N.E., Washington, D.C. 20549. Copies of such
material may be obtained by mail from the Public Reference Branch of the SEC
at
such address, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference room. Certain of our SEC filings
are
also available to the public at the SEC’s website at
http://www.sec.gov.
You
may
request a copy of our SEC filings, at no cost, by e-mailing to [email protected]
and upon
said request copies will be sent by e-mail. A copy of each report submitted
in
accordance with applicable U.S. law is available for review at our principal
executive offices.
I. |
Subsidiary
Information
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Not
applicable.
Item
11. |
Quantitative
and Qualitative Disclosures about Market Risk
|
Market
risk represents the risk of changes in the value of our financial instruments
as
a result of fluctuations in foreign currency exchange rates.
The
following table sets forth our consolidated balance sheet exposure with respect
to change in foreign currency exchange rates as of December 31,
2007.
Currency
|
|
Current
Monetary Assets
(Liabilities)-net
|
|
|
|
(In US $ thousands)
|
|
NIS
|
|
|
(135
|
)
|
Euro
|
|
|
2,362
|
|
Romanian
Ron
|
|
|
(353
|
)
|
Other
non-dollar currencies
|
|
|
309
|
|
|
|
|
2,183
|
|
Our
annual expenses paid in NIS are approximately $7 million. Accordingly, we
estimate that a hypothetical increase of the value of the NIS against the U.S.
dollar by 1% would result in an increase in our operating expenses by
approximately $70,000 for the year ended December 31, 2007.
During
the last quarter of 2004, we deposited an amount of $30 million with
several banks for periods between seven and ten years. The arrangements with
the
banks are described above in Item 5.B.
At
December 31, 2007, we held investments in auction rate securities called
"Mantoloking CDO 2006 LTD SER 2006-1A Class A-2, ISIN#US564616AB65" (the
"Security") in the principal amount of $20.3 million. The stated maturity of
these securities is 2046. For a general description of certain types of auction
rate securities, see Section D ("Risk Factors") above. While the liquidity
of
the Security has been significantly impacted by market conditions, we continue
to receive interest payments every month. The estimated market value of the
Security at December 31, 2007 was approximately $5.1 million, which
reflects a $15.2 million adjustment to the principal value of
$20.3 million (see also note 11(d) to our consolidated financial statements
under Item 18).
Recently
we were advised that the Security has been downgraded to Ba1 by Moody's and
on
CreditWatch with negative implications. The Security remains rated BBB by
Standard & Poor’s. As of June16, 2008, the estimated fair value of the
security was $4.7 million.
As
of
December 31, 2007, we did not hold any derivative financial instruments for
either trading or non-trading purposes.
Item
12. |
Description
of Securities Other Than Equity
Securities
|
Not
applicable.
PART
II
Item
13. |
Defaults,
Dividend Arrearages and
Delinquencies
|
Not
applicable.
Item
14. |
Material
Modifications to the Rights of Security Holders and Use of
Proceeds
|
The
effective date of our first registration statement, filed on Form F-1 under
the
Securities Act of 1933 (No. 333-12266) relating to the initial public offering
of our ordinary shares, was August 7, 2000. Net proceeds to us were $29.9
million. From the time of receipt through December 31, 2007, the proceeds were
used for acquisitions, investments in marketable securities and debentures,
and
dividend payments.
Item
15T. |
Controls
and Procedures
|
Disclosure
Controls and Procedures
We
performed an evaluation of the effectiveness of the design and operation of
our
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) as of December 31, 2007. The
evaluation was performed with the participation of our senior management and
under the supervision and with the participation of our chief executive officer
and chief financial officer. Based on this evaluation, our chief executive
officer and chief financial officer have concluded that our disclosure controls
and procedures are effective to alert them on a timely basis to material
information required to be included in our periodic reports with the SEC.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management, including our chief executive officer and chief financial officer,
is responsible for establishing and maintaining adequate internal control over
our financial reporting, as such term is defined in Rule 13a-15(f) under the
Securities Exchange Act. Our internal control system was designed to provide
reasonable assurance to our management and our board of directors regarding
the
reliability of financial reporting and the preparation and fair presentation
of
published financial statements for external purposes in accordance with
generally accepted accounting principles. All internal control systems, no
matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurances with
respect to financial statement preparation and presentation. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may
decline.
Our
management (with the participation of our chief executive officer and chief
financial officer) conducted an evaluation, pursuant to Rule 13a-15(c) under
the
Securities Exchange Act, of the effectiveness, as of the end of the period
covered by this Annual Report, of our internal control over financial reporting
based on the criteria set forth in Internal
Control-Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on the results of this evaluation, management assessed the effectiveness of
our
internal control over financial reporting as at December 31, 2007 and
concluded that our internal control over financial reporting was effective
as of
December 31, 2007.
This
Annual Report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management’s report in this Annual Report.
Changes
in Financial Control Over Financial Reporting
As
we
previously reported, in 2007, subsequent to the filing of our initial annual
report on Form 20-F for the year ended December 31, 2006, we determined that
we
were required to restate our previously issued financial statements to correct
an error in the balance sheet as of December 31, 2006 and in the statement
of
cash flows for the year ended December 31, 2006 relating to the classification
of our holding in auction rate securities as cash equivalents rather than
short-term marketable securities. In connection with the restatement, management
determined that a material weakness in internal control over financial reporting
existed as of December 31, 2006 because at that time we did not have effective
controls designed and in place to ensure that our investments were classified
in
accordance with generally accepted accounting principles. In order to address
that failure, we enhanced our controls in 2007 to include a review of all our
investment instruments for proper classification.
Item
16A. |
Audit
Committee Financial Expert
|
Our
board
of directors has designated Mr. Amnon Neubach as our “audit committee financial
expert” as defined by the SEC rules.
In
April
2004, our board of directors adopted our Code of Ethics, a code that applies
to
all of our directors and employees.
Item
16C. |
Principal
Accountant Fees and
Services
|
In
the
annual meeting held in August 2007, our shareholders re-appointed Kesselman
& Kesselman, certified public accountants in Israel and a member of
PricewaterhouseCoopers International Limited, to serve as our independent
auditors. These accountants billed the following fees to us for professional
services in each of the last two fiscal years:
|
|
Years
ended December 31,
|
|
|
|
2006
|
|
2007
|
|
Audit
Fees
|
|
$
|
55,000
|
|
$
|
75,000
|
|
Audit-Related
Fees
|
|
|
0
|
|
|
0
|
|
Tax
Fees
|
|
|
5,000
|
|
|
5,000
|
|
All
Other Fees
|
|
|
0
|
|
|
0
|
|
Total
|
|
$
|
60,000
|
|
$
|
80,000
|
|
Tax
Fees.
Services comprising fees disclosed under this category includes: preparation
of
original and amended tax returns; claims for refund; tax advice and assistance
related to: dividend distribution, approved enterprise and tax audits and
appeals.
Our
audit
committee’s policy is to approve each audit and non-audit service to be
performed by our independent accountant before the accountant is
engaged.
Item
16D. |
Exemptions
from the Listing Standards for Audit
Committees
|
Not
applicable.
Item
16E. |
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
|
Not
applicable.
PART
III
Item
17. |
Financial
Statements
|
Not
applicable.
Item
18. |
Financial
Statements
|
Our
consolidated financial statements and related auditors’ report for the year
ended December 31, 2007 are attached to this Annual Report.
The
following exhibits are filed as part of this Annual Report:
Exhibit
No.
|
|
Exhibit
|
|
|
|
1.1*
|
|
Memorandum
of Association, as amended
|
|
|
|
1.2***
|
|
Articles
of Association, as amended
|
|
|
|
4.1**
|
|
MIND
1998 Share Option Plan
|
|
|
|
4.2**
|
|
MIND
2000 Share Option Plan
|
|
|
|
8
|
|
List
of Subsidiaries
|
|
|
|
10.1
|
|
Consent
of Kesselman & Kesselman
|
|
|
|
11**
|
|
Code
of Ethics and Business Conduct
|
|
|
|
12.1
|
|
Certification
of Principal Executive Officer pursuant to 17 CFR 240.13a-14(a),
as
adopted pursuant to §302 of the Sarbanes-Oxley Act
|
|
|
|
12.2
|
|
Certification
of Principal Financial Officer pursuant to 17 CFR 240.13a-14(a),
as
adopted pursuant to §302 of the Sarbanes-Oxley Act
|
|
|
|
13.1
|
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act
|
|
|
|
13.2
|
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act
|
|
|
|
15.1
|
|
Consent
of Houlihan Smith & Company
|
*
|
Incorporated
by reference to MIND C.T.I. Ltd.’s Annual Report on Form 20-F for the
fiscal year ended December 31, 2002 (Commission file number 000-31215).
|
**
|
Incorporated
by reference to MIND C.T.I. Ltd.’s Annual Report on Form 20-F for the
fiscal year ended December 31, 2003 (Commission file number
000-31215).
|
***
|
Incorporated
by reference to MIND C.T.I. Ltd.’s Annual Report on Form 20-F for the
fiscal year ended December 31, 2005 (Commission file number
000-31215).
|
SIGNATURES
The
Registrant hereby certifies that it meets all of the requirements for filing
on
Form 20-F and has duly caused and authorized the undersigned to sign this annual
report on its behalf.
|
MIND
CTI LTD.
|
|
|
|
/s/
Monica Eisinger
|
|
|
|
|
By:
|
Monica
Eisinger |
|
Title:
|
President &
CEO |
|
Date:
|
June
30, 2008 |
MIND
C.T.I. LTD.
(An
Israeli Corporation)
2007
CONSOLIDATED FINANCIAL STATEMENTS
MIND
C.T.I. LTD.
(An
Israeli Corporation)
2007
CONSOLIDATED FINANCIAL STATEMENTS
TABLE
OF
CONTENTS
|
|
Page
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
F-2
|
CONSOLIDATED
FINANCIAL STATEMENTS:
|
|
|
Balance
sheets
|
|
F-3
|
Statements
of operations
|
|
F-4
|
Statements
of changes in shareholders’ equity
|
|
F-5
|
Statements
of cash flows
|
|
F-6
|
Notes
to financial statements
|
|
F-8
|
The
amounts are stated in U.S. dollars ($) in thousands.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
shareholders of
MIND
C.T.I. LTD.
We
have
audited the consolidated balance sheets of Mind C.T.I. Ltd. (the “Company”) and
its subsidiaries as of December 31, 2007 and 2006 and the consolidated
statements of operations, changes in shareholders’ equity and cash flows for
each of the three years in the period ended December 31, 2007. These
financial statements are the responsibility of the Company’s 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 consolidated financial position of the Company
and
its subsidiaries as of December 31, 2007 and 2006 and the consolidated
results of its operations and its cash flows for each of the three years in
the
period ended December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America.
As
discussed in note 1(n) to the consolidated financial statements, effective
January 1, 2006, the Company changed its method of accounting for share-based
payment to conform with FASB Statement of Financial Accounting Standards No.
123
(revised 2004), “Share-based Payment".
Tel-Aviv,
Israel
|
Kesselman
& Kesselman
|
June
30, 2008
|
Certified
Public Accountants (Isr.)
|
Kesselman
& Kesselman is a member of PricewaterhouseCoopers International Limited, a
company limited by guarantee registered in England and Wales.
