Our Customers
Our
products are used in more than 500 laboratories in over 40 countries. Our strongest
presence is in North America. The adaptable nature of our software allows us to offer
solutions to customers in a wide range of industries, including pharmaceuticals, public health, food
and beverage, oil and gas, environmental, chemical, agriculture and cosmetics. STARLIMS is
used by laboratories in multiple disciplines, but primarily in quality assurance and
control, testing and monitoring, and research and development.
A
significant portion of our customers are government laboratories in industries such as
public health, environmental science, forensic science, agriculture and water quality. In
2005, 2006 and 2007, sales to such laboratories accounted for 54%, 44% and 42% of our
total revenues, respectively. Of total revenues in 2005, 2006 and 2007, 50%, 32% and 33%,
respectively, were attributable to U.S. federal, state and local government contracts. Our
largest government customers include the California Animal Health and Food Safety
Laboratory System, California Department of Health Services, Jamaican Ministry of Health,
Singapore Health Services Authority, U.K. National Health Service, U.S. Air Force, U.S.
Centers of Disease Control and Federal Bureau of Prisons.
In
2004, the GSA (the procurement arm of the federal government) awarded to us a GSA Schedule
70. GSA Schedule 70 provides federal agencies with global access to information technology
and telecommunications hardware, software and professional services without the need to
seek bids from suppliers who are not GSA contract holders. Since there is no maximum order
limitation under the multiple-award GSA Schedule 70, customers can use GSA Schedule 70 for
large-scale, multi-million dollar LIMS implementations. Our GSA Schedule 70 award
facilitates our participation in large scale U.S. government LIMS projects in areas of
public health, food and water supply and scientific investigations. Our GSA contract is
valid for five years, expiring in July 2009, and may be extended for three additional
five-year periods at the option of the GSA.
In
the private sector, we primarily serve the manufacturing and life sciences markets. Our
manufacturing customers include laboratories in industries such as oil and gas, chemical,
food and beverage, metals and mining, consumer goods and automotive. Our life sciences
customers include laboratories in industries such as pharmaceuticals, biopharmaceuticals,
medical devices, biotechnology and contract research organizations. Other customers in the
private sector include contract laboratories that specialize in serving various industries
(primarily environmental and food safety).
We
do not believe we are dependent on any single customer. Amgen Inc., a leading U.S.-based
biotechnology company that entered into a contract with us in 2005, represented
approximately 11%, 18% and 9% of our total revenues for the years ended December 31, 2005,
2006 and 2007, respectively. As of December 31, 2006, that U.S.-based biotechnology
company had completed all of its minimum purchase obligations under that contract and we
are unable to project whether that customer will provide us with significant income in the
future.
Sales and Marketing
Prior
to 1998, we developed LIMS software that was marketed, sold and supported exclusively by
Varian Inc., a leading scientific instrument manufacturer. Since such time, we have been
selling STARLIMS through our direct sales force and network of distributors. As of
December 31, 2007, we employed 18 persons in sales and marketing as compared to 17 persons
in sales and marketing as of December 31, 2006. Our marketing efforts focus on raising
awareness for our products and generating qualified sales leads. Our direct sales force,
which is the source of the majority of our revenues, is operated out of four global field
offices in Florida, Canada, Hong Kong and United Kingdom. In addition, follow-on sales are
accomplished by the efforts of our sales force and professional services team. As of
December 31, 2007, our sales and marketing employees were located in the United States,
Canada, Europe and the Asia Pacific region. In 2005, 2006 and 2007, approximately 85%, 83%
and 84% of our revenues, respectively, were generated by our direct sales force and the
remainder was generated by our distributors. In 2005, 2006 and 2007, none of our
distributors accounted for more than 10% of our total revenues.
20
We
utilize the services of distributors in approximately 35 countries. As of December 31, 2007
and 2006, we had 23 distributors. We generally enter into a standard distribution
agreement with each of our distributors, according to which the distributor is granted
either an exclusive or non-exclusive right to market and sell our product offerings in a
certain geographic area. Those agreements that grant exclusivity to certain geographic
areas provide us the right to sell to specified international customers under worldwide
agreements.
Our
marketing strategy is to generate sales leads, continue to promote the market adoption of
our web-based LIMS, build our STARLIMS brand recognition and establish our company as a
leading global provider of commercial LIMS solutions. Our principal marketing initiatives
target key executives and decision makers within our existing and potential customer base,
and include: participation in user conferences, trade shows, workshops and industry
events; publication of articles and opinion pieces in trade magazines and journals;
participation in industry standardization bodies; press and industry analyst relations;
advertising in internet search engines and electronic and printed professional
publications; and maintaining a multi-lingual website that generates potential customer
leads (
www.starlims.com
).
Competition
The
LIMS market is highly competitive and gradually consolidating and is not dominated by any
one LIMS provider. Additionally, our market is subject to shifting customer needs,
periodic introductions of new products and changing technology.
Our
principal competitors are the LIMS divisions of multi-national laboratory equipment
companies, such as Thermo Fisher Scientific Inc. and Applied Biosystems, as well as
independent LIMS companies. To a lesser extent we also compete with system integrators and
consulting firms specializing in software for laboratory testing, quality control and
clinical trials. Some of our competitors have greater name recognition, longer operating
histories and significantly greater resources than we have.
Our
ability to remain competitive will depend to a great extent upon our ongoing product
development and ability to provide a high level of professional services and customer
support. We believe that the principal competitive factors in our market include:
|
|
—
|
product
functionality and breadth of integration across a wide range of laboratories;
|
|
|
—
|
performance,
security, scalability, flexibility and reliability of the software;
|
|
|
—
|
quality
of professional services and customer support;
|
|
|
—
|
reputation
and financial stability;
|
|
|
—
|
cost
and demonstrable benefits for customers;
|
|
|
—
|
speed
and ease of implementation and integration; and
|
|
|
—
|
sales
and marketing capabilities.
|
We
believe that we compete favorably with our competitors on the basis of these factors.
There can be no assurance that our current or prospective competitors will not offer or
develop products or services that are superior to, or that achieve greater market
acceptance than, our products.
Intellectual Property
Our
success and ability to compete are dependent on our ability to develop and maintain the
proprietary aspects of our technology and operate without infringing the proprietary
rights of others. We rely upon a combination of trademark, trade secret, copyright and
unfair competition laws, as well as license agreements and other contractual provisions,
to protect our intellectual property and other proprietary rights. In addition, we attempt
to protect our intellectual property and proprietary information by requiring our
employees and consultants to enter into confidentiality, non-competition and assignment of
inventions agreements. These legal protections afford only limited protection for our
technology. Despite our precautions, it may be possible for third parties to obtain and
use our intellectual property without authorization. We own the trademark and service mark
STARLIMS, and we own the registered U.S. trademark for STARLIMS for computer software. As
is typical to our industry, we do not own any registered patents or pending patent
applications. We currently hold several domain names, including the domain name
“starlims.com.” Our agreements with employees, consultants and others who
participate in development activities could be breached. We may not have adequate remedies
for any breach, and our trade secrets may otherwise become known or independently
developed by our competitors or other third parties. In addition, the laws of some foreign
countries do not protect proprietary rights to the same extent as the laws of the United
States, and effective copyright, trademark and trade secret protection may not be
available in those jurisdictions.
21
Due
to rapid technological change, we believe that factors such as the technological and
creative skills of our personnel, new product developments and enhancements to existing
products are more important than the various legal protections of our technology to
establishing and maintaining a technology leadership position.
Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt to copy
aspects of our software solutions or to obtain and use information that we regard as
proprietary. Litigation may be necessary in the future to enforce our intellectual
property rights or to determine the validity and scope of the proprietary rights of
others. Any such litigation could result in substantial costs and diversion of resources
and could have a material adverse effect on our business, operating results or financial
condition. There can be no assurance that our means of protecting our proprietary rights
will be adequate or that our competitors will not independently develop similar
technology. Any failure to meaningfully protect our intellectual property and other
proprietary rights could have a material adverse effect on our business, operating results
or financial condition.
In
addition, if any of our software is covered by third-party patents or other intellectual
property rights, we could be subject to infringement actions. Although we believe that our
software does not infringe on patents held by others, we cannot assure you that it does
not or that it will not in the future. Any infringement claims made against us could cause
us to incur substantial costs defending against the claim, even if the claim is without
merit, and could distract our management from our business. Moreover, any settlement of or
adverse judgment resulting from such claims could require us to pay substantial amounts or
obtain a license to continue to use the technology that is the subject of the claim, or
otherwise restrict or prohibit our use of the technology. Any required licenses may not be
available to us on acceptable terms, if at all. If we do not obtain any required licenses,
we could encounter delays in product introductions if we attempt to design around the
technology at issue or to find another provider of suitable alternative technology to
permit us to continue offering the applicable software solution. In addition, we generally
provide in our customer agreements, that we will indemnify our customers against
third-party infringement claims relating to our technology provided to the customer, which
could obligate us to fund significant amounts.
We
also integrate into our products certain technology licensed from third parties. We do not
believe that any technology licensed from third parties and integrated into our products
is material to our business. We may be required to license additional technology in the
future for use in our products or enhancements. We may not be able to license these
technologies on commercially advantageous terms or at all. Our inability to obtain any of
these licenses could delay product development until alternative technologies can be
identified, licensed and integrated.
Standards and Regulations
Our
operations are not subject to any specific regulations or obligatory standards. There are,
however, voluntary guides published for sale to LIMS developers, notably those of ASTM
International, previously known as the American Society for Testing and Materials, or
ASTM. We follow and keep current with respect to the standards set out in the guides
published by ASTM. We are also ISO (International Organization for Standardization)
9001:2000 certified through January 2009. Additionally, we are members of the American
Society for Quality and the International Society for Pharmaceutical Engineering.
22
To
date, we have not been subject to direct regulation by the U.S. Food and Drug
Administration, or the FDA. However, to the extent one of our customers incorporates our
software into a medical device regulated by the FDA, the FDA may evaluate our software and
consider its safety and effectiveness when evaluating or approving the medical device.
Moreover, it is possible that in the future the FDA may impose different or more stringent
regulations or requirements upon our customers or subject us to regulations in a manner
that may adversely impact our business.
Unlike
the LIMS industry, many of the industries in which our customers operate are regulated by
various federal and state agencies depending on the type of testing conducted at the
laboratory, such as, by way of example, the FDA, the Centers for Medicare and Medicaid
Services, or the CMS, the U.S. Environmental Protection Agency, or the EPA, the
Occupational Safety and Health Administration, or OSHA, and by their international
counterparts. In addition, such industries seek to comply with industry-specific quality
standards, such as those of the International Organization for Standardization and Six
Sigma, and regulatory practices, such as GLPs, good clinical practices and good
manufacturing practices, or GMPs.
If
our product offerings fail to allow our customers and potential customers to operate in a
manner that is compliant with applicable regulations and regulatory guidance, our current
and potential customers may be unwilling to use our software products. Accordingly, we
have designed our products to allow compliance with current regulations and standards
applicable to the industries in which our customers operate. We also expend considerable
time and effort monitoring regulatory developments that could affect the use of our
products by our customers. However, we cannot assure you that our software will continue
to allow customers to maintain compliance with applicable regulations and guidelines as
they emerge.
ISO
17025, “General Requirements for the Competence of Calibration and Testing
Laboratories,” is a prominent example of a quality standard affecting laboratories.
This standard assists laboratories which have implemented its requirements to achieve
consistent production of competent results. To be recognized as adhering to the standard,
laboratories must be accredited and undergo periodic assessments of their activities. The
principles underlying the requirements of the standard include capacity, exercise of
responsibility, use of scientific method, objectivity of results, impartiality of conduct,
traceability of measurement, repeatability of test and transparency of process.
GMPs
are a set of regulations, codes and guidelines for the manufacture of drugs or drug
substances and products, medical devices, in vivo and in vitro diagnostic products and
foods. An extremely important part of GMPs is documenting every aspect of the process,
activities and operations. If the documentation cannot show the manner in which the
product was made and tested and does not allow for traceability, then the product does not
meet the required specification and is considered contaminated. Additionally, it is a GMP
requirement that all manufacturing and testing equipment and utilities be qualified as
suitable for use and that all operational methodologies and procedures (such as
manufacturing, cleaning, and analytical testing) utilized in the drug process be validated
to demonstrate that they can perform the activities they purport to according to
predetermined specifications.
Several
of our customers are engaged in clinical testing that is regulated by the FDA and other
governmental authorities world-wide. The use of software during the clinical trial process
must adhere to regulations such as GLPs and other FDA rules, the Consolidated Guidance for
Industry from the International Conference on Harmonization regarding GLP for Europe,
Japan and the United States and other guidance documents. In addition, the FDA has
developed regulations and regulatory guidance concerning electronic records and electronic
signatures. The regulations, codified as 21 CFR Part 11, are interpreted for clinical
trials in a guidance document titled Computerized Systems Used in Clinical Trials. Other
guidance documents have been issued that also assist in the interpretation of 21 CFR Part
11. This regulatory guidance provides that computerized systems used to capture or manage
clinical trial data must meet certain standards of attributability, accuracy,
retrievability, traceability, inspectability, validity, security and dependability.
23
Regulation
of the use and disclosure of personal medical information is complex and expanding.
Federal legislation in the United States, known as the Health Insurance Portability and
Accountability Act of 1996, or HIPAA, imposes a number of requirements on the use and
disclosure of “protected health information,” which is individually
identifiable. Health care facilities and providers who are involved in clinical trials may
be subject to such requirements. HIPAA also imposes on these healthcare facilities and
providers standards to assure the confidentiality of health information stored or
processed electronically, including a series of administrative, technical and physical
security procedures. This may affect us in several ways. Many users of our product
offerings are directly regulated under HIPAA and, to the extent our products cannot be
utilized in a manner that is consistent with the users’ HIPAA compliance
requirements, our products will likely not be selected. In addition, we may be directly
affected by HIPAA and similar state privacy laws. Under HIPAA, to the extent we perform
functions or activities on behalf of customers that are directly regulated by such medical
privacy laws, such customers may be required to obtain satisfactory assurance from us, in
the form of a written agreement, that we will comply with various HIPAA requirements,
including inspection by federal authorities. A breach of such an agreement may result in
contractual liability to our customer or other adverse consequences. Regulation of medical
information generally is increasing at the state and federal levels in the United States
and elsewhere, and such regulations may negatively affect our business.
|
C.
|
ORGANIZATIONAL
STRUCTURE
|
Our
principal subsidiary, STARLIMS Corporation, is incorporated in Florida, the United States.
In 2006, we established three additional wholly-owned subsidiaries, STARLIMS Canada
organized in Canada, STARLIMS Asia Pacific organized in Hong Kong and STARLIMS Europe
organized in the United Kingdom.
|
D.
|
PROPERTY,
PLANTS AND EQUIPMENT
|
Our
corporate headquarters are located at 32B Habarzel Street, Tel Aviv 69710, Israel, where
we own and occupy approximately 2,600 square feet of office space. We lease approximately
10,000 square feet of office space in Hollywood, Florida for our U.S. subsidiary, STARLIMS
Corporation, under a lease that expires in October 2009. The aggregate annual rent for our
office space in Florida was approximately $315,000 in 2007. We lease approximately 7,500
square feet of space in Montreal, Canada for our Canadian subsidiary under a lease that
expires in June 2011 at an annual rent of approximately $184,000. We also lease
approximately 3,000 square feet of space in Hong Kong for our Hong Kong subsidiary under a
lease that expires in January 2010, at an annual rent of approximately $70,000. Since
November 2006, we have leased approximately 3,000 square feet of space in Ashkelon, Israel
for our Israeli research and development center under a lease that expires in December
2008, at an annual rent of approximately $32,000. From time to time we also lease, through
staffing service providers, small offices in various locations to accommodate field sales
personnel.
|
ITEM 4A.
|
|
UNRESOLVED STAFF COMMENTS
|
Not
applicable.
|
ITEM 5.
|
|
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|
The
following discussion of our results of operations should be read together with our audited
consolidated financial statements and the related notes, which appear elsewhere in this
annual report. The following discussion contains forward-looking statements that reflect
our current plans, estimates and beliefs and involve risks and uncertainties. Our actual
results may differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include those discussed below
and elsewhere in this annual report.
24
Background
We
were incorporated under the laws of the State of Israel in May 1986. Our ordinary shares
have traded on the TASE since November 1993 and have also been listed on the NASDAQ Global
Market (symbol: LIMS) since our public offering in the United States in May 2007. We
develop, market and sell a configurable off-the-shelf LIMS software solution trade-named
“STARLIMS.” Our principal subsidiary, STARLIMS Corporation, is incorporated in
Florida, the United States. In 2006, we established three additional subsidiaries,
STARLIMS Canada organized in Canada, STARLIMS Asia Pacific organized in Hong Kong and
STARLIMS Europe organized in the United Kingdom.
Our
consolidated financial statements are prepared in U.S. dollars and in accordance with
generally accepted accounting principles in the United States, or U.S. GAAP.
Overview
We
are a leading provider of LIMS and have over 20 years experience in the LIMS market.
STARLIMS manages the collection, processing, storage, retrieval and analysis of
information generated in laboratories. Our software improves the reliability of sampling
processes, supports compliance with domestic and international regulations and industry
standards, and provides comprehensive reporting, monitoring and analysis capabilities. In
March 2006, we introduced a web-based LIMS solution, which enables our customers to
manage their globally distributed laboratories more efficiently and effectively.
Our
STARLIMS solution is used by more than 500 laboratories in over 40 countries around the
world and our strongest presence is in North America. The adaptable nature of our software
allows us to offer solutions to customers in a wide range of industries and in multiple
disciplines, primarily quality assurance and control, testing and monitoring, and research
and development. The primary users of STARLIMS are government, manufacturing and life
sciences organizations.
We
released our web-based, configurable off-the-shelf STARLIMS Version 10 in March 2006 and
unlike many traditional LIMS that were augmented by web-enabled capabilities, STARLIMS
Version 10 was developed from inception as a true web-based product. STARLIMS Version 10
requires no client-side installation or maintenance and enables us to offer a solution
that facilitates global deployment and centralized management. We are among the first in
the LIMS industry to offer such capabilities and since its release, we have experienced
increased interest in STARLIMS Version 10, primarily from global organizations with
multiple, widely distributed laboratories.
Our
release of STARLIMS Version 10 did not represent a change in our basic business model and
we continue to offer both versions of our STARLIMS software under a perpetual license,
which permits the installation of the software on the customer’s servers. We
currently do not offer hosting services on our or any third party’s hardware, which
eliminates the risks associated with the provision of hosting services. Upon the
introduction of STARLIMS Version 10, we began to exclusively invest our marketing
resources in creating increased market familiarity for web-based LIMS and discontinued our
promotion of the prior client-server version of STARLIMS. Following a decrease in revenues
from software licensing in the year ended December 31, 2006, which we believe was
primarily attributable to the time required for the market to become familiar with and
adopt web-based LIMS, our software licensing revenues increased by 29% in the year ended
December 31, 2007. We believe this increase was attributable to the broader adoption of
STARLIMS Version 10.
In
January 2006, to increase our market share in the life sciences, we acquired all of the
outstanding stock of STARLIMS Canada, a Canadian company that served as a distributor of
our software products in Canada and as a subcontractor for implementation services in the
United States. We paid approximately $1.6 million for the acquisition. We have designated
STARLIMS Canada as a Center of Excellence, which as of December 31, 2007, employed a team
of 34 employees, who are dedicated exclusively to the life sciences.
In
July 2006, we established a subsidiary in Hong Kong, STARLIMS Asia Pacific, which acquired
certain assets and liabilities of a company that served as our business development office
in the Asia Pacific region. As of December 31, 2007, STARLIMS Asia Pacific employed a team
of 20 sales personnel and programmers focused on supporting our expansion efforts into the
fast growing LIMS markets in China and South East Asia.
25
In
July 2006, we established a subsidiary in the United Kingdom, STARLIMS Europe, which is
responsible for direct sales in the United Kingdom and supports our expanding distribution
network throughout the rest of Europe.
In
July 2006, we entered into an agreement with EMC Corporation, or EMC, a leading provider
of enterprise content management, under which we have embedded EMC’s Documentum
software into STARLIMS. This allows users to manage structured and unstructured data
within a single repository. We intend to continue this initiative and develop a LIMS
solution that provides the functionalities of an electronic laboratory notebook, or ELN,
and a scientific document management system, or SDMS. We released our first LIMS solution
providing SDMS functionalities during the first quarter of 2008 and intend to release our
first LIMS solution providing ELN functionalities during 2008.
In
November 2006, we established a research and development center in Ashkelon, Israel that
employed 18 programmers as of December 31, 2007.
On
May 23, 2007, we issued 2,100,000 ordinary shares in an initial public offering in the
United States. On June 27, 2007, the underwriters, Oppenheimer & Co. and JMP
Securities LLC, exercised part of their over allotment and purchased an additional 126,300
ordinary shares. We sold a total of 2,226,300 ordinary shares (including the over
allotment option shares) at a price to the public of $13.50 per share resulting in net
proceeds from the offering of approximately U.S. $27 million.
In
February 2008, we adopted a share repurchase program, allowing us to repurchase our
ordinary shares over a period of 18 months in the open market, at times and prices that
management considers appropriate, taking into account prevailing market conditions and
other corporate considerations. The program limits us to aggregate purchases of up to $2
million. As of March 30, 2008, we had repurchased 89,027 ordinary shares under the program
at a total purchase price of $671,851, or an average price of $7.55 per share. In
conjunction with our repurchase program, we have established a Rule 10b5-1 trading plan,
which provides for a scheduled repurchase mechanism that is managed by our broker.
Sources of Revenues
We
generate revenues from the sale of perpetual licenses to use STARLIMS, software
maintenance, and related professional services. Our customers generally enter into a
standard license and services agreement with us, under which they are granted a perpetual,
non-exclusive license to use the STARLIMS software and are offered the right to purchase
annual maintenance that provides updates and upgrades to our software if and when made
available. In North America, Latin America and Asia Pacific, we offer our customers
professional services, which include consulting services, implementation, training and
technical support for the software. In other regions, where we do not operate directly,
these services are provided by our network of distributors.
The
following table presents a breakdown of our revenues for each of the three years ended
December 31, 2007:
|
|
2005
|
2006
|
2007
|
|
|
Revenues
|
% of
Total
Revenues
|
Revenues
|
% of
Total
Revenues
|
Revenues
|
% of
Total
Revenues
|
|
|
(U.S. dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licensing
|
|
|
$
|
9,645
|
|
|
59
|
%
|
$
|
8,286
|
|
|
42
|
%
|
$
|
10,656
|
|
|
45
|
%
|
|
Maintenance
|
|
|
|
2,169
|
|
|
14
|
%
|
|
2,841
|
|
|
14
|
%
|
|
3,241
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product revenues
|
|
|
$
|
11,814
|
|
|
73
|
%
|
$
|
11,127
|
|
|
56
|
%
|
|
13,897
|
|
|
58
|
%
|
|
Services
|
|
|
|
4,400
|
|
|
27
|
%
|
|
8,638
|
|
|
44
|
%
|
|
9,878
|
|
|
42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
$
|
16,214
|
|
|
100
|
%
|
$
|
19,765
|
|
|
100
|
%
|
$
|
23,775
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
26
The
following table presents the geographic breakdown (based on information provided by our
customers as to the intended place of use) of our revenues for each of the three years
ended December 31, 2007:
|
|
2005
|
2006
|
2007
|
|
|
Revenues
|
% of
Total
Revenues
|
Revenues
|
% of
Total
Revenues
|
Revenues
|
% of
Total
Revenues
|
|
|
(U.S. dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
$
|
12,359
|
|
|
76
|
%
|
$
|
14,689
|
|
|
74
|
%
|
$
|
16,094
|
|
|
68
|
%
|
|
Europe
|
|
|
|
1,340
|
|
|
8
|
%
|
|
2,870
|
|
|
14
|
%
|
|
3,584
|
|
|
15
|
%
|
|
Latin America
|
|
|
|
1,833
|
|
|
12
|
%
|
|
1,690
|
|
|
9
|
%
|
|
1,987
|
|
|
8
|
%
|
|
Asia
|
|
|
|
682
|
|
|
4
|
%
|
|
516
|
|
|
3
|
%
|
|
2,110
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
16,214
|
|
|
100
|
%
|
$
|
19,765
|
|
|
100
|
%
|
$
|
23,775
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
Cost of Revenues and
Operating Expenses
Cost
of Revenues
. Cost of products consists of purchases of third-party software components
and other royalty payments to third parties. Cost of services consists primarily of
salaries of employees of our professional services organization and subcontracting costs
we incur when professional services are provided on our behalf by third party system
integrators and consulting firms. Our professional services teams and subcontractors
provide our customers with training and technical support and assist them in the
implementation of STARLIMS. Our professional services staff increased significantly from
28 employees as of December 31, 2005 to 82 employees as of December 31, 2006 and further
increased to 84 employees as of December 31, 2007. In 2005, 2006 and 2007,
salary and subcontracting costs represented 84%, 83% and 82% of our cost of services,
respectively.
Research
and Development Expenses
. Research and development expenses consist primarily of
salaries of employees engaged in on-going research and development activities and other
related expenses. We have historically focused our research and development efforts on
increasing the functionality, performance and integration of STARLIMS with other business
applications. Prior to November 2006, our research and development activities were
conducted solely at our Florida facility. In November 2006, we established an additional
research and development center in Ashkelon, Israel and had 18 programmers employed at
that center as of December 31, 2007. We expect that research and development expenses will
increase in the future as we introduce additional integrated software solutions to our
product suite. Our research and development personnel grew from 18 to 32 to 34 employees
as of December 31, 2005, 2006, and 2007, respectively.
Selling
and Marketing Expenses
. Selling and marketing expenses consist primarily of salaries
and related expenses for sales and marketing personnel, sales commissions, marketing
campaigns, website related expenses, public relations, promotional materials, travel
expenses and trade show exhibit expenses. We expect that selling and marketing expenses
will increase as we expand our activities associated with our web-based configurable
off-the-shelf STARLIMS and we increase our efforts to further establish its market
adoption. We do not plan to change our sales and marketing activities or business model as
a result of the introduction of our web-based STARLIMS. Our sales and marketing personnel
grew from 12 to 17 to 18 employees as of December 31, 2005, 2006, and 2007, respectively.
General
and Administrative Expenses
. General and administrative expenses consist primarily of
salaries and related expenses for executive, accounting, human resources and
administrative personnel, professional fees, provisions for doubtful accounts and other
general corporate expenses. We expect that general and administrative expenses will
increase in the future as we add personnel and incur additional professional fees and
insurance costs related to the growth of our business and the listing of our shares on The
NASDAQ Global Market. Our management and administrative personnel grew from 8 employees as
of December 31, 2005 to 17 employees as of December 31, 2006 and 2007.
27
Financial
Income, Net
. Financial income, net consists primarily of income on marketable
securities, interest on bonds and commercial paper, as well as interest on cash deposits
and exchange rate gains (losses).
Income
Tax Expense
. Our taxable income in Israel was subject to corporate tax at the
statutory rate of 31% in 2006 and 29% in 2007. The applicable rate for 2008 is 27%; for
2009, it will be 26%, and for 2010 and thereafter, it will be 25%. Our Israeli research
and development center, established in Israel in November 2006, was recognized under the
Israeli Law for the Encouragement of Capital Investments, 1959 as a “Benefited
Enterprise,” entitling us to various tax benefits. Our benefit under this program
commenced in the 2006 tax year and will be in effect for ten years. Any taxable income
attributable to an increase in our revenues subject to Israeli tax over $3.5 million (the
average of such revenues for the years 2003-2005) will be tax exempt in such period. In
the event of distribution of cash dividends from income which was tax exempt, we would
have to pay corporate tax in respect of the amount distributed. The benefits under our
Benefited Enterprise are subject to our compliance with conditions under applicable law
and the approval that we received from the Israeli Tax Authority. As of December 31, 2007,
we were in compliance with all applicable conditions. The statutory tax rate applicable to
our operations in the United States for 2007 was 36% and the rates applicable to our other
foreign subsidiaries ranged from 17.5% to 32% in the year ended
December 31, 2007. See Item 10E. “Additional Information – Taxation
– Israeli Tax Considerations.”
Critical Accounting
Policies and Estimates
Our
consolidated financial statements are prepared in accordance with U.S. GAAP. The
preparation of the financial statements requires us to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues, costs and expenses and
related disclosures. Though we evaluate our estimates and assumptions on an ongoing basis,
our actual results may differ from these estimates.
Certain
of our accounting policies that we believe are the most important to the portrayal of our
financial condition and results of operations and that require management’s
subjective judgments are described below to facilitate better understanding of our
business activities. We base our judgments on our experience and assumptions that we
believe are reasonable and applicable under the circumstances.
Revenue Recognition
Our
revenues are derived from licensing our software products, which include annual
maintenance contracts, and rendering services, which typically include consulting,
implementation, training and technical support. Our typical licensing transaction provides
a perpetual non-exclusive license to use our software products, which use is restricted in
terms of either the number of users or the specified locations of use (site license). We
generally license our software products under multiple element arrangements, in cases
where the customer requires a combination of maintenance, consulting, implementation,
training or other services, in addition to the software license.
We
recognize revenues pursuant to the provisions of American Institute of Certified Public
Accountants Statement of Position, or SOP, 97-2,
“Software Revenue
Recognition
,” or SOP 97-2, as amended by SOP 98-9, “
Modification of SOP
97-2, Software Revenue Recognition With Respect to Certain Transactions
.”
While
these statements of position govern the basis for recognition of revenues from our
operations, judgment and the use of estimates are required in connection with the
determination of the amount of software licensing and services revenues, as well as the
amount of deferred revenues to be recognized in each accounting period. Our ability to
identify the type of elements included in our multiple-element software arrangements, to
determine whether services are essential to the functionality of the software and to
establish the vendor specific objective evidence, or VSOE, of fair value for the
identified elements could materially impact the amount and timing of our recognized and
deferred revenues.
Software
Licensing and Maintenance Revenue Recognition.
Revenues from software licensing are
recognized when all the following criteria are met: (i) persuasive evidence of an
arrangement exists, (ii) delivery has occurred, (iii) our fee is fixed or determinable,
and (iv) collectibility is probable.
28
Revenues
from post-contract customer support arrangements, referred to as maintenance contracts,
which are initially bundled in the licensing fee, are separated from such licensing fee
based on VSOE of fair value and recognized ratably over the contractual period of the
arrangement (typically one year). Revenues from renewal of maintenance contracts,
generally covering a period of one year, are recognized ratably over the contractual
period of the arrangement. Maintenance contracts provide the right to unspecified software
upgrades and updates on a when-and-if-available basis.
In
multiple-element arrangements that include software licensing and services that are not
essential to the functionality of the software, revenues allocated to the services are
accounted for separately. In such cases, revenues are recognized using the residual method
when VSOE of fair value exists for all of the undelivered elements under the arrangement.
We allocate revenues to each undelivered element based on its respective fair value which
is the price charged when that element is sold separately or, by reference to a renewal
rate specified in the related arrangement. Revenues are recognized for the delivered
elements when (i) VSOE of the fair values of all undelivered elements exists, and (ii) all
revenue recognition criteria of SOP 97-2 are satisfied.
Revenues
for arrangements that include services deemed as essential to the functionality of the
software or involve significant production, modification, or customization of the software
are recognized in accordance with SOP 81-1, “
Accounting for Performance of
Construction-Type and Certain Production-Type Contracts
,” based on the percentage
of completion method of accounting. If such arrangements include elements that do not
qualify for contract accounting (such as bundled maintenance contracts), those elements
are accounted for separately provided that all other applicable revenue recognition
criteria are satisfied. Provisions for estimated losses attributable to uncompleted
contracts are made in the period in which such losses are initially determined, in an
amount equal to the estimated loss on the entire contract.
In
arrangements in which sales to end-customers are made by a distributor and we are the
primary obligor and bear the risks associated with the transaction, revenues are recorded
upon the sale to the end-customer in an amount equal to the end-customer purchase price,
provided all other revenue recognition criteria of SOP 97-2 are satisfied. In arrangements
in which sales are made to the distributor under non-exchangeable, non-refundable and
non-returnable terms, the distributor is considered as the end-customer and revenues are
recorded upon the sale to the distributor in an amount equal to the distributor’s
purchase price, net of the commission to which the distributor is entitled provided all
other revenue recognition criteria of SOP 97-2 are satisfied.
Services
Revenues Recognition. Our professional services include training, technical support,
consulting services and implementation services. Revenues from professional services that
are time-and-material based are recognized as such services are provided based on time and
materials invested. Revenues from professional services that are milestone-based are
recognized upon the completion of each respective milestone. Revenues from training are
recognized as the training is provided. Revenues from technical support arrangements are
recognized ratably over the contractual period of the arrangements (typically one year).
Goodwill
Our
long-term assets include goodwill resulting from business combinations, which are
accounted for under the purchase method. Goodwill is the excess of the purchase price over
the fair value of identifiable net assets acquired in business combinations accounted for
as purchases. Goodwill is not amortized to earnings, but rather is subject to periodic
testing for impairment at least annually or more frequently if certain events or
indicators of impairment occur, at the reporting unit level. Impairment is the condition
that exists when the carrying amount of goodwill exceeds its implied fair value.
Measurement of an impairment loss is an estimate performed based on the following: if the
fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting
unit is considered not impaired; if the carrying amount of the reporting unit goodwill
exceeds the implied fair value of the goodwill, an impairment loss is recognized in an
amount equal to that excess. We use the discounted cash flow method to determine the fair
value of the reporting unit. Our determination whether goodwill is to be impaired involves
assumptions and estimates relating to our potential future benefits of that goodwill. If
these estimates or related assumptions change in the future we may be required to record
impairment charges of our goodwill.
29
Functional Currency in
U.S. Dollars
The
reporting currency of our company is the U.S. dollar. The majority of our revenues are
generated in U.S. dollars or linked to the U.S. dollar. In addition, a substantial portion
of our costs are incurred in U.S. dollars. We believe that the U.S. dollar is the primary
currency of the economic environment in which we operate. The functional currency of each
of our non-Israeli subsidiaries is the respective local currency.
Transactions
of our subsidiaries that are in currencies other than the subsidiary’s functional
currency are translated into the respective functional currency based on the currency
exchange rates at the date of the transaction in accordance with the principles set forth
in Statement of Financial Accounting Standards, or SFAS, No. 52, “
Foreign Currency
Translation,
” or SFAS 52. All transaction gains and losses from the translation
of monetary balance sheet items resulting from transactions in currencies other than the
functional currency are recorded as financial income (expenses) as they arise.
The
financial statements of our subsidiaries with a functional currency other than the U.S.
dollar are translated into U.S. dollars prior to their inclusion in the consolidated
financial statements, in accordance with the provisions of SFAS 52, as follows: assets and
liabilities are translated using the year-end exchange rates; and statements of income
transactions are translated at the date of the transaction using the then current exchange
rates. Translation adjustments are presented in shareholders’ equity as Other
Comprehensive Income (Loss).
