OPERATING EXPENSES
RESEARCH AND DEVELOPMENT, NET
Research and development costs, net were $4.6 million in 2006 and 2007,
representing 63% and 79% of sales in 2006 and 2007, respectively. Research and
development costs, net consisted principally of salaries and benefits for
software and hardware engineers and sub-contractors, related facilities costs
and activities and expenses associated with computer, software and other
equipment used in software and hardware development and testing. Research and
development costs, net in 2007 and 2006 included stock-based compensation
amounts of $353,000 and $248,000, respectively, due to the implementation of
FASB 123(R) in 2006. None of our software or hardware development costs have
been capitalized during any of the reported periods, as the amount of software
and hardware development costs eligible for capitalization at such stage has
historically been insignificant.
Our research and development efforts in 2007 have been financed from internal
resources and through programs sponsored by the Chief Scientist. Pursuant to the
terms of the Chief Scientist royalty-bearing program, we were required to pay
royalties of between 3% and 4.5% of sales of products and related services
developed in any project partially funded by the Chief Scientist, up to an
amount of 100% of the grant obtained. For grants received under programs
approved subsequent to January 1, 1999, royalties are payable up to 100% of the
grant obtained plus interest at the annual rate of Libor applicable to U.S.
dollar deposits.
Our research and development expenses in 2007 and 2006 were net of participation
from the Chief Scientist. In each of 2006 and 2007, participation received or
accrued from the Chief Scientist was $0.8 million. In 2007, we paid or accrued
royalties to the Chief Scientist in an aggregate amount of approximately
$175,000 compared with $201,000 in 2006. Our contingent liability to the Chief
Scientist amounts to approximately $21 millions.
SELLING AND MARKETING
In 2007, selling and marketing expenses were $4.7 million, or 82% of sales,
compared with $4.1 million or 57% of sales in 2006. Selling and marketing
expenses included salaries and benefits, sales commissions, travel expenses and
related costs for our sales, marketing, and distribution personnel, reserves for
potential damages to, loss of, or obsoleteness of trial systems. Selling and
marketing expenses in 2006 and 2007 included stock-based compensation amounting
to $138,000 and $224,000, respectively, due to the implementation of FASB 123(R)
in 2006. Selling and marketing expenses also included the costs of programs
aimed at increasing revenue, such as advertising, trade shows and other market
development programs. The increase in selling and marketing expenses in absolute
numbers in 2007 compared to 2006 resulted primarily from selling and marketing
activities in Russia.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consisted principally of salaries and
benefits, outside legal, accounting and consultant fees, travel expenses and
related costs for management, directors' fees, directors and officers insurance,
finance, logistics, human resources, communication, legal, information systems
and administrative personnel. General and administrative expenses in 2006 and
2007 included stock-based compensation amounting to $554,000 and $552,000,
respectively, due to the implementation of FASB 123(R) in 2006. General and
administrative expenses also included expenses associated with computing
equipment and software used in the administration operations. General and
administrative expenses were $2.0 million, or 35% of sales, in 2007, compared
with $2.5 million, or 34% of sales, in 2006. The decrease in general and
administrative expenses in absolute numbers resulted primarily from the fact
that in 2006 the Company paid its former Chief Executive Officer certain
severance payments.
IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS
In 2007, we recorded approximately $5.4 million of expenses relating to
impairment of goodwill. Under Statement of Financial Accounting Standard No. 142
"Goodwill and other Intangible Assets" ("SFAS 142") goodwill is no longer
amortized but instead is tested for impairment at least annually (or more
frequently if impairment indicators arise).
The Company decided to perform an impairment test mainly due to the fact that in
addition to its losses, as of December 31, 2007, the Company's market
capitalization was lower than the Company's shareholders' equity as of such
date. That indication did not exist in 2006. We had no material other income
(expenses) in 2007 and 2006.
FINANCE INCOME, NET
Finance income, net in 2007 consisted principally of interest income received in
connection with our bank deposits, bank charges and currency differences between
the NIS and US dollar. In 2007, finance income, net was $230,000, or 4% of
sales, compared to $32,000, or less than 1% of sales, in 2006.
TAXES ON INCOME, TAX REFUNDS AND TAX BENEFITS
In 2007, VocalTec and Tdsoft had two and four, respectively, Approved Enterprise
programs under the Law for the Encouragement of Capital Investments, 1959. Such
programs are eligible for certain tax benefits for the first several years in
which they generate taxable income. Income derived from an Approved Enterprise
is subject to a zero tax rate for two years and up to an additional eight years
of a reduced corporate tax rate of 25% until the earlier of (i) seven to ten
consecutive years, commencing in the year in which the specific Approved
Enterprise first generates taxable income (which income is not offset by
deductions attributable to the other sources), (ii) twelve years from
commencement of production or (iii) fourteen years from the date of approval of
the Approved Enterprise status. Some of our production and development
facilities have been granted Approved Enterprise status. To date, neither of our
Approved Enterprise programs has generated any taxable income.
As of December 31, 2007, we had net operating loss carryforwards in Israel of
approximately $187 million ($140 million allocated to VocalTec and $47 million
allocated to Tdsoft). This net-operating loss may be carried forward and offset
against future taxable income under applicable tax laws. We also had an
aggregate net-operating loss carryforwards in the U.S. of approximately $9
million, which may not be carried forward and offset against future taxable
income due to change of control in the Company regarding the merger between
Vocaltec and Tdsoft in November 2005. Tax benefits, which apply to us under
Israeli law, do not apply to any income generated by any of our other
subsidiaries.
32
NET INCOME (LOSS)
Net loss in 2007 was $14.2 million, representing 246% of sales, compared with a
net loss of $7.0 million, representing 96% of sales, in 2006.
Our financial statements are reported in dollars and the vast majority of our
sales are made in U.S. dollars. Most of our expenses are in New Israeli Shekels
(NIS) and dollars. The cost of our operations in Israel, as expressed in
dollars, is influenced by the extent to which any increase/decrease in the rate
of inflation in Israel is not offset by the appreciation/depreciation of the NIS
in relation to the dollar. In 2007, the rate of inflation in Israel was 3.4% and
the rate of appreciation of the NIS in relation to the dollar was 8.9%.
5B. LIQUIDITY AND CAPITAL RESOURCES
During the past three years, we covered our cash flow requirements with cash
proceeds from the issuance of shares and warrants to investors, sales of
patents, operating revenues and grants from the Chief Scientist.
As of December 31, 2008, we had approximately $15.0 million in cash and cash
equivalents and bank deposits, comprised of $5.1 million in cash and cash
equivalents and $9.9 million in bank deposits. As of December 31, 2007, we had
approximately $4.5 million in cash and cash equivalents.
As of December 31, 2008, we had working capital of approximately $10.1 million,
compared with $0.7 million as of December 31, 2007. The net increase in working
capital during 2008 resulted primarily from the increase in cash and cash
equivalents and short term bank deposits during 2008, resulting primarily from
the sales of the patents.
Net cash used in operating activities was $4.6 million, $3.9 million and $7.4
million for the years ended December 31, 2008, 2007 and 2006, respectively. Net
cash provided by (used in) investing activities was $5.2 million, $2.5 million
and $(2.5) million for the years ended December 31, 2008, 2007 and 2006,
respectively.
The Company had no net cash generated by financing activities in 2008 and 2007.
We anticipate that operating expenses may exceed revenues, net of cost of sales
in 2009 and possibly beyond if we do not sufficiently increase sales and reduce
our costs. We believe that our current cash and cash equivalents balances,
together with future estimated cash flows from operations and grants from the
Chief Scientist, if received, are sufficient to meet our anticipated cash needs
for working capital and capital expenditures for at least the next 12 months.
Capital expenditures in 2008 were approximately $269,000, compared with $178,000
in 2007 and $335,000 in 2006.
We maintained annual car leases in the amount of approximately $464,000 in 2008,
and our total liability for early termination of the leases is in the amount of
up to approximately $57,000.
INVENTORY AND RECEIVABLES
Inventories as of December 31, 2008 were $38,000, compared to $261,000 as of
December 31, 2007.
Trade receivables are from sales of our products, primarily to
telecommunications systems integrators, resellers and service providers. Trade
receivables are presented at gross value less reserve for doubtful accounts of
$0 and $160,000 as of December 31, 2008 and 2007, respectively. Trade
receivables, net, as of December 31, 2008 were $0.2 million, compared to trade
receivable, net of $0.6 million as of December 31, 2007. The decrease in trade
receivable, net, resulted mainly from the manner in which the Company accounted
for such trade receivable, and from improved collection as well. For additional
information on our revenue recognition policies, see Note 2(k) to the financial
statements attached to this annual report.
Prepaid expenses and other receivables were $0.5 million as of December 31,
2008, compared with $1.5 million as of December 31, 2007. The decrease in 2008
was mainly due to a decrease in finished goods included in other receivables,
which finished goods were delivered to customers' sites but not recognized as
cost of sales, due to the fact that revenue recognition criteria for the related
sales were not met.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2007, the FASB issued SFAS 141(R), Business Combinations ("SFAS No.
141(R)"). This Statement replaces SFAS 141, Business Combinations ("SFAS No.
141"), and requires an acquirer to recognize the assets acquired, the
liabilities assumed, including those arising from contractual contingencies, any
contingent consideration, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited
exceptions specified in the statement. SFAS 141(R) also requires the acquirer in
a business combination achieved in stages (sometimes referred to as a step
acquisition) to recognize the identifiable assets and liabilities, as well as
the noncontrolling interest in the acquiree, at the full amounts of their fair
values (or other amounts determined in accordance with SFAS 141(R)). In
addition, SFAS 141(R)'s requirement to measure the noncontrolling interest in
the acquiree at fair value will result in recognizing the goodwill attributable
to the noncontrolling interest in addition to that attributable to the acquirer.
SFAS 141(R) amends SFAS No. 109, Accounting for Income Taxes ("SFAS No. 109"),
to require the acquirer to recognize changes in the amount of its deferred tax
benefits that are recognizable because of the consummation of a business
combination either in income from continuing operations in the period of the
combination or directly in contributed capital, depending on the circumstances.
It also amends SFAS 142, Goodwill and Other Intangible Assets ("SFAS No. 142"),
to, among other things, provide guidance on the impairment testing of acquired
research and development intangible assets and assets that the acquirer intends
not to use. SFAS 141(R) applies prospectively to business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The Company does not expect that
the adoption of SFAS 141R will have any impact on its consolidated financial
statements.
33
In December 2007, the FASB issued SFAS 160 ("SFAS No. 160"), Noncontrolling
Interests in Consolidated Financial Statements. SFAS 160 amends Accounting
Research Bulletin 51, Consolidated Financial Statements, to establish accounting
and reporting standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. It also clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial statements. SFAS
160 also changes the way the consolidated income statement is presented by
requiring consolidated net income to be reported at amounts that include the
amounts attributable to both the parent and the noncontrolling interest. It also
requires disclosure, on the face of the consolidated statement of income, of the
amounts of consolidated net income attributable to the parent and to the
noncontrolling interest. SFAS 160 requires that a parent recognize a gain or
loss in net income when a subsidiary is deconsolidated and requires expanded
disclosures in the consolidated financial statements that clearly identify and
distinguish between the interests of the parent owners and the interests of the
noncontrolling owners of a subsidiary. SFAS 160 is effective for fiscal periods,
and interim periods within those fiscal years, beginning on or after December
15, 2008. The Company does not expect the adoption of SFAS No. 160 will have
significant impact on its consolidated financial statement.
In February 2008, the FASB issued FASB Staff Position No. FAS 157-1,
"Application of FASB Statement No. 157 to FASB Statement No. 13 and Other
Accounting Pronouncements That Address Fair Value Measurements for Purposes of
Lease Classification or Measurement under Statement 13" and FASB Staff Position
No. FAS 157-2, "Effective Date of FASB Statement No. 157". Collectively, the
Staff Positions defer the effective date of Statement 157 to fiscal years
beginning after November 15, 2008 for nonfinancial assets and nonfinancial
liabilities except for items that are recognized or disclosed at fair value on a
recurring basis at least annually, and amend the scope of Statement 157. As
described in Note 4, the Company adopted Statement 157 and the related FASB
staff positions except for those items specifically deferred under FSP No. FAS
157-2.
In March 2008, the FASB issued Statement 161 "Disclosures about Derivative
Instruments and Hedging Activities" ("SFAS 161") an amendment to FASB No. 133.
This statement changes the disclosure requirements for derivative instruments
and hedging activities. Entities are required to provide enhanced disclosures
about (a) how and why and entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. This statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. Early application is encouraged. The Company does not expect the
adoption of SFAS 161 to have a material impact on its financial position,
results of operations or cash flows.
In June 2008, the FASB issued EITF No. 07-5 "Determining whether an Instrument
(or Embedded Feature) is indexed to an Entity's Own Stock" ("EITF 07-5"). EITF
07-5 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. Early
application is not permitted. Paragraph 11(a) of SFAS No. 133 specifies that a
contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the Company's own stock and (b) classified in stockholders'
equity in the statement of financial position would not be considered a
derivative financial instrument. EITF 07-5 provides a new two-step model to be
applied in determining whether a financial instrument or an embedded feature is
indexed to an issuer's own stock and thus able to qualify for the SFAS 133
paragraph 11(a) scope exception. The Company believes adopting this statement
will have no impact on the consolidated financial statements.
5C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
INTELLECTUAL PROPERTY
We believe that the improvement of existing products, our technologies and the
development of new products are important in establishing and maintaining a
competitive advantage. We believe that the value of our products is dependent,
to a certain extent, upon the maintenance of patent, the license rights to use
certain patents, trade secret or copyright protection of our proprietary
software and technologies. We rely on a combination of trade secrets, copyright,
trademark and patent law, together with non-disclosure and invention assignment
agreements, to establish and protect the technology used in our products.
We have filed numerous patent applications in the United States and other
countries with respect to certain technologies employed in our products. Some of
those applications have already registered and we have the rights to use these
registered patents, either under a non-exclusive license, or by owning these
patents. In addition, we have filed trademark applications in the United States
and other countries with respect to trademarks associated with us, and our
products. Some of those applications have already been registered and we own
those registered trademarks.
34
During 2008, the Company entered into a patent purchase agreement, pursuant to
which the Company agreed to sell 15 patents and certain patent-related rights,
out of the Company's portfolio of 22 patents, the Company was granted with a
geographically unlimited, non-exclusive license to use the sold patents and
other patent-related rights in connection with the development and marketing of
its products. Generally, we enter into non-disclosure and invention assignment
agreements with our employees, and into non-disclosure agreements with our
consultants, subcontractors and distributors and channel partners. However,
there can be no assurance that such measures will protect our proprietary
technology, that competitors will not develop products with features based upon,
or otherwise similar to, our products or that we will be able to enjoin
competitors from selling similar products.
Although we do not believe that our products infringe on any valid claim of a
patent owned by any third party, third parties have asserted infringement and
other claims against us from time to time. These claims have been directed at
certain basic and fundamental components of our products. Those of which were
not abandoned were resolved by successfully implementing a licensing agreement.
There can be no assurance that third parties will not assert such claims against
us in the future or that such claims will not be successful.
We could incur substantial costs and diversion of management resources with
respect to the defense of any claims relating to proprietary rights that could
have a material adverse effect on our business, financial condition or results
of operations. If any such claims or actions are asserted or prosecuted against
us, we may seek to obtain a license under a third party's intellectual property
rights. There can be no assurance, however, that under such circumstances a
license would be available on reasonable terms or at all. In the event a party
that is successful in asserting a claim against us does not grant a license,
such party could secure a judgment resulting in the award of damages, as well as
injunctive or other equitable relief which could effectively block us from
manufacturing, using, selling, or otherwise distributing its products.
VocalTec, Essentra, Internet Phone, TdSOFT, TdGATE and TdVIEW are trademarks or
registered trademarks of VocalTec and its fully-owned subsidiaries. All other
trademarks or registered trademarks used in this Annual Report are the property
of their respective owners.
RESEARCH AND DEVELOPMENT
We believe that our ability to enhance our current products, develop and
introduce new products on a timely basis, maintain technological competitiveness
and meet customer requirements is essential to our future success. Accordingly,
we devote and intend to continue to devote a significant portion of our
personnel and financial resources to research and development. We also intend to
continue seeking and maintaining close relationships with our customers in order
to remain responsive to their needs. We have an educated and experienced
research and development team that specializes in telecommunications and
networking, computer and networking software, communications protocols and VoIP
application software development. We seek to employ highly qualified technical
personnel in order to maintain and expand our technological expertise.
The Company may engage in the future in joint research and development projects
with third parties. The ownership of any intellectual or other proprietary
property developed in such projects shall be negotiated between the Company and
the relevant third party.
See "Item 5A - Operating and Financial Review and Prospects - Operating Results
- Research and development costs, net".
5D. TREND INFORMATION
We believe that our business is subject to the following trends:
TRENDS IN THE COMMUNICATIONS INDUSTRY
REGULATION AND COMPETITION: Service providers worldwide are facing an increasing
array of challenges given the ongoing regulatory changes and technological
advances in the communications industry. Global deregulation is promoting
competition to incumbent service providers from both new entrants and operators
in adjacent industries, such as wireless, satellite, Internet and cable
television service providers. At the same time, end user demands are rapidly
evolving. While in the past, communications traffic consisted primarily of
traditional voice communications and basic data traffic, such as email and
facsimiles, in recent years, with the wide acceptance of the Internet and
broadband infrastructure, end users are increasingly seeking fast, personalized,
content-rich, easy-to-use communications and are relying on these applications
in both their professional and personal lives. Accordingly, this trend is
increasing demand for high-speed access services, including IP-based voice,
video, data and wireless services.
The combination of competitive pressures and end user demands is placing
pressure on service providers to add new services to their existing offerings
quickly, with the flexibility to continue to add functionality and to scale as
needed. Many new and incumbent service providers presently offer a bundle of
voice, video and data services to end users, often referred to as "triple-play,
or "multi-play". For example, these services may include both traditional and
enhanced voice services, broadcast television and on-demand video, and
high-speed Internet access delivered over a converged broadband connection to
the home or office. Operators also are increasingly adding wireless to the
triple-play bundle, referred to as "quad-play", which has contributed to
consolidation in the service provider market. The bundling of services enables
service providers to generate new sources of revenue and enhance customer
relationships.
35
The initial capital costs and ongoing operating expense associated with the
deployment of new services are considerable. Many service providers have
significant investments in their existing network infrastructures, which may
consist of disparate media, such as copper, coax and fiber, as well as numerous
protocol families based on Internet Protocol, or IP, Asynchronous Transfer Mode,
or ATM, and Time Division Multiplexing, or TDM. Service providers generally seek
to maximize their return on investment by leveraging existing infrastructure to
offer new services. This has increased the demand both for upgrades to existing
equipment and for cost-effective new equipment that supports disparate media and
numerous protocol families.
INVESTMENT MADE IP INFRASTRUCTURES: As voice, video and data traffic travels
over communications network infrastructure, it typically passes through the core
and access networks before arriving at the customer premise, or destination. The
growing demand for Internet bandwidth over the last decade prompted service
providers to make significant capacity investments in the core network, which is
the part of the network that is responsible for transporting large volumes of
traffic between and within cities. Service providers have also made significant
investments in upgrading the core network to a mostly IP-based infrastructure to
more efficiently manage the increased data traffic. This is an ongoing
transformation that is expected to continue in the coming years.
The access network is located between the core network and the customer premise
and is integral to the aggregation and distribution of network services and to
the creation of new services. Service providers have begun looking at ways to
efficiently enable the deployment of new services with ever-increasing bandwidth
requirements, such as video or bundled services. To complement the investments
made in the core network and to combine voice, video and data over a common
network, service providers are increasingly seeking to upgrade access
infrastructures based on IP technologies. Increasingly, the use of IP as a
transport technology to combine voice, video and data over a common network is
emerging as the principal network architecture for service providers. The demand
for broadband connectivity to the Internet led incumbent local exchange carriers
to offer broadband over copper to the residential market. This was offered using
ADSL technology. The fast deployment of ADSL opened up an opportunity for
alternative carriers to offer voice over this broadband connection, bypassing
the need for any permission from the provider of the ADSL service. In addition,
new wireless technologies today provide an alternative low cost method of
offering broadband access services. The initial adoption of wireless broadband
technologies, such as WiMAX is a good example of this. WiMAX technology is said
to facilitate the deployment of a broadband access infrastructure by omitting
the need to drive cables underground; this is conducive to both a quicker and
more cost-effective deployment. Alternative and Greenfield carriers are looking
to WiMAX technology for the delivery of both a data and video/voice service.
The availability of broadband services is a very significant factor in the
ability to offer Essentra BAX as a service delivery platform for providing Class
5 Voice over Broadband (VoBB) services. Various market research firms estimate
that in 2010 approximately 15% of all wire-line telephone lines will implement
Voice over Broadband (VoBB) technology.
CONVERGENCE OF VOICE AND DATA: The maturing of VoIP technology and the
advantages of an IP network is leading to the convergence of data and voice
networks and the offering of a mix of data and voice services over a single
packet-based IP network. This trend is expected to change telephony network
deployment and operation by removing all territorial/localized networks and the
localization aspect of the telephone number and possibly even replacing
traditional telephone numbers with an alternative personal ID. Converged
networks will reduce the cost of deployment of telephony switching equipment.
Converged networks will also reduce the cost of operation as the same
packet-based network will serve voice and data. Softswitch technology is at the
heart of this evolution. The softswitch will not only replace the legacy TDM
switch, but it will no longer be an integral part of each and every
neighborhood. Fewer high capacity softswitches will serve larger populations.
The physical location of the softswitch will not be related to the subscribers
that it will serve. Massive efforts and large projects are planned by most
telephony service providers, which are expected to result in around 200 million
telephony lines connected to softswitches by 2010 (according to a 2007 report by
Infonetics Research). Essentra product family aims at this market, which is
expected to grow (according to the same report) by an annual average of 30-40%
in the coming years.
WIRELINE AND MOBILE CONVERGENCE AND IMS: A new network architecture known as IMS
(Internet Multimedia Subsystem) has been designed by the 3GPP (3rd Generation
Partnership Project) to deliver IP-based service to end-users. This will be the
network architecture for the mobile third generation migration to packetized
voice. The unique abilities of IMS to offer fast implementations of new services
and the comfortable handling of access networks led the industry to consider the
adoption of IMS also for the wireline business, especially for VoIP technology.
In a few years, we expect to start experiencing IMS offering Fixed-Mobile
Convergence (FMC), where the same handset will be used in both fixed and mobile
networks and offer identical services to the consumer. This will be the final
step in convergence of all multimedia fixed and mobile networks, offering a
single service platform to all terminals, whether a computer, a PDA, a wireline
phone or a mobile phone. Essentra architecture has followed the guidelines of
IMS/TISPAN, and more adjustments will be needed as implementation of IMS
continues.
INCREASING NEED FOR VOIP INTERCONNECTION: With the dramatic rise in Broadband
infrastructures throughout the world, service provider and end-user demand for
VoIP is growing rapidly. Established global telecommunications service providers
such as British Telecom, AT&T and KDDI have joined new entrants such as Skype
and Vonage, as well as cable operators such as Comcast and Cablevision in
offering IP telephony services. Currently, there are hundreds of VoIP providers
operating throughout the world. Some offer stand-alone telephony service, while
others bundle VoIP with Internet access and video service for a full triple play
suite. With this tremendous growth come a variety of challenges for carriers and
service providers as they either build out their networks or migrate from legacy
TDM technology to an IP-based infrastructure.
36
Traditional fixed-line service providers are not the only ones migrating to IP;
several leading mobile operators have announced plans to convert to an IP-based
infrastructure in the coming years. The growing implementation of IP
communications, coupled with the emerging fixed-mobile convergence over IP, is
driving the need for more sophisticated infrastructure solutions that can
facilitate smooth deployments and transitions.
Unlike traditional telephony service, there is no single global standard for
VoIP. As such, VoIP implementations are based on a variety of different
standards, making VoIP networks essentially a growing number of islands. In
order to ensure a successful VoIP roll out and generate steady revenues for
providers, these islands need to be connected to one another in a manner that is
secure, reliable and seamless. While traditional architecture was once an
effective way in which to connect multiple islands, it is becoming increasingly
necessary for carriers to rely on IP-based solutions for VoIP interconnection.
The ability for VoIP networks to interconnect directly one to the other is of
paramount importance in the further adoption of VoIP technology. VoIP
interconnect traffic is expected to grow significantly in coming years.
HOSTED SERVICES FOR ENTERPRISES: Carriers have usually not succeeded to offer
more than basic services to enterprises. The basic services included E1/T1
trunking with PRI, or Primary Rate Interface (an ISDN link between customer
premises, usually a PBX, and the Class 5 switch) and DID, or Direct Inward
Dialing (which allows one to call a person's office telephone extension from an
outside telephone service). Centrex services have been offered by carriers,
mainly in the US, since the early 1980's, but never became a significant
business. Softswitch technology combined with application servers offering a
rich PBX-type set of features and the trends of outsourcing such services, lead
to the re-evaluation of the potential of the new IP-based Centrex services. The
availability of web based self-care services encourages carriers to offer
IP-Centrex as a competing service to IP-PBX solutions. IP technology adds the
ability to combine IP-Centrex with VPN to effectively interconnect multiple
corporate offices from one central location. Considering this, Essentra offers
rich Centrex features combined with VPN capability and corporate level
provisioning tools. The expected size of the IP-Centrex market is currently
unclear, but the feature set is becoming a must in most softswitch deployments.
CONSOLIDATION: In recent years, we have witnessed a consolidation in our
industry. Large service providers are acquiring other service providers, and
large equipment vendors are acquiring smaller vendors, in order to leverage the
benefits of synergies and size and to provide their customers with a more
complete solution. We expect this trend to continue in the future.
