If we are unable to generate
revenues from advertisers, this may have a detrimental effect on our revenues and results
of operations.
In
addition to search generated revenues, we currently display third party advertising on our
website and in our free software, which have provided a steady portion of our revenues in
the past. However, our ability to increase and even maintain our advertising revenues may
be limited by, among other reasons, a possible perception caused by other companies that
the Internet is an ineffective marketing medium due to the excessive number of banner
advertisements, the growing number of installations by Internet users of
filter software programs that allow them to block pop-up
advertisements by other companies and to prevent installation of software components
installed by others, that act as spying agents, and the limitations on the content of
advertisements on the Internet compared to other forms of media. In addition, our
advertising revenues depend, in part, on the number of our active users and visitors to
our website. Because, based on current estimates, most users stop using the
IncrediMail
®
software after five years, if we do not
continue to experience large numbers of new registered users, or if our website traffic
decreases, our advertising revenues may not increase or could decline. In addition, we may
not be able to increase our advertising revenue if advertising rates decrease in response
to increased competition. Our inability to increase our revenues from advertisers could
reduce our growth and affect our profitability.
The market for email software
products and services is highly competitive, and if we cannot compete effectively, our
revenues will decline and we will be unable to gain or retain market share.
Our
products compete in the market for email software products and services that aim to offer
a customized and entertaining email experience for consumers, including features such as
graphic email notifiers, software skins, email backgrounds and multimedia content. Our
main competitors among specialized providers of email services offer the following
products: FunWeb Products, Hotbar
®
and WikMail, all
of which incorporate special features that provide a personalized email experience. In
addition, our products also face competition from general email software programs offered
to the private market by large Internet and software companies, such as AOL9 by America
Online, Inc.,
Thunderbird
®
by Mozilla Foundation and
Outlook Express and MSN9 by Microsoft Corporation (Nasdaq: MSFT), some of which may also
incorporate certain special features that provide a personalized email experience. Many of
the large Internet and software companies offer their email software programs free of
charge. Competition with these products could result in reduced prices and margins, fewer
purchases of our products and services and loss of market share.
Many
of our competitors have more established brands, products and customer relationships than
we do, which could inhibit our market penetration efforts even if they may not offer a
customized and entertaining email experience similar to
IncrediMail
®
. For example, consumers may choose to
receive an extensive package of Internet and email services from a more dominant and
recognized company, such as Microsoft Corporation (Outlook Express or
MSN
®
) or America Online, Inc.
(AOL
®
). If we are unable to achieve continued market
penetration, we will be unable to compete effectively.
In
addition, many of our other current and potential competitors have significantly greater
financial, research and development, manufacturing, and sales and marketing resources than
we have. These competitors could use their greater financial resources to acquire other
companies to gain enhanced name recognition and market share, as well as to develop new
technologies, products or features that could effectively compete with our existing
product lines. Demand for our products could be diminished by equivalent or superior
products and technologies offered by competitors. See Item 4.B Business Overview
Competition for additional discussion of our competitive market.
We face significant competition
from large-scale web-based email providers, principally Google, Yahoo and Microsoft
Our
products also compete in the market for web-based email software products and services,
such as Googles Gmail, Yahoo!s Mail and Microsofts Hotmail. The web
based email market is characterized with significant competition, changing technologies
and evolving products and services enhancements.
Google,
Yahoo! and Microsoft are each offering a web-based e-mail service in addition to the many
other services they provide, such as desktop search, local search, instant messaging,
photos, maps, video sharing, mobile applications and so on. We expect these competitors to
increasingly use their financial and engineering resources to compete with our
client-based e-mail service, if we are unable to successfully compete with them, our
results of operations may be adversely affected.
The market for wallpapers,
screensavers and photograph management tools is highly competitive, and if we cannot
compete effectively, we may not be able to generate revenues in the future or achieve
significant market share.
Our
Magentic product is a desktop enhancer and offers brand-new graphically enriched ways to
view and enjoy personal photos. This product was first introduced in 2006, currently
competes in the market for wallpapers, screensavers and PC software managing and
presenting personal photographs, aiming to offer a creative, personal and entertaining
experience for PC users. Our main competitors in these areas include Screensavers.com and
webshots© by American Greetings Corp. (NYSE: AM). Competition with these products
could result in increased investments in R&D and Marketing expenses as well as fewer
downloads and registrations of our product.
8
Many
of our competitors have more established brands, products and customer relationships than
we do, which could inhibit our market penetration efforts even if they may not offer a
similar variety, currently free of charge, such as American Greetings Corp.
(webshots©). If we are unable to achieve continued market penetration, we will not be
able to compete effectively.
In
addition, many of our other current and potential competitors have significantly greater
financial, research and development, manufacturing, and sales and marketing resources than
we have. These competitors could use their greater financial resources to acquire other
companies to gain enhanced name recognition and market share, as well as to develop new
technologies, products or features that could effectively compete with our product. Demand
for our products could be diminished by equivalent or superior products and technologies
offered by competitors. See Item 4.B Business Overview Competition for
additional discussion of our competitive market.
The market for creative instant
messaging enrichment tools is highly competitive, and if we cannot compete effectively, we
may not be able to generate revenues in the future or achieve significant market share.
We
are currently in the process of developing a creative enhancer for instant messaging
adapting our experience model currently applied to email, to instant
messaging. Our main competitors in this area include SweetIM and SmileyCentral by
IAC/InterActiveCorp (Nasdaq: IACI). Competition with these products could result in
increased investments in R&D and Marketing expenses as well as fewer downloads and
registrations of our product.
Many
of our competitors have more established brands, products and customer relationships than
we do, which could inhibit our market penetration efforts even if they may not offer a
similar variety, currently free of charge, such as IAC/InterActiveCorp (SmileyCentral). If
we are unable to achieve continued market penetration, we will not be able to compete
effectively.
In
addition, many of our other current and potential competitors have significantly greater
financial, research and development, manufacturing, and sales and marketing resources than
we have. These competitors could use their greater financial resources to acquire other
companies to gain enhanced name recognition and market share, as well as to develop new
technologies, products or features that could effectively compete with our product. Demand
for our products could be diminished by equivalent or superior products and technologies
offered by competitors. See Item 4.B Business Overview Competition for
additional discussion of our competitive market.
We may use a substantial portion
of our invested resources to acquire an unspecified business. These acquisitions could
divert our resources, cause dilution to our shareholders and adversely affect our
financial results.
We
may use a portion of our invested resources to acquire complementary products,
technologies or businesses. In December 2006, we acquired the assets of a transaction
processing company called BizChord Consulting Corporation and, although a relatively small
acquisition, diverting managements attention to a certain extent. The acquisition
has not as yet met the Companys expectations; resulting in the Company recording in
the fourth quarter of 2007 an impairment charge to the intangible assets acquired in such
transaction in an amount of approximately $0.3 million. Prior to such acquisition our
management had no experience making acquisitions or integrating acquired businesses.
Negotiating potential acquisitions or integrating newly-acquired products, technologies or
businesses could divert our managements attention from other business concerns and
could be expensive and time-consuming. Acquisitions could expose our business to
unforeseen liabilities or risks associated with the business or assets acquired or with
entering new markets. In addition, we might lose key employees while integrating new
organizations. Consequently, we might not effectively integrate any acquired products,
technologies or businesses, and might not achieve anticipated revenues or cost benefits.