Allowance for Doubtful
Accounts
An
allowance for doubtful accounts is determined as a percentage of the balance of the
accounts receivable based on our estimates and past experience. When and if there is
specific evidence based on which, in our estimation, collectibility is not assured, the
allowance for doubtful accounts is computed on the specific identification basis. Any
change in our estimates may result in greater amounts recorded as an allowance for
doubtful accounts.
Research and Development
Software
research and development costs incurred prior to the establishment of technological
feasibility are charged to research and development expenses as incurred. Software
development costs incurred subsequent to the establishment of technological feasibility
through the period of general market availability of the products are capitalized, if
material. Based on our software research and development process, technological
feasibility is established upon completion of a working model only when all planning,
designing, coding and testing have been completed in accordance with design
specifications. To date, software research and development costs associated with the
establishment of technological feasibility were uncertain until release, and we have
expensed all software research and development costs accordingly.
Income Taxes
In
connection with the preparation of our financial statements, we estimate our income taxes
in each of the jurisdictions in which we operate. This process involves the assessment of
our loss carryforwards, credits and tax positions, as well as estimating the actual
current tax liability together with assessing temporary differences resulting from tax
reporting on a cash basis and different treatment of certain items, such as reserves and
accrued liabilities, for tax and accounting purposes. We then assess the likelihood that
deferred tax assets will be recovered from future taxable income, and to the extent we
estimate that recovery is not likely, we establish a valuation allowance. Based on
historical results, we do not believe that it is more likely than not that we will realize
the value of all our deferred tax assets and therefore have provided the required
valuation allowance against our net deferred tax assets.
30
Stock-Based Compensation
We
account for stock-based compensation in accordance with FASB Statement No. 123 (Revised
2004), “
Share-Based Payment
,” or SFAS 123(R), applying the modified
prospective method, and with Securities and Exchange Commission Staff Accounting Bulletin,
or SAB, No. 107, “
Share-Based Payment
,” or SAB 107, and SAB 110. In
accordance with SFAS 123(R), we measure the compensation cost associated with share-based
payment transactions based on the fair value on the respective grant date. Such
transactions include options and restricted stock units awarded to employees and a
liability award related to conditional adjustments to the salaries of certain officers
(see Item 6.B “Directors, Senior Management and Employees- Compensation”). The
costs associated with the awards are expensed over the vesting period of each grant,
according to the straight-line method.
For
employee option grants, the fair value of each option granted is estimated on the date of
grant using the Black-Scholes option-pricing model. For restricted stock units awarded to
employees and the liability award, the fair value is estimated on the date of grant using
the Monte-Carlo option-pricing model. When determining fair value based on those pricing
models, we use weighted average assumptions relating to the dividend yield, expected
volatility, risk free interest rate, expected holding period of the option by the employee
and forfeiture rates, in accordance with SAB 107. Changes in our assumptions with respect
to these components, or applying a different pricing model, may change the compensation
award costs and amounts expensed in each period and consequently the results of our
operations. In 2005, 2006, and 2007, we incurred share-based compensation expense of
$140,000, $141,000 and $177,000, respectively, attributable to all our share-based
payments. We expect that such expenses will increase in the future as we grant additional
stock-based compensation awards and recruit additional employees.
Results of Operations
The
following table presents certain financial data expressed as a percentage of total
revenues for the periods indicated:
|
|
As of December 31,
|
|
|
2005
|
2006
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licensing
|
|
|
|
59.5
|
%
|
|
41.9
|
%
|
|
44.8
|
%
|
|
Maintenance
|
|
|
|
13.4
|
|
|
14.4
|
|
|
13.6
|
|
|
Services
|
|
|
|
27.1
|
|
|
43.7
|
|
|
41.6
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
Cost of revenues
|
|
|
|
21.1
|
|
|
28.3
|
|
|
35.6
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
78.9
|
|
|
71.7
|
|
|
64.4
|
|
|
Operating expenses:
|
|
|
|
Research and development
|
|
|
|
8.5
|
|
|
9.4
|
|
|
12.0
|
|
|
Selling and marketing
|
|
|
|
25.3
|
|
|
24.0
|
|
|
24.4
|
|
|
General and administrative
|
|
|
|
12.3
|
|
|
13.3
|
|
|
11.8
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
|
46.1
|
|
|
46.7
|
|
|
48.2
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
32.8
|
|
|
25.0
|
|
|
16.2
|
|
|
Financial income, net
|
|
|
|
1.7
|
|
|
3.1
|
|
|
6.5
|
|
|
Income tax expense
|
|
|
|
12.1
|
|
|
8.9
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
22.4
|
%
|
|
19.2
|
%
|
|
19.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2007 Compared with Year Ended December 31, 2006
Revenues.
Revenues increased from $19.8 million for the year ended December 31, 2006
to $23.8 million for the year ended December 31, 2007, an increase of 20%.
Revenues from software licensing increased from $8.3 million for the year ended
December 31, 2006 to $10.7 million for the year ended December 31, 2007, an
increase of approximately 29%. The increase in software licensing revenues in
the year ended December 31, 2007 is as a result of the broader adoption of
STARLIMS Version 10 and the increased revenues derived from each transaction.
We expect our revenues to continue to increase in 2008 as the market for
web-based LIMS continues to develop and our share of that market grows.
31
Revenues
from maintenance increased from $2.8 million for the year ended
December 31, 2006 to $3.2 million for the year ended December
31, 2007, an increase of 14%. This increase is attributable to the growth of our
customer base.
Revenues
from services increased from $8.6 million for the year ended December 31, 2006 to
$9.9 million for the year ended December 31, 2007, an increase of 14%. This
increase is primarily attributable to the implementation of STARLIMS by larger customers
with laboratories in multiple sites, with each site requiring increased professional
services.
Cost
of Revenues.
Cost of services increased from $5.6 million for the year ended December
31, 2006 to $8.0 million for the year ended December 31, 2007, an increase of
46%. This increase is attributable to the expansion of our professional services,
including the expansion of our Canadian-based subsidiary and the establishment of our Hong
Kong subsidiary in July 2006, and an increased use of specialized sub-contractors
with security clearances necessary for our government projects. Cost of products increased
from $31,000 for the year ended December 31, 2006 to $374,000 for the year ended
December 31, 2007, primarily due to purchases of software components required
for our offering to the LIS market, which we recently entered.
Gross
Profit
. Gross profit as a percentage of revenues decreased from 72% for the year ended
December 31, 2006 to 64% for the year ended December 31, 2007. This
decrease was primarily a result of an increased use of specialized sub-contractors with
security clearances necessary for our government projects and increased cost of goods due
to our entry into the LIS market.
Research
and Development Expenses
. Research and development expenses increased from $1.9
million for the year ended December 31, 2006 to $2.9 million for the year ended
December 31, 2007, an increase of 54%. Such increase is primarily attributable
to the establishment of our development center in Israel in November 2006. Research
and development expenses as a percentage of revenues increased from 9% for the year ended
December 31, 2006 to 12% for the year ended December 31, 2007. We expect that
our research and development expenses will increase moderately in 2008 due to our
development of SDMS and ELN functionalities.
Selling
and Marketing Expenses
. Selling and marketing expenses increased from $4.7 million for
the year ended December 31, 2006 to $5.8 million for the year ended
December 31, 2007, an increase of 22%. Of such increase, approximately $398,000
was attributable to our trade shows and expositions, primarily our customer conference,
which took place in December 2007. Selling and marketing expenses as a percentage of
revenues remained constant at approximately 24% for the years ended
December 31, 2006 and 2007.
General
and Administrative Expenses
. General and administrative expenses increased from $2.6
million for the year ended December 31, 2006 to $2.8 million for the year ended
December 31, 2007, an increase of 6%. An increase of approximately $271,000 was
attributed to increased professional services fees and insurance expenses due to our
initial public offering in the United States in May 2007. General and administrative
expenses as a percentage of revenues decreased from approximately 13% for the year ended
December 31, 2006 to approximately 12% for the year ended
December 31, 2007. This decrease is due to the increase in our revenues, while
the majority of our general and administrative expenses are of a fixed nature.
Financial
Income, Net
. Financial income, net increased from $600,000 for the year ended
December 31, 2006 to $1.6 million for the year ended
December 31, 2007, an increase of approximately 154%. This increase is primarily
attributable to interest income from bonds and commercial paper, which we purchased with
proceeds from our initial public offering in the United States. Such interest income in
2007 was $903,000, compared to $168,000 in 2006. This increase is also attributable to a
$326,000 gain on marketable securities in 2007, compared to a $192,000 gain on marketable
securities in 2006. Our financial income also increased due to the appreciation of the NIS
against the U.S. dollar by approximately 9% in 2007 compared to approximately 8% in 2006.
As a result, we recorded a foreign currency exchange gain of $241,000 in 2007 compared to
a foreign currency exchange gain of $164,000 in 2006.
32
Income
Tax Expense
. Income tax expenses were $1.8 million for the year ended December
31, 2006, or a 32% effective tax rate, compared to $0.9 million, or a 16% effective
tax rate, for the year ended December 31, 2007. The decrease in our effective
tax rate in the year ended December 31, 2007 was primarily attributable to the
establishment of our development center in Israel in November 2006, which is regarded
as a “Benefited Enterprise” entitling us to certain tax benefits under Israeli
law, including a tax exemption for income attributable to the Benefited Enterprise.
Year Ended December 31,
2006 Compared with Year Ended December 31, 2005
Revenues
.
Revenues increased from $16.2 million for the year ended December 31, 2005
to $19.8 million for the year ended December 31, 2006, an
increase of 22%. Revenues from software licensing decreased from $9.6 million
for the year ended December 31, 2005 to $8.3 million for the
year ended December 31, 2006, a decrease of 14%. In March 2006,
we released our new web-based STARLIMS Version 10, which introduces a new
paradigm in the management of laboratory information, and at the same time, we
discontinued our promotion of STARLIMS Version 9, which utilizes an older
client-server technology. We did not change our business model upon the
introduction of STARLIMS Version 10, and both STARLIMS Versions 9 and 10 are
sold under a perpetual license. We believe that our revenues from software
licensing in the year ended December 31, 2006 were negatively
affected as a result of the transition to promoting the new version and the
time required for the market to become familiar with and adopt web-based LIMS.
The negative impact of the transition to STARLIMS Version 10 was offset in part
in the fourth quarter of 2006 as we experienced a significant increase in
software licensing revenues. In 2006, we generated $6.2 million or 75% of
our software licensing revenues from STARLIMS Version 10 and approximately half
of such revenues were generated in the last quarter of 2006.
Revenues
from maintenance increased from $2.2 million for the year ended
December 31, 2005 to $2.8 million for the year ended
December 31, 2006, an increase of 31%. Maintenance revenues increased in 2006 as
a result of the growth of our customer base.
Revenues
from services increased from $4.4 million for the year ended
December 31, 2005 to $8.6 million for the year ended
December 31, 2006, an increase of 96%. The increase in revenues from services in
2006 is primarily attributable to the implementation of STARLIMS by larger customers with
laboratories in multiple sites, with each site requiring specific configuration,
implementation and training. In 2006, we established and further expanded our
Canadian-based Center of Excellence, which primarily focuses on providing professional
services to our global life sciences customers and significantly contributed to the
increase in revenues from services in 2006. Additionally, the increase in revenues from
services was attributable to professional services revenues associated with the
implementation of transactions that closed in the second half of 2005.
Cost
of Revenues
. Cost of services increased from $3.3 million for the year ended
December 31, 2005 to $5.6 million for the year ended
December 31, 2006, an increase of 68%. Approximately $2.0 million of such
increase was attributable to the establishment of our Canadian-based Center of Excellence
and the related expansion of professional services delivered to our life sciences
customers, which was offset in part by a decrease of approximately $998,000 in
subcontracting costs for professional services by third party system integrators. In
addition, approximately $252,000 of such increase was attributable to our recruitment of
additional professional services employees in connection with the establishment of our
Hong Kong subsidiary in 2006. In total, our professional services staff increased from 28
employees as of December 31, 2005 to 82 employees as of
December 31, 2006. Cost of products decreased from $120,000 for the year ended
December 31, 2005 to $31,000 for the year ended December 31, 2006, a
decrease of 74%.
Gross
Profit
. Gross profit as a percentage of revenues decreased from 79% for the year ended
December 31, 2005 to 72% for the year ended December 31, 2006. This
decrease was primarily a result of the change in the mix of our revenues as the service
portion of our revenues increased. Service revenues have a lower gross profit margin than
revenues from software licensing and maintenance.
33
Research
and Development Expenses
. Research and development expenses increased from
$1.4 million for the year ended December 31, 2005 to $1.9 million for
the year ended December 31, 2006, an increase of 36%. Of such increase,
approximately $198,000 was attributable to an increase in the number of our research and
development personnel that we hired primarily to support the introduction and continuous
enhancement of our STARLIMS Version 10, which was released in March 2006 and
approximately $174,000 was attributable to third party development expenses. In addition,
we incurred approximately $49,000 in expenses associated with the establishment of a new
research and development center in Israel in November 2006. Research and development
expenses as a percentage of revenues increased from approximately 8% for the year ended
December 31, 2005 to approximately 9% for the year ended
December 31, 2006.
Selling
and Marketing Expenses
. Selling and marketing expenses increased from
$4.1 million for the year ended December 31, 2005 to $4.7 million for
the year ended December 31, 2006, an increase of 16%. Of such increase,
approximately $339,000 was attributable to the establishment of our Canadian-based Center
of Excellence and approximately $308,000 was attributable to our increased level of
operations in Europe. Selling and marketing expenses as a percentage of revenues decreased
from approximately 25% for the year ended December 31, 2005 to approximately 24%
for the year ended December 31, 2006.
General
and Administrative Expenses
. General and administrative expenses increased from
$2.0 million for the year ended December 31, 2005 to $2.6 million for
the year ended December 31, 2006, an increase of 32%. Such increase was
primarily due to increased costs of approximately $538,000 related to additional
administrative personnel and professional fees attributable to the expansion of our global
business. General and administrative expenses as a percentage of revenues increased from
approximately 12% for the year ended December 31, 2005 to approximately 13% for
the year ended December 31, 2006.
Financial
Income, Net
. Financial income, net increased from $271,000 for the year ended
December 31, 2005 to $610,000 for the year ended December 31, 2006, an
increase of 125%. This increase is primarily attributable to a $192,000 gain on marketable
securities in 2006, compared to a $117,000 gain on marketable securities in 2005. This
increase is also due to the appreciation of the NIS against the U.S. dollar in 2006 by
approximately 8%. As a result, in 2006, we recorded foreign currency exchange gains of
$164,000. In comparison, in 2005, the NIS depreciated against the U.S. dollar by
approximately 7%. As a result, in 2005, we recorded foreign currency exchange losses of
$102,000.
Income
Tax Expense
. Income tax expense was $2.0 million for the year ended December 31,
2005, or a 35% effective tax rate, compared to $1.8 million, or a 32% effective tax
rate, for the year ended December 31, 2006. This decrease in our tax rate in
2006 was attributable to the decrease in the statutory tax rate in Israel in 2006 and to
foreign currency gains on NIS-denominated securities due to the appreciation of the NIS
against the U.S. dollar. The foreign currency gains created financial income that was not
taxed in Israel since our Israeli tax returns are reported in NIS while our financial
statements are reported in U.S. dollars.
Quarterly Results of
Operations
The
following tables set forth certain quarterly financial information for each of the eight
fiscal quarters ended December 31, 2007, in dollars and as a percentage of revenues. In
management’s opinion, this data has been prepared on a basis consistent with our
audited consolidated financial statements included elsewhere in this annual report and
include all adjustments, consisting only of normal recurring adjustments that we consider
necessary for a fair presentation of the information for the quarters presented. The
operating results for any quarter are not necessarily indicative of results that we might
achieve for any future periods.
34
|
|
For the Three Month Periods Ended
|
|
|
Mar. 31,
2006
|
June 30,
2006
|
Sept. 30,
2006
|
Dec.
31,
2006
|
Mar.
31,
2007
|
June
30,
2007
|
Sept.
30,
2007
|
Dec.
31,
2007
|
|
|
(Unaudited)
(U.S. dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
Software licensing
|
|
|
$
|
1,060
|
|
$
|
2,382
|
|
$
|
1,344
|
|
$
|
3,500
|
|
$
|
2,679
|
|
$
|
2,032
|
|
$
|
2,816
|
|
$
|
3,129
|
|
|
Maintenance
|
|
|
|
644
|
|
|
678
|
|
|
754
|
|
|
765
|
|
|
727
|
|
|
790
|
|
|
814
|
|
|
910
|
|
|
Services
|
|
|
|
1,616
|
|
|
2,139
|
|
|
2,110
|
|
|
2,773
|
|
|
2,001
|
|
|
2,699
|
|
|
2,526
|
|
|
2,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
|
3,320
|
|
|
5,199
|
|
|
4,208
|
|
|
7,038
|
|
|
5,407
|
|
|
5,521
|
|
|
6,156
|
|
|
6,691
|
|
|
Cost of Revenues
|
|
|
|
1,128
|
|
|
1,278
|
|
|
1,401
|
|
|
1,781
|
|
|
1,826
|
|
|
2,010
|
|
|
1,981
|
|
|
2,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
2,192
|
|
|
3,921
|
|
|
2,807
|
|
|
5,257
|
|
|
3,581
|
|
|
3,511
|
|
|
4,175
|
|
|
4,039
|
|
|
Research and development expenses
|
|
|
|
424
|
|
|
461
|
|
|
403
|
|
|
578
|
|
|
676
|
|
|
669
|
|
|
705
|
|
|
822
|
|
|
Selling and marketing expenses
|
|
|
|
1,020
|
|
|
1,368
|
|
|
1,246
|
|
|
1,107
|
|
|
1,165
|
|
|
1,332
|
|
|
1,481
|
|
|
1,814
|
|
|
General and administrative expenses
|
|
|
|
555
|
|
|
702
|
|
|
579
|
|
|
798
|
|
|
573
|
|
|
671
|
|
|
757
|
|
|
798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
193
|
|
|
1,390
|
|
|
579
|
|
|
2,774
|
|
|
1,167
|
|
|
839
|
|
|
1,232
|
|
|
605
|
|
|
Financial income, net
|
|
|
|
73
|
|
|
270
|
|
|
135
|
|
|
132
|
|
|
131
|
|
|
222
|
|
|
569
|
|
|
629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
|
|
266
|
|
|
1,660
|
|
|
714
|
|
|
2,906
|
|
|
1,298
|
|
|
1,061
|
|
|
1,801
|
|
|
1,234
|
|
|
Income tax expense
|
|
|
|
84
|
|
|
496
|
|
|
206
|
|
|
976
|
|
|
187
|
|
|
196
|
|
|
249
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$
|
182
|
|
$
|
1,164
|
|
$
|
508
|
|
$
|
1,930
|
|
$
|
1,111
|
|
$
|
865
|
|
$
|
1,552
|
|
$
|
981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Month Periods Ended
|
|
|
Mar. 31,
2006
|
June 30,
2006
|
Sept. 30,
2006
|
Dec.
31,
2006
|
Mar.
31,
2007
|
June
30,
2007
|
Sept.
30,
2007
|
Dec.
31,
2007
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
Software licensing
|
|
|
|
31.9
|
%
|
|
45.9
|
%
|
|
31.9
|
%
|
|
49.7
|
%
|
|
49.5
|
%
|
|
36.8
|
%
|
|
45.8
|
%
|
|
46.8
|
%
|
|
Maintenance
|
|
|
|
19.4
|
|
|
13.0
|
|
|
18.0
|
|
|
10.9
|
|
|
13.5
|
|
|
14.3
|
|
|
13.2
|
|
|
13.6
|
|
|
Services
|
|
|
|
48.7
|
|
|
41.1
|
|
|
50.1
|
|
|
39.4
|
|
|
37.0
|
|
|
48.9
|
|
|
41.0
|
|
|
39.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
|
100 %
|
|
|
100 %
|
|
|
100
|
|
|
100 %
|
|
|
100 %
|
|
|
100 %
|
|
|
100
|
|
|
100 %
|
|
|
Cost of Revenues
|
|
|
|
34
|
|
|
24.6
|
|
|
33.3
|
|
|
25.3
|
|
|
33.8
|
|
|
36.4
|
|
|
32.2
|
|
|
39.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
66
|
|
|
75.4
|
|
|
66.7
|
|
|
74.7
|
|
|
66.2
|
|
|
63.6
|
|
|
67.8
|
|
|
60.4
|
|
|
Research and development expenses
|
|
|
|
12.8
|
|
|
8.9
|
|
|
9.6
|
|
|
8.2
|
|
|
12.5
|
|
|
12.1
|
|
|
11.5
|
|
|
12.3
|
|
|
Selling and marketing expenses
|
|
|
|
30.7
|
|
|
26.3
|
|
|
29.6
|
|
|
15.7
|
|
|
21.5
|
|
|
24.1
|
|
|
24.1
|
|
|
27.1
|
|
|
General and administrative expenses
|
|
|
|
16.7
|
|
|
13.5
|
|
|
13.8
|
|
|
11.3
|
|
|
10.6
|
|
|
12.2
|
|
|
12.3
|
|
|
11.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
5.8
|
|
|
26.7
|
|
|
13.7
|
|
|
39.5
|
|
|
21.6
|
|
|
15.2
|
|
|
20
|
|
|
9
|
|
|
Financial income, net
|
|
|
|
2.2
|
|
|
5.2
|
|
|
3.2
|
|
|
1.9
|
|
|
2.4
|
|
|
4.0
|
|
|
9.2
|
|
|
9.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
|
|
8.0
|
|
|
31.9
|
|
|
16.9
|
|
|
41.4
|
|
|
24.0
|
|
|
19.2
|
|
|
29.3
|
|
|
18.4
|
|
|
Income tax expense
|
|
|
|
2.5
|
|
|
9.5
|
|
|
4.9
|
|
|
13.9
|
|
|
3.5
|
|
|
3.6
|
|
|
4.0
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
5.5
|
%
|
|
22.4
|
%
|
|
12.0
|
%
|
|
27.5
|
%
|
|
20.5
|
%
|
|
15.7
|
%
|
|
25.2
|
%
|
|
14.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We
expect our operating results to fluctuate significantly in the future from quarter to
quarter as a result of various factors, many of which are outside our control, including
the timing of the closing of our transactions. Consequently, we believe that
period-to-period comparisons of our operating results may not necessarily be meaningful
and, as a result, you should not rely on them as an indication of future performance.
35
Seasonality
We
experience seasonality in our revenues, with the third and fourth quarters typically
having the highest revenues for the year. We believe that this seasonality results
primarily from our customers’ budgeting cycles. The U.S. federal government budget
year ends in the third calendar quarter of the year and a majority of corporate budget
years end in the fourth calendar quarter of the year. In addition, our customers also tend
to make software license purchases near the end of a particular quarter, which tends to
make our revenues for a particular period unpredictable for a significant portion of the
period in question until purchase decisions have been made and license agreements have
been entered into. We expect that this seasonality within a particular year and
unpredictability within a particular quarterly period will continue for the foreseeable
future.
Impact of Currency
Fluctuation
We
operate in the United States, Canada, Israel, Hong Kong and the United Kingdom. As a
result, our financial results, which are reported in U.S. dollars, could be affected by
factors such as changes in foreign currency. In 2007, approximately 17% of our expenses
were paid in Canadian dollars, primarily salary and salary-related expenses of our staff
at STARLIMS Canada, which we acquired in January 2006. Therefore, the U.S. dollar cost of
our operations in Canada is influenced by the exchange rate between the U.S. dollar and
the Canadian dollar. If the U.S.-dollar cost of our operations in Canada increases, our
U.S.-dollar-measured results of operations will be adversely affected. During 2007, the
Canadian dollar appreciated against the U.S. dollar by approximately 18%. We cannot assure
you that we will not be adversely affected in the future if the Canadian dollar continues
to appreciate against the U.S. dollar.
In
addition, approximately 35% of our marketable securities ($1.1 million, as of December 31,
2007) are NIS-denominated bonds. Consequently, our financial results are affected by
fluctuations in the rates of exchange between the U.S. dollar and the NIS. In 2005, the
NIS depreciated against the U.S. dollar by approximately 7%. As a result, in 2005, we
recorded a foreign currency exchange loss of $102,000. In comparison, in 2006 and 2007,
the NIS appreciated against the U.S. dollar by approximately 8% and 9%, respectively. As a
result, in 2006 and 2007, we recorded a foreign currency exchange gain of $164,000 and
$241,000, respectively.
Conditions in Israel
We
are incorporated under the laws of, and our principal executive offices and manufacturing
and research and development facilities are located in, the State of Israel. See Item 3D
“Key Information – Risk Factors – Risks Relating to Our Location in
Israel” for a description of governmental, economic, fiscal, monetary or political
polices or factors that have materially affected or could materially affect our
operations.
Effective Corporate Tax
Rate
Israeli
companies are generally subject to corporate tax on their taxable income. The applicable
rate for 2007 was 29%; for 2008, the applicable rate is 27%; for 2009, it will be 26%, and
for 2010 and thereafter, it will be 25% .
In
June 2006, we received a pre-ruling from the Israeli Tax Authority according to which a
development center we established in November 2006 in Ashkelon, Israel will be regarded as
a “Benefited Enterprise.” This entitles us to tax benefits under the Israeli Law
for the Encouragement of Capital Investments, 1959, referred to as the Investments Law.
The benefits include full exemption from corporate tax on undistributed taxable income
attributable to the Benefited Enterprise, reduced tax on dividends and accelerated
depreciation for manufacturing assets. For a ten year period ending December 31, 2015, any
taxable income attributable to an increase in the revenues we account for in Israel over
the average annual revenues for the years 2003-2005 ($3.5 million) will be tax exempt. The
result of this tax benefit in 2007 was a reduction of our total tax liability by
approximately $900,000 and a decrease of our effective tax rate from approximately 32% to
approximately 16%. The benefits are conditional on our compliance with certain conditions
in the Investments Law and the terms of the pre-ruling from the Israeli Tax Authority. See
Item 10E. “Additional Information – Taxation – Israeli Tax Considerations
– Tax Benefits under the Law for the Encouragement of Capital Investments,
1959.”
36
Our
taxes outside Israel are dependent on our operations in each jurisdiction as well as
relevant laws and treaties. Our company and its subsidiaries are each taxed individually
and not on a consolidated basis.
Recently Issued
Accounting Standards
In
September 2006, the Financial Accounting Standards Board, or FASB, issued SFAS No. 157,
“
Fair Value Measurements,
” or SFAS 157. SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value measurements. The provisions of SFAS
157 are effective on January 1, 2008. The FASB issued a Staff Position to defer the
effective date of this Standard for one year for all non financial assets and non
financial liabilities, except for those items that are recognized or disclosed at fair
value in the financial statements on a recurring basis. The adoption of SFAS 157 is not
expected to have a material effect on our financial position or results of operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities,” or SFAS 159. SFAS 159 permits entities
to choose to measure many financial instruments, including available-for-sale and
held-to-maturity securities, and certain other items at fair value at specified election
dates. According to SFAS 159, a business entity that has elected to apply its provisions
shall report unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting period. If the fair value option is
elected for available-for-sale and held-to-maturity securities at the effective date,
cumulative unrealized gains and losses shall be included in the statement of income as
cumulative-effect adjustment. SFAS 159 is effective as of the beginning of the
entity’s fiscal year beginning after November 15, 2007. Accordingly, we may elect to
adopt SFAS 159 on January 1, 2008. We
are currently evaluating the impact that SFAS 159 may have on our financial position and
results of operations.
In
December 2007, the FASB issued SFAS No. 141(Revised), “
Business
Combinations
,” or SFAS 141(R), the
purpose of
which is to improve
the relevance, representational faithfulness, and
comparability of the information
that a reporting entity provides in its
financial statements relating to a business
combination and its effects. SFAS 141(R) requires the acquiring entity in a business
combination to recognize all (and
only) the assets acquired and liabilities assumed
in the transaction; establishes the acquisition-date fair value as the measurement
objective for all
assets acquired and liabilities assumed; and requires the
acquirer to disclose
to investors and other users all of the information they need
to evaluate and
understand the nature and financial effect of the business
combination. SFAS 141(R) is effective as of the beginning of the entity’s fiscal year
beginning after
December 15, 2008. Accordingly, we are required to adopt SFAS
141(R) on January 1, 2009. We are currently evaluating the impact that SFAS 141(R) may
have on our financial position and results of operations.
In
December 2007, the FASB issued SFAS No. 160, “
Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51
,” or SFAS 160.
SFAS 160 establishes accounting and reporting standards that require that the ownership
interests in subsidiaries held by parties other than the parent be clearly identified,
labeled, and presented in the consolidated statement of financial position within equity,
but separate from the parent’s equity; the amount of consolidated net income
attributable to the parent and to the noncontrolling interest be clearly identified and
presented on the face of the consolidated statement of income; and changes in a
parent’s ownership interest while the parent retains its controlling financial
interest in its subsidiary be accounted for consistently. SFAS 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. The adoption of the provisions of SFAS 160 is not expected to have
an impact on our financial position or results of operations.
|
B.
|
LIQUIDITY
AND CAPITAL RESOURCES
|
From
our inception until our initial public offering in Israel in November 1993, we financed
our operations through cash generated by operations and borrowings under lines of credit
and shareholder loans. Since our initial public offering in Israel, we have financed our
operations through cash generated by our operations.
37
On
May 23, 2007, we issued 2,100,000 ordinary shares in an initial public offering in the
United States. On June 27, 2007, the underwriters, Oppenheimer & Co. and JMP
Securities LLC, exercised part of their over allotment and purchased an additional 126,300
ordinary shares. We sold a total of 2,226,300 ordinary shares (including the over
allotment option shares) at a price to the public of $13.50 per share resulting in net
proceeds from the offering of approximately U.S. $27 million.
As
of December 31, 2006, we had approximately $2.5 million in cash and cash
equivalents, $196,000 in restricted short-term deposits and $2.3 million in marketable
securities available-for-sale. As of December 31, 2007, we had approximately
$31.7 million in cash and cash equivalents (which consist primarily of commercial
paper), $195,000 in restricted short-term deposits and $1.0 million in marketable
securities available-for-sale. The increase in our cash and cash equivalents is
attributable to the proceeds from our initial public offering in the United States in May
2007. As of December 31, 2006 and 2007, our marketable securities consisted of
corporate and government bonds.
Capital
expenditures for fixed assets for the years ended December 31, 2006 and 2007
were approximately $640,000 and $523,000, respectively. In 2006, we invested approximately
$1.6 million for the acquisition of all of the outstanding stock of STARLIMS Canada,
which served as our Canadian distributor prior to the acquisition. We currently do not
have significant capital spending or purchase commitments, but we expect to continue to
engage in capital spending consistent with anticipated growth in our operations,
infrastructure and personnel.
Since
our initial public offering in Israel, we have repurchased our ordinary shares under four
programs authorized by our Board of Directors in 1995, 2000, 2004 and 2008, respectively.
As of December 31, 2007, we had repurchased an aggregate of 1,410,869 ordinary shares
for approximately $3.5 million under the first three of these programs. As of March
30, 2008, we had repurchased an aggregate of 89,027 ordinary shares for approximately
$671,850 million under the repurchase plan that we adopted in February 2008. All of the
repurchased shares are held by us as treasury stock other than 144,375 ordinary shares,
which were sold upon exercise of employee share options.
We
believe that our existing cash and cash equivalents balances, and cash provided by
operating activities will be sufficient to meet our working capital, capital expenditure
and other cash requirement needs over at least the next 12 months. Our future capital
requirements will depend on many factors, including our rate of revenue growth, the
expansion of our selling and marketing activities, the timing and extent of research and
development spending to support product development and enhancement efforts, costs
associated with expansion into new territories or markets, the timing of the introduction
of new products and services and the enhancement of existing products and the continuing
market acceptance of our products and services. To the extent that our existing cash and
cash that will be generated from operations is insufficient to finance our future
activities and planned growth, we may need to raise additional funds through public or
private equity or debt financings.
In
the future, we may enter into arrangements to invest in or acquire complementary
businesses, products or technologies. To that end, in February 2008, we entered into a
memorandum of understanding for the acquisition of our professional services provider in
the United Kingdom. Any such future acquisitions may require us to seek additional debt or
equity financing, which funds may not be available on terms favorable to us or at all.
Cash Flows
The
following table summarizes our cash flows for the periods presented:
|
|
|
Year ended December 31,
|
|
|
|
2006
|
2007
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
$
|
2,141
|
|
$
|
4,131
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
|
(1,690
|
)
|
|
124
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
|
(1,306
|
)
|
|
24,795
|
|
|
|
The effect of exchange rate changes on cash and cash equivalents
|
|
|
|
(3
|
)
|
|
115
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
|
(858
|
)
|
|
29,165
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
|
3,397
|
|
|
2,539
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
|
$
|
2,539
|
|
$
|
31,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Operating
Activities
Net
cash provided by operating activities was approximately $2.1 million for the year ended
December 31, 2006. This amount was primarily attributable to net income of
$3.8 million, which was offset in part by increased trade receivables of $1.4
million. Net cash provided by operating activities was approximately $4.1 million for the
year ended December 31, 2007. This amount was primarily attributable to net income of
$4.5 million.
Investing
Activities
Net
cash used in investing activities was approximately $1.7 million for the year ended
December 31, 2006. Of the cash used in investing activities in 2006,
approximately $1.0 million, net, was used to acquire all of the outstanding stock of
STARLIMS Canada, and approximately $640,000 was used for purchases of property and
equipment. Net cash provided by investing activities was approximately $124,000 for the
year ended December 31, 2007. Of the cash provided by investing activities
during the year ended December 31, 2007, approximately $3.2 million was
provided by proceeds from the sale of marketable securities, while approximately
$2.4 million was used for purchases of marketable securities and approximately $0.5
million was used for purchases of property and equipment.
Financing
Activities
Net
cash used in financing activities was $1.3 million for the year ended
December 31, 2006, primarily attributable to the payment of an annual dividend
of an aggregate $1.4 million. Net cash provided by financing activities was
$24.8 million for the year ended December 31, 2007, primarily attributable
to the $26.8 million proceeds from our initial public offering in the United States in May
2007. In January 2007, we distributed a dividend of $1.9 million.
|
C.
|
RESEARCH
AND DEVELOPMENT
|
We
place considerable emphasis on research and development to expand the capabilities of our
existing products, to develop new products and to improve our existing technologies. We
believe that our future success will depend upon our ability to maintain our technological
leadership, to enhance our existing products and technology and to introduce on a timely
basis new commercially viable products and technology addressing the needs of our
customers. Our investment in research and development for the years ended December 31,
2005, 2006 and 2007, was $1.4 million, $1.9 million and $2.9 million, respectively. The
increase in research and development expenses in 2007 was mainly attributable to our
research and development center in Ashkelon, Israel, which we established in November
2006. As part of our product development process, we seek to maintain close relationships
with our customers to identify market needs and to define appropriate product
specifications.