OTHER TRENDS: In addition to the foregoing, we have identified the following
trends:
(i) VoIP networks have emerged in many business segments, in both the
carrier and the enterprise markets. Due to reasons such as security, protocol
variance and other reasons, these networks are still not linked to each other
using native IP. This has created an opportunity, which the Company is planning
to leverage using the Essentra EX Peering Manager and derivatives of that
product, to provide products that meet the need of VoIP interconnect. This
transition is due in part to the fact that being connected using IP is more
cost-effective than being connected through the PSTN; Essentra EX facilitates
routing between disparate networks and enables optimizing use of network
resources and costs;
(ii) Adoption of a standard IMS (IP Multimedia Subsystem) architecture by
carriers and vendors, including mobile and fixed carriers and networks,
resulting in a new definition of telecom infrastructure, focusing on IP
multimedia service implementation. The Company is continuously looking at the
evolution of IMS and is investigating the further alignment of its solutions
with the functional description described in the standard;
(iii) Convergence between fixed and mobile networks, both on the
infrastructure and the service and business aspects, with respect to which the
Company offers a solution providing some of the elements in an FMC-type (fixed
mobile conveyance) implementation. This trend is characterized by the
unification of infrastructures (including unification at the infrastructure and
service layers). The Company recently began looking at how it can address the
needs specific to mobile operators.
(iv) One of the major trends apparent in the IT industry today is the move
towards services in the cloud and to new service models, such as SaaS (Software
As A Service). Cloud computing is a style of computing in which dynamically
scalable and often virtualized resources are provided as a service over the
Internet. With the ever growing bandwidth available in the market, hosting
applications in the network becomes virtually like placing them next door,
within the company premises. The financial crisis gives another reason for
CAPEX/OPEX reduction and cloud computing supports that, by allowing for more
efficient use of elastic computing resources. The Company is actively looking at
these trends, both as a technology driver to gain scaling out and modular growth
of its solutions and for the possible adaptation of new business models.
5E. OFF-BALANCE SHEET ARRANGEMENTS There are no off-balance sheet arrangements
that have or are reasonably likely to have a current or future material effect
on the company's financial condition, changes in financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital
resources.
37
5F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
CONTRACTUAL OBLIGATIONS PAYMENT DUE BY PERIOD (IN THOUSANDS OF DOLLARS)
-------------------------------------------------------- ------------------------------------------------------
LESS THAN MORE THAN 5
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
----- ----- ----- ----- -----
CONTRACTUAL OBLIGATIONS
Uncertain tax positions (1) 1,329 - - -
Operating Lease Obligations 585 468 117 - -
Other Long Term Liabilities Reflected on the Registrant's
Balance Sheet under U.S. GAAP (2) 1,626 756 - - 870
(1) Uncertain income tax position under FASB Interpretation No.48, "Accounting
for Uncertainty in Income Taxes," ("FIN 48") are due upon settlement and we
are unable to reasonably estimate the ultimate amount or timing of
settlement. See Note 16(i) in our Consolidated Financial Statements for
further information regarding the Company's liability under FIN 48.
(2) As of December 31, 2008 we had 1,107 in severance pay funds to cover such
liabilities.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A. DIRECTORS AND SENIOR MANAGEMENT
The following sets forth certain information regarding our directors and
executive officers:
NAME POSITION
------- -------------------------------------
Ido Gur President and Chief Executive Officer
Ilan Rosen (1) Chairman of the Board of Directors
Robert Wadsworth Director
Tsipi Kagan (1)(2) External Director
Yoseph Dauber (1)(2) External Director
Eran Dariel (2) Director
Joshua Di-nur Chief Financial Officer
---------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Set forth below is a biographical summary of the business experience of each of
the directors and executive officers named above:
IDO GUR was appointed as the Company's President and Chief Executive Officer on
September 1, 2008. Mr. Gur has plenty of experience in the management of global
technology companies. Prior to joining ECI, Mr. Gur spent 3 years at ECI Telecom
as Executive Vice President Global Sales & Marketing. Prior to that, Mr. Gur was
EVP Sales & Marketing at Corrigent Networks. Before joining Corrigent Networks,
Mr. Gur spent 7 years in ECI Telecom in various positions in Marketing & Sales.
In the early stages of his career, Mr. Gur worked 5 years as R&D Team Leader in
an Israeli startup company named Holo-Or. Mr. Gur has a Masters degree in
physics from Tel Aviv University, Israel.
ILAN ROSEN was appointed as Chairman of the Board of Directors in November 2005
(following and pursuant to the business combination). He has been a member of
the board of directors of Tdsoft since 1997, and has served as Chairman of
Tdsoft's board of directors since 1997. Mr. Rosen has served as a special
advisor to HarbourVest Partners LLC since March 2003 and is an observer on the
board of directors of Telrad Networks Ltd. and PacketLight Networks Ltd. Between
1989 and 1993, Mr. Rosen served on various boards of directors as a Business
Manager at Polar Investments Ltd., an investment company of Bank Hapoalim Ltd.
From 1993 to 1996, he served as President of Adsha Development & Investments
Ltd., an Israeli investment company that was listed on the Tel Aviv Stock
Exchange, and in that capacity served on various boards of directors. From
November 1996 through January 2004, Mr. Rosen served as Vice President of
Teledata Networks (formerly ADC Telecommunications, Israel and prior thereto
Teledata Communications Ltd.) and in that capacity, in addition to serving as a
board member of Tdsoft, Mr. Rosen served on the board of directors of each of
G-Connect Ltd., VManage Ltd., Mind CTI Ltd. and various other companies. In
early 2000, ADC Telecommunications Inc. launched a project in the name of ADC
Ventures, and Mr. Rosen served as the Managing Director of this project in
Israel. Mr. Rosen received a B.Sc. (cum laude) in mechanical engineering from
Tel Aviv University in 1979, and an M.B.A. from Tel Aviv University in 1986.
ROBERT M. WADSWORTH was appointed as a director in November 2005 (following and
pursuant to the business combination). He is Managing Director of HarbourVest
Partners, LLC. Mr. Wadsworth oversees many of HarbourVest's investment
activities in both the industrial and information technology sectors. He is
currently a director of Network Engines, Inc. and Trintech Group PLC, which are
both public companies. He is also a director of Akibia, AWS Convergence
(Weatherbug), Kinaxis, Loxam and several other U.S. and non-U.S. private
companies. His prior experience includes management consulting with Booz, Allen
& Hamilton, where he specialized in the areas of operations strategy and
manufacturing productivity. Mr. Wadsworth received a B.S. (magna cum laude) in
Systems Engineering and Computer Science from the University of Virginia in 1982
and an MBA (with distinction) from Harvard Business School in 1986.
YOSEPH DAUBER has served as a director of NICE Systems Ltd. since April 2002.
Mr. Dauber also serves on the board of directors of Delek Group. Mr. Dauber is
currently the Chairman of Kcps Manof Fund. Until January 2009, Mr. Dauber served
as a director of Clal Insurance Holdings and until November 2008 he served as a
director of Bank Hapoalim. Mr. Dauber has also served on the board of directors
of Lodzia Rotex Ltd. and Afcon Industries Ltd. Mr. Dauber has served in various
senior positions at Bank Hapoalim since 1973. Until June 2002, he was Deputy
Chairman of the Board of Management and joint Managing Director of Bank Hapoalim
and was responsible for the commercial division of the bank. Between 1994 and
1996 and until June 2002, Mr. Dauber served as Chairman of Poalim American
Express and of the Isracard Group. From 2002 to 2003, he served as Chairman of
the Israel Maritime Bank Ltd. Mr. Dauber holds a Bachelor's degree in Economics
and Statistics from the Hebrew University in Jerusalem and a Masters degree in
Law from Bar Ilan University. Mr. Dauber qualifies as an External Director under
the Companies Law.
38
JOSHUA DI-NUR joined VocalTec in September 2008. Mr. Di-nur's management career
includes a variety of high-level finance positions in Israel (in public and
private companies) as well as General Management positions outside of Israel
(USA and China). Mr. Di-nur is also an executive and personal coach (with
emphasis on coaching and mentoring CFOs and other senior managers). Prior to
joining VocalTec, Mr. Di-nur held a number of key positions, including:
President of ECI China Ltd., a Chinese subsidiary of ECI Telecom, Vice President
and CFO of ECI Ltd., the Optical Network Division, Vice President and CFO of
Pelephone Communication Ltd., President and CEO of Degem systems Inc., Vice
President and CFO of Degem Systems Ltd., an industrial public entity in the
field of systems in technological trainings, Vice President and CFO of
InterPharm Laboratories Ltd., then a publicly held company, NASDAQ listed
pharmaceutical company, Vice President and CFO of Pecker Plada Group, an
industrial public company in the field of steel and ceramic tiles, and Vice
President and CFO of Periclase Dead Sea Ltd., a subsidiary of Israel Chemical
Ltd. Mr. Di-nur is a certified Public Accountant and received a B.A in Economics
and Accounting from Tel-Aviv University.
TSIPI KAGAN was appointed director in October 2008. Since November 2008 Ms.
Kagan has served as the Chief Financial Officer of Xjet Ltd., a private company
developing and manufacturing equipment for the production of solar cells. From
2003 to August 2008 Ms. Kagan has served as the Chief Financial Officer of
Radvision Ltd., a communications equipment developer. From 2000 to 2003, Ms.
Kagan served as the Chief Financial Officer of Phone-Or Ltd., a developer of
optical microphones and sensors. From 1994 to 2000, Ms. Kagan served as a Senior
Manager at Ernst & Young, Israel. Prior to joining Ernst & Young, Ms. Kagan
served as a Public Accountant at Miller, Kaplan, Arase & Co., Los Angeles. Ms.
Kagan holds a BA in Accounting and Economics from Tel Aviv University and a
Certificate of Advanced Accounting Studies from Tel Aviv University. Ms. Kagan
qualifies as an External Director under the Companies Law.
ERAN DARIEL is the co-founder, and since late 2007 has been serving as President
and CEO, of XSIGHTS-Media, a software and service provider delivering fully
integrated solutions to print media-owners and advertisers. From 2002 until mid
2005, Mr. Dariel served as the Executive VP & General Manager of the Lightscape
Optical Network Business Unit of ECI Telecom. From 2000 until 2002, Mr. Dariel
served as the President and CEO of Lightscape Networks (a wholly-owned
subsidiary of ECI Telecom). From 1992 until 1999, Mr. Dariel held the following
positions in the Optical Division of ECI Telecom: Director, System Architecture;
AVP, Technology & System Architecture; and VP, Marketing & Business Development.
Prior to joining ECI Telecom, Mr. Dariel served as a project manager at Atari
Computers and at Silicom. Mr. Dariel holds an MSc. degree in Electronics and
Computer Engineering from Ben Gurion University and a BSc. degree in Electronics
and Computer Engineering from Ben Gurion University.
6.B. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The aggregate compensation paid to VocalTec's directors and executive officers
as a group during the fiscal year ended December 31, 2008 was approximately $0.9
million in salaries, directors' fees and bonuses. No additional amounts were set
aside or accrued by the Company or its subsidiaries in 2008 to provide pension
retirement or similar benefits to the directors and executive officers.
During the fiscal year ended December 31, 2008, 40,000 options to purchase
ordinary shares, at an exercise price per share equal to the average closing
price of the Company's shares over the 30-day period prior to the date of
approval of the options by the Company's shareholders, were granted to each of
Joseph Atsmon, Yoseph Dauber, Tsipi Kagan and Robert Wadsworth, 15,385 options
to purchase ordinary shares were granted to Tsipi Kagan at an exercise price per
share equal to $5.93, 8,615 options to purchase ordinary shares were granted to
Tsipi Kagan at an exercise price per share equal to $3.308, and 60,000 options
to purchase ordinary shares were granted to Ilan Rosen, the Chairman of the
Board, at an exercise price per share equal to the average closing price of the
Company's shares over the 30-day period prior to the date of approval of the
options by the Company's shareholders. The abovementioned options are
exercisable for a period of twelve months following such time on which the
person receiving such options ceases from being a director of the Company.
During the fiscal year ended December 31, 2008, 60,000 options to purchase
ordinary shares were granted to Joshua Di-nur, the Company's Chief Financial
Officer, at an exercise price per share equal to $0.26.
6.C. BOARD PRACTICES
The period during which our directors and senior management have each
served in their respective offices is set forth in "Item 6 - Directors, Senior
Management and Employees - Directors and Senior Management". There is no date of
expiration of the current term of office of any of the senior management
members. The expiration date of the terms of office of our directors are as
follows: (a) Robert Wadsworth - at the annual shareholders meeting to be held in
2009 (at which time he may be re-appointed as a director); (b) Ilan Rosen and
Eran Dariel - at the annual shareholders meeting in 2011(at which time each of
them may be re-appointed as a director); (c) Tsipi Kagan , who was elected as an
external director in October 2008, will serve in such position for three years
and may then be appointed for an additional three-year term as an external
director; and (d) Yoseph Dauber, who was elected as an external director in
August 2006, will serve in such position for three years and may then be
appointed for an additional three-year term as an external director.
39
There are no service contracts between us or any of our subsidiaries and our
directors in their capacity as directors providing for benefits upon termination
of employment, except for the termination provisions included in the employment
agreement of Ido Gur, our President and Chief Executive Officer, which provide
for: (i) entitlement to receive salary and benefits as provided for in the
employment agreement, during the 180 day notice period, (ii) the right to have
options granted continue to vest in accordance with their terms during the
duration of the 180 day notice period, (iii) any event that under the terms of
the employment agreement causes acceleration of vesting prior to termination of
employment shall indeed cause the acceleration if it takes place during the 180
day notice period, (iv) the date upon which such acceleration of vesting shall
be effected shall be the date upon which the 180 day notice period would have
expired as if Mr. Gur were to continue to be employed by the Company for the
duration of such notice period, and (v) the exercise period after termination of
employment shall be deemed to commence on the date upon which the 180 day notice
period would have expired as if Mr. Gur were to continue to be employed by the
Company for the duration of the notice period. Prior to the expiry of two years
of continuous employment, Mr. Gur will be entitled to exercise all of his vested
options during the period of up to 12 months commencing on the expiry of the
180-day notice period. After the expiry of at least two years of continuous
employment, Mr. Gur will be entitled to exercise all of his vested options
including the options the vesting of which was accelerated, in the period up to
the expiry of 18 months commencing on the expiry of the 180 day notice period.
In November 2005, we entered into new indemnification agreements with our
directors, in which the Company undertook to indemnify the directors for the
matters and in the circumstances described in such indemnification agreements,
in an aggregate amount of up to $4 million, provided that if such amount is
insufficient to cover all amounts to which such persons are entitled pursuant to
such undertaking of the Company, such amount shall be allocated among the
indemnified persons pro rata to the amounts to which they are so entitled. All
the indemnification agreements provide protection against personal liability due
to an act performed or failure to act in the capacity as a director or officer.
In November 2007, our Board determined that in light of the expansion of the
Company's business, it is appropriate to increase the indemnification coverage
under the directors and officers insurance policy from US$5,000,000 per event
and in the aggregate to US$10,000,000 per event and in the aggregate. Such
increase was approved by our shareholders at the annual shareholders meeting
held on November 29, 2007.
Under the Companies Law, the board of directors of any publicly traded company
must also appoint an audit committee, comprised of at least three directors,
including all of the external directors, but excluding:
o the chairman of the board of directors;
o any controlling shareholder or a relative of a controlling
shareholder; and
o any director employed by the Company or who provides services to the
Company on a regular basis.
AUDIT COMMITTEE
Our audit committee is comprised of Yoseph Dauber, Tsipi Kagan and Eran Dariel.
We believe that Mr. Dauber and Ms. Kagan qualify as audit committee financial
experts (as such term is defined under the US Securities Exchange Act of 1934
(the "Exchange Act")), and that each of them and Eran Dariel qualifies as an
independent director (as such term is defined under the Nasdaq rules). The
purpose of the audit committee is to provide assistance to the Board of
Directors in fulfilling its legal and fiduciary obligations with respect to
matters involving the accounting, auditing, financial reporting and internal
control functions of VocalTec and its subsidiaries as well as complying with the
legal requirements under Israeli law and the Sarbanes-Oxley Act of 2002. The
following are examples of functions within the authority of the audit committee:
o To detect irregularities in the management of our business and our
internal controls procedures through, among other things, consultation
with our internal and external auditors and to suggest to the board of
directors methods to correct those irregularities.
o To decide whether to approve acts or transactions involving directors,
executive officers, controlling shareholders and third parties in
which directors, executive officers or controlling shareholders have
an interest.
o To assist our board of directors in performing its duties to oversee
our accounting and financial policies, internal controls, and
financial reporting practices and to communicate on a regular basis
with the company's outside auditors and review their operation and
remuneration.
o To maintain and facilitate communication between our board of
directors and our financial management and auditors.
In addition, the approval of the audit committee is required to effect specified
actions and transactions with office holders, controlling shareholders and third
parties in which an office holder or controlling shareholder has a personal
interest (as such term is interpreted under Israeli law).
An audit committee may not approve an action or a transaction with an office
holder or a controlling shareholder or an entity in which either of them has a
personal interest unless at the time of approval the two external directors are
serving as members of the audit committee and at least one of the external
directors is present at the meeting in which an approval is granted.
40
Our audit committee usually convenes once per quarter to review the Company's
quarterly financial results, and as necessary to resolve issues that are in the
scope of responsibility of the committee.
Our compensation committee is comprised of Yoseph Dauber, Tsipi Kagan and Ilan
Rosen, and meets several times per year regarding option grants and general
compensation issues relating to our employees.
NASDAQ EXEMPTION FOR A FOREIGN PRIVATE ISSUER
We are a foreign private issuer within the meaning of Nasdaq Marketplace Rule
5000(a)(18), since we are incorporated in the State of Israel and we meet the
other criteria set forth for a "foreign private issuer" under Rule 3b-4(c) under
the Exchange Act.
Pursuant to Nasdaq Marketplace Rule 5615(a)(3), a foreign private issuer may
follow home country practice in lieu of certain provisions of the Nasdaq
Marketplace Rule 5600 series and certain other Nasdaq Marketplace Rules. Please
see ITEM 16.G - "Corporate Governance" for a description of the manner in which
we rely upon home country practice in lieu of Nasdaq listing requirements.
6.D. EMPLOYEES
As of December 31, 2008, we employed 48 full-time employees and 4 part-time
employees, of which 24 were employed in research and development, 18 were
employed in sales and marketing, 9 were employed in general and administrative,
and 1 was employed in operations. All of these employees were based in our
facilities in Israel. As of December 31, 2007, we employed 60 full-time
employees and 4 part-time employees, of which 33 were employed in research and
development, 20 were employed in sales and marketing, 9 were employed in general
and administrative, and 2 were employed in operations. All of these employees
were based in our facilities in Israel. As of December 31, 2006, we employed 72
full-time employees and 3 part-time employees, of which 39 were employed in
research and development, 21 were employed in sales and marketing, 11 were
employed in general and administrative, and 4 were employed in operations. Of
these employees, 73 were based in our facilities in Israel, 1 in Singapore and 1
in Europe.
We believe that our relations with our employees are good. Neither our employees
nor we are parties to any collective bargaining agreements, except for
provisions of such agreements that are applicable to the industry in which the
Company is engaged by virtue of expansion orders of the Israeli Ministry of
Labor and Welfare issued under applicable Israeli laws.
6.E. SHARE OWNERSHIP
As of May 11, 2009, each of the individuals listed in "Item 6 - Directors,
Senior Management and Employees - Directors and Senior Management" beneficially
owned less than 1% of our ordinary shares, and each such person's individual
share ownership has not been previously disclosed to shareholders or otherwise
made public. Mr. Gur has been granted options to purchase 1,106,400 ordinary
shares of the Company, which constitutes as of May 11, 2009, 19.4%of the
Company's outstanding ordinary shares, at the following exercise prices: $0.50
per share with respect to 442,560 options, $1.00 per share with respect to
442,560 options, and $3.00 per share with respect to 221,280 options. The number
of options to vest is allocated as follows: 40% to the options with an exercise
price of $0.50, 40% to the options with an exercise price of $1.00, and 20% to
the options with an exercise price of $3.00. 25% of the total amount granted
shall vest and become exercisable twelve (12) months after the date of the
grant, and 6.25% of the total amount granted shall vest and become exercisable
every three (3) months (quarter) thereafter for twelve (12) quarters, in each
case, provided that Mr. Gur continues to be employed by the Company at the
applicable date of vesting, which period of employment includes the 180 day
notice period. The options are subject to certain acceleration events provided
for in Mr. Gur's employment agreement and option agreement. Prior to the expiry
of two years of continuous employment, Mr. Gur will be entitled to exercise all
of his vested options during the period of up to 12 months commencing as of the
expiry of the 180 day notice period. After the expiry of at least two years of
continuous employment, Mr. Gur will be entitled to exercise all of his vested
options including the options the vesting of which was accelerated, in the
period up to the expiry of 18 months commencing as of the expiry of the 180 day
notice period.
On February 15, 2006, we filed with the U.S. Securities and Exchange Commission
a registration statement on Form S-8, pursuant to which we registered for resale
all of the shares underlying our amended 2003 Master Stock Option Plan that had
not been registered previously. As of the date hereof, the Company has
registered for resale an aggregate of 1,038,462 (reflecting the 1-for-13 reverse
split effected on November 25, 2005) ordinary shares that have been or may in
the future be granted under the Company's option plans. Options generally have a
term of seven (7) years. However, options granted prior to December 13, 2005
have a term of ten (10) years. Earlier termination may occur if the employee's
employment with us is terminated or if certain corporate changes or transactions
occur. Our board of directors determines the grant and the exercise price at the
time the options are granted upon recommendation of the Compensation Committee.
The Company's shareholders approved at the extraordinary general meeting of
shareholders held on April 11, 2007, an annual increase of the number of
ordinary shares underlying the Company's 2003 Amended Master Stock Option Plan
by such number of ordinary shares that shall equal 3% of the issued and
outstanding share capital of the Company, on a fully diluted basis, at the time
of the relevant increase, starting in 2008 (each such increase to be effected
immediately following the annual general meeting of the Company's shareholders
in the relevant year). Such 3% increase replaced in 2008 the previous annual
increase of 180,000 shares that was approved by the Company's shareholders at
the annual general meeting held on August 21, 2006 (which was in effect for
2007).
41
The exercise price per share is determined by the Board, or the Compensation
Committee, and is usually granted at the approximate fair market value of the
shares on the date of grant, as determined by the closing price of our ordinary
shares as reported by Nasdaq on the business day prior to the date of grant.
Each stock option agreement specifies the date and period over which the option
becomes exercisable. Options granted by us to employees generally vest over a
period of four years, either in equal quarterly installments of 6.25% of the
option shares, starting three months after the date of grant, or 25% of the
option shares are vested one year following the option grant, and the remaining
75% vest in equal quarterly installments of 6.25% over the remaining three
years. Vesting of options granted to employees is conditional upon the grantee
remaining continuously employed by VocalTec or its subsidiaries.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7.A. MAJOR SHAREHOLDERS
The following table sets forth, as of May 11, 2009, the number of our ordinary
shares, which constitute our only voting securities, beneficially owned by (i)
all shareholders known to us to own more than five percent (5%) of our
outstanding ordinary shares, and (ii) all of our directors and executive
officers as a group.
ORDINARY SHARES
BENEFICIALLY OWNED
-------------------------
NAME AND ADDRESS NUMBER PERCENT
---------------- --------- ---------
HarbourVest International Private Equity Partners III -
Direct Fund L.P.(1) 1,218,444 21.37%
Neuberger Berman, LLC (2) 999,937 17.53%
The Israeli Aircraft Industries Workers' Provident Fund (3) 420,000 7.36%
Various entities affiliated with Apex (4) 416,675 7.31%
Officers and directors as a group (7 persons) (5) 89,401 1.57%
(1) Includes 88,000 ordinary shares underlying outstanding warrants that are
currently exercisable.
(2) Neuberger Berman, LLC and Neuberger Berman Management Inc. stated in a
Schedule 13G filed by them with the SEC on February 13, 2009 that (i) they
are deemed to be the beneficial owners of the shares listed above since
they have shared power to make decisions whether to retain or dispose of
such shares, and in certain cases they also have the power to vote these
shares, and (ii) Neuberger Berman, LLC and Neuberger Berman Management Inc.
serve as a sub-adviser and investment manager, respectively, of Neuberger
Berman's various mutual funds, which hold such shares in the ordinary
course of their business and not with the purpose nor with the effect of
changing or influencing the control of the Company.
(3) Includes 180,000 ordinary shares underlying outstanding warrants that are
currently exercisable.
(4) Includes 360,000 ordinary shares underlying outstanding warrants that are
currently exercisable.
(5) Represents 89,401 ordinary shares underlying outstanding options that are
either currently exercisable or will become exercisable within 60 days of
the date hereof.
On March 2, 2009, the Company purchased an aggregate of 1,673,549 of our shares,
constituting approximately 22.7% of our issued and outstanding share capital
immediately prior to such purchase, from our largest shareholder as of such
date, Cisco Systems International B.V. As a result of such purchase, the
purchased shares became dormant shares, conferring no rights on the Company, and
the amount of our outstanding shares has decreased by such number of purchased
shares, resulting in the holdings of our major shareholders listed above
increasing significantly.
Our major shareholders do not have different voting rights from each other or
from other shareholders.
To our knowledge, (A) we are not directly or indirectly owned or controlled (i)
by another corporation or (ii) by any foreign government or (iii) by any other
natural or legal persons and (B) there are no arrangements, the operation of
which may at a subsequent date result in a change in control of VocalTec.
For information as to the portion of each class of securities held in the United
States and the number of record holders see "Item 9 - The Offer and Listing".
7.B. RELATED PARTY TRANSACTIONS
None.
42
7.C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
8.A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
Our consolidated financial statements are set forth in Item 18 of this document.
EXPORT SALES
Export sales of VocalTec in 2008 were $5.7 million or 94% of sales compared with
export sales in 2007 which were $5.6 million or 98% of sales, and with $6.7
million or 93% of sales in 2006.
LEGAL PROCEEDINGS
From time to time, we are involved in various routine legal proceedings
incidental to the ordinary course of our business. We do not believe that the
outcome of these pending legal proceedings will have a material adverse effect
on our business or consolidated financial condition or profitability. For
additional information, see note 8b. to the attached consolidated Financial
Statements.