In addition, future acquisitions could result in customer dissatisfaction, performance
problems with an acquired product, technology or company, or issuances of equity
securities that cause dilution to our existing shareholders. Furthermore, we may incur
contingent liability or possible impairment charges related to goodwill or other
intangible assets or other unanticipated events or circumstances, and we may not have, or
may not be able to enforce, adequate remedies in order to protect our Company. If any of
these or similar risks relating to acquiring products, technologies or businesses should
occur in the future on a scale that is larger than the effect of the acquisition described
above, our business could be materially harmed.
9
If we are deemed to be not in
compliance with applicable data protection laws, our operating results could be materially
affected.
We
collect and maintain certain information about our customers in our database. Such
collection and maintenance of customer information is subject to data protection laws and
regulations in Israel, the United States and other countries. A failure to comply with
applicable regulations could result in class actions, governmental investigations and
orders, and criminal and civil liabilities, which could materially affect our operating
results.
Although
we strive to comply with all applicable regulations and use our best efforts to inform our
customers of our business practices prior to any installations of our software, it is
possible that these laws may be interpreted and applied in a manner that is inconsistent
with our data practices. If so, in addition to the possibility of fines, this could result
in an order requiring that we change our data practices, which in turn could have a
material effect on our business. See Item 4.B Business Overview Government
Regulation for additional discussion of applicable regulations.
If there are privacy or security
concerns regarding our collection, use and handling of personal information, we could
incur substantial expenses.
Although
we take all reasonable steps to insure the security of personal information, concerns may
be expressed, from time to time, about whether our products compromise the privacy or
confidentiality of the information of users and others. Concerns about our collection,
use, sharing or handling of personal information or other privacy related matters, even if
unfounded, could damage our reputation and operating results. See Item 4.B Business
Overview Government Regulation for additional discussion of applicable
regulations.
We rely on online payment for our
products and any limitations imposed on online payment services could increase our costs
associated with the collection of payment and could adversely affect our business.
Payment
for our products is processed online. We engage third parties to process online payment
for our products. Credit card companies could change their policies with respect to
acceptance of online payments, refunds and charge-backs or in response to any change in
government regulations. Any of these changes could result in increased costs for providing
online payment services. Furthermore, implementation of an alternative method for
collection of payment would entail substantial expenses and may not be feasible for our
business.
We depend on a third party
Internet and telecommunication provider to operate our website and securing alternate
sources for these services could significantly increase our expenses.
We
depend on Bezeq International Ltd., a third party provider of Internet and related
telecommunication services, including hosting and location facilities, to operate our
website. This company may not continue to provide services to us without disruptions in
services, at the current cost or at all. While we believe that there are many alternative
providers of hosting and other communication services available to us, the costs
associated with any transition to a new service provider could be substantial and require
us to reengineer our computer systems and telecommunications infrastructure to accommodate
a new service provider. This process could be both expensive and time consuming and could
result in lost business both during the transition period and after.
Our
servers and communications systems could be damaged or interrupted by fire, flood, power
loss, telecommunications failure, earthquakes, acts of war or terrorism, acts of God,
computer viruses, physical or electronic break-ins and similar events or disruptions.
Although we maintain back-up systems for our servers, any of these events could cause
system interruption, delays, loss of critical data and lost registered users and revenues.
We
currently rely solely on the Internet as a means to sell our products. Accordingly, if we,
or our customers, are unable to utilize the Internet due to a failure of technology or
infrastructure, terrorist activity or other reasons, we could lose current or potential
customers and revenues. While we have backup systems for most aspects of our operations,
our systems are not fully redundant and our disaster recovery planning may not be
sufficient for all eventualities. In addition, we may have inadequate insurance coverage
or insurance limits to compensate us for losses from a major interruption. Furthermore,
interruptions in our website could materially impede our ability to attract new companies
to advertise on our website and to maintain relationships with current advertisers.
Difficulties of this kind could damage our reputation, be expensive to remedy and curtail
our growth.
Termination of our agreement with
Commtouch could result in lost revenues and loss of market share.
We
launched our anti-spam solution
JunkFilter Plus
in the third quarter of 2005. This
solution has been providing an increasingly significant portion of our revenues in the
past. If our agreement to use the anti-spam software development kit developed by
Commtouch Ltd. were to terminate, we would be required to redevelop our
JunkFilter Plus
anti-spam product, or retain a new provider of a development kit, and, as a result, we
may have to refund some of the outstanding subscription fees, we would likely suffer lost
revenues and the potential loss of market share.
10
Our products operate in a variety
of computer configurations and could contain undetected errors or defects that could
result in product failures, lost revenues and loss of market share.
Our
software may contain undetected errors, failures or defects, especially when the products
are first introduced or when new versions are released. Our customers computer
environments are often characterized by a wide variety of standard and non-standard
configurations that make pre-release testing for programming or compatibility errors very
difficult and time-consuming. Therefore, there could be errors or failures in our
products. In addition, despite testing by us and beta testing by some of our registered
users, errors, failures or bugs may not be found in new products or releases until after
commencement of commercial sales. In the past, we have discovered software errors,
failures and defects in certain of our product offerings after their introduction and have
likely experienced delayed or lost revenues during the period required to correct these
errors.
Errors,
failures or defects in products released by us could result in negative publicity, product
returns, loss of or delay in market acceptance of our products, loss of competitive
position or claims by customers. Alleviating any of these problems could require
significant expense and could cause interruptions.
A decline in market acceptance for
Microsoft technologies on which our products rely could have a material adverse affect on
us
Our
products currently run on Microsoft Windows operating systems. Our web client interfaces
are supported on certain browsers which run on Windows, Mac and Linux. A decline in market
acceptance for Microsoft technologies or the increased acceptance of other server
technologies could cause us to incur significant development costs and could have a
material adverse effect on our ability to market our current products. Although we believe
that Microsoft technologies will continue to be widely used by businesses, we cannot
assure you that businesses will adopt these technologies as anticipated or will not in the
future migrate to other computing technologies that we do not currently support. In
addition, our products and technologies must continue to be compatible with new
developments in Microsoft technologies. We cannot assure you that we can maintain such
compatibility or that we will not incur significant expenses in connection therewith.
More individuals are using non-PC
devices to access the Internet, and our online services may not be accepted by such users
The
number of individuals who access the Internet through
devices other then personal
computer, such as mobile phones, has increased dramatically. Our products were designed
for rich, graphic enviroments such as those available on desktop and laptop computers. The
lower resulotion, slower communication, functioality and memory associated with
alternative devices currently available may make the use of our products through these
devices difficult. If consumers find our products difficult to access, we may fail to
capture a sufficient share of an increasignly important portion of the market for online
services and may fail to attract advertisers and web traffic.
Exchange rate fluctuations may
decrease our earnings if we are not able to hedge our currency exchange risks effectively.
A
majority of our revenues are denominated in U.S. dollars. However, most of our costs,
mainly personnel expenses, are incurred in New Israeli Shekels (NIS). Inflation in Israel
may have the effect of increasing the U.S. dollar cost of our operations in Israel. If the
U.S. dollar declines in value in relation to the New Israeli Shekel, it will become more
expensive for us to fund our operations in Israel. A revaluation of one percent of the NIS
as compared to the U.S. dollar could reduce our income before taxes by approximately $0.1
million. During 2005 the exchange rate of the U.S. dollar to the New Israeli Shekel
increased, this trend reversed in 2006, and continued to further decrease in 2007 and
subsequently in 2008.
In
addition, a significant portion of our sales is in currencies other than the U.S. dollar.