As
of December 31, 2007, our research and development staff consisted of 34 employees, of
whom 16 employees were located in Florida and 18 were located in Israel, compared to 32
employees as of December 31, 2006, of whom 18 employees were located in Florida and 14
were
located in Israel.
Trend
information is included in Items 5A and 5B of this Annual Report.
39
|
E.
|
OFF-BALANCE
SHEET ARRANGEMENTS
|
We
are not a party to any material off-balance sheet arrangements. In addition, we have no
unconsolidated special purpose financing or partnership entities that are likely to create
material contingent obligations.
|
F.
|
TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
|
The
following table summarizes our minimum contractual obligations and commercial commitments
as of December 31, 2007 and the effect we expect them to have on our liquidity and cash
flow in future periods.
Contractual Obligations
|
Payments due by period
|
|
|
Total
|
Less than
1 year
|
1-3 years
|
3-5 years
|
More than
5 years
|
|
|
(U.S. dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
$
|
1,567
|
|
$
|
614
|
|
$
|
785
|
|
$
|
168
|
|
|
-
|
|
|
Other long-term liabilities reflected on
|
|
|
|
the balance sheet
|
|
|
|
120
|
|
|
-
|
|
|
120
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
1,687
|
|
$
|
614
|
|
$
|
905
|
|
$
|
168
|
|
|
-
|
|
|
|
|
|
|
|
|
As
of December 31, 2007, our principal commitments consisted of obligations
outstanding under operating leases. Our capital requirements are dependent on many
factors, including market acceptance of our software product offerings and the allocation
of resources to our research and development efforts, as well as our marketing and sales
activities. In the last three years, we have experienced substantial increases in our
expenditures as a result of the growth in our operations and personnel. We intend to
increase our expenditures in the future consistent with our anticipated growth. We
anticipate that our cash resources will be used primarily to fund our operating
activities, as well as for capital expenditures.
|
ITEM 6.
|
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
|
A.
|
DIRECTORS
AND SENIOR MANAGEMENT
|
Set
forth below are the name, age, principal position and a biographical description of each
of our directors and executive officers:
|
|
Name
|
Age
|
Position with the Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Itschak Friedman
|
51
|
Chairman of the Board of Directors
|
|
|
|
|
and Chief Executive Officer
|
|
|
Dinu Toiba
|
53
|
Vice Chairman of the Board of Directors, Executive Vice
|
|
|
|
|
President and Chief Information Officer
|
|
|
Chaim Friedman
|
47
|
Director and Chief Financial Officer
|
|
|
Eyal Guterman
|
49
|
Director, Treasurer and Risk Management Officer
|
|
|
Jeff Ferguson
|
56
|
Chief Operating Officer
|
|
|
Clive Baron
|
54
|
Chief Business Development Officer
|
|
|
Simon Wood
|
48
|
Executive Director of Marketing and Education
|
|
|
Martin Bandel (1)
|
48
|
Director
|
|
|
Dov Kleiman (1)
|
51
|
Outside Director
|
|
|
Eliane Markowitz (1)
|
44
|
Outside Director
|
|
|
|
|
|
|
|
(1)
Member of our Audit Committee
|
40
Messrs.
Itschak Friedman, Dinu Toiba, Chaim Friedman, Eyal Guterman and Martin Bandel
will serve as directors until our 2008 Annual General Meeting of Shareholders
to be held on April 17, 2008 and are all standing for reelection at such
meeting. Mr. Dov Kleiman and Ms. Eliane Markowitz will serve as outside
directors pursuant to the provisions of the Israeli Companies Law for a
three-year term until our 2010 annual general meeting of shareholders,
following which their service as outside directors may be renewed for
additional three-year terms subject to certain conditions. See Item 6C. “Directors
and Senior Management –Board Practices – Outside and Independent
Directors.”
Itschak
Friedman
has served as the chairman of our board of directors and chief executive
officer of our company since 1988. Mr. Friedman also serves as the president of our U.S.
subsidiary, STARLIMS Corporation. In addition, Mr. Friedman serves as a director of Gazit
Inc. Mr. Friedman holds a bachelor’s degree in geology from the Hebrew University of
Jerusalem. Itschak Friedman is the brother of Chaim Friedman.
Dinu
Toiba
has served as the vice chairman of our board of directors since our
initial public offering in Israel in 1993 and currently also serves as our executive vice
president and chief information officer. Mr. Toiba has been responsible for the
development of our software since 1990, and also serves as the Vice President of our U.S.
subsidiary, STARLIMS Corporation. Mr. Toiba holds B.Sc. and MSc. degrees in mathematics,
both from the University of Bucharest.
Chaim
Friedman
has served as a director of our company since 1989. Since 1989, Mr. Friedman
has also served as chief financial officer of our company, which services he provides to
our company through
Sivanir (Management Services) 1992 Ltd., or Sivanir Management.
Mr. Friedman devotes all of his time to our company. Mr. Friedman holds a B.Sc. degree in
economics and management from the Technion – Israel Institute of Technology. Chaim
Friedman is the brother of Itschak Friedman.
Eyal
Guterman
has served as a director of our company since our initial public offering in
Israel. Since 1993, Mr. Guterman has also served as our treasurer and risk management
officer, which services he provides to our company through Sivanir Management. Mr.
Guterman devotes approximately 25% of his time to our company. Mr. Guterman holds a B.A.
degree in economics from Ben-Gurion University and an M.B.A. degree from Bar Ilan
University.
Jeff
Ferguson
has served as our chief operating officer since 2003. From July 1995 until
January 2003, Mr. Ferguson was the director of enterprise systems at Applied Biosystems,
an Applera Corporation subsidiary. Mr. Ferguson holds a bachelor’s degree in
education from Eastern Michigan University.
Clive
Baron
has served as our chief business development officer since July 2007. Prior to
joining our company and from July 1998, Mr. Baron served as the chief executive officer of
Symmetry, a LIMS company based in South African, which subsequently was acquired by
LabWare Inc. In January 2001, Mr. Baron joined LabWare Inc. as head of sales and marketing
operations for North America. From 1985 to 1995, Mr. Baron founded and managed two
software companies that were subsequently sold to publicly traded companies. Mr. Baron
holds a B.Sc. degree in mechanical engineering from the University of Pretoria, South
Africa.
Dr.
Simon Wood
has been with our company since April 2006, initially as the
head of our professional and technical training and certification programs for
our employees, distributors, partners and customers. Dr. Wood was appointed as
our executive director of marketing and education in January 2007. Prior to
joining our company and from February 2003, Dr. Wood served as senior
consultant and head of consultancy services of Labformatics Ltd. From September
1988 to September 2002, Dr. Wood held various positions with the processor of
Thermo Fisher Scientific Inc. and its subsidiaries, initially as an analyst and
implementation manager and thereafter as a customer services manager,
operations director, global services manager, customer relationship management
project director, and lastly as a business systems director of its informatics
division. Dr. Wood holds a B.Sc. degree in plant biology from The University of
Newcastle upon Tyne and a Ph.D. in Mycology from Sheffield University.
41
Martin
Bandel
has served as a director of our company since January 2007 and is a member of
our audit committee. He also serves as a director of STARLIMS Europe Ltd. Mr. Bandel is an
independent consultant and has a supervisory role at Manhattan Loft Corporation, where he
served as chief financial officer from July 2000 to February 2008. From May 1993 to July
2000, Mr. Bandel served as the chief financial officer of the Cromwell Land Group at
Charterhouse Plc (now part of HSBC). From January 1991 to September 1993, Mr. Bandel
served as an independent strategic and financial consultant for several businesses. Mr.
Bandel holds a diploma in accountancy from the City of London University and has been a
member of the Institute of Chartered Accountants in England and Wales since 1982 and of
the Chartered Institute of Tax since 1983.
Dov
Kleiman
has served as an outside director (within the meaning of the Israeli
Companies Law) of our company since 2004 and is the chairman of our Audit Committee. Mr.
Kleiman has served as the chief cost accountant of the Osem/Nestle group since 1987. Mr.
Kleiman holds a B.A. degree in economics and an M.B.A. degree, both from Bar-Ilan
University.
Eliane
Markowitz
has served as an outside director (within the meaning of the Israeli
Companies Law) of our company since January 2007 and is a member of our audit committee.
From May 2001 until November 2003 and again since January 2005, Ms. Markowitz has been
with Medison Pharma Ltd., initially as the product manager of the hematology field and
currently as marketing manager of its diagnostic division. In the interim period, from
December 2003 until December 2004, Ms. Markovitz served as the business development and
marketing manager and was the owner of Rimipharm Medical Product Ltd. Ms. Markovitz has
approximately 20 years of experience in the pharmaceutical industry. Ms. Markowitz holds
B.Sc. and Msc. degrees in animal science, both from the Hebrew University of Jerusalem.
The
following table sets forth all compensation we paid with respect to all of our directors
and executive officers as a group for the year ended December 31, 2007.
|
|
|
Salaries, fees,
commissions and bonuses*
|
Pension,
retirement and
similar benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and executive officers
|
|
|
|
|
|
|
|
|
|
|
as a group (ten persons)
|
|
|
$
|
1.2 million
|
|
$
|
66,000
|
|
|
|
|
|
|
|
|
*
Excludes
business travel expenses, relocation expenses, professional and business association dues
and expenses reimbursed to directors and executive officers, and other benefits commonly
reimbursed or paid by companies in Israel. Also excludes our expenses in 2007 under SFAS
123(R) attributable to options and restricted stock units granted to officers.
|
All
our executive officers work full time for us other than Mr. Eyal Guterman, our treasurer
and risk management officer, who devotes approximately 25% of his time to our company.
We
do not pay our directors for their services, other than our outside directors (in
accordance with their compensation requirements under Israeli law) and our independent
director. During the year ended December 31, 2007, we paid each non-executive director an
annual meeting fee of NIS 26,800 (approximately $6,524), a fee of NIS 1,028 (approximately
$250) for each meeting of the board of directors or a committee attended in person and a
fee of NIS 514 (approximately $125) for each meeting of the board of directors or
committee attended by phone.
As
of December 31, 2007, one executive officer held options to purchase 132,000 ordinary
shares. Of such options, options to purchase 12,000 ordinary shares, exercisable at $2.40
per share, were granted under our 2001 Stock Option Plan and expire in May 2009 and
options to purchase 120,000 ordinary shares, exercisable at $6.27 per share, were granted
under our 2005 Stock Option Plan and expire in March 2010. The exercise price of such
options is the closing price of our ordinary shares on the TASE on the day preceding the
option grant date. In addition, as of December 31, 2007, three executive officers held an
aggregate of 50,500 restricted stock units, or RSUs, granted under our 2007 Restricted
Stock Unit Plan. 50% of the outstanding RSUs will vest upon the completion of two years of
continuous employment, and an additional 25% of the RSUs will vest upon the completion of
each of the third and fourth years of continuous employment. See Item 6.E.,
“Directors, Senior Management and Employees – Share Ownership – Stock
Option Plans.”
42
Mr.
Itschak Friedman, chairman of our board of directors and our chief executive
officer, and Mr. Dinu Toiba, vice chairman of our board of directors and our
executive vice president and chief information officer, both of whom are also
principal shareholders of our company, are employed as officers of our U.S.
subsidiary, STARLIMS Corporation, under agreements entered into on November 1,
1993. During the term of their employment, Messrs. Friedman and Toiba are
required to provide services in the software industry exclusively through our
company. Under their respective employment agreements, Messrs. Friedman and
Toiba are entitled to monthly salaries of $12,250 and $9,600, respectively,
linked to the U.S. consumer price index ($17,243 and $13,513 per month,
respectively, as of December 31, 2007). Both of the agreements will continue
until terminated in accordance with their terms. Each of the agreements with
Messrs. Friedman and Toiba may be terminated by our company without cause upon
180 days prior written notice. Messrs. Friedman and Toiba have agreed not to
compete with the business of our company for two years following termination of
their employment and are subject to confidentiality undertakings during and
following the term of the agreement. Upon termination of their agreements for
any reason, Messrs. Friedman and Toiba are entitled to payment in an amount
equal to 150% of their last monthly salary, multiplied by the number of years
of employment starting from January 1, 1993. Since 1993, we have paid Messrs.
Friedman and Toiba one and a half months salary at the end of each year instead
of them being entitled to receive the 150% of their last monthly salary payment
upon termination of their respective employment. In the years ended December
31, 2005, 2006 and 2007, such payments were $24,756 and $25,365 and $25,865,
respectively, for Mr. Friedman and $19,400, $19,878 and $20,255, respectively,
for Mr. Toiba. Under amendments to the employment agreements of such officers
of June 2007, they will be entitled to annual salaries of $360,000 and
$260,000, respectively, subject to and commencing the first month after a
period of 45 consecutive trading days in which the average closing price of our
ordinary shares on The NASDAQ Global Market has been at least $15.50, effective
for a period of five years thereafter. Also following such event, the cash
severance payments will no longer be made and they will not be entitled to any
severance payment upon the termination of their employment.
In
January 1993, we entered into a management and consulting agreement with Sivanir
Management under which Mr. Chaim Friedman serves as our chief financial officer on a full
time basis and Mr. Eyal Guterman serves as our treasurer and risk management officer on a
part time (25%) basis. For these services, we agreed to pay Sivanir Management $9,000 per
month, linked to the U.S. consumer price index. We paid Sivanir Management an aggregate
$146,000, $150,000 and $153,000 in each of the years ended December 31, 2005, 2006 and
2007, respectively. The agreement with Sivanir Management is renewed automatically each
year for an additional one year period, unless one party notifies the other of its
termination upon 180 days advanced written notice. Under an amendment to our management
and consulting agreement with Sivanir Management, Sivanir Management will be entitled to
an annual service fee of $260,000, subject to and commencing the first month after a
period of 45 consecutive trading days in which the average closing price of our ordinary
shares on The NASDAQ Global Market has been at least $15.50, effective for a period of
five years thereafter.
Election of Directors
According
to the Israeli Companies Law, the management of our business is vested in our board of
directors. Our board of directors may exercise all powers and may take all actions that
are not specifically granted to our shareholders.
Our
articles of association provide that we may have no less than two and no more than 12
directors or such greater number as may be determined from time to time at a general
meeting of shareholders. Our current board of directors consists of seven directors. In
accordance with our articles of association and the Israeli Companies Law, all of our
directors (other than our outside directors) are elected at annual meetings of our
shareholders, which are required to be held at least once during every calendar year and
not more than 15 months after the last preceding meeting. Except for our outside
directors, our directors are elected by a vote of the holders of a majority of the voting
power represented and voting at such meetings and hold office until the next annual
meeting of shareholders following the annual meeting at which they were elected. If the
annual meeting of shareholders does not elect directors, the directors elected in the
preceding meeting will continue in office. Directors, other than outside directors, may be
removed earlier from office by resolution passed with the approval of the majority of the
voting rights represented and voting at a general meeting of our shareholders. Our board
of directors may temporarily fill vacancies on the board until the next annual meeting of
shareholders, provided that the total number of directors will not exceed the maximum
number determined by the general meeting of shareholders.
43
The
Israeli Companies Law requires the board of directors of a public company to determine a
minimum number of directors with “accounting and financial expertise.” Our board
of directors determined, accordingly, that at least one director must have
“accounting and financial expertise.”
We
follow Israeli law and practice, instead of the requirements of the NASDAQ Marketplace
Rules, with regard to the nomination process of directors, in accordance with which our
board of directors is authorized to recommend to our shareholders director nominees for
election, and our shareholders may nominate candidates for election as directors by the
general meeting of shareholders. See below in this Item 6C. “Directors, Senior
Management and Employees – Board Practices – NASDAQ Marketplace Rules and Home
Country Practices.”
Outside and Independent
Directors
Outside
Directors
. Under the Israeli Companies Law, public companies incorporated under the
laws of the State of Israel are required to appoint at least two outside directors. The
Israeli Companies Law provides that a person may not be appointed as an outside director
if the person, or the person’s relative, partner, employer or an entity under that
person’s control, has or had during the two years preceding the date of appointment
any affiliation with the company, its controlling shareholder or any entity controlled by
the Company or its controlling shareholder. The term “relative” means a spouse,
sibling, parent, grandparent, child or child of spouse or spouse of any of the above. In
general, the term “affiliation” includes an employment relationship, a business
or professional relationship maintained on a regular basis, control and service as an
office holder. Under the Israeli Companies Law, the term “office holder”
includes a director, general manager, chief business manager, deputy general manager, vice
general manager, or any person filling any of these positions in a company even if he or
she holds a different title, and also includes any other manager directly subordinate to
the general manager.
In
addition, no person may serve as an outside director if the person’s position or
other activities create, or may create, a conflict of interest with the person’s
position as director or may otherwise interfere with the person’s ability to serve as
director. If, at the time an outside director is appointed all members of the board of
directors are of the same gender, then that outside director must be of the other gender.
A director of one company may not be appointed as an outside director of another company
if a director of the other company is acting as an outside director of the first company
at such time.
At
least one of the outside directors elected must have “accounting and financial
expertise” and any other outside director must have “accounting and financial
expertise” or “professional qualification,” as such terms are defined by
regulations promulgated under the Israeli Companies Law. However, Israeli companies listed
on certain stock exchanges outside Israel, including The NASDAQ Global Market, are not
required to appoint an outside director with “accounting and financial
expertise” if a director with accounting and financial expertise who qualifies as an
independent director for purposes of audit committee membership under the laws of the
foreign country in which the stock exchange is located serves on its board of directors.
All of the outside directors of such a company must have “professional
qualification.”
The
outside directors are elected by shareholders at a general meeting, provided that either:
|
|
—
|
the
majority of shares voted at the meeting (not including abstentions), including at least
one-third of the shares of the non-controlling shareholders voted at the meeting, vote in
favor of the outside director; or
|
|
|
—
|
the
majority of shares voted at the meeting (not including abstentions) vote in favor of the
outside director and the total number of shares held by non-controlling shareholders that
voted against the election of the outside director does not exceed one percent of all of
the voting rights in the company.
|
44
In
general, outside directors serve for a three-year term and may be reelected to one
additional three-year term. However, Israeli companies that are listed on certain stock
exchanges outside Israel, including The NASDAQ Global Market, such as our company, may
appoint an outside director for further terms of not more than three years each subject to
certain conditions. Such conditions include the determination by the audit committee and
board of directors, that in view of the director’s professional expertise and special
contribution to the company’s board of directors and its committees, the appointment
of the outside director for a third term or more is in the best interest of the company.
An
outside director may be removed from office at the initiative of the board of directors at
a special general meeting of shareholders, if the board resolves that the statutory
requirements for that person’s appointment as outside director no longer exist, or
that the outside director has violated his or her duty of loyalty to the company. The
resolution of the special general meeting of shareholders regarding the termination of
office of an outside director requires the same majority that is required for the election
of an outside director. The court may order the termination of the office of an outside
director on the same grounds, following a motion filed by a director or a shareholder.
Each
committee of the board of directors that is authorized to exercise powers vested in the
board of directors must include at least one outside director, and the audit committee
must include all the outside directors. An outside director is entitled to compensation as
provided in regulations adopted under the Israeli Companies Law and is otherwise
prohibited from receiving any other compensation, directly or indirectly, in connection
with such service.
Our
Board of Directors has two outside directors under Israeli law, Mr. Dov Kleiman, who has
“accounting and financial expertise,” and Ms. Eliane Markowitz, who has
“professional qualification,” as such terms are defined under the Israeli
Companies Law.
Independent
Directors.
In general, NASDAQ Marketplace Rules require that the board of directors of
a NASDAQ-listed company have a majority of independent directors and its audit committee
must consist solely of independent directors, as defined under NASDAQ Marketplace Rules,
within 12 months of its initial public offering. We currently comply with the requirements
of NASDAQ and the Securities and Exchange Commission as to the composition of our audit
committee and intend to comply with the NASDAQ requirement to maintain a majority of
independent directors within 12 months of our initial public offering (by May 23, 2008).
Our
Board of Directors has determined that each of Mr. Dov Kleiman, Ms. Eliane Markowitz and
Mr. Martin Bandel qualifies as an independent director under the requirements of the
Securities and Exchange Commission and NASDAQ. Mr. Dov Kleiman and Ms. Eliane Markowitz
are also our outside directors within the meaning of the Israeli Companies Law.
Audit Committee
Under
the Israeli Companies Law, the board of directors of any public company must establish an
audit committee. The audit committee must consist of at least three directors and must
include all of the outside directors. The audit committee may not include: the chairman of
the board of directors; any director employed by the company or providing services to the
company on an ongoing basis; or a controlling shareholder or any of the controlling
shareholder’s relatives.
In
addition, the NASDAQ Marketplace Rules require us to establish an audit committee
comprised of at least three members, all of whom must be independent directors, each of
whom is financially literate and satisfies the respective “independence”
requirements of the Securities and Exchange Commission and NASDAQ and one of whom has
accounting or related financial management expertise at senior levels within a company.
Our
audit committee consists of three members, Martin Bandel, Dov Kleiman, and Eliane
Markowitz, all of whom satisfy the respective “independence” requirements of the
Securities and Exchange Commission and NASDAQ and are financially literate. Our board of
directors has determined that each of Dov Kleiman and Martin Bandel qualifies as an audit
committee financial expert as defined by rules of the Securities and Exchange Commission.
The composition and function of the audit committee meets the requirements of Israeli law,
the Securities and Exchange Commission and NASDAQ Marketplace Rules.
45
Under
the Israeli Companies Law, the approval of the audit committee is required for specified
actions and transactions with office holders and controlling shareholders. Additionally,
under the Israeli Companies Law, the role of the audit committee is to identify faults in
the business practices of the company, among other things, by consulting with the
company’s independent registered public accounting firm and internal auditor, and to
make recommendations to the board for remedying such faults.
Internal Audit
Under
the Israeli Companies Law, the board of directors of a public company must appoint an
internal auditor nominated by the audit committee. The role of the internal auditor is,
among other things, to examine whether a company’s actions comply with applicable law
and proper business practice. Under the Israeli Companies Law, the internal auditor may be
an employee of the company but not an interested party or an office holder, or a relative
of an interested party or an office holder, nor may the internal auditor be the
company’s independent registered public accounting firm or anyone acting on its
behalf. Mr. Yehuda Milberg, Certified Public Accountant (Israel), serves as our internal
auditor.
Directors’ Service
Contracts
Our
U.S. subsidiary, STARLIMS Corporation, has entered into employment agreements with each of
Mr. Itschak Friedman, our chief executive officer, who is also the chairman of our board
of directors, and Mr. Dinu Toiba, our executive vice president and chief information
officer, who is also vice chairman of our board of directors. See Item 6B.
“Directors, Senior Management and Employees – Compensation.”
Other
than as described in Item 6B, there are no arrangements or understandings between us and
any of our subsidiaries, on the one hand, and any of our directors, on the other hand,
providing for benefits upon termination of their employment or service as directors of our
company or any of our subsidiaries.
Fiduciary Duties of
Office Holders
The
Israeli Companies Law codifies the fiduciary duties that “office holders,”
including directors and executive officers, owe to a company. An “office holder”
is defined in the Israeli Companies Law as a director, general manager, chief business
manager, deputy general manager, vice general manager, 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. An office holder’s
fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care
requires an office holder to act with the standard of proficiency with which a reasonable
office holder in the same position and in the same circumstances would act. This includes
the duty to utilize reasonable means to obtain (i) information regarding the business
worthiness of a given action brought for his approval or performed by him by virtue of his
position and (ii) all other information of importance pertaining to the foregoing actions.
The duty of loyalty requires that an office holder act in good faith and for the benefit
of the company, including the duty to: (i) avoid any conflict of interest between the
office holder’s position in the company and any other position he holds or his
personal affairs, (iii) avoid any competition with the company’s business, (iii)
avoid exploiting any business opportunity of the company in order to obtain benefit for
the office holder or any other person; and (iv) disclose to the company any information or
documents relating to the company’s affairs that the office holder has received by
virtue of his position as an office holder.
Approval of Related
Party Transactions Under Israeli Law
Under
the Israeli Companies Law, transactions of a company with an office holder and
transactions of a company with another entity in which an office holder has a personal
interest require special approvals, and may only be approved if they are not adverse to
the company’s interest. Transactions which are not extraordinary, must be approved by
the board of directors or as otherwise provided for in a company’s articles of
association. Extraordinary transactions with an office holder that is not a director and
transactions that involve the grant of an exemption, insurance, indemnification or an
undertaking to indemnify an office holder that is not a director must be approved by the
audit committee and the board of directors. Extraordinary transactions with a director and
transactions involving the conclusion of a contract by a company with a director as to the
terms of his office, including the grant of an exemption, insurance, indemnification or an
undertaking to indemnify, or the conclusion of a contract by a company with a director as
to the terms of his employment in other positions, must be approved by the audit
committee, board of directors and general meeting of shareholders. If the office holder is
a controlling shareholder or a relative of a controlling shareholder, any extraordinary
transaction, compensation, exemption, indemnification and insurance of the office holder
must be approved by our audit committee, board of directors and general meeting of
shareholders, supported by the vote of at least one-third of the shares of the
shareholders voting on the matter that have no personal interest in the transaction, or
provided that the total number of shares held by shareholders that have no personal
interest in the transaction that voted against the proposal did not exceed one percent of
all of the voting rights in the company.
46
The
Israeli Companies Law requires that an office holder and the controlling shareholder
disclose any personal interest that he or she may have and all related material
information known to him or her relating to any existing or proposed transaction by the
company promptly and in any event no later than the first meeting of the board of
directors at which such transaction is considered. The requirement does not apply with
respect to a transaction with a relative that is not an extraordinary transaction. An
extraordinary transaction is a transaction other than in the ordinary course of business,
other than on market terms, or likely to have a material impact on the company’s
profitability, assets or liabilities.
A
director who has a personal interest in a matter, which is considered at a meeting of the
board of directors or the audit committee, may not participate or vote on this matter in
such meeting, unless the transaction under consideration is not an extraordinary
transaction or the majority of the members of the board or the audit committee have a
personal interest, as the case may be. In the event the majority of the members of the
board or the audit committee have a personal interest, then the approval of the general
meeting of shareholders is also required.
Board
of directors and shareholder approval is also required in the event a company issues its
securities in a private placement of securities that will cause a person to become a
controlling shareholder, or in the event a private placement in which 20% or more of the
company’s outstanding share capital prior to the placement are offered, the payment
for which (in whole or in part) is not in cash or listed securities or not under market
terms, and that issuance will (i) increase the relative holdings of a shareholder that
holds 5% or more of the company’s outstanding share capital or voting rights; or (ii)
cause any person to become a holder of more than 5% of the company’s outstanding
share capital or voting rights. For this purpose, convertible securities or securities
exercisable into shares held by such person are assumed to have been converted and
exercised.
Exemption, Insurance and
Indemnification of Directors and Officers
Exemption
of Office Holders.
The Israeli Companies Law provides that an Israeli company cannot
exempt an office holder from liability with respect to a breach of his or her duty of
loyalty. If permitted by its articles of association, a company may exempt in advance an
office holder from his or her liability to the company, in whole or in part, with respect
to a breach of his or her duty of care. However, a company may not exempt in advance a
director from his or her liability to the company with respect to a breach of his duty of
care with respect to distributions.
Our
articles of association permit us to exempt our office holders in accordance with the
Israeli Companies Law as currently in effect.
Insurance
of Office Holders
. Israeli law provides that a company may, if permitted by its
articles of association, enter into a contract to insure its office holders for
liabilities incurred by the office holder with respect to an act or omission performed in
his or her capacity as an office holder, as a result of: (i) a breach of the office
holders duty of care to the company or another person; (ii) a breach of office holders
duty of loyalty to the company, provided that the office holder acted in good faith and
had reasonable grounds to assume that the act would not prejudice the company’s
interests; and (iii) a monetary liability imposed upon the office holder in favor of
another person.
47
Our
articles of association permit us to purchase insurance covering the liability of our
office holders in accordance with the Israeli Companies Law as currently in effect. We
currently maintain a directors’ and officers’ liability insurance policy that
provides coverage of up to $20 million per claim and in the aggregate per year, and a
public offering of securities insurance policy providing coverage of up to $25 million per
claim and in the aggregate for three years following our May 2007 initial public offering
in the United States.
Indemnification
of Office Holders
. Under Israeli law a company may, if permitted by its articles of
association, indemnify an office holder for acts or omissions performed by the office
holder in such capacity for (a) monetary liability imposed upon the office holder in favor
of another person pursuant to a court judgment, including a settlement or an arbitration
award approved by a court; (b) reasonable litigation expenses, including attorney’s
fees, actually incurred by the office holder as a result of an investigation or proceeding
instituted against him or her by a competent authority, provided that such investigation
or proceeding concluded without the filing of an indictment against the office holder or
the imposition of any monetary liability in lieu of criminal proceedings, or concluded
without the filing of an indictment against the office holder and a monetary liability was
imposed on him or her in lieu of criminal proceedings with respect to a criminal offense
that does not require proof of criminal intent; and (c) reasonable litigation expenses,
including attorneys’ fees, actually incurred by the office holder or imposed upon the
office holder by a court: (i) in an action, suit or proceeding brought against the office
holder by or on behalf of the company or another person, (ii) in connection with a
criminal charge from which the office holder was acquitted, or (iii) in connection with a
criminal proceeding in which the office holder was convicted of a criminal offense
that does not require proof of criminal intent.
The
indemnification provisions in a company’s articles of association may include:
|
|
—
|
a
provision allowing the company to undertake in advance to indemnify an office holder,
except that with respect to a monetary liability imposed on the office holder by any
judgment, settlement or court-approved arbitration award, the undertaking must be limited
to types of events which the company’s board of directors deems foreseeable
considering the company’s actual operations at the time of the undertaking, and to
an amount or standard that the board of directors has determined as reasonable under the
circumstances; and
|
|
|
—
|
a
provision allowing the company to retroactively indemnify an office holder.
|
Our
articles of association permit us to indemnify our office holders in accordance with the
Israeli Companies Law as currently in effect. We have provided each of our directors and
officers a letter of indemnification for liabilities or expenses incurred as a result of
their acts in their capacity as directors and officers of our company, in an aggregate
amount not to exceed $3.5 million, to the extent that their liability is not covered under
our directors’ and officers’ liability insurance policy.
Limitations
on Exemption, Insurance and Indemnification
. The Israeli Companies Law provides that
neither a provision of the articles of association permitting the company to enter into a
contract to insure the liability of an office holder, nor a provision in the articles of
association or a resolution of the board of directors permitting the indemnification of an
office holder, nor a provision in the articles of association exempting an office holder
from duty to the company shall be valid, where such insurance, indemnification or
exemption relates to any of the following:
|
|
—
|
a
breach by the office holder of his duty of loyalty, except with respect to insurance
coverage or indemnification if the office holder acted in good faith and had reasonable
grounds to assume that the act would not prejudice the company;
|
|
|
—
|
a
breach by the office holder of his duty of care if such breach was committed
intentionally or recklessly, unless the breach was committed only negligently;
|
|
|
—
|
any
act or omission committed with intent to derive an unlawful personal gain; and
|
|
|
—
|
any
fine or forfeiture imposed on the office holder.
|
48
In
addition, pursuant to the Israeli Companies Law, exemption of, procurement of insurance
coverage for, an undertaking to indemnify or indemnification of an office holder must be
approved by the audit committee and the board of directors and, if such office holder is a
director or a controlling shareholder or a relative of the controlling shareholder, also
by the shareholders general meeting. If a controlling shareholder is interested in such
transaction as an office holder or as a relative of an office holder, the resolution must
be supported by the vote of at least one-third of the shares of the shareholders voting on
the matter that have no personal interest in the transaction, unless the total number of
shares held by shareholders that have no personal interest in the transaction that voted
against the proposal did not exceed one percent of all of the voting rights in the
company.
NASDAQ Marketplace Rules
and Home Country Practices
Under
NASDAQ Marketplace Rule 4350, or Rule 4350, foreign private issuers, such as our company,
are permitted to follow certain home country corporate governance practices instead of
certain provisions of Rule 4350. A foreign private issuer that elects to follow a home
country practice instead of any of such provisions of Rule 4350, must submit to NASDAQ, in
advance, a written statement from an independent counsel in such issuer’s home
country certifying that the issuer’s practices are not prohibited by the home
country’s laws.
In
connection with our initial public offering in the United States in May 2007, we provided
NASDAQ with a notice of non-compliance with Rule 4350 with respect to the requirements
regarding the directors’ nominations process. Instead, we follow Israeli law and
practice in accordance with which our board of directors is authorized to recommend to our
shareholders director nominees for election, and our shareholders may nominate candidates
for election as directors by the general meeting of shareholders. See above in this Item
6C. “Directors, Senior Management and Employees – Board Practices –
Election of Directors.”
At
December 31, 2007, we employed 153 full-time employees. Of these full-time employees, 17
employees were engaged in management and administration, 18 employees were engaged in
sales and marketing, 84 employees were engaged in implementation and support and 34
employees were engaged in research and development. Of such employees, 107 were located in
North America, 20 in the Asia Pacific region and 26 in Europe and the Middle East.
At
December 31, 2006, we employed 148 full-time employees. Of these full-time employees, 17
employees were engaged in management and administration, 17 employees were engaged in
sales and marketing, 82 employees were engaged in implementation and support and 32
employees were engaged in research and development. Of such employees, 113 were located in
North America, 14 in the Asia Pacific region and 21 in Europe and the Middle East.
At
December 31, 2005, we employed 66 full-time employees. Of these full-time employees, eight
employees were engaged in management and administration, 12 employees were engaged in
sales and marketing, 28 employees were engaged in implementation and support and 18
employees were engaged in research and development. Of such employees, 61 were located in
the United States and five were in Israel.
The
foregoing includes Mr. Chaim Friedman, our chief financial officer, and Mr. Eyal Guterman,
our treasurer and risk management officer, both of whom provide these services to us
through Sivanir Management, an Israeli company jointly owned by Messrs. Friedman and
Guterman. Mr. Friedman devotes all of his time to our company and Mr. Guterman
devotes approximately 25% of his time to our company.
Israeli
labor laws govern the length of the workday, minimum wages for employees, procedures for
hiring and dismissing employees, determination of severance pay, annual leave, sick days
and other conditions of employment. Israeli law generally requires payment of severance
pay to dismissed employees and employees leaving employment under certain other
circumstances. We fund statutory severance pay obligations by contributions to insurance
companies and severance pay funds in the amount of 8.33% of the employee’s wages. A
provision in our financial reports covers the difference between statutory severance pay
obligations and the contributions to the insurance companies and severance pay funds.
Furthermore, we and our Israeli employees are required to make payments to the National
Insurance Institute, which is similar to the U.S. Social Security Administration. Such
amounts also include payments by the employee for health insurance. The employees’
payments to the National Insurance Institute range between approximately 3.5% and 12% of
an employee’s wages, and our payments range between approximately 4.1% and 5.5% of
such wages. As of January 2008, under an order issued by the Ministry of Industry,
Commerce and Labor, all Israeli employers are obligated to contribute to a pension plan a
certain percentage of the wages of their employees that have been employed for a minimum
period, and their age is within the age range specified in the order, unless a more
preferable pension arrangement for those employees is in place. . The minimum period is
nine months with respect to pension contributions payable in 2008, and six months with
respect to pension contributions payable in 2009 and thereafter. We are currently in
compliance with this obligation. Under the order the employer’s contribution to
the pension plan will increase gradually until 2013 to up to 5% of the employees’
wages.