MIND
C.T.I. LTD.
CONSOLIDATED
BALANCE SHEETS
|
|
December
31
|
|
|
|
2007
|
|
2006
|
|
|
|
U.S.
dollars in thousands
|
|
Assets
|
|
|
|
|
|
|
|
CURRENT
ASSETS
(note 10):
|
|
|
|
|
|
|
|
Cash
and cash equivalents (note 11a)
|
|
$
|
12,390
|
|
$
|
4,771
|
|
Marketable
securities
|
|
|
21
|
|
|
22,800
|
|
Accounts
receivable (note 11b):
|
|
|
|
|
|
|
|
Trade
|
|
|
4,967
|
|
|
5,385
|
|
Other
|
|
|
135
|
|
|
124
|
|
Prepaid
expenses
|
|
|
166
|
|
|
107
|
|
Deferred
income taxes (note 9e)
|
|
|
131
|
|
|
154
|
|
Inventories
|
|
|
44
|
|
|
35
|
|
Total
current assets
|
|
|
17,854
|
|
|
33,376
|
|
INVESTMENTS
AND OTHER NON CURRENT ASSETS:
|
|
|
|
|
|
|
|
Marketable
debentures (note 11c)
|
|
|
|
|
|
10,000
|
|
Long-term
investment (note 11c)
|
|
|
5,113
|
|
|
|
|
Other
(note 11d)
|
|
|
968
|
|
|
1,003
|
|
PROPERTY
AND EQUIPMENT, net
of accumulated depreciation and amortization (note 3)
|
|
|
1,616
|
|
|
1,558
|
|
INTANGIBLE
ASSETS, net
of accumulated amortization (note 5)
|
|
|
1,951
|
|
|
888
|
|
GOODWILL
(note
4)
|
|
|
10,224
|
|
|
6,966
|
|
Total
assets
|
|
$
|
37,726
|
|
$
|
53,791
|
|
|
|
|
|
|
|
|
|
Liabilities
and shareholders’ equity
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
(note 10):
|
|
|
|
|
|
|
|
Accounts
payable and accruals:
|
|
|
|
|
|
|
|
Trade
|
|
$
|
741
|
|
$
|
464
|
|
Other
(note 11e)
|
|
|
2,406
|
|
|
2,509
|
|
Deferred
revenues (note 11f)
|
|
|
1,053
|
|
|
1,236
|
|
Advances
from customers
|
|
|
213
|
|
|
241
|
|
Total
current liabilities
|
|
|
4,413
|
|
|
4,450
|
|
EMPLOYEE
RIGHTS UPON RETIREMENT
(note 6)
|
|
|
1,504
|
|
|
1,482
|
|
COMMITMENTS
AND CONTINGENT LIABILITIES (note
7)
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
5,917
|
|
|
5,932
|
|
SHAREHOLDERS’
EQUITY (note
8):
|
|
|
|
|
|
|
|
Share
capital - ordinary shares of
|
|
|
|
|
|
|
|
NIS
0.01 par value (authorized as of December 31, 2007 and 2006 -
88,000,000
shares; issued and outstanding:
December
31, 2007 – 21,594,010 shares;
December
31, 2006 – 21,547,019 shares)
|
|
|
54
|
|
|
54
|
|
Additional
paid-in capital
|
|
|
57,880
|
|
|
59,872
|
|
Differences
from translation of foreign currency financial statements of a
subsidiary
|
|
|
(141
|
)
|
|
|
|
Accumulated
deficit
|
|
|
(25,984
|
)
|
|
(12,067
|
)
|
Total
shareholders’ equity
|
|
|
31,809
|
|
|
47,859
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
37,726
|
|
$
|
53,791
|
|
|
|
|
Amnon
Neubach
|
|
Monica
Eisinger
|
Director
|
|
Chairperson
of the Board of Directors,
|
|
|
President
and Chief Executive
Officer
|
The
accompanying notes are an integral part of the financial
statements.
MIND
C.T.I. LTD.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Years
ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
U.S.
dollars in thousands,
except
per share data
|
|
REVENUES
(note 12a):
|
|
|
|
|
|
|
|
|
|
|
Sales
of licenses
|
|
$
|
5,903
|
|
$
|
8,467
|
|
$
|
7,420
|
|
Services
|
|
|
12,544
|
|
|
11,593
|
|
|
8,181
|
|
|
|
|
18,447
|
|
|
20,060
|
|
|
15,601
|
|
COST
OF REVENUES
|
|
|
5,784
|
|
|
5,675
|
|
|
4,015
|
|
GROSS
PROFIT
|
|
|
12,663
|
|
|
14,385
|
|
|
11,586
|
|
RESEARCH
AND DEVELOPMENT EXPENSES
(note 12b)
|
|
|
5,714
|
|
|
6,118
|
|
|
5,086
|
|
SELLING
AND MARKETING EXPENSES
(note 12c)
|
|
|
3,846
|
|
|
3,628
|
|
|
2,148
|
|
GENERAL
AND ADMINISTRATIVE EXPENSES
(note 12d)
|
|
|
1,845
|
|
|
2,135
|
|
|
1,507
|
|
OPERATING
INCOME
|
|
|
1,258
|
|
|
2,504
|
|
|
2,845
|
|
FINANCIAL
INCOME (EXPENSES):
|
|
|
|
|
|
|
|
|
|
|
IMPAIRMENT
OF AUCTION RATE SECURITIES (note
11c)
|
|
|
(15,187
|
)
|
|
|
|
|
|
|
OTHER
FINANCIAL INCOME (EXPENSES)
-
net (note 12e)
|
|
|
2,082
|
|
|
(222
|
)
|
|
1,260
|
|
INCOME
(LOSS) BEFORE TAXES ON INCOME
|
|
|
(11,847
|
)
|
|
2,282
|
|
|
4,105
|
|
TAXES
ON INCOME
(note 9)
|
|
|
108
|
|
|
1,373
|
|
|
43
|
|
NET
INCOME (LOSS) FOR THE YEAR
|
|
$
|
(11,955
|
)
|
$
|
909
|
|
$
|
4,062
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
(LOSS) PER ORDINARY SHARE (note
12f)-
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.55
|
)
|
$
|
0.04
|
|
$
|
0.19
|
|
WEIGHTED
AVERAGE NUMBER OF ORDINARY SHARES
|
|
|
|
|
|
|
|
|
|
|
USED
IN COMPUTATION OF EARNINGS
|
|
|
|
|
|
|
|
|
|
|
PER
ORDINARY SHARE – IN THOUSANDS (note
12f):
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,586
|
|
|
21,515
|
|
|
21,431
|
|
Diluted
|
|
|
21,586
|
|
|
21,546
|
|
|
21,619
|
|
The
accompanying notes are an integral part of the financial
statements.
MIND
C.T.I. LTD.
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
Differences from
|
|
|
|
|
|
|
|
|
|
|
|
translation of foreign
|
|
|
|
|
|
|
|
Share capital
|
|
Additional
|
|
currency financial
|
|
|
|
|
|
|
|
Number
|
|
|
|
paid-in
|
|
statement of
|
|
Accumulated
|
|
|
|
|
|
of shares
|
|
Amount
|
|
capital
|
|
a subsidiary
|
|
deficit
|
|
Total
|
|
|
|
In thousands
|
|
U.S. dollars in thousands
|
|
BALANCE
AT JANUARY 1, 2005
|
|
|
21,281
|
|
$
|
53
|
|
$
|
59,077
|
|
|
|
|
$
|
(8,886
|
)
|
$
|
50,244
|
|
CHANGES
DURING 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,062
|
|
|
4,062
|
|
Dividend
paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,143
|
)
|
|
(5,143
|
)
|
Employee
stock options exercised
|
|
|
182
|
|
|
*
|
|
|
322
|
|
|
|
|
|
|
|
|
322
|
|
BALANCE
AT DECEMBER 31, 2005
|
|
|
21,463
|
|
|
53
|
|
|
59,399
|
|
|
|
|
|
(9,967
|
)
|
|
49,485
|
|
CHANGES
DURING 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
909
|
|
|
909
|
|
Dividend
paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,009
|
)
|
|
(3,009
|
)
|
Employees
share based compensation expenses
|
|
|
|
|
|
|
|
|
325
|
|
|
|
|
|
|
|
|
325
|
|
Employee
stock options exercised
|
|
|
84
|
|
|
1
|
|
|
148
|
|
|
|
|
|
|
|
|
149
|
|
BALANCE
AT DECEMBER 31, 2006
|
|
|
21,547
|
|
|
54
|
|
|
59,872
|
|
|
|
|
|
(12,067
|
)
|
|
47,859
|
|
CHANGES
DURING 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
$
|
(141
|
)
|
|
|
|
|
(141
|
)
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,955
|
)
|
|
(11,955
|
)
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
(141
|
)
|
|
(11,955
|
)
|
|
(12,096
|
)
|
Dividend
paid (note 8b)
|
|
|
|
|
|
|
|
|
(2,356
|
)
|
|
|
|
|
(1,962
|
)
|
|
(4,318
|
)
|
Employees
share based compensation expenses
|
|
|
|
|
|
|
|
|
269
|
|
|
|
|
|
|
|
|
269
|
|
Employee
stock options exercised
|
|
|
47
|
|
|
*
|
|
|
95
|
|
|
|
|
|
|
|
|
95
|
|
BALANCE
AT DECEMBER 31, 2007
|
|
|
21,594
|
|
$
|
54
|
|
$
|
57,880
|
|
$
|
(141
|
)
|
$
|
(25,984
|
)
|
$
|
31,809
|
|
*
Represents an amount less than $ 1,000.
The
accompanying notes are an integral part of the financial
statements.