In 2007, approximately 25% of our revenues were in these currencies. To the extent such
sales are not immediately exchanged for US dollars, we bear a foreign currency fluctuation
risk. As of December 31, 2007, we had a net foreign currency liability of approximately
$1.3 million and our total foreign exchange income was approximately $0.2 million for the
year ended December 31, 2007. In addition, in territories where our prices are based on
local currencies, fluctuations in the dollar exchange rate could affect our gross profit
margin. To assist us in hedging the risks associated with fluctuations in currency
exchange rates, we have contracted a consultant proficient in this area, and are
implementing his proposals. However, due to the market conditions, volatility and other
factors, his proposals occasionally prove to be ineffective or worse, and the
implementation of his proposals ineffective. We may incur losses from unfavorable
fluctuations in foreign currency exchange rates. See Item 11 Quantitative and
Qualitative Disclosure of Market Risks for further discussion of the effects of
exchange rate fluctuations on earnings.
11
A loss of the services of our
senior management and other key personnel could adversely affect execution of our business
strategy.
We
depend on the continued services of our senior management, particularly Ofer Adler our
Chief Executive Officer, Chief Product Officer and co-founder. Our business and operations
to date have been mainly implemented under the direction of our current senior management
and Yaron Adler, our co-founder and former Chief Executive Officer. In February 2008,
Yaron Adler was appointed the Companys President and Ofer Adler replaced him as
Chief Executive Officer. This recent transition or loss of service could create a gap in
management and could result in the loss of management and technical expertise necessary
for us to execute our business strategy and thereby, adversely affect execution of our
business strategy. Although we have obtained key person life insurance on the
life of Ofer Adler in the amount of $1.5 million, we do not expect to obtain key
person life insurance with respect to our other officers.
Further,
our ability to execute our business strategy also depends on our ability to continue to
attract, retain and motivate qualified and skilled technical and creative personnel and
skilled management, marketing and sales personnel. If we cannot attract and retain
additional key employees or lose one or more of our current key employees, our ability to
develop or market our products could be adversely affected. See Item 6 Directors,
Senior Management and Employees.
Under current U.S. and Israeli
law, we may not be able to enforce covenants not to compete and, therefore, may be unable
to prevent our competitors from benefiting from the expertise of some of our former
employees.
We
have entered into non-competition agreements with all of our professional employees. These
agreements prohibit our employees, if they cease working for us, from competing directly
with us or working for our competitors for a limited period. Under current U.S. and
Israeli law, we may be unable to enforce these agreements, in whole or in part, and it may
be difficult for us to restrict our competitors from gaining the expertise that our former
employees gained while working for us. For example, Israeli courts have recently required
employers seeking to enforce non-compete undertakings of a former employee to demonstrate
that the competitive activities of the former employee will harm one of a limited number
of material interests of the employer which have been recognized by the courts, such as
the secrecy of a companys confidential commercial information or its intellectual
property. If we cannot demonstrate that harm would be caused to us, we may be unable to
prevent our competitors from benefiting from the expertise of our former employees.
Our international operations
involve special risks that could increase our expenses, adversely affect our operating
results and require increased time and attention of our management.
We
derive and expect to continue to derive a substantial portion of our revenues from
customers outside United States. Our international sales and related operations are
subject to a number of inherent risks, including risks with respect to:
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potential
loss of proprietary information due to piracy, misappropriation or laws that may be less
protective of our intellectual property rights than those of the United States;
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costs
and delays associated with translating and supporting our products in multiple languages;
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foreign
exchange rate fluctuations and economic instability, such as higher interest rates and
inflation, which could make our products more expensive in those countries;
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costs
of compliance with a variety of laws and regulations;
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restrictive
governmental actions such as trade restrictions;
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limitations
on the transfer and repatriation of funds and foreign currency exchange restrictions;
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compliance
with different consumer and data protection laws and restrictions on pricing or discounts;
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lower
levels of adoption or use of the Internet and other technologies vital to our business
and the lack of appropriate infrastructure to support widespread Internet
usage;
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12
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lower
levels of consumer spending on a per capita basis and fewer opportunities for growth in
certain foreign market segments compared to the United States;
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lower
levels of credit card usage and increased payment risk;
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changes
in domestic and international tax regulations; and
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geopolitical
events, including war and terrorism.
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Risks Related to Our
Intellectual Property
If we are unable to protect our
intellectual property rights, our competitive position could be harmed.
Our
ability to execute our business strategy and compete depends in part upon our ability to
protect our intellectual property. In 2000, we submitted patent applications in the United
States, the European Community and Israel with respect to certain processes that we employ
in our products. One patent has been issued in the United States under these applications
to date. Our pending and future patent applications may not issue as patents or, if
issued, may not issue in a form that will be advantageous to us. Any issued patents may be
challenged, invalidated or legally circumvented by third parties. We cannot be certain
that our patents will be upheld as valid and enforceable or prevent the development of
competitive products. Consequently, competitors could develop, manufacture and sell
products that directly compete with our products, which could decrease our sales and
diminish our ability to compete. If our intellectual property does not adequately protect
us from our competitors products and methods, our competitive position could be
adversely affected and we could be precluded from operating all or a portion of our
business.
In
addition, we exploit our brand name
Incredi
by applying it to products offered
through collaborations with third parties. We have registered INCREDIMAIL as a trademark
only in the United States. Our ownership and use of the
Incredi
brand name may be
challenged, invalidated or legally circumvented by third parties, in which case our
ability to generate revenues from its exploitation will suffer.
We
have registered, or have rights to, various domain names relating to our brand, including
incredimail.com, incredidate.com and incredigames.com. If we fail to maintain, or to
enforce our rights to these registrations, it will be difficult for us to implement our
strategy to increase recognition of our brand. Third parties have registered domain names
similar to ours and if such parties engage in a business that may be harmful to our
reputation or confusing to our customers, our revenue may decline and we may incur
additional expenses in maintaining our brand.
We
rely on a combination of patent and other intellectual property laws and confidentiality,
non-disclosure and assignment of inventions covenants as appropriate, with our employees
and consultants, to protect and otherwise seek to control access to, and distribution of,
our proprietary information. These measures may not be adequate to protect our property
from unauthorized disclosure, third-party infringement or misappropriation. We also rely
on trade secret protection for our technology, in part through confidentiality covenants
with our employees, consultants and third parties. However, these parties may breach these
covenants and we may not have adequate remedies for any breach. Also, others may learn of
our trade secrets through a variety of methods. In addition, the laws of certain countries
in which we sell our products may not protect our intellectual property rights to the same
extent as the laws of the United States or Israel. See Item 4.B Business Overview
Intellectual Property.
Third party claims of infringement
or other claims against us could require us to redesign our products, seek licenses, or
engage in future costly intellectual property litigation, which could adversely affect our
financial position and our ability to execute our business strategy.
The
appeal of our products is largely the result of the graphics, sound and multimedia content
that we incorporate in our products. We enter into licensing arrangements with third
parties for these uses. However, other third parties may from time to time claim that our
current or future use of content, sound and graphics infringe their intellectual property
rights, and seek to prevent, limit or interfere with our ability to make, use or sell our
products. For example, in 2002 and again in 2004, a third party had contacted us to demand
that we remove certain Smiley graphics from our website, claiming that he had
registered a trademark with respect to these graphics and that our use infringed his
rights. We believe this claim to be without any merit and intend to vigorously defend any
suit filed against us in this matter.