49
At
the start of their employment, our employees generally sign written employment agreements
that include confidentiality, non-competition and assignment of invention agreement
provisions.
Our
employees are not represented by any labor union. Since our inception, we have not
experienced labor-related work stoppages and believe that our relations with our employees
are good.
The
following table sets forth certain information as of March 30, 2008 regarding the
beneficial ownership of our ordinary shares by each of our directors and executive
officers.
|
|
Name
|
Number of
Ordinary Shares
Beneficially Owned(1)
|
Percentage of
Outstanding
Ordinary
Shares(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Itschak Friedman
|
|
|
|
1,360,508
|
(3)
|
|
15.75
|
%
|
|
|
Dinu Toiba
|
|
|
|
750,000
|
(3)
|
|
8.68
|
%
|
|
|
Chaim Friedman
|
|
|
|
396,922
|
(3)(4)
|
|
4.60
|
%
|
|
|
Eyal Guterman
|
|
|
|
381,935
|
(4)
|
|
4.42
|
%
|
|
|
Jeff Ferguson
|
|
|
|
102,000
|
(5)
|
|
1.18
|
%
|
|
|
Simon Wood
|
|
|
|
--
|
|
|
--
|
|
|
|
Clive Baron
|
|
|
|
--
|
|
|
--
|
|
|
|
Martin Bandel (1)
|
|
|
|
--
|
|
|
--
|
|
|
|
Dov Kleiman (1)
|
|
|
|
--
|
|
|
--
|
|
|
|
Eliane Markowitz (1)
|
|
|
|
700
|
|
|
*
|
|
|
|
|
|
|
|
(1)
|
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Ordinary shares relating to options currently
exercisable or exercisable within 60 days of the date of this table are
deemed outstanding for computing the percentage of the person holding such
securities but are not deemed outstanding for computing the percentage of
any other person. Except as indicated by footnote, and subject to
community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares
shown as beneficially owned by them.
|
|
(2)
|
The
percentages shown are based on 8,635,648 ordinary shares issued and
outstanding as of March 30, 2008 (excluding 1,358,896 ordinary shares held as treasury stock).
|
|
(3)
|
Messrs.
Itschak Friedman, Dinu Toiba and Chaim Friedman are parties to a voting
agreement dated October 31, 1993, as amended on December 21, 2005. The
voting agreement also grants the parties a right of first refusal to
purchase each other’s shares in our company.
|
|
(4)
|
Includes
64,703 ordinary shares held by Sivanir Ltd., an Israeli company jointly
owned by Messrs. Chaim Friedman and Eyal Guterman.
|
|
(5)
|
Subject
to currently exercisable options.
|
50
Share Option Plans
Stock
options have from time to time been an important component of the compensation packages
for many of our mid-level and senior-level employees. We currently have three stock option
plans and one restricted stock unit plan, all of which are summarized below.
2001 Option Plan and
2005 Option Plan
In
March 2001, we adopted our 2001 Option Plan, or the 2001 Plan, under which we are
authorized to issue up to an aggregate 200,000 ordinary shares. Employees of our company
and our U.S. subsidiary, STARLIMS Corporation, are eligible to participate in the 2001
Plan.
In
March 2005, we adopted our 2005 Option Plan, or the 2005 Plan, under which we are
authorized to issue up to an aggregate 200,000 ordinary shares. Employees of our company
and our U.S. subsidiary, STARLIMS Corporation, are eligible to participate in the 2005
Plan.
The
terms of the 2001 Plan and 2005 Plan, collectively referred to as the Option Plans, are
essentially identical and are summarized together below.
Awards
under the Option Plans. Awards under the Option Plans are in the form of non-qualified
stock options. Shares that are forfeited under the terms of the Option Plans and shares
that are the subject of options that expire unexercised or which are otherwise surrendered
by an optionee without receiving any payment or other benefit for the option may again be
subject to new awards under the Option Plans.
Administration
of the Option Plans
. The Option Plans are administered by our Board of Directors and
may also be administered by a compensation committee of our Board of Directors, consisting
of not fewer than two directors. In general, each member of such a compensation committee
will be a non-employee director within the meaning of the Securities Exchange Act of 1934,
as amended, and an outside director within the meaning of the Internal Revenue Code of
1986, as amended. Subject to the provisions of the applicable Option Plan and applicable
law, the compensation committee has the authority to establish those rules and regulations
as they may deem appropriate for the proper administration of the Option Plans. Subject to
the provisions of the applicable Option Plan, our Board of Directors and compensation
committee have the authority to grant awards under the Option Plans, to interpret the
provisions of the Option Plans and, subject to the requirements of applicable law, to
prescribe, amend, and rescind rules and regulations relating to the Option Plan or any
award under the Option Plans as they may deem necessary or advisable. All decisions made
by our Board of Directors or the compensation committee pursuant to the provisions of the
Option Plans will be final, conclusive and binding on all persons. No member of our Board
of Director or compensation committee will be liable for anything done or omitted to be
done by such member or any other member of the Board of Directors or compensation
committee in connection with the Option Plans, except for the member’s own willful
misconduct or as expressly provided by statute.
Option
Price
. In general, except as otherwise provided by our Board of Directors or the
compensation committee in the optionee’s stock option agreement, the exercise price
per each ordinary share will be the closing price of an ordinary share on the TASE on the
date of the option grant, translated into U.S. dollars based on the U.S. dollar
representative rate of exchange as published by the Bank of Israel on such date.
Option
and Exercise Period
. Options granted under the Option Plans expire on the fifth
anniversary of their award and no option may be exercised after the expiration of its
term. Except as otherwise provided by our Board of Directors or the compensation committee
in the optionee’s stock option agreement, 50% of the options granted under the Option
Plans vest and become exercisable upon the completion of two years of continuous
employment service with our company or STARLIMS Corporation and 25% of the options granted
under the Option Plans vest and become exercisable upon the completion of each of the
third and fourth years of such continuous employment service. However, unless determined
otherwise by our Board of Directors, options will cease to vest and all unvested options
will be null and void immediately upon a reduction in the scope of duties that the
optionee performs for our company or STARLIMS Corporation, regardless of whether the
optionee’s job title changes (medical, military, disability, including pregnancy, and
other leaves of absence approved by our company or STARLIMS Corporation are deemed to be
continuous employment to the extent required by law or determined by the Board of
Directors or the compensation committee).
51
Change
of Control
. In the event of a change of control, as defined in the Option Plans, the
expiration of all options granted under the Option Plans may be accelerated or the terms
of the options may be changed by our Board of Directors.
Non-Transferability
of Options
. Options granted under the Option Plans are not assignable or transferable
by the optionee, and may be exercised during the lifetime of the optionee only by the
optionee. However, during the optionee’s lifetime, the optionee may, with the consent
of the Board of Directors or the compensation committee, transfer without consideration
all or any part of his/her options to (i) one or more members of the optionee’s
immediate family (as defined in the Option Plans); (ii) a trust established for the
exclusive benefit of one or more members of the optionee’s immediate family; or (iii)
a limited liability company in which all members are members of the optionee’s
immediate family.
Amendment
and Termination
. Our Board of Directors may, from time to time, alter, amend, suspend
or terminate the Option Plans with respect to options that have not been granted, subject
to applicable law and any requirement for shareholder approval imposed by any stock
exchange or quotation system on which our ordinary shares are listed or quoted. Subject to
the provisions of the applicable Option Plan regarding a change of control, our Board of
Directors and the compensation committee may not, without the consent of the optionee,
alter or in any way impair the rights of an optionee under any award previously granted.
The termination of the Option Plans will not affect any option previously granted. The
Option Plans will terminate and no further options may be granted under the Option Plan
after the fifth anniversary of their effective date, unless terminated earlier by the
Board of Directors.
Grants
to Non-U.S. Persons
. Without amending the Option Plans, our Board of Directors or the
compensation committee may grant options to eligible individuals who are not U.S.
nationals on such terms and conditions different from those specified in the Option Plans,
and the board of directors and compensation committee may make such modifications,
amendments and procedures to the Option Plans as may be necessary or advisable to comply
with the provisions of laws in other countries in which we operate or have employees.
As
of December 31, 2007, options to purchase 24,500 ordinary shares were outstanding under
the 2001 Plan, exercisable at an average exercise price of $2.44 per share, and options to
purchase 81,250 ordinary shares were outstanding under the 2005 Plan, exercisable at an
average exercise price of $6.30 per share. During 2007, our employees exercised options to
purchase 16,250 ordinary shares under the 2001 Plan and options to purchase 1,250 ordinary
shares under the 2005 Plan. As of December 31, 2007, there were no ordinary shares
available for future option grants under the 2001 Plan and 25,000 ordinary shares remain
available for future option grants under the 2005 Plan.
2006 Employee Option Plan
In
January 2006, we adopted our Employee Option Plan, or the 2006 Israeli Plan, under which
we are authorized to grant options to employees of our company and subsidiaries. The 2006
Israeli Plan is designed to reflect the provisions of the Israeli Income Tax Ordinance
[New Version] – 1961, as amended, or the Israeli Tax Ordinance, which affords certain
tax advantages to Israeli employees, officer and directors that are granted options in
accordance with its terms. Up to 40,500 ordinary shares may be issued under the 2006
Israeli Plan; however, such number of ordinary shares is part of the aggregate 200,000
ordinary shares that may be issued under the 2005 Plan. In accordance with the Israeli Tax
Ordinance and the 2006 Israeli Plan, the option awards are deposited and held in escrow
for a period of at least 24 months from the date of grant.
The
2006 Israeli Plan may be administered by our Board of Directors or a committee appointed
by our Board of Directors, in which case, whenever appropriate, all references in the 2006
Israeli Plan and in this description to the Board of Directors will be deemed to refer to
such committee. Subject to the provisions of the 2006 Israeli Plan and applicable law, our
Board of Directors will determine the exercise price of each option, the number of shares
underlying the option, its vesting schedule and the term of the option. No option may be
exercised after the expiration of its term.
52
Under
the 2006 Israeli Plan, the optionee may not assign, transfer or waive the options for the
benefit of others, including other employees, other than by will or the laws of descent
and distribution, and may be exercised during the lifetime of the optionee only by the
optionee or his or her legal guardian.
As
of December 31, 2007, no options to purchase ordinary shares were outstanding under the
2006 Israel Plan. During 2007, no options were exercised under the 2006 Israel Plan. As of
December 31, 2007, 25,000 ordinary shares were available for future option grants under
the 2006 Israeli Plan; however, such number of ordinary shares is part of the aggregate
ordinary shares that are available for future option grants under the 2005 Plan.
2007 Restricted Stock
Unit Plan
In
November 2007, we adopted our Restricted Stock Unit Plan, or the 2007 Plan. The 2007 Plan
is intended to provide incentives to employees, non-employee directors and consultants of
our company. Under the 2007 Plan, our Board of Directors grants plan participants a
contractual right to receive our shares at the end of a vesting period, the amount of such
shares and the vesting period to be determined by our Board of Directors in each
individual grant. The 2007 Plan provides for the issuance of up to 240,000 of our ordinary
shares. Prior to receiving such shares, if any, plan participants will have no right to
vote or receive dividends on their granted shares. Generally, a plan participant’s
grant will be forfeited upon termination of employment or services with our company prior
to the end of the vesting period, unless otherwise provided by our Board of Directors in
the individual grant. Unvested grants will also terminate in the event that the market
price of our ordinary shares falls below 50% of the grant price.
As
of December 31, 2007, we had awarded a total of 177,300 restricted stock units under the
2007 Plan, none of which are currently vested. As of December 31, 2007, 62,700 ordinary
shares were available for future awards under the 2007 Plan.
|
ITEM 7.
|
|
MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
The
following table sets forth certain information as of March 30, 2008 regarding the
beneficial ownership by all shareholders known to us to own beneficially 5.0% or more of
our ordinary shares:
Name
|
Number of
Ordinary Shares
Beneficially Owned(1)
|
Percentage of
Outstanding
Ordinary Shares(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Itschak Friedman
|
|
|
|
1,360,508
|
(3)
|
|
15.75
|
%
|
|
Dinu Toiba
|
|
|
|
750,000
|
(3)
|
|
8.68
|
%
|
|
Clal Insurance Enterprises Holdings Ltd.
|
|
|
|
628,507
|
(4)
|
|
7.28
|
%
|
|
Gagnon Securities LLC
|
|
|
|
604,761
|
(5)
|
|
7.00
|
%
|
|
(1)
|
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Ordinary shares relating to options currently
exercisable or exercisable within 60 days of the date of this table are
deemed outstanding for computing the percentage of the person holding such
securities but are not deemed outstanding for computing the percentage of
any other person. Except as indicated by footnote, and subject to
community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares
shown as beneficially owned by them.
|
|
(2)
|
The
percentages shown are based on 8,635,648 ordinary shares issued and
outstanding as of March 30, 2008 (excluding 1,358,896 ordinary shares held as treasury stock).
|
53
|
(3)
|
Messrs.
Itschak Friedman, Dinu Toiba and Chaim Friedman are parties to a voting
agreement dated October 31, 1993, as amended on December 21, 2005. The
voting agreement also grants the parties a right of first refusal to
purchase each other’s shares in our company.
|
|
(4)
|
Based
solely upon, and qualified in its entirety with reference to, a Schedule
13G filed with the Securities and Exchange Commission on February 14,
2008. Under the Schedule 13G, Clal Insurance Enterprises Holdings Ltd., or
Clal, disclaims beneficial ownership of 602,318 of the ordinary shares. In
addition, the Schedule 13G states that by reason of the ownership interest
of IDB Development Corporation Ltd. and IDB Holding Corporation (“IDB
Holding”) in Clal, and by reason of the interests in, and
relationships among them, with respect to IDB Holding, of Mr. Nochi
Dankner, Mrs. Shelly Bergman, Mrs. Ruth Manor and Mr. Avraham Livnat, such
entities and persons may each be deemed a beneficial owner of the 628,507
ordinary shares beneficially owned by Clal, however such persons and
entities disclaim beneficial ownership of the 628,507 ordinary shares
beneficially owned by Clal.
|
|
(5)
|
Based
solely upon, and qualified in its entirety with reference to, a Schedule
13G filed with the Securities and Exchange Commission on March 28, 2008.
|
Significant Changes in
the Ownership of Major Shareholders
On
November 20, 2007, Mr. Neil Gagnon filed a Schedule 13G with the Securities and Exchange
Commission reflecting beneficial ownership of 439,693, or 5.04%, of our ordinary shares.
On February 13, 2008, Mr. Neil Gagnon filed a Schedule 13G/A with the Securities and
Exchange Commission reflecting beneficial ownership of 527,156, or 6.04%, of our ordinary
shares as of December 31, 2007. On March 28, 2008, Gagnon Securities LLC, or Gagnon
Securities, filed a Schedule 13G with the Securities and Exchange Commission reflecting
beneficial ownership of 604,761, or 7.00%, of our ordinary shares as of March 30, 2008.
The Schedule 13G filed by Gagnon Securities indicates that Gagnon Securities is an
investment adviser and that it disclaims beneficial ownership of all securities held by
its clients’ funds. In addition, such Schedule 13G indicates that prior filings were
made on behalf of Gagnon Securities under the name Neil Gagnon and all future filings will
be under the name of Gagnon Securities, provided that Mr. Gagnon’s personal ownership
in our ordinary shares does not exceed 1% of our outstanding shares.
Other
than described above, we know of no significant changes in the percentage ownership held
by any major shareholders during the past three years, other than changes in the
percentage ownership of our major shareholders resulting from our initial public offering
in the United States in May 2007.
Major Shareholders
Voting Rights
Our
major shareholders do not have different voting rights
Record Holders
Based
on our register of ordinary shares and information provided to us by our transfer agent,
as of March 31, 2008, Cede & Co., the nominee of The Depository Trust Company, was the
only holder of record of our ordinary shares in the United States, holding 2,597,990 of
our ordinary shares representing approximately 30.1% of our outstanding shares (excluding
treasury stock). The number of record holders in the United States is not representative
of the number of beneficial holders nor is it representative of where such beneficial
holders reside, since the record holders of a significant majority of our ordinary shares
are nominees or other brokers, including Israel Discount Bank Nominees Company, which held
ordinary shares representing approximately 70% of our outstanding shares as of March 31,
2008 (excluding treasury stock).
|
B.
|
RELATED
PARTY TRANSACTIONS
|
We
have entered into a management and consulting agreement with Sivanir Management, which is
jointly owned by Messrs. Chaim Friedman and Eyal Guterman, both of whom are directors of
our company. Under the agreement, Mr. Chaim Friedman serves as our chief financial officer
on a full time basis and Mr. Eyal Guterman serves as our treasurer and risk management
officer on a part time basis, devoting approximately 25% of his business time and
attention to our company. We paid Sivanir Management an aggregate of $146,000, $150,000
and $153,000 in each of the years ended December 31, 2005, 2006 and 2007, respectively.
See Item 6B. “Directors, Senior Management and Employees – Compensation.”
|
C.
|
INTERESTS
OF EXPERTS AND COUNSEL
|
Not
applicable.
54
|
ITEM 8.
|
|
FINANCIAL
INFORMATION
|
|
A.
|
CONSOLIDATED
STATEMENTS AND OTHER FINANCIAL INFORMATION
|
Financial Statements
See
the consolidated financial statements, including the notes thereto, and the exhibits
listed in Item 19 hereof and incorporated herein by reference.
Legal Proceedings
We
are not presently involved in any legal proceedings. However, during the ordinary course
of our business, we are, from time to time, threatened with, or may become a party to,
legal actions and other proceedings.
Dividend Distribution
Policy
We
paid annual dividends of NIS 1.00, NIS 1.00 and NIS 1.25 per ordinary share in January
2005, 2006 and 2007, respectively. Although we paid dividends on an annual basis during
the five years prior to our initial public offering in the United States in May 2007, we
have not declared or distributed any dividend since such time and do not currently have a
dividend distribution policy. Future dividend distributions are subject to the discretion
of our board of directors and will depend on a number of factors, including our operating
results, future capital resources available for distribution, capital requirements,
financial condition, the tax implications of dividend distributions on our income, future
prospects and any other factors our board of directors may deem relevant.
The
distribution of dividends also may be limited by Israeli law, which permits the
distribution of dividends only out of profits (as defined by the Israeli Companies Law) or
otherwise upon the permission of the court. “Profits” are defined in the Israeli
Companies Law as the balance of surpluses, or the surpluses accumulated over the past two
years, whichever is the greater, in accordance with the latest adjusted financial
statements, audited or reviewed, prepared by the company, provided that the date in
respect of which the statements were prepared is no earlier than six months prior to the
date of distribution. “Surplus” means sums included in a company’s
shareholders’ equity originating from the net profit of the company, as determined
according to generally accepted accounting principles, and sums other than share capital
or premiums that are included in shareholders’ equity under generally accepted
accounting principles and the Minister of Justice prescribed that they are to be
considered surplus.
In
the event that we distribute cash dividends from tax exempt income attributable to any of
our Approved Enterprise or Benefited Enterprise, we would have to pay corporate tax in
respect of the amount distributed. See Item 10E. “Additional Information –
Taxation – Israeli Tax Considerations – Tax Benefits under the Law for the
Encouragement of Capital Investments, 1959.”
Except
as otherwise disclosed in this annual report, no significant change has occurred since
December 31, 2007.
|
ITEM 9.
|
|
THE
OFFER AND LISTING
|
|
A.
|
OFFER
AND LISTING DETAILS
|
Annual Stock Information
The
following table sets forth, for each of the years indicated, the high and low market
prices of our ordinary shares on the NASDAQ Global Market and the Tel Aviv Stock Exchange:
55
|
|
NASDAQ Global Market
|
Tel Aviv Stock Exchange
|
Year
|
High
|
Low
|
High
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
-
|
|
|
-
|
|
$
|
2.47
|
|
$
|
1.32
|
|
|
2004
|
|
|
|
-
|
|
|
-
|
|
$
|
4.00
|
|
$
|
1.69
|
|
|
2005
|
|
|
|
-
|
|
|
-
|
|
$
|
10.36
|
|
$
|
3.52
|
|
|
2006
|
|
|
|
-
|
|
|
-
|
|
$
|
10.94
|
|
$
|
7.35
|
|
|
2007*
|
|
|
$
|
13.78
|
|
$
|
10.60
|
|
$
|
14.20
|
|
$
|
10.03
|
|
|
|
|
|
|
|
* Prices of our ordinary shares on
the NASDAQ Global Market are from May 21, 2007.
Quarterly Stock
Information
The
following table sets forth, for each of the full financial quarters in the years
indicated, the high and low market prices of our ordinary shares on the NASDAQ Global
Market and the Tel Aviv Stock Exchange:
|
|
NASDAQ Global Market
|
Tel Aviv Stock Exchange
|
|
|
High
|
Low
|
High
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
|
-
|
|
|
-
|
|
$
|
10.94
|
|
$
|
9.05
|
|
|
Second Quarter
|
|
|
|
-
|
|
|
-
|
|
$
|
11.29
|
|
$
|
7.35
|
|
|
Third Quarter
|
|
|
|
-
|
|
|
-
|
|
$
|
10.56
|
|
$
|
7.93
|
|
|
Fourth Quarter
|
|
|
|
-
|
|
|
-
|
|
$
|
10.79
|
|
$
|
9.44
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
First Quarter
|
|
|
|
-
|
|
|
-
|
|
$
|
12.43
|
|
$
|
10.03
|
|
|
Second Quarter*
|
|
|
$
|
13.78
|
|
$
|
12.45
|
|
$
|
14.20
|
|
$
|
11.84
|
|
|
Third Quarter
|
|
|
$
|
13.07
|
|
$
|
10.77
|
|
$
|
12.67
|
|
$
|
10.37
|
|
|
Fourth Quarter
|
|
|
$
|
12.50
|
|
$
|
10.60
|
|
$
|
12.63
|
|
$
|
10.36
|
|
* Prices of our ordinary shares on
the NASDAQ Global Market are from May 21, 2007.
Monthly Stock Information
The
following table sets forth, for the most recent six months, the high and low market prices
of our ordinary shares on the NASDAQ Global Market and the Tel Aviv Stock Exchange:
|
|
NASDAQ Global Market
|
Tel Aviv Stock Exchange
|
|
|
High
|
Low
|
High
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2007
|
|
|
$
|
12.50
|
|
$
|
11.40
|
|
$
|
12.63
|
|
$
|
11.68
|
|
|
November 2007
|
|
|
$
|
12.28
|
|
$
|
11.70
|
|
$
|
12.48
|
|
$
|
11.46
|
|
|
December 2007
|
|
|
$
|
12.11
|
|
$
|
10.60
|
|
$
|
12.27
|
|
$
|
10.36
|
|
|
January 2008
|
|
|
$
|
10.99
|
|
$
|
6.25
|
|
$
|
10.74
|
|
$
|
6.15
|
|
|
February 2008
|
|
|
$
|
8.29
|
|
$
|
7.24
|
|
$
|
8.57
|
|
$
|
7.13
|
|
|
March 2008 (until March 28)
|
|
|
$
|
8.00
|
|
$
|
7.18
|
|
$
|
8.09
|
|
$
|
6.99
|
|
Not
applicable.
In
November 1993, we completed an initial public offering of our ordinary shares in Israel
and our ordinary shares have traded on the Tel Aviv Stock Exchange since such time. Since
our public offering in the United States in May 2007, our ordinary shares have also been
listed on the NASDAQ Global Market (symbol: LIMS).
56
Not
applicable.
Not applicable.
Not
applicable.
|
ITEM 10.
|
|
ADDITIONAL
INFORMATION
|
Not
applicable.
|
B.
|
MEMORANDUM
AND ARTICLES OF ASSOCIATION
|
Set
out below is a description of certain provisions of our Articles of Association and of the
Israeli Companies Law related to such provisions. This description is only a summary and
does not purport to be complete and is qualified by reference to the full text of the
Articles of Association, which are incorporated by reference as exhibits to this Annual
Report, and to Israeli law.
Purposes and Objects of
the Company
We
are a public company registered under the Israel Companies Law as STARLIMS Technologies
Ltd. Our registration number with the Israeli Companies Registrar is 520040247. Pursuant
to our memorandum of association, we were formed for the purpose of, among other things,
trading, marketing, distribution and export of computers and peripheral computer
equipment, software products and measuring equipment for laboratories.
The Powers of the
Directors
Under
the provisions of the Israel Companies Law and our articles of association, a director
cannot participate in a meeting nor vote on a proposal, arrangement or contract in which
he or she is materially interested. In addition, our directors cannot vote compensation to
themselves or any members of their body without the approval of our audit committee and
our shareholders at a general meeting. See “Item 6B. Directors, Senior Management and
Employees – Compensation.”
Directors
may not enter into borrowing arrangements on our behalf except in the manner approved by
the Company.
Under
our articles of association, retirement of directors from office is not subject to any age
limitation and our directors are not required to own shares in our company in order to
qualify to serve as directors.
Rights Attached to Shares
Our
authorized share capital consists of 15,000,000 ordinary shares, each with a par value of
NIS 1.0 per share. All of our issued and outstanding ordinary shares are duly authorized,
validly issued, fully paid and non-assessable.
57
The
rights attached to the ordinary shares are as follows:
Dividend
and Liquidation Rights.
The holders of our ordinary shares are entitled to
their proportionate share of any cash dividend, share dividend or dividend in kind
subsequently declared with respect to our ordinary shares. Dividends are paid to the
holders of ordinary shares proportionate to the amounts that were paid up or were treated
as having been paid up on the par value of the shares that they hold. Under the Israeli
Companies Law a company may effect a distribution out of its profits (as defined by the
Israeli Companies Law) provided that there is no reasonable concern that such distribution
might deprive the company of its ability to meet its existing and anticipated liabilities
as they become due. “Profits” are defined in the Israeli Companies Law as the
balance of surpluses, or the surpluses accumulated over the past two years, whichever is
the greater, in accordance with the latest adjusted financial statements, audited or
reviewed, prepared by the company, provided that the date in respect of which the
statements were prepared is no earlier than six months prior to the date of distribution.
“Surplus” means sums included in a company’s shareholders’ equity
originating from the net profit of the company, as determined according to generally
accepted accounting principles, and sums other than share capital or premiums that are
included in shareholders’ equity under generally accepted accounting principles and
the Minister of Justice prescribed that they are to be considered surplus.
A
company that does not have profits (within the meaning of the Israeli Companies Law) and
wishes to make a distribution must obtain court permission, which will be granted if the
court is convinced that there is no reasonable concern that such distribution might
deprive the company of its ability to meet its existing and anticipated liabilities as
they become due.
Under
the Israeli Companies Law, dividend distributions are determined by the board of directors
and do not require the approval of the shareholders of a company unless the company’s
articles of association provide otherwise. Our articles of association do not require
shareholder approval of a dividend distribution.
In
the event of our liquidation, after satisfaction of liabilities to creditors, our assets
will be distributed to the holders of ordinary shares proportionate to the amounts that
were paid up or were treated as having been paid up on the par value of the shares that
they hold.
Voting
Rights.
Holders of ordinary shares have one vote for each ordinary share
held on all matters submitted to a vote of shareholders. Such 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.
The
quorum required for a general meeting of shareholders consists of at least two
shareholders present in person or by proxy or by written ballot who hold or represent, in
the aggregate, at least one third of the voting rights of the company. A meeting adjourned
for lack of a quorum shall be adjourned to the same day in the following week at the same
time and place or to any time and place as the board of directors designates in a notice
to the shareholders. At the adjourned meeting, the required quorum consists of at least
two shareholders present in person or by proxy or by written ballot.
Under
the Israeli Companies Law, unless otherwise provided in the articles of association or
applicable law, all resolutions of the shareholders require a simple majority of the
voting rights represented at the meeting, in person, by proxy or by written ballot, and
voting on the resolution. Under the Israeli Companies Ordinance, a resolution for the
voluntary winding up of the company requires approval by holders of 75% of the voting
rights represented and voting at the general meeting.
Pursuant
to our articles of association, our directors (except the outside directors) are elected
at our annual general meeting of shareholders by a vote of the holders of a majority of
the voting power represented and voting at such meeting and hold office until the next
annual general meeting of shareholders. If directors have not been elected at the general
meeting, the directors who were elected at the previous meeting will continue in office.
All the members of our Board of Directors (except the outside directors) may be reelected
upon completion of their term of office. For information regarding the election of outside
directors, see Item 6C. “Directors and Senior Management –Board Practices –
Outside and Independent Directors.”
58
Rights
to Share in our Company’s Profits
. Our shareholders have the right to
share in our profits distributed as a dividend and any other permitted distribution. See
this Item 10B. “Additional Information – Memorandum and Articles of Association
– Rights Attached to Shares – Dividend and Liquidation Rights.”
Rights
to Share in Surplus in the Event of Liquidation
. In the event of our
liquidation, after satisfaction of liabilities to creditors, our assets will be
distributed to the holders of ordinary shares proportionate to the amounts that were paid
up or were treated as having been paid up on the par value of the shares they hold. This
right may be affected by the grant of preferential dividend or distribution rights to the
holders of a class of shares with preferential rights that may be authorized in the
future.
Liability
to capital calls by our company
. Under our memorandum of association and
the Israeli Companies Law, the liability of our shareholders is limited to the par value
of the shares held by them.
Limitations
on any existing or prospective major shareholder
. See Item 6C.
“Directors and Senior Management –Board Practices – Approval of Related
Party Transactions Under Israeli Law.”
Modification of Rights
Attached to Shares
The
Israeli Companies Law provides that, unless otherwise provided by the articles of
association, the rights of a particular class of shares may not be adversely modified
without the approval of a separate class meeting of the affected class.
Annual and Special
Meetings
Under
the Israeli Companies Law a company must convene an annual meeting of shareholders at
least once every calendar year and within 15 months of the last annual meeting. Depending
on the matter to be voted upon, in general notice of at least 14 days or 35 days prior to
the date of the meeting is required. Our board of directors may, in its discretion,
convene additional meetings as “special general meetings.” In addition, the
board must convene a special general meeting upon the demand of two of the directors, 25%
of the nominated directors, one or more shareholders having at least 5% of the outstanding
share capital and at least 1% of the voting power in the company, or one or more
shareholders having at least 5% of the voting power in the company. The chairman of the
board of directors presides at each of our general meetings. If there is no chairman or he
or she is absent from the meeting within 15 minutes from the time set for the meeting or
if he or she refuses to take the chair at the meeting, the members that are present may
elect one of the directors as chairman of the meeting or where no director is present or
if all the directors who are present refuse to take the chair – one of the members
present may be elected to chair the meeting. The chairman of the board of directors is not
entitled to a vote at a general meeting in his or her capacity as chairman.
Limitations on the
Rights to Own Our Ordinary Shares
Neither
our memorandum of association, 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,
except that shares held by citizens of countries which are in a state of war with Israel
will not confer any rights to their holders unless the Minister of Finance consents
otherwise.
Anti-Takeover
Provisions; Mergers and Acquisitions
Tender
Offer
.
A person wishing to acquire shares, or any class of shares, of a
publicly traded Israeli company and who would as a result hold over 90% of the
company’s issued and outstanding share capital, or a class of shares, is required by
the Israeli Companies Law to make a tender offer to all of the company’s shareholders
for the purchase of all of the remaining issued and outstanding shares of the company, or
the class of shares, as the case may be. If the shareholders who do not respond to the
offer hold less than 5% of the issued share capital of the company, or of the relevant
class of shares, all of the shares that the acquirer offered to purchase will be
transferred to the acquirer by operation of law. However, the shareholders may petition
the court to determine that the consideration for the acquired shares is less than the
shares’ fair value and that the acquiring party should pay the shares’ fair
value. If the dissenting shareholders hold more than 5% of the issued and outstanding
share capital of the company, or of the relevant class of shares, as the case may be, the
acquirer may not acquire additional shares of the company from shareholders who accepted
the tender offer if following such acquisition the acquirer would own over 90% of the
company’s issued and outstanding share capital, or of the relevant class of shares.
59
The
Israeli Companies Law provides that an acquisition of shares of a public company be made
by means of a tender offer if as a result of the acquisition the purchaser would become
the holder of a “control block.” Under the Israeli Companies Law shares
conferring 25% or more of the voting rights in the company constitute a “control
block.” The requirement for a tender offer does not apply if there is already another
holder of a control block. Similarly, the Israeli Companies Law provides that an
acquisition of shares in a public company must be made by means of a tender offer if as a
result of the acquisition the acquirer would hold more than 45% of the voting rights in
the company, unless there is another person holding more than 45% of the voting rights in
the company. These requirements do not apply if:
|
|
—
|
the
acquisition was made in a private placement the object of which was to confer to the
acquiring party a “control block” where there is no holder of a “control
block,” or to confer to the acquiring party 45% of the voting rights in the company
where there is no holder of 45% of the voting rights in the company, and the private
placement received the general meeting’s approval; or
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the
acquisition was from the holder of a "control block" and resulted in a person becoming
the holder of a "control block;" or
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the
acquisition was from a shareholder holding more than 45% of the voting rights in the
company and resulted in a person becoming a holder of more than 45% of the voting rights
in the company.
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Merger
.
The
Israeli Companies Law permits merger transactions if approved by each party’s
board of directors and, except under certain circumstances specified below, by
the majority of each party’s shares voted on the proposed merger at a
shareholders meeting convened upon prior notice of at least 35 days (which may
be shortened to 14 days in certain circumstances). A merger is defined as the
transfer of all assets and liabilities, including conditional, future, known
and unknown debts of the target company to the surviving company, as a result
of which the target company is liquidated, and stricken out of the Companies
Register.
Under
the Israeli Companies Law, if the approval of a general meeting of the shareholders is
required, merger transactions may be approved by holders of a simple majority of the
shares present and voting, in person or by proxy or by written ballot, at the general
meeting convened to approve the transaction. If one of the merging companies, or a
shareholder that holds 25% or more of the means of control of one of the merging
companies, or a 25% shareholder, holds shares of the other merging company, then a
dissenting vote of holders of the majority of the shares of the other merging company
present and voting, excluding shares held by the merging company or a 25% shareholder
thereof, or by anyone acting on behalf of either of them, their relatives and corporations
controlled thereby, is sufficient to reject the merger transaction. Means of control are
defined as any of the following: (i) the right to vote at a general meeting of a company;
and (ii) the right to appoint a director of a company. If the transaction would have been
approved but for the exclusion of the votes as previously indicated, a court may still
approve the merger upon the request of holders of at least 25% of the voting rights of the
company. The court will not approve a merger unless it is convinced that the merger is
fair and reasonable, taking into account the values of the merging companies 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 the merged company. In addition, a merger may
not be completed unless at least 50 days have passed from the date that a proposal for
approval of the merger was filed with the Israeli Registrar of Companies and 30 days from
the date that shareholder approval of both merging companies was obtained.