(Continued
- 1)
MIND
C.T.I. LTD.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Years
ended December 31
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
U.S.
dollars in thousands
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(11,955
|
)
|
$
|
909
|
|
$
|
4,062
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
950
|
|
|
1,391
|
|
|
987
|
|
Impairment
of auction rate securities
|
|
|
15,187
|
|
|
|
|
|
|
|
Deferred
income taxes, net
|
|
|
78
|
|
|
(293
|
)
|
|
|
|
Accrued
severance pay
|
|
|
22
|
|
|
176
|
|
|
(151
|
)
|
Capital
loss (gain) on sale of property and equipment
|
|
|
8
|
|
|
(3
|
)
|
|
(38
|
)
|
Employees
share based compensation
|
|
|
269
|
|
|
325
|
|
|
|
|
Realized
loss on sale of marketable debentures held-to-maturity
|
|
|
4
|
|
|
|
|
|
|
|
Changes
in operating asset and liability items:
|
|
|
|
|
|
|
|
|
|
|
Decrease
(increase) in accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
|
1,330
|
|
|
(1,996
|
)
|
|
196
|
|
Interest
accrued on long-term bank deposits and marketable
debentures
|
|
|
19
|
|
|
(37
|
)
|
|
242
|
|
Other
|
|
|
(11
|
)
|
|
558
|
|
|
85
|
|
Increase
in prepaid expenses
|
|
|
(17
|
)
|
|
(21
|
)
|
|
(37
|
)
|
Increase
in inventories
|
|
|
(9
|
)
|
|
(5
|
)
|
|
(12
|
)
|
Increase
(decrease) in accounts payable and accruals:
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
|
156
|
|
|
(222
|
)
|
|
(697
|
)
|
Other
|
|
|
(1,127
|
)
|
|
768
|
|
|
(1,510
|
)
|
Decrease
in deferred revenues
|
|
|
(205
|
)
|
|
(408
|
)
|
|
(799
|
)
|
Decrease
in advances from customers
|
|
|
(28
|
)
|
|
(549
|
)
|
|
(1,467
|
)
|
Net
cash provided by operating activities
|
|
|
4,671
|
|
|
593
|
|
|
861
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Purchase
of marketable securities
|
|
|
(166,300
|
)
|
|
(200,550
|
)
|
|
|
|
Sale
of marketable securities
|
|
|
168,800
|
|
|
177,750
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(445
|
)
|
|
(379
|
)
|
|
(589
|
)
|
Acquisition
of subsidiaries, net of cash acquired (a)
|
|
|
(4,979
|
)
|
|
|
|
|
(4,233
|
)
|
Severance
pay funds
|
|
|
(20
|
)
|
|
(119
|
)
|
|
94
|
|
Investment
in long-term bank deposits
|
|
|
|
|
|
|
|
|
(10,000
|
)
|
Sale
(acquisition) of marketable debentures held-to-maturity
|
|
|
9,996
|
|
|
(10,000
|
)
|
|
|
|
Withdrawal
of long-term bank deposits
|
|
|
|
|
|
30,000
|
|
|
10,000
|
|
Proceeds
from sale of property and equipment
|
|
|
139
|
|
|
162
|
|
|
175
|
|
Net
cash provided by (used in) investing activities
|
|
|
7,191
|
|
|
(3,136
|
)
|
|
(4,553
|
)
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options exercised and paid
|
|
|
95
|
|
|
149
|
|
|
322
|
|
Dividend
paid
|
|
|
(4,318
|
)
|
|
(3,009
|
)
|
|
(5,143
|
)
|
Net
cash used in financing activities
|
|
|
(4,223
|
)
|
|
(2,860
|
)
|
|
(4,821
|
)
|
TRANSLATION
ADJUSTMENTS ON CASH AND CASH EQUIVALENTS
|
|
|
(20
|
)
|
|
|
|
|
|
|
INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
7,619
|
|
|
(5,403
|
)
|
|
(8,513
|
)
|
BALANCE
OF CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
|
|
4,771
|
|
|
10,174
|
|
|
18,687
|
|
BALANCE
OF CASH AND CASH EQUIVALENTS AT END OF YEAR
|
|
$
|
12,390
|
|
$
|
4,771
|
|
$
|
10,174
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW AND NON-CASH ACTIVITIES -
|
|
|
|
|
|
|
|
|
|
|
cash
paid during the year for income tax
|
|
$
|
902
|
|
$
|
39
|
|
$
|
20
|
|
(Concluded
- 2)
MIND
C.T.I. LTD.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Year
ended
December
31
|
|
|
|
2007
|
|
2005
|
|
|
|
U.S.
dollars in
thousands
|
|
(a)
Acquisition
of subsidiaries:
|
|
|
|
|
|
|
|
Assets
and liabilities of the subsidiaries upon acquisition:
|
|
|
|
|
|
|
|
Working
capital (excluding cash and cash equivalents)
|
|
$
|
(176
|
)
|
$
|
(4,881
|
)
|
Property
and equipment
|
|
|
239
|
|
|
277
|
|
Intangible
assets
|
|
|
1,577
|
|
|
1,871
|
|
Goodwill
|
|
|
3,339
|
|
|
6,966
|
|
Cash
paid – net
|
|
$
|
4,979
|
|
$
|
4,233
|
|
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - SIGNIFICANT ACCOUNTING POLICIES:
MIND
C.T.I. Ltd. (the “Company”) is an Israeli company, which together with its
subsidiaries, develops, manufactures and markets billing and customer care
software products for wireless, wire-line and next-generation carriers that
provide voice, data and internet protocol ("IP") services. The Company also
provides a call management system used by enterprises for call accounting,
traffic analysis and fraud detection.
The
Company has wholly-owned subsidiaries in the United States, Romania and
U.K.
The
consolidated financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") in the United States of
America.
|
3) |
Use
of estimates in preparation of financial statements
|
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets
and
liabilities and disclosure of contingent assets and liabilities at the dates
of
the financial statements and the reported amounts of revenues and expenses
during the reporting years. Actual results could differ from those estimates.
The most significant estimates with regard to the Company's consolidated
financial statements relate to revenue recognition of products sales using
the
percentage completion method and the valuation of auction rate securities.
The
currency of the primary economic environment in which the operations of the
Company and its subsidiaries, except the subsidiary in the U.K. as described
below, are conducted is the U.S. dollar (“dollar” or “$”). Most of the Company’s
revenues are derived from sales outside of Israel, which are denominated
primarily in dollars. In addition, most marketing and service costs are incurred
outside Israel, primarily in dollars. Thus, the functional currency of the
Company and its subsidiaries is the dollar.
Transactions
and balances originally denominated in dollars are presented at their original
amounts. Balances in non-dollar currencies are re-measured into dollars using
historical and current exchange rates for non-monetary and monetary balances,
respectively. For non-dollar transactions and other items (detailed below)
reflected in the statements of operations, the following exchange rates are
used: (i) for transactions: exchange rates at transaction dates or average
rates; and (ii) for other items (derived from non-monetary balance sheet items,
such as depreciation and amortization, changes in inventories, etc.) -
historical exchange rates. The resulting currency translation gains or losses
are carried to financial income or expenses, as appropriate.
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
1 - SIGNIFICANT ACCOUNTING POLICIES
(continued):
The
functional currency of the subsidiary in the U.K. is the British Pound. The
financial statements of this subsidiary are included in consolidation, based
on
translation into U.S. dollars in accordance with Statement of Financial
Accounting Standards (“FAS”) 52 of the Financial Accounting Standards Board of
the United States (“FASB”): assets and liabilities are translated at year-end
exchange rates, while operating results items are translated at average exchange
rates during the year. Differences resulting from translation are presented
in
shareholders’ equity, under other comprehensive income (loss).
|
b. |
Principles
of consolidation:
|
|
1) |
The
consolidated financial statements include the accounts of the Company
and
all of its subsidiaries.
|
|
2) |
Inter-company
balances and transactions have been eliminated in consolidation.
Profits
from inter-company sales, not yet realized outside the Company and
its
subsidiaries, have also been
eliminated.
|
The
Company and its subsidiaries consider all highly liquid investments, which
include short-term bank deposits (up to three months from date of deposit)
that
are not restricted as to withdrawal or use, to be cash equivalents.
Inventories
are valued at the lower of cost or market value. Cost is determined by the
“first-in, first-out” method. Most of the inventories compounds of acquired
hardware.
|
e. |
Marketable
securities and debentures
|
The
Company accounts for its investment in marketable securities and debentures
using Statement of Financial Accounting Standard No. 115, "Accounting for
Certain Investments in Debt and Equity Securities".
Management
determines the appropriate classification of its investments in debt securities
at the time of purchase and reevaluates such determinations at each balance
sheet date.
Marketable
securities consist mainly of investment in auction rate securities classified
as
available-for-sale and are recorded at fair value. The fair value of quoted
securities is based on current market value. When securities do not have an
active market, fair value is determined using a valuation model. Changes in
fair
value, net of taxes, if applicable, are reflected in other comprehensive income.
Unrealized losses considered to be temporary are reflected in other
comprehensive income; unrealized losses that are considered to be
other-than-temporary are charged to income as an impairment charge (see also
note 11(c)).
Marketable
debentures are classified as held-to-maturity when the Company has the positive
intent and ability to hold the debentures to maturity and are stated at
amortized cost.The amortized cost of held-to-maturity debentures is adjusted
for
amortization of premiums and accretion of discounts to maturity. Such
amortization and interest are included in the statements of operations as
financial income or expenses, as appropriate.
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
1 - SIGNIFICANT ACCOUNTING POLICIES
(continued):
|
f. |
Property
and equipment:
|
|
1)
|
These
assets are stated at cost.
|
|
2)
|
The
assets are depreciated by the straight-line method, on basis of their
estimated useful life.
|
Annual
rates of depreciation are as follows:
|
|
%
|
|
Computers
and electronic equipment
|
|
|
15-33
|
|
|
|
|
(mainly 33)
|
|
Office
furniture and equipment
|
|
|
6-7
|
|
Vehicles
|
|
|
15
|
|
Leasehold
improvements are amortized by the straight-line method over the term of the
lease, which is shorter than the estimated useful life of the
improvements.
These
assets represent technology, backlog and customer relationship acquired (see
note 5), are stated at cost and amortized as follows:
Technology
and customer relationship are amortized by the straight-line method over an
estimated period of useful lives (Technology – 3-5 years; Customer relationship
– 5 years).
Backlog
is amortized according to the related revenue recognition.
Goodwill
reflects the excess of the purchase price of subsidiaries acquired over the
fair
value of net assets acquired. Goodwill is not amortized but rather tested for
impairment at least annually. The Company performs annual testing for impairment
of the goodwill during the third quarter of each year. As of December 31, 2007,
the Company has determined that there is no impairment with respect to the
goodwill.
|
i. |
Impairment
of long-lived assets and definite life intangible
assets
|
Long-lived
assets held and used are reviewed for impairment whenever events or changes
in
circumstances indicate that the carrying amount of the assets may not be
recoverable. If the sum of the expected future cash flows (undiscounted and
without interest charges) of these 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.
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
1 - SIGNIFICANT ACCOUNTING POLICIES
(continued):
|
j. |
Deferred
income taxes:
|
|
1) |
Effective
January 1, 2007, the Company adopted FIN 48, “Accounting for
Uncertainty in Income Taxes – an interpretation of FAS 109”, which was
issued in July 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
policy to include interest and penalties relating to uncertain tax
positions, within the provision for income taxes has not change as
a
result of implementing FIN 48. The adoption of FIN 48 did not effect
on
the Company’s financial statements.
|
|
1)
|
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 income tax provisions and benefits are based on
the
changes in the deferred tax asset or tax liability from period to
period.
Valuation allowance is included in respect of deferred tax assets
when it
is more likely than not that such assets will not be
realized.
|
|
2)
|
The
Company may incur additional tax liability in the event of inter-company
dividend distribution by non-Israeli subsidiaries. Such additional
tax
liability has not been provided for in these financial statements,
as the
Company does not expect these companies to distribute dividends in
the
foreseeable future.
|
|
3)
|
Taxes
which would apply in the event of disposal of investments in non-Israeli
subsidiaries have not been taken into account in computing the deferred
taxes, as it is the Company’s policy to hold these investments, and not to
realize them.
|
The
Company’s revenues consist of revenues generated from sales of billing and
customer care software products to service providers and call management
software to enterprises, as well as revenues generated from integration and
implementation services provided in connection with software products,
Maintenance services consisting of “when-and-if-available” software product
upgrades and enhancements and customer telephone support and training. The
Company recognizes revenue net of VAT.
The
Company applies the provisions of Statement of Position 97-2 of the American
Institute of Certified Public Accounts (“SOP 97-2”), “Software Revenue
Recognition” and Statement of Position 81-1 (“SOP 81-1”) “Accounting for
performance of construction type and certain production type contracts”, as
follows:
Revenue
from sale of products is recognized when delivery has occurred, persuasive
evidence of an arrangement exists, the sales price is fixed or determinable
and
collection is probable. Customization of the product, if any, is performed
before delivery occurs. If collection is not considered probable, revenue is
recognized when the fee is collected.