13
If
it appears necessary or desirable, we may seek to obtain licenses for intellectual
property rights that we are allegedly infringing, may infringe or desire to use. Although
holders of these types of intellectual property rights often offer these licenses, we
cannot assure you that licenses will be offered or that the terms of any offered licenses
will be acceptable to us. Our failure to obtain a license for key intellectual property
rights from a third party for technology or content, sound or graphic used by us could
cause us to incur substantial liabilities and to suspend the development and sale of our
products. Alternatively, we could be required to expend significant resources to re-design
our products or develop non-infringing technology. If we are unable to re-design our
products or develop non-infringing technology, our revenues could decrease and we may not
be able to execute our business strategy.
We
may become involved in litigation not only as a result of alleged infringement of a
third-partys intellectual property rights, but also to protect our own intellectual
property rights. If we do not prevail in any third-party action for infringement, we may
be required to pay substantial damages and be prohibited from using intellectual property
essential to our products.
We
may also become involved in litigation in connection with the brand name rights associated
with our Company name or the names of our products. We do not know whether others will
assert that our Company name or brand name infringes their trademark rights. In addition,
names we choose for our products may be claimed to infringe names held by others. If we
have to change the name of our Company or products, we may experience a loss in goodwill
associated with our brand name, customer confusion and a loss of sales. Any lawsuit,
regardless of its merit, would likely be time-consuming, expensive to resolve and require
additional management time and attention.
Unlawful copying of our products
or other third party violations of existing legal protections or reductions in the legal
protection for intellectual property rights of software developers or use of open source
software could adversely affect our revenue.
The
software products that we sell incorporate a technology that reduces the ability of third
parties to copy the software without having paid for it. Unlicensed copying and use of
software and intellectual property rights represents a loss of potential revenue to us,
which could be more significant in countries where laws are less protective of
intellectual property rights. Continued educational and enforcement efforts may not affect
revenue positively and further deterioration in compliance with existing legal protections
or reductions in the legal protection for intellectual property rights of software
developers could adversely affect our revenue.
In
addition, certain of our products or services may now or in the future incorporate open
source software, which are typically distributed as-is without warranties,
such as warranties of performance or ownership or indemnities against intellectual
property infringement claims. Moreover, to the extent that we incorporate open source
software into our products or services, although we do not currently intend ever to
incorporate open source software that would require us to do so, the license for such open
source software may obligate us, among other things, to pass on to our licensees without
charge the rights to use, copy, modify and redistribute the underlying software source
code, both with respect to the original open source code and any modifications to such
code created by us.
If
we fail to detect and stop misrepresentations of our site and products, we could lose
confidence of our costumers, thereby causing our business to suffer
We
are exposed to the risk of domains using our brand names (such as IncrediMail)
in various ways, and attracting in this manner our potential or existing users. Many times
these domains are engaged with fraudulent or spam activities and using our brand names can
result in damaging our reputation and losing our clients confidence in our products.
If we are unable to detect and terminate effectively this misrepresentation activity, we
may lose users and our ability to produce revenues will be harmed.
Risks Related to Our
Industry
The Internet as a medium for
commerce and communication is not yet fully established and is subject to uncertainty and
a decline in the number of Internet users could cause our revenues to decrease and our
products to become obsolete.
The
Internet as a medium for communication is not yet fully established and is subject to
uncertainty. In addition, the electronic communication industry is rapidly evolving, as
new means for electronic communication are offered to the public. Our ability to execute
our business strategy is dependent upon the continued predominance of email as a means of
electronic communication and upon the continued use of the Internet.
Although
email software programs and services currently enjoy a large market, the development and
consumer acceptance of other means of electronic communication, such as text messaging
over phone networks, chat-boards, blogs and web-based social networks, could result in a
substantial decrease in the size of this market, in which case our revenues could decrease
and our products could become obsolete.
14
In
addition, our products may only be used on personal computers that can be and are
connected to the Internet. While the number of Internet users has been rising, the
Internet infrastructure may not expand fast enough to meet the increased levels of demand.
In addition, activity that diminishes the experience for Internet users, such as spyware,
spoof emails, viruses and spam directed at Internet users, as well as viruses and
denial of service attacks directed at Internet companies and service
providers, may discourage people from using the Internet, including for communications and
commerce. Furthermore, newer users of the Internet could be less active email users
compared to our earlier users. If use of the Internet as a medium for communication and
commerce grows at a slower rate than we anticipate, our sales would be less than expected.
In addition, the development and acceptance of new technologies and platforms could divert
our targeted customers from the use of the Internet, in which case our results of
operations will be adversely affected.
New laws and regulations
applicable to e-commerce, Internet advertising, privacy and data collection, and
uncertainties regarding the application or interpretation of existing laws and
regulations, could harm our business.
Our
business is conducted through the Internet and therefore, among other things, we are also
subject to the laws and regulations that apply to e-commerce. These laws and regulations
are becoming more prevalent in the United States and elsewhere and may impede the growth
of the Internet or other online services. These regulations and laws may cover taxation,
user privacy, data protection, pricing, content, copyrights, electronic contracts and
other communications, Internet advertising, consumer protection, the provision of online
payment services, broadband residential Internet access, and the characteristics and
quality of products and services.
Many
areas of the law affecting the Internet remain largely unsettled, even in areas where
there has been some legislative action. It is difficult to determine whether and how
existing laws, such as those governing intellectual property, privacy and data protection,
libel, data security and taxation, apply to the Internet and our business. New laws and
regulations may seek to impose additional burdens on companies conducting business over
the Internet. We are unable to predict the nature of the limitations that may be imposed.
For
example, legislation has been enacted to regulate the use of cookie
technology. Upon installation of our software, certain cookies generated by us and our
advertisers are placed on our customers computers. It has been argued that Internet
protocol addresses and cookies are intrinsically personally identifiable information that
is subject to privacy standards. We cannot assure you that our current policies and
procedures would meet these restrictive standards.
In
addition, technology is changing constantly and data security regulations and standards
are in a state of flux. Changes in law or regulations may require that we materially
change the way we do business. For example, we may be required to implement physical,
administrative and technological security measures different from those we have now, such
as different data access controls or encryption technology. We may incur substantial
expenses in implementing such security measures.
In
addition, although current decisions of the U.S. Supreme Court restrict the imposition of
obligations to collect state and local sales and use taxes with respect to sales made over
the Internet, the U.S. Congress and a number of states have been considering various
initiatives that could limit or supersede these decisions. If any of these initiatives
result in a reversal of the Courts current position, we could be required to collect
sales and use taxes on our U.S. sales. The imposition by state and local governments of
various taxes upon Internet commerce could create administrative burdens for us and could
decrease our future sales.
The
EU has already enacted legislation regarding Value Added Tax imposed on certain software
sold by companies outside the EU to consumers in the EU over the Internet. This
legislation could be interpreted to include other parts of the Companys business not
yet accrued for by the Company, causing additional significant tax exposure, or
alternatively, reduce the competitiveness of the Companys pricing of its products.
The
cost of compliance with taxation, consumer and privacy related regulations could be
material and we may not be able to comply with the applicable regulations in a timely or
cost-effective manner. In response to evolving legal requirements, we may be compelled to
change our business model and practices, which could reduce our sales, and we may not be
able to replace the revenues lost as a consequence of the change. These changes could also
require us to incur significant expenses, subject us to liability and require increased
time and attention of our management. See Item 4.B Business Overview
Government Regulation for additional discussion of applicable regulations affecting
our Company.