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Notwithstanding
the foregoing, a merger is not subject to the approval of the shareholders of the target
company if the target company is a wholly-owned subsidiary of the surviving company. A
merger is not subject to the approval of the shareholders of the surviving company if:
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the
merger does not require the alteration of the memorandum or articles of association of
the surviving company;
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the
acquiring company would not issue more than 20% of the voting rights thereof to the
shareholders of the target company in the course of the merger and no person will become,
as a result of the merger, a controlling shareholder of the surviving company, on a fully
diluted basis;
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neither
the target company, nor any shareholder that holds 25% of the means of control of the
target company is a shareholder of the surviving company; and
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there
is no person that holds 25% or more of the means of control in both companies.
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Disclosure of
Shareholders Ownership
The
Israeli Securities Law, 5728-1968 and regulations promulgated thereunder contain various
provisions regarding the ownership threshold above which shareholders must disclose their
share ownership. However, these provisions do not apply to companies, such as ours, whose
shares are publicly traded in Israel as well on the NASDAQ Global Market. We are required
pursuant to the Israeli Securities Law and the regulations promulgated thereunder to
submit to the Israeli Companies Registrar, the Israeli Securities Authority and the Tel
Aviv Stock Exchange, among other things, all information that we receive from our
shareholders regarding their shareholdings in our company, provided that such information
was published or is required to be published under applicable foreign law.
Changes in Our Capital
Changes
in our capital are subject to the approval of the shareholders at a general meeting by a
simple majority of the votes of shareholders participating and voting in the general
meeting.
While
we have numerous contracts with customers and distributors we do not deem any such
individual contract to be material.
The
Israeli Currency Control Law, 5738-1978 provides that transactions in foreign currencies,
and transactions with foreign residents, require a permit. Since 1998, when a new
“general permit” was issued under the law, there are no Israeli currency control
restrictions on payments of dividends or other distributions with respect to our ordinary
shares or the proceeds from the sale of the shares, except for the obligation of Israeli
residents to file reports with the Bank of Israel regarding certain transactions.
The
following is a discussion of Israeli and United States tax consequences material to our
shareholders. To the extent that the discussion is based on new tax legislation which has
not been subject to judicial or administrative interpretation, the views expressed in the
discussion might not be accepted by the tax authorities in question. The discussion is not
intended, and should not be construed, as legal or professional tax advice and does not
exhaust all possible tax considerations.
Holders
of our ordinary shares should consult their own tax advisors as to the United States,
Israeli or other tax consequences of the purchase, ownership and disposition of ordinary
shares, including, in particular, the effect of any foreign, state or local taxes.
61
ISRAELI TAX
CONSIDERATIONS
The
following is a general discussion only and is not exhaustive of all possible tax
considerations. It is not intended, and should not be construed, as legal or professional
tax advice and should not be relied upon for tax planning purposes. In addition, this
discussion does not address all of the tax consequences that may be relevant to purchasers
of our ordinary shares in light of their particular circumstances, or certain types of
purchasers of our ordinary shares subject to special tax treatment. Examples of these
kinds of purchasers include residents of Israel and traders in securities who are subject
to special tax regimes not covered in this discussion. Each individual/entity should
consult its own tax or legal advisor as to the Israeli tax consequences of the purchase,
ownership and disposition of our ordinary shares.
To
the extent that part of the discussion is based on new tax legislation, which has not been
subject to judicial or administrative interpretation, we cannot assure that the tax
authorities or the courts will accept the views expressed in this section.
The
following summary describes the current tax structure applicable to companies in Israel,
with special reference to its effect on us. The following also contains a discussion of
the material Israeli tax consequences to holders of our ordinary shares.
General Corporate Tax
Structure
Israeli
companies were subject to corporate tax at the rate of 29% on taxable income for the year
2007 and were subject to capital gains tax at a rate of 25% on capital gains (other than
gains derived from the sale of listed securities that are taxed at the prevailing
corporate tax rates) derived after January 1, 2003. The applicable corporate tax
for 2008 is 27%; for 2009, the applicable rate will be 26%, and for 2010 and thereafter,
it will be 25%. However, the effective tax rate payable by a company that derives income
from a benefited enterprise as further discussed below may be lower.
Tax Benefits under the Law for the
Encouragement of Industry (Taxes), 1969
Under
the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement
Law, Industrial Companies (as defined below) are entitled to the following tax benefits:
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amortization
of the expenses incurred in the purchase of know-how and patents, over an eight-year
period;
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expenses
related to a public offering are deductible over a three-year period;
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the
right to file, under specified conditions, a consolidated tax return with other Israeli
Industrial Companies under the same control that engage in the same economic sector; and
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accelerated
depreciation rates on equipment and buildings.
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Under
the Industry Encouragement Law, an “Industrial Company” is defined as a company
resident in Israel, at least 90% of the income of which, in any tax year, exclusive of
income from government loans, capital gains, interest and dividends, is derived from an
“Industrial Enterprise” owned by it. An “Industrial Enterprise” is
defined as an enterprise whose major activity in a given tax year is industrial production
activity.
We
believe that we currently qualify as an Industrial Company within the definition of the
Industry Encouragement Law. No assurance can be given that we will continue to qualify as
an Industrial Company or that the benefits described above will be available in the
future.
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Tax Benefits under the Law for the
Encouragement of Capital Investments, 1959
The
Law for the Encouragement of Capital Investment, 1959, or the Investment Law, provides
that certain capital investments in production facilities that contribute to the economic
independence of the Israeli economy and are deemed competitive facilities that contribute
to the Israeli gross domestic product may, subject to the conditions specified in the law,
be entitled to the status of an “Approved Enterprise.” A company having an
Approved Enterprise is entitled to certain benefits, including Israeli Government cash
grants and tax benefits.
The
Investment Law specifies certain conditions that an Approved Enterprise has to comply
with, including compliance with the definition of an “Industrial Enterprise” as
detailed in the Investment Law and minimum capital investments. In addition, for the
status of an Approved Enterprise an entity must comply with at least one of the following
conditions during the period of entitlement in order to enjoy the benefits:
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that
the Approved Enterprise engage primarily in biotechnology or nanotechnology and receive
the prior approval of the Chairman of the Industrial Research and Technology
Administration confirming this; or
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that
the Approved Enterprise's revenues from any single country do not exceed 75% of the
Approved Enterprise's total revenues; or
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that
25% of the Approved Enterprise’s revenues during the benefits period derive from
sales within a single country with a population of at least 12 million.
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An
Approved Enterprise that complies with one of the foregoing conditions and other terms
specified in the Investment Law is a “Benefited Enterprise.” A Benefited
Enterprise is entitled to accelerated depreciation for its manufacturing assets. In
addition, a Benefited Enterprise is entitled to full exemption from corporate tax on
undistributed income for a period of two to ten years, depending on the geographic
location of the Benefited Enterprise within Israel, and a reduced corporate tax rate of
10% to 25% on undistributed income for the remainder of the benefits period. The duration
of the remainder of the benefits period varies, depending on the level of Foreign
Investment in the enterprise in each year, and the location of the enterprise. The scope
of the reduction in the corporate tax rate is also dependant on the level of Foreign
Investment in the enterprise. Foreign Investment is determined pursuant to the percentage
of a company’s share capital (conferring rights to profits, voting and appointment of
directors) and shareholders loans owned by non-Israeli residents. The minimum amount
constituting a Foreign Investment for purposes of the Law is NIS 5.0 million. A Benefited
Enterprise located in Development Zone A, where we established a development center in
November 2006, is exempt from corporate tax on undistributed income for
10 years. A Benefited Enterprise located in Development Zone B is exempt from
corporate tax on undistributed income for six years, and subject to a reduced corporate
tax rate of 25% in the seventh year. A Benefited Enterprise located in an area other than
Zone A or B is exempt from corporate tax on undistributed income for two years and subject
to a reduced corporate tax rate of 25% in the following four years. However, if the
enterprise has a Foreign Investment of 25% or more it will enjoy a reduced corporate tax
rate during the four years following the six years of full exemption if located in Zone B,
or if located in an area other than Zone A or B it will enjoy a reduced corporate tax rate
during the eight years following the two years of full exemption. The reduced corporate
tax rate would be 25%, unless the enterprise has a Foreign Investment of 49% or more. If
the Foreign Investment is 49% or more but less than 74%, the reduced corporate tax rate
would be 20%, if the Foreign Investment is 74% or more but less than 90% the reduced
corporate tax rate would be 15%, and if the Foreign Investment is 90% or more the reduced
corporate tax rate would be 10%. The lowest level of foreign investment during the year
will be used to determine the relevant tax rate for that year.
If
the company pays a dividend out of income derived from the Benefited Enterprise during the
tax exemption period, a portion of its income that is equivalent to the amount distributed
as dividends will be subject to corporate tax. Dividends paid to shareholders out of
income derived from the Benefited Enterprise are subject to income tax at a reduced rate
of 15% subject to the relevant tax treaty as detailed below.
A
Benefited Enterprise located in Zone A is entitled to substitute the full exemption from
corporate tax on undistributed income by a reduced corporate tax rate of 11.5%. In this
case it would not be subject to additional corporate tax in case of dividend
distributions, dividends distributed from the income of the Benefited Enterprise to
Israeli residents will be subject to 15% income tax, and dividends distributed from the
income of the Benefited Enterprise to non-Israeli residents will be subject to 4% income
tax.
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The
period of benefits may in no event exceed 14 years from the year the company chooses as
the year of election, within the meaning of the Investment Law, for the Benefited
Enterprise. The reduced income tax on dividends distributed out of income derived from a
Benefited Enterprise is applicable only if the dividends are distributed within 12 years
after the benefits period. Dividends distributed by an enterprise that has a Foreign
Investment of 25% or more are not subject to the 12-year limitation.
If
a company has more than one Approved Enterprise or if only a portion of its capital
investments are approved, its effective tax rate is the result of a weighted combination
of the applicable rates. The tax benefits relate only to taxable profits attributable to
the specific Approved Enterprise. Income derived from activity that is not integral to the
activity of the Approved Enterprise does not enjoy tax benefits.
In
June 2006, we received a pre-ruling from the Israeli Tax Authority confirming that a
development center which we established in November 2006 in the industrial zone of
Ashkelon, Israel will be regarded a Benefited Enterprise. Benefited Enterprises located in
this area, which is qualified as Zone A, may elect between a full exemption from corporate
tax on undistributed profits or a reduced corporate tax of 11.5%. We have elected the full
exemption option, which will apply to taxable income attributable to the Benefited
Enterprise. In addition, we have retained earnings in the amount of $355,000 from an
investment that was recognized as an Approved Enterprise and whose benefit period
terminated in 1997, and retained earnings of approximately $2.9 million from an investment
that was recognized as a Benefited Enterprise and whose benefit period will terminate in
2015. If these earnings were distributed as a dividend by the company, they would be
subject to 25% corporate tax (or 33.33% under certain conditions), in addition to the
income tax that will apply with respect to the dividend income paid to our shareholders.
The
benefits available to our Benefited Enterprise are conditional upon our fulfilling certain
conditions stipulated in the Investment Law and its regulations and the terms of the
pre-ruling that we received from the Israeli Tax Authority. The pre-ruling that we
received is subject to several conditions which include, among other things, that we
remain controlled and managed from Israel throughout the benefit period and that we not
change our line of business or business model, or significantly reduce the volume of our
production or variety of our products. In addition, under the pre-ruling, during the
benefit period, a certain percentage of our employees who are engaged in core research and
development must be located in Israel, a certain percentage of our employees who are
engaged in quality control must be located in Israel and no fewer than 12 of the employees
engaged in core research and development must be recruited and employed in Israel. If we
were to violate one or more of these conditions we could be required to pay the monetary
equivalent of the tax benefits, linked to the Israeli consumer price index, plus interest
and penalties. As of the date of this annual report, we were in compliance with all
applicable conditions.
Special Provisions
Relating to Taxation under Inflationary Conditions
The
Income Tax Law (Inflationary Adjustments), 1985, generally referred to as the Inflationary
Adjustments Law, was enacted for the purpose of overcoming issues arising from a
traditional tax system in an economy undergoing rapid inflation. The Inflationary
Adjustments Law was applicable for our company until 2006. Commencing 2007 (for the
company) and 2008 (for the Israeli subsidiaries), we are taxed under the Dollar
Regulations described below.
Pursuant
to the Inflationary Adjustments Law, results for tax purposes are measured in real terms,
based on changes in the Israeli Consumer Price Index. The Inflationary Adjustments Law is
highly complex. The features that are material to us can be described as follows:
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when
the value of a company’s equity, as calculated under the Inflationary Adjustments
Law, exceeds its assets (as defined in the Inflationary Adjustments Law), a deduction
from taxable income is permitted equal to the excess multiplied by the applicable annual
rate of inflation. The maximum deduction permitted in any single tax year is 70% of
taxable income, with the unused portion permitted to be carried forward, linked to the
increase in the consumer price index;
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if
the cost of the company’s assets exceeds its equity, then the excess multiplied by
the applicable annual rate of inflation is added to taxable income; and
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subject
to certain limitations, depreciation deductions on fixed assets and losses carried
forward are adjusted for inflation based on the increase in the Israeli consumer price
index.
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The
Minister of Finance may, with the approval of the Knesset Finance Committee, determine by
decree, during a certain fiscal year (or until February 28th of the following year)
in which the rate of increase of the Israeli consumer price index would not exceed or did
not exceed 3%, that some or all of the provisions of the Inflationary Adjustments Law
shall not apply with respect to such fiscal year, or, that the rate of increase of the
Israeli consumer price index relating to such fiscal year shall be deemed to be 0%, and to
make the adjustments required to be made as a result of such determination. The Minister
of Finance has determined that the provisions of the Inflationary Adjustments Law
regarding adjustments of inventory and adjustments of advances from client and to
suppliers shall not apply with respect to the 2007 fiscal year.
The
Israeli tax ordinance and regulations promulgated thereunder allow “Foreign-Invested
Companies,” (as defined in the Investments Law) that maintain their accounts in U.S.
dollars in compliance with regulations published by the Israeli Minister of Finance (the
Dollar Regulations), to base their tax returns on their operating results as reflected in
their U.S. dollar financial statements or to adjust their tax returns based on exchange
rate changes rather than changes in the Israeli consumer price index, in lieu of the
principles set forth by the Inflationary Adjustments Law. For these purposes, a
Foreign-Invested Company is a company (i) more than 25% of whose share capital, in terms
of rights to profits, voting and appointment of directors are held by persons who are not
residents of Israel; and (ii) more than 25% of whose combined share and loan capital is
held by persons who are not residents of Israel. A company that elects to measure its
results for tax purposes based on the U.S. dollar exchange rate cannot change such
election for a period of three years following the election. We qualify as a “Foreign
Investment Company” within the meaning of the Inflationary Adjustments Law and have
elected to measure our results for tax purposes in the years 2007-2010 based on the U.S.
dollar exchange rate.
On
February 26, 2008, the Israeli Parliament (the Knesset) enacted the Income Tax Law
(Inflationary Adjustments) (Amendment No. 20) (Restriction of Effective Period), 2008,
which we refer to as the Inflationary Adjustments Amendment. In accordance with the
Inflationary Adjustments Amendment, the effective period of the Inflationary Adjustments
Law will cease at the end of the 2007 tax year and as of the 2008 tax year the provisions
of the law shall no longer apply, other than the transitional provisions intended at
preventing distortions in the tax calculations. In accordance with the Inflationary
Adjustments Amendment, commencing the 2008 tax year, income for tax purposes will no
longer be adjusted to a real (net of inflation) measurement basis. Furthermore, the
depreciation of inflation immune assets and carried forward tax losses will no longer be
linked to the Israeli consumer price index. However, the provisions regarding
Foreign-Invested Companies remain in force.
Taxation of our
Shareholders
Taxation
of Non-Israeli Shareholders on Receipt of Dividends
. According to Israeli
tax law, non-Israeli residents are subject to income tax on income accrued or derived from
sources in Israel. Dividends distributed by a company resident in Israel are deemed income
accrued or derived from sources in Israel.
Unless
a lower rate is provided in a treaty between Israel and the shareholder’s country of
residence, dividends from income attributed to our “Approved Enterprise” will be
subject to income tax in Israel at the rate of 15%, and dividends from income which is not
attributed to an “Approved Enterprise” will be subject to income tax in Israel
at the rate of 20%, except for dividend distributed to “a substantial
shareholder” which will be subject to tax at the rate of 25%. A “substantial
shareholder” is a shareholder holding, either directly or indirectly, alone or
together with another, at least 10% of any means of control in a company. The term
“together with another” means together with a relative, or together with someone
who is not a relative with whom the individual, either directly or indirectly, usually
cooperates, pursuant to an agreement, with respect to the material affairs of the company.
The relevant holdings for the purpose of determining whether a shareholder is a
substantial shareholder are the shareholder’s holdings at the time of the
distribution and at any time during the 12 months preceding the distribution. These taxes
will be withheld at source from the amounts distributed as dividends. The withholding tax
from dividends derived from traded securities by a “substantial shareholders” is
limited to 20%.
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A
non-resident of Israel who receives dividends from which tax was withheld at source is
generally exempt from the duty to file returns in Israel in respect of such income,
provided that the dividends were not derived from a business conducted in Israel by the
taxpayer and the taxpayer has no other taxable sources of income in Israel.
Under
the Convention between the U.S. Government and the Government of Israel with Respect to
Taxes on Income, or the U.S.-Israel Tax Treaty, the maximum rate of tax chargeable in
Israel on dividends paid to a U.S. resident, within the meaning of the U.S.-Israel Tax
Treaty, is 25%. Furthermore, the maximum rate of tax chargeable on dividends that are paid
to a U.S. corporation holding at least 10% of the outstanding shares of the voting stock
of the paying company during the part of the tax year of the paying company that precedes
the date of the payment of the dividend and during the whole of its prior tax year, is
12.5%. This reduced rate will not apply if more than 25% of the paying company’s
gross income consists of interest or dividends (other than dividends or interest received
from subsidiary corporations, 50% or more of the outstanding shares of the voting shares
of which are owned by the paying company at the time such dividends or interest is
received). These provisions of the U.S.-Israel Tax Treaty will not apply to dividends
constituting industrial or commercial profits attributable to a permanent establishment
which the recipient has in Israel, that are subject to the specific provisions of the
treaty relating to industrial or commercial profits.
Investors
should consult their own tax advisors to determine if they are eligible for benefits under
the U.S. Israel Tax Treaty.
Capital
Gains Taxes Applicable to Non-Israeli Shareholders
. In general, Israel
imposes a capital gains tax on the sale of capital assets located in Israel, including
shares of Israeli resident companies, by both Israeli and non-Israeli resident
shareholders, unless a specific exemption is available, or unless a tax treaty between
Israel and the shareholder’s country of residence provides otherwise.
Shareholders
that are not Israeli residents are exempt from Israeli capital gains tax on any gains
derived from the sale of shares that are traded on an Israeli stock exchange, unless such
gains are derived from a permanent establishment of such shareholders in Israel, and
provided that the shares were purchased after the listing of the shares on the stock
exchange. Our shares have been traded on the TASE since 1993. Therefore, the exemption
will apply to capital gains derived by eligible non-Israeli residents.
Non-Israeli
residents are also exempt from Israeli capital gains tax on any gains derived from the
sale of shares of Israeli companies publicly traded on a recognized stock market outside
of Israel, provided such shareholders did not acquire their shares prior to the
issuer’s initial public offering and that the gains did not derive from a permanent
establishment of such shareholders in Israel, and that such shareholders are not subject
to the Inflationary Adjustments Law or the Income Tax Ordinance’s provisions
concerning bookkeeping in a foreign currency.
However,
a non-Israeli corporation will not be entitled to the foregoing exemptions if (i) it is
controlled by Israeli residents; or (ii) Israeli residents are the beneficiaries of or
entitled to 25% or more of the revenues or profits of such non-Israeli corporation,
whether directly or indirectly.
In
certain instances where our non-Israeli shareholders may be liable to Israeli tax on the
sale of their ordinary shares, the payment of the consideration may be subject to Israeli
withholding tax.
In
addition, the sale, exchange or disposition of our ordinary shares by a shareholder who is
a U.S. resident (within the meaning of the U.S.-Israel Tax Treaty) holding the ordinary
shares as a capital asset will be also exempt from Israeli capital gains tax under the
U.S.-Israel Tax Treaty, unless (i) the shareholder holds, directly or indirectly, shares
representing 10% or more of our voting capital during any part of the 12-month period
preceding such sale, exchange or disposition; or (ii) the capital gains arising from such
sale, exchange or disposition are attributable to a permanent establishment of the
shareholder located in Israel; or (iii) an individual shareholder is present in Israel for
a period or periods aggregating 183 days or more during the taxable year. In such case the
U.S. resident would be subject to Israeli capital gain tax, to the extent applicable, as
mentioned above. However, under the U.S.-Israel Tax Treaty, the U.S. resident would be
permitted to claim a credit for such taxes against the U.S. federal income tax imposed on
the sale, exchange or disposition, subject to the limitation in U.S. law applicable to
foreign tax credits. The U.S.-Israel Tax Treaty does not relate to U.S. state or local
taxes.
66
UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES
The
following discussion summarizes the material U.S. federal income tax considerations
applicable to the purchase, ownership and disposition of our ordinary shares. Unless
otherwise stated, this summary deals only with shareholders that are U.S. Holders (as
defined below) who hold their ordinary shares as capital assets.
As
used in this section, the term “U.S. Holder” means a beneficial owner of an
ordinary share who is:
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an
individual citizen or resident of the United States or an individual treated as a U.S.
citizen or resident for U.S. federal income tax purposes;
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a
corporation or other entity taxable as a corporation for U.S. federal income tax purposes
created or organized in or under the laws of the United States, any State
or the District of Columbia;
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an
estate, the income of which is subject to U.S. federal income taxation regardless of its
source; or
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any
trust if (A)(i) a court within the United States is able to exercise primary supervision
over the administration of the trust and (ii) one or more United States persons have the
authority to control all substantial decisions of the trust, or (B) such trust validly
elects to be treated as a United States person.
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The
term “Non-U.S. Holder” means a beneficial owner of an ordinary share that is an
individual, corporation, estate or trust and is not a U.S. Holder. The tax consequences to
a Non-U.S. Holder may differ substantially from the tax consequences to a U.S. Holder.
Certain aspects of U.S. federal income tax relevant to a Non-U.S. Holder are discussed
below.
This
description is based on provisions of the U.S. Internal Revenue Code of 1986, as amended
(the “Code”), existing and proposed U.S. Treasury regulations promulgated
thereunder, administrative and judicial interpretations thereof, and the US-Israel Tax
Treaty, each as in effect as of the date of this Annual Report. These sources may change,
possibly with retroactive effect, and are open to differing interpretations. This
description does not discuss all aspects of U.S. federal income taxation that may be
applicable to investors in light of their particular circumstances or to investors who are
subject to special treatment under U.S. federal income tax law, including:
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dealers
in stocks, securities or currencies;
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financial
institutions and financial services entities;
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real
estate investment trusts;
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regulated
investment companies;
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persons
that receive ordinary shares in connection with the performance of services;
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tax-exempt
organizations;
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persons
that hold ordinary shares as part of a straddle or appreciated financial position or as
part of a hedging, conversion or other integrated instrument;
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persons
who acquire their ordinary shares through the exercise or cancellation of employee stock
options or otherwise as consideration for their services;
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individual
retirement and other tax-deferred accounts;
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expatriates
of the United States and certain former long-term residents of the United States;
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persons
liable for the alternative minimum tax;
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persons
having a "functional currency" other than the U.S. dollar; and
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direct,
indirect or constructive owners of 10% or more, by voting power or value, of our company.
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If
a partnership or an entity treated as a partnership for U.S. federal income tax purposes
owns ordinary shares, the U.S. federal income tax treatment of a partner in such a
partnership will generally depend upon the status of the partner and the activities of the
partnership. A partnership that owns ordinary shares and the partners in such partnership
should consult their tax own advisors about the U.S. federal income tax consequences of
holding and disposing of ordinary shares.
This
discussion does not consider the possible application of U.S. federal gift or estate tax
or alternative minimum tax.
All
investors are urged to consult their own tax advisors as to the particular tax
consequences to them of an investment in our ordinary shares, including the effect and
applicability of United States federal, state, local and foreign income and other tax laws
(including estate and gift tax laws) and tax treaties.
Distributions Paid on
the Ordinary Shares
Subject
to the discussion below under “Passive Foreign Investment Company
Considerations,” a U.S. Holder generally will be required to include in his or her
gross income as ordinary dividend income the amount of any distributions paid on the
ordinary shares, including the amount of any Israeli taxes withheld, to the extent that
those distributions are paid out of our current or accumulated earnings and profits, as
determined for U.S. federal income tax purposes. Subject to the discussion below under
“Passive Foreign Investment Company Considerations,” distributions in excess of
our earnings and profits will be applied against and will reduce the U.S. Holder’s
tax basis in its ordinary shares and, to the extent they exceed that tax basis, will be
treated as gain from a sale or exchange of those ordinary shares. Our dividends will not
qualify for the dividends-received deduction applicable in some cases to U.S.
corporations.
Dividends
that we pay in NIS, including the amount of any Israeli taxes withheld therefrom, will be
included in your income in a U.S. dollar amount calculated by reference to the exchange
rate in effect on the day such dividends are received, regardless of whether the payment
is in fact converted into U.S. dollars. A U.S. Holder who receives payment in NIS and
converts NIS into U.S. dollars at an exchange rate other than the rate in effect on such
day will have a foreign currency exchange gain or loss that would be treated as ordinary
income or loss. U.S. Holders should consult their own tax advisors concerning the U.S. tax
consequences of acquiring, holding and disposing of NIS.
68
Subject
to certain limitations, “qualified dividend income” received by a noncorporate
U.S. Holder in tax years beginning on or before December 31, 2010 will be subject to tax
at a reduced maximum tax rate of 15%. Distributions taxable as dividends paid on the
ordinary shares should qualify for the 15% rate provided that we are not a passive foreign
investment company (as described below) for U.S. tax purposes and that either: (i) we are
entitled to benefits under the income tax treaty between the United States and Israel (the
“U.S.-Israel Tax Treaty”) or (ii) the ordinary shares are readily tradable on an
established securities market in the United States and certain other requirements are met.
We believe that we are entitled to benefits under the U.S.-Israel Tax Treaty and that the
ordinary shares currently will be readily tradable on an established securities market in
the United States. However, no assurance can be given that the ordinary shares will remain
readily tradable. The rate reduction does not apply unless certain holding period
requirements are satisfied. With respect to the ordinary shares, the U.S. Holder must have
held such shares for at least 61 days during the 121-day period beginning 60 days before
the ex-dividend date. The rate reduction also does not apply to dividends received from
passive foreign investment companies, see discussion below, or in respect of certain
hedged positions or in certain other situations. The legislation enacting the reduced tax
rate contains special rules for computing the foreign tax credit limitation of a taxpayer
who receives dividends subject to the reduced tax rate. U.S. Holders of ordinary shares
should consult their own tax advisors regarding the effect of these rules in their
particular circumstances.
Subject
to the discussion below under “Information Reporting and Back-up Withholding,” a
Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on
dividends received on ordinary shares unless that income is effectively connected with the
conduct by that Non-U.S. Holder of a trade or business in the United States, in which case
a corporate Non-U.S. Holder may also be subject to the U.S. branch profits tax.
Foreign Tax Credit
Any
dividend income resulting from distributions we pay to a U.S. Holder with respect to the
ordinary shares generally will be treated as foreign source income for U.S. foreign tax
credit limitation purposes. Subject to certain conditions and limitations, Israeli tax
withheld on dividends may be deducted from taxable income or credited against a U.S.
Holder’s U.S. federal income tax liability. The limitation on foreign taxes eligible
for credit is calculated separately with respect to specific classes of income. For this
purpose, any dividend that we distribute generally will constitute “passive category
income,” or, in the case of certain U.S. Holders, “general category
income.” The rules relating to the determination of foreign source income and the
foreign tax credit are complex, and the availability of a foreign tax credit depends on
numerous factors. Each investor who is a U.S. Holder should consult with its own tax
advisor to determine whether its income with respect to the ordinary shares would be
foreign source income and whether and to what extent that investor would be entitled to a
foreign tax credit.
Disposition of Ordinary
Shares
Upon
the sale or other disposition of ordinary shares, subject to the discussion below under
“Passive Foreign Investment Company Considerations,” a U.S. Holder generally
will recognize capital gain or loss equal to the difference between the amount realized on
the disposition and the holder’s adjusted tax basis in the ordinary shares. U.S.
Holders should consult their own advisors with respect to the tax consequences of the
receipt of a currency other than U.S. dollars upon such sale or other disposition.
Gain
or loss upon the disposition of the ordinary shares will be treated as long-term if, at
the time of the sale or disposition, the ordinary shares were held for more than one year.
The deductibility of capital losses by a U.S. Holder is subject to limitations. In
general, any gain or loss recognized by a U.S. Holder on the sale or other disposition of
ordinary shares will be U.S. source income or loss for U.S. foreign tax credit purposes.
U.S. Holders should consult their own tax advisors concerning the source of income for
U.S. foreign tax credit purposes and the effect of the U.S.-Israel Tax Treaty on the
source of income.
Subject
to the discussion below under “Information Reporting and Back-up Withholding,” a
Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on
any gain realized on the sale or exchange of ordinary shares unless:
|
|
—
|
that
gain is effectively connected with the conduct by the Non-U.S. Holder of a trade or
business in the United States, and, if a tax treaty applies, is
attributable to a permanent establishment or fixed base of the Non-U.S.
Holder in the United States; or
|
|
|
—
|
in
the case of any gain realized by an individual Non-U.S. Holder, that holder is present in
the United States for 183 days or more in the taxable year of the sale or exchange, and
other conditions are met.
|
69
Passive Foreign
Investment Company Considerations
Special
U.S. federal income tax rules apply to U.S. Holders owning shares of a passive foreign
investment company. A non-U.S. corporation will be considered a passive foreign investment
company for any taxable year in which, after applying certain look-through rules, 75% or
more of its gross income consists of specified types of passive income, or 50% or more of
the average value of its assets consists of assets that produce, or are held for the
production of, passive income. For this purpose, passive income includes generally
dividends, interest, royalties, rents, annuities and the excess of gains over losses from
the disposition of assets which produce passive income.
If
we were classified as a passive foreign investment company, a U.S. Holder could be subject
to increased tax liability upon the sale or other disposition of ordinary shares or upon
the receipt of amounts treated as “excess distributions.” Under these rules, the
excess distribution and any gain would be allocated ratably over the U.S. Holder’s
holding period for the ordinary shares, and the amount allocated to the current taxable
year and any taxable year prior to the first taxable year in which we were a passive
foreign investment company would be taxed as ordinary income. The amount allocated to each
of the other taxable years would be subject to tax at the highest marginal tax rate in
effect for the applicable class of taxpayer for that year, and an interest charge for the
deemed deferral benefit would be imposed on the resulting tax allocated to such other
taxable years. The tax liability with respect to the amount allocated to years prior to
the year of the disposition, or “excess distribution,” cannot be offset by any
net operating losses. In addition, holders of stock in a passive foreign investment
company may not receive a “step-up” in basis on shares acquired from a decedent.
If we are a passive foreign investment company in any year, a U.S. Holder would be
required to file an annual return on IRS Form 8621 regarding distributions received with
respect to ordinary shares and any gain realized on the disposition of ordinary shares.
Based
on our current and projected income, assets and activities, we do not believe that we will
be a passive foreign investment company for our current taxable year. However, because the
determination of whether we are a passive foreign investment company is based upon the
composition of our income and assets from time to time, we cannot be certain that we will
not be considered a passive foreign investment company for the current taxable year or any
future taxable year.
The
passive foreign investment company tax consequences described above will not apply to a
U.S. Holder if the U.S. Holder makes an election to treat us as a qualified electing fund,
or QEF. If a U.S. Holder makes a timely QEF election, the U.S. Holder would be required to
include in income for each taxable year its pro rata share of our ordinary earnings as
ordinary income and its pro rata share of our net capital gain as long-term capital gain,
whether or not such amounts are actually distributed to the U.S. Holder. However, a U.S.
Holder would not be eligible to make a QEF election unless we comply with certain
applicable information reporting requirements. We will determine whether or not we are
willing to provide U.S. Holders with the information needed to report income and gain
under a QEF election should we become a passive foreign investment company.
As
an alternative to making a QEF election, a U.S. Holder of passive foreign investment
company stock which is publicly traded may in certain circumstances avoid certain of the
tax consequences generally applicable to holders of a passive foreign investment company
by electing to mark the stock to market annually and recognizing as ordinary income or
loss each year an amount equal to the difference as of the close of the taxable year
between the fair market value of the passive foreign investment company stock and the U.S.
Holder’s adjusted tax basis in the passive foreign investment company stock. Losses
would be allowed only to the extent of net mark-to-market gain previously included by the
U.S. Holder under the election for prior taxable years. Income recognized and deductions
allowed under the mark-to-market provisions, as well as any gain or loss on the
disposition of ordinary shares with respect to which the mark to market election is made,
is generally treated as ordinary income or loss (except that loss is treated as capital
loss to the extent the loss exceeds the net mark-to-market gains, if any, that a U.S.
Holder included in its income with respect to such ordinary shares in prior years).
However, gain or loss from the disposition of ordinary shares (as to which a
“mark-to-market” election was made) in a year in which we are no longer a
passive foreign investment company, will be capital gain or loss. The mark-to-market
election is available for so long as our ordinary shares constitute “marketable
stock,” which includes stock of a passive foreign investment company that is
“regularly traded” on a “qualified exchange or other market.”
Generally, a “qualified exchange or other market” includes a national securities
exchange that is registered with the Securities and Exchange Commission or the national
market system established pursuant to Section 11A of the Securities Exchange Act of 1934.
A class of stock that is traded on one or more qualified exchanges or other markets is
“regularly traded” on an exchange or market for any calendar year during which
that class of stock is traded, other than in de minimis quantities, on at least 15 days
during each calendar quarter. We believe that The NASDAQ Global Market will constitute a
qualified exchange or other market for this purpose. However, we can not be certain that
our ordinary shares will continue to trade on The NASDAQ Global Market or that the
ordinary shares will be regularly traded for this purpose.
70
The
rules applicable to owning shares of a passive foreign investment company are complex, and
each holder who is a U.S. Holder should consult with its own tax advisor regarding the
consequences of investing in a passive foreign investment company.
Information Reporting
and Backup Withholding
Payments
in respect of ordinary shares may be subject to information reporting to the U.S. Internal
Revenue Service and to U.S. backup withholding tax at a rate equal to the fourth lowest
income tax rate applicable to individuals (which, under current law, is 28%). Backup
withholding will not apply, however, if you (i) are a corporation or come within certain
exempt categories, and demonstrate the fact when so required, or (ii) furnish a correct
taxpayer identification number and make any other required certification. U.S. Holders who
are required to establish their exempt status generally must provide such certification on
IRS Form W-9.