The
Company generally does not grant a right of return on products sold to
customers, distributors and resellers. In the event the right of return is
granted, revenue is recognized after such right has expired.
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
1 - SIGNIFICANT ACCOUNTING POLICIES
(continued):
The
services the Company provides consist of implementation, training, hardware
installation, maintenance, support, managed services and project
management.
All
services are priced on a fixed price basis and are recognized ratably over
the
period in which the services are provided except services which are recognized
under the percentage-of-completion method as described below.
Revenues
from managed services include a monthly fee for services and for right of use
and are recorded as service revenues and license revenues, respectively. The
monthly fee is based on number of subscribers and the agreements include a
minimum monthly charge. These revenues are recognized on a monthly basis.
Products
are mainly supplied with maintenance and support services for a period of one
year from delivery. When revenue on sale of the products is recognized, the
Company defers a portion of the sales price and recognizes it as maintenance
and
support service revenue ratably over the above period. The portion of the sales
price that is deferred is determined based on the fair value of the service
as
priced in transactions in which the Company renders solely maintenance and
support services.
Where
the
services are considered essential to the functionality of the software products,
both the software product revenue and the revenue related to the integration
and
implementation services are recognized under the percentage-of-completion method
in accordance with SOP 81-1. The Company generally determines the
percentage-of-completion by comparing the costs incurred to date to the
estimated total costs required to complete the project. When the estimate
indicates that a loss will be incurred, such loss is recorded in the period
identified. Significant judgments and estimates are involved in determining
the
percent complete of each contract. Different assumptions could yield materially
different results.
|
l. |
Research
and development expenses
|
Pursuant
to FAS No. 86, “Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed”, development costs related to software products
are expensed as incurred until the “technological feasibility” of the product
has been established. Because of the relatively short time period between
"technological feasibility" and product release, and the insignificant amount
of
costs incurred during such period, no software development costs have been
capitalized.
|
m. |
Allowance
for doubtful accounts
|
The
allowance is determined for specific debts doubtful of
collection.
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
1 - SIGNIFICANT ACCOUNTING POLICIES
(continued):
Prior
to
January 1, 2006, the Company accounted for employees’ share-based payment 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. In accordance with Statement of Financial Accounting Standards
No. 123 - “Accounting for Stock-Based Compensation” (“FAS 123”), as amended
by Statement of Financial Accounting Standards No. 148, “Accounting for
Stock-Based Compensation - Transition and Disclosure”, the company disclosed pro
forma information, assuming the company had accounted for employees’ share-based
payments using the fair value-based method defined in FAS 123.
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 expense over the requisite service period, net
of
estimated forfeitures. The Company estimated forfeitures based on historical
experience and anticipated future conditions.
In
March
2005, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 107 (“SAB 107”). SAB 107 provides supplemental implementation guidance
on FAS 123(R), including guidance on valuation methods, inventory capitalization
of share-based compensation cost, income statement effects, disclosures and
other issues. SAB 107 requires share-based payment to be classified in the
same
expense line items as cash compensation. The Company has applied the provisions
of SAB 107 in its adoption of FAS 123(R) including use of simplified method
for estimating the expected term of employee's stock options.
The
Company elected to recognize compensation cost for an award with only service
conditions that has a graded vesting schedule using the straight-line method
over the requisite service period for the entire award.
The
Company elected to adopt the modified prospective transition method, permitted
by FAS 123(R). Under such transition method, FAS 123(R) has been implemented
as
from the first quarter of 2006 with no restatement of prior periods. The
valuation provisions of FAS 123(R) apply to new awards and to awards modified,
repurchased, or cancelled after January 1, 2006. Additionally, compensation
cost for the portion of awards for which the requisite service has not been
rendered that are outstanding as of January 1, 2006 are recognized over the
remaining service period using the grant-date fair value of those awards as
calculated for pro forma disclosure purposes under FAS 123.
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
1 - SIGNIFICANT ACCOUNTING POLICIES
(continued):
In
November 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3 “Transition
Election Related to Accounting for Tax Effects of Share-Based Payment Awards”.
The Company has elected to adopt the alternative transition method provided
in
the FASB Staff Position for calculating the tax effects of stock-based
compensation pursuant to FAS 123(R). The alternative transition method includes
simplified methods to establish the beginning balance of the additional paid-in
capital pool related to the tax effects of employee share-based payment, which
is available to absorb tax deficiencies recognized subsequent to the adoption
of
FAS 123(R).
Share-based
employee compensation cost for the year ended December 31, 2005 was
determined using the intrinsic value method. The following table provides pro
forma financial information as if Share-based employee compensation cost had
been computed under FAS 123:
|
|
Year ended
December 31, 2005
|
|
|
|
U.S. dollars in
thousands,
except per share data
|
|
Net
income, as reported
|
|
$
|
4,062
|
|
Deduct
- share -based employee compensation costs for all awards determined
under
fair value method
|
|
|
(252
|
)
|
Pro
forma net income
|
|
$
|
3,810
|
|
Net
income per share:
|
|
|
|
|
Basic
and diluted - as reported
|
|
$
|
0.19
|
|
Basic
and diluted - pro forma
|
|
$
|
0.18
|
|
These
expenses are charged to income as incurred. Advertising expenses totaled
$ 43,000,
$
24,000
and $ 37,000 in the years ended December 31, 2007, 2006 and 2005,
respectively.
Comprehensive
income (loss) component other than net income is currency translation
adjustments.
|
q. |
Earnings
per share ("EPS")
|
Basic
EPS
is computed by dividing net income by the weighted average number of shares
outstanding during the years.
Diluted
EPS reflects the increase in the weighted average number of shares outstanding
that would result from the assumed exercise of employee stock options,
calculated using the treasury-stock-method.
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
1 - SIGNIFICANT ACCOUNTING POLICIES
(continued):
Balances
the linkage arrangements in respect of which stipulate linkage to the last
index
published prior to date of payment are stated on the basis of the last index
published prior to balance sheet date (the index for November).
|
s. |
Concentration
of credit risks
|
The
Company's long term securities portfolio at December 31, 2007 consists of
auction rate securities. Factors that may impact the securities' valuation
include changes to credit ratings of the securities as well as the underlying
assets supporting these securities, rates of default of the underlying assets,
underlying collateral values, discount rates, counterparty risk and ongoing
strength and quality of market credit and liquidity. The credit risk in respect
of these securities is significant.
Most
of
the Company’s and its subsidiaries cash and cash equivalents at
December 31, 2007 and 2006 were deposited with Israeli, European and U.S.
banks. The Company is of the opinion that the credit risk in respect of those
balances is insignificant.
The
Company's revenues have been generated from a large number of customers.
Consequently, the exposure to credit risks relating to trade receivables is
limited. The Company performs ongoing credit evaluations of its customers for
the purpose of determining the appropriate allowance for doubtful
accounts.
|
t. |
Recently
issued accounting pronouncements:
|
|
1)
|
In
September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157
defines fair value, establishes a framework and gives guidance regarding
the methods used for measuring fair value, and expands disclosures
about
fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years (January 1, 2008, for the Company).
Subsequent to the issuance of SFAS 157, the FASB issued FASB Staff
Positions (FSP) 157-1, "Application of FASB Statement No. 157 to
FASB
Statement No. 13 and Other Accounting Pronouncements That Address
Fair
Value Measurements for Purposes of Lease Classification or Measurement
under Statement 13" and FSP 157-2 "Effective Date of FASB Statement
No.
157." FSP 157-1 excludes, in certain circumstances, SFAS 13 and other
accounting pronouncements that address fair value measurements for
purposes of lease classification or measurement under Statement 13
from
the provision of SFAS 157. FSP 157-2 delays the effective date of
SFAS 157
for nonfinancial assets and nonfinancial liabilities, except those
that
are recognized or disclosed at fair value in the financial statements
on a
recurring basis (at least annually). FSP 157-2 defers the effective
date
of SFAS 157 for such instruments to fiscal years beginning after
November
15, 2008, and interim periods within those fiscal (January
1, 2009, for the Company). The Company is currently assessing the
impact
that SFAS 157 will have on its consolidated financial
statements.
|
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
1 - SIGNIFICANT ACCOUNTING POLICIES
(continued):
|
2)
|
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 various financial assets and financial
liabilities at fair value. Unrealized gains and losses on items for
which
the fair value option has been elected would be reported in earnings.
As
applicable to the Company, this statement will be effective as of
the year
beginning January 1, 2008. The Company does not expect the adoption
of
this statement to have a material effect on its consolidated financial
statements.
|
|
3)
|
In
December 2007, the SEC issued Staff Accounting Bulletin No. 110
(“SAB 110”) relating to the use of a “simplified” method in
developing an estimate of expected term of “plain vanilla” share options.
SAB 107, which was applied by the Company for estimating the expected
term
of employee's stock options, previously allowed the use of the simplified
method until December 31, 2007. SAB 110 allows, under certain
circumstances, to continue to accept the use of the simplified method
beyond December 31, 2007. The Company does not expect that the adoption
of
SAB 110 will have material impact on its consolidated financial
statements. The Company is currently evaulating the impact that the
adoption of SAB 110 would have on its consolidated financial
statements.
|
|
4)
|
In
December 2007, the FASB issued FAS No. 141 (revised 2007) (“FAS 141R”),
“Business Combinations”. FAS 141R will change how business acquisitions
are accounted for and will impact financial statements both on the
acquisition date and in subsequent periods key changes include: acquired
in-process research and development will no longer be expensed on
acquisition, but capitalized and amortized over its useful life;
fair
value will be based on market participant assumptions; acquisition
costs
will generally be expensed as incurred; restructuring costs will
generally
be expensed in periods after the acquisition date. Early adoption
is not
permitted. As applicable to the Company, this statement will be effective
as of the year beginning January 1, 2009. The Company believes that
the
adoption of FAS 141R could have an impact on its consolidated
financialstatements; however, the impact would depend on the nature,
terms
and magnitude of acquisitions it consummates in the
future.
|
Certain
comparative figures have been reclassified to conform to the current year
presentation.
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
2 - ACQUISITIONS:
|
a. |
Omni
Consulting Company Limited
|
On
October 10, 2007 (“Acquisition date”), the Company acquired 100% of the shares
conferring ownership and control in Omni Consulting Company Limited (“Omni”) for
an aggregate consideration of $ 5,972 thousands in cash (including related
expenses). In addition, subject to the achievement of agreed performance related
earn-outs, which have not yet been met, the Company undertook to make payments
to the sellers through the third quarter of 2009, up to a maximum of
approximately $1.5 million, which if paid will be recorded as additional
goodwill. Omni provides billing and customer care software solutions to
carriers. Omni was founded in 1996, and is based in Reading, U.K. The main
purpose of the acquisition was to facilitate the Company in penetrating the
U.K.
market. During December 2007, Omni changed its name to Mind Software
Limited.