15
Risks Related to Our
Operations in Israel
Political, economic and military
instability in the Middle East may impede our ability to operate and harm our financial
results.
Our
principal executive offices are located in Israel. Accordingly, political, economic and
military conditions in the Middle East may affect our business directly. Since the
establishment of the State of Israel in 1948, a number of armed conflicts have occurred
between Israel and its Arab neighbors. During the summer of 2006, Israel was engaged in an
armed conflict with Hezbollah, a Lebanese Islamist Shiite militia group and political
party. This conflict involved missile strikes against civilian targets in northern Israel,
and negatively affected business conditions in Israel. Any hostilities involving Israel or
the interruption or curtailment of trade between Israel and its present trading partners
could affect adversely our operations. Although Israel has entered into various agreements
with the Palestinian Authority, Israel has been and is subject to civil unrest and
Palestinian terrorist activity, with varying levels of severity, since October 2000. The
election in early 2006 of representatives of the Hamas movement to a majority of seats in
the Palestinian Legislative Council and the tension among the different Palestinian
factions may create additional unrest and uncertainty. Ongoing and revived hostilities and
the attempts to resolve the conflict between Israel and its Arab neighbors often results
in political instability that affects the Israeli capital markets and can cause volatility
in interest rates, exchange rates and stock market quotes. These or other Israeli
political or economic factors could harm our operations and product development and cause
our sales to decrease. Furthermore, several countries, principally those in the Middle
East, still restrict business with Israel and Israeli companies and, although the impact
of these restrictions is not as important for a company such as ours that sells its
products through the Internet, it may nevertheless have an adverse effect on our results
of operations.
Our operations may be disrupted by
the obligations of our personnel to perform military service.
Many
of our male employees in Israel, including members of senior management, are obligated to
perform up to 36 days of military reserve duty annually until they reach age 48 and, in
the event of a military conflict, could be called to active duty. Our operations could be
disrupted by the absence of a significant number of our employees related to military
service or the absence for extended periods of military service of one or more of our key
employees.
Investors and our shareholders generally may have difficulties enforcing a U.S. judgment against us, our executive
officers and our directors or asserting U.S. securities laws claims in Israel.
We
are incorporated in Israel and all of our executive officers and most of our directors
reside outside the United States. Service of process upon them may be difficult to effect
within the United States. Furthermore, all of our assets and most of the assets of our
executive officers and directors are located outside the United States. Therefore, a
judgment obtained against us or any of them in the United States, including one based on
the civil liability provisions of the U.S. federal securities laws may not be collectible
in the United States and may not be enforced by an Israeli court. It also may be difficult
for you to assert U.S. securities law claims in original actions instituted in Israel.
The tax benefits available to us
require us to meet several conditions and may be terminated or reduced in the future,
which would increase our costs and taxes.
We
have generated income and therefore, are able to take advantage of tax exemptions and
reductions resulting from the Approved Enterprise status of our facilities in
Israel. To remain eligible for these tax benefits, we must continue to meet certain
conditions stipulated in the Law for the Encouragement of Capital Investments, 1959 (the
Investment Law), and its regulations and the criteria set forth in the
specific certificate of approval. If we fail to meet the required conditions in the
future, the tax benefits would be canceled and we could be required to refund any tax
benefits we have received with interest and adjustment for change in Israeli consumer
price index. These tax benefits may not be continued in the future at their current levels
or at any level.
Effective
April 1, 2005, the Investment Law was amended. As a result, the criteria for investments
qualified to receive tax benefits as an Approved Enterprise were revised. No assurance can
be given that we will, in the future, be eligible to receive additional tax benefits under
this law. The termination or reduction of these tax benefits would increase our tax
liability in the future, which would reduce our profits or increase our losses.
Additionally, if we increase our activities outside of Israel, for example, by future
acquisitions, our increased activities might not be eligible for inclusion in Israeli tax
benefit programs. As a result of the amendment and recent interpretations, tax-exempt
income generated under the provisions of the new law will subject us to taxes upon
distribution or liquidation and we may be required to record deferred tax liability with
respect to such tax-exempt income, possibly affecting our results in the future. See
Item 10.E Taxation Israeli Taxation Law for the Encouragement of
Capital Investments, 1959 for more information about these programs.
16
Risks Related to our
Ordinary Shares and their Listing on a Stock Exchange
We incur significant costs as a
result of being a public company.
As
a public company, we incur significant legal, accounting and other expenses. We incur
costs associated with our public company reporting requirements as well as costs
associated with corporate governance requirements, including requirements under the
Sarbanes-Oxley Act of 2002, the rules of the Nasdaq Stock Market, the provisions of the
Israeli Securities Law that apply to duel listed companies (companies that are listed on
the Tel Aviv Stock Exchange (TASE) and another recognized stock exchange) and
the provisions of the Israeli Companies Law that apply to public companies. For example,
as a public company, we have created additional board committees and are required to have
two external directors pursuant to the Israeli Companies Law. We have also contracted an
internal auditor and a consultant for implementation of and compliance with the
requirements under the Sarbanes-Oxley Act. See Item 5 Operating and Financial Review
and Prospects Overview General and Administrative Expenses for a
discussion of our increased expenses as a result of being a public company.
A small number of existing
shareholders hold a significant percentage of our outstanding ordinary shares and can
exercise significant influence over our actions.
As
of February 29, 2008, our directors and officers beneficially owned (including shares
issuable upon exercise of options exercisable within 60 days of such date) approximately
35% of our outstanding ordinary shares in the aggregate. The interests of these
shareholders may differ from your interests. These shareholders, acting together, could
exercise significant influence over our operations and business strategy and will have
sufficient voting power to influence all matters requiring approval by our shareholders,
including the ability to elect or remove directors, to approve or reject mergers or other
business combination transactions, the raising of future capital and the amendment of our
articles of association, which govern the rights attached to our ordinary shares. In
addition, this concentration of ownership may delay, prevent or deter a change in control,
or deprive you of a possible premium for your ordinary shares as part of a sale of our
Company.
The rights and responsibilities of
our shareholders are governed by Israeli law and differ in some respects from the rights
and responsibilities of shareholders under U.S. law.
We
are incorporated under Israeli law. The rights and responsibilities of holders of our
ordinary shares are governed by our memorandum of association, our articles of association
and by Israeli law. These rights and responsibilities differ in some respects from the
rights and responsibilities of shareholders in typical U.S. corporations. In particular, a
shareholder of an Israeli company has a duty to act in good faith toward the company and
other shareholders and to refrain from abusing his power in the company, including, among
other things, in voting at the general meeting of shareholders on certain matters. See
Item 10.B Memorandum and Articles of Association Approval of Related Party
Transactions for additional information concerning this duty. Our shareholders
generally may find it difficult to comply with the provisions of Israeli law.
Provisions of our articles of
association and Israeli law may delay, prevent or make difficult an acquisition of our
Company, which could prevent a change of control and, therefore, depress the price of our
shares.
Israeli
corporate law regulates mergers, requires tender offers for acquisitions of shares above
specified thresholds, requires special approvals for transactions involving directors,
officers or significant shareholders and regulates other matters that may be relevant to
these types of transactions. In addition, our articles of association contain provisions
that may make it more difficult to acquire our Company, such as provisions establishing a
classified board. Furthermore, Israeli tax considerations may make potential transactions
unappealing to us or to some of our shareholders. See Item 10.B Memorandum and
Articles of Association Approval of Related Party Transactions and Item
10.E Taxation Israeli Taxation for additional discussion about some
anti-takeover effects of Israeli law.