Backup
withholding is not an additional tax. Amounts withheld under the backup withholding rules
may be credited against a U.S. Holder’s U.S. tax liability, and a U.S. Holder may
obtain a refund of any excess amounts withheld under the backup withholding rules by
filing the appropriate claim for refund with the IRS.
Any
U.S. holder who holds 10% or more in vote or value of our ordinary shares will be subject
to certain additional United States information reporting requirements.
U.S. Gift and Estate Tax
An
individual U.S. Holder of ordinary shares will generally be subject to U.S. gift and
estate taxes with respect to ordinary shares in the same manner and to the same extent as
with respect to other types of personal property.
|
F.
|
DIVIDEND
AND PAYING AGENTS
|
Not
applicable.
Not applicable.
We
are subject to the reporting requirements of the United States Securities Exchange Act of
1934, as amended, as applicable to “foreign private issuers” as defined in Rule
3b-4 under the Exchange Act, and in accordance therewith, we file annual and interim
reports and other information with the Securities and Exchange Commission.
71
As
a foreign private issuer, we are exempt from certain provisions of the Exchange Act.
Accordingly, our proxy solicitations are not subject to the disclosure and procedural
requirements of Regulation 14A under the Exchange Act, transactions in our equity
securities by our officers and directors are exempt from reporting and the
“short-swing” profit recovery provisions contained in Section 16 of the Exchange
Act. In addition, we are not required under the Exchange Act to file periodic reports and
financial statements as frequently or as promptly as U.S. companies whose securities are
registered under the Exchange Act. However, we distribute to our shareholders an annual
report containing financial statements that have been audited by an independent registered
public accounting firm, and we file reports with the Securities and Exchange Commission on
Form 6-K containing unaudited condensed interim financial information for the first three
quarters of each fiscal year.
This
annual report and the exhibits thereto and any other document we file pursuant to the
Exchange Act may be inspected without charge and copied at prescribed rates at the
following Securities and Exchange Commission public reference rooms: 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549; and on the Securities and Exchange Commission Internet
site (http://www.sec.gov) and on our website
http://www.starlims.com
. You may
obtain information on the operation of the Securities and Exchange Commission’s
public reference room in Washington, D.C. by calling the Securities and Exchange
Commission at 1-800-SEC-0330 or by visiting the Securities and Exchange Commission’s
website at
http://www.sec.gov
, and may obtain copies of our filings from the public
reference room by calling 1-800-SEC-0330. The Exchange Act file number for our Securities
and Exchange Commission filings is 001-33487.
The
documents concerning our company referred to in this annual report may also be inspected
at our offices located at 32B Habarzel Street, Tel Aviv 69710, Israel.
|
I.
|
SUBSIDIARY
INFORMATION
|
Not
applicable.
|
ITEM 11.
|
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
|
Interest Rate Risk
We
do not believe that we have any material exposure to interest rate risk other than
sensitivity to prevailing interest rates that may affect income from our cash deposits,
commercial paper and marketable securities.
Foreign Currency
Exchange Risk
We
operate in the United States, Canada, Israel, Hong Kong and the United Kingdom. As a
result our financial results, which are reported in U.S. dollars, could be affected by
factors such as changes in foreign currency. In 2007, approximately 17% of our expenses
were paid in Canadian dollars, primarily salary and salary-related expenses of our staff
at STARLIMS Canada, which we acquired in January 2006. Therefore, the U.S. dollar cost of
our operations in Canada is influenced by the exchange rate between the U.S. dollar and
the Canadian dollar. If the U.S.-dollar cost of our operations in Canada increases, our
U.S.-dollar-measured results of operations will be adversely affected. During 2007, the
Canadian dollar appreciated against the U.S. dollar by approximately 18%. We cannot assure
you that we will not be adversely affected in the future if the Canadian dollar continues
to appreciate against the U.S. dollar.
In
addition, approximately 35% of our marketable securities ($1.1 million, as of December 31,
2007) are NIS-denominated bonds. Consequently, our financial results are affected by
fluctuations in the rates of exchange between the U.S. dollar and the NIS. In 2005, the
NIS depreciated against the U.S. dollar by approximately 7%. As a result, in 2005, we
recorded a foreign currency exchange loss of $102,000. In comparison, in 2006 and 2007,
the NIS appreciated against the U.S. dollar by approximately 8% and 9%, respectively. As a
result, in 2006 and 2007, we recorded a foreign currency exchange gain of $164,000 and
$241,000, respectively.
72
|
ITEM 12.
|
|
DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
|
Not
applicable.
PART II
|
ITEM 13.
|
|
DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES
|
None.
|
ITEM 14.
|
|
MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|
The
effective date of our first registration statement, filed on Form F-1, under the
Securities Act of 1933, as amended (No. 333-142605) relating to the initial public
offering of our ordinary shares in the United States, was May 23, 2007. The offering
commenced on May 23, 2007 and terminated after the sale of all the securities registered.
The offering was managed by Oppenheimer & Co. and JMP Securities LLC.
In
the offering, we sold an aggregate of 2,226,300 ordinary shares (including over allotment
option shares) for an aggregate offering price of approximately $30.1 million. The amount
of underwriting discount paid by us in the offering was $2.1 million and the costs of the
offering, not including the underwriting discount, were approximately $1.3 million.
The net proceeds that we received as
a result of the offering were approximately $27 million. As of December 31, 2007, all of
our net proceeds were in cash and cash equivalents (primarily commercial paper). We intend
to use such net proceeds for general corporate purposes, including working capital and
capital expenditures. None of the net proceeds of the offering was paid directly or
indirectly to any director, officer, general partner of ours or to their associates,
persons owning 10% or more of any class of our equity securities, or to any of our
affiliates.
|
ITEM 15.
|
|
CONTROLS AND PROCEDURES
|
Not
applicable.
|
ITEM 15T.
|
|
CONTROLS
AND PROCEDURES
|
We
maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and that such information is accumulated and
communicated to our chief executive officer and chief financial officer to allow timely
decisions regarding required disclosure. Our management, including our chief executive
officer and chief financial officer, conducted an evaluation of our disclosure controls
and procedures, as defined under Exchange Act Rule 13a-15(e), as of the end of the period
covered by this Annual Report on Form 20-F. Based upon that evaluation, our chief
executive officer and chief financial officer have concluded that, as of such date, our
disclosure controls and procedures were effective.
This
annual report does not include a report of management’s assessment regarding internal
control over financial reporting or an attestation report of our company’s registered
public accounting firm due to a transition period established by rules of the Securities
and Exchange Commission for newly public companies.
73
|
ITEM 16A.
|
|
AUDIT
COMMITTEE FINANCIAL EXPERT
|
Our
board of directors has determined that each of Dov Kleiman and Martin Bandel, independent
directors, qualifies as an audit committee financial expert as defined by rules of the
Securities and Exchange Commission.
We
have adopted a code of ethics that applies to our chief executive officer and all senior
financial officers of our company, including the chief financial officer, chief accounting
officer or controller, or persons performing similar functions. Our code of ethics is
available on our website at
http://www.starlims.com/company/STARLIMS_Ethics.htm
. If we
make any substantive amendment to the code of ethics or grant any waivers, including any
implicit waiver, from a provision of the codes of ethics, we will disclose the nature of
such amendment or waiver on our website.
|
ITEM 16C.
|
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
Fees Paid to Independent
Public Accountants
The
following table sets forth, for each of the years indicated, the fees paid to our
principal independent registered public accounting firm. Since the listing of our ordinary
shares on the NASDAQ Global Market in May 2007, all of such fees were pre-approved in
advance by our Audit Committee.
|
|
|
Year Ended December 31,
|
|
|
Services Rendered
|
2006
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audit (1)
|
|
|
$
|
75,000
|
|
$
|
110,000
|
|
|
|
Audit-related
|
|
|
|
--
|
|
|
--
|
|
|
|
Tax (2)
|
|
|
|
70,000
|
|
|
113,000
|
|
|
|
Other (3)
|
|
|
|
|
|
|
186,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
145,000
|
|
$
|
409,000
|
|
|
|
(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 registered public
accounting firm can reasonably provide.
|
|
|
(2)
|
Tax
fees relate to services performed by tax experts of our independent
registered public accounting firm and by the auditors of our foreign
subsidiaries relating to tax compliance and advice.
|
|
|
(3)
|
Other
fees in 2007 primarily relate to services provided in connection with our
initial public offering in the United States in May 2007.
|
Pre-Approval Policies
and Procedures
Our
audit committee has adopted a policy and procedures for the pre-approval of audit and
non-audit services rendered by our independent registered public accounting firm,
Brightman Almagor & Co., Certified Public Accountants, A Member Firm of Deloitte
Touche Tohmatsu. Pre-approval of an audit or non-audit service may be given as a general
pre-approval, as part of the audit committee’s approval of the scope of the
engagement of our independent registered public accounting firm, or on an individual
basis. Any proposed services exceeding general pre-approved levels also require specific
pre-approval by our audit committee. The policy prohibits retention of the independent
registered public accounting firm to perform the prohibited non-audit functions defined in
Section 201 of the Sarbanes-Oxley Act or the rules of the Securities and Exchange
Committee, and also requires the audit committee to consider whether proposed services are
compatible with the independence of the independent registered public accounting firm.
74
|
ITEM 16D.
|
|
EXEMPTIONS
FROM THE LISTING REQUIREMENTS AND STANDARDS FOR AUDIT COMMITTEE
|
Not
applicable.
|
ITEM 16E.
|
|
PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
|
Issuer Purchase of
Equity Securities
Neither
we nor any affiliated purchaser has purchased any of our securities during 2007.
PART III
|
ITEM 17.
|
|
FINANCIAL
STATEMENTS
|
We
have elected to furnish financial statements and related information specified in Item 18.
|
ITEM 18.
|
|
FINANCIAL
STATEMENTS
|
Consolidated Financial Statements
of STARLIMS Technologies Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index to Consolidated Financial Statements
|
F-1
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
F-2
|
|
|
|
|
|
Consolidated Balance Sheets
|
F-3
|
|
|
|
|
|
Consolidated Statements of Income
|
F-4
|
|
|
|
|
|
Statements of Changes in Shareholders' Equity and Other Comprehensive Income
|
F-5
|
|
|
|
|
|
Consolidated Statements of Cash Flows
|
F-6- F-7
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
F-8- F-43
|
Index
to Exhibits
|
|
1.1
|
English
Translation of Memorandum of Association of the Registrant (1)
|
|
|
1.2
|
English
Translation of Articles of Association of the Registrant (2)
|
|
|
1.3
|
English
Translation of Certificate of Name Change (3)
|
|
|
2.1
|
Specimen
of Ordinary Share Certificate (4)
|
|
|
3.1
|
English
Translation of Voting Agreement dated October 31, 1993 by and among Messrs. Itschak
Friedman, Dinu Toiba and Chaim Friedman, as amended on
December 21, 2005 (5)
|
|
|
4.1
|
English
Translation of Management and Consulting Agreement dated November 1, 1993 with
Sivanir (Management Services) 1992 Ltd. (6)
|
75
|
|
4.4
|
English
Translation of 2006 Employee Option Plan (9)
|
|
|
4.5
|
2007
Restricted Stock Unit Plan
|
|
|
8.1
|
List
of Subsidiaries of the Registrant
|
|
|
12.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended
|
|
|
12.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended
|
|
|
13.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
13.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
15.1
|
Consent
of Brightman Almagor & Co., a member firm of Deloitte Touche Tohmatsu
|
|
|
(1)
|
Filed
as Exhibit 3.1 to the Registrant’s Registration Statement on Form
F-1/A, registration number 333-142605, filed with the Securities and
Exchange Commission, and incorporated herein by reference.
|
|
|
(2)
|
Filed
as Exhibit 3.2 to the Registrant’s Registration Statement on Form
F-1/A, registration number 333-142605, filed with the Securities and
Exchange Commission, and incorporated herein by reference.
|
|
|
(3)
|
Filed
as Exhibit 3.3 to the Registrant’s Registration Statement on Form
F-1, registration number 333-142605, filed with the Securities and
Exchange Commission, and incorporated herein by reference.
|
|
|
(4)
|
Filed
as Exhibit 4.1 to the Registrant’s Registration Statement on Form
F-1/A, registration number 333-142605, filed with the Securities and
Exchange Commission, and incorporated herein by reference.
|
|
|
(5)
|
Filed
as Exhibit 10.7 to the Registrant’s Registration Statement on Form
F-1, registration number 333-142605, filed with the Securities and
Exchange Commission, and incorporated herein by reference.
|
|
|
(6)
|
Filed
as Exhibit 10.3 to the Registrant’s Registration Statement on Form
F-1, registration number 333-142605, filed with the Securities and
Exchange Commission, and incorporated herein by reference.
|
|
|
(7)
|
Filed
as Exhibit 10.4 to the Registrant’s Registration Statement on Form
F-1, registration number 333-142605, filed with the Securities and
Exchange Commission, and incorporated herein by reference.
|
|
|
(8)
|
Filed
as Exhibit 10.5 to the Registrant’s Registration Statement on Form
F-1, registration number 333-142605, filed with the Securities and
Exchange Commission, and incorporated herein by reference.
|
|
|
(9)
|
Filed
as Exhibit 10.6 to the Registrant’s Registration Statement on Form
F-1, registration number 333-142605, filed with the Securities and
Exchange Commission, and incorporated herein by reference.
|
76
STARLIMS TECHNOLOGIES LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F - 1
|
Brightman Almagor
1 Azrieli Center
Tel Aviv 67021
P.O.B. 16593, Tel Aviv 61164
Israel
Tel: +972 (3) 608 5555
Fax: +972 (3) 609 4022
info@deloitte.co.il
www.deloitte.com
|
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
STARLIMS Technologies Ltd.
We have audited the accompanying
consolidated balance sheets of STARLIMS Technologies
Ltd. and its subsidiaries (the
“Company”) as of December 31, 2006 and 2007, and the related consolidated
statements of income, changes in shareholders’ equity and other comprehensive
income, and cash flows for each of the three years in the period ended December 31, 2007.
These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its 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 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, as
well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of STARLIMS Technologies
Ltd. and its subsidiaries as of
December 31, 2006 and 2007, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2007, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants
A Member Firm of Deloitte Touche Tohmatsu
Tel Aviv, Israel
March 30, 2008
F - 2
STARLIMS TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share data and per share data)
|
|
|
As of December 31,
|
|
|
Note
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
$
|
2,539
|
|
$
|
31,704
|
|
|
Restricted short-term deposits
|
|
|
|
|
|
|
196
|
|
|
195
|
|
|
Marketable securities - available-for-sale
|
|
|
|
4
|
|
|
2,334
|
|
|
1,012
|
|
|
Trade receivables (net of allowance
|
|
|
|
for doubtful accounts of $291 and $192, respectively)
|
|
|
|
5
|
|
|
8,966
|
|
|
9,215
|
|
|
Other current assets
|
|
|
|
6
|
|
|
949
|
|
|
1,667
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
14,984
|
|
|
43,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Assets
|
|
|
|
Marketable securities - held-to-maturity
|
|
|
|
4
|
|
|
1,435
|
|
|
2,206
|
|
|
Other long-term assets
|
|
|
|
7
|
|
|
859
|
|
|
564
|
|
|
Fixed assets, net
|
|
|
|
8
|
|
|
1,481
|
|
|
1,601
|
|
|
Goodwill
|
|
|
|
3
|
|
|
1,137
|
|
|
1,326
|
|
|
Other intangible assets, net
|
|
|
|
9
|
|
|
69
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
Total long-term assets
|
|
|
|
|
|
|
4,981
|
|
|
5,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
$
|
19,965
|
|
$
|
49,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
Trade accounts payable
|
|
|
|
|
|
$
|
356
|
|
$
|
201
|
|
|
Deferred revenues
|
|
|
|
|
|
|
1,821
|
|
|
2,276
|
|
|
Other current liabilities and accrued expenses
|
|
|
|
10
|
|
|
2,292
|
|
|
2,291
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
|
|
4,469
|
|
|
4,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Liabilities
|
|
|
|
Long-term deferred revenues
|
|
|
|
|
|
|
99
|
|
|
68
|
|
|
Accrued severance pay
|
|
|
|
11
|
|
|
32
|
|
|
52
|
|
|
Deferred taxes
|
|
|
|
16
|
|
|
1,396
|
|
|
841
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
|
|
|
|
1,527
|
|
|
961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' Equity
|
|
|
|
13
|
|
|
|
|
|
|
|
|
Ordinary shares, NIS 1.00 par value;
|
|
|
|
authorized 15,000,000 shares as of December 31, 2006 and 2007;
|
|
|
|
issued 7,764,869 and 9,991,169 shares as of December 31, 2006 and 2007
|
|
|
|
respectively; outstanding 6,490,500 and 8,724,675 shares as of December 31, 2006
|
|
|
|
and 2007, respectively
|
|
|
|
|
|
|
2,600
|
|
|
3,151
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
4,325
|
|
|
30,893
|
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
104
|
|
|
260
|
|
|
Retained earnings
|
|
|
|
|
|
|
9,672
|
|
|
12,267
|
|
|
Treasury stock, at cost - 1,274,369 and 1,266,494 ordinary shares, respectively
|
|
|
|
|
|
|
(2,732
|
)
|
|
(2,773
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
|
|
|
|
13,969
|
|
|
43,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
|
|
|
|
$
|
19,965
|
|
$
|
49,527
|
|
|
|
|
|
|
|
|
|
The
accompanying notes form an integral part of the consolidated financial statements.
F - 3
STARLIMS TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in thousands, except share data and per share data)
|
|
|
Year Ended December 31,
|
|
|
Note
|
2 0 0 5
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
Software licensing
|
|
|
|
|
|
$
|
9,645
|
|
$
|
8,286
|
|
$
|
10,656
|
|
|
Maintenance
|
|
|
|
|
|
|
2,169
|
|
|
2,841
|
|
|
3,241
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product revenues
|
|
|
|
|
|
|
11,814
|
|
|
11,127
|
|
|
13,897
|
|
|
Services
|
|
|
|
|
|
|
4,400
|
|
|
8,638
|
|
|
9,878
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
|
|
|
|
16,214
|
|
|
19,765
|
|
|
23,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
Cost of products
|
|
|
|
|
|
|
120
|
|
|
31
|
|
|
374
|
|
|
Cost of services
|
|
|
|
|
|
|
3,306
|
|
|
5,557
|
|
|
8,095
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
|
|
|
|
3,426
|
|
|
5,588
|
|
|
8,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
12,788
|
|
|
14,177
|
|
|
15,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
Research and development
|
|
|
|
|
|
|
1,373
|
|
|
1,866
|
|
|
2,872
|
|
|
Selling and marketing
|
|
|
|
|
|
|
4,099
|
|
|
4,741
|
|
|
5,792
|
|
|
General and administrative
|
|
|
|
|
|
|
1,992
|
|
|
2,634
|
|
|
2,799
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
|
|
|
|
7,464
|
|
|
9,241
|
|
|
11,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
5,324
|
|
|
4,936
|
|
|
3,843
|
|
|
|
|
|
|
Financial income, net
|
|
|
|
15
|
|
|
271
|
|
|
610
|
|
|
1,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
5,595
|
|
|
5,546
|
|
|
5,394
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
16
|
|
|
1,969
|
|
|
1,762
|
|
|
885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
$
|
3,626
|
|
$
|
3,784
|
|
$
|
4,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
$
|
0.57
|
|
$
|
0.59
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of ordinary shares used in computing basic
|
|
|
|
earnings per share
|
|
|
|
17
|
|
|
6,380,774
|
|
|
6,459,030
|
|
|
7,799,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
$
|
0.56
|
|
$
|
0.58
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of ordinary shares used in computing diluted
|
|
|
|
earnings per share
|
|
|
|
17
|
|
|
6,506,904
|
|
|
6,559,985
|
|
|
7,897,036
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes form an integral part of the consolidated financial statements.
F - 4
STARLIMS TECHNOLOGIES LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND OTHER COMPREHENSIVE INCOME
(U.S. dollars in thousands, except share data)
|
|
Ordinary shares (*)
|
|
|
|
|
|
|
|
Number
of shares
|
Amount
|
Additional
paid-in
capital
|
Accumulated
other
comprehensive
income
|
Retained
earnings
|
Treasury
Stock,
at cost
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2005
|
|
|
|
7,765
|
|
$
|
2,600
|
|
$
|
4,394
|
|
$
|
169
|
|
$
|
3,633
|
|
$
|
(3,353
|
)
|
$
|
7,443
|
|
|
Comprehensive income:
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,626
|
|
|
|
|
|
3,626
|
|
|
Losses on marketable securities
|
|
|
|
available-for-sale, net of tax:
|
|
|
|
Realized gains included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
(107
|
)
|
|
|
|
|
|
|
|
(107
|
)
|
|
Unrealized losses
|
|
|
|
|
|
|
|
|
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,389
|
)
|
|
|
|
|
(1,389
|
)
|
|
Exchange rate differences
|
|
|
|
attributable to dividend paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
18
|
|
|
Issuance of treasury stock
|
|
|
|
against exercise of options
|
|
|
|
|
|
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
121
|
|
|
55
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
|
|
7,765
|
|
|
2,600
|
|
|
4,468
|
|
|
12
|
|
|
5,888
|
|
|
(3,232
|
)
|
|
9,736
|
|
|
Comprehensive income:
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,784
|
|
|
|
|
|
3,784
|
|
|
Translation adjustment of
|
|
|
|
financial statements of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
(24
|
)
|
|
Gains (losses) on marketable securities
|
|
|
|
available-for-sale, net of tax:
|
|
|
|
Realized gains included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
(103
|
)
|
|
|
|
|
|
|
|
(103
|
)
|
|
Unrealized gains
|
|
|
|
|
|
|
|
|
|
|
|
|
219
|
|
|
|
|
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of treasury stock
|
|
|
|
against exercise of options
|
|
|
|
|
|
|
|
|
|
(284
|
)
|
|
|
|
|
|
|
|
500
|
|
|
216
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
|
7,765
|
|
|
2,600
|
|
|
4,325
|
|
|
104
|
|
|
9,672
|
|
|
(2,732
|
)
|
|
13,969
|
|
|
Comprehensive income:
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,509
|
|
|
|
|
|
4,509
|
|
|
Translation adjustments of
|
|
|
|
financial statements of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
232
|
|
|
|
|
|
|
|
|
232
|
|
|
Gains (losses) on marketable securities
|
|
|
|
available-for-sale, net of tax:
|
|
|
|
Realized gains included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
(90
|
)
|
|
|
|
|
|
|
|
(90
|
)
|
|
Unrealized gains
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of shares, net
|
|
|
|
2,226
|
|
|
551
|
|
|
26,426
|
|
|
|
|
|
|
|
|
|
|
|
26,977
|
|
|
Dividend declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,914
|
)
|
|
|
|
|
(1,914
|
)
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(93
|
)
|
|
(93
|
)
|
|
Issuance of treasury stock
|
|
|
|
against exercise of options
|
|
|
|
|
|
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
52
|
|
|
17
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
177
|
|
|
|
|
|
|
|
|
|
|
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
$
|
9,991
|
|
$
|
3,151
|
|
$
|
30,893
|
|
$
|
260
|
|
$
|
12,267
|
|
$
|
(2,773
|
)
|
$
|
43,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Number
of shares is presented in thousands.
|
The accompanying notes form an
integral part of the consolidated financial statements.
F - 5
STARLIMS TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
|
|
Year Ended December 31,
|
|
|
2 0 0 5
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS - OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$
|
3,626
|
|
$
|
3,784
|
|
$
|
4,509
|
|
|
Adjustments to reconcile net income to cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
|
|
|
125
|
|
|
378
|
|
|
510
|
|
|
Stock-based compensation
|
|
|
|
140
|
|
|
141
|
|
|
177
|
|
|
Gains related to marketable securities
|
|
|
|
(117
|
)
|
|
(192
|
)
|
|
(326
|
)
|
|
Capital loss on sale of fixed assets
|
|
|
|
-
|
|
|
-
|
|
|
8
|
|
|
Increase in accrued severance pay
|
|
|
|
7
|
|
|
-
|
|
|
20
|
|
|
Deferred income taxes
|
|
|
|
152
|
|
|
174
|
|
|
(732
|
)
|
|
The effect of exchange rate changes
|
|
|
|
102
|
|
|
(164
|
)
|
|
(241
|
)
|
|
Changes in assets and liabilities:
|
|
|
|
Increase in trade receivables
|
|
|
|
(2,704
|
)
|
|
(1,406
|
)
|
|
(30
|
)
|
|
Increase (decrease) in allowance for doubtful accounts
|
|
|
|
41
|
|
|
80
|
|
|
(99
|
)
|
|
Decrease (increase) in other current assets
|
|
|
|
(140
|
)
|
|
(460
|
)
|
|
75
|
|
|
Increase (decrease) in trade accounts payable
|
|
|
|
79
|
|
|
(15
|
)
|
|
(182
|
)
|
|
Increase in deferred revenues
|
|
|
|
580
|
|
|
408
|
|
|
395
|
|
|
Increase (decrease) in other current liabilities
|
|
|
|
1,276
|
|
|
(587
|
)
|
|
47
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
|
3,167
|
|
|
2,141
|
|
|
4,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS - INVESTING ACTIVITIES
|
|
|
|
Investments in available-for-sale marketable securities
|
|
|
|
(1,857
|
)
|
|
(1,982
|
)
|
|
(740
|
)
|
|
Proceeds from sale of available-for-sale marketable securities
|
|
|
|
1,570
|
|
|
2,380
|
|
|
1,563
|
|
|
Investment in held-to-maturity marketable securities
|
|
|
|
(25
|
)
|
|
-
|
|
|
(1,706
|
)
|
|
Proceeds from redemption of held-to-maturity securities
|
|
|
|
-
|
|
|
-
|
|
|
1,685
|
|
|
Investments in deposits, net
|
|
|
|
(60
|
)
|
|
(235
|
)
|
|
(101
|
)
|
|
Loans to employees, net
|
|
|
|
(100
|
)
|
|
(164
|
)
|
|
(64
|
)
|
|
Purchase of fixed assets
|
|
|
|
(265
|
)
|
|
(640
|
)
|
|
(523
|
)
|
|
Proceeds from sale of fixed assets
|
|
|
|
-
|
|
|
-
|
|
|
10
|
|
|
Acquisition of subsidiary, net of cash acquired, and business operation (A)
|
|
|
|
-
|
|
|
(1,049
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
|
(737
|
)
|
|
(1,690
|
)
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS - FINANCING ACTIVITIES
|
|
|
|
Proceeds from issuance of shares, net of issuance costs
|
|
|
|
-
|
|
|
-
|
|
|
26,785
|
|
|
Deferred share issuance costs
|
|
|
|
-
|
|
|
(133
|
)
|
|
-
|
|
|
Proceeds from sale of treasury stock against exercise of options
|
|
|
|
55
|
|
|
216
|
|
|
17
|
|
|
Dividends paid
|
|
|
|
(1,456
|
)
|
|
(1,389
|
)
|
|
(1,914
|
)
|
|
Purchase of treasury stock by the Company
|
|
|
|
-
|
|
|
-
|
|
|
(93
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
|
(1,401
|
)
|
|
(1,306
|
)
|
|
24,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE EFFECT OF EXCHANGE RATE
|
|
|
|
CHANGES ON CASH AND CASH EQUIVALENTS
|
|
|
|
(54
|
)
|
|
(3
|
)
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
|
975
|
|
|
(858
|
)
|
|
29,165
|
|
|
Cash and cash equivalents at the beginning of the year
|
|
|
|
2,422
|
|
|
3,397
|
|
|
2,539
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the year
|
|
|
$
|
3,397
|
|
$
|
2,539
|
|
$
|
31,704
|
|
|
|
|
|
|
|
|
|
The accompanying notes form an
integral part of the consolidated financial statements.
F - 6
STARLIMS TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(cont.)
(U.S. dollars in thousands)
|
|
Year Ended December 31,
|
|
|
2 0 0 5
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for income taxes
|
|
|
$
|
951
|
|
$
|
1,439
|
|
$
|
1,995
|
|
|
|
|
|
|
|
|
|
APPENDIX A - ACQUISITION OF SUBSIDIARY AND BUSINESS OPERATION
|
|
Year Ended December 31,
|
|
|
2 0 0 5
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets (excluding cash and cash equivalents)
|
|
|
$
|
-
|
|
$
|
(844
|
)
|
$
|
-
|
|
|
Fixed assets, net
|
|
|
|
-
|
|
|
(120
|
)
|
|
-
|
|
|
Current liabilities
|
|
|
|
-
|
|
|
1,164
|
|
|
-
|
|
|
Goodwill and other intangible assets
|
|
|
|
-
|
|
|
(1,249
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
$
|
(1,049
|
)
|
$
|
-
|
|
|
|
|
|
|
|
|
|
The
accompanying notes form an integral part of the consolidated financial statements.
F - 7
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 1 –
DESCRIPTION OF BUSINESS AND GENERAL
|
|
STARLIMS
Technologies
Ltd.
(the “Company”), an Israeli corporation whose shares are traded on the Tel-Aviv
Stock Exchange and NASDAQ, separately and together with its subsidiaries (the “Group”),
develops, markets and sells configurable off-the-shelf laboratory information management
system (“LIMS”) software solutions trade-named “STARLIMS.”
|
|
|
STARLIMS
manages the collection, processing, storage, retrieval and analysis of information
generated in laboratories. The STARLIMS software improves the reliability of sampling
processes, supports compliance with domestic and international regulations and industry
standards, and provides comprehensive reporting, monitoring and analysis capabilities.
STARLIMS software is installed in numerous laboratories in many countries around the
world. The configurable nature of the software allows the Group to offer solutions to
customers in a wide range of industries and in multiple disciplines, primarily quality
assurance and control, testing and monitoring, and research and development. The primary
users of STARLIMS are government, manufacturing and life sciences organizations. The
Group generates the majority of its revenues from customers based in North America.
|
|
|
As
of December 31, 2007, the Group consists of the following foreign wholly-owned
subsidiaries:
|
|
|
—
|
STARLIMS
Corp.
is incorporated in the U.S. and based in the State of Florida. This subsidiary
sells directly to customers in the U.S. and is engaged with
distributors in many countries.
|
|
|
—
|
STARLIMS
Canada
is incorporated in Canada and based in Montreal. This subsidiary mainly
provides professional services on behalf of STARLIMS Corp. to customers in the life
sciences, and also manages direct sales in Canada.
|
|
|
—
|
STARLIMS
Asia Pacific
which was established in July 2006 is incorporated and based in Hong
Kong. This subsidiary manages the Group’s sales in Asia.
|
|
|
—
|
STARLIMS
Europe
which was established in July 2006 is incorporated in England and based in
London. This subsidiary is responsible for the Group’s sales in Europe.
|
F - 8
STARLIMS TECHNOLOGIES
LTD.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(U.S. dollars in
thousands, except share data)
NOTE 2 –
SIGNIFICANT ACCOUNTING POLICIES
|
|
The
Company’s consolidated financial statements have been prepared in accordance with
generally accepted accounting principles (“GAAP”) in the United States of
America.
|
|
|
B.
|
Principles
of Consolidation
|
|
|
The
consolidated financial statements include the accounts of the Company and its
subsidiaries, all of which are wholly-owned by the Company. Inter-company balances and
transactions have been eliminated. As for goodwill and other intangible assets as a
result of business combinations, see Note 3.
|
|
|
C.
|
Functional
Currency and Financial Statements in U.S. Dollars
|
|
|
The
reporting currency of the Group is the U.S. dollar. The majority of the Group’s
revenues are generated in U.S. dollars (“U.S. dollars”, or “$”) or
linked to the U.S. dollar. In addition, a substantial portion of the Group’s costs
are incurred in U.S. dollars. The Company’s management determined that the U.S.
dollar is the primary currency of the economic environment in which the Group operates.
The functional currency of the Company and its Israeli subsidiaries is the U.S. dollar.
The functional currency of each of the Company’s non-Israeli subsidiaries is the
respective local currency.
|
|
|
Transactions
in currencies other than each Group-entity’s functional currency are translated into
the respective functional currency based on the currency exchange rates at the date of
the transaction, in accordance with the principles set forth in Statement of Financial
Accounting Standards (“SFAS”) No. 52, “
Foreign Currency Translation
”.