The
acquisition was accounted for using the purchase method under FAS 141 (“Business
Combinations”). Based upon an appraisal, performed by management with the
assistance of independent appraisers, the purchase price was allocated to those
assets acquired and
liabilities
assumed based on the estimated fair value of those assets and liabilities as
of
October 10, 2007. Identifiable intangible assets, which are depreciated by
the
straight-line method over 5 years, consist of acquired technology in the amount
of approximate $ 1,102 thousands and customer relationship in the amount of
approximate $ 475 thousands. Goodwill of approximate $ 3,339 thousands
represents the excess of the purchase price over the fair-value of the net
tangible and identifiable assets acquired. The financial statements of Omni
have
been consolidated for the first time in 2007. The consolidated statement of
operations for the year 2007 includes the results of the operations of Omni
for
the period from the acquisition date to December 31, 2007.
The
following table summarizes the fair value of the assets acquired and liabilities
assumed with reference to the acquisition of Omni as of the acquisition
date:
|
|
U.S. dollars
in thousands
|
|
Current
assets
|
|
$
|
1,976
|
|
Property
and equipment
|
|
|
239
|
|
Identifiable
Intangible assets
|
|
|
1,577
|
|
Goodwill
|
|
|
3,339
|
|
Current
liabilities
|
|
|
(1,159
|
)
|
|
|
$
|
5,972
|
|
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
2 - ACQUISITIONS (continued):
Hereafter
are certain unaudited pro forma combined statement of income data for the years
ended December 31, 2007 and 2006, as if the acquisition of Omni occurred on
January 1, 2007 and 2006, respectively, after giving effect to the purchase
accounting adjustments, including amortization of identifiable intangible
assets. The pro forma financial information is not necessarily indicative of
the
combined results that would have been attained had the acquisition taken place
at the beginning of 2007 and 2006, respectively, nor is it necessarily
indicative of future results.
|
|
Year
ended December 31
|
|
|
|
2007
|
|
2006
|
|
|
|
U.S.
dollars in thousands
(except
per share data)
|
|
|
|
(Unaudited)
|
|
Revenues
|
|
$
|
22,513
|
|
$
|
24,263
|
|
Net
income (loss)
|
|
|
(11,914
|
)
|
|
1,007
|
|
Net
income (loss) per share – basic and diluted
|
|
|
(0.55
|
)
|
|
0.05
|
|
On
August
8, 2005, the Company acquired 100% of the shares conferring ownership and
control in Sentori, Inc (“Sentori”) for an aggregate consideration of $4,426
thousands in cash. Sentori provides billing and customer care software solutions
mainly to mobile carriers and Mobile Virtual Network Operators ( “MVNO”).
Sentori was founded in 1994, and is based in the Washington, DC metro area.
The
main purpose of the acquisition was to facilitate the Company in penetrating
the
U.S. market.
The
acquisition was accounted for using the purchase method under FAS 141 (“Business
Combinations”). Based upon an appraisal, performed by management with the
assistance of independent appraisers, the purchase price was allocated to those
assets acquired and liabilities assumed based on the estimated fair value of
those assets and liabilities as of August 8, 2005 (“Acquisition date”).
Identifiable
intangible assets consist of acquired technology in the amount of $671,000,
customer relationship in the amount of $682,000 and backlog in the amount of
$518,000. Goodwill of $6,966 thousands represents the excess of the purchase
price over the fair-value of the net tangible and identifiable assets acquired.
The financial statements of Sentori have been consolidated for the first time
in
2005. The consolidated statement of operations for the year 2005 includes the
results of the operations of Sentori for the period from the acquisition date
to
December 31, 2005.
The
technology and customer relationship acquired in August 2005 are amortized
by
the straight-line method over an estimated period of useful lives (Technology-
3
years, Customer relationship- 5 years). The backlog was amortized according
to
the related revenue recognition
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
2 - ACQUISITIONS (continued):
The
following table summarizes the fair value of the assets acquired and liabilities
assumed with reference to the acquisition of Sentori:
|
|
U.S. dollars
in thousands
|
|
Current
assets
|
|
$
|
374
|
|
Property
and equipment
|
|
|
277
|
|
Identifiable
Intangible assets
|
|
|
1,871
|
|
Goodwill
|
|
|
6,966
|
|
Current
liabilities
|
|
|
(5,062
|
)
|
|
|
$
|
4,426
|
|
Hereafter
are certain unaudited pro forma combined statement of income data for the year
ended December 31, 2005, as if the acquisition of Sentori occurred on January
1,
2005, after giving effect to the purchase accounting adjustments, including
amortization of identifiable intangible assets. The pro forma financial
information is not necessarily indicative of the combined results that would
have been attained had the acquisition taken place at the beginning of 2005,
nor
is it necessarily indicative of future results.
|
|
Year ended
December 31, 2005
|
|
|
|
U.S. dollars in
thousands
(except per share
data)
|
|
|
|
(Unaudited)
|
|
Revenues
|
|
$
|
19,619
|
|
Net
income
|
|
$
|
3,201
|
|
Net
income per share - basic and diluted
|
|
$
|
0.15
|
|
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
3 - PROPERTY AND EQUIPMENT:
|
a. |
Composition
of assets, grouped by major classification, is as
follows:
|
|
|
December
31
|
|
|
|
2007
|
|
2006
|
|
|
|
U.S.
dollars in thousands
|
|
Computers
and electronic equipment
|
|
$
|
3,601
|
|
$
|
3,149
|
|
Land
|
|
|
263
|
|
|
251
|
|
Office
furniture and equipment
|
|
|
498
|
|
|
480
|
|
Vehicles
|
|
|
968
|
|
|
1,062
|
|
Leasehold
improvements
|
|
|
1
|
|
|
1
|
|
|
|
|
5,331
|
|
|
4,943
|
|
Less
- accumulated depreciation and amortization
|
|
|
3,715
|
|
|
3,385
|
|
|
|
$
|
1,616
|
|
$
|
1,558
|
|
|
b. |
Depreciation
and amortization expenses totaled $ 474,000, $ 619,000 and
$ 526,000 in the years ended December 31, 2007, 2006 and 2005,
respectively.
|
NOTE
4 – GOODWILL:
Composition
of goodwill and the changes during 2007, are as follows:
Cost
|
|
Balance at
beginning
of year
|
|
Purchase
during the
year
|
|
Other
changes
*
|
|
Balance
at end of
year
|
|
U. S. dollars In thousands
|
|
6,966
|
|
|
3,339
|
|
|
(81
|
)
|
|
10,224
|
|
The
goodwill acquired in August 2005 and October 2007 and was not impaired since,
see also note 2.
|
* |
Differences
from translating the financial statements of a consolidated company
denominated in foreign
currency.
|
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
5 - INTANGIBLE ASSETS:
Composed
as follows:
|
|
December 31, 2007
|
|
December 31, 2006
|
|
December 31
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Depreciated balance
|
|
|
|
U.S. dollars in thousands
|
|
Customer
relationship
|
|
$
|
1,146
|
|
$
|
351
|
|
$
|
682
|
|
$
|
190
|
|
$
|
795
|
|
$
|
492
|
|
Technology
|
|
|
2,746
|
|
|
1,590
|
|
|
1,671
|
|
|
1,313
|
|
|
1,156
|
|
|
358
|
|
Backlog
|
|
|
518
|
|
|
518
|
|
|
518
|
|
|
480
|
|
|
-,-
|
|
|
38
|
|
|
|
$
|
4,410
|
|
$
|
2,459
|
|
$
|
2,871
|
|
$
|
1,983
|
|
$
|
1,951
|
|
$
|
888
|
|
Amortization
expenses totaled $ 476,000, $ 772,000 and $ 461,000 in the years ended
December
31, 2007, 2006 and 2005, respectively.
Estimated
amortization expense for the following years, subsequent to December 31,
2007:
|
|
U.S.
dollars
in
thousands
|
|
Year
ended December 31:
|
|
|
|
|
2008
|
|
$
|
579
|
|
2009
|
|
|
444
|
|
2010
|
|
|
390
|
|
2011
|
|
|
307
|
|
2012
|
|
|
231
|
|
|
|
$
|
1,951
|
|
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
6 - EMPLOYEE RIGHTS UPON RETIREMENT:
|
a. |
Israeli
law generally requires payment of severance pay upon dismissal of
an
employee or upon termination of employment in certain other circumstances.
The severance pay liability of the Company to its Israeli employees,
based
upon the number of years of service and the latest monthly salary,
is
partly covered by regular deposits with severance pay funds and pension
funds, and by purchase of insurance policies; under labor agreements,
the
deposits with recognized pension funds and the insurance policies,
as
above, are in the employees' names and are, subject to certain
limitations, the property of the
employees.
|
The
severance pay liabilities covered by the pension funds are not reflected in
the
financial statements as the severance pay risks have been irrevocably
transferred to the pension funds.
The
amounts accrued and the portion funded with severance pay funds and by the
insurance policies are reflected in the financial statements as
follows:
|
|
December
31
|
|
|
|
2007
|
|
2006
|
|
|
|
U.S.
dollars in
thousands
|
|
Accrued
severance pay
|
|
$
|
1,504
|
|
$
|
1,482
|
|
Less
- amounts funded (presented in “other assets”)
|
|
|
(840
|
)
|
|
(820
|
)
|
Unfunded
balance
|
|
$
|
664
|
|
$
|
662
|
|
The
amounts of accrued severance pay as above cover the Company’s severance pay
liability in accordance with labor agreements in force and based on salary
components which, in management’s opinion, create entitlement to severance pay.
The Company records the obligation as if it was payable at each balance sheet
date on an undiscounted basis.
The
Company may only make withdrawals from the funds for the purpose of paying
severance pay.
|
b. |
The
severance pay expenses were $ 243,000, $ 344,000 and
$ 250,000 in the years ended December 31, 2007, 2006 and 2005,
respectively.
|
|
c. |
The
earnings on the amounts funded in the years ended December 31, 2007,
2006
and 2005 are not material.
|
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
6 - EMPLOYEE RIGHTS UPON RETIREMENT (continued):
|
d. |
The
Company expects to pay the following future benefits to its employees
upon
their normal retirement age:
|
|
|
U.S. dollars in
thousands
|
|
2008
|
|
|
-,-
|
|
2009
|
|
|
6
|
|
2010
|
|
|
-,-
|
|
2011
|
|
|
-,-
|
|
2012
|
|
|
-,-
|
|
2013-2017
|
|
|
13
|
|
The
above
amounts were determined based on the employees’ current salary rates and the
number of service years that will be accumulated upon their retirement date.
These amounts do not include amounts that might be paid to employees that will
cease working with the Company before their normal retirement age.
NOTE
7 - COMMITMENTS AND CONTINGENT LIABILITIES:
The
Company and its subsidiaries entered into premises lease agreements that will
expire between 2008 and 2010.
The
rental payments for the premises in the United States are payable in dollars,
the rental payments for the premises in the United Kingdom are payable in
British pounds, the rental payments for the premises in the Israel are payable
in NIS and the rental payments for the premises in Romania are payable in
Euros.
Future
minimum lease commitments of the Company and its subsidiaries under the above
leases, at exchange rates in effect on December 31, 2007, are as follows:
|
|
U.S. dollars in
thousands
|
|
Years
ending December 31:
|
|
|
|
|
2008
|
|
$
|
782
|
|
2009
|
|
|
557
|
|
2010
|
|
|
36
|
|
|
|
$
|
1,375
|
|
Rental
expense totaled $ 803,000, $ 708,000 and $ 464,000 in the years
ended December 31, 2007, 2006 and 2005, respectively.