DIVIDENDS
We have never declared or paid cash dividends on the ordinary shares. We intend
to retain our earnings for future growth and therefore do not anticipate paying
any cash dividends in the foreseeable future.
8.B. SIGNIFICANT CHANGES
Except as disclosed elsewhere in this annual report, there have been no other
significant changes since December 31, 2008.
ITEM 9. THE OFFER AND LISTING
9.A. OFFER AND LISTING DETAILS
Through May 11, 2009, for the periods indicated, the high and low reported
trading prices on the close of trading of our ordinary shares as reported by
Nasdaq were as follows:
HIGH LOW
------- -------
2004 6.90 1.06
2005 24.7 3.45
2006 10.95 3.07
2007 4.09 0.82
2008 0.79 0.15
2007
First Quarter 4.09 3.10
Second Quarter 3.61 2.63
Third Quarter 3.19 1.99
Fourth Quarter 2.15 0.82
2008
First Quarter 0.79 0.37
Second Quarter 0.65 0.45
Third Quarter 0.52 0.22
Fourth Quarter 0.33 0.15
MOST RECENT SIX MONTHS
December 2008 0.27 0.15
January 2009 0.22 0.18
February 2009 0.37 0.18
March 2009 0.41 0.29
April 2009 0.45 0.33
May 2009 (through May 24, 2009) 0.55 0.41
43
As of May 21, 2009, 5,702,815 of our ordinary shares were issued and
outstanding. At such date, the last reported sale price of the ordinary shares
was $0.41 per share, and the ordinary shares were held by 255 record holders. Of
those 255 record holders, 28 are shown on our records as having United States
addresses. We believe that as of April 20, 2009 approximately 88.59% of our
outstanding ordinary shares were held in the United States.
9.B. PLAN OF DISTRIBUTION
Not applicable.
9.C. MARKETS
Our ordinary shares were initially quoted on the Nasdaq National Stock Market on
February 7, 1996 under the symbol "VOCLF," which was changed to "VOCL" on April
20, 1999. Our ordinary shares were quoted on the Nasdaq Stock Market from
October 17, 2000 until December 2002, under the symbol "VOCL". In December 2002,
we transferred to the Nasdaq Capital Market (formerly: Nasdaq SmallCap), in July
2003 we transferred back to the Nasdaq National Market and in April 2005, due to
the fact that we no longer satisfied the minimum stockholders' equity continued
listing requirement of the Nasdaq National Market, we transferred back to the
Nasdaq Capital Market, where our shares continue to be listed under the trading
symbol VOCL. In August 2005, we were notified by Nasdaq Capital Market that we
were not in compliance with its minimum stockholders' equity standard listing
requirements. On November 25, 2005, following the consummation of the
transaction with Tdsoft, and in order for our shares to continue to be listed on
the Nasdaq Capital Market, we effected a 1-for-13 reverse split of our issued
and outstanding share capital, resulting in the par value of our ordinary shares
being increased to NIS 0.13 per share. On November 28, 2005, the Nasdaq Capital
Market informed us that we complied with all initial listing requirements of the
Nasdaq Capital Market. Our shares traded on the Nasdaq Capital Market under the
symbol "VOCLD" from November 28, 2005 through December 27, 2005 and under the
symbol "VOCL" since December 28, 2005. On February 5, 2008, the Nasdaq Capital
Market sent us a Staff Deficiency Letter, indicating that we have failed to
comply with the minimum bid price requirement for continued listing set forth in
Nasdaq's old Marketplace Rule 4320(e)(2)(E)(ii) (which has recently been changed
to Nasdaq Marketplace Rule 5550(a)(2). The letter provided that we have until
August 4, 2008 to regain compliance, i.e., that the bid price of our shares
close at $1.00 per share or more for a minimum of 10 consecutive business days
during the period ending on August 4, 2008. We did not succeed in complying with
such requirement by August 4, 2008. According to a letter received from the
Nasdaq Capital Market on August 7, 2008, we were not eligible for an additional
180-calendar day compliance period (since we did not meet the Nasdaq Capital
Market initial listing criteria set forth in old Marketplace Rule 4310(c))
(which has recently been moved to various rules upon Nasdaq's revision of its
Marketplace Rules). We requested a hearing on the determination to suspend
trading of our shares before a Nasdaq Listing Qualifications Panel. Such hearing
was scheduled for October 2, 2008 and at such time we requested to postpone it
until after the Extraordinary General Meeting of our shareholders was scheduled
to be held (October 16, 2008) in which our shareholders were going to be asked
to authorize a reverse split of our shares which would have resulted in our
share price reaching the minimum bid price requirement for continued listing. We
anticipated that as a result, the scheduled hearing would be rendered
unnecessary. Our request for such postponement was not granted, and further to
the hearing which was held on October 2, 2008, we proceeded with the
Extraordinary General Meeting of our shareholders which was eventually held on
October 16, 2008. At the Extraordinary General Meeting, our shareholders
authorized our management to affect a reverse stock split to such extent that
will be determined by our management to be necessary to enable us to comply with
the foregoing listing requirement of the Nasdaq Capital Market; however, before
the final ratio of the reverse stock split was determined by our management
based on the closing price of the Company's shares on the Nasdaq Capital Market
on the day of the Extraordinary General Meeting, we were informed by Nasdaq that
Nasdaq has extended its suspension of the rules requiring a minimum $1.00
closing bid price and a minimum market value of publicly held shares.
Enforcement of these rules is scheduled to resume on July 19, 2009.
9.D. SELLING SHAREHOLDERS
Not applicable.
9.E. DILUTION
Not applicable.
9.F. EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
10.A. SHARE CAPITAL
Not applicable
44
10.B. MEMORANDUM AND ARTICLES OF ASSOCIATION
VocalTec is a public company organized in the State of Israel under the
Companies Law. We are registered with the Registrar of Companies of the State of
Israel and have been assigned company number 52-004262-3.
OBJECTS AND PURPOSES
The objects and purposes of our company are to engage in any legal occupation
and/or business.
RIGHTS, PREFERENCES AND RESTRICTIONS UPON SHARES
Our Articles of Association authorize one class of shares, which are our
ordinary shares. We may declare a dividend to be paid to the holders of our
ordinary shares according to their rights and interests in our profits. Our
board may declare interim dividends and a final dividend for any fiscal year
only out of retained earnings, or earnings derived over the two most recent
fiscal years, whichever is higher. The Companies Law and our articles provide
that our board may declare and pay dividends (subject to certain limitations)
without any further action by our shareholders. All unclaimed dividends may be
invested or otherwise used by the board for our benefit until those dividends
are claimed. In the event an unclaimed dividend is claimed, only the principal
amount of the dividend will be paid to the person entitled to the dividend.
Subject to the creation of any special rights regarding the distribution of
dividends, any dividends we declare will be distributed to shareholders in
proportion to their holdings.
If we liquidate, after satisfying liabilities to creditors, our assets will be
distributed to the holders of ordinary shares in proportion to their holdings.
Holders of ordinary shares have one vote for each paid-up ordinary share on all
matters submitted to a vote of our 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.
Our articles provide that directors are elected by an ordinary resolution of a
general meeting of our shareholders. Our ordinary shares do not have cumulative
voting rights in the election of directors. Accordingly, the holders of ordinary
shares representing more than 50% of the voting power in our company have the
power to elect all directors. However, our board of directors (other than the
external directors) is divided into three classes, the members of each of which
are elected until the annual general meeting of our shareholders held in the
third year after their appointment.
We may, subject to the applicable provisions of the Companies Law, issue
redeemable shares and subsequently redeem them. In addition, our board may make
calls upon shareholders in respect of any sum, which has not been paid up in
respect of any shares held by those shareholders.
Under the Companies Law, the disclosure requirements that apply to an office
holder and are described below under "Approval of Related Party Transactions
Under Israeli Law" also apply to a controlling shareholder of a public company.
A shareholder that holds more than 50% of the voting rights in a public company
is deemed to be a controlling shareholder. A shareholder that holds more than
25% of the voting rights in a public company may also be deemed to be a
controlling shareholder, for purposes of approval of certain related party
transactions, if there is no other shareholder holding more than 25% of the
voting rights at such time. Extraordinary transactions with a controlling
shareholder or in which a controlling shareholder has a personal interest, and
the terms of compensation of a controlling shareholder who is an office holder,
require the approval of the audit committee, the board of directors and the
shareholders of the company, in such order, provided that either (i) the
shareholder approval includes the approval of the holders of at least one third
of the shares of shareholders having no personal interest in the transaction who
vote at the meeting (abstained votes are disregarded), or (ii) the total number
of shares of shareholders having no personal interest in the transaction who
vote against the transaction does not exceed one percent of the aggregate voting
rights in the company.
The Companies Law also requires a shareholder to act in good faith towards a
company in which he holds shares and towards other shareholders and to refrain
from abusing his power in the company, including in connection with the voting
at a shareholders' meeting on:
o Any amendment to the Articles of Association;
o An increase in the company's authorized capital;
o A merger; or
o Approval of certain transactions with control persons and other
related parties, which require shareholder approval.
A shareholder has the general duty to refrain from depriving other shareholders
of their rights. Any controlling shareholder, any shareholder that knows that it
possesses the power to determine the outcome of a shareholder vote and any
shareholder that, under the provisions of the Articles of Associations, has the
power to appoint an office holder in the company, is under a duty to act in
fairness towards the company. The Companies Law does not describe the substance
of this duty (except by providing that the remedies generally available upon a
breach of contract will be available also in the event of a breach of the duty
to act with fairness) and such substance has not yet been adjudicated by Israeli
courts.
45
MODIFICATIONS OF SHARE RIGHTS
Under our Articles of Association, the rights attached to any class may be
varied by adoption of the necessary amendment of the articles, provided that the
holders of shares of the affected class approve the change by a class meeting in
which the holders of at least 75% of the voting power represented at the meeting
and voting on the issue approve the change. Our articles differ from the
Companies Law in this respect as under the law, changes in the rights of
shareholders require the consent of more than 50% of the voting power of the
affected class represented at the meeting and voting on the change.
SHAREHOLDERS MEETINGS AND RESOLUTIONS
We are required to hold an annual general meeting of our shareholders once every
calendar year, but no later than 15 months after the date of the previous annual
general meeting. All meetings other than the annual general meeting of
shareholders are referred to as extraordinary general meetings. Extraordinary
general meetings may be called by our board whenever it sees fit, at such time
and place, within or without the State of Israel, as the board may determine. In
addition, the Companies Law provides that the board of a public company is
required to convene an extraordinary meeting upon the request of (a) any two
directors of the company or one quarter of the company's board of directors or
(b) one or more shareholders holding, in the aggregate, (i) at least five
percent of the outstanding shares of the company and at least one percent of the
voting power in the company or (ii) at least five percent of the voting power in
the company.
The quorum required for a meeting of shareholders consists of at least two
shareholders present in person or by proxy who hold or represent in the
aggregate at least 33.3% of our issued share capital. A meeting adjourned for
lack of a quorum is adjourned to the same day in the following week at the same
time and place or any time and place as the chairman of the meeting determines.
At such reconvened meeting, the required quorum consists of any two shareholders
present in person or by proxy.
Notwithstanding the foregoing, our articles provide that a resolution in writing
signed by all our shareholders then entitled to attend and vote at general
meetings or to which all such shareholders have given their written consent (by
letter, telegram, facsimile or otherwise) shall be deemed to have been
unanimously adopted by a duly convened general meeting.
Our articles enable our board to fix a record date to allow us to determine the
shareholders entitled to notice of, or to vote at, any general meeting of our
shareholders. The record date may not be more than 40 days and not less than
four days before the date of the meeting. Each shareholder of record as of the
record date determined by the board may vote the shares then held by that
shareholder unless all calls and other sums then payable by the shareholder in
respect of its shares have not been paid.
LIMITATION ON OWNERSHIP OF SECURITIES
The ownership and voting of our ordinary shares by non-residents of Israel are
not restricted in any way by our articles or by the laws of the State of Israel,
except for shareholders who are subjects of countries that are enemies of the
State of Israel.
MERGERS AND ACQUISITIONS; TENDER OFFERS; ANTI-TAKEOVER PROVISION
The Companies Law includes provisions allowing corporate mergers. These
provisions require that the board of directors of each company that is party to
the merger approve the transaction. In addition, the shareholders of each
company must approve the merger by a vote of the majority of the company's
shares, present and voting on the proposed merger at a shareholders' meeting,
called on at least 35 days' prior notice. In determining whether the requisite
majority has approved the merger, shares held by the other party to the merger
or any person holding at least 25% of such other party, are excluded from the
vote. If the merger would have been approved but for the exclusion of the votes
of certain shareholders as provided above, a court may still approve the merger
upon the request of holders of at least 25% of the voting rights of a company,
if the court holds that the merger is fair and reasonable, taking into account
the valuation of the parties to the merger and the consideration offered to the
shareholders. Upon the request of a creditor of either party to the proposed
merger, the court may delay or prevent the merger if it concludes that there
exists a reasonable concern that, as a result of the merger, the surviving
company will be unable to satisfy the obligations of any of the parties to the
merger, and the court may also provide instructions to assure the rights of
creditors. In addition, a merger may not be completed unless at least 50 days
have elapsed from the date that a notice of the merger was filed with the Israel
Registrar of Companies and at least 30 days have elapsed from the date that
shareholder approval of both merging companies was obtained. Notwithstanding the
foregoing, a merger is not subject to shareholders approval if (i) the target
company is a wholly-owned subsidiary of the acquiring company and (ii) the
acquiring company is issuing to the shareholders of the target company up to 20%
of its share capital and no person will become, as a result of the merger, a
control person, subject to certain limitation relating to the counting of the
votes, at a meeting of the shareholders of a company that is a party to the
merger, of any entity or person that is either the other party to the merger or
a control person thereof.
The Companies Law also provides that, except in certain circumstances set forth
in the Companies Law, the acquisition of shares in a public company must be made
by means of a special tender offer if, as a result of the acquisition, the
purchaser would become a 25% shareholder of the company. The rule does not apply
if there already is another 25% shareholder of the company. Similarly, the law
provides that an acquisition of shares in a public company must be made by means
of a special tender offer if, as a result of the acquisition, the purchaser
would become a 45% shareholder of the company, unless there already is a 45%
shareholder of the company. These requirements do not apply if, in general, the
acquisition (1) was made in a private placement that received the approval of
the company's shareholders; (2) was from a 25% or greater shareholder of the
company which resulted in the acquirer becoming a 25% or greater shareholder of
the company, or (3) was from a 45% or greater shareholder of the company which
resulted in the acquirer becoming a 45% or greater shareholder of the company.
The tender offer must be extended to all shareholders, but the offeror is not
required to purchase more than 5% of the company's outstanding shares,
regardless of how many shares are tendered by shareholders (if more shares are
tendered than proposed by the purchaser to be purchased, the purchaser will
purchase from all tendering shareholders the amount of shares proposed to be
purchased, on a pro rata basis). The tender offer may be consummated only if (i)
at least 5% of the company's outstanding shares will be acquired by the offeror,
and (ii) the number of shares tendered in the offer exceeds the number of
shares, the holders of which objected to the offer.
46
In addition, the Companies Law provides that if, following any acquisition of
shares of a public company, the purchaser would hold 90% or more of the shares
of the company, such acquisition must be made by means of a full tender offer
for all of the target company's shares. An acquirer who wishes to eliminate all
minority shareholders must do so by means of a full tender offer and acquire
such amount of shares that will cause him to hold more than 95% of the
outstanding shares of the target company. If less than 5% of the outstanding
shares are not tendered, all of the shares that the acquirer offered to purchase
will be transferred to the acquirer by operation of law. The Companies Law
provides for appraisal rights if any shareholder files a request in court within
three months following the consummation of a full tender offer. If more than 5%
of the outstanding shares are not tendered in the full tender offer, the
acquirer may not acquire tendered shares if by doing so the acquirer would own
more than 90% of the outstanding shares of the target company.
Our Articles of Association contain provisions that could delay, defer or
prevent a change in our control. These provisions include advance notice
requirements and a staggered board. Under the advance notice requirements,
shareholders seeking to propose items for inclusion on the agenda for a general
meeting of shareholders, must submit those items in writing to our corporate
secretary not less than 60 days (or not less than 90 days for the nomination of
candidates for election of directors) and not more than 120 days prior to the
particular meeting. The staggered board provisions of our articles are described
above under "Item 6.C - Directors, Senior Management and Employees - Board
Practices"
BOARD PRACTICES
Under our Articles of Association, our board can, at its discretion, cause the
Company to borrow money or secure the payment of any sum upon terms and
conditions it deems fit. The board can utilize this power through various
methods, including the issuance of bonds or debentures, or mortgages, charges or
other securities on the whole of the Company or any part of it.
Our directors are not subject to any age limit requirement, nor are they
disqualified from serving on the board because of a failure to own VocalTec
shares.
Under our Articles of Association, our board of directors (other than external
directors) is classified into three classes. Each class has a nearly equal
number of directors, as determined by the board of directors. Currently, our
directors are classified into two classes. The terms for these classes of
directors will expire at the annual shareholder meetings in 2009 and 2011. At
each shareholders' meeting, the successors of each class of directors whose term
expired are elected to hold office for a term expiring at the annual
shareholders meeting held in the third year following the year of their
election. The staggered board structure may not be amended without the approval
of the greater of (i) holders of not less than 75% of the voting power
represented at a shareholders' meeting in person or by proxy and voting thereon,
or (ii) holders of a majority of the outstanding voting power of all shares of
the Company.
A recent change to the Companies Law requires that every candidate for the
position of board member of a public company ill out a qualification statement
prior to the submission of his/her appointment as a director of the company to
the approval of the company's shareholders, and further requires from each of
the directors already in office at the effective time of this change to the
Companies Law, to fill out the qualification statement prior to the first annual
general meeting of shareholders of the company, which is to take place after the
effective date of this change. Such qualification statement shall provide that
the candidate possesses the necessary qualifications and has the ability to
dedicate the appropriate time for the purpose of performing his/her service as a
director in the company.
EXTERNAL DIRECTORS
We are subject to the provisions of the Companies Law. Under the Companies Law,
companies incorporated under the laws of the State of Israel whose shares have
been offered to the public in or outside of Israel are required to appoint at
least two external directors. Certain regulations promulgated under the
Companies Law set out the conditions and criteria for a director qualifying as
having a "financial and accounting expertise" or a "professional qualification".
A director with financial and accounting expertise is a director who, due to his
education, experience and skills, possesses capabilities relating to and an
understanding of business and accounting matters and financial statements, which
enable him to understand in depth the company's financial statements and to
initiate a debate regarding the manner in which the company's financial
information is presented. A director who meets a professional qualification is a
director who satisfies one of the following requirements: (i) the director holds
an academic degree in either economics, business administration, accounting, law
or public administration, (ii) the director either holds another academic degree
or has obtained other higher education in the company's primary field of
business or in an area that is relevant to his position, (iii) the director has
at least five (5) years of experience serving in one of the following capacities
or an aggregate of at least five (5) years of experience in two or more of the
following capacities: (a) a senior business management position of a company
with a substantial scope of business, (b) a senior position in the primary field
of business of the company or (c) a senior public administration position. A
proposed external director must submit to the company a declaration as to his or
her compliance with the requirements for his or her election as an external
director (including with respect to such person's financial and accounting
expertise or professional qualification). At least one of the external directors
should have a "financial and accounting expertise" and the other external
directors should have a "professional qualification". The board of directors
should determine the minimum number of directors who should have financial and
accounting expertise in addition to at least one external director. In
determining such number, the board of directors shall consider, among other
things, the type and size of the company and the scope and complexity of its
operations. The Companies Law provides that a person may not be appointed as an
external director if the person or the person's relative, partner, employer or
any entity under the person's control, has, as of the date of the person's
appointment to serve as external director, or had, at any time during the two
years preceding that date, any affiliation with the company, any entity
controlling the company or any entity controlled by the company or by the
controlling entity of the company. The term "affiliation" includes:
47
o an employment relationship;
o a business or professional relationship maintained on a regular basis;
o control; and
o service as an office holder (other than as a director that has been
appointed as an external director of a company that is intending to
consummate its initial public offering).
"Office holder" is defined as a director, general manager, chief business
manager, deputy general manager, vice general manager, executive vice president,
vice president, other manager directly subordinate to the general manager or any
other person assuming the responsibilities of any of the foregoing positions,
without regard to such person's title.
In addition, no person can serve as an external director if the person's
position or other business activities create, or may create, a conflict of
interest 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 a former 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.
External directors are to be elected by a majority vote at a shareholders'
meeting, provided that either (i) the shareholder approval includes the approval
of the holders of at least one third of the shares of non-controlling
shareholders who vote at the meeting or (b) the total number of shares of
non-controlling shareholders who vote against the transaction does not exceed
one percent of the aggregate voting rights in the company.
The initial term of an external director is three years, and he or she may be
reelected to one additional term of three years. 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. If an external directorship becomes
vacant, our board of directors is required under the Companies Law to call a
shareholders' meeting immediately to appoint a new external director. Each
committee of a company's board of directors that has the power to exercise
discretion of the board is required to include at least one external director,
and all external directors have to be members of the company's audit committee.
If at the time of appointment of an external director all of the members of the
board of directors are of one gender, the appointed external director must be of
the other gender.
External directors are entitled to compensation as provided in regulations
promulgated under the Companies Law and are otherwise prohibited from receiving
any other compensation, directly or indirectly, from the company.
INDEPENDENT DIRECTORS
We are subject to the rules of Nasdaq applicable to listed companies. Under the
Nasdaq rules, a majority of our board of directors must be comprised of
independent directors and we are required to appoint a minimum of three
independent directors. The independence standard under the Nasdaq rules excludes
current employees, former employees of a company or of any of its affiliates for
a period of three years after cessation of employment, as well as any immediate
family member of an executive officer of a company or of any of its affiliates.
All of our current directors meet the independence standards of the Nasdaq rules
and we currently comply with the foregoing requirements.
In addition, a recent change to the Companies Law allows us to include in our
Articles of Association a provision indicating the number of independent
directors who shall serve on our board of directors. The independence standard
of an independent director under the Companies Law refers to the standard under
the Companies Law of an external director (see description above), whose
nomination shall have been approved by the audit committee, and who shall not
have served as a director in a company for a period exceeding nine consecutive
years. Alternatively, we may include in our Articles of Association a provision
regarding the number of independent directors, which provision shall state that
if there is no controlling shareholder in the company, the majority of the board
of directors shall be comprised of independent directors (including the external
directors) and if there is a controlling shareholder in the company, then at
least one third of the board of directors shall be comprised of independent
directors.
48
The Companies Law restricts a company from appointing its independent directors
as officers, employees or service providers, whether directly or indirectly,
including through an independent director's wholly-owned corporation, unless two
years have passed since the termination of his position as an independent
director in the company.
We have not yet amended our Articles of Association so as to include either of
the aforementioned provisions.
AUDIT COMMITTEE
See "Item 6.C - Directors, Senior Management and Employees - Board Practices".
INTERNAL AUDITOR
The Companies Law also requires us to appoint an internal auditor nominated by
the audit committee. The role of the internal auditor is to examine, among other
matters, whether the company's actions comply with the law and orderly business
procedure. Under the Companies Law, the internal auditor may not be an
interested party, an office holder or an affiliate, or a relative of an
interested party, nor may the internal auditor be the company's independent
accountant or its representative. The firm of Brukner Ingber has acted as the
company's internal auditor since October 2000.
APPROVAL OF RELATED PARTY TRANSACTIONS UNDER ISRAELI LAW
The Companies Law imposes a duty of care and a duty of loyalty on all of a
company's office holders (as defined under "External Directors" above),
including directors and executive officers. The duty of care requires an office
holder to act with the level of care that a reasonable office holder in the same
position would have acted under the same circumstances. The duty of loyalty
generally requires an office holder to act in good faith and for the benefit of
the company.
The Companies Law requires that an office holder of a company promptly disclose
any personal interest that he may have and all related material information
known to him, in connection with any existing or proposed transaction
contemplated by the company. Once an office holder complies with these
disclosure requirements, the board of directors may approve a transaction
between the company and the office holder, or a third party in which an office
holder has a personal interest, unless the Articles of Association provide
otherwise.
A transaction that is adverse to the company's interest cannot be approved. If
the transaction is an extraordinary transaction under the Companies Law, then,
in addition to any approval stipulated by the Articles of Association, it also
requires audit committee approval before board approval and, in certain
specified circumstances, subsequent shareholder approval.
Under the Companies Law, the disclosure requirements that apply to an office
holder also apply to a controlling shareholder of a public company. A
controlling shareholder includes a shareholder that holds 25% or more of the
voting rights in a public company if no other shareholder owns more than 50% of
the voting rights in the company. A shareholder that holds more than 25% of the
voting rights in a public company may also be deemed to be a controlling
shareholder, for purposes of approval of certain related party transactions, if
there is no other shareholder holding more than 25% of the voting rights at such
time. Extraordinary transactions with a controlling shareholder or in which a
controlling shareholder has a personal interest, and the terms of compensation
of a controlling shareholder who is an office holder, require the approval of
the audit committee, the board of directors and the shareholders of the company,
provided that either (i) the shareholder approval includes the approval of the
holders of at least one third of the shares of shareholders having no personal
interest in the transaction who vote at the meeting (votes abstained are
disregarded) or (ii) the total number of shares of shareholders having no
personal interest in the transaction who vote against the transaction does not
exceed one percent of the aggregate voting rights in the company.
Under the Companies Law, the entering by a company into a contract with a
non-controlling director as to the terms of his office requires the approval of
the board of directors followed by the approval of the shareholders of the
company, and in a public company, the transaction requires the approval of the
audit committee followed by the approval of the board of directors and the
shareholders of the company.
A director who has a personal interest in the approval of a transaction that is
submitted to approval of the audit committee or the board of directors shall not
be present during the deliberations and shall not take part in the voting of the
audit committee or of the board of directors on such transaction.