All gains and losses from translation of monetary balance sheet items and transactions
denominated in currencies other than the functional currency are recorded in the
statements of income as financial income, net as they arise. Financial income, net in
2005, 2006 and 2007 include net foreign currency transaction gains (losses) of $(102),
$164 and $241, respectively.
|
|
|
The
financial statements of STARLIMS Canada, STARLIMS Asia Pacific and STARLIMS Europe, whose
functional currency is other than the U.S. dollar, are translated into U.S. dollars prior
to their inclusion in the consolidated financial statements, in accordance with the
provisions of SFAS 52, as follows: assets and liabilities are translated using the
year-end exchange rates; statements of income transactions are translated at the date of
the transaction using the current exchange rates. Translation adjustments gains (losses)
for 2005, 2006 and 2007 in the amount of $0, $(24) and $232, respectively, are presented
in shareholders’ equity as “Accumulated Other Comprehensive Income”(“OCI”).
|
F - 9
STARLIMS TECHNOLOGIES
LTD.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(U.S. dollars in
thousands, except share data)
NOTE 2 – SIGNIFICANT ACCOUNTING
POLICIES
(cont.)
|
|
The
preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, and
the disclosure of contingent assets and liabilities as of the date of the financial
statements, as well as the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
|
|
|
E.
|
Cash
and Cash Equivalents
|
|
|
The
Group considers as cash equivalents all highly liquid investments, which include high
rated short-term commercial papers and short-term bank deposits with an original maturity
date of three months or less that are not restricted as to withdrawal or use.
|
|
|
The
Group accounts for investments in marketable securities in accordance with FASB Statement
No. 115, “
Accounting for Certain Investments in Debt and Equity Securities”
as
follows:
|
|
|
(1)
|
Marketable
securities available-for-sale
– Investments in marketable securities
which are not classified as held-to-maturity securities, are classified as
available-for-sale securities. Marketable securities available-for-sale
includes debt and equity securities and are measured at their fair value as of
the balance sheet date. Gains (losses) derived from fair value adjustments, net
of tax, are presented in shareholders’ equity under OCI. Upon realization
of these securities, gains (losses) presented in the OCI are classified to
financial income, net. Costs attributable to realized securities and amounts
reclassified out of OCI are determined based on the specific identification
method.
|
|
|
(2)
|
Marketable
securities held-to-maturity
– Investments in marketable securities,
when the Group has the positive intent and ability to hold until maturity, are
classified as held-to-maturity securities. Such investments are presented at
amortized cost with the addition of interest accrued to balance sheet date
(such interest represents the computed yield on cost from acquisition to
maturity). Interest and amortization of premium related to these securities are
included in financial income, net.
|
|
|
In
debt securities transferred into the held-to-maturity category from the
available-for-sale category, following management’s determination and ability to
hold these securities until maturity, the unrealized holding gain or loss at the date of
the transfer continues to be reported in the OCI, and is amortized over the remaining
life of the security as an adjustment of yield in a manner consistent with the
amortization of the premium.
|
F - 10
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 2 – SIGNIFICANT ACCOUNTING
POLICIES
(cont.)
|
|
G.
|
Allowance
for Doubtful Accounts
|
|
|
The
allowance for doubtful accounts is determined as a percentage of the balance of the trade
receivables based on management estimates and past experience. When and if there is
specific evidence based on which, in management’s estimation, collectibility is not
assured, the allowance for doubtful accounts is computed on the specific identification
basis.
|
|
|
Fixed
assets are stated at cost, net of accumulated depreciation and amortization. Depreciation
is calculated based on the straight-line method, over the estimated economic useful lives
of the assets, as follows:
|
|
|
|
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term land lease and buildings
|
25
|
|
|
Computers and peripheral equipment
|
Mainly 3
|
|
|
Office furniture and equipment (mainly 7 years)
|
5, 7
|
|
|
Leasehold
improvements are amortized by the straight-line method over the shorter of the term of
the lease or the estimated useful life of the improvements.
|
|
|
I.
|
Other
Intangible Assets
|
|
|
Intangible
assets are amortized over their useful lives using a method of amortization that reflects
the pattern in which the economic benefits of the intangible assets are consumed or
otherwise used up, in accordance with FASB No. 142,
“Goodwill and Other
Intangible Assets”
(“SFAS 142”).
|
|
|
Other
intangible assets, comprised of backlog acquired and distribution rights that are not
deemed to have indefinite lives, are amortized on a straight-line method over a period of
one and three years, respectively.
|
|
|
J.
|
Impairment
of long-lived assets
|
|
|
Impairment
examinations and recognition are performed and determined based on the provisions of FASB
Statement No. 144, “
Accounting for the Impairment or Disposal of Long-Lived Assets
” (“SFAS
144”). SFAS 144 requires that long-lived assets and certain identifiable assets held
for use be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of an asset
to be held and used is determined by a comparison of the carrying amount of the asset and
the amount of undiscounted future net cash flows to be generated by the asset. In the
event that an asset is considered to be impaired, an impairment charge is recorded in the
amount by which the carrying amount of the asset exceeds its estimated fair value. During
2005, 2006 and 2007, no impairment losses have been identified.
|
F - 11
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 2 – SIGNIFICANT ACCOUNTING
POLICIES
(cont.)
|
|
Goodwill
resulting from business combinations accounted for under the purchase method.
|
|
|
Goodwill
is the excess of the purchase price over the fair value of identifiable net assets
acquired in business combinations accounted for as purchases. Under SFAS 142, goodwill is
not amortized to earnings, but rather is subject to periodic testing for impairment, at
the reporting unit level, at least annually or more frequently if certain events or
indicators of impairment occur. Impairment is the condition that exists when the carrying
amount of goodwill exceeds its implied fair value.
|
|
|
Measurement
of an impairment loss is an estimate, performed based on the following: If the fair value
of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is
considered not impaired. If the carrying amount of the reporting unit goodwill
exceeds the implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess. The Group uses the discounted cash flow method to determine
the fair value of the reporting unit. During 2005, 2006 and 2007, no impairment losses
have been identified.
|
|
|
L.
|
Provision
for Warranty
|
|
|
The
Group generally provides limited product and services related warranties for a period up
to one year, pursuant to which the Group generally warrants that all licensed products
will perform their stated functions substantially error free and uninterrupted. The Group
also warrants that the software does not include or contain any disabling hardware
device, code, design, or routine that causes the software to be erased or become
inoperable. Accruals for known matters are recorded if a loss is probable and can be
reasonably estimated. Accruals for estimated incurred unidentified matters are recorded
based on management’s estimate and past experience. Based on historical experience,
accruals for the periods presented were not recorded due to immateriality.
|
|
|
The
liability for severance pay benefits to Israeli employees, which according to Israeli Law
is not contingent on future service, is accounted for based on the provisions of EITF
88-1
“Determination of Vested Benefit Obligation for a Defined Benefit Pension
Plan
”. According to this guidance, the obligation is recorded as if it was
payable at each balance sheet date (the so called “shut-down method”). The
obligation is generally based upon length of service and the employee’s last monthly
salary and is recognized on an undiscounted basis. See also Note 11A.
|
|
|
Amounts
contributed
with respect to the Group’s non-Israeli employees, all of which
are under defined contribution plans, are accounted for in accordance with the provisions
of FASB Statement No. 87 “
Employers’ Accounting for Pensions
”. Said
contributions are expensed as incurred.
|
F - 12
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
|
|
(1)
|
The
Group accounts for income taxes in accordance with FASB Statement No. 109,
“
Accounting for Income Taxes
” (“SFAS 109”) and
interpretation related thereto, that is FIN 48 “
Accounting for
Uncertainty
in Income Taxes
” (“FIN 48”).
|
|
|
(2)
|
Deferred
income taxes are determined by the asset and liability method based on the
estimated future tax effects attributable to temporary differences between
income tax bases of assets and liabilities and their reported amounts in the
financial statements, and to carryforwards for tax losses and deductions.
Deferred tax balances are computed using the enacted tax rates to be in effect
at the time when these differences are expected to reverse, as they are known
at the balance sheet date.
|
|
|
Deferred
tax assets and liabilities are classified as current or non-current according to the
classification of the respective asset or liability, or the expected reversal date of the
specific temporary difference, if not related to a specific asset or liability.
|
|
|
Valuation
allowances in respect of deferred tax assets are established when it is more likely than
not that all or a portion of the deferred income tax assets will not be realized.
|
|
|
(3)
|
Tax
positions taken or expected to be taken are accounted for in accordance with
the provisions of FIN 48. The term
tax position
refers to a position in
a previously filed tax return or a position expected to be taken in a future
tax return that is reflected in measuring current or deferred income tax assets
and liabilities for interim or annual periods. A tax position can result in a
permanent reduction of income tax payable, a deferral of income taxes otherwise
currently payable to future years, or a change in the expected realizability of
deferred tax assets.
|
|
|
The
financial statements effects of a tax position is initially recorded when it is
more-likely-than-not, based on the technical merits, the facts ,circumstances and
information available as of the balance sheet date, that the position will be sustained
upon examination by the relevant taxing position. Management evaluates each tax position
without consideration of the possibility of offset or aggregation with other positions.
|
|
|
A
tax position that meets the more-likely-than-not threshold measured as the largest amount
of tax benefit that is greater than 50 percent likely of being realized upon ultimate
settlement with a taxing authority that has full knowledge of all relevant information. A
previously recognized tax position is derecognized in the first period in which it is no
longer more-likely-than-not that the tax position would be sustained upon examination by
an appropriate taxing authority.
|
|
|
Interest
paid or to be paid on an underpayment of income taxes is included in income tax expense.
Penalties are provided for when a tax position does not meet the minimum statutory
threshold to avoid payment of penalties, and are included in income tax expense.
|
F - 13
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
|
|
(4)
|
Taxes
which would apply in the event of disposal of investments in foreign
subsidiaries have not been taken into account in determining deferred income
taxes, as it is the Company’s policy to hold these investments for
long-term rather than realizing them in the foreseeable future.
|
|
|
O.
|
Derivative
Financial Instruments
|
|
|
The
Group, from time to time, enters into foreign exchange transactions, mainly traded
options. The results of these transactions, which do not qualify for hedge accounting,
are reflected in the statements of income in financial income, net. Gains from said
transactions for each of the years ended December 31, 2005, 2006 and 2007 were determined
based on fair value, and amounted to $39, $2 and $0, respectively.
|
|
|
P.
|
Fair
Value of Financial Instruments
|
|
|
The
financial instruments of the Group consist primarily of cash and cash equivalents,
restricted short-term deposits, marketable securities, trade receivables, trade accounts
payable and other receivables and payables. In view of their nature, the fair values of
financial instruments included in the working capital are usually identical or close to
their carrying amounts as of the balance sheet date.
|
|
|
The
ordinary shares of the Company held by the Group (“treasury stock”) are
presented at cost and deducted from the Company’s shareholders’ equity. The
results of realization of the ordinary shares accounted for as treasury stock are
reflected in the statements of changes in shareholders’ equity.
|
|
|
The
Group’s revenues are derived from licensing its STARLIMS software products, which
include annual maintenance contracts, and rendering services which typically include
consulting, implementation, training and technical support. The Group’s typical
licensing transaction provides a perpetual non-exclusive license to use STARLIMS software
products, which use is restricted in terms of either the number of users or the specified
locations of use. The Group generally licenses its software products under multiple
element arrangements, in cases were the customer requires a combination of maintenance,
consulting, implementation, training, or other services, in addition to the software
license.
|
F - 14
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 2 – SIGNIFICANT ACCOUNTING
POLICIES
(cont.)
|
|
R.
|
Revenue
Recognition
(cont.)
|
|
|
The
Group recognizes revenues pursuant to the provisions of American Institute of Certified
Public Accountants Statement of Position 97-2, “
Software Revenue Recognition
” (“SOP
97-2”), as amended by SOP 98-9, “
Modification of SOP 97-2, Software Revenue
Recognition With Respect to Certain
Transactions
”. While these Statements
govern the basis for recognition of revenues from the operations of the Group, judgment
and the use of estimates are required in connection with the determination of the amount
of software licensing and services revenues, as well as the amount of deferred revenues,
to be recognized in each accounting period.
|
|
|
(1)
|
Product
revenues – software licensing and maintenance
|
|
|
Revenues
from software licensing are recognized when all the criteria under SOP 97-2 are met, as
follows: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred,
(iii) the fee is fixed or determinable, and (iv) collectibility is probable.
|
|
|
Revenues
from post-contract customer support arrangements (“Maintenance Contracts”),
which are bundled in the initial license, are separated from the initial licensing fee
based on Vendor Specific Objective Evidence (“VSOE”) of fair value and
recognized ratably over the contractual period of the arrangement (typically one year).
Revenues from renewal of Maintenance Contracts, generally covering a period of one year,
are recognized ratably over the contractual period of the arrangement. Maintenance
Contracts provide the right to unspecified software upgrades and updates on a
when-and-if-available basis.
|
|
|
In
multiple-element arrangements that include software licensing and services that are not
essential to the functionality of the software, revenues allocated to the services are
accounted for separately. In such cases, revenues are recognized using the residual
method when VSOE of fair value exists for all of the undelivered elements under the
arrangement. The Group allocates revenues to each undelivered element based on its
respective fair value which is the price charged when that element is sold separately, or
by reference to a renewal rate specified in the related arrangement. Revenues are
recognized for the delivered elements when (i) VSOE of the fair values of all undelivered
elements exist, and (ii) all revenue recognition criteria of SOP 97-2 are satisfied.
|
|
|
Revenues
for arrangements that include services deemed as essential to the functionality of the
software, or involve significant production, modification, or customization of the
software, are recognized in accordance with SOP 81-1, “
Accounting for Performance
of
Construction-Type and Certain Production-Type Contracts
”. Accordingly,
these revenues are recognized based on the percentage of completion method. If such
arrangements include elements that do not qualify for contract accounting (generally
bundled Maintenance Contracts), said elements are accounted for separately provided that
all applicable revenue recognition criteria are satisfied. Provisions for estimated
losses attributable to uncompleted contracts are made in the period in which such losses
are initially determined, in an amount equal to the estimated loss on the entire contract.
|
F - 15
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 2 – SIGNIFICANT ACCOUNTING
POLICIES
(cont.)
|
|
R.
|
Revenue
Recognition
(cont.)
|
|
|
(1)
|
Product
revenues – software licensing and maintenance
(cont.)
|
|
|
In
arrangements in which sales to end customers are made by a distributor and the Group is
the primary obligor and bears the risks associated with the transaction, revenues are
recorded upon the sale to the end-customer in an amount equal to the end customer
purchase price, provided all other revenue recognition criteria of SOP 97-2 are
satisfied. In arrangements in which sales are made to the distributor under
non-exchangeable, non-refundable and non-returnable terms, the distributor is considered
as the end-customer and revenues are recorded upon the sale to the distributor in an
amount equal to distributor purchase price, provided all other revenue recognition
criteria of SOP 97-2 are satisfied.
|
|
|
Services
include professional services, training and technical support.
|
|
|
—
|
Professional
services
– Professional services include consulting services and implementation
services. Revenues from professional services that are time-and-material-based are
recognized as such services are provided based on time and materials invested. Revenues
from professional services that are milestone-based are recognized upon the completion of
each respective milestone.
|
|
|
—
|
Training
– Revenues
from training are recognized as the training is provided.
|
|
|
—
|
Technical
support
– Revenues from technical support arrangements are recognized ratably
over the contractual period of the arrangements (typically one year).
|
|
|
—
|
Out-of-pocket
expenses
– Reimbursement of out-of-pocket expenses that are billed to customers
are included in revenues from services as such expenses are incurred.
|
|
|
Payments
for Maintenance Contracts attributable to periods subsequent to the balance sheet date,
as well as payments received from customers for software licensing, for which revenue
recognition criteria have not been met as of the balance sheet date, or payments for
services that have not yet been provided as of such date, are deferred to subsequent
periods.
|
F - 16
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 2 – SIGNIFICANT ACCOUNTING
POLICIES
(cont.)
|
|
—
|
Cost
of products
– Cost of products include purchases and royalties for third party
software components, which are directly related to the sale of products.
|
|
|
—
|
Cost
of services
– Cost of services include payroll costs of professional service
employees, sub-contracting costs related to providing services, and other direct and
indirect costs related to the provision of professional services, training and technical
support .
|
|
|
T.
|
Research
and Development Costs
|
|
|
Software
research and development costs incurred prior to the establishment of technological
feasibility are charged to research and development expenses as incurred. Software
development costs incurred subsequent to the establishment of technological feasibility
through the period of general market availability of the products are capitalized,
subject to materiality, in accordance with the provisions set forth in FASB Statement No.
86, “
Accounting for the Costs of Computer
Software to be Sold, Leased or
Otherwise Marketed
”. Based on the Group’s product research and development
process, technological feasibility is established upon completion of a working model only
when all planning, designing, coding and testing have been completed in accordance with
design specifications. To date, software research and development costs associated with
the establishment of technological feasibility were uncertain until release and
accordingly the Group has expensed all software research and development costs.
|
|
|
U.
|
Selling
and Marketing Costs
|
|
|
—
|
Advertising
costs
– Advertising costs are charged to selling and marketing expenses as
incurred. Such expenses totaled $887, $752 and $1,164 in the years ended December 31,
2005, 2006 and 2007, respectively.
|
|
|
—
|
Commissions
to distributors
– In transactions in which the Group is the primary obligor,
entitled commissions to distributors are included in selling and marketing expenses. Such
commissions are accrued for in the period in which the related revenues are recorded.
|
|
|
In
arrangements in which sales are made to the distributor under non-exchangeable,
non-refundable and non-returnable terms and the distributor is considered as the
end-customer, entitled commissions to distributors are characterized as a reduction from
revenues. Such commissions are accrued for in the period in which the related revenues
are recorded.
|
|
|
V.
|
Other
Comprehensive Income
|
|
|
Other
comprehensive income, presented in shareholders’ equity, includes unrealized gains
(losses) on marketable securities available-for-sale and those related to such securities
that were reclassified to held-to-maturity, net of related deferred income taxes, and
the effect of translation adjustments of financial
statements of subsidiaries whose functional currency is not the U.S. dollar. The
accumulated other comprehensive income as of December 31, 2006 and 2007 amounted to $104
and $260, respectively. Said amounts are comprised primarily of the effect of translation
adjustments.
|
F - 17
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 2 – SIGNIFICANT ACCOUNTING
POLICIES
(cont.)
|
|
W.
|
Stock-Based
Compensation
|
|
|
The
Group accounts for stock-based compensation to employees and officers in accordance with
FASB Statement No. 123 (Revised 2004), “
Share-Based Payment
” (“SFAS
123(R)”), applying the modified prospective application method, and Securities and
Exchange Commission Staff Accounting Bulletin (“SAB”) No. 107 (“SAB
107”) and SAB 110.
|
|
|
In
accordance with SFAS 123(R), the Group measures the compensation costs associated with
share-based payment transactions, which include grant of options and restricted stock
units (“RSU”) to employees, based on the fair value at the grant date. The
costs associated with the awards to employees are expensed over the vesting period of
each grant, according to the straight-line method. The fair value of each option granted
to employees is estimated on the date of grant using the Black-Scholes option-pricing
model; the fair value of each RSU granted to employees is estimated on the date of grant
using the Monte Carlo option-pricing model; all with the weighted average assumptions
detailed in Note 13E(7).
|
|
|
Share-based
payment transactions also include liability award related to conditional adjustments to
the salaries of certain officers related to potential increased compensation to officers
based on the Company’s share price appreciation. The costs associated with the
liability award are expensed over the estimated period over which the liability would
become effective, according to the straight-line method. The fair value of the liability
award is estimated on the date of grant and at each balance sheet date using the Monte
Carlo option-pricing model with the weighted average assumptions detailed in Note 12A.
|
|
|
Basic
earnings per ordinary share are presented in accordance with SFAS 128 “
Earnings
per Share
” (“SFAS 128”). Accordingly, the basic earnings per ordinary
share are computed by dividing net income by the weighted-average number of ordinary
shares issued and outstanding during the year. Such number of ordinary shares excludes
treasury stock on a weighted-average basis.
|
|
|
Diluted
earnings per ordinary share are computed by dividing net income by the weighted-average
number of ordinary shares issued and outstanding during the year with the addition of
potentially dilutive ordinary shares. Such number of ordinary shares excludes treasury
stock on a weighted-average basis. Potentially dilutive ordinary shares reflect the
ordinary shares that would result from the assumed exercise of employee options, computed
using the treasury stock method in accordance with SFAS 128.
|
F - 18
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 2 – SIGNIFICANT ACCOUNTING
POLICIES
(cont.)
|
|
Y.
|
Recent
Accounting Pronouncements
(cont.)
|
|
|
(1)
|
SFAS
No. 157, “Fair Value Measurements” –
In September 2006, the
FASB issued SFAS No. 157,
“Fair Value Measurements
” (“SFAS
157”). This Standard defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. The provisions of this Standard are
effective on January 1, 2008. The FASB issued a Staff Position to defer the
effective date of this Standard for one year for all non financial assets and
non financial liabilities, except for those items that are recognized or
disclosed at fair value in the financial statements on a recurring basis. The
adoption of SFAS 157 is not expected to have material effect on the Company’s
financial position or results of operations.
|
|
|
(2)
|
SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities”
– In February 2007, the FASB issued SFAS
No. 159, “
The Fair Value Option for Financial Assets and
Financial
Liabilities
” (“SFAS 159”). SFAS 159 permits entities to
choose to measure many financial instruments, including available-for-sale and
held-to-maturity securities, and certain other items at fair value at specified
election dates. According to SFAS 159, a business entity that has elected to
apply its provisions shall report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent
reporting period. If the fair value option is elected for available-for-sale
and held-to-maturity securities at the effective date, cumulative unrealized
gains and losses shall be included in the retained earnings as
cumulative-effect adjustment. SFAS 159 is effective as of the beginning of the
entity’s fiscal year beginning after November 15, 2007. Accordingly, the
Company may elect to adopt SFAS 159 on January 1, 2008. The Company is
currently evaluating the impact that SFAS 159 may have on its financial
position and results of operations.
|
|
|
(3)
|
SFAS
No. 141 (Revised 2007), “Business Combinations –
In December
2007, the FASB issued SFAS No. 141(Revised) “
Business Combinations
” (“SFAS
141(R)”) the purpose of which is to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial statements relating to a business
combination and its effects. This Standard requires the acquiring entity in a
business combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction; establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to investors and other users all
of the information needed to evaluate and understand the nature and financial
effect of the business combination. SFAS 141(R) is effective as of the
beginning of the entity’s fiscal year beginning after December 15, 2008.
Accordingly, the Company is to adopt SFAS 141(R) on January 1, 2009. The
Company is currently evaluating the impact that SFAS 141(R) may have on its
financial position and results of operations.
|
F - 19
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 2 – SIGNIFICANT ACCOUNTING
POLICIES
(cont.)
|
|
Certain
financial statement data for prior years have been reclassified to conform to current
year financial statement presentation. The reclassification did not impact net income,
working capital or cash flows from operations as previously reported.
|
NOTE 3 –
SIGNIFICANT ACQUISITION
|
|
A.
|
In
January 2006, the Company acquired all of the outstanding stock
of a
Canadian company (“STARLIMS Canada”), for a consideration of $1,566.
STARLIMS Canada, that until the acquisition date served as a distributor in
Canada of the Group’s software products and as a subcontractor for
implementation services in the U.S., and has specialized in the life sciences
for more than 10 years, was acquired as part of the Group’s strategy to
expand the Group’s presence in these industries. The transaction was
accounted for in accordance with SFAS 141 “
Business Combination”
and
SFAS 142. The results of operations of STARLIMS Canada have been included in
the consolidated financial statements commencing January 2006.
|
|
|
The
total purchase price has been allocated to identifiable assets acquired and liabilities
assumed based on their estimated fair value. Fair value for backlog acquired was
determined based on signed arrangements with customers prevailing as of the date of the
acquisition. Fair value for distribution rights was determined based on the discounted
forecasted net profits for the period in which such distribution rights were expected to
prevail. The excess of the purchase price over the fair value of the net assets acquired
has been assigned primarily to goodwill. The following table presents the estimated fair
value of the net assets acquired as of the acquisition date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible assets acquired and liabilities assumed
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
$
|
517
|
|
|
|
Accounts receivable
|
|
|
|
416
|
|
|
|
Other current assets
|
|
|
|
23
|
|
|
|
Fixed assets
|
|
|
|
120
|
|
|
|
Current liabilities
|
|
|
|
(638
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
438
|
|
|
|
|
|
|
|
|
Identified intangible assets
|
|
|
|
|
Backlog acquired
|
|
|
$
|
13
|
|
|
|
Distribution rights
|
|
|
|
64
|
|
|
|
Goodwill (*)
|
|
|
|
1,051
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,128
|
|
|
|
|
|
|
|
|
(*)
|
With
the acquisition of STARLIMS Canada, the Group’s abilities in providing
services to customers in the life sciences were significantly enhanced
attributable to STARLIMS Canada’s experience and expertise in this field.
The goodwill is to be expensed for tax purposes according to the straight-line
method over a ten-year period ending in 2016.
|
F - 20
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 3 – SIGNIFICANT
ACQUISITION
(cont.)
|
|
B.
|
The
following table presents data relating to subsidiary initially consolidated and
business operation acquired in 2006 as of the acquisition dates, substantially
all of which relates to STARLIMS Canada:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
$
|
1,361
|
|
|
|
Fixed assets, net
|
|
|
|
120
|
|
|
|
Goodwill arising on acquisitions
|
|
|
|
1,137
|
|
|
|
Identified intangible assets
|
|
|
|
112
|
|
|
|
Current liabilities
|
|
|
|
(1,164
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
1,566
|
|
|
|
|
|
|
|
|
C.
|
Pro
forma financial data
|
|
|
The
following unaudited pro forma summary presents results of operations data for 2005 as
though the acquisition of STARLIMS Canada has been completed at the beginning of that
year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
Software licensing
|
|
|
$
|
9,700
|
|
|
|
Maintenance
|
|
|
|
2,568
|
|
|
|
|
|
|
|
|
Total product revenues
|
|
|
|
12,268
|
|
|
|
Services
|
|
|
|
4,920
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
$
|
17,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
$
|
13,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
$
|
5,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$
|
3,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
Basic
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
D.
|
In
February 2008, the Company entered into a memorandum of understanding for the acquisition
of its professional services provider in the United Kingdom. The acquisition is subject to customary closing conditions and is expected to be completed in the second quarter of 2008.
|
F - 21
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 4 – MARKETABLE
SECURITIES
|
|
A.
|
Marketable
securities available-for-sale
|
|
|
|
Cost
|
Gross
unrealized
gains
|
Gross
unrealized
losses
|
Aggregate
fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
$
|
2,256
|
|
$
|
107
|
|
$
|
29
|
|
$
|
2,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
$
|
1,008
|
|
$
|
18
|
|
$
|
14
|
|
$
|
1,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
As of December 31, 2007
|
|
|
Composition:
|
Cost
|
Fair value
|
Cost
|
Fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Bonds (*)
|
|
|
$
|
1,025
|
|
$
|
1,018
|
|
$
|
537
|
|
$
|
527
|
|
|
|
Government bonds
|
|
|
|
1,231
|
|
|
1,316
|
|
|
471
|
|
|
485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,256
|
|
$
|
2,334
|
|
$
|
1,008
|
|
$
|
1,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
All bonds held as of December 31, 2007 will mature between 2008 and 2016.
|
|
|
B.
|
Marketable
securities held-to-maturity
|
|
|
|
Amortized
cost
|
Aggregate
fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
|
|
|
|
2006 (2)
|
|
|
$
|
1,435
|
|
$
|
1,429
|
|
|
|
|
|
|
|
|
|
|
2007 (1) (2)
|
|
|
$
|
2,206
|
|
$
|
2,217
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
balance of marketable securities held-to-maturity as of December 31, 2007 was
comprised primarily of high rated corporate and government bonds. All
securities held as of such date will mature between 2008 and 2014, primarily in
2014. Marketable securities held-to-maturity as of December 31, 2006 was
comprised primarily of corporate and government bonds.
|
|
|
(2)
|
During
2006 and 2007, marketable securities available-for-sale in the amount of $545
and $514, respectively, were transferred to marketable securities
held-to-maturity.
|
F - 22
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 5 – TRADE
RECEIVABLES
|
|
A.
|
Trade
receivables consist of the following:
|
|
|
|
As of December 31,
|
|
|
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Billed trade receivables
|
|
|
$
|
8,219
|
|
$
|
6,285
|
|
|
|
Unbilled trade receivables
|
|
|
|
747
|
|
|
2,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,966
|
|
$
|
9,215
|
|
|
|
|
|
|
|
|
|
|
B.
|
Changes
in allowance for doubtful accounts:
|
|
|
|
Year Ended December 31,
|
|
|
|
2 0 0 5
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts - beginning of year
|
|
|
$
|
170
|
|
$
|
211
|
|
$
|
291
|
|
|
|
Provisions for the year
|
|
|
|
|
(included in general and administrative expenses)
|
|
|
|
297
|
|
|
333
|
|
|
(85
|
)
|
|
|
Write off of bad debts
|
|
|
|
(256
|
)
|
|
(253
|
)
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts - end of year
|
|
|
$
|
211
|
|
$
|
291
|
|
$
|
192
|
|
|
|
|
|
|
|
|
|
|
NOTE 6 – OTHER
CURRENT ASSETS
|
|
Other
current assets consist of the following:
|
|
|
|
As of December 31,
|
|
|
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
$
|
392
|
|
$
|
589
|
|
|
|
Deferred tax assets
|
|
|
|
39
|
|
|
623
|
|
|
|
Tax advances, net
|
|
|
|
272
|
|
|
48
|
|
|
|
Advances to suppliers and sub-contractors
|
|
|
|
119
|
|
|
113
|
|
|
|
Others
|
|
|
|
127
|
|
|
294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
949
|
|
$
|
1,667
|
|
|
|
|
|
|
|
|
NOTE 7 – OTHER
LONG-TERM ASSETS
|
|
Other
long-term assets consist of the following:
|
|
|
|
As of December 31,
|
|
|
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
$
|
119
|
|
$
|
29
|
|
|
|
Loans and grants to employees
|
|
|
|
303
|
|
|
314
|
|
|
|
Deferred share issuance costs
|
|
|
|
133
|
|
|
-
|
|
|
|
Deferred tax assets
|
|
|
|
304
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
859
|
|
$
|
564
|
|
|
|
|
|
|
|
|
F - 23
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 8 – FIXED
ASSETS, NET
|
|
|
As of December 31,
|
|
|
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
Long-term land lease and buildings (D below)
|
|
|
$
|
684
|
|
$
|
684
|
|
|
|
Computers and peripheral equipment
|
|
|
|
1,239
|
|
|
1,621
|
|
|
|
Office furniture and equipment
|
|
|
|
494
|
|
|
690
|
|
|
|
Leasehold improvements
|
|
|
|
149
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,566
|
|
|
3,175
|
|
|
|
Less: accumulated depreciation and amortization
|
|
|
|
1,085
|
|
|
1,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,481
|
|
$
|
1,601
|
|
|
|
|
|
|
|
|
|
|
B.
|
As
for the geographical location of the Group’s fixed assets, see Note 19C.
|
|
|
C.
|
Depreciation
and amortization expenses for the years ended December 31, 2005, 2006 and 2007
were $125, $252 and $434, respectively.
|
|
|
D.
|
The
majority of the perpetual land lease and buildings as of December 31, 2007
consists of the Company’s offices in Israel. These premises are currently
occupied under a long-term lease from the Israel Lands Authority. The Company
has no obligation for lease payments.
|
NOTE 9 – OTHER
INTANGIBLE ASSETS, NET
|
|
Other
assets, net consist of the following:
|
|
|
|
As of December 31,
|
|
|
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identified intangible assets (see Note 3)
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
$
|
112
|
|
$
|
112
|
|
|
|
Less: accumulated amortization
|
|
|
|
(43
|
)
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
69
|
|
$
|
37
|
|
|
|
|
|
|
|
|
F - 24
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 10 – OTHER
CURRENT LIABILITIES AND ACCRUED EXPENSES
|
|
Other
current liabilities and accrued expenses consist of the following:
|
|
|
|
As of December 31,
|
|
|
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees
|
|
|
$
|
560
|
|
$
|
532
|
|
|
|
Government authorities
|
|
|
|
813
|
|
|
981
|
|
|
|
Advances from customers
|
|
|
|
190
|
|
|
29
|
|
|
|
Commissions to distributors
|
|
|
|
502
|
|
|
197
|
|
|
|
Accrued expenses
|
|
|
|
95
|
|
|
441
|
|
|
|
Others
|
|
|
|
132
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,292
|
|
$
|
2,291
|
|
|
|
|
|
|
|
|
NOTE 11 – ACCRUED
SEVERANCE PAY
|
|
A.
|
Israeli
Employees
– Israeli law and labor agreements determine the obligations
of the Company to make severance payments to dismissed employees and to
employees leaving employment under certain other circumstances. The liability
for severance pay benefits, as determined by Israeli Law, is generally based
upon length of service and the employee’s last monthly salary. The
severance pay liability with respect to Israeli employees, which reflects the
undiscounted amount of the liability, is, in part, covered by insurance
policies and by regular deposits with recognized severance pay funds. The
amounts so funded are not reflected separately on the balance sheets, as the
severance pay risks have been irrevocably transferred to the insurance
companies and severance pay funds. Severance pay liability not covered by the
insurance policies and severance funds is fully provided for in the financial
statements on an undiscounted basis.
|
|
|
B.
|
Non-Israeli
Employees
– The Group’s non-Israeli subsidiaries provide various
defined contribution plans for the benefit of their employees according to each
subsidiary’s local requirements. Under these plans, contributions to funds
are based on a specified percentage of the employees’ salaries.
|
|
|
C.
|
Costs
relating to all of the Group’s employee severance benefits and
defined contribution plans amounted to $57, $151 and $263 in the years
ended December 31, 2005, 2006 and 2007, respectively. The increase in 2006
and 2007 in comparison to the previous year is attributable mainly to an
increase in the number of employees.
|
F - 25
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 12 –
COMMITMENTS AND CONTINGENCIES
|
|
A.
|
Compensation
of executive officers whom are also principal shareholders
|
|
|
(1)
|
Under
agreements entered into in November 1993, two executive officers whom are also
principal shareholders (“Officers”) are entitled to annual salary of
$147 and $115, respectively, linked to the U.S. consumer price index (as of
December 31, 2007 – $207 and $162, respectively). Both of the agreements
will continue until terminated in accordance with their terms. Each of the
agreements with these Officers may be terminated by the Company without cause
upon 180 days prior written notice. Upon termination of their agreements for
any reason, the Officers are entitled to payment in an amount equal to 150% of
their last monthly salary, multiplied by the number of years of employment
starting from January 1, 1993, which has already been paid.
|
|
|
In
June 2007, the general assembly of the Company’s shareholders approved an amendment
to the Officers’ employment agreements, according to which the Officers will be
entitled to an annual salary of $350 and $260, respectively, subject to and commencing
the first month after a period of 45 consecutive trading days in which the average
closing price of the Company’s ordinary shares on The NASDAQ has been at least
$15.50. Under the approved amendments, the Officers will not be entitled to any cash
severance payments and they will not be entitled to any severance payments upon the
termination of their employment. The amendments will be in force for a period of five
years following its effective date.
|
|
|
(2)
|
In
January 1993, the Company entered into a management and consulting agreement
with Sivanir (Management Services) 1992 Ltd., a company which is jointly owned
by other two executive officers whom are also principal shareholders (“Sivanir”).