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
7 - COMMITMENTS AND CONTINGENT LIABILITIES (continued):
|
b. |
Contingent
liabilities:
|
|
1)
|
On
November 4, 2007 a claim was filed by the Manufacturers Association
of
Israel against the Company in respect of amounts allegedly due to
the
association for membership fees. A provision has been made for possible
losses on the claim that, in the opinion of the Company’s and its
managements, is reasonable, based on their experience and their legal
counsel’s opinion.
|
|
2) |
The
Company may receive in the future notifications from customers with
respect to possible indemnification or other action by the Company
in
connection with intellectual property claims resulting from use of
the
Company's products. The Company typically undertakes, subject to
various
contractual conditions and other limitations, to defend intellectual
property claims against customers arising from the purchase and use
of its
products. The Company's obligations under these agreements generally
provide that the Company may, at its option, either obtain the right
to
continue using the products or modify them and, in some cases, take
back
the products with a refund to the customer. To date, no demands have
been
made by customers seeking indemnification against the Company with
respect
to intellectual property claims.
|
|
3) |
As
to earn-outs regarding the acquisition of Omni, see note
2(a).
|
NOTE
8 - SHAREHOLDERS’ EQUITY:
The
Company’s ordinary shares are traded in the United States on the Nasdaq National
Market, under the symbol MNDO and on the Tel-Aviv Stock Exchange.
During
2007, the Company paid dividend to its shareholders approximately $4.3 million.
Since the Company at that time had insufficient statutory retained earnings,
the
distribution was done partially from available statutory retained earnings
and
the residual amount by way of reduction of share premium, representing return
of
amounts paid in by shareholders, after due approval by an Israeli court order,
in accordance to the Israeli Companies Law.
In
the
event cash dividends are declared by the Company, such dividends will be paid
in
Israeli currency. Under current Israeli regulations, any cash dividend paid
in
Israeli currency in respect of ordinary shares purchased by non-residents of
Israel with non-Israeli currency may be freely repatriated in such non-Israeli
currency, at the rate of exchange prevailing at the time of conversion. See
also
note 9a.
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
8 - SHAREHOLDERS’ EQUITY (continued):
The
Company paid dividend to its shareholders in the amounts of $4.3 million, $3.0
million and $5.1 million during 2007, 2006 and 2005, respectively.
Dividends
paid per share in the years ended December 31, 2007, 2006 and 2005 were $0.20,
$0.14 and $ 0.24, respectively.
|
1) |
In
December 1998, the Board of Directors approved an employee stock
option
plan, which was amended in 2000 and in 2003 (the “1998 Plan”). During
2004, the Board of Directors approved an employee stock option plan
(the
“2000 Plan”). Under the 1998 Plan (as amended in 2000 and in 2003) and the
2000 plan, options for up to 4,306,000 ordinary shares of NIS 0.01
par value are to be granted to employees of the Company and its
subsidiaries.
|
Each
option can be exercised to purchase one ordinary share of NIS 0.01 par value
of
the Company. Immediately upon issuance, the ordinary shares issuable upon the
exercise of the options will confer on holders the same rights as the other
ordinary shares.
The
Board
of Directors determines the exercise price and the vesting period of the options
granted. The options vest over three to five years. Options not exercised will
expire approximately 5-7 years after they are granted.
The
compensation costs charged against income for all of the Company's equity
remuneration plans during 2007 and 2006 were approximately $269,000 and
$325,000, respectively without any reduction in income taxes.
As
a
result of a change made to Section 102 of the Israeli Income Tax Ordinance
as part of the Israeli tax reform of 2003, and pursuant to an election made
by
the Company thereunder, employees will be subject to a lower tax rate on capital
gains accruing to them in respect of Section 102 awards made after
December 31, 2002. However, the Company will not 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 it had previously
been
entitled to do under Section 102.
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
8 - SHAREHOLDERS’ EQUITY (continued):
The
following is a summary of the status of the 1998 Plan and 2000 plan as of
December 31, 2007, 2006 and 2005, and changes during the years ended on
those dates:
|
|
Years ended December 31
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Number
|
|
Weighted
average
Exercise
price
|
|
Number
|
|
Weighted
average
exercise
price
|
|
Number
|
|
Weighted
average
exercise
price
|
|
Options
outstanding at beginning of year
|
|
|
1,230,101
|
|
$ |
3.41
|
|
|
1,951,290
|
|
$ |
4.06
|
|
|
1,749,680
|
|
$ |
4.26
|
|
Changes
during year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted(a)(b)
|
|
|
96,000
|
|
$ |
2.77
|
|
|
380,400
|
|
|
3.09
|
|
|
736,000
|
|
|
3.08
|
|
Exercised
|
|
|
(46,991
|
)
|
$ |
2.01
|
|
|
(84,039
|
)
|
|
1.77
|
|
|
(181,500
|
)
|
|
1.77
|
|
Forfeited
|
|
|
(228,500
|
)
|
$ |
3.26
|
|
|
(546,440
|
)
|
|
3.36
|
|
|
(236,840
|
)
|
|
3.57
|
|
Expired
|
|
|
(91,600
|
)
|
$ |
3.95
|
|
|
(471,110
|
)
|
|
6.19
|
|
|
(116,050
|
)
|
|
5.55
|
|
Options
outstanding at end of year
|
|
|
959,010
|
|
$ |
3.39
|
|
|
1,230,101
|
|
$ |
3.41
|
|
|
1,951,290
|
|
$ |
4.06
|
|
Options
exercisable at end of year
|
|
|
540,910
|
|
$ |
3.52
|
|
|
441,101
|
|
$ |
3.46
|
|
|
764,480
|
|
$ |
4.87
|
|
Weighted
average grant date fair value of options granted during the year
(c)
|
|
|
|
|
$ |
0.94
|
|
|
|
|
$ |
1.19
|
|
|
|
|
$ |
0.84
|
|
(a) Including
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
granted
to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company’s
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chairperson
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the
Board of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Executive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,000
|
|
$ |
3.82
|
|
Other
directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,000
|
|
$ |
3.82
|
|
|
(b) |
In
2007, the options were granted with an exercise price equal to the
market
price of the Company’s stock at date of three trade days from the grant.
During the years 2006 and 2005, all options were granted with an
exercise
price equal to the market price of the Company's stock at date of
grant.
|
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
8 - SHAREHOLDERS’ EQUITY (continued):
|
(c) |
The
fair value of each stock option granted is computed on the date of
grant
according to the Black-Scholes option-pricing model with the following
assumptions:
|
|
|
Years ended December 31
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Dividend
yield
|
|
|
4
|
%
|
|
5
|
%
|
|
28
|
%
|
Expected
volatility*
|
|
|
47
|
%
|
|
59
|
%
|
|
34
|
%
|
Average
risk-free interest rate
|
|
|
4.6
|
%
|
|
4.7
|
%
|
|
4.0
|
%
|
Expected
average term - in years
|
|
|
3.75
|
|
|
4.75
|
|
|
3.52
|
|
|
* |
Volatility
is based on historical volatility of the Company's share price for
periods
matching the expected term of the option until
exercise.
|
As
of
December 31, 2007 there were approximately $333 thousands of total unrecognized
compensation costs related to nonvested share-based compensation awards granted
under the stock option plan. The costs are expected to be recognized over a
weighted average period of 1.13 years.
The
total
intrinsic value of options exercised during the years ended December 31, 2007,
2006 and 2005 were approximately $40,000, $107,000 and $539,000, respectively.
As of December 31, 2007, the aggregate intrinsic value of the outstanding
options and exercisable options is $4 thousands and $4 thousands,
respectively.
|
2) |
The
following table summarizes information about options outstanding
and
exercisable at December 31, 2007:
|
|
Options outstanding
|
|
Options exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Number
|
|
average
|
|
Weighted
|
|
Number
|
|
average
|
|
Weighted
|
|
|
Range of
|
|
outstanding at
|
|
remaining
|
|
average
|
|
exercisable at
|
|
remaining
|
|
Average
|
|
|
exercise
|
|
December 31,
|
|
contractual
|
|
exercise
|
|
December 31,
|
|
contractual
|
|
Exercise
|
|
|
prices
|
|
2007
|
|
life
|
|
price
|
|
2007
|
|
life
|
|
Price
|
|
|
|
|
|
|
Years
|
|
|
|
|
|
Years
|
|
|
|
$
|
|
1.23 –
2.32
|
|
|
76,710
|
|
|
1.02
|
|
$ |
2.27
|
|
|
76,710
|
|
|
1.02
|
|
$ |
2.27
|
|
$
|
|
2.61
– 2.77
|
|
|
106,000
|
|
|
4.68
|
|
$ |
2.73
|
|
|
7,000
|
|
|
5.59
|
|
$ |
2.61
|
|
$
|
|
2.82
– 2.87
|
|
|
182,000
|
|
|
4.78
|
|
$ |
2.83
|
|
|
95,000
|
|
|
4.79
|
|
$
|
2.83
|
|
$
|
|
3.24
|
|
|
184,800
|
|
|
5.15
|
|
$ |
3.24
|
|
|
34,200
|
|
|
5.15
|
|
$ |
3.24
|
|
$
|
|
3.82
– 3.84
|
|
|
225,500
|
|
|
3.33
|
|
$ |
3.83
|
|
|
195,500
|
|
|
3.21
|
|
$
|
3.83
|
|
$
|
|
4.24
– 4.48
|
|
|
170,000
|
|
|
3.68
|
|
$ |
4.36
|
|
|
122,500
|
|
|
3.68
|
|
$ |
4.35
|
|
$
|
|
5.00
– 5.08
|
|
|
14,000
|
|
|
3.73
|
|
$ |
5.07
|
|
|
10,000
|
|
|
3.55
|
|
$ |
5.06
|
|
|
|
|
|
|
959,010
|
|
|
3.99
|
|
$ |
3.39
|
|
|
540,910
|
|
|
3.44
|
|
$ |
3.52
|
|
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
9 - TAXES ON INCOME:
|
a. |
Tax
benefits under the Law for the Encouragement of Capital Investments,
1959
|
|
|
Substantially
all of the Company’s production facilities have been granted “approved
enterprise” status under the above law (including Amendment No. 60 to the
law that was published in April 2005). Income derived from the approved
enterprise is tax exempt for a period of ten years commencing in
the first
year in which the Company earns taxable income from the approved
enterprise (provided the maximum period to which it is restricted
by law
has not elapsed), since the Company has elected the “alternative benefits”
scheme (involving waiver of investment
grants).
|
The
Company has three approved enterprises. The period of tax benefits of the first
approved enterprise, which commenced operations in 1995, expired in the end
of
2004. The period of tax benefits in respect of the second approved enterprise
entitled to the said benefits commenced in
2000
and
will be expired in the end of 2009. The period of tax benefits in respect of
the
third approval enterprise has not yet commenced. Commencing 2005, the Income
derived from the first approved enterprise, according to the computation of
the
increase in the turnover, is subject to regular tax rates, see d.
below.
According
to the above law, in the event of distribution of cash dividends from income
that was tax exempt as above, the Company would have to pay the 25% tax in
respect of the amount distributed.