Notwithstanding the above, a director may be present at a deliberation of the
audit committee and the board of directors and may take part in the voting, if
the majority of the members of the audit committee or the board of directors, as
the case may be, have a personal interest in the approval of the transaction, in
which case the transaction shall also require the approval of the shareholders
of the company.
49
EXEMPTION, INSURANCE AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
EXEMPTION
Under the Companies Law, an Israeli company may not exempt an office holder from
liability with respect to a breach of his duty of loyalty, but may exempt in
advance an office holder from his liability to the company, in whole or in part,
with respect to a breach of his duty of care (other than with respect to a
breach of duty of care with respect to the distribution of a dividend or
redemption of the company's securities). Under the Companies Law, a company may
not indemnify an office holder, nor enter into an insurance contract that would
provide coverage for any monetary liability incurred as a result of any of the
following:
o a breach by the office holder of his duty of loyalty, unless the
office holder acted in good faith and had a reasonable basis to
believe that the act would not prejudice the company;
o a breach by the office holder of his duty of care, if such breach was
done intentionally or in disregard of the circumstances of the breach
or its consequences, other than a breach committed solely by
negligence;
o any act or omission done with the intent to derive an illegal personal
benefit; or
o any fine levied against the office holder as a result of a criminal
offense.
OFFICE HOLDER INSURANCE
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:
o a breach of his duty of care to us or to another person;
o 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
o a financial liability imposed upon him in favor of another person
concerning an act performed by him in his capacity as an office
holder.
INDEMNIFICATION OF OFFICE HOLDERS
Our Articles of Association provide that we may indemnify an office holder
against:
o a financial liability imposed on him in favor of another person by any
judgment, including a settlement or an arbitrator's award approved by
a court concerning an act performed in his capacity as an office
holder;
o reasonable litigation expenses, including attorneys' fees, expended by
the office holder or charged to him by a court, in proceedings we
institute against him or instituted on our behalf or by another
person, or in a criminal charge from which he was acquitted, or in
which he was convicted of an offence that does not require proof of
criminal intent; or
o reasonable litigation expenses, including attorneys' fees, expended by
the office holder as a result of an investigation or proceeding
instituted against him by an authority authorized to conduct such
investigation or proceeding, provided that (i) no indictment (as
defined in the Companies Law) was filed against such office holder as
a result of such investigation or proceeding, and (ii) no financial
liability as a substitute for the criminal proceeding (as defined in
the Companies Law) was imposed upon him as a result of such
investigation or proceeding or if such financial liability was
imposed, it was imposed with respect to an offence that does not
require proof of criminal intent.
Under the Companies Law, our Articles of Association may also include a
provision authorizing us to grant in advance an undertaking to indemnify an
office holder, provided that the undertaking is limited to such events which the
board of directors shall deem to be likely to occur in light of the operations
of the Company at the time that the undertaking to indemnify is made and for
such amounts or criteria which the board of directors may, at the time of the
giving of such undertaking to indemnify, deem to be reasonable under the
circumstances. Such undertaking shall set forth such events which the board of
directors shall deem to be likely to occur in light of the operations of the
Company at the time that the undertaking to indemnify is made, and the amounts
and/or criteria which the board of directors may, at the time of the giving of
such undertaking to indemnify, deem to be reasonable under the circumstances;
and a provision authorizing us to retroactively indemnify an office holder.
REQUIRED APPROVALS
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, with respect to directors, by our
shareholders.
THRESHOLD FOR DISCLOSURE OF SHARE OWNERSHIP
We are subject to the rules of the US Securities and Exchange Commission, and
our shareholders are subject to the requirements under Section 13 of the
Exchange Act with respect to disclosure of their holding percentage in the
Company. Under such Section and the rules promulgated thereunder, each of our
shareholders that owns 5% or more of our outstanding share capital must file
with the US Securities and Exchange Commission a form disclosing such
shareholder's holding percentage and certain other information (and provide us
with a copy of such form).
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CERTAIN LISTING REQUIREMENTS OF NASDAQ
We are not in compliance with Nasdaq Marketplace Rules 5605(e)(2) (requiring
companies to adopt a formal written charter or board resolution addressing the
company's nominations process), 4350(c)(2) (Regularly scheduled meetings of the
company's independent directors) and 5635(c) (Regarding the establishment of or
a material amendment to a stock option or purchase plan or other equity
compensation arrangement). Under Israeli law, the nominations process is
conducted by the full board of directors. Similarly, under Israeli law all
matters that are subject to the approval of a company's board of directors are
discussed by the full board of directors. Finally, under Israeli law, the board
of directors has the authority to establish stock option or purchase plans or
other equity compensation arrangements, and to adopt material amendments to such
plans.
10.C. MATERIAL CONTRACTS NOT IN THE ORDINARY COURSE OF BUSINESS
o In July 2008, the Company consummated the sale of 11 patents and
certain patent-related rights, for an aggregate consideration of $12.5
million. The sold patents consisted of nine US patents, one Israeli
patent and one Australian patent. Upon consummation of the sale, we
were granted a geographically unlimited, non-exclusive license to use
the sold patents and other patent-related rights in connection with
the development and marketing of our products.
o In December 2008, the Company consummated the sale of four patents and
certain patent-related rights, for an aggregate consideration of $7
million. Upon consummation of the sale, we were granted a
geographically unlimited, non-exclusive license to use the sold
patents and other patent-related rights with respect to products
covered by such patents and other patent-related rights and other
evolutions thereof.
10.D. EXCHANGE CONTROLS
There are currently no Israeli currency control restrictions on payments of
dividends or other distributions with respect to our ordinary shares or the
proceeds from the sale of 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.
Non-residents of Israel who purchase our securities with non-Israeli currency
will be able to repatriate dividends (if any), liquidation distributions and the
proceeds of any sale of such securities, into non-Israeli currencies at the rate
of exchange prevailing at the time of repatriation, provided that any applicable
Israeli taxes have been paid (or withheld) on such amounts.
Neither our Articles of Association nor the laws of the State of Israel restrict
in any way the ownership or voting of ordinary shares by non-residents of
Israel, except with respect to citizens of countries that are in a state of war
with Israel.
10.E. TAXATION AND GOVERNMENT PROGRAMS
The following is a summary of the current tax structure, which is applicable to
companies in Israel, with special reference to its effect on us and our group
companies. The following also contains a discussion of material Israeli and U.S.
tax consequences to our shareholders and government programs from which we, and
some of our group companies, benefit. The following also contains a discussion
of certain Israeli and U.S. tax consequences to persons purchasing our ordinary
shares. To the extent that the discussion is based on new tax legislation, which
has yet to be subject to judicial or administrative interpretation, there can be
no assurance that the views expressed in the discussion will accord with any
such interpretation in the future. The discussion is not intended and should not
be construed as legal or professional tax advice and is not exhaustive of all
possible tax considerations.
In July 2002, the Israeli Parliament approved a law enacting extensive changes
to Israel's tax law (the "TAX REFORM LEGISLATION") generally effective January
1, 2003. Among the key provisions of the Tax Reform Legislation were (i) changes
which may result in the imposition of taxes on dividends received by an Israeli
company from its foreign subsidiaries; and (ii) the introduction of the
"controlled foreign corporation" concept according to which an Israeli company
may become subject to Israeli taxes on certain income of a non-Israeli
subsidiary if the subsidiary's primary source of income or profit is passive
income (such as interest, dividends, royalties, rental income or capital gains).
An Israeli company that is subject to Israeli taxes on the income of its
non-Israeli subsidiaries may receive a credit for certain income taxes
paid/withheld or that will be paid/withheld by the subsidiary in its country of
residence, according to the terms and conditions determined in the Israeli Tax
Ordinance.
The following summary is included herein as general information only and is not
intended as a substitute for careful tax planning. Accordingly, each investor
should consult his or her own tax advisor as to the particular tax consequences
to such investor of the purchase, ownership or sale of an ordinary share,
including the effect of applicable state, local, foreign or other tax laws and
possible changes in tax laws.
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ISRAEL CORPORATE TAX CONSIDERATIONS
GENERAL CORPORATE TAX STRUCTURE
The regular rate of corporate tax, which Israeli companies were subject to in
2008 was 27% (such tax rate has been reduced to 26% in 2009 and will be reduced
further to 25% in 2010). Israeli companies are generally subject to Capital
Gains Tax at a rate of 25% for capital gains (other than gains deriving from the
sale of listed securities derived after January 1, 2003). However, the effective
rate of tax payable by a company (such as ours) which derives income from an
"Approved Enterprise" (as further discussed below) may be considerably lower.
Following an additional amendment to the Israeli Tax Ordinance (the "ITO"),
which came into effect on January 1, 2009, an Israeli corporation may elect a 5%
rate of corporate tax (instead of 25%) for income from dividend distributions
received from a foreign subsidiary which is distributed and used in Israel in
2009, or within one year after actual receipt of the dividend, whichever is
later. The 5% tax rate is subject to various conditions, which include
conditions with regard to the identity of the corporation that distributes the
dividends, the source of the dividend, the nature of the use of the dividend
income, and the period during which the dividend income will be used in Israel.
LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959
GENERAL. Certain of our production and development facilities have been granted
approved enterprise status pursuant to the Law for the Encouragement of Capital
Investments, 1959 (the "INVESTMENT LAW"). The Investment Law provides that a
capital investment in eligible facilities may, upon application to the
Investment Center of the Ministry of Industry and Trade of the State of Israel,
or the Investment Center, be designated as an Approved Enterprise. Each
certificate of approval for an Approved Enterprise relates to a specific
investment program delineated both by its financial scope, including its capital
sources, and by its physical characteristics, e.g., the equipment to be
purchased and utilized pursuant to the program. The tax benefits derived from
any such certificate of approval relate only to taxable income attributable to
the specific Approved Enterprise.
Subject to certain provisions concerning income and subject to the Alternative
Benefits (see below), any distributed dividends are deemed attributable to the
entire enterprise, and the effective tax rate and the effective withholding tax
rates represent the weighted combination of the various applicable tax rates.
TAX BENEFITS. Taxable income of a company derived from an Approved Enterprise is
subject to corporate income tax at the rate of up to 25% (rather than the tax
rates referred to under "General Corporate Tax Structure" above) for a certain
period of time. The benefit period is a period of seven years commencing in the
year in which the Approved Enterprise first generates taxable income. The
benefits may be shorter as it is limited to 12 years from the commencement of
production of the Approved Enterprise or 14 years from the date of approval,
whichever is earlier. Under certain circumstances (as further detailed below),
the benefit period may extend to a maximum of ten years from the commencement of
the benefit period. A company which operates under more than one approval or
that has capital investments which are only partly approved (such as a company
being designated as a Mixed Enterprise), may have an effective company tax rate
that is the result of a weighted combination of the various applicable rates.
A company owning an Approved Enterprise which was approved after April 1, 1986,
may elect to forego the entitlement to grants or state guarantees and apply for
an alternative package of tax benefits. These benefits provide that
undistributed income from the Approved Enterprise is fully tax exempt from
corporate tax for a defined period, which ranges between two and ten years from
the first year of taxable income, subject to the limitations described above,
depending principally upon the geographic location within Israel and the type of
the approved enterprise. Upon expiration of such period, the Approved Enterprise
is eligible for a beneficial tax rate (25% or lower in the case of an Foreign
Investment Company (the "FIC"), as described below), for the remainder of the
otherwise applicable period of benefits, as described above.
Should the percentage of share capital of the companies having Approved
Enterprises held by non-Israeli shareholders exceed 25%, future Approved
Enterprises of such companies would qualify for reduced tax rates for an
additional three year period, after the seven years mentioned above.
The company tax rate applicable to income earned from Approved Enterprise
programs (currently, for programs in which an application for an Approved
Enterprise status was submitted before December 31, 2004) in the benefit period
by a company meeting these qualifications is as follows:
PERCENTAGE OF NON-ISRAELI OWNERSHIP TAX RATE
----------------------------------- --------
Over 25% but less than 49% 25%
49% or more but less than 74% 20%
74% or more but less than 90% 15%
90% or more 10%
Entitlement to these benefits is subject to the final ratification of the
Investment Center, and is conditioned upon fulfillment of all terms of the
approved program. However, there can be no assurance that our group companies
which enjoy Approved Enterprise benefits will obtain approval for additional
Approved Enterprises, or that the provisions of the Investment Law will not
change with respect to future approvals, or that the above-mentioned
shareholding portion will be reached for each subsequent year. In the event of
our failure to comply with these conditions, the tax and other benefits could be
canceled, in whole or in part, and we might be required to refund the amount of
the canceled benefits, together with the addition of Israeli Consumer Price
Index (the "CPI") linkage difference and interest. We believe that our Approved
Enterprise substantially complies with all such conditions at present, but there
can be no assurance that it will continue to do so.
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The undistributed income derived from each of our approved enterprise programs
is tax-exempt for a two year period beginning with the first year in which it
generates otherwise taxable income and is subject to a reduced tax rate for the
remainder of the benefit period.
A company that pays a dividend out of income derived from the Approved
Enterprise(s) during the tax exemption period will be required to recapture the
deferred corporate income tax applicable to the amount distributed (grossed up
to reflect such tax) at the rate which would have been applicable had such
company not elected the Alternative Package. This rate is generally 10% to 25%,
depending on the extent to which non-Israeli shareholders hold such company's
shares.
The dividend recipient is taxed at the reduced rate applicable to dividends from
Approved Enterprises (generally 15% as compared to 25% for individuals or an
exemption for companies), if the dividend is distributed during the tax benefit
period or within 12 years after this period. However, the limitation does not
apply if the company qualifies as a foreign investors' company. This tax must be
withheld by such company at source, regardless of whether the dividend is
converted into foreign currency.
Subject to certain provisions concerning income subject to Mixed Enterprises,
all dividends are considered to be attributable to the entire enterprise and the
effective tax rate on the dividend is the result of a weighted combination of
the various applicable tax rates. However, such company is not obliged to
distribute exempt retained profits under the Alternative Package, and such
company may generally decide from which year's profits to declare dividends.
Each application to the Investment Center is reviewed separately, and a decision
as to whether or not to approve such application is based, among other things,
on the then prevailing criteria set forth in the Investment Law, on the specific
objectives of the applicant company set forth in such application and on certain
financial criteria of the applicant company. Accordingly, there can be no
assurance that any such application by any of our group companies will be
approved. In addition, the benefits available to an Approved Enterprise are
conditional upon the fulfillment of certain conditions stipulated in the
Investment Law and its regulations and the criteria set forth in the certificate
of approval, as described above. In the event that these conditions are
violated, in whole or in part, a company with an Approved Enterprise would be
required to refund the amount of tax benefits, with the addition of the Israeli
CPI linkage differences and interest.
A company which qualifies as a FIC is a company, like us, in which more than 25%
of the share capital (in terms of shares, rights to profit, voting and
appointment of directors) and of the combined share and loan capital is owned,
directly or indirectly, by non-residents of Israel and is therefore entitled to
further tax benefits relating to its approved enterprises. Such a company will
be eligible for an extension of the period of tax benefits for its approved
enterprises (up to ten years) and further tax benefits, should the level of non
- Israeli ownership in it increase above 49%.
Notwithstanding the foregoing, proceeds received from the sale of our products
may be deemed to be royalties under the domestic law of the country of residence
of the purchaser/licensee or under an applicable tax treaty and as such subject
to withholding tax in such country. For instance, proceeds received by our
company from the sale of our software in the United States might be treated as
royalties and as such subjected to U.S. withholding tax of either 10% or 15%,
pursuant to the U.S.-Israel Tax Treaty.
Where withholding tax is paid by our company to the country of residence of the
purchaser/licensee, such tax would generally be creditable by our company for
Israeli income tax purposes, pursuant to any relevant income tax treaty and
under Israeli law against income derived from the same source. However, where we
do not have taxable income for Israeli tax purposes because of the application
of a tax exemption available to an Approved Enterprise or because of losses for
tax purposes, we would have no Israeli tax liability against which to credit the
foreign tax withheld and paid by us. Furthermore, under Israeli law, we cannot
carry forward such unused credit to future tax years in the case of exempt
income or have limited ability to carry forward such credit in the case of
taxable income.
From time to time, the Government of Israel has discussed reducing the benefits
available to companies under the Investment Law. The termination or substantial
reduction of any of the benefits available under the Investment Law could have a
material adverse effect on future investments by our company in Israel.
Notwithstanding the foregoing, on March 29, 2005, the Israeli Parliament passed
an amendment to the Investment Law, which revamps the Israeli tax incentives for
future industrial and hotel investments (the "2005 amendment"). A tax "holiday"
package can now be elected for up to 15 years for a "Privileged Enterprise" as
defined in the 2005 amendment, if certain conditions are met, without needing to
obtain approval. The extent of the tax benefits available depends upon the level
of foreign investment.
The 2005 amendment became effective on April 1, 2005. Taxpayers may, under
certain conditions, claim Privileged Enterprise status for new and expanded
enterprises with respect to 2004 or subsequent years, unless the Investment
Center granted such taxpayer Approved Enterprise status prior to December 31,
2004.
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Subject to certain conditions, various alternative tax-only benefit packages can
now be elected with respect to investments in a "Privileged Enterprise", without
prior approval. Companies in industry or tourism in Israel may elect between:
o Tax "holiday" package - for a "Privileged Enterprise": a tax exemption
applies to undistributed profits for 2 to 15 years depending on the
geographical location of the "Privileged Enterprise" and the level of
foreign ownership. Company tax rates of between 10% and 25% apply to
distributed exempt profits or profits derived subsequent to the exempt
period. The total period of tax benefits is 7 to 15 years, or
o Grant / Reduced tax package - for an "Approved Enterprise": Fixed
asset grants of between 10% and 24% for enterprises in a development
area and reduced company tax rates between 0% and 25% for 7 to 15
years.
Dividend withholding tax also applies at a rate of 4% or 15% depending on the
package selected.
GRANTS UNDER THE LAW FOR THE ENCOURAGEMENT OF INDUSTRIAL RESEARCH AND
DEVELOPMENT, 1984
Israeli tax laws have allowed, under certain conditions, a tax deduction for
expenditures (including capital expenditures) in scientific research and
development projects, if the expenditures are approved or funded by the Israeli
Government and the research and development is for the promotion of the
enterprise and is carried out by or on behalf of the company seeking such
deduction. Expenditures not approved as above or funded are deductible in equal
portions over a three-year period.
Under the law for the Encouragement of Industrial Research and Development, 1984
(the "Research Law"), research and development programs that meet specified
criteria and are approved by a committee of the Chief Scientist, are eligible
for grants of up to 50% of the program's expenses. Under the provisions of
Israeli law in effect until 1996, royalties of 2%-3% of the revenues derived in
connection with products developed according to, or as a result of, a research
and development program funded by the Chief Scientist had to be paid to the
State of Israel. Pursuant to an amendment effected in 1996 effective with
respect to Chief Scientist programs funded in or after 1994, royalties at the
rate of 3% during the first three years, 4% over the following three years and
5% in or after the seventh year of the revenues derived in connection with
products developed according to such programs are payable to the State of
Israel. The maximum aggregate royalties will not exceed 100% (or, for funding
prior to 1994, 100%-150%) of the dollar-linked value of the total grants
received. Pursuant to an amendment effected in 2000, effective with respect to
Chief Scientist programs funded in or after 2000, the royalty rates described
above were updated to 3% during the first three years and 3.5% in or after the
fourth year, of the revenues derived in connection with products developed under
such programs. Pursuant to an amendment effected on January 1, 1999, effective
with respect to Chief Scientist programs approved in or after 1999, funds
received from the Chief Scientist shall bear annual interest at a rate equal to
LIBOR for twelve months.
Generally, the Research Law requires that the manufacturing of any product
developed through research and development funded by the Israeli Government
shall be in Israel. It also provides that know-how from the research and
development that is used to produce the product may not be transferred to third
parties without the approval of a research committee of the Chief Scientist.
Such approval is not required for the export of any products resulting from such
research and development.
However, under the Regulations, in the event that any portion of the
manufacturing is not performed in Israel, if approved by the Chief Scientist, we
would be required to pay an increased royalty at the rates of 120%, 150% or 300%
of the grant if the manufacturing portion that is performed outside of Israel is
less than 50%, between 50% and 90% and more than 90%, respectively.
In 2002, the Research Law was amended to, among other things, enable companies
applying for grants from the Chief Scientist to seek prior approval for
conducting manufacturing activities outside of Israel without being subject to
increased royalties. However, this amendment will not apply to any of our
existing grants. In addition, the amendment provides that one of the factors to
be taken into consideration by the Chief Scientist in deciding whether to
approve a grant application is the percentage of the manufacturing of the
relevant product that will be conducted outside of Israel. Accordingly, should
we seek additional grants from the Chief Scientist in connection with which we
also seek prior approval for manufacturing products outside of Israel, we may
not receive such grant or may receive a grant in an amount that is less than the
amount we sought.
In March 2005, an amendment to the Research Law was enacted. One of the main
modifications included in the amendment was an authorization to the research
committee to allow transfer outside of Israel of know-how derived from an
approved program and the related manufacturing rights. Essentially, the research
committee may approve transfer of know-how in limited circumstances as follows:
o in the event of a sale of the know-how itself to a non-affiliated
third party, provided that upon such sale the owner of the know-how
pays to the Chief Scientist a certain amount of cash payment set forth
in the Research Law. In addition, the amendment provides that if the
purchaser of the know-how gives the selling Israeli company the right
to exploit the know-how by way of an exclusive, irrevocable and
unlimited license, the research committee may approve such transfer in
special cases without requiring the payment of such amount.
o in the event of a sale of the company which is the owner of the
know-how, pursuant to which the company ceases to be a an Israeli
company, provided that upon such sale the owner of the know-how pays
to the Chief Scientist a certain cash payment set forth in the
Research Law.
54
o in the event of an exchange of know-how such that in exchange for the
transfer of know-how outside of Israel, the recipient of such know-how
transfers know-how to the company in Israel such that the Chief
Scientist is convinced that the benefit to the Israeli economy as a
result of such exchange is greater then the benefit without such
exchange.
Another provision in the amendment concerns the transfer of manufacture rights.
The research committee may, in special cases, approve the transfer of
manufacture or of manufacturing rights of a product developed within the
framework of the approved program or which results therefrom, outside of Israel.
If the research committee does approve a transfer of manufacturing rights out of
Israel, the aggregate total of royalties payments under the royalties
regulations increases to an amount of 120%-300% of the grants, depending on the
portion of manufacture transferred. The rates of royalties may also increase
upon "export of manufacturing rights".
LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969
Pursuant to the Law for the Encouragement of Industry (Taxes), 1969, a company
qualifies as an "Industrial Company" if it is a resident of Israel and at least
90% of its gross income in any tax year (exclusive of income from certain
defense loans, capital gains, interest and dividends) is derived from an
"industrial enterprise" it owns. An "industrial enterprise" is defined as an
enterprise whose major activity, in a given tax year, is industrial
manufacturing.
We believe that we currently qualify as an Industrial Company. Accordingly, we
are entitled to certain tax benefits, including a deduction of 12.5% per annum
on the purchase of patents or certain other intangible property rights (other
than goodwill) used for the development or promotion of the industrial
enterprise over a period of eight years beginning with the year in which such
rights were first used.
The tax laws and regulations dealing with the adjustment of taxable income for
local inflation provide that an industrial enterprise, like us, is eligible for
special rates of depreciation deductions. These rates vary in the case of plant
and machinery according to the number of shifts in which the equipment is being
operated and range from 20% to 40% on a straight-line basis, or 30% to 50% on a
declining balance basis (instead of the regular rates which are applied on a
straight-line basis).
Moreover, industrial enterprises which are approved enterprises (see below) can
choose between (a) the special rates referred to above and (b) accelerated
regular rates of depreciation applied on a straight-line basis with respect to
property and equipment, generally ranging from 200% (with respect to equipment)
to 400% (with respect to buildings) of the ordinary depreciation rates during
the first five years of service of these assets, provided that the depreciation
on a building may not exceed 20% per annum. In no event may the total
depreciation exceed 100% of the cost of the asset.
In addition, Industrial Companies may (i) amortize the cost of purchased
know-how and patents over an eight-year period for tax purposes, (ii) elect to
file consolidated tax returns with additional related Israeli Industrial
Companies and (iii) deduct expenses related to public offerings in equal amounts
over three years.
Eligibility for benefits under the Encouragement of Industry Law is not
contingent upon the approval of any governmental authority. No assurance can be
given that we will continue to qualify as an Industrial Company, or will avail
ourselves of any benefits under this law in the future or that Industrial
Companies will continue to enjoy such tax benefits in the future.
EMPLOYEE STOCK OPTIONS
Effective from January 1, 2003, the Tax Reform Legislation enables a company to
grant options through one of three tax tracks:
(a) the income tax track through a trustee pursuant to which the optionee pays
income tax rate (according to the marginal tax rate of the optionee - up to
47% tax in 2008) plus payments to the National Insurance Institute and
health tax on the profit gained upon the earlier to occur of the transfer
of the options or the underlying shares from the trustee to the optionee or
the sale of the options or the underlying shares by the trustee, and the
company may recognize expenses pertaining to the options for tax purposes.
The options (or upon their exercise, the underlying shares) must be held by
a trustee for a period of 12 months commencing from the end of the year in
which the options were granted. Options that were granted following January
1, 2006 must be held by a trustee for a period of 12 months commencing on
the date on which the options were granted; or
(b) the capital gains tax track through a trustee pursuant to which the
optionee pays capital gains tax at a rate of 25% on the profit upon, the
earlier to occur of the transfer of the options or the underlying shares
from the trustee to the optionee or the sale of the options or the
underlying shares by the trustee (in this track the optionee is not
required to make payments to the National Insurance Institute and health
tax) and the Company may not recognize expenses pertaining to the options
for tax purposes. Options (or upon their exercise, the underlying shares)
granted prior to January 1, 2006, must be held by a trustee for either (i)
a period of 24 months commencing from the end of the year in which the
options were granted or (ii) for a period of 30 months commencing on the
date on which the options were granted, at the optionee's discretion and
deposited with the trustee. Options that were granted following January 1,
2006 must be held by a trustee for a period of 24 months commencing on the
date on which the options were granted and deposited with the trustee; or
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(c) the income tax track without a trustee pursuant to which the optionee pays
income tax rate (according to the marginal tax rate of the optionee up to
47% tax in 2008) plus payments to the National Insurance Institute and
health tax on the profit upon the sale of the underlying shares, and the
company may not recognize expenses pertaining to the options for tax
purposes.