These
provisions of Israeli law may delay, prevent or make difficult an acquisition of our
Company, which could prevent a change of control and therefore depress the price of our
shares.
17
Future sales of our
ordinary shares could reduce our stock price.
Sales
by shareholders of substantial amounts of our ordinary shares, or the perception that
these sales may occur in the future, could materially and adversely affect the market
price of our ordinary shares. In addition, our executive officers, directors and certain
large shareholders are no longer subject to contractual restrictions on the sale by them
of shares, resulting in a substantial number of shares held by them or issuable upon
exercise of options currently eligible for sale in the public market. Furthermore, the
market price of our ordinary shares could drop significantly if our executive officers,
directors, or certain large shareholders sell their shares, or are perceived by the market
as intending to sell them.
Although we have paid dividends in
the past we do not expect to pay dividends in the future and any return on investment may
be limited to the value of our stock.
Although
we have paid dividends in the past, we do not anticipate paying cash dividends on our
ordinary shares in the foreseeable future. The payment of dividends on our ordinary shares
will depend on our earnings, financial condition and other business and economic factors
affecting us at the time as our board of directors may consider relevant. We may pay
dividends in any fiscal year only out of profits, as defined by the Israeli
Companies Law, and provided that the distribution is not reasonably expected to impair our
ability to fulfill our outstanding and expected obligations. If we do not pay dividends,
our stock may be less valuable because a return on your investment will only occur if our
stock price appreciates. We intend to reinvest the amount of tax exempt income derived
from our Approved Enterprise status and not to distribute that income as
dividends. See Item 8.A Consolidated Statements and Other Financial Information
Policy on Dividend Distribution for additional information regarding the
payment of dividends.
U.S.
investors in our Company could suffer adverse tax consequences if we are
characterized as a passive foreign investment company.
If,
for any taxable year, our passive income or our assets that produce passive income exceed
levels provided by law, we may be characterized as a passive foreign investment company,
or PFIC, for U.S. federal income tax purposes. This characterization could result in
adverse U.S. tax consequences to our shareholders. If we were classified as a passive
foreign investment company, a U.S. holder of our ordinary shares 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. holders
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 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 shares in a passive foreign investment company
may not receive a step-up in basis on shares acquired from a decedent. U.S.
shareholders should consult with their own U.S. tax advisors with respect to the U.S. tax
consequences of investing in our ordinary shares, as well as the specific application of
the excess distribution and other rules discussed in this paragraph. For a
discussion of how we might be characterized as a PFIC and related tax consequences, please
see Item 10.E Taxation United States Federal Income Tax Considerations
Passive Foreign Investment Company Considerations.
18
ITEM 4.
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|
INFORMATION ON THE COMPANY
|
A.
|
HISTORY
AND DEVELOPMENT OF THE COMPANY
|
Our History
We
were incorporated in the State of Israel in November 1999 under the name Verticon Ltd. We
changed our name to IncrediMail Ltd. in November 2000 to better reflect the nature of our
business. We operate under the laws of the State of Israel. Our headquarters are located
at 4 HaNechoshet Street,
Tel-Aviv 69710, Israel. Our phone number is (972-3)
769-6100. Our agent for service of process in the United States is Puglisi &
Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19715. Our website
addresses are
www.incredimail-corp.com
and
www.incredimail.com
. The
information on our websites does not constitute part of this annual report.
We
completed the initial public offering of our ordinary shares in the United States on
February 3, 2006, whereby we became a limited liability public company under
the Israeli Companies Law. The registration statement on Form F-1 relating to our initial
public offering became effective on January 30, 2006. Immediately prior to the
effectiveness of our registration statement, we increased our authorized share capital to
15 million ordinary shares and completed a 38-for-one ordinary share split affected as a
dividend on our ordinary shares. In addition, upon the closing of our initial public
offering, our then outstanding redeemable convertible preferred shares were automatically
converted, on a 38-for-one basis, into an aggregate of 1,764,948 ordinary shares.
Since
November 20, 2007 the Companys ordinary shares are also traded on the Tel Aviv Stock
Exchange.
Principal Capital
Expenditures
We
had capital expenditures of $1.4 million in 2007, $0.8 million in 2006 and $0.3 million in
2005. We currently expect that our capital expenditures will be approximately $0.5 million
in 2008. We have financed our capital expenditures with cash generated from operations.
Our
capital expenditures during 2005 consisted primarily of computer hardware and software. In
2006 and 2007, our capital expenditures consisted primarily of leasehold improvements and
furnishings, as well as continued investments in computer hardware and software. In 2008,
we expect these investments to decrease to a level of less than $0.5 million, for
acquiring computer hardware, software, peripheral equipment and installation, all which
are expected to be financed by the Companys resources.
Overview
We
are an Internet content and media company, whose products we believe bring a new level of
fun, personality and convenience to email, desktops and screen savers, and have been
downloaded more than eighty million times. Having secured a large active email user base,
IncrediMail is now branching out into Instant Messaging, using its unique content and
approach to enhance the user experience.
Since
we began operations in 2000, our products have been downloaded in more than 100 countries,
and in 2007 we recorded on average of approximately 1.2 million registered downloads each
month. As of December 31, 2007, we have more than 10 million active users, and currently,
more than 330 million IncrediMail
®
emails are sent by our
users each month. Our users typically use our products for as long as five years. Through
December 31, 2007, we have sold more than 1.3 million products and content licenses
worldwide to our registered users. We believe our historical track record of converting
registered users to purchasing customers represents a convincing validation of our
business strategy.
We
generate revenue by:
|
|
generating
searches and sharing in the revenues with the provider of the search engine
|
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|
selling
our premium software products and services;
|
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|
licensing
and co-branding our Incredi brand to operators of third party websites; and
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selling
paid advertising and sponsored links on our website and email client.
|
For
a breakdown of total revenues by category of activity, see Item 5.A Operating
Results Revenues.
To
date, we have relied primarily on viral growth to grow our user base. Our
viral growth has resulted from recipients of our users emails clicking
on the link at the bottom of emails sent with
IncrediMail® Xe
and then
downloading our products and also from word of mouth. Our revenues were $10.9 million in
2006 and $18.7 million in 2007. Our operations have been profitable since 2002, with a
gross profit margin of over 90% and an operating income ranging between 15% and 42% of our
revenues.
19
When
we use the term registered user in this annual report, we mean an
IncrediMail® user who has downloaded one of our products and completed the
registration process. Registrations are not necessarily indicative of the number of
individual users as a user may register more than one time. In addition, the term
active user as used in this annual report means a registered user who has
performed any activity using any IncrediMail® product or service, including opening or
sending emails using IncrediMail®, downloading content or updating the product, in the
90 days prior to the measurement date.
Our Market
Email
Market Opportunity
. In recent years, email has become one of the most important forms
of electronic communication worldwide. The email market may be divided into two segments:
the consumer, or home user, market and the business, or corporate, market. Our products
target the consumer market. Both the consumer and the business markets are serviced by
many of the same popular email software programs, such as Microsoft Outlook, and by
web-based email services, such as Hotmail, Yahoo!
®
Mail
and Gmail.
Security
remains a critical concern for the consumer market as viruses, worms and identity theft
continue to grow. Spam also continues to rise. Any new email software product should
provide an effective and secure product that satisfies users concerns.