According to the agreement in force with Sivanir as of December 31, 2007,
Sivanir is entitled to annual services fee of $108, linked to the U.S. consumer
price index (as of December 31, 2007 – $153). The agreement with Sivanir
is renewed automatically each year for an additional one year period, unless
one party notifies the other of its termination upon 180 days advanced written
notice.
|
|
|
In
June 2007, the general assembly of the Company’s shareholders, approved an amendment
to Sivanir’s agreement, according to which Sivanir will be entitled to an annual
service fee of $260 subject to and commencing the first month after a period of 45
consecutive trading days in which the average closing price of the Company’s
ordinary shares on The NASDAQ has been at least $15.50. The amendment will be in force
for a period of five years following its effective date.
|
|
|
(3)
|
The
contingent additional compensation described above qualifies for liability
award under SFAS 123(R). The total compensation related thereto as of December
31, 2007 amounted to $396, determined based on the Monte Carlo option-pricing
model.
|
F - 26
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 12 – COMMITMENTS AND CONTINGENCIES
(cont.)
|
|
The
Group has entered into operating lease agreements for the premises it uses, which have
expiration dates through 2012. The minimum projected charges under the above leases,
which are denominated mainly in U.S. dollars, are as follows:
|
|
|
Year Ending December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
$
|
614
|
|
|
|
2009
|
|
|
|
563
|
|
|
|
2010
|
|
|
|
222
|
|
|
|
2011
|
|
|
|
130
|
|
|
|
2012
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,567
|
|
|
|
|
|
|
|
|
Office
lease expenses totaled $182, $378 and $668 in the years ended December 31, 2005, 2006 and
2007, respectively.
|
|
|
The
Group is committed to pay royalties on revenues derived from the sale of certain software
products. Through December 31, 2007, no material transactions requiring the payments of
royalties were recorded.
|
|
|
D.
|
The
Company provided letters of indemnification to each of its directors and
officers, and to Sivanir. Said letters bind the Company to indemnify such
officers for liabilities or expenses they incur as a result of their acts in
their capacity as directors and officers of the Company, in an aggregate amount
not to exceed $3,500, to the extent that their liability is not covered under
the Company’s directors’ and officers’ liability insurance
policy.
|
F - 27
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 13 –
SHAREHOLDERS’ EQUITY
|
|
A.
|
Description
of ordinary shares
|
|
|
As
of December 31, 2006 and 2007, the Company had 15,000,000 authorized ordinary shares, par
value New Israeli Shekel (“NIS”) 1.00 each, of which 6,490,500 and 8,724,675
ordinary shares, respectively, were issued and outstanding as of such dates (net of
1,274,369 and 1,266,494 ordinary shares held by the Group, respectively).
|
|
|
Holders
of ordinary shares are entitled to participate equally in the payment of cash dividends
and bonus share (stock dividend) distributions and, in the event of the liquidation of
the Company, in the distribution of assets after satisfaction of liabilities to creditors.
|
|
|
Each
ordinary share is entitled to one vote on all matters to be voted on by shareholders.
|
|
|
In
May 2007, the Company completed an initial public offering of its ordinary shares at a
price of $13.50 per share. Following the offering, and including the partial exercise in
June 2007 of an over-allotment option the Company granted the underwriters, the Company
issued 2,226,300 of its ordinary shares, in consideration for gross proceeds of $30,055
(net of related costs – $26,652).
|
|
|
In
March 2004, the Company’s Board of Directors resolved to designate up to NIS 1
million (approximately $222) for the purpose of purchasing during 2004 ordinary shares of
the Company, at a price per share not to exceed NIS 12.00, and to authorize a committee
of the Board of Directors, which was established for this purpose, to facilitate such
resolution. As of December 31, 2006 and 2007, the Group holds 1,274,369 and 1,266,494
ordinary shares of the Company, respectively, constituting 16.4% and 12.7% of the Company’s
ordinary shares as of such dates. An amount equal to the cost of the treasury stock
($2,773 as of December 31, 2007) may not be distributed as cash dividends. The treasury
stock may be used in connection with option exercise.
|
|
|
In February 2008, the Company adopted
a share repurchase program, allowing it to repurchase up to $2,000 of the Company’s
ordinary shares over a period of 18 months in the open market, at times and prices that
management considers appropriate, taking into account prevailing market conditions and
other corporate considerations. Subsequent to the balance sheet date, the Company
repurchased 89,027 of its ordinary shares under the program at a total purchase price of
$672, or an average price of $7.55 per share.
|
F - 28
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 13
–
SHAREHOLDERS’ EQUITY
(cont.)
|
|
The
Company has not adopted a dividend distribution policy. However, in each of the five
years between 2002 and 2006, the Company paid dividends on an annual basis, and in
January 2006 and 2007, the Company paid annual dividends in respect of previous year of
NIS 1.00 ($0.22) and NIS 1.25 ($0.29) per ordinary share, or a total of $1,389 and
$1,914, respectively.
|
|
|
Any
future dividend distributions are subject to the discretion of the Company’s Board
of Directors, dependent on factors deemed relevant by the Board.
|
|
|
The
distribution of dividends also may be limited by the Israeli Companies Law, which permits
the distribution of dividends only out of retained earnings or otherwise upon the
permission of the Court.
|
|
|
(1)
|
2001
option plan
– In March 2001, a committee of the Board of
Directors adopted the 2001 option plan, under which the Company is authorized
to grant to employees up to an aggregate of 200,000 options exercisable to
ordinary shares of the Company. All options under this plan were granted as of
the balance sheet date. As of December 31, 2007, 24,500 options under this plan
are exercisable at an average exercise price of $2.44. A total of 152,750
options that were granted under this plan were exercised through December 31,
2007.
|
|
|
(2)
|
2005
option plan
– In March 2005, a committee
of the Board of
Directors adopted the 2005 option plan, under which the Company is authorized
to grant to employees up to an aggregate of 200,000 options exercisable to
ordinary shares of the Company. All options under this plan were granted as of
the balance sheet date. As of December 31, 2007, 81,250 options under this plan
are exercisable at an average exercise price of $6.30. A total of 1,250 options
that were granted under this plan were exercised through December 31, 2007.
|
F - 29
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 13
–
SHAREHOLDERS’ EQUITY
(cont.)
|
|
E.
|
Employee
option plans
(cont.)
|
|
|
(3)
|
General
terms of 2001 and 2005 option plans
–
The terms of the option
plans are essentially identical, and stipulate that the exercise price per
ordinary share will be the market price of the Company’s ordinary share on
the Tel-Aviv Stock Exchange on the date of grant. Except as otherwise provided,
50% of the options granted under the plans vest and become exercisable upon the
completion of two years of continuous employment with the Group with an
additional amount of 25% of the options granted under the plans vesting and
becoming exercisable upon the completion of each of the third and fourth years
of such continuous employment. Options granted are exercisable for five years
from the date of grant.
|
|
|
The
ordinary shares underlying the options may be issued either from the treasury stock or by
issuing new ordinary shares.
|
|
|
(4)
|
2007
Restricted Stock Units Plan
|
|
|
In
August 2007, the Company’s Board of Directors approved the grant of up to 240,000
restricted stock units (“RSUs”) under the 2007 Restricted Stock Units Plan (“2007
RSU Plan”) to employees of the Group and non-employee directors and consultants of
the Company. According to this plan, a restricted stock unit is a unit whose value is
equal to an ordinary share of the Company at the date of grant (no shares shall be
actually awarded to a grantee of RSUs). As of December 31, 2007, a total of 177,300 units
under this plan were granted (the share price on the grant date was $11.7).
|
|
|
Fifty
percent (50%) of the RSUs shall vest and become exercisable upon the completion of two
years of continuous employment with the Group with an additional amount of 25% of the
RSUs granted under the plan vesting and becoming exercisable upon the completion of each
of the third and fourth years of such continuous employment.
|
|
|
According
to the 2007 RSU Plan, if the average closing price of the Company’s ordinary shares
over any 30-day period is 50% less than the closing price of the ordinary share on the
date of award of the RSUs, the granted RSUs will be automatically cancelled with respect
to unvested units. At each anniversary vesting date, the vested RSUs shall be settled by
delivery of ordinary shares of the Company.
|
|
|
The
cost of the RSUs granted as of December 31, 2007, determined based on the fair value as
of the grant dates, amounted to a total of $1,031. The Company utilized the Monte Carlo
Model to estimate fair value, in accordance with SFAS 123(R), utilizing the assumptions
presented in section (7) below.
|
F - 30
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 13
–
SHAREHOLDERS’ EQUITY
(cont.)
|
|
E.
|
Employee
option plans
(cont.)
|
|
|
(5)
|
Summary
of the status of all employee option and RSU plans
|
|
|
A
summary of the status of
the Company’s three employee option and RSU plans as of December 31, 2005, 2006 and
2007, as well as changes during each of the years then ended, is presented below:
|
|
|
|
2 0 0 5
|
2 0 0 6
|
2 0 0 7
|
|
|
|
Number
of share
options
|
Weighted
average
exercise
price
|
Number
of share
options
|
Weighted
average
exercise
price
|
Number of
share
options
|
Weighted
average
exercise
price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
beginning of the year
|
|
|
|
187,500
|
|
$
|
2.26
|
|
|
330,000
|
|
$
|
4.33
|
|
|
229,250
|
|
$
|
5.45
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
168,000
|
|
|
6.31
|
|
|
7,500
|
|
|
9.52
|
|
|
177,300
|
(*)
|
|
-
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
(24,000
|
)
|
|
2.23
|
|
|
(99,000
|
)
|
|
2.20
|
|
|
(17,500
|
)
|
|
2.60
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
(1,500
|
)
|
|
2.22
|
|
|
(9,250
|
)
|
|
3.56
|
|
|
(4,475
|
)
|
|
1.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding -
|
|
|
|
|
end of the year
|
|
|
|
330,000
|
|
|
4.33
|
|
|
229,250
|
|
|
5.45
|
|
|
384,575
|
|
|
3.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable -
|
|
|
|
|
end of the year
|
|
|
|
90,000
|
|
|
2.19
|
|
|
24,750
|
|
|
2.40
|
|
|
105,750
|
|
|
5.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Comprised
of RSUs granted – See Note 13E(4).
|
|
|
(6)
|
Summary
of information about employee share options and RSU outstanding
|
|
|
The
following table summarizes information about options and RSU under the Company’s
three option and RSU plans that were outstanding as of December 31, 2007:
|
|
|
Exercise
price
|
Number of options
outstanding as of
December 31, 2007
|
Weighted average
remaining contractual
life (in years)
|
Number of options
exercisable as of
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.40
|
|
|
36,625
|
|
|
1.38
|
|
|
24,250
|
|
|
|
|
6.27
|
|
|
150,500
|
|
|
2.23
|
|
|
75,250
|
|
|
|
|
6.70
|
|
|
13,750
|
|
|
2.35
|
|
|
6,250
|
|
|
|
|
9.52
|
|
|
7,500
|
|
|
3.63
|
|
|
-
|
|
|
|
|
-
|
|
|
176,200
|
|
|
2.61
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
384,575
|
|
|
2.36
|
|
|
105,750
|
|
|
|
|
|
|
|
|
|
|
F - 31
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 13
–
SHAREHOLDERS’ EQUITY
(cont.)
|
|
E.
|
Employee
option plans
(cont.)
|
|
|
(7)
|
Weighted
Average grant-date fair value of options and RSU granted to employees
|
|
|
The
weighted average grant-date fair value of the options and RSU granted during 2005, 2006
and 2007 to employees amounted to $2.65, $3.98 and $5.82 per option/RSU, respectively.
The Company utilized the Black-Scholes (options) and Monte Carlo (RSUs) option-pricing
models to estimate fair value utilizing the following assumptions, based on the
requirements of SFAS 123(R), SAB 107 and SAB 110, for the years 2005, 2006 and 2007 (all
in weighted averages):
|
|
|
|
Year Ended December 31,
|
|
|
|
2 0 0 5
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
5.5%
|
5.5%
|
0% - 3.5%
|
|
|
Expected volatility
|
46% - 50%
|
48%
|
48% - 61%
|
|
|
Risk free interest rate
|
3.8% - 4.3%
|
4.8%
|
3.3% - 4.5%
|
|
|
Expected holding period (in years)
|
3.5 - 4.5
|
3.5 - 4.5
|
2 - 4
|
|
|
Dividend
yield
– Management used an expected dividend yield based primarily on past
experience and management’s forecasts applicable as of the grant date.
|
|
|
Expected
volatility
– Management estimated volatility based on the historical volatility
of the Company’s ordinary shares, being the only traded financial instrument of the
Company, using in most cases daily observations of the Company’s price share to
determine the standard deviation. Following the initial public offering described
in section B above and with respect to the RSUs, management estimated volatility based on
a blended rate based on historical data of the Company’s ordinary shares, along with
volatility data of similar companies traded on the NASDAQ.
|
|
|
Risk
free interest rate
– The risk-free interest rate is based on the implied yield
in effect at the time of each option/RSU grant, based on U.S. Treasury zero-coupon bond
issued with equivalent remaining terms.
|
|
|
Expected
holding period (expected term)
– Management believes that as of the
balance sheet date, the Company’s historical share option exercises do not provide a
supportable and reasonable basis upon which to estimate expected term, as for its current
historical data lacks sufficient experience and is not indicative to make reasonable
expectations regarding the future. Accordingly, and as for the Company’s employee
option plans have the characteristics of “plain vanilla”, the expected term is
determined based on the simplified method illustrated by SAB 107 and SAB 110; and as for
the RSUs, the expected term is identical to the vesting period.
|
|
|
Management
estimates forfeiture rates at the date of grant, which are adjusted in subsequent
periods. Management uses historical data to estimate pre-vesting option forfeiture rates
and records share-based compensation expense only for those awards that are expected to
vest.
|
F - 32
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 13
–
SHAREHOLDERS’ EQUITY
(cont.)
|
|
E.
|
Employee
option plans
(cont.)
|
|
|
(8)
|
Total
compensation cost for share-based payment arrangements
|
|
|
The
following table summarizes the effects of share-based compensation on statements of
income line items:
|
|
|
|
Year Ended December 31,
|
|
|
|
2 0 0 5
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
$
|
13
|
|
$
|
18
|
|
$
|
27
|
|
|
|
Research and development
|
|
|
|
16
|
|
|
16
|
|
|
16
|
|
|
|
Selling and marketing
|
|
|
|
101
|
|
|
96
|
|
|
125
|
|
|
|
General and administrative
|
|
|
|
10
|
|
|
11
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
140
|
|
$
|
141
|
|
$
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefits
|
|
|
$
|
50
|
|
$
|
51
|
|
$
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 14 – FINANCIAL
INSTRUMENTS
|
|
A
financial instrument is defined as cash, evidence of an ownership interest in an entity,
or a contract that imposes on one entity a contractual obligation either to deliver or
receive cash or another financial instrument to or from a second entity. Examples of
financial instruments include cash and cash equivalents, trade receivables, loans,
investments (bonds and equity securities), trade accounts payable, accrued expenses,
options and forward contracts.
|
|
|
The
Company provides certain disclosures with regard to financial instruments, including
derivatives. These disclosures include, among other matters, the nature and terms of
derivative transactions, information about significant concentrations of credit risk, and
the fair value of financial assets and liabilities.
|
|
|
A.
|
Concentrations
of credit risks
|
|
|
All
of the Group’s cash and cash equivalents as of December 31, 2006 and 2007, and
marketable securities as of such dates, which represent highly rated corporate and
government bonds, were deposited with major financial institutions in Israel, US, and
Canada. The Group is of the opinion that the credit risk with respect to these balances
is remote since the financial institutions with which these transactions are entered into
are solid and well-established.
|
|
|
Exposure
to credit risks relating to trade receivables is also limited, since the majority of the
Company’s customers are governmental agencies and large and solid
corporations.
The Group performs ongoing credit evaluations of its customers and generally does not
require collateral. An appropriate allowance for doubtful accounts is included in trade
receivables (see Notes 2G and 5B).
|
F - 33
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 14 –
FINANCIAL
INSTRUMENTS
(cont.)
|
|
B.
|
Fair
value of financial instruments
|
|
|
The
following methods and assumptions were used by the Group in estimating its fair value
disclosures for financial instruments:
|
|
|
(1)
|
The
fair value of cash and cash equivalents, short-term deposits, trade receivables
and trade accounts payable approximates their carrying amounts due to the
short-term maturities of these financial instruments.
|
|
|
(2)
|
The
fair value of marketable securities available-for-sale is identical to their
carrying amounts since the carrying amounts are presented based on quoted
market prices. The fair value of marketable securities held-to-maturity is
similar to their carrying amounts since the addition of interest accrued to
balance sheet date approximately reflects the changes in the fair value of
these securities.
|
|
|
(3)
|
Cash
deposits are presented according to their fair value based on statements
provided by the financial institutions.
|
|
|
C.
|
Derivative
financial instruments
|
|
|
The
Group has only limited involvement with derivative financial instruments, which mainly
include foreign exchange transactions (options contracts). These transactions do not
qualify for hedge accounting under SFAS 133, “
Accounting for Derivative
Instruments and Hedging Activities
”. As of December 31, 2007, the Group did not
hold any derivative financial instruments.
|
NOTE 15 – FINANCIAL
INCOME, NET
|
|
|
Year Ended December 31,
|
|
|
|
2 0 0 5
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains related to marketable securities
|
|
|
$
|
117
|
|
$
|
192
|
|
$
|
326
|
|
|
|
Interest from bonds (including commercial papers)
|
|
|
|
139
|
|
|
168
|
|
|
903
|
|
|
|
Exchange rate gains (losses)
|
|
|
|
(102
|
)
|
|
164
|
|
|
241
|
|
|
|
Interest on cash deposits
|
|
|
|
66
|
|
|
32
|
|
|
99
|
|
|
|
Gains from traded options
|
|
|
|
39
|
|
|
2
|
|
|
-
|
|
|
|
Other
|
|
|
|
12
|
|
|
52
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
271
|
|
$
|
610
|
|
$
|
1,551
|
|
|
|
|
|
|
|
|
|
|
F - 34
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 16 – INCOME
TAXES
|
|
A.
|
Basis
for measurement of results for tax purposes
|
|
|
The
Company is taxed under the Israeli Tax Ordinance. The Company’s Israeli subsidiaries
are taxed under the Israeli Tax Ordinance and Income Tax (Inflationary Adjustments) Law,
1985 (the “Inflationary Adjustments Law”). Pursuant to the Inflationary
Adjustments Law, results for tax purposes are measured in real terms, based on changes in
the Israeli Consumer Price Index. Commencing 2007 (for the Company) and 2008 (for the
Israeli subsidiaries), the Company and its Israeli subsidiaries will be taxed under the
dollar regulations.
|
|
|
B.
|
Tax
benefits under the Law for the Encouragement of Industry (Taxes), 1969
|
|
|
The
Company is an “Industrial Company” as defined by this Law and as such is
entitled to certain tax benefits, consisting mainly of accelerated depreciation, the
right to deduct for tax purposes costs in connection with issuance of its shares to the
public and amortization of goodwill.
|
|
|
C.
|
Tax
benefits under the Israeli Law for the Encouragement of
Capital Investments, 1959 (the “Investments Law”)
|
|
|
According
to the Investments Law, as amended in April 2005, an eligible investments program will be
qualified for tax benefits as a “Benefited Enterprise” (rather than the
previous terminology of “Approved Enterprise”) if it is a competitive
industrial facility (as defined in the Investments Law) that will contribute to the
independence of the Israeli economy and to Israel’s gross domestic product. In
addition, a Benefited Enterprise should comply with minimum capital investments as
provided in the Investment Law.
|
|
|
The
Company’s research and development center established in Israel in November 2006,
was recognized under the Investments Law as a Benefited Enterprise, entitling the Company
to the following primary tax benefits:
|
|
|
—
|
Tax
exemption
– Through December 31, 2015, any income tax attributable to increase
in the Company’s revenues on a stand alone basis over its average revenues for the
years 2003-2005 ($3,456), will be tax exempt.
In the event of a distribution of
cash dividends from such tax exempt income, the Company would be required to pay
corporate income taxes in respect of the amount distributed.
|
|
|
—
|
Accelerated
depreciation
– Fixed assets used by the Benefited Enterprise are entitled to
accelerated depreciation rates during the first five tax years of the use of these
assets.
|
F - 35
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 16
–
INCOME TAXES
(cont.)
|
|
C.
|
Tax
benefits under the Israeli Law for the Encouragement
of Capital Investments, 1959 (the “Investments Law”)
(cont.)
|
|
|
Entitlement
to the above tax benefits is subject to the Company’s compliance with the conditions
stipulated by the Investments Law, the regulations promulgated thereunder and the
certificate of approval for specific investments in the Benefited Enterprise. The major
conditions under the Company’s certificate of approval relate to the number of
research and development employees based in Israel and to the continuation of the Company’s
current operations and activities.
|
|
|
In
the event the Company fails to comply with such conditions, the benefits may be cancelled
and the Company may be required to refund all or part of the amounts saved as a result of
such tax benefits with interest and inflation adjustments based on the Israeli Consumer
Price Index. As of December 31, 2007, the Company was in compliance with all applicable
conditions.
|
|
|
Due
to the classification of part of the Company’s enterprise as an Approved Enterprise
and Benefited Enterprise under the Investments Law, the Company had accumulated
undistributed retained earnings attributable to the Approved and Benefited Enterprise
amounting to $3,246 as of December 31, 2007. In the event the Company distributes such
amount, in whole or in part, as cash dividends, amounts distributed out of $355 will be
then subject to tax at the rate of 25% (or 33.33% under certain conditions), and amounts
distributed out of $2,891 will be subject to tax at the rate of 20% (in case of foreign
shareholders percentage is over 50%), or 25% (in case of foreign shareholders percentage
is less than 50%).
|
|
|
—
|
Israeli
companies
– Taxable income of the Company and its Israeli subsidiaries which is
not attributable to an eligible program under the Investments Law is subject to corporate
statutory tax at rates of 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and
thereafter. For each of the years ended December 31, 2005 and 2006, the corporate tax
rate was 34% and 31%, respectively.
|
|
|
—
|
Foreign
subsidiaries
– The enacted statutory tax rates applicable to non-Israeli
subsidiaries as of December 31, 2007 are as follows:
|
|
|
Company
incorporated in the US - tax rate of approximately 36%.
|
|
|
Company
incorporated in Canada - tax rate of 32%.
|
|
|
Company
incorporated in Hong Kong - tax rate of 17.5%.
|
|
|
Company
incorporated in the UK - tax rate of 20%.
|
F - 36
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 16
–
INCOME TAXES
(cont.)
|
|
E.
|
Carry
forward tax losses
|
|
|
Carryforward
tax losses and capital tax losses of certain subsidiaries as of December 31, 2007
amounted to approximately $338 and $738, respectively.
|
|
|
The
Company and its Israeli subsidiaries possess tax assessments which are deemed final
through the year ended December 31, 2003. STARLIMS Corp. has received final assessments
through the year ended December 31, 2005. STARLIMS Canada has received final assessments
through the year ended December 31, 2004. The other subsidiaries have not been assessed
for tax purposes since their incorporation.
|
|
|
(1)
|
The
following is a summary of the components of the deferred tax benefits and
liabilities reflected on the balance sheets:
|
|
|
|
As of December 31,
|
|
|
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities - current
|
|
|
|
|
|
|
|
|
|
|
Differences due to tax reporting on cash basis
|
|
|
$
|
449
|
|
$
|
449
|
|
|
|
Available-for-sale marketable securities
|
|
|
|
-
|
|
|
(21
|
)
|
|
|
Carryforward tax losses
|
|
|
|
(220
|
)
|
|
(269
|
)
|
|
|
Allowance for doubtful accounts
|
|
|
|
(98
|
)
|
|
(61
|
)
|
|
|
Depreciation and amortization
|
|
|
|
9
|
|
|
12
|
|
|
|
Options
|
|
|
|
(52
|
)
|
|
(47
|
)
|
|
|
Deferred revenues
|
|
|
|
(612
|
)
|
|
(704
|
)
|
|
|
Reserves and accruals
|
|
|
|
-
|
|
|
(230
|
)(*)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(524
|
)
|
|
(871
|
)
|
|
|
Valuation allowance
|
|
|
|
181
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
Total current deferred tax liabilities, net
|
|
|
$
|
(343
|
)
|
$
|
(623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities - long-term
|
|
|
|
|
Differences due to tax reporting on cash basis
|
|
|
$
|
1,347
|
|
$
|
898
|
|
|
|
Depreciation and amortization
|
|
|
|
77
|
|
|
81
|
|
|
|
Options
|
|
|
|
-
|
|
|
(138
|
)
|
|
|
Deferred revenues
|
|
|
|
(34
|
)
|
|
-
|
|
|
|
Reserves and accruals
|
|
|
|
6
|
|
|
(221
|
)(*)
|
|
|
|
|
|
|
|
|
|
Total long-term deferred tax liabilities, net
|
|
|
$
|
1,396
|
|
$
|
620
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Balances
include short-term and long-term deferred tax assets at an aggregate amount
of $325 regarding share issuance costs charged directly to shareholders' equity.
|
F - 37
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 16
–
INCOME TAXES
(cont.)
|
|
G.
|
Deferred
income taxes
(cont.)
|
|
|
(2)
|
The
deferred taxes are presented in the balance sheets as follows:
|
|
|
|
As of December 31,
|
|
|
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
$
|
(39
|
)
|
$
|
(623
|
)
|
|
|
Long-term assets
|
|
|
|
(304
|
)
|
|
(221
|
)
|
|
|
Long-term liabilities
|
|
|
|
1,396
|
|
|
841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,053
|
|
$
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
The
deferred taxes were computed at tax rates of 17.5%-39.5%.
|
|
|
H.
|
Effective
income tax rates
|
|
|
Following
is a reconciliation of the theoretical tax expenses assuming all income is taxed at the
regular tax rates applicable to Israeli companies (2005-34%, 2006-31%, 2007-29%) and the
actual tax expenses:
|
|
|
|
Year Ended December 31,
|
|
|
|
2 0 0 5
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes as reported in the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidated statements of income
|
|
|
$
|
5,595
|
|
$
|
5,546
|
|
$
|
5,394
|
|
|
|
|
|
|
|
|
|
|
|
|
Theoretical tax expense
|
|
|
$
|
1,902
|
|
$
|
1,719
|
|
$
|
1,564
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible expenses
|
|
|
|
51
|
|
|
43
|
|
|
6
|
|
|
|
Tax exempt income
|
|
|
|
(9
|
)
|
|
(15
|
)
|
|
(3
|
)
|
|
|
Differences due to statutory tax rates
|
|
|
|
11
|
|
|
168
|
|
|
70
|
|
|
|
Tax exemption applicable to "Approved Enterprises"
|
|
|
|
|
and exempted income
|
|
|
|
-
|
|
|
-
|
|
|
(558
|
)
|
|
|
Differences arising from the
|
|
|
|
|
basis of measurement for tax purposes
|
|
|
|
39
|
|
|
(96
|
)
|
|
(39
|
)
|
|
|
Differences attributable to utilization of carryforward
|
|
|
|
|
tax losses for which no deferred tax assets were
|
|
|
|
|
recorded
|
|
|
|
(24
|
)
|
|
6
|
|
|
(78
|
)
|
|
|
Tax expense in respect of previous years
|
|
|
|
11
|
|
|
(22
|
)
|
|
(28
|
)
|
|
|
Other
|
|
|
|
(12
|
)
|
|
(41
|
)
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,969
|
|
$
|
1,762
|
|
$
|
885
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
|
35
|
%
|
|
32
|
%
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
F - 38
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 16
–
INCOME TAXES
(cont.)
|
|
I.
|
Components
of tax expenses
|
|
|
(1)
|
Income
before income taxes included in the statements of income:
|
|
|
|
Year Ended December 31,
|
|
|
|
2 0 0 5
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Israeli
|
|
|
$
|
4,538
|
|
$
|
4,878
|
|
$
|
3,923
|
|
|
|
Non-Israeli
|
|
|
|
1,057
|
|
|
668
|
|
|
1,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,595
|
|
$
|
5,546
|
|
$
|
5,394
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
Income
taxes included in the statements of income:
|
|
|
|
Year Ended December 31,
|
|
|
|
2 0 0 5
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Israeli
|
|
|
$
|
1,619
|
|
$
|
1,364
|
|
$
|
534
|
|
|
|
Non-Israeli
|
|
|
|
198
|
|
|
224
|
|
|
1,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,817
|
|
|
1,588
|
|
|
1,617
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
Israeli
|
|
|
|
-
|
|
|
-
|
|
|
(136
|
)
|
|
|
Non-Israeli
|
|
|
|
152
|
|
|
174
|
|
|
(596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152
|
|
|
174
|
|
|
(732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,969
|
|
$
|
1,762
|
|
$
|
885
|
|
|
|
|
|
|
|
|
|
|
|
|
Each
of the Company’s foreign subsidiaries files its income tax returns in the
jurisdiction of its home country.
|
|
|
The
Company adopted the provisions of FASB International No. 48, “
Accounting for
Uncertainty in
Income Taxes
” (“FIN 48”) on January 1, 2007. The
initial implementation of FIN 48 resulted in immaterial amounts to be recorded as
liability for unrecognized tax benefits as of January 1, 2007.
|
|
|
A
reconciliation of the beginning and ending amount of unrecognized tax benefits is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2007
|
|
|
$
|
-
|
|
|
|
Additions based on tax position related to the current year
|
|
|
|
69
|
|
|
|
Additions for tax positions of prior years
|
|
|
|
22
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
$
|
91
|
|
|
|
|
|
|
F - 39
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 17 – EARNINGS
PER SHARE
|
|
The
following table provides a reconciliation of the ordinary shares used in computations of
basic and diluted earnings per share:
|
|
|
|
Year Ended December 31,
|
|
|
|
2 0 0 5
|
2 0 0 6
|
2 0 0 7
|
|
|
|
Thousand of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of issued ordinary shares
|
|
|
|
7,765
|
|
|
7,765
|
|
|
9,070
|
|
|
|
Less - weighted average number of shares
|
|
|
|
|
held as treasury stock
|
|
|
|
(1,384
|
)
|
|
(1,306
|
)
|
|
(1,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of outstanding ordinary shares used in
|
|
|
|
|
computation of basic earnings per share
|
|
|
|
6,381
|
|
|
6,459
|
|
|
7,800
|
|
|
|
|
|
|
|
|
|
Plus - incremental ordinary shares
|
|
|
|
|
from assumed exercise of options
|
|
|
|
126
|
|
|
101
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of ordinary shares used in
|
|
|
|
|
computation of diluted earnings per share
|
|
|
|
6,507
|
|
|
6,560
|
|
|
7,897
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
to purchase 8,750, 7,500 and 176,200 ordinary shares were outstanding as of December 31,
2005, 2006 and 2007, respectively, but were not included in the computation of diluted
earnings per share due to their anti-dilutive effect.
|
NOTE 18 – RELATED
PARTIES BALANCES AND TRANSACTIONS
|
|
A.
|
Balances
–
Balances with related parties as of December 31, 2006 and 2007 were
insignificant.
|
|
|
|
Year Ended December 31,
|
|
|
|
2 0 0 5
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation of officers and directors
|
|
|
$
|
575
|
|
$
|
589
|
|
$
|
603
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses related to directors
|
|
|
$
|
31
|
|
$
|
28
|
|
$
|
106
|
|
|
|
|
|
|
|
|
|
|
F - 40
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 19 – SEGMENTAL
DISCLOSURE
|
|
The
Company makes segmental disclosure in accordance with the provisions of SFAS No. 131,
“Disclosures about Segments of an Enterprise and Related Information
” (“SFAS
131”) which requires segmentation based on the Group’s internal organization
and reporting of revenue and other performance measures. The Company’s segments are
designed to allocate resources internally and provide a framework to determine management
responsibility. According to SFAS No. 131, operating segments are defined as
components of an enterprise about which discrete financial information is available that
is evaluated regularly by the chief operating decision maker, or decision making group,
in deciding how to allocate resources and in assessing performance. Accordingly, the
Group has three reportable operating segments evaluated regularly by the Company’s
Chief Executive Officer. The types of products and services provided by these segments
are: (i) software licensing, (ii) maintenance, and (iii) services which include
professional services, training and technical support. For additional information
regarding these activities, see Note 2R.
|
|
|
Currently,
the Company does not separately allocate operating expenses (that is, research and
development, selling and marketing and general and administrative expenses) nor does it
allocate specific assets to these segments, other than goodwill that is assigned in its
entirety to the services operating segment. Thus, the segment information disclosed
includes only revenues, cost of revenues and gross profit.
|
F - 41
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 19
– SEGMENTAL
DISCLOSURE
(cont.)
A.
Operating segments
(cont.)
The following presents revenues and
gross profit by each operating segment:
|
|
Year Ended December 31, 2005
|
Year Ended December 31, 2006
|
|
|
Software
licensing
|
maintenance
|
Services
|
Total
|
Software
licensing
|
maintenance
|
Services
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
|
9,645
|
|
$
|
2,169
|
|
$
|
4,400
|
|
$
|
16,214
|
|
$
|
8,286
|
|
$
|
2,841
|
|
$
|
8,638
|
|
$
|
19,765
|
|
|
Cost of revenues (*)
|
|
|
|
120
|
|
|
-
|
|
|
3,306
|
|
|
3,426
|
|
|
31
|
|
|
-
|
|
|
5,557
|
|
|
5,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
$
|
9,525
|
|
$
|
2,169
|
|
$
|
1,094
|
|
$
|
12,788
|
|
$
|
8,255
|
|
$
|
2,841
|
|
$
|
3,081
|
|
$
|
14,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
1,373
|
|
|
|
|
|
|
|
|
|
|
|
1,866
|
|
|
Selling and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
4,099
|
|
|
|
|
|
|
|
|
|
|
|
4,741
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
1,992
|
|
|
|
|
|
|
|
|
|
|
|
2,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,464
|
|
|
|
|
|
|
|
|
|
|
|
9,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
5,324
|
|
|
|
|
|
|
|
|
|
|
|
4,936
|
|
|
Financial, net
|
|
|
|
|
|
|
|
|
|
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
5,595
|
|
|
|
|
|
|
|
|
|
|
|
5,546
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
1,969
|
|
|
|
|
|
|
|
|
|
|
|
1,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,626
|
|
|
|
|
|
|
|
|
|
|
$
|
3,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
Software
licensing
|
maintenance
|
Services
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
|
10,656
|
|
$
|
3,241
|
|
$
|
9,878
|
|
$
|
23,775
|
|
|
Cost of revenues (*)
|
|
|
|
374
|
|
|
-
|
|
|
8,095
|
|
|
8,469
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
$
|
10,282
|
|
$
|
3,241
|
|
$
|
1,783
|
|
|
15,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
2,872
|
|
|
Selling and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
5,792
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
2,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,463
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
3,843
|
|
|
Financial income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
1,551
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
5,394
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
885
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,509
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Include
immaterial amounts related to maintenance costs.
|
F - 42
STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)
NOTE 19
– SEGMENTAL
DISCLOSURE
(cont.)
|
|
B.
|
Revenues
by geographical areas
|
|
|
|
Year Ended December 31,
|
|
|
|
2 0 0 5
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
$
|
12,359
|
|
$
|
14,689
|
|
$
|
16,094
|
|
|
|
Latin America
|
|
|
|
1,833
|
|
|
1,690
|
|
|
1,987
|
|
|
|
Europe
|
|
|
|
1,256
|
|
|
2,682
|
|
|
3,235
|
|
|
|
Asia
|
|
|
|
682
|
|
|
516
|
|
|
2,110
|
|
|
|
Israel
|
|
|
|
84
|
|
|
188
|
|
|
349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,214
|
|
$
|
19,765
|
|
$
|
23,775
|
|
|
|
|
|
|
|
|
|
|
|
|
C.
|
Enterprise-wide
disclosure
|
|
|
The
composition of the Group’s fixed assets, net according to their physical location is
as follows:
|
|
|
|
As of December 31,
|
|
|
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
$
|
663
|
|
$
|
690
|
|
|
|
Asia (Hong Kong)
|
|
|
|
61
|
|
|
177
|
|
|
|
Israel
|
|
|
|
757
|
|
|
734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,481
|
|
$
|
1,601
|
|
|
|
|
|
|
|
|
|
|
D.
|
Major
customers (as percentage of total revenues)
|
|
|
|
Year Ended December 31,
|
|
|
|
2 0 0 5
|
2 0 0 6
|
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
|
11
|
%
|
|
18
|
%
|
|
9
|
%
|
F - 43
S I G N A T U R E S
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.
|
|
|
STARLIMS Technologies Ltd.
By: /s/ Itschak Friedman
——————————————
Itschak Friedman
Chief Executive Officer
|
|
|
|
By: /s/ Chaim Friedman
——————————————
Chaim Friedman
Chief Financial Officer
|
Dated: March 31, 2008
77
Grafico Azioni Starlims Technologies Ltd. (MM) (NASDAQ:LIMS)
Storico
Da Mag 2024 a Giu 2024
Grafico Azioni Starlims Technologies Ltd. (MM) (NASDAQ:LIMS)
Storico
Da Giu 2023 a Giu 2024