In accordance with the provisions of the Tax Reform Legislation, if a company
has selected the capital gains track, the company must continue granting options
under the selected capital gains track until the end of the year following the
year in which the first grant of options under that trustee track will be made.
Notwithstanding the above, the company may at any time also grant options under
the provisions of the income tax track without a trustee.
The above rules apply only to employees, including officer holders but excluding
controlling shareholders.
TAXATION OF OUR SHAREHOLDERS
CAPITAL GAINS
Israeli law imposes a capital gains tax on the sale of capital assets. The law
distinguishes between real gain and inflationary surplus. The inflationary
surplus is the portion of the total capital gain that is equivalent to the
increase of the relevant asset's purchase price, which is attributable to the
increase in the Israeli CPI between the date of purchase and the date of sale.
Foreign residents who purchased an asset in foreign currency may request that
the inflationary surplus be computed on the basis of the devaluation of the NIS
against such foreign currency. The real gain is the excess of the total capital
gain over the inflationary surplus. The inflationary surplus accumulated from
and after December 31, 1993, is exempt from any capital gains tax in Israel
while the real gain is taxed at the applicable rate discussed below. Dealers in
securities in Israel are taxed at regular tax rates applicable to business
income.
Pursuant to the Convention Between the Government of the United States of
America and the Government of Israel with respect to Taxes on Income (the
"U.S.-Israel Tax Treaty"), the sale, exchange or disposition of ordinary shares
by a person who qualifies as a resident of the United States within the meaning
of the U.S.-Israel Tax Treaty and who is entitled to claim the benefits afforded
to such resident by the U.S.-Israel Tax Treaty (called a Treaty U.S. Resident)
will not be subject to Israeli capital gains tax unless (a) such Treaty U.S.
Resident is an individual and was present in Israel for more than 183 days
during the relevant taxable year or (b) such Treaty U.S. Resident holds,
directly or indirectly, shares representing 10% or more of the voting power of a
company during any part of the 12-month period preceding such sale, exchange or
disposition. A sale, exchange or disposition of shares by a Treaty U.S. Resident
who is an individual and was present in Israel for more than 183 days during the
relevant taxable year or who holds, directly or indirectly, shares representing
10% or more of the voting power of a company at any time during such preceding
12-month period would be subject to such Israeli tax, to the extent applicable,
unless the aforementioned exemption from capital gain tax for shares listed on
the Tel-Aviv Stock Exchange applies; however, in the event that under the
U.S.-Israel Tax Treaty and the Israeli tax law a Treaty U.S. Resident will be
subject to capital gain tax in Israel, such Treaty U.S. Resident would be
permitted to claim a credit for the Israeli taxes paid against the U.S. federal
income tax imposed on the sale, exchange or disposition, subject to the
limitations under U.S. law applicable to foreign tax credits. The U.S.-Israel
tax treaty does not relate to U.S. state or local taxes. For non-U.S. residents,
the purchaser of securities may be required to withhold a maximum of 20% capital
gains tax on all amounts received for the sale of our securities, for so long as
the capital gain from such a sale is not exempt from Israeli capital gains tax,
and unless a different rate is provided in a treaty between Israel and the
seller's country of residence.
On January 1, 2006, the Law for Amendment of the Income Tax Ordinance (Amendment
No. 147), (the "Tax Reform"), came into effect, thus imposing capital gains tax
at a rate not to exceed 20% on gains derived by an individual on or after
January 1, 2006 from the sale of securities in Israeli companies. The aforesaid
does not apply to the sale of securities by an individual who is classified as a
"significant shareholder" in the Company (one who holds, directly or indirectly,
alone or together with another, at least 10% in one or more of the means of
control in the Company - either at the time of sale of the securities or at any
time during the 12 months that preceded the above stated sale), in which case
the rate of tax in respect of the capital gains will not exceed 25%.
Furthermore, this tax rate does not apply to: (1) dealers in securities; (2)
shareholders that report in accordance with the Income Tax Law (Inflationary
Adjustment)-1985; or (3) shareholders who acquired their shares prior to an
initial public offering. 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. Non-Israeli residents will be
exempt from Israeli capital gains tax on any gains derived from the sale of
shares publicly traded on the Tel Aviv Stock Exchange (the "TASE") or on a
recognized stock exchange outside of Israel, provided such shareholders did not
acquire their shares prior to an initial public offering and provided that the
profits were not derived from a permanent establishment in Israel. However,
non-Israeli corporations selling such securities, including U.S. resident
corporations, will not be entitled to such an exemption if an Israeli resident
(i) has a controlling interest of 25% or more in the non-Israeli corporation, or
(ii) is the beneficiary which is directly or indirectly entitled to 25% or more
of the revenues or profits of the non-Israeli corporation. Notwithstanding the
foregoing, dealers in securities in Israel are taxed at regular tax rates
applicable to business income. In any event, the provisions of the Tax Reform do
not affect the exemption from capital gains tax for gains accrued before January
1, 2003 from a sale of securities in Israeli companies publicly traded on the
TASE or on a recognized stock exchange outside of Israel.
56
In addition, there is an exemption under certain Israeli domestic regulations,
according to which U.S. resident purchasers who are unable to benefit from the
U.S.-Israel tax treaty may wish to utilize a recently introduced special
exemption on capital gains arising from the sale of securities in an Israeli
company (including companies which are deemed an Israeli resident corporation
for tax purposes) between July 1, 2005, and December 31, 2008. In order for this
exemption to apply, the following conditions need to be met:
1. An application is to be submitted to the Israeli Tax Authority at the same
time as the reporting of the sale and capital gain;
2. The capital gain does not derive from a permanent establishment of the seller
in Israel;
3. The seller is an individual and has been a resident of a country with which
Israel has a tax treaty (e.g., the U.S) during the ten continuous years prior to
the acquisition or is an entity where at least 75% of the means of control of
the entity are ultimately held, directly or indirectly, by individual
shareholders who are residents of a country with which Israel has a tax treaty
(e.g., the U.S) during the ten continuous years prior to the acquisition. Where
the entity is listed on a non-Israel stock exchange, this condition is deemed
met automatically in respect of "non-material" shareholders and unless it can be
proved otherwise. "Material" is defined as a 10% or more holding, directly or
indirectly, of any means of control, together with related parties;
4. The shares were not purchased from a related party and the provision of the
part of the Israeli Income Tax Ordinance which addresses capital gains or a
certain tax exemption granted in connection with the issuance of shares in
exchange for the transfer of ownership in a real estate property to the issuer,
did not apply to such purchase of shares;
5. The sale was reported to the tax authority in the country of the seller's
residence; and
6. Within 30 days of the acquisition, the transaction was disclosed in full to
the Israeli Tax Authority.
We note that pursuant to a recent amendment to the ITO, sale of securities in a
private Israeli company, which were purchased after January 1, 2009, should be
exempt from tax in Israel provided conditions 2 and 4 are met.
WITHHOLDING TAX
Nonresidents of Israel are subject to income tax on income accrued or derived
from sources in Israel. These sources of income include passive income such as
dividends, royalties and interest, as well as non-passive income from services
rendered in Israel. We are generally required to withhold income tax at the rate
of 20% on all distributions of dividends, although, with respect to U.S.
taxpayers, according to the U.S.-Israel Tax Treaty, if the dividend recipient is
a corporation that holds 10% or more of our voting stock for a certain period
prior to the declaration and payment of the dividend, we are only required to
withhold at a 12.5% rate. Notwithstanding the foregoing, with regard to
dividends generated by an Approved Enterprise, we are required to withhold
income tax at the rate of 15%. If the dividend is attributable partly to income
derived from an Approved Enterprise, and partly to other sources of income, the
withholding rate will be a blended rate reflecting the relative portions of the
two types of income. The withheld tax is the final tax in Israel on dividends
paid to non-residents who do not conduct business in Israel.
ESTATE AND GIFT TAX
Israel presently has no estate or gift tax.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of United States federal income tax considerations is
based on the United States Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations, judicial decisions and published positions of the
United States Internal Revenue Service (the "IRS"), all as in effect on the date
hereof. This discussion does not address all aspects of United States federal
income taxation (including potential application of the alternative minimum tax)
that may be relevant to a particular shareholder based on such shareholder's
particular circumstances. In particular, the following discussion does not
address the United States federal income tax consequences of purchasing, holding
or disposing of our ordinary shares to shareholders who own (directly,
indirectly constructively or through attribution) 10% or more of our outstanding
voting stock, who hold our stock as part of a straddle or hedging or conversion
transaction, or who are broker-dealers, traders in securities who elect to
mark-to-market, insurance companies, tax-exempt organizations, banks, financial
institutions, non-resident aliens of the United States, partnerships or entities
classified as partnerships for U.S. federal income tax purposes or U.S. Holders
(as defined below) whose functional currency is not the U.S. dollar. The
following discussion also does not address any aspect of State, local or
non-United States tax laws. Further, this summary generally considers only a
U.S. Holder that will own our ordinary shares as capital assets (generally,
assets held for investment). Each prospective investor should consult its tax
advisor with respect to the specific United States federal, state and local tax
consequences of purchasing, holding or disposing of our ordinary shares.
TAXATION OF U.S. HOLDERS
For purposes of this discussion, a "U.S. Holder" means any beneficial owner of
our ordinary shares who, for United States federal income tax purposes, is: (i)
a citizen or resident of the United States; (ii) a corporation or entity treated
as a corporation organized in or under the laws of the United States or any
state thereof or the District of Columbia; (iii) an estate the income of which
is subject to United States federal income taxation regardless of source; or
(iv) a trust, if a United States court is able to exercise primary supervision
over its administration and one or more United States persons have the authority
to control all of its substantial decisions or a trust that was in existence on
August 20, 1996 and validly elected to continue to be treated as a domestic
trust. A "Non-U.S. Holder" is any beneficial owner other than a U.S. Holder. If
a partnership or any other entity or arrangement treated as a partnership holds
our ordinary shares, the United States federal income tax treatment of a partner
generally will depend upon the status of the partner and the activities of the
partnership. If you are a partner in a partnership holding our ordinary shares,
you should consult your tax advisor.
57
DISTRIBUTIONS. We do not anticipate that we will make distributions to
shareholders in the foreseeable future. If we do make any such distributions,
the gross amount of such distributions (before reduction for any Israeli
withholding tax) will be included in the gross income of U.S. Holders to the
extent of our earnings and profits, as calculated under United States federal
income tax principles. Such dividends will not qualify for the dividends
received deduction available in certain circumstances to corporate holders.
Subject to the discussion below under "Passive Foreign Investment Company
Status", to the extent that any such distribution exceeds our earnings and
profits, such distribution will be treated as a non-taxable return of capital to
the extent of the U.S. Holder's adjusted basis in our ordinary shares and
thereafter as taxable capital gain. For United States federal income tax
purposes, the amount of any dividend that we pay in NIS to a U.S. Holder will
equal the U.S. dollar value of such NIS at the exchange rate in effect on the
date the dividend is considered to be received by the U.S. Holder, regardless of
whether the NIS are actually converted into U.S. dollars at that time. A U.S.
Holder who receives a foreign currency distribution and converts the foreign
currency into U.S. dollars subsequent to receipt will have foreign exchange gain
or loss, based on any appreciation or depreciation in the value of the foreign
currency against the U.S. dollar, which will generally be United States source
ordinary income or loss.
REDUCED TAX RATES FOR CERTAIN DIVIDENDS
REDUCED TAX RATES FOR CERTAIN DIVIDENDS. Subject to the discussion below under
"Passive Foreign Investment Company Status", for taxable years before January 1,
2011, a dividend paid by us to certain shareholders will be taxed at the
preferential tax rates applicable to long-term capital gains if (a) we are a
"qualified foreign corporation" (as defined below), (b) the U.S. Holder
receiving such dividend is an individual, estate, or trust and (c) such dividend
is paid on our ordinary shares that have been held by such U.S. Holder for more
than 60 days during the 120-day period beginning 60 days before the "ex-dividend
date" (i.e., the first date that a purchaser of such Share will not be entitled
to receive such dividend).
Generally, we may be considered a "qualified foreign corporation" (a "QFC") if
we are eligible for the benefits of a comprehensive income tax treaty with the
United States which includes an information exchange program that the IRS
determines is satisfactory. However, even if we are so eligible, we will not be
treated as a QFC if we were a PFIC for the taxable year during which we paid a
dividend or for the preceding taxable year. As discussed below, we do not
believe that we should be considered a PFIC for any tax year through and
including the tax year ended December 31, 2007 and thus for those years we
expect to be a QFC. However, for the tax year ended December 31, 2008 there is a
significant possibility that we could be considered a PFIC and thus we may not
be considered a QFC for the tax year 2008 and potentially not for any following
taxable year.
CREDIT FOR ISRAELI TAXES WITHHELD. Any dividends that we pay to a U.S. Holder
with respect to our ordinary shares generally will be treated for United States
federal income tax purposes as foreign-source income. Subject to certain
conditions and limitations, any Israeli taxes withheld or paid with respect to
dividends on our ordinary shares generally will be eligible for credit against
the U.S. Holder's United States federal income tax liability. Such limitations
include extensive separate computation rules under which foreign tax credits
allowable with respect to specific classes of foreign-source income cannot
exceed the United States federal income taxes otherwise payable with respect to
such classes of income. Subject to the particular circumstances of a U.S.
Holder, any dividends with respect to our ordinary shares generally will be
classified as "passive income" for foreign tax credit purposes.
Alternatively, a U.S. Holder may elect to claim a United States tax deduction
for any such Israeli tax, but only for a tax year in which the U.S. Holder
elects to do so with respect to all foreign income taxes paid. In addition, a
non-corporate U.S. Holder cannot elect to deduct Israeli taxes if such U.S.
Holder does not itemize deductions.
DISPOSITIONS. In general, any gain or loss recognized by a U.S. Holder on the
sale or other disposition of our ordinary shares will be United States-source
income or loss for purposes of the United States foreign tax credit limitation,
except in certain limited situations (typically only applicable to sales through
a permanent establishment in Israel) where the gain may be re-sourced. U.S.
Holders should consult their tax advisors regarding the application of the
United States foreign tax credit limitation to gain or loss recognized on the
disposition of our ordinary shares and the treatment of any foreign currency
gain or loss on any NIS received in respect of the sale or other disposition of
our ordinary shares.
PASSIVE FOREIGN INVESTMENT COMPANY STATUS
Generally a non-United States corporation is treated as a passive foreign
investment company (a "PFIC") for United States federal income tax purposes if
either (i) 75% or more of its gross income (including the pro rata share of
gross income of any company (United States or non-United States) in which such
corporation is considered to own 25% or more of the stock by value) for the
taxable year is passive income, generally referred to as the "income test," or
(ii) 50% or more of the average value of its assets (including the pro rata
value of the assets of any company in which such corporation is considered to
own 25% or more of the stock by value) during the taxable year, measured at the
end of each quarter, produce or are held for the production of passive income in
the taxable year, generally referred to as the "asset test".
58
The asset test generally requires a company to determine the value of its
passive assets as a percentage of the value of its total assets. For a publicly
traded corporation, such as us, the total value of its assets will generally be
treated as equal to the sum of (i) the average value of its outstanding stock
plus (ii) its liabilities. In most cases, the average value of the outstanding
stock is determined based on its trading value, although in certain cases it may
be possible for a corporation to demonstrate a different value if it can support
that the average trading value of its stock does not reflect its real fair
market value and can further support an alternative valuation.
IF THE STANDARD VALUATION METHOD OF USING THE AVERAGE TRADING VALUE OF OUR
ORDINARY SHARES WERE TO BE USED, THIS WOULD RESULT IN US BEING A PFIC FOR THE
TAX YEAR ENDED DECEMBER 31, 2008. THEREFORE, THERE IS A SIGNIFICANT POSSIBILITY
THAT WE WERE A PFIC IN 2008 AND WE MAY CONTINUE TO BE A PFIC IN 2009 IF THE
AVERAGE TRADING VALUE OF OUR SHARES DOES NOT SIGNIFICANTLY CHANGE OR THE
PERCENTAGE OF OUR PASSIVE ASSETS IS SIGNIFICANTLY REDUCED. IN VIEW OF THIS
SIGNIFICANT POSSIBILITY, U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS
FOR GUIDANCE.
If we were deemed to be a PFIC for any taxable year during which a U.S. Holder
held ordinary shares and such holder failed to make either a "QEF election" or a
"mark-to-market election" (each as described below):
o gain recognized by the U.S. Holder upon the disposition of, as well as
income recognized upon receiving certain dividends on, our ordinary
shares would be taxable as ordinary income;
o the U.S. Holder would be required to allocate such dividend income
and/or disposition gain ratably over such holder's entire holding
period for such ordinary shares;
o the amount allocated to each year other than the year of the dividend
payment or disposition would be subject to tax at the highest
individual or corporate tax rate, as applicable, and an interest
charge would be imposed with respect to the resulting tax liability;
o the U.S. Holder would be required to file an annual return on IRS Form
8621 regarding distributions received on, and gain recognized on
dispositions of, our ordinary shares; and
o any U.S. Holder who acquired our ordinary shares upon the death of a
U.S. Holder would not receive a step-up of the income tax basis to
fair market value of such shares. Instead, such U.S. Holder
beneficiary would have a tax basis equal to the decedent's basis, if
lower.
Although a determination as to a corporation's PFIC status is made annually, an
initial determination that a corporation is a PFIC for any taxable year
generally will cause the above described consequences to apply for all future
years to U.S. Holders who held shares in the corporation at any time during a
year when the corporation was a PFIC and who did not timely make a QEF election
or mark-to-market election (each as described below) with respect to such shares
with their United States federal income tax return for the first tax year in
which such U.S. Holder owned the shares and the corporation was a PFIC. This
will be true even if the corporation ceases to be a PFIC in later years.
However, with respect to a PFIC that does not make any distributions or deemed
distributions, the above tax treatment would apply only to U.S. Holders who
realize gain on their disposition of shares in the PFIC.
QEF election
A U.S. Holder that owns ordinary shares may elect, provided that the Company
provides such person with certain information, to have the Company treated, with
respect to that person, as a "Qualified Electing Fund" or QEF. (A U.S. Holder
who makes a QEF election with respect to the Company is referred to herein as an
"Electing Shareholder"). The QEF election is made on a
shareholder-by-shareholder basis, applies to all ordinary shares held or
subsequently acquired by the Electing Shareholder and can only be revoked with
consent of the United States Internal Revenue Service. The QEF Election must be
made by a shareholder on or before the due date (with regard to extensions) for
such person's tax return for the taxable year for which the election is made
and, once made, will be effective for all subsequent taxable years of such
person unless revoked.
An Electing Shareholder generally will be required to include currently in gross
income its pro rata share of the Company's annual ordinary earnings and net
capital gains, if any, in any taxable year that the Company is a PFIC. Any
income inclusion will be required whether or not such shareholder owns ordinary
shares for an entire taxable year or at the end of the Company's taxable year.
The amount that the Electing Shareholder will have to include in income will be
determined without regard to the Company's prior year losses or the amount of
cash distributions, if any, received from the Company. Electing Shareholders
will be required to pay tax currently on such income, unless an election is made
to defer such payment and the shareholder pays an interest charge.
An Electing Shareholder is required to make an annual information statement
which would include information as to its pro rata share of ordinary earnings
and net capital gains, calculated under U.S. tax principles, and as to
distributions on such ordinary shares. If, in the future, we determine that we
are or were a PFIC, we may attempt to assist such shareholder with the gathering
of the information required to make such information statement, but we are not
required to do so. Electing Shareholders should be aware that the information
required may not be freely available.
59
So long as an Electing Shareholder's QEF election is in effect with respect to
the entire holding period for its ordinary shares, any gain or loss realized by
such shareholder on the sale or exchange of such ordinary shares held as capital
assets ordinarily would be a capital gain or loss and taxable to such
shareholder in the same manner as if the shares were not shares in a PFIC.
U.S. Holders will be permitted to make retroactive elections in particular
circumstances, including if the U.S. Holder had a reasonable belief that the
Company was not a PFIC and filed a protective election. U.S. Holders should
consult their tax advisors as to the consequences of making a protective QEF
election or other consequences of making the QEF election.
In the event that we were deemed to be a PFIC for any taxable year and a U.S.
Holder failed to make a QEF election for the first taxable year that we were a
PFIC and such U.S. Holder owned our ordinary shares, the U.S. Holder could
obtain treatment similar to that afforded a shareholder who has made a timely
QEF election by making a QEF election and a deemed sale election or "purging
election" for the same taxable year. If a purging election is made, the U.S.
Holder will be treated as if it had sold our ordinary shares for their fair
market value on the last day of the taxable year and will recognize gain, but
not loss, on such deemed sale in accordance with the general PFIC rules,
including the interest charge provisions described above. Thereafter, the U.S.
Holder's interest will be treated as an interest in a qualified electing fund.
Mark-to-market election
A U.S. Holder generally may make a mark-to-market election with respect to
shares of "marketable stock" of a PFIC. The term "marketable stock" generally
includes stock of a PFIC that is "regularly traded" on a "qualified exchange or
other market". Generally, a "qualified exchange or other market" means (i) a
national securities exchange which is registered with the United States
Securities and Exchange Commission or the national market system established
pursuant to Section 11A of the United States Securities Exchange Act of 1934 or
(ii) a foreign securities exchange that is regulated or supervised by a
governmental authority of the country in which the market is located and that
has the following characteristics: (a) the exchange has trading volume, listing,
financial disclosure, surveillance and other requirements designed to prevent
fraudulent and manipulative acts and practices, to remove impediments to and
perfect the mechanism of a free and open, fair and orderly, market, and to
protect investors, and the laws of the country in which the exchange is located
and the rules of the exchange ensure that such requirements are actually
enforced and (b) the rules of the exchange effectively promote active trading of
listed stocks. A class of stock is "regularly traded" on a qualified exchange or
other market for any calendar year during which such class of stock is traded
(other than in de minimis quantities) on at least 15 days during each calendar
quarter, subject to special rules for an initial public offering. In the event
that our shares do not qualify as "marketable stock" for these purposes, a U.S.
Holder will not be eligible to make a mark-to-market election.
As with a QEF election, a mark-to-market election is made on a
shareholder-by-shareholder basis, applies to all ordinary shares held or
subsequently acquired by a U.S. Holder and can only be revoked with consent of
the United States Internal Revenue Service (except to the extent the ordinary
shares no longer constitute "marketable stock"). As a result of a mark-to-mark
election, in any taxable year that the Company is a PFIC, a U.S. Holder would
generally be required to report gain or loss annually to the extent of the
difference between the fair market value of the ordinary shares at the end of
the taxable year and such U.S. Holder's adjusted tax basis of the ordinary
shares at that time. Any gain under this computation, and any gain on an actual
disposition of the ordinary shares, would be treated as ordinary income. Any
loss under this computation, and any loss on an actual disposition of ordinary
shares, generally would be treated as ordinary loss to the extent of the
cumulative net mark-to-market gain previously included. Any remaining loss from
marking ordinary shares to market will not be allowed, and any remaining loss
from an actual disposition of ordinary shares generally would be capital loss.
The U.S. Holder's tax basis in the ordinary shares is adjusted annually for any
gain or loss recognized under the mark-to-market election.
Unless either (i) the mark-to-market election is made with respect to the
taxable year in which the U.S. Holder's holding period for the ordinary shares
commences or (ii) a QEF election has been in effect for such person's entire
holding period, any mark-to-market gain for the election year generally will be
subject to the general rules applicable to the disposition of shares of a PFIC,
discussed above.
U.S. HOLDERS OF OUR ORDINARY SHARES SHOULD CONSULT THEIR TAX ADVISORS ABOUT THE
PFIC RULES, INCLUDING THE POSSIBILITY, AND ADVISABILITY OF, AND THE PROCEDURE
AND TIMING FOR MAKING A QEF OR MARK-TO-MARKET ELECTION IN CONNECTION WITH THEIR
HOLDING OF ORDINARY SHARES, INCLUDING OPTIONS TO ACQUIRE OUR ORDINARY SHARES.
CONTROLLED FOREIGN CORPORATION STATUS
We have not determined whether we meet the definition of a controlled foreign
corporation ("CFC") for United States federal income tax purposes. We would be a
CFC if U.S. persons each owning (directly, indirectly or by attribution) 10% or
more of the voting power of our shares ("10% Shareholders") own in the aggregate
more than 50% of the voting power or value of our shares. If we were a CFC, 10%
Shareholders could have adverse consequences, including being required to
include a portion of our undistributed income as constructive dividends in
taxable income each year.
60
U.S. HOLDERS OF OUR ORDINARY SHARES WHO MAY BE 10% SHAREHOLDERS SHOULD CONSULT
THEIR INDEPENDENT TAX ADVISORS ABOUT THE CFC RULES.
TAXATION OF NON-U.S. HOLDERS
Subject to the discussion below with respect to the United States backup
withholding tax, a Non-U.S. Holder generally will not be subject to United
States federal income tax on dividends from us, if any, or gain from the sale or
other disposition of ordinary shares, unless (i) such income is effectively
connected with the conduct by the Non-U.S. Holder of a United States trade or
business, and in the case of a resident of a country which has an income tax
treaty with the United States, such income is attributable to a permanent
establishment (or in the case of an individual, a fixed place of business) in
the United States; or (ii) with respect to any gain on the sale or other
disposition of ordinary shares realized by an individual Non-U.S. Holder, such
individual Non-U.S. Holder is present in the United States for 183 days or more
in the taxable year of the sale or other disposition and meets certain other
conditions.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under the Code, under certain circumstances, United States tax information
reporting and "backup withholding" of United States federal income tax on
dividends on, and the proceeds of dispositions of, our ordinary shares may apply
to both U.S. Holders and Non-U.S. Holders. Backup withholding will not apply,
however, to a holder who furnishes a correct taxpayer identification number or
certificate of foreign status and makes any other required certification or who
is otherwise exempt from backup withholding. Generally, a U.S. Holder will
provide such certification on IRS Form W-9, and a non-U.S. Holder will provide
such certification on IRS Form W-8. Any amounts withheld under the United States
backup withholding rules will be allowed as a refund or credit against the U.S.