Evolution
of the Specialized Email Software Programs.
In order to be viable, email systems must
function as an effective means of communication. In addition, we believe that many in the
consumer or home user market are seeking an entertaining experience and a way to express
their creativity and individual personalities. We believe that consumer email users are
ready to accept email software products that offer users a customizable and entertaining
email experience together with security and anti-spam features.
The IncrediMail Solution
We
employ an innovative approach to enhancing our users email experience. Our
IncrediMail products provide the following benefits:
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Variety
and Amount of Content.
Our products offer users access to an extensive and
continually growing pool of content that we believe is one of the largest collections of
creative and diverse graphics, sound and multimedia content available online for email
communications. We began assembling our content in 1999.
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Creative
Technology.
Our proprietary
technology, which is based on advanced software
development standards, is designed to produce robust quality products that provide the
functionality expected in an email client packaged in a friendly, less
technologically-oriented and entertaining environment.
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Customization
.
The diversity of our graphics, sound and multimedia content enables our users to
customize and personalize their email messages and letters easily and quickly.
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Flexibility
and Ease of Use for Both Sender and Recipient.
We strive to offer a simple and
intuitive user interface that enables our users to create different experiences depending
on the nature or recipient of the email or letter. Users can easily change one or more
features for a specific email. Further, recipients of
IncrediMail®
emails can
easily open them, using most available email clients and can see all the features without
the need for special software.
|
Our Strategy
Our
objective is to become the market leader in entertaining and creative email systems for
the consumer and home user market. Based on our survey of downloads of our products and
those of competitors from third party websites, we believe that
IncrediMail
®
Xe
is one of the most downloaded free products providing an entertaining and
creative email system, and our strategy will include building on its popularity and
seeking to convert free users to paying customers. The key elements of our strategy are
to:
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Maintain
and grow our user base.
Our effective viral marketing has resulted in millions of
registered users who spread the word about our products and services at relatively low
marketing costs to us. For that reason, we expect a significant part of our products and
services offering will remain free. In order to increase the size of our user base, we
intend to use increasing sums in media buying and other advertising and marketing
activities, primarily online. We plan to continue and further increase the team charged
with optimizing the media buying effort, increase the effectiveness of our online
marketing activity and monetize user registrations and active user base.
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20
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Increase
the use of our products by our users and the searches performed by them through our
products.
With the increasing monetization possibilities of search generation, the
strategic importance of enabling search through and because of our products has grown
significantly. This is further emphasized by the demographics of our users and the
relatively high revenues they generate while searching over the Internet. We therefore
intend to increase the availability of search generating channels to our users through
numerous points in each and throughout our products and to leverage the large active user
base, primarily, those that are using our free products.
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Enhance
product offerings and increase user sales.
We plan to stimulate growth of our sales
and enhance our cross-sale capabilities by improving our existing product and service
offering. We will continue to seek to convert free users into paying customers by
marketing the paid products and services to our large user base.
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Avoid
offensive market tools.
We design our products and services to address users aversion
to spam, spyware and other perceived offensive Internet marketing tools, which we believe
encourages more use of them and increases user loyalty.
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Continue
to focus on the online consumer market.
Email continues
to grow as a
communication medium. The Internet allows us to reach potential users throughout the
world quickly and easily as well as reduces the costs associated with sales and
distribution of our products and services.
|
Our Products
Our
products are currently available in nine languages in addition to English. Prices and
license fees for our premium products vary based on market, length of license period and
whether the products are offered together. We offer the following products, all of which
may be downloaded over the Internet through a personal computer running on a Microsoft
Windows operating system:
IncrediMail
®
Xe
, launched in September 2000, is our flagship product that is
available over the Internet free of charge. It offers a variety of features that the user
can apply to email messages including:
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pre-prepared
backgrounds and letterheads;
|
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animated
notifiers (animated indications that mail has been received);
|
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emoticons
(animations that are intended to convey emotions);
|
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handwritten
signatures;
|
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a
web gallery with additional animations, notifiers and email backgrounds;
|
Since
the second quarter of 2004,
IncrediMail
®
Xe
also includes basic anti-spam features that allow users to specify trusted domains and
email addresses. Emails that come from the specified sources will not be treated as spam;
all other emails will be automatically marked as potential spam.
IncrediMail
®
Premium
, launched in the first quarter of 2001, is an enhanced version
of
IncrediMail® Xe
. Users who upgrade their free version of
IncrediMail
®
Xe
through the purchase of
IncrediMail
®
Premium
also benefit from the
following features:
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no
advertising banners displayed in the product;
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the
ability to change the appearance of the product through the use of software skins;
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voice
message recorder;
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no
promotional link at the bottom of outgoing emails;
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21
|
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a
web gallery with additional animations, notifiers and email backgrounds;
|
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advanced
account access; and
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email-based
user support.
|
The
advanced account access system allows a user to download a specific email from an account
without necessarily downloading all emails that have been delivered to the account. In
addition, it allows a user to preview the email details residing on the server and delete
email messages from the account without first having to download them. This software
feature is built into
IncrediMail
®
Premium
and does not require the user to download or install any additional software. Users
are therefore able to remove undesirable emails that they suspect may be infected with
viruses or that may otherwise compromise their computers without downloading them. We
generally charge $29.95 for
IncrediMail
®
Premium.
IncrediMail
®
Letter Creator
, also launched in the first quarter of 2001, is an
application that enables
IncrediMail
®
Xe
and
IncrediMail® Premium
users to design and create their own personalized
email letters and ecards. Such users can create their own letterheads, customize their
emails with 3D effects, font styles, images and pictures and add personalized backgrounds.
Emoticon Super Pack,
launched in the first quarter of 2005, is a special package of
emoticons sold separately.
Through
December 31, 2007, we have sold approximately 0.9 million licenses for
IncrediMail®
Premium, IncrediMail
®
Letter Creator or Emoticon
Super Pack
. We generally charge $39.95 for
IncrediMail
®
Letter Creator,
$49.95 for a bundled package of
IncrediMail
®
Premium
and
IncrediMail
®
Letter Creator
and
$9.95 for
Emoticon Super Pack
.
The
Gold Gallery
, launched in February 2004, is a license-based content product. It offers
additional IncrediMail
®
content files in the form of
email backgrounds, animations, sounds, graphics and email notifiers. Through December 31,
2007, we have sold approximately 0.3 million licenses for
The Gold Gallery
of which
approximately 64% were for a one year license, 3% were for a two year license and 33% were
for a lifetime license for use of the content database.
IncrediMail
®
Xe
and
IncrediMail
®
Premium
users can license
The Gold Gallery
for a fee ranging from $25.95 to $58.55, depending on the length of
the license period.
JunkFilter
Plus
, launched in July 2005, is an advanced anti-spam product, based on the Recurrent
Pattern Detection Technology (RPD) that we license from Commtouch Ltd.
JunkFilter
Plus
offers a filtering technique to manage unwanted email, including offensive
content, viruses, hoax emails and identity theft scams. This anti-spam product is designed
to automatically identify and block undesirable mail from the users inbox and
protect against fraudulent and malicious emails. It detects and blocks spam in the first
few minutes of an outbreak, unlike other anti-spam approaches. We generally charge $39.95
for our
JunkFilter Plus
. Through December 31, 2007, we have sold approximately 0.2
million licenses for
JunkFilter Plus.
Magentic,
was launched as a Beta in April 2006 and fully released a few months later.