Due
to
the accumulated tax losses of the Company and as a result that the Company
does
not have approved enterprise taxable income, no additional tax liability will
be
incurred by the Company as a result of dividend distribution from the balance
of
undistributed income.
The
entitlement to the above benefits is conditional upon the Company’s fulfilling
the conditions stipulated by the above law, regulations published thereunder
and
the certificate of approval for the specific investments in approved
enterprises. In the event of failure to comply with these conditions, the
benefits may be cancelled and the Company may be required to refund the amount
of the benefits, in whole or in part, with the addition of linkage differences
to the Israeli CPI and interest.
|
b. |
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, in accordance with the changes in the Israeli CPI. The Company is taxed
under this law. As explained in note 1a(4), the financial statements are
measured in dollars. The difference between the changes in the Israeli CPI
and
in the exchange rate of the dollar relative to Israeli currency - both on annual
and cumulative bases - causes a difference between taxable income and income
reflected in these financial statements.
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
9 - TAXES ON INCOME (continued):
Under
the
Income Tax (Inflationary Adjustments) Law, 1985 (hereafter - the inflationary
adjustments law) (Amendment No. 20, 2008, hereafter - the amendment), that
was
enacted in the Kneset on February 26, 2008, the provisions of the Inflationary
Adjustments Law will no longer apply to the Company in 2008 and thereafter.
The
amendment specifies transitional provisions regarding the discontinuance of
the
provisions of the Inflationary Adjustments Law that have applied to the company
through the end of 2007.
Paragraph
9(f) of FAS 109, “Accounting for Income Taxes”, prohibits the recognition of
deferred tax liabilities or assets that arise from differences between the
financial reporting and tax basis of assets and liabilities that are remeasured
from the local currency into dollars using historical exchange rates, and that
result from changes in exchange rates or indexing for tax purposes.
Consequently, the above-mentioned differences were not reflected in the
computation of deferred tax assets and liabilities.
|
c. |
Tax
benefits under the Law for the Encouragement of Industry (Taxes),
1969
|
The
Company is an “industrial company”, as defined by this law. As such, the Company
is entitled to claim depreciation at increased rates for equipment used in
industrial activity, as stipulated by regulations published under the
inflationary adjustments law.
|
d. |
Other
applicable tax rates:
|
|
1) |
Income
from other sources in Israel
|
The
income of the Company (other than income from ”approved enterprises”, see c.
below) is taxed at the regular rate. In July 2004 and August 2005, amendments
to
the Income Tax Ordinance were enacted to effect a gradual reduction in the
corporate tax rate from 36% to 25% in the following manner: 2005 - 34%, 2006
-
31%, 2007 - 29%, 2008 - 27%, 2009 - 26% and for 2010 and thereafter -
25%.
|
2) |
Income
of non-Israeli subsidiaries
|
Non-Israeli
subsidiaries are taxed according to tax laws in their countries of
residence.
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
9 - TAXES ON INCOME (continued):
|
e. |
Deferred
income taxes:
|
|
|
December
31
|
|
|
|
2007
|
|
2006
|
|
|
|
U.S.
dollars
in
thousands
|
|
1) Provided
in respect of the following: |
|
|
|
|
|
Short-term
(presented in the balance sheets among current
assets):
|
|
|
|
|
|
Research
and development expenses
|
|
$ |
111
|
|
$ |
126
|
|
Allowance
for doubtful accounts
|
|
|
15
|
|
|
21
|
|
Other
|
|
|
5
|
|
|
7
|
|
|
|
|
131
|
|
|
154
|
|
Long-term
(presented in the balance sheets among non-current
assets):
|
|
|
|
|
|
|
|
Carryforward
tax losses
|
|
|
5,186
|
|
|
4,192
|
|
Impairment
of auction rate securities
|
|
|
3,797
|
|
|
|
|
Intangible
assets
|
|
|
(464
|
)
|
|
(311
|
)
|
Research
and development expenses
|
|
|
51
|
|
|
59
|
|
Other
|
|
|
14
|
|
|
22
|
|
Less-
valuation allowance
|
|
|
*(8,492
|
)
|
|
(3,815
|
)
|
|
|
|
92
|
|
|
147
|
|
|
|
$ |
223 |
|
$ |
301
|
|
|
* |
Including
a valuation allowance that relates to Omni as of the acquisition
date
amounting to $592 thousands, that if and when realized in the future
periods, will reduce the carrying value of the goodwill, see also
note
2a.
|
|
2) |
At
December 31, 2007, the Company had accumulated tax losses amounting
to
approximately $1.8 million (December 31, 2006 - approximately $2.4
million). These losses are denominated in NIS, linked to the Israeli
CPI
and are available indefinitely to offset future taxable business
income.
|
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
9 - TAXES ON INCOME
(continued):
|
f. |
Taxes
on income included in the statements of
operations:
|
1) As
follows:
|
|
Years ended December 31
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
U.S. dollars in thousands
|
|
Current:
|
|
|
|
|
|
|
|
In
Israel
|
|
$ |
36
|
|
$ |
97
|
|
$ |
14
|
|
Outside
Israel
|
|
|
54
|
|
|
39
|
|
|
29
|
|
|
|
|
90
|
|
|
136
|
|
|
43
|
|
Deferred,
see e. above
|
|
|
78
|
|
|
(293
|
)
|
|
|
|
For
previous years
|
|
|
(60
|
)
|
|
*1,530
|
|
|
|
|
|
|
$ |
108
|
|
$ |
1,373
|
|
$ |
43
|
|
*
This
amount relates to settlement of disputes with the Israeli Tax Authorities on
issues related to the approved enterprise regime for tax years 2003 to
2005.
|
2) |
Following
is a reconciliation of the theoretical tax expense, assuming all
income is
taxed at the regular tax rates applicable to companies in Israel
(see d.
above), and the actual tax expense:
|
|
|
Years
ended December 31
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
U.S.
dollars in thousands
|
|
Income
(loss) before taxes on income, as reported in the statements of
operations*
|
|
$ |
(11,847
|
)
|
$ |
2,282
|
|
$ |
4,105
|
|
Theoretical
tax expense (benefit)
|
|
|
(3,436
|
)
|
|
707
|
|
|
1,396
|
|
Less
- tax benefits arising from approved enterprise status, see a.
above
|
|
|
3,157
|
|
|
(630
|
)
|
|
(1,347
|
)
|
|
|
|
(279
|
)
|
|
77
|
|
|
49
|
|
Increase
(decrease) in taxes resulting from permanent differences:
|
|
|
|
|
|
|
|
|
|
|
Non-Israeli
tax withholding which can not be offset against Israeli
income tax
|
|
|
37
|
|
|
97
|
|
|
43
|
|
Disallowable
deductions
|
|
|
14
|
|
|
13
|
|
|
2
|
|
Differences
between the basis of measurement of income reported for tax purposes,
and
the basis of measurement of income for financial reporting purposes
|
|
|
(40
|
)
|
|
(39
|
)
|
|
(24
|
)
|
Taxes
in respect of previous years
|
|
|
(60
|
)
|
|
1,530
|
|
|
|
|
Changes
in valuation allowance
|
|
|
4,085
|
|
|
(77
|
)
|
|
222
|
|
Changes
in taxes resulting from computation of deferred taxes at a rate
which is
different from the theoretical rate and other
|
|
|
(3,649
|
)
|
|
(228
|
)
|
|
(249
|
)
|
Taxes
on income for the reported year
|
|
$ |
108
|
|
$ |
1,373
|
|
$ |
43
|
|
* As
follows:
|
|
|
|
|
|
|
|
|
|
|
Taxable
in Israel
|
|
$ |
(11,238
|
)
|
$
|
1,895
|
|
$ |
3,503
|
|
Taxable
outside Israel
|
|
|
(609
|
)
|
|
387
|
|
|
602
|
|
|
|
$ |
(11,847
|
) |
$ |
2,282
|
|
$ |
4,105
|
|
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
9 - TAXES ON INCOME
(continued):
The
Company has received final assessments from the tax authorities, through the
year ended December 31, 2005. The subsidiaries, except Omni, have not been
assessed since incorporation. Omni has received final tax assessments through
tax year 2006.
NOTE
10 - LINKAGE OF MONETARY BALANCES IN NON-DOLLAR
CURRENCIES:
|
|
December 31, 2007
|
|
|
|
|
|
Non-dollar
|
|
|
|
Israeli currency
|
|
currencies**
|
|
|
|
Linked*
|
|
Unlinked
|
|
|
|
|
|
U.S. dollars in thousands
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$ |
249
|
|
$ |
1,013
|
|
Accounts
receivable:
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
|
|
|
|
434
|
|
|
2,528
|
|
Other
|
|
$ |
37
|
|
|
23
|
|
|
47
|
|
|
|
$ |
37
|
|
$ |
706
|
|
$ |
3,588
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accruals:
|
|
|
|
|
|
|
|
|
|
|
Trade
|
|
|
|
|
$ |
399
|
|
$ |
178
|
|
Other
|
|
|
|
|
|
479
|
|
|
1,093
|
|
|
|
|
|
|
$ |
878 |
|
$ |
1,271
|
|
*
To the
Israeli CPI.
**
Mainly
Euro.
NOTE
11 - SUPPLEMENTARY BALANCE SHEET INFORMATION:
|
a. |
Cash
and cash equivalents
|
The
balance as of December 31, 2007 and 2006 includes $ 10.3 million and $ 2.9
million, respectively, of highly liquid bank deposits. The deposits are
denominated in dollars and, as of December 31, 2007, bear weighted average
annual interest of 4.95%.
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
11 - SUPPLEMENTARY BALANCE SHEET INFORMATION (continued):
|
|
December 31
|
|
|
|
2007
|
|
2006
|
|
|
|
U.S. dollars in
thousands
|
|
1) Trade:
|
|
|
|
|
|
Open
accounts
|
|
$ |
5,718
|
|
$ |
6,165
|
|
Less
- allowance for doubtful accounts *
|
|
|
(751
|
)
|
|
(780
|
)
|
|
|
$ |
4,967
|
|
$ |
5,385
|
|
|
|
Year ended December 31
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
U.S. dollars in thousands
|
|
*
The changes in allowance for doubtful accounts are composed as
follows:
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$ |
780
|
|
$ |
603
|
|
$ |
881
|
|
Increase
(decrease) during the year
|
|
|
56
|
|
|
177
|
|
|
(315
|
)
|
Acquisition
of a subsidiary
|
|
|
10
|
|
|
|
|
|
126
|
|
Bad
debt written off
|
|
|
(95
|
)
|
|
|
|
|
(89
|
)
|
Balance
at end of year
|
|
$ |
751
|
|
$ |
780
|
|
$ |
603
|
|
|
|
December 31
|
|
|
|
2007
|
|
2006
|
|
|
|
U.S. dollars in
thousands
|
|
2) Other:
|
|
|
|
|
|
Government
of Israel
|
|
|
37
|
|
|
|
|
Employees
|
|
|
36
|
|
|
17
|
|
Interest
accrued on long-term investment
|
|
|
19
|
|
|
37
|
|
Sundry
|
|
|
43
|
|
|
70
|
|
|
|
$ |
135
|
|
$ |
124
|
|
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
11 - SUPPLEMENTARY BALANCE SHEET INFORMATION (continued):
|
c. |
Long-term
investment and marketable
debentures:
|
1) Held-to-maturity
marketable debentures:
In
December 2006 the Company purchased marketable debentures (“the debentures”) in
the amount of $10 million with a stated term of 54 months. The debentures mature
in one settlement in 2011. The debentures bear interest at an annual rate of
5.4% and were presented in the balance sheet among the investment and other
non
current assets. The fair value of the debentures as of December 31, 2006 was
$9.95 million. The unamortized loss of the debentures as of December 31, 2006
was approximately $87,000.