Holder's or the non-U.S. Holder's United States federal income tax liability,
provided the required information is furnished to the IRS.
10.F. DIVIDENDS AND PAYING AGENTS
Not applicable.
10.G. STATEMENT BY EXPERTS
Not applicable.
10.H. DOCUMENTS ON DISPLAY
We are subject to certain of the information reporting requirements of the
Exchange Act. As a "foreign private issuer" we are exempt from the rules and
regulations under the Exchange Act prescribing the furnishing and content of
proxy statements, and our officers, directors and principal shareholders are
exempt from the reporting and "short-swing" profit recovery provisions contained
in Section 16 of the Exchange Act, with respect to their purchase and sale of
our shares. In addition, we are not required to file reports and financial
statements with the Securities and Exchange Commission as frequently or as
promptly as U.S. companies whose securities are registered under the Exchange
Act. However, we file with the Securities and Exchange Commission an annual
report on Form 20-F containing financial statements audited by an independent
accounting firm, within 180 days after the end of each fiscal year.
You may read and copy any document we file with the SEC at its public reference
facilities at, 100 F Street, N.E., Room 1580, Washington, D.C. 20549 and at the
SEC's regional offices at 233 Broadway, New York, NY 10279 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, IL 60661. You may also obtain
copies of the documents at prescribed rates by writing to the Public Reference
Section of the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The
SEC also maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. The address of this web site is http://www.sec.gov. Please call
the SEC at 1-800-SEC-0330 for further information on the operation of the public
reference facilities.
10.I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since the majority of our revenues are paid in or linked to U.S. dollars, we
believe that inflation and fluctuations in the NIS/U.S. dollar exchange rate
have no material effect on our revenues. Inflation in Israel and U.S. dollar
exchange rate fluctuations, however, have some influence on our expenses and, as
a result, on our net income. The cost of our Israel operations, as expressed in
U.S. dollars, is influenced by the extent to which any increase in the rate of
inflation in Israel is not offset, or is offset on a lagging basis, by a
devaluation of the NIS in relation to the U.S. dollar.
A significant portion of our expenditures are employee compensation-related.
Salaries are paid in NIS. The devaluation of the NIS against the U.S. dollar
decreases employee compensation expenditures as expressed in dollars
proportionally. As a result, we sometimes use derivative financial instruments
in our investment portfolio to hedge foreign currency or other types of market
risks. We place our investments in instruments that meet high credit quality
standards. We generally invest cash in time deposit. We do not expect any
material loss with respect to our investment portfolio.
61
Our results of operations are affected by a devaluation of the NIS against the
U.S. dollar. A devaluation of the NIS in relation to the U.S. dollar will have
the effect of decreasing the U.S. dollar value of our assets, mostly current
assets, to the extent of the underlying value of which is NIS-based. Such a
devaluation would also have the effect of reducing the dollar amount of any of
our liabilities which are payable in NIS, unless such payables are linked to the
dollar.
The table below provides information about our investment portfolio. For
investment securities, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates. Our investment
policy requires that all investments mature in two years or less.
Principal (Notional) Amounts by Expected Maturity in U.S. Dollars:
FAIR MARKET VALUE ON DECEMBER 31
(IN THOUSANDS, EXCEPT INTEREST RATES AND DURATION)
2006 2007 2008
--------- --------- ---------
Total Portfolio 9,116 5,035 15,544
Average Interest Rate 4.9% 4.7% 1.69%
Average Duration (Month) 0.25 0.25 2.74
Cash Equivalents (up to three
months maturity) 6,116 5,035 5,644
Average Interest Rate 4.8% 4.7% 0.03%
Short Term Investments
(three-twelve months maturity) 3,000 - 9,900
Average Interest Rate 5.2% -% 2.63%
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART TWO.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
The Company is not in default of any payment of principal, interest, sinking or
purchase fund installment, or indebtedness of the Company or any of its
subsidiaries exceeding 5% of total assets on a consolidated basis. There has
been no payment of dividends that is in arrears, and there has been no material
delinquency relating to any class of preferred stock in the Company or its
subsidiaries.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
There have been no material changes to or limitations on the rights of the
holders of any class of registered shares caused by the changes in the terms of
the securities or the issuance or modification of a different class of
securities. There has been no material withdrawal or substitution of assets.
ITEM 15T. CONTROLS AND PROCEDURES
15T.A. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
period covered by this annual report. Our management recognizes that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives and our management
applies its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
Our management has concluded that, as of December 31, 2008, the Company's
controls and procedures were not effective due to (i) a lack of adequate
information flow between the Company's sales and financial departments,
resulting in the information processed by the financial department being
incomplete and (ii) a lack of adequate allocation of responsibilities within the
financial department among the employees who are involved in the financial
closing and reporting process.
Consequently, as of December 31, 2008, the Company's internal controls did not
provide us with reasonable assurance that information required to be disclosed
by us in the reports we file or submit under the Exchange Act and the rules
thereunder is recorded, processed and reported accurately.
62
To address the material weakness in internal control over financial reporting,
the Company performed additional analyses and other post closing procedures in
order to assure that the consolidated financial statements included in this
annual report have been prepared in accordance with generally accepted
accounting principles in the United States.
15T.B. MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. Our internal control over financial reporting is a
process to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Our internal control
over financial reporting includes those policies and procedures that:
o pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our
assets;
o provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorizations
of our management and directors; and
o provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements.
Our management recognizes that there are inherent limitations in the
effectiveness of any system of internal control over financial reporting,
including the possibility of human error and the circumvention or override of
internal control. Accordingly, even effective internal control over financial
reporting can provide only reasonable assurance with respect to financial
statement preparation, and may not prevent or detect all misstatements. Further,
because of changes in conditions, the effectiveness of internal control over
financial reporting may vary over time.
Our management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008. The objective of this assessment was to
determine whether the Company's internal control over financial reporting was
effective as of December 31, 2008. That assessment identified the following
material weakness in internal control over financial reporting as of December
31, 2008. A material weakness is a deficiency, or a combination of deficiencies,
in internal control over financial reporting, which result(s) in a reasonable
possibility that a material misstatement of financial statements will not be
prevented or detected on a timely basis.
Our management has concluded that as of December 31, 2008, a material weakness
existed with respect to procedures applied by the Company in connection with the
financial statements close process, which material weakness results in a
reasonable possibility that a material misstatement of the Company's annual
financial statements will not be prevented or detected on a timely basis. Such
weakness was reflected mainly in a lack of adequate information flow between the
Company's sales and financial departments, resulting in the information
originally processed by the financial department being incomplete, and in an
additional lack of adequate allocation of responsibilities within the financial
department among the employees who are involved in the financial closing and
reporting process.
Management intends to take the following remediation steps in connection
with the foregoing material weakness:
(1) The Company intends to allocate responsibilities in a clear manner
among the employees who are involved in the financial closing and
reporting process, including the management.
(2) The Company intends to adopt a clear policy of financial department
approval for each sale and sales department input for each sale
recognized in the reports.
The Company's annual report for the year ended December 31, 2007 provided that a
material weakness was also reflected in a lack of effective controls designed to
provide reasonable assurance that material errors in revenues with respect to
establishment of VSOE would be prevented or detected in a timely manner. Such
material weakness was remedied as of December 31, 2008.
As we have done over the last year, we intend to continue to monitor our
internal controls and procedures and our progress on the remediation steps
identified above. We believe that the steps taken to date, together with the
measures described above (once designed and operating effectively), will
remediate the remaining material weakness we have identified and strengthen our
internal control over financial reporting. If further improvements and/or
enhancements are necessary, we will take steps to implement such improvements
and/or enhancements.
Our financial statements have been audited by Kost, Forer, Gabbay & Kasierer (a
Member of Ernst & Young Global), an independent registered public accounting
firm.
63
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 SECURITIES AND EXCHANGE
COMMISSION THAT PERMIT US TO PROVIDE ONLY MANAGEMENT'S REPORT IN THIS ANNUAL
REPORT.
15T.C. ATTESTATION REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM
Not applicable.
15T.D. CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the period covered by this annual report, we have taken the following
remediation steps with respect to the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act): (i) the composition of a policy for Financial Closing & Reporting
(FCR) process, (ii) the use of US GAAP checklists and (iii) steps to ensure that
the Company's accounting and financing personnel is more proficient and up to
date with respect to accounting matters and other areas relevant to the
preparation of financial reporting. In addition, in late 2008, the Company began
taking steps towards adopting a clear policy of financial department approval
for each sale and sales department input for each sale recognized in the
reports. Other than the foregoing, there have not been any changes that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
ITEM 16.A. AUDIT COMMITTEE FINANCIAL EXPERT.
The Company's audit committee is comprised of Yoseph Dauber, Eran Dariel and
Tsipi Kagan. We believe that Mr. Dauber and Ms. Kagan qualify as audit committee
financial experts as such term is defined in the Form 20-F. See "Item 6.C -
Directors, Senior Management and Employees - Board Practices".
ITEM 16.B. CODE OF ETHICS.
We have adopted a written code of ethics that applies to our principal executive
officer, principal financial officer, executive vice president global sales,
principal controller, treasurer and to persons performing similar functions. A
copy of our code of ethics was filed with our annual report on Form 20-F for the
year ended December 31, 2003 as Exhibit 11.
We have also adopted updated written standards of business conduct that apply to
all directors, officers and employees. A copy of our standards of business
conduct is attached hereto as Exhibit 11(c). During 2006, our board of directors
adopted certain amendments to the insider trading policy included in such
standards of business conduct. A copy of the amended insider trading policy was
filed as an exhibit to our annual report on Form 20-F for the year ended
December 31, 2006.
ITEM 16.C. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Our audit committee is responsible for the oversight of our independent
auditors' work. The audit committee's policy is to pre-approve all audit and
non-audit services provided by our auditors. These services may include audit
services, audit-related services, tax services and other services, as further
described below. The audit committee sets forth the basis for its pre-approval
in detail, listing the particular services or categories of services which are
pre-approved, and setting forth a specific budget for such services. Additional
services may be pre-approved by the audit committee on an individual basis. Our
audit committee pre-approval policies and procedures for audit and non-audit
services were filed as an exhibit to our annual report on Form 20-F for the year
ended December 31, 2003.
The auditors of VocalTec billed for the following fees for audit and
audit-related services in 2007 and 2008 (in thousands of U.S. dollars):
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2007 2008
------------------------- -------------------------
SERVICES RENDERED FEES PERCENTAGES FEES PERCENTAGES
----------------- --------- --------- --------- ---------
Audit (1) 85 77% 99 51%
Audit-related (2) - - - -
Tax (3) 25 23% 53 27%
Other (4) - - 42 22%
Total 110 100% 194 100%
(1) Audit fees consist of services that would normally be provided in connection
with statutory and regulatory filings or engagements, including services that
generally only the independent accountant can reasonably provide.
64
(2) Audit-related fees relate to assurance and associated services that
traditionally are performed by the independent auditor, including: accounting
consultation and consultation concerning financial accounting and reporting
standards.
(3) Tax fees relate to tax compliance, planning and advice.
(4) Other fees relate to consulting services.
All of the services referred to in clauses (2), (3) and (4) above were approved
by the audit committee of VocalTec.
ITEM 16.D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
ITEM 16.E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS.
MAXIMUM NUMBER (OR
APPROXIMATE DOLLAR
TOTAL NUMBER OF SHARES VALUE) OF SHARES THAT
PURCHASED AS PART OF MAY YET BE PURCHASED
TOTAL NUMBER OF ORDINARY PUBLICLY ANNOUNCED PLANS UNDER THE PLANS OR
PERIOD SHARES PURCHASED PRICE PAID PER SHARE OR PROGRAMS PROGRAMS
---------------------------- -------------------------- -------------------------- -------------------------- --------------------------
March 2, 2009 1,673,549(1) $0.40 none US$0
ITEM 16F: CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
None.
ITEM 16.G: CORPORATE GOVERNANCE
Except as otherwise indicated, the Company is in compliance with corporate
governance standards as currently applicable to the Company under Israeli, U.S.,
SEC and Nasdaq laws and regulations. We are not in compliance with Nasdaq
Marketplace Rules 5605(e)(2) (requiring companies to adopt a formal written
charter or board resolution addressing the company's nominations process),
5605(b)(2) (Regularly scheduled meetings of the company's independent directors)
and 5635(c) (Regarding the establishment of or a material amendment to a stock
option or purchase plan or other equity compensation arrangement). Under Israeli
law, the nominations process is conducted by the full board of directors.
Similarly, under Israeli law, all matters that are subject to the approval of a
company's board of directors are discussed by the full board of directors.
Finally, under Israeli law, the board of directors has the authority to
establish stock option or purchase plans or other equity compensation
arrangements, and to adopt material amendments to such plans.
Furthermore, we have elected to follow our home country practice in lieu of the
requirements set forth in Nasdaq Marketplace Rule 5250(d)(1) which require a
domestic United States company to make available to its shareholders a copy of
its annual report containing its audited financial statements in one of three
specific ways. Instead of distributing copies of our annual report by mail,
furnishing an annual report in accordance with Rule 14a-16 under the Exchange
Act or posting our annual report on our website and undertaking to provide a
hard copy thereof free of charge upon request, we simply make our annual report
available to shareholders via our website (http://www.vocaltec.com).
----------
(1) Represents shares purchased under the Stock Repurchase Agreement between us
and Cisco Systems International B.V., dated March 2, 2009. Under the Share
Purchase Agreement we bought an aggregate of 1,673,549 of our shares,
constituting approximately 22.7% of our issued and outstanding share capital as
of such date, from Cisco Systems International B.V., our largest shareholder as
of such date. The share purchase was executed at a price per share of $0.40, for
a total aggregate purchase price of approximately $669,000.
65
PART THREE.
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
VOCALTEC COMMUNICATIONS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008
IN U.S. DOLLARS
INDEX
PAGE
------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2
CONSOLIDATED BALANCE SHEETS F-3 - F-4
CONSOLIDATED STATEMENTS OF OPERATIONS F-5
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8 - F-31
F - 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
VOCALTEC COMMUNICATIONS LTD.
We have audited the accompanying consolidated balance sheets of VocalTec
Communications Ltd. ("the Company") and its subsidiaries as of December 31, 2008
and 2007, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2008. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit 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. We were not engaged to
perform an audit of the Company's and its subsidiaries' internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's and its subsidiaries' internal
control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 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, 2008 and 2007, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2008, in conformity with U.S. generally accepted
accounting principles.
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
June 4, 2009 A Member of Ernst & Young Global
F - 2
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
DECEMBER 31,
--------------------
NOTE 2008 2007
------- ------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,090 $ 4,496
Short term bank deposits 9,900 -
Restricted cash 554 539
Trade receivables (net of allowance for doubtful accounts of $ 0 and
$ 160 as of December 31, 2008 and 2007, respectively) 214 625
Prepaid expenses and other accounts receivable 3 483 1,543
Severance pay funds 489 421
Inventories 4 38 261
------- -------
TOTAL current assets 16,768 7,885
------- -------
SEVERANCE PAY FUNDS 618 1,010
------- -------
PROPERTY AND EQUIPMENT, NET 5 614 655
------- -------
OTHER INTANGIBLE ASSETS 6 160 2,481
------- -------
GOODWILL 6 - 2,297
------- -------
Total assets $18,160 $14,328
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F - 3
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
DECEMBER 31,
-----------------------
NOTE 2008 2007
------ -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables $ 1,707 $ 813
Accrued expenses and other accounts payable 7 3,300 3,166
Accrued severance pay 756 552
Deferred revenues 885 2,697
-------- --------
TOTAL current liabilities 6,648 7,228
-------- --------
LONG-TERM LIABILITIES:
Accrued severance pay 870 1,393
-------- --------
TOTAL long-term liabilities 870 1,393
-------- --------
TOTAL liabilities 7,518 8,621
-------- --------
COMMITMENTS AND CONTINGENCIES 8
SHAREHOLDERS' EQUITY: 10
Share capital
Ordinary shares of NIS 0.13 par value:
Authorized - 150,000,000 shares at December 31, 2008
and 2007; Issued and outstanding - 7,376,364 shares
at December 31, 2008 and 2007 213 213
Other comprehensive income 12 76 18
Additional paid-in capital 94,761 93,592
Accumulated deficit (84,408) (88,116)
-------- --------
TOTAL shareholders' equity 10,642 5,707
-------- --------
$ 18,160 $ 14,328
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F - 4
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
YEAR ENDED DECEMBER 31,
--------------------------------------
NOTE 2008 2007 2006
------ -------- -------- --------
Sales: 13
Products $ 3,980 $ 3,006 $ 4,738
Services 2,134 2,748 2,542
-------- -------- --------
6,114 5,754 7,280
-------- -------- --------
Cost of sales *):
Products 2,027 2,027 2,171
Services 580 523 563
-------- -------- --------
2,607 2,550 2,734
Inventory write-off - 459 -
Amortization of intangible assets 328 385 392
-------- -------- --------
2,935 3,394 3,126
-------- -------- --------
Gross profit 3,179 2,360 4,154
-------- -------- --------
Operating expenses:
Research and development, net 14 4,154 4,567 4,619
Selling and marketing 3,554 4,736 4,147
General and administrative 2,704 1,992 2,474
Income from sale of patents, net 17 (14,913) - -
Impairment of goodwill and intangible assets 3,993 5,437 -
-------- -------- --------
TOTAL net operating expenses (income) (508) 16,732 11,240
-------- -------- --------
Operating income (loss) 3,687 (14,372) (7,086)
Other income, net - - 42
Financial income, net 15 90 230 32
-------- -------- --------
Income (loss) before taxes on income 3,777 (14,142) (7,012)
Taxes on income 16 69 37 -
-------- -------- --------
Net Income (loss) $ 3,708 $(14,179) $ (7,012)
======== ======== ========
Dividend in respect of reduction in exercise price of
certain warrants - - (37)
-------- -------- --------
Net Income (loss) attributable to ordinary shareholders $ 3,708 $(14,179) $ (7,049)
======== ======== ========
Basic and diluted net income (loss) per Ordinary share 12 $ 0.50 $ (1.92) $ (1.30)
======== ======== ========
Weighted average number of Ordinary shares used in
computing net loss per Ordinary share - basic and diluted 7,376 7,376 5,436
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F - 5
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
NUMBER OF
SHARES AMOUNT ADDITIONAL DEFERRED OTHER TOTAL
--------- --------- PAID-IN STOCK BASED ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
ORDINARY ORDINARY CAPITAL COMPENSATION DEFICIT INCOME EQUITY
--------- --------- --------- --------- --------- --------- ---------
Balance as of January 1, 2006 4,661,627 $ 132 $ 79,652 $ (67) $ (66,854) $ - $ 12,863
Reclassification of deferred stock
compensation due to the
adoption of SFAS 123(R) - - (67) 67 - -
Stock based compensation related to
options issued to employees 948 - 948
Exercise of employees stock options 29,737 1 149 - - - 150
Issuance of ordinary shares and warrants
in private placements 2,685,000 80 *) 11,509 - - - 11,589
Dividend in respect of reduction in
exercise price of certain warrants - - 37 - (37) - -
Net loss - - - (7,012) - (7,012)
--------- --------- --------- --------- --------- --------- ---------
Balance as of December 31, 2006 7,376,364 213 92,228 - (73,903) - 18,538
Stock based compensation related to
options issued to employees - - 1,147 - - - 1,147
Other comprehensive income related to
unrealized gain on derivative instruments - - - - - 18 18
Cumulative effect of FIN 48 adoption - - - - (34) - (34)
Reversal of a provision for issuance expenses - - 217 - - - 217
Net loss - - - - (14,179) - (14,179)
--------- --------- --------- --------- --------- --------- ---------
Balance as of December 31, 2007 7,376,364 213 93,592 - (88,116) 18 5,707
Stock based compensation related to options
issued to employees - - 1,169 - - - 1,169
Other comprehensive income related to
unrealized gain on derivative instruments - - - - - 58 58
Net Income - - - - 3,708 - 3,708
--------- --------- --------- --------- --------- --------- ---------
Balance as of December 31, 2008 7,376,364 $ 213 $ 94,761 $ - $ (84,408) $ 76 $ 10,642
========= ========= ========= ========= ========= ========= =========
*) Net of issuance expenses of $ 1,075.
The accompanying notes are an integral part of the consolidated financial
statements.
F - 6
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
------------------------------------
2008 2007 2006
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,708 $(14,179) $ (7,012)
Adjustments required to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 818 977 1,428
Impairment of Goodwill and intangible assets 3,993 5,437 -
Changes in the accrued liability for severance pay (318) 7 (697)
Compensation expense related to shares and options issued to
employees, net 1,169 1,147 948
Gain on sale of equipment - (4) (19)
Gain on amounts funded in respect of severance pay (62) (187) (158)
Capital gain from sale of patents (14,913) - -
Decrease (increase) in trade receivables, net 411 818 (868)
Decrease (increase) in prepaid expenses and other receivables 1,118 (197) 50
Decrease in inventories 223 277 517
Increase (decrease) in trade payables 894 (117) (483)
Increase (decrease) in accrued expenses and other liabilities 133 (439) (1,142)
Increase (decrease) in deferred revenues (1,812) 2,520 6
-------- -------- --------
Net cash provided by (used in) operating activities (4,638) (3,940) (7,430)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (269) (178) (335)
Proceeds from sale of property and equipment - 4 26
Proceeds from sale of patents 17,413 - -
Payments related to sale of patents (2,383)
Investment in short term deposit (9,900) - (3,000)
Investment in restricted cash (15) (377) -
Proceeds from short term deposit and restricted cash - 3,000 -
Amounts withdrawn (funded) in respect of severance pay funds, net 386 33 847
-------- -------- --------
Net cash provided by (used in) investing activities 5,232 2,482 (2,462)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of loan from shareholder - - (1,031)
Proceeds from issuance of shares upon exercise of stock options by
employees - - 150
Issuance of shares, net - - 11,589
-------- -------- --------
Net cash provided by financing activities - - 10,708
-------- -------- --------
Increase (decrease) in cash and cash equivalents 594 (1,458) 816
Cash and cash equivalents at the beginning of the year 4,496 5,954 5,138
-------- -------- --------
Cash and cash equivalents at the end of the year $ 5,090 $ 4,496 $ 5,954
======== ======== ========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid during the year for income taxes $ 46 $ 22 $ 27
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F - 7
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 1:- GENERAL
a. VocalTec Communications Ltd. ("VocalTec") and its subsidiaries ("the
Company"), is a global provider of carrier-class multimedia and
voice-over-IP solutions for communication service providers. The
Company provides trunking, peering, access gateway and service
delivery solutions (the Essentra product line) that enable flexible
deployment of next-generation networks (NGNs).
b. On November 24, 2005, VocalTec acquired all of the issued and
outstanding Ordinary shares of Tdsoft Ltd. ("Tdsoft"), a
privately-held company organized in Israel, and as consideration
issued to Tdsoft shareholders Ordinary shares of VocalTec
constituting, immediately following such issuance, 75% of the issued
and outstanding share capital of VocalTec. For accounting purposes,
the transaction was accounted for as a reverse acquisition, with
Tdsoft treated as the accounting acquirer. Accordingly, the
acquisition was accounted for as a purchase business combination using
Tdsoft's historical financial information and recording VocalTec
acquired assets and assumed liabilities at fair value as of November
24, 2005. Tdsoft is engaged in the development and marketing of
systems that enable service providers to deliver voice services over
different types of access networks. The Company derives revenues from
the sale of its systems, including software it develops and
maintenance services relating to the systems and software sold.
Towards the end of 2007, Tdsoft discontinued the marketing of most of
its products.
c. The Company derived revenues from several major customers - see note
12.
d. In 2008, the Company signed two Patent Purchase Agreements (PPA) for
the sale of selected patents. Pursuant to the agreements, the Company
sold 15 patents and certain patent-related rights, out of the
company's portfolio of 22 patents - see note 17.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States ("U.S.
GAAP"). The significant accounting policies followed in the preparation of
the financial statements, applied on a consistent basis, are:
a. Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of
income and expenses during the reported period. Actual results could
differ from those estimates.
F - 8
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
b. Financial statements in U.S. dollars:
The financial statements have been prepared in U.S. dollars
("dollar"), since the currency of the primary economic environment in
which the operations of the Company and certain subsidiaries are
conducted is the dollar. Most of the Company's revenues are generated
in dollar. In addition, a considerable portion of the Company's costs
is incurred in dollars and the Company's financing is generally
obtained in dollar. The Company's management believes that the dollar
is the currency of the primary economic environment in which the
Company operates. Thus, the functional and reporting currency of the
Company is the dollar. Accordingly, the Company's and its
subsidiaries' transactions and balances denominated in dollars are
presented at their original amounts. Transactions and balances in
other currencies have been remeasured into dollars in accordance with
the guidance in Statements of the Financial Accounting Standard No.
52, "Foreign Currency Translation" ("SFAS No. 52"). Exchange gain and
loss are presented in financial income net.
c. Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its directly and indirectly wholly-owned subsidiaries. As
of the balance sheet date the only significant subsidiary is Tdsoft
Ltd.
d. Cash equivalents, restricted cash and short term bank deposits:
Cash equivalents are short-term, highly liquid investments that are
readily convertible to cash with original maturities of three months
or less.
Restricted cash is invested in highly liquid deposits, which are used
as security for bank guarantees provided primarily to lessors of
office premises and motor vehicles (see note 8).
Short term bank deposits with original maturities of more than three
months but less than one year are presented as part of short-term
investments. Such deposits are presented at cost including accrued
interest. Interest on the deposits is recorded as financial income.
e. Inventories:
Inventories are stated at the lower of cost or market value. Inventory
write-offs are provided to cover risks arising from slow-moving items,
technological obsolescence and discontinued products. Costs are
determined as follows:
Components cost is determined by the average-cost method.
Hardware products are determined on the basis of direct costs, with
costs measured on an average basis.
F - 9
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
f. Fair value of financial instruments:
The Company adopted the provision of FASB Statement 157 "Fair Value
Measurements and certain related FASB staff positions ("Statement
157") on January 1, 2008 except as it apply to the nonfinancial assets
and nonfinancial liabilities subject to FSP FAS 157-2. Statement 157
defines fair value as the price that would be received from selling an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. When determining
the fair value measurements for assets and liabilities required to be
recorded at fair value, the Company considers the principal or most
advantageous market in which it would transact and consider
assumptions that market participants would use when pricing the asset
or liability, such as inherent risk, transfer restrictions, and risk
of nonperformance.
Statement 157 also establishes a fair value hierarchy that requires an
entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. A financial
instrument's categorization within the fair value hierarchy is based
upon the lowest level of input that is significant to the fair value
measurement. Statement 157 establishes three levels of inputs that may
be used to measure fair value:
- Level 1: quoted prices in active markets for identical assets or
liabilities;
- Level 2: inputs other than Level 1 that are observable, either
directly or indirectly, such as quoted prices in active markets
for similar assets or liabilities, quoted prices for identical or
similar assets or liabilities in markets that are not active, or
other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the
assets or liabilities; or
- Level 3: unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the
assets or liabilities.
The actual value at which such financial assets could actually be
sold or settled with a willing buyer or seller may differ from
such estimated fair values depending on a number of factors
including, but not limited to, current and future economic
conditions, the quantity sold or settled, the presence of an
active market and the availability of a willing buyer or seller.
g. Property and equipment, net:
Equipment is stated at cost less accumulated depreciation.
Depreciation is calculated by the straight-line method over the
estimated useful lives of the assets at the following annual rates:
%
-----------------------------------------
Computers and related equipment 33
Office furniture and equipment 6 - 25 (mainly-8%)
Leasehold improvements Over the shorter of the term of the lease
or the life of the asset
F - 10
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
h. Impairment of long-lived assets:
The Company's long-lived assets are reviewed for impairment in
accordance with SFAS No. 144, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to the future
undiscounted cash flows expected to be generated by the assets. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. The loss is allocated
to the long-lived assets of the group on a pro rata basis using the
relative carrying amounts of those assets, except that the loss
allocated to an individual long-lived asset of the group shall not
reduce the carrying amount of that asset below its fair value whenever
that fair value is determinable As of December 31, 2008, 2007 and 2006
no impairment losses have been identified for property and equipment
since fair value of those assets was higher then its carrying amounts
Intangible assets are comprised of acquired technology, customer
contracts, customer relations, trade name and patents. All intangible
assets are amortized using the straight-line method over their
estimated useful life.
During 2006 and 2007 no impairment losses were identified. During
2008, the Company recorded an impairment loss for intangible assets in
the amount of $ 1,639.
i. Goodwill:
Goodwill is measured as the excess of the cost of an acquired company
over the sum of the amounts assigned to tangible and identifiable
intangible assets acquired less liabilities assumed. Goodwill is not
amortized, but rather reviewed for impairment at least annually in
accordance with the provisions of SFAS No. 142. The goodwill
impairment test under SFAS No. 142 involves a two-step approach. Under
the first step, the Company determines the fair value of each
reporting unit to which goodwill has been assigned. The Company
determined that it has only one reporting unit. The Company then
compares the fair value of each reporting unit to its carrying value,
including goodwill. The Company estimates the fair value of each
reporting unit by estimating the present value of the reporting unit's
future cash flows. If the fair value exceeds the carrying value, no
impairment loss is recognized. If the carrying value exceeds the fair
value, the goodwill of the reporting unit is considered potentially
impaired and the second step is completed in order to measure the
impairment loss. Under the second step, goodwill is reduced to its
implied fair value through an adjustment to the goodwill balance,
resulting in an impairment charge. The Company has elected to perform
its analysis of goodwill during the fourth quarter of each year.
During 2006 no impairment loss was identified. In 2007 and 2008, the
Company recorded impairment losses for goodwill in the amounts of $
5,437 and $ 2,297, respectively.
F - 11
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
j. Revenue recognition:
The Company generates revenues from licensing the rights to use its
software products, from the sale of its systems and from providing
maintenance, engineering and support services. The Company's products
are sold both to end users and to resellers, who are considered
end-users for the purpose of revenue recognition.
Revenue from software products is recognized when all criteria
outlined in the American Institute of Certified Public Accountants
Statement of Position ("SOP") 97-2, "Software Revenue Recognition", as
amended by SOP 98-9, "Modification of SOP 97-2, Software Reveneue
Recognition, with Respect to Certain Transactions", are met:
persuasive evidence of an arrangement exists, the product has been
delivered, no significant obligation to the customer remains, the
sales price is fixed or determinable and collectibility is reasonably
assured. The Company does not grant a right of return to its
customers.
Where software arrangements involve multiple elements, revenue should
be allocated to each undelivered element based on vendor specific
objective evidence ("VSOE") of the fair value of the undelivered
element. The VSOE used by the Company until the end of 2006 to
allocate the arrangement fees to support services and maintenance was
based on the price charged when these elements were sold separately
(upon renewal). Revenues for the delivered product until the end of
2006 were recorded based on the "residual method" presented by SOP
98-9, "Modification of SOP 97-2, Software Revenue Recognition With
Respect to Certain Transactions", whereby the remainder of the
arrangement fee, after allocating revenue to undelivered elements
which are not considered essential to the software's functionality as
described above is allocated to the delivered product. Under the
residual method revenue is recognized for the delivered elements when
(1) there is VSOE of fair value on all the undelivered elements and
(2) all revenue recognition criteria of SOP 97-2 are satisfied. Under
the residual method any discount in the arrangement is allocated to
the delivered element. As a result , revenues allocated to the support
services and maintenance were recognized ratably over the service
period.
Effective January 1, 2007, due to a limited number of separate support
services and maintenance contracts consummated during 2007 since the
Company began providing its services through distributors and
integrators, VSOE is no longer attainable to support allocation of
services and maintenance revenues. Accordingly, recognition of
revenues from bundled software arrangements in 2008 and 2007 are
recognized ratably over the period of the last delivered element in
the arrangement, which is typically the customer support and
maintenance service period, assuming all other revenue recognition
criteria are met.
When an arrangement provides for acceptance of the product by the
customer, revenue is not recognized until such acceptance is received.
In certain cases, when the company sells its products through
resellers in new and emerging market channels for which no comparable
history has been established, the Company recognizes revenues only
when all obligations to the end user have been completed, provided all
other revenue recognition criteria have been met.
Arrangements including training and installation services are
recognized only after the services are performed.
F - 12
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Revenue from software maintenance and technical support contracts is
recognized on a straight line basis over the term of the maintenance
and support arrangement.
In 2006 deferred revenue includes unearned amounts received under the
maintenance and support contracts and amounts received from customers
but not recognized as revenues. From 2007, deferred revenue includes
amounts received under bundled software arrangements and amounts
received from customers, but not recognized as revenue.
Revenue from sale of systems is recognized upon delivery to the
end-user or the reseller. Provisions for warranty are made at the time
of the sale. Such revenues are recognized in accordance with Staff
Accounting Bulletin No. 104, "Revenue Recognition in Financial
Statements" ("SAB No. 104").
k. Research and development costs, net:
Research and development costs, net of grants received, are charged to
the statement of operations as incurred. Statement of Financial
Accounting Standard No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed", ("SFAS No. 86"),
requires capitalization of certain software development costs
subsequent to the establishment of technological feasibility. Costs
incurred by the Company between the establishment of technological
feasibility and the point at which the products are ready for general
release, have been insignificant. Therefore, all research and
development costs have been expensed. Research and development grants
were deducted from research and development costs (See m below).
l. Royalties-bearing grants
Royalty-bearing grants from the Government of Israel and other
governmental institutions for funding approved research and
development projects are recognized at the time the Company is
entitled to such grants, on the basis of the research and development
costs incurred. Such grants are included as a deduction of research
and development costs since at the time received it is not probable
the Company will generate sales from these projects and pay the
royalties resulting from such sales. For the grants received and
deducted from the research and development costs - see Note 13.
m. Income taxes:
The Company and its subsidiaries account for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes". This
Statement prescribes the use of the liability method whereby deferred
tax asset and liability account balances are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. The
Company and its subsidiaries provide a valuation allowance, if
necessary, to reduce deferred tax assets to their estimated realizable
value. As of December 31, 2008, a full valuation allowance was
provided by the Company. See Note 15 for the impact of adoption of FIN
48, Accounting for uncertainty in Income Taxes, in 2007.
F - 13
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
n. Accounting for stock-based compensation:
The Company accounts for stock-based compensation in accordance with
SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS No.
123(R)"). SFAS No. 123(R) requires companies to estimate the fair
value of equity-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as an expense over the
requisite service periods in the Company's consolidated income
statements.
The Company adopted SFAS 123(R) using the modified prospective
transition method, which requires the application of the accounting
standard as of January 1, 2006, the first day of the Company's fiscal
year 2006. Under that transition method, compensation cost recognized
in the year ended December 31, 2008 and 2007, includes: (a)
compensation cost for all share-based payments granted prior to, but
not yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of
Statement 123, and (b) compensation cost for all share-based payments
granted subsequent to January 1, 2006, based on the grant-date fair
value estimated in accordance with the provisions of SFAS 123(R). As
required by the modified prospective method results for prior periods
have not been restated. The Company recognized compensation expenses
for the value of these awards, which has graded vest on the
accelerated attribution method over the requisite service period of
each of the award, net of estimated forfeitures. Estimated forfeitures
were based on actual historical pre-vesting forfeitures. The Company
applied the provisions of SAB107 in it's adoption of FAS123R.
Expenses include stock based compensation related to employees as
follows:
YEAR ENDED DECEMBER 31,
----------------------------------
2008 2007 2006
-------- -------- --------
Cost of sales $ 17 $ 18 $ 8
Research and development, net 357 353 248
Selling and marketing 263 224 138
General and administrative 532 552 554
-------- -------- --------
$ 1,169 $ 1,147 $ 948
======== ======== ========
The fair value for options granted in 2006, 2007 and 2008 is amortized
over their vesting period and is estimated at the date of grant using
a Black-Scholes options pricing model with the following weighted
average assumptions:
YEAR ENDED DECEMBER 31,
------------------------------------
EMPLOYEE STOCK OPTIONS 2008 2007 2006
---------------------- -------- -------- ---------
Expected volatility 115% 120% 105%
Risk-free interest 2.4% 4.7% 4.9%
Dividend yield 0% 0% 0%
Expected life (years) 5 years 5 years 4.6 years
F - 14
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The computation of expected volatility is based on realized historical
stock price volatility of the Company over historical period equal to
the employee's stock options expected life. The interest rate for
period within the contractual life of the award is based on the U.S.
Treasury yield curve in effect at the time of grant. The Company has
historically not paid dividends and has no foreseeable plans to pay
dividends. In December 2007, the SEC staff issued Staff Accounting
Bulletin No. 110 ("SAB 110"), which became effective on January 1,
2008. SAB 110 amends Staff Accounting Bulletin No. 107 ("SAB 107"),
Share-Based Payment. SAB 110 expresses the views of the SEC staff
regarding the use of a "simplified" method in developing an estimate
of expected term of "plain vanilla" share options in accordance with
FASB Statement No. 123(R), Share-Based Payment. Under the "simplified"
method, the expected term is calculated as the midpoint between the
vesting date and the end of the contractual term of the option. The
use of the "simplified" method, which was first described in SAB 107,
was scheduled to expire on December 31, 2007. SAB 110 extends the use
of the "simplified" method for "plain vanilla" awards in certain
situations. The SEC staff does not expect the "simplified" method to
be used when sufficient information regarding exercise behavior, such
as historical exercise data or exercise information from external
sources, becomes available. The adoption of SAB 110 did not have any
effect on the Company's financial statements.
The Company currently uses the simplified method as adequate
historical experience is not available to provide a reasonable
estimate. The Company adopted SAB 110 effective January 1, 2008 and
will continue to apply the simplified method until enough historical
experience is available to provide a reasonable estimate of the
expected term for stock option grants.
The Company recognizes these compensation costs net of a forfeiture
rate for only those shares expected to vest on accelerated attribution
basis over the requisite service period of the award, which is
generally the option vesting term of one to three years. SFAS 123(R)
requires forfeitures to be estimated at the time of grant and revised,
if necessary, in subsequent periods if actual forfeitures differ from
those estimates.
o. Severance pay:
The Company's liability for severance pay for its Israeli employees is
calculated pursuant to Israel's Severance Pay Law and employment
agreements based on the most recent salary of the employees. The
Company's liability for all of its employees, is fully covered by
monthly deposits with managers' insurance policies and by an accrual.
The value of these managers' insurance policies is recorded as an
asset in the Company's balance sheet.
The deposited funds include profits accumulated up to the balance
sheet date. The deposited funds may be withdrawn only upon the
fulfillment of the obligation pursuant to Israel's Severance Pay Law
or labor agreements. The value of the deposited funds is based on the
cash surrendered value of these funds and includes immaterial profits.
Severance expense for the years ended December 31, 2008, 2007 and 2006
amounted to approximately $ 494, $ 787 and $ 170, respectively.
p. Concentration of credit risks:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents, restricted cash and trade receivables.
F - 15
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Cash and cash equivalents and the short term deposit are invested in
U.S. dollars with major banks in Israel. Generally, these deposits may
be redeemed upon demand, and bear minimal risk.
The Company's trade receivables are generally derived from sales of
products and services rendered to large and solid organizations
located primarily in Europe (mainly Russia), North America, and the
Far East. The Company performs ongoing credit evaluations of its
customers. To date the Company has not experienced any material losses
in respect of its trade receivable. For new customers, the Company may
require a letter of credit or upfront cash payments. An allowance for
doubtful accounts is determined on specific basis in accordance with
Management's estimation and historical experience.
Expense (income) resulting from the net increase (decrease) in the
allowance for doubtful accounts was $ (20), $ 40 and $ 70 for the
years ended December 31, 2008, 2007 and 2006, respectively.
The Company sometimes uses derivative financial instruments to manage
its exposure to fluctuations in foreign exchange rates. The Company
accounts for derivative financial instruments in accordance with SFAS
133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"). Under SFAS No. 133, all derivatives are recorded as
either assets or liabilities in the consolidated balance sheet, at
fair value. The classification of gains and losses resulting from
changes in the fair values of derivatives is dependent on the intended
use of the derivative and its resulting designation. Adjustments to
reflect changes in fair values of derivatives not designated as
hedging instruments are reflected in earnings. For derivative
instruments that are designated and qualify as a cash flow hedge, the
effective portion of the gain or loss on the derivative instrument is
reported as a component of other comprehensive income and reclassified
into earnings in the same line item associated with the forecasted
transaction in the same period during which the hedge transaction
affects earnings. The ineffective portion of derivative's change in
fair value is recognized in earnings depending upon the exposure being
hedged.
Income resulting from the hedging activities was $18, $ 0 and $ 0 for
the years ended December 31, 2008, 2007 and 2006, respectively.
q. Net income (loss) per share:
Basic net loss per share is computed using the weighted average number
of Common shares outstanding during the period, and excludes any
dilutive effects of options. Diluted net loss per share is computed
using the weighted average number of Common shares plus dilutive
potential shares of Ordinary stock considered outstanding during the
period.
In the years ended December 31, 2008, 2007 and 2006, all outstanding
stock options have been excluded from the calculations of diluted net
earning (loss) per share, since they would have an anti-diluted
effect.
F - 16
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
r. Impact of recently issued accounting standards:
In December 2007, the FASB issued SFAS 141(R), Business Combinations
("SFAS No. 141(R)"). This Statement replaces SFAS 141, Business
Combinations ("SFAS No. 141"), and requires an acquirer to recognize
the assets acquired, the liabilities assumed, including those arising
from contractual contingencies, any contingent consideration, and any
noncontrolling interest in the acquiree at the acquisition date,
measured at their fair values as of that date, with limited exceptions
specified in the statement. SFAS 141(R) also requires the acquirer in
a business combination achieved in stages (sometimes referred to as a
step acquisition) to recognize the identifiable assets and
liabilities, as well as the noncontrolling interest in the acquiree,
at the full amounts of their fair values (or other amounts determined
in accordance with SFAS 141(R)). In addition, SFAS 141(R)'s
requirement to measure the noncontrolling interest in the acquiree at
fair value will result in recognizing the goodwill attributable to the
noncontrolling interest in addition to that attributable to the
acquirer.
SFAS 141(R) amends SFAS No. 109, Accounting for Income Taxes ("SFAS
No. 109"), to require the acquirer to recognize changes in the amount
of its deferred tax benefits that are recognizable because of the
consummation of a business combination either in income from
continuing operations in the period of the combination or directly in
contributed capital, depending on the circumstances.
It also amends SFAS 142, Goodwill and Other Intangible Assets ("SFAS
No. 142"), to, among other things, provide guidance on the impairment
testing of acquired research and development intangible assets and
assets that the acquirer intends not to use. SFAS 141(R) applies
prospectively to business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. The Company does not expect
that the adoption of SFAS 141R will have any impact on its
consolidated financial statements.
In December 2007, the FASB issued SFAS 160 ("SFAS No. 160"),
Noncontrolling Interests in Consolidated Financial Statements. SFAS
160 amends Accounting Research Bulletin 51, Consolidated Financial
Statements, to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of
a subsidiary. It also clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity that
should be reported as equity in the consolidated financial statements.
SFAS 160 also changes the way the consolidated income statement is
presented by requiring consolidated net income to be reported at
amounts that include the amounts attributable to both the parent and
the noncontrolling interest. It also requires disclosure, on the face
of the consolidated statement of income, of the amounts of
consolidated net income attributable to the parent and to the
noncontrolling interest. SFAS 160 requires that a parent recognize a
gain or loss in net income when a subsidiary is deconsolidated and
requires expanded disclosures in the consolidated financial statements
that clearly identify and distinguish between the interests of the
parent owners and the interests of the noncontrolling owners of a
subsidiary. SFAS 160 is effective for fiscal periods, and interim
periods within those fiscal years, beginning on or after December 15,
2008. The Company does not expect the adoption of SFAS No. 160 will
have significant impact on its consolidated financial statement.
F - 17
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
In February 2008, the FASB issued FASB Staff Position No. FAS 157-1,
"Application of FASB Statement No. 157 to FASB Statement No. 13 and
Other Accounting Pronouncements That Address Fair Value Measurements
for Purposes of Lease Classification or Measurement under Statement
13" and FASB Staff Position No. FAS 157-2, "Effective Date of FASB
Statement No. 157". Collectively, the Staff Positions defer the
effective date of Statement 157 to fiscal years beginning after
November 15, 2008 for nonfinancial assets and nonfinancial liabilities
except for items that are recognized or disclosed at fair value on a
recurring basis at least annually, and amend the scope of Statement
157. As described in Note 4, the Company adopted Statement 157 and the
related FASB staff positions except for those items specifically
deferred under FSP No. FAS 157-2.
In March 2008, the FASB issued Statement 161 "Disclosures about
Derivative Instruments and Hedging Activities" ("SFAS 161") an
amendment to FASB No. 133. This statement changes the disclosure
requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about (a) how
and why and entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity's financial
position, financial performance, and cash flows. This statement is
effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. Early application is
encouraged. The Company does not expect the adoption of SFAS 161 to
have a material impact on its financial position, results of
operations or cash flows.
In June 2008, the FASB issued EITF No. 07-5 "Determining whether an
Instrument (or Embedded Feature) is indexed to an Entity's Own Stock"
("EITF 07-5"). EITF 07-5 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. Early application is not permitted.
Paragraph 11(a) of SFAS No. 133 specifies that a contract that would
otherwise meet the definition of a derivative but is both (a) indexed
to the Company's own stock and (b) classified in stockholders' equity
in the statement of financial position would not be considered a
derivative financial instrument. EITF 07-5 provides a new two-step
model to be applied in determining whether a financial instrument or
an embedded feature is indexed to an issuer's own stock and thus able
to qualify for the SFAS 133 paragraph 11(a) scope exception. The
Company believes adopting this statement will have no impact on the
consolidated financial statements.
F - 18
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 3:- PREPAID EXPENSES AND OTHER ACCOUNTS RECEIVABLE
DECEMBER 31,
---------------------
2008 2007
-------- --------
Prepaid expenses *) $ 182 $ 1,394
Research and development participation and grants receivable - 14
Government authorities 132 80
Others 169 55
-------- --------
$ 483 $ 1,543
======== ========
*) As of December 31, 2008 and 2007, including $ 115 and $ 1,283,
respectively, of costs of hardware products delivered to customers'
sites and not recognized as cost of sales since revenue in the related
arrangements is being recognized over the last deliverable element
(see also note 2k).
NOTE 4:- INVENTORIES
DECEMBER 31,
---------------------
2008 2007
-------- --------
Components $ 38 $ 61
Finished goods - 200
-------- --------
$ 38 $ 261
======== ========
*) Write-off of inventories for the years ended December 31, 2008, 2007
and 2006 amounted to $ 0, $ 459 and $ 0, respectively.
During 2008, the Company purchased old equipment from one of its customers,
in the amount of $300,000. The equipment was recorded as inventory, and
during the year has been written off and recorded against deduction from
service revenues.
NOTE 5:- PROPERTY AND EQUIPMENT, NET
DECEMBER 31,
---------------------
2008 2007
-------- --------
Cost:
Computers and related equipment $ 4,844 $ 4,579
Office furniture, equipment and leasehold improvements 1,316 1,314
Motor vehicle - 10
-------- --------
6,170 5,903
Less - accumulated depreciation 5,546 5,248
-------- --------
Property and equipment, net $ 614 $ 655
======== ========
Depreciation expense was $ 308, $ 411 and $ 522 for the years ended
December 31, 2008, 2007 and 2006, respectively.
All of the property and equipment is located in Israel.
F - 19
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 6:- GOODWILL AND OTHER INTANGIBLE ASSETS
DECEMBER 31,
---------------------
2008 2007
-------- --------
Intangible assets
Cost:
Technology $ 3,049 $ 3,049
Customer contracts 372 372
Customer relations 887 887
Trade name 301 301
Patents 80 250
-------- --------
4,689 4,859
Accumulated amortization (including write downs):
Technology (including $1,093 write down in 2008) 3,049 1,628
Customer contracts 372 372
Customer relations (including $494 write down in 2008) 887 265
Trade name (including $51 write down in 2008) 141 60
Patents 80 53
-------- --------
4,529 2,378
-------- --------
Total amortized cost $ 160 $ 2,481
-------- --------
Goodwill $ - $ 2,297
======== ========
a. The future annual estimated amortization expense of the intangible
assets in the next 5 years relating to VocalTec's amortizable
intangible assets existing as of December 31, 2008, is approximately
as follows:
TOTAL
AMORTIZATION
------------
2009 $ 40
2010 40
2011 40
2012 40
b. Amortization expenses amounted to approximately $ 508, $ 566 and $ 906
for the years ended December 31, 2008, 2007and 2006.
Due to the fact that As of December 31, 2008 and 2007, the Company's
market value was substantially lower than the shareholders equity in
its books, and due to the Company's loss in 2008 (excluding the income
from patent sale) ,the Company performed impairment test of long lived
operating assets, including intangible assets. As a result of the
impairment test of long lived operating assets, including intangible
assets, the Company recorded impairment loss of approximately $ 1,639
related to intangible assets in 2008. This impairment loss is included
in separate line item in the statement of operations, together with
impairment loss related to impairment of goodwill (see note 2h). The
Company identified two assets groups, its patent portfolio and all
other operating assets and liabilities except the patent portfolio, as
defined in SFAS 144. The fair value of the asset groups was estimated
using the income approach.
F - 20
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 6:- GOODWILL AND OTHER INTANGIBLE ASSETS (CONT.)
c. The changes in the carrying amount of goodwill for the three years in
the period ended December 31, 2008 are as follows:
BALANCE AS OF JANUARY 1, 2007 6,950
ADJUSTMENT OF GOODWILL DUE TO INCREASE IN TAX PROVISION
RESULTED FROM THE IMPLEMENTATION OF FIN 48 784
IMPAIRMENT LOSS (5,437)
--------
BALANCE AS OF DECEMBER 31, 2007 2,297
IMPAIRMENT LOSS (2,297)
--------
BALANCE AS OF DECEMBER 31, 2008 -
========
d. As a result of the annual impairment test of goodwill, performed at
the fourth quarter of each year, the Company recorded impairment loss
of approximately $ 2,297 and $ 5,437 related to goodwill in 2008 and
2007, respectively. This impairment loss is included in separate line
item in the statement of operations. The Company identified one
reporting unit, as defined in SFAS 142. The fair value of the
reporting unit was estimated using the discounted cash flow approach.
NOTE 7:- ACCRUED EXPENSES AND OTHER ACCOUNTS PAYABLE
DECEMBER 31
-------------------
2008 2007
-------- --------
Employees and payroll accruals $ 721 $ 706
Accrued expenses 450 370
Accrued vacation pay 495 536
Tax accruals 1,344 1,275
Government Institutions 133 195
Office lease 118 8
Others 39 76
-------- --------
$ 3,300 $ 3,166
======== ========
NOTE 8:- COMMITMENTS AND CONTINGENCIES
a. In connection with its research and development activities through
December 31, 2008, the Company received and accrued participation
payments from the Office of the Chief Scientist of the Ministry of
Industry and Trade in Israel ("OCS"). In return for the Government of
Israel's participation, the Company is committed to pay royalties at a
rate of 3.5% - 4.5% of sales of the developed product, up to 100% of
the amount of grants received linked to the U.S. dollar (grants
received under programs approved subsequent to January 1, 1999, are
subject to interest at the annual rate of LIBOR applicable to U.S.
dollar deposits).
F - 21
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 8:- COMMITMENTS AND CONTINGENCIES (CONT.)