In
December 2007 due to the sub-prime crisis in the United States, the Company
withdrew the debentures prior to their maturity for a total consideration of
$9.996 million.
2) Available-for-sale
securities - investment in auction rate securities
The
Company accounts for its available-for-sale securities in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities.” At December 31, 2007, all of the Company’s long-term
securities are reported at fair value. Due to the lack of availability of
observable market quotes on the Company’s investment of auction rate securities,
the fair value was estimated by an independent appraiser. The valuation model
considered the structure of the security, the quality of the collateral and
the
default risks, and the liquidity determinants affecting the
security
Historically,
given the liquidity created by auctions, the Company’s auction rate securities
were presented as current assets under short-term investments in the Company’s
balance sheet. Given the auction rate securities held by the Company at
December 31, 2007 have experienced multiple failed auctions as the amount
of securities submitted for sale has exceeded the amount of purchase orders,
the
Company’s auction rate securities are illiquid until there is a successful
auction. Accordingly, the entire amount of such remaining auction rate
securities has been reclassified from current to non-current assets and is
presented among the long-term assets in the Company’s balance sheet as of
December 31, 2007.
The
Company holds an investment of $20.3 million par value in auction rate
security called "Mantoloking CDO 2006-1A, Class A-2" (hereafter - the
"Security") which is secured by collateralized debt. Consistent with the
Company’s investment policy guidelines, the auction rate securities investment
held by the Company had AAA credit ratings at the time of purchase. With the
liquidity issues experienced in the global credit and capital markets and as
described above, the Security held by the Company at December 31, 2007 have
experienced multiple failed auctions.
As
of
June 26, 2008, the Security is rated Ba1 by Moody's and on Credit-Watch with
negative implications. The security is rated BBB by Standard &
Poor's.
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
11 - SUPPLEMENTARY BALANCE SHEET INFORMATION (continued):
The
estimated fair value of the Company’s Security at December 31, 2007, based
on the valuation model was approximately $5.1 million, which reflects a
$15.2 million impairment to the principal value of $20.3 million.
Although the Security continue to pay interest according to its stated terms,
based on an internal analysis by management, the Company determined the $15.2
million impairment to be other-than-temporary and thus charged to earnings
under
finance expenses.
Due
to
the continuing changes and the uncertainty in the credit markets, it is possible
that the valuation of investment in auction rate securities will further
fluctuate in the near term.
|
d. |
Other
non current assets composed as
follows:
|
|
|
December 31
|
|
|
|
2007
|
|
2006
|
|
|
|
U.S. dollars in
thousands
|
|
Amounts
funded with severance pay funds and by insurance policies in respect
of
liability for employee rights upon retirement, see also note
6
|
|
$ |
840
|
|
$ |
820
|
|
Deferred
income taxes, see note 9e
|
|
|
92
|
|
|
147
|
|
Other
assets
|
|
|
36
|
|
|
36
|
|
|
|
$ |
968
|
|
$ |
1,003
|
|
|
e. |
Accounts
payable and accruals -
other:
|
|
|
December
31
|
|
|
|
2007
|
|
2006
|
|
|
|
U.S.
dollars in thousands
|
|
Payroll
and related expenses
|
|
$ |
1,144
|
|
$ |
1,132
|
|
Government
of Israel
|
|
|
39
|
|
|
900
|
|
Accrued
vacation pay
|
|
|
388
|
|
|
142
|
|
Accrued
expenses and sundry
|
|
|
835
|
|
|
335
|
|
|
|
$ |
2,406
|
|
$ |
2,509
|
|
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
11 - SUPPLEMENTARY BALANCE SHEET INFORMATION (continued):
The
changes in deferred revenue which are related to maintenance commitments in
the
years ended December 31, 2007 and 2006 are as follows:
|
|
December 31
|
|
|
|
2007
|
|
2006
|
|
|
|
U.S. dollars in thousands
|
|
Balance
at beginning of the year
|
|
$ |
1,236
|
|
$ |
1,644
|
|
Deferred
revenue relating to new sales
|
|
|
12,460
|
|
|
13,218
|
|
Revenue
recognized during the year
|
|
|
(12,643
|
)
|
|
(13,626
|
)
|
Balance
at end of the year
|
|
$ |
1,053
|
|
$ |
1,236
|
|
|
g. |
Fair
value of financial
instruments
|
The
fair
value of the financial instruments included in the working capital of the
Company and its subsidiaries is usually identical or close to their carrying
value.
As
to the
fair value of the investment in auction rate securities, see note
11(c)2.
The
fair
value of the marketable debentures as of December 31, 2006, based on quoted
market values, amounted to $9,950 thousands.
NOTE
12 - SELECTED STATEMENT OF OPERATIONS DATA:
a. Revenues:
|
1) |
The
Company's revenues derive from sale of software products in one operating
segment. The Company has two product lines: (i) product line “A” - billing
and customer care solutions for service providers; and (ii) product
line
“B” - call accounting and call management solutions for enterprises.
Revenues from Sentori and Omni product lines are included in product
line
“A”.
|
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
11 - SUPPLEMENTARY BALANCE SHEET INFORMATION (continued):
Following
are data regarding revenues classified by product lines:
|
|
Years ended December 31
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
U.S. dollars in thousands
|
|
Product
line “A”
|
|
*$ |
15,386
|
|
*$ |
17,180
|
|
*$ |
12,693
|
|
Product
line “B”
|
|
|
3,061
|
|
|
2,880
|
|
|
2,908
|
|
|
|
$ |
18,447
|
|
$ |
20,060
|
|
$ |
15,601
|
|
*
Including $ 4,492, $ 6,798 and $ 2,645 thousands for 2007, 2006 and 2005,
respectively, recognized under the percentage-of-completion method, see also
note 1(k).
|
2) |
Following
are data regarding geographical revenues classified by geographical
location of the customers:
|
|
|
Years ended December 31
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
U.S. dollars in thousands
|
|
America
|
|
$ |
7,779
|
|
$ |
9,643
|
|
$ |
5,556
|
|
Asia
|
|
|
388
|
|
|
525
|
|
|
893
|
|
Africa
|
|
|
1,010
|
|
|
1,094
|
|
|
1,797
|
|
Australia
|
|
|
11
|
|
|
-
|
|
|
12
|
|
Europe
|
|
|
7,975
|
|
|
7,693
|
|
|
6,285
|
|
Israel
|
|
|
1,284
|
|
|
1,105
|
|
|
1,058
|
|
|
|
$ |
18,447
|
|
$ |
20,060
|
|
$ |
15,601
|
|
Most
of
the Company’s property and equipment are located in Israel and
Romania.
|
3) |
Revenues
from single customer in the year ended December 31, 2007, totaled
approximately $1.86 million (10% of total revenues).
|
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
12 - SELECTED STATEMENT OF OPERATIONS DATA (continued):
|
|
Years ended December 31
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
U.S. dollars in thousands
|
|
b.
Research and development expenses:
|
|
|
|
|
|
|
|
Payroll
and related expenses
|
|
$ |
4,419
|
|
$ |
4,249
|
|
$ |
3,597
|
|
Depreciation
and amortization
|
|
|
237
|
|
|
338
|
|
|
285
|
|
Other
|
|
|
1,058
|
|
|
1,531
|
|
|
1,204
|
|
|
|
$ |
5,714
|
|
$ |
6,118
|
|
$ |
5,086
|
|
c. Selling
and marketing expenses:
|
|
|
|
|
|
|
|
|
|
|
Payroll
and related expenses
|
|
$ |
2,881
|
|
$ |
2,613
|
|
$ |
1,208
|
|
Depreciation
and amortization
|
|
|
240
|
|
|
260
|
|
|
161
|
|
Travel
and conventions
|
|
|
293
|
|
|
436
|
|
|
297
|
|
Commissions
|
|
|
90
|
|
|
26
|
|
|
177
|
|
Other
|
|
|
342
|
|
|
293
|
|
|
305
|
|
|
|
$ |
3,846 |
|
$ |
3,628
|
|
$ |
2,148
|
|
d. General
and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
Payroll
and related expenses
|
|
$ |
1,112
|
|
$ |
1,049
|
|
$ |
687
|
|
Depreciation
and amortization
|
|
|
55
|
|
|
70
|
|
|
51
|
|
Professional
services
|
|
|
289
|
|
|
401
|
|
|
189
|
|
Allowance
for doubtful accounts and bad debts
|
|
|
34
|
|
|
208
|
|
|
309
|
|
Other
|
|
|
355
|
|
|
407
|
|
|
271
|
|
|
|
$ |
1,845
|
|
$ |
2,135
|
|
$ |
1,507
|
|
|
|
|
|
|
|
|
|
|
|
|
e. Other
financial income (expenses) - net:
|
|
|
|
|
|
|
|
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
Interest
on bank deposits and short-term marketable securities
|
|
$ |
46
|
|
$ |
909
|
|
$ |
1,435
|
|
Interest
on long-term securities
|
|
|
1,149
|
|
|
|
|
|
|
|
Interest
on marketable debentures
|
|
|
650
|
|
|
37
|
|
|
|
|
Non-dollar
currency gains - net
|
|
|
263
|
|
|
190
|
|
|
|
|
|
|
|
2,108
|
|
|
1,136
|
|
|
1,435
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Bank
commissions
|
|
|
(26
|
)
|
|
(28
|
)
|
|
(27
|
)
|
Loss
from early redemption of long-term bank deposits
|
|
|
|
|
|
(1,330
|
)
|
|
|
|
Non-dollar
currency losses - net
|
|
|
|
|
|
|
|
|
(148
|
)
|
|
|
|
(26
|
)
|
|
(1,358
|
)
|
|
(175
|
)
|
|
|
$ |
2,082
|
|
$ |
(222
|
)
|
$ |
1,260
|
|
MIND
C.T.I. LTD.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE
12 - SELECTED STATEMENT OF OPERATIONS DATA (continued):
|
f. |
Earnings
per ordinary share (“EPS”)
|
Following
are data relating to the weighted average number of shares for the purpose
of
computing EPS:
|
|
Years ended December 31
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(In thousands)
|
|
Weighted
average number of shares issued and outstanding - used in
computation of basic EPS
|
|
|
21,586
|
|
|
21,515
|
|
|
21,431
|
|
Add
- incremental shares from assumed exercise of
options
|
|
|
|
|
|
31
|
|
|
188
|
|
Weighted
average number of shares used in computation of diluted
EPS
|
|
|
21,586
|
|
|
21,546
|
|
|
21,619
|
|
In
the
years ended December 31, 2007, 2006 and 2005, options that their effect was
anti-dilutive, were not taken into account in computing the diluted earning
per
share.
The
number of options that could potentially dilute primary EPS in the future and
were not included in the computing of diluted EPS is 959,010 options for 2007,
1,016,000 options for 2006 and 1,188,300 for 2005.