The Company's total contingent liability for royalties payable to the
OCS with respect to future sales, based on Government of Israel
participations received or accrued, net of royalties paid or accrued,
totaled approximately $ 22 million as of December 31, 2008. The
obligation to pay these royalties is contingent on actual sales of the
products, and in the absence of such sales, no payment is required.
Cost of sales includes royalties paid and accrued to the Government of
Israel in the amount of $ 208, $ 175 and $ 201 for the years ended
December 31, 2008, 2007, and 2006, respectively. With respect to the
sale of patents related payments to OCS, see Note 16.
b. Certain claims, mainly for patent infringement and breach of contract
have been made against VocalTec Ltd., Tdsoft Ltd. or its U.S.
subsidiary. The Company cannot estimate the exposure amount, and in
any case, these allegations have not resulted in any action brought
against the Company. The Company's management does not believe that it
is probable that the above mentioned allegations will result in a loss
to the Company. Accordingly, no provision was recorded with respect to
these allegations.
During 2008, the Company received a claim from one of its former
employees in Germany, regarding his retirement conditions. The Company
recorded a provision in its books in an amount deemed appropriate to
cover such claim.
c. The Company's facilities in Israel are rented under operating leases
with different periods ending through April 2010 (with renewal
option). Rent expense amounted to $ 468, $ 415 and $ 256 for the years
ended December 31, 2008, 2007 and 2006, respectively. Annual minimum
rental commitments under non-cancelable leases at balance sheet date
are approximately as follows:
2009 468
2010 117
--------
Total $ 585
========
At the end of 2008, the Company left the third floor of its leased
building in order to save expenses, and moved into one floor. Since
the Company is still obligated to pay rent for the third floor until
the end of the contract a liability for the lease termination cost,
including remaining lease rentals, reduced by probable sub lease
rentals, in the amount of $ 118 thousand was recorded.
The Company also maintains motor vehicle leases. The total liability
for early termination of such leases is approximately $ 57. Motor
vehicle lease expense amounted to $ 464, $ 407 and $ 470 for the years
ended December 31, 2008, 2007 and 2006, respectively.
d. Under the purchase agreement with Be-Connected from 2004, the bank
provided the shareholders of Be-Connected on behalf of Tdsoft a bank
guarantee of $ 500, in respect of certain guarantees that a
shareholder of Be-Connected gave to its customers. $ 140 out of the $
500 expired in November 2006, the other $ 360 will expire in May 2009.
e. The bank provided, with respect to offices lessors, bank guarantee on
behalf of Tdsoft, in the amount of $ 150.
F - 22
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 9:- FAIR VALUE MEASUREMENTS
In accordance with SFAS No. 157, the Company measures its foreign
currency derivative contracts at fair value. Foreign currency
derivative contracts are classified within Level 2 value hierarchy as
the valuation inputs are based on quoted prices and market observable
data of similar instruments.
The following table provides information by value level for financial
assets and liabilities that are measured at fair value, as defined by
SFAS No. 157, on a recurring basis as of December 31, 2008.
FAIR VALUE MEASUREMENTS
-----------------------------------------------
DESCRIPTION FAIR VALUE LEVEL 1 LEVEL 2 LEVEL 3
----------- -------- -------- -------- --------
DERIVATIVE ASSET 76 76
======== ======== ======== ========
NOTE 10:- SHARE CAPITAL
a. Share capital
All Ordinary shares of the Company have the same rights. Dividends
declared by the company will be distributed to shareholders in
proportion to their holdings. If the Company is liquidated, after
satisfying liabilities to creditors, the Company's assets will be
distributed to the holders of Ordinary shares in proportion to their
holdings.
Holders of Ordinary shares have one vote for each paid-up Ordinary
share on all matters submitted to a vote of our 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.
b. In May 2006 the Company issued in a private placement in consideration
for $ 4,591, net of issuance expenses of $ 548, 935,000 Ordinary
Shares and warrants to purchase up to 424,050 Ordinary Shares at an
exercise price of $ 7.9 per share. The warrants became exercisable 6
months after issuance and will remain exercisable until the fifth
anniversary of the date of issuance. According to the agreements, the
investors have the right to receive payment for liquidated damages if
a registration statement on Form F-3 is not declared effective within
60 days from the date of the closing and/or the failure to maintain
the registration Statement effective. The liquidated damages will be
in the amount of 0.0333% of the purchase price paid by the investors
for each day of delay up to 10% of the proceeds received. The shares
and shares to be derived from the warrants were registered for trading
on NASDAQ on May 22, 2006. As of December 31, 2008, no liability was
recorded in respect of the liquidated damages as the Company does not
deem it probable that such liquidated damages will be made.
F - 23
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 10:- SHARE CAPITAL (CONT.)
In December 2006 the Company decided to reduce the exercise price of
the warrants issued by the Company to the investors from $ 7.9 per
share to $ 6.87 per share - the closing price of the Company's
ordinary shares on the Nasdaq Capital Market at the close of business
immediately prior to execution of the agreement relating to the May
2006 issuance. The benefit of $ 37 to the warrant holders from the
aforementioned reduction in the exercise price was recorded as a
preferred deemed dividend to the warrant holders.
As of December 31, 2008, none of these warrants were exercised into
the Company's Ordinary shares.
c. In November 2006, the Company issued in a private placement in
consideration for $ 6,998, net of issuance expenses of $ 527,
1,750,000 Ordinary Shares and warrants to purchase up to 1,400,000
Ordinary Shares at an exercise price of $ 5.5 per share. The warrants
are exercisable during a period ending June 30, 2011. The shares were
registered for trading on NASDAQ on December 4, 2006. As of December
31, 2008, none of these warrants were exercised into the Company's
ordinary shares.
d. Share option plans:
In August 2005, the board of directors of VocalTec resolved to
transfer to the VocalTec 2003 Master Stock Option Plan all of the
shares then available for grants of options under the other VocalTec
option plans. Pursuant to the business combination, the number of
shares underlying the 2003 Master Stock Option Plan was increased by
576,923 to a total of 1,038,462 shares, and VocalTec adopted each of
Tdsoft's option plans, such that all outstanding options granted under
the various Tdsoft option plans to purchase Ordinary shares of Tdsoft
were assumed by VocalTec, except that the Tdsoft Ordinary shares
underlying such options were replaced by VocalTec's Ordinary shares in
amounts and for exercise prices in accordance with the conversion
ratio set forth in the agreement for the business combination (and
which options continued to be subject, except as set forth herein, to
the terms of the Tdsoft option plans under which they were granted).
Following consummation of the business combination, the Company's
board of directors resolved (i) to effect certain amendments to the
2003 Master Stock Option Plan and (ii) that options granted under
older stock option plans shall revert to the amended 2003 Master Stock
Option Plan upon the expiration or cancellation of such option.
Options granted under the VocalTec amended 2003 Master Stock Option
Plan generally have a term of seven (7) years. However, options
granted prior to December 13, 2005 have a term of ten (10) years.
Earlier termination may occur if the employee's employment with the
Company is terminated or if certain corporate changes or transactions
occur. The Company's board of directors determines the grant and the
exercise price at the time the options are granted upon recommendation
of the compensation committee.
Each stock option agreement specifies the date and period over which
the option becomes exercisable. Options granted generally vest over a
period of four years, either in equal quarterly installments of 6.25%
of the option shares, starting three months after the date of grant,
or 25% of the option shares are vested one year following option
grant, and the remaining 75% vest in equal quarterly installments of
6.25% over the remaining three years. Vesting of options granted to
employees is conditional upon the grantee remaining continuously
employed by VocalTec or its subsidiaries.
F - 24
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 10:- SHARE CAPITAL (CONT.)
As of December 31, 2008, 375,533 share options are still available for
future grants under the Company's existing plans, including a one time
increase of 600,000 share options and an annual increase of 334,326
share options approved by the 2008 annual general meeting of the
shareholders. Options which are cancelled or forfeited before
expiration become available for future grants.
A summary of the Company's share option activity under the plans is as
follows:
YEAR ENDED DECEMBER 31, 2008
--------------------------------------------------------------
WEIGHTED
AVERAGE
WEIGHTED REMAINING
AVERAGE CONTRACTUAL AGGREGATE
NUMBER OF EXERCISE TERM (IN INTRINSIC
OPTIONS PRICE YEARS) VALUE
---------- ---------- ---------- ----------
Outstanding - beginning of year 1,326,696 $ 4.67
Granted 1,755,900 $ 1.01
Exercised - $ -
Forfeited (575,538) $ 3.68
---------- ----------
Outstanding - end of year 2,507,058 $ 2.23 5.92 $ -
========== ========== ========== ==========
Vested and expected to vest - end of year 1,732,646 $ 2.66 5.71 $ -
========== ========== ========== ==========
Options exercisable - end of year 637,664 $ 4.72 4.72 $ -
========== ========== ========== ==========
The weighted average fair values of the options granted during 2008,
2007 and 2006, were $ 0.36, $ 3.32 and $ 3.22, respectively.
The total unrecognized Compensation cost related to non vested options
as of December 31, 2008 is $ 2.2 million, and the weighted average
period over which the cost is expected to be realized is 2.0 years.
The following table summarizes information about options outstanding
and exercisable at December 31, 2008:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -------------------------
WEIGHTED-
AMOUNT AVERAGE WEIGHTED AMOUNT WEIGHTED
OUTSTANDING AT REMAINING AVERAGE OUTSTANDING AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 2008 LIFE PRICES 2008 PRICES
--------------- --------- --------- ---------
(YEARS)
---------
$ 0.00-0.50 682,560 6.63 $ 0.42 - $ 0.00
$ 0.51-1.00 761,620 6.23 $ 0.87 61,560 $ 0.70
$ 1.01-3.00 266,880 6.38 $ 2.98 14,250 $ 2.88
$ 3.01-5.00 519,226 5.07 $ 3.52 324,692 $ 3.55
$ 5.01-20.00 268,906 4.52 $ 6.12 229,296 $ 6.17
$ 20.01-224.25 7,866 3.30 $ 45.53 7,866 $ 45.53
--------- --------- ---------
2,507,058 5.92 $ 2.23 637,664 $ 4.72
========= =========
F - 25
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 11:- NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted
net loss per Ordinary share:
YEAR ENDED DECEMBER 31,
---------------------------------------
2008 2007 2006
-------- -------- --------
Numerator:
Net income (loss) $ 3,708 $(14,179) $ (7,012)
Dividend in respect to reduction in exercise price of
certain warrants - - (37)
-------- -------- --------
Net income (loss) attributable to common shareholders
after allocation of undistributed earnings to
convertible Preferred shares $ 3,708 $(14,179) $ (7,049)
======== ======== ========
Denominator:
Weighted average number of Ordinary shares outstanding
during the year used to compute basic and diluted
net loss per Ordinary share 7,376 7,376 5,436
======== ======== ========
Basic and diluted net income (loss) per Ordinary share
(all options are anti-dilutive) $ 0.50 $ (1.92) $ (1.30)
======== ======== ========
NOTE 12:- DERIVATIVE FINANCIAL INSTRUMENTS
As of December 31, 2008, the Company had forward exchange contracts
for the acquisition of approximately NIS 15,150 thousand, in
consideration for $ 3,900, maturing during 2009. The fair value of
these contracts as of December 31, 2008 was $ 76. The purpose of the
contracts was to hedge the NIS expenses during 2009 (mainly salary),
by signing contracts to buy NIS amounts in previously determined
exchange rates, and by that obtaining fixed expenses in US$. The
hedged amount was determined according to estimated salary and other
related NIS expenses in 2009.
NOTE 13:- GEOGRAPHIC, MAJOR CUSTOMERS AND PRODUCT LINE INFORMATION
The Company manages its business on a basis of one reportable segment.
The Company follows the guidance in Statement of Financial Accounting
Standards No. 131, "Disclosure about Segment of an Enterprise and
Related Information".
YEAR ENDED DECEMBER 31,
--------------------------------------
2008 2007 2006
-------- -------- --------
Sales classified by geographic areas based on end-
customer location:
Russia $ 3,140 $ 1,635 $ 399
Germany 948 1,314 947
Italy 650 884 1,666
Iceland 93 155 272
Europe - other 73 643 1,015
Americas (principally United States) 362 351 770
Asia 162 124 882
Israel 388 145 540
Africa and Middle East 298 503 789
-------- -------- --------
$ 6,114 $ 5,754 $ 7,280
======== ======== ========
F - 26
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 13:- GEOGRAPHIC, MAJOR CUSTOMERS AND PRODUCT LINE INFORMATION (CONT.)
YEAR ENDED DECEMBER 31,
--------------------------------------
2008 2007 2006
-------- -------- --------
%
--------------------------------------
Sales to a single customer exceeding 10%:*)
Customer A *) *) 13
Customer B 15 22 18
Customer C 26 12 *)
Customer D *) 10 *)
Customer E 14 *) *)
*) Less than 10%.
Total revenues from external customers on the basis of the Company's
product lines are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
2008 2007 2006
-------- -------- --------
The Essentra family $ 5,731 $ 4,482 $ 4,550
Tdgate 203 769 1,542
Hunt 180 192 360
Proxi - 100 73
Tas - 179 388
Core (software) - 32 367
-------- -------- --------
$ 6,114 $ 5,754 $ 7,280
======== ======== ========
NOTE 14:- RESEARCH AND DEVELOPMENT, NET
YEAR ENDED DECEMBER 31,
--------------------------------------
2008 2007 2006
-------- -------- --------
Research and development expenses $ 4,231 $ 5,340 $ 5,439
Less- participations from:
OCS 77 773 799
BIRD - - 21
-------- -------- --------
$ 4,154 $ 4,567 $ 4,619
======== ======== ========
NOTE 15:- FINANCIAL INCOME, NET
YEAR ENDED DECEMBER 31,
----------------------------------------
2008 2007 2006
-------- -------- --------
Financial income :
Interest on cash and cash equivalents,
net of bank fees $ 114 $ 321 $ 112
Foreign currency translation adjustments, net (24) (91) (80)
-------- -------- --------
$ 90 $ 230 $ 32
======== ======== ========
F - 27
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 16:- TAXES ON INCOME
a. Measurement of taxable income:
Under the Income Tax (Inflationary Adjustments) Law, 1985 ("the
Israeli law"), results for tax purposes in Israel are measured in real
terms, in accordance with the changes in the Israeli Consumer Price
Index ("Israeli CPI"). Accordingly, until 2007, results for tax
purposes were measured in terms of earnings in NIS after certain
adjustments for increases in the Israeli CPI. Beginning January 1,
2008, the Inflationary Adjustments Law was repealed.
b. Tax benefits under Israel's Law for the Encouragement of Industry
(Taxation), 1969:
VocalTec Ltd. and Tdsoft Ltd. are considered each an "industrial
company", as defined by the Law for the Encouragement of Industry
(Taxes), 1969, and as such, are entitled to certain tax benefits,
mainly the right to claim public issuance expenses and accelerated
depreciation.
c. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959:
Certain investments of VocalTec Ltd. and Tdsoft Ltd. received
"Approved Enterprise" status through the "Alternative Benefits" track,
and, as such, are eligible for various benefits. VocalTec Ltd. and
Tdsoft Ltd. currently have two and four "Approved Enterprise"
programs, respectively. These benefits include accelerated
depreciation of equipment used in the investment program, as well as a
full tax exemption on undistributed income for a period of two years
and reduced tax rates of 25% or less for an additional period of up to
eight years (depending on the percentage of foreign ownership),
commencing with the date on which taxable income is first earned.
Since VocalTec Ltd. and Tdsoft Ltd. have had no taxable income since
inception, the benefits period has not yet commenced.
The period of tax benefits detailed above, except the full tax
exemption period, is subject to a limit of 12 years from the
commencement of production, or 14 years from the approval date,
whichever is earlier. The entitlement to the above benefits is
conditional upon VocalTec Ltd. and Tdsoft Ltd. fulfilling the
conditions stipulated by the above law, regulations published
there-under and the letters 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 VocalTec Ltd. and
Tdsoft Ltd. may be required to refund the amount of the benefits, in
whole or in part, including interest. As of December 31, 2008,
management believes that VocalTec Ltd. and Tdsoft Ltd. are meeting all
of the aforementioned conditions.
The tax-exempt income attributable to the "Approved Enterprise" can be
distributed to shareholders without subjecting the distributing
company to taxes only upon the complete liquidation of the company. If
these retained tax-exempt profits are distributed in a manner other
than in the complete liquidation of the company, they would be taxed
at the corporate tax rate applicable to such profits as if the company
had not elected the alternative track of benefits, currently 25% for
an "Approved Enterprise". As of December 31, 2008, the accumulated
deficit of each company does not include tax-exempt profits earned by
their "Approved Enterprise".
Income from sources other than the "Approved Enterprise" during the
benefit period will be subject to tax at the regular corporate tax
rate of 29%. The regular corporate tax rate is to be gradually reduced
to 25% by 2010 (27% in 2008, 26% in 2009 and 25% in 2010).
d. VocalTec Ltd. received final tax assessment for the tax years up to
2004. Tdsoft Ltd. received final tax assessment for the tax years up
to 2002. VocalTec Inc. received final tax assessment for the tax years
up to 2003. Tdsoft Inc. received final tax assessment for the tax
years up to 2005.
F - 28
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 16:- TAXES ON INCOME (CONT)
e. VocalTec Ltd. and Tdsoft Ltd. have net operating loss carryforwards
for tax purposes of approximately $ 141,000 and $ 53,000 as of
December 31, 2008, respectively, which may be carried forward
indefinitely. VocalTec Communications Inc. and Tdsoft Communications,
Inc., which are subject to U.S. income taxes, have a loss for tax
purposes of approximately $ 9,000 as of December 31, 2008. These
losses can be carried forward until 2025. A valuation allowance was
recorded for the entire deferred tax asset in respect of the
carryforward losses, due to the uncertainty regarding future
realization. Management currently believes that since the Company has
a history of losses it is more likely than not that the deferred tax
regarding the loss carryforward will not be realized in the
foreseeable future.
Utilization of U.S. net operating losses may be subject to substantial
annual limitations due to the "change in ownership" provisions of the
Internal Revenue code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses before
utilization.
f. Taxes on income are comprised as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
2008 2007 2006
-------- -------- --------
Current taxes (domestic) $ 69 $ 37 $ -
======== ======== ========
g. Deferred taxes on income:
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes and the tax effect for carryforward losses. Significant
components of the Company's deferred tax assets are as follows:
DECEMBER 31
------------------------
2008 2007
-------- --------
Deferred tax asset:
Reserves and allowances $ 277 $ 329
Net operating losses carryforward 48,357 46,802
-------- --------
Net deferred tax asset before valuation allowance 48,634 47,131
Valuation allowance (48,634) (47,131)
-------- --------
Net deferred tax asset $ - $ -
======== ========
Management currently believes that since the Company has a history of
losses, it is more likely than not that the deferred tax asset will
not be utilized.
The difference between the theoretical tax computed and the actual tax
expense resulted mainly from valuation allowance recorded with respect
to carryforward losses and other temporary differences, primarily
related to severance and vacation reserves.
F - 29
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 16:- TAXES ON INCOME (CONT)
h. Income (loss) before income taxes is comprised as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------
2008 2007 2006
-------- -------- --------
Israel $ 3,811 $(13,531) $ (6,396)
Foreign (34) (611) (616)
-------- -------- --------
$ 3,777 $(14,142) $ (7,012)
======== ======== ========
i. In June 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FAS 109. This
interpretation prescribes a minimum recognition threshold a tax
position is required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition of tax
positions, classification on the balance sheet, interest and
penalties, accounting in interim periods, disclosure and transition.
FIN 48 requires significant judgment in determining what constitutes
an individual tax position as well as assessing the outcome of each
tax position. Changes in judgment as to recognition or measurement of
tax positions can materially affect the estimate of the effective tax
rate and consequently, affect the operating results of the Company.
The Company adopted the provisions of FIN 48 as of January 1, 2007.
The accumulated effect of applying FIN 48 have been recorded as an
increase of $ 784 of the goodwill and an increase of $ 34 of the
accumulated deficit and $818 of the income tax payable as of January
1, 2007, of which $ 93 related to interest and penalties. The Company
includes interest and penalties in its current tax expenses - $22 was
recorded in 2007 and $ 43 in 2008.
A reconciliation of the beginning and ending balances of the total
amounts of gross tax benefits is as follows:
Gross unrecognized tax benefits of January 1, 2007 $ 420
Increase in income tax position related to prior years 818
Increase in income tax position related to 2007 37
--------
Gross unrecognized tax benefits at December 31, 2007 $ 1,275
========
Increase in income tax position related to current year 54
--------
Gross unrecognized tax benefits at December 31, 2008 $ 1,329
========
F - 30
VOCALTEC COMMUNICATIONS LTD.
AND ITS SUBSIDIARIES
NOTE 17:- INCOME FROM SALE OF PATENTS, NET
In May 2008, the Company signed a Patent Purchase Agreement (PPA) for the
sale of selected patents to Karo Millennium J.P. L.L.C. Pursuant to the
agreement, the Company sold 11 patents and certain patent-related rights,
out of the company's portfolio of 22 patents. With the consummation of the
transaction and the payment of all transaction-related expenses, including
payment to the Office of the Chief Scientist (OCS), the Company retained
net profit amounting to approximately $8.8 million.
In December 2008, the Company signed an additional PPA for the sale of
certain patents to Masinolli Fund L.L.C. Pursuant to the agreement, the
Company sold 4 patents and certain patent-related rights, out of the
company's remaining portfolio of 11 patents. With the consummation of the
transaction and the payment of all transaction-related expenses, the
Company retained net profit amounting to approximately $6.1 million.
The Company was granted a geographically unlimited, non-exclusive license
to use the sold patents and other patent-related rights in connection with
the development and marketing of its products. Upon completion of the sale
of the four patents, the Company retained a patent portfolio comprising
seven additional patents as well as several trademarks, including the
"Internet Phone" trademark and Internet domain name.
NOTE 18:- SUBSEQUENT EVENT
On March 2, 2009, the Company bought an aggregate of 1,673,549 of its
shares, constituting approximately 22.7% of the issued and outstanding
share capital of the company, from its largest shareholder, Cisco Systems
International B.V. The share purchase was executed at a price per share of
$0.40, for a total aggregate purchase price of approximately $ 669,000.
F - 31
ITEM 19. EXHIBITS
1. Amended and Restated Articles of Association, previously filed with
the SEC on June 20, 2007 as Exhibit 1 to the Company's Annual Report
on Form 20-F for the year ended December 31, 2006 and incorporated
herein by reference.
2.1 Form of Share Certificate of VocalTec Communications Ltd., previously
filed with the SEC on April 21, 2006 as Exhibit 2.1 to the Company's
Annual Report on Form 20-F for the year ended December 31, 2005 (as
amended on May 16, 2006) and incorporated herein by reference.
4.1 (a) 2003 Amended Master Stock Option Plan previously filed with
the SEC on February 15, 2006 as Exhibit 99.2 to the Company's
registration statement on Form S-8 (File Number 333-131870) and
incorporated herein by reference.
(b) Summary of the lease agreement between Tdsoft and Limor Hugi
and others dated April 26, 2004, previously filed with the SEC on
April 21, 2006 as Exhibit 4.1(b) to the Company's Annual Report on
Form 20-F for the year ended December 31, 2005 (as amended on May 16,
2006) and incorporated herein by reference.
(c) Audit committee pre-approval policies and procedures for
audit and non-audit services, previously filed with the SEC on April
2, 2004 as Exhibit 4.1(k) to the Company's Annual Report on Form 20-F
for the year ended December 31, 2003, and incorporated herein by
reference.
(d) Form of indemnification undertaking dated as of November 24,
2005 between the Company and each of Joseph Albagli, Ilan Rosen,
Robert Wadsworth and Joseph Atsmon, previously filed with the SEC on
April 21, 2006 as Exhibit 4.1(g) to the Company's Annual Report on
Form 20-F for the year ended December 31, 2005 (as amended on May 16,
2006) and incorporated herein by reference.
(e) Form of indemnification undertaking dated as of November 24,
2005 between the Company and each of Dr. Elon Ganor, Yoav Chelouche
and Michal Even Chen, previously filed with the SEC on April 21, 2006
as Exhibit 4.1(h) to the Company's Annual Report on Form 20-F for the
year ended December 31, 2005 (as amended on May 16, 2006) and
incorporated herein by reference.
(f) Patent Purchase Agreement dated May 28, 2008 by and between
the Company and Karo Millennium J.P., L.L.C., filed with the SEC on
July 15, 2008 as Exhibit 4.1(j) to the Company's Annual Report on Form
20-F for the year ended December 31, 2007 and incorporated herein by
reference.
(g) Patent Purchase Agreement dated December 5, 2008 by and
between the Company and Masinolli Fund, L.L.C.
(h) Stock Repurchase Agreement dated March 2, 2009 by and between
the Company and Cisco Systems International B.V.
8. List of Subsidiaries.
11. (a) Code of ethics for our principal executive officer, principal
financial officer, executive vice presidents, principal controller,
treasurer and persons performing similar functions, previously filed
with the SEC on April 2, 2004 as Exhibit 11 to the Company's Annual
Report on Form 20-F for the year ended December 31, 2003 and
incorporated herein by reference.
(b) Amended insider trading policy, previously filed with the SEC
on June 20, 2007 as Exhibit 11 to the Company's Annual Report on Form
20-F for the year ended December 31, 2006 and incorporated herein by
reference.
(c) Standards of Business Conduct for our directors, officers and
employees.
12. Certifications of CEO and CFO of VocalTec Communications Ltd. required
by Rule 13a-14(a) (17 CFR 240.13a - 14(a)) or Rule 15d-14(a) (17 CFR
240.15d - 14(a)).
13. Certifications of CEO and CFO of VocalTec Communications Ltd. required
by Rule 13a-14(b) (17 CFR 240.13a - 14(b)) or Rule 15d-14(b) (17 CFR
240.15d - 14(b)).
14. Consent of Kost Forer Gabbay & Kasierer, an affiliate of Ernst & Young
Global, Independent Auditors.
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SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
By: /s/ Ido Gur
-----------------------
Ido Gur
Chief Executive Officer
Date: June 4, 2009
67