Magentic
enhances and enriches the computer desktop by adding enhanced graphics
enabling users to easily personalize the working environment.
Magentic
offers
hundreds of high quality wallpapers and screensavers and has already over 5.9 million
registered downloads. We are currently developing a new version of this product.
Magentic2
is intended to be, when completed, a brand-new graphically enriched ways
to view and enjoy personal photos. Some of the features in
Magentic2
are: 3D Photo
Screensavers enriched with a variety of styles and designs, fun desktop widgets that
display photos in the most creative and playful ways (named PhotoToys), and
Collage Wallpapers presenting photos within various themes, sceneries, and illustrations.
Magentic2 is designed to reveal on a users desktop all chosen photos saved on a
users personal computer.
In
addition, the software allows users to take photos from photo hosting web sites (such as
Flickr and Picasa) and continue viewing new photos once uploaded to these sites directly
in Magentic2 as well, thereby enabling the user to enjoy photos on the computer desktop.
Products under
Development
Our
research and development activities are conducted internally by our Chief Technology
Officer and a 64-person research and development staff. Our research and development
efforts are focused on the development of upgraded software, new features and new
products. In addition to the continued development and enhancement of our existing product
suite, we are currently developing a graphic enhancing tool for instant messaging
products.
22
IncrediMail
is developing a product that will enable incorporation of its rich content and creativity
into the instant messenger tools, such as Windows Live
Messenger
®
. By doing so, we will bring in new
demographics into the
IncrediMail
®
experience.
In
the past we had initiated numerous other projects such as branded content and a social
community site for
IncrediMail
®
users, however, these
efforts have been discontinued while we focus on our core competencies. Management is
constantly reassessing its initiatives, in an effort to optimize and leverage its added
value and competitive advantages. Although the above projects are the initiatives
currently identified by our management, we cannot assure you that these projects will be
completed as currently contemplated or at all. In addition, future initiatives may take
priority over the development of these projects.
Sales, Marketing and
Distribution
Our
products are sold throughout the world in more than 100 countries. The following table
shows the distribution since inception of our registered users and products sold by
territory:
|
|
Registrations
|
Products Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
|
55
|
%
|
|
36
|
%
|
|
North America
|
|
|
|
25
|
%
|
|
52
|
%
|
|
South America
|
|
|
|
11
|
%
|
|
3
|
%
|
|
Oceania
|
|
|
|
2
|
%
|
|
6
|
%
|
|
Other
|
|
|
|
7
|
%
|
|
3
|
%
|
|
|
|
|
To
date, we have relied mainly on viral growth, arising from recipients of our
users emails clicking on the link at the bottom of emails sent with
IncrediMail
®
Xe
and then downloading our
products and from word-of-mouth. In addition, we have recently begun employing traditional
marketing strategies, including offline and online advertising and public relations events
and we intend to further increase these efforts. We have designed our products to address
users aversion to spam, spyware and other perceived offensive Internet marketing
tools. To date, we have not been affected by the growing number of installations by
Internet users of filter software programs that allow them to block pop
up advertisements or to prevent installation of software components that act as
spying agents. The growth of our revenues would be adversely affected if our products,
while not doing any of these things, were subject to being filtered by
consumers.
During
2006 we opened an office in the United States, which is charged with local corporate
communications, business development efforts and our marketing effort in China.
We
have typically experienced stronger sales in the first and fourth quarters, principally
because our products and services are purchased in holiday sales in December or in the
after-holiday sales in January. This is in addition to the general seasonality of the
Internet as well as e-commerce, being more active in the winter months.
We
currently have a Vice President Marketing and 19 employees in our sales and
marketing department. We expect to hire additional sales and marketing personnel in
Israel, as we increase our marketing efforts, optimizing our media buying and increasing
our search generated revenues.
We
have begun discussions with various possible partners the introduction and marketing of
our products in China. Although, as mentioned, we have completed translating our
applications to Chinese and Japanese, we now must pursue cultural adaptation and
subsequently market our products in China in order to see the results of this effort in
the latter part of 2008.
Collaborations
We
have licensing and promotion arrangements with Oberon Media Inc. and Yahoo!, for the
use of our brand name and marketing of their products and services.
Under
our agreement with Oberon Media Inc., effective since 2004 Oberon Media sells its gaming
software through a website using our
Incredi
brand for the domain name
IncrediGames
and our websites graphical external envelop. In addition, we
market and promote the
IncrediGames
website, among other things, through a
link in our websites main toolbar. In consideration for our brand and promotional
activity, we share the net license fees (as defined in the agreement) Oberon Media
receives from end-users in connection with the purchase of its software through the
IncrediGames website.
23
In
June 2006 we signed an agreement with Yahoo! Inc. to offer a co-branded version of the
Yahoo! Personals service, launching the new dating service,
IncrediMail®
Personals
provided by Yahoo! Personals, located at
http://incredimail.personals.yahoo.com
. We generate revenues through Yahoo! paying
us a portion of the revenues generated by this site. The agreement with Yahoo! provides us
the right to use Yahoo! Personals as our exclusive dating partner in the U.S
.
and
market Yahoo! Personals under our brand name to our U.S. users.
In
addition, in October 2006 we signed an agreement with Babylon Ltd., by which, the Company
has built into its most recent version of IncrediMail Babylons single-click
translation and information solutions, available free of charge to all of
IncrediMails users worldwide. Besides the added value being provided to the
Companys users, these users will have the option to purchase Babylon 6, a full
version to use on any desktop application outside IncrediMail® and IncrediMail will
receive a portion of these revenues.
Intellectual Property
We
rely on a combination of patent, copyright, trademark and trade secret laws and
confidentiality and invention assignment agreements to protect our intellectual property
rights.
Most
of the components of our software products and services were developed solely by us. We
have licensed certain components of our software, such as a speller function, from third
parties. Except for our agreement with Commtouch Ltd. (described below), all of these
licenses entailed a one-time fee or are freeware. We believe that these components are not
material to the overall performance of our software and may be replaced without
significant difficulty.
In
2001, we submitted patent applications in the United States, Europe and Israel for the
following two inventions:
|
|
system
and method for visual feedback of command execution in electronic mail systems; and
|
|
|
system
and method for intelligent transmission of digital content embedded in electronic mail
messages.
|
In
July 2006, a patent was awarded in the US for the first invention; a patent has not yet
been issued for the second invention.
In
2007 an international application was filed for the invention interactive message
editing system and method.
We
enter into licensing arrangements with third parties for the use of graphic, sound and
multimedia content integrated into our products.
We
have registered INCREDIMAIL as a trademark in the United States. All other trademarks,
trade names and service marks appearing in this annual report are the property of their
respective owners.
All
professional employees and technical consultants are required to execute confidentiality
covenants in connection with their employment and consulting relationships with us. We
also require them to agree to disclose and assign to us all inventions conceived in
connection with their services to us. However, there can be no assurance that these
arrangements will be enforceable or that they will provide us with adequate protection.
JunkFilter
Plus
was developed using an anti-spam software development kit developed by Commtouch
Ltd. Under our December 2004 agreement with Commtouch, Commtouch granted us a nonexclusive
right and license to copy the software development kit and related software and
documentation for purposes of further development or modification in connection with the
design, development and sale of products that integrate the spam identification and
classification services of Commtouchs Detection Center, and to sell products
incorporating such software and documentation. Under the agreement, we pay Commtouch an
annual fee for each customer who purchases
JunkFilter Plus
based on the number of
purchasers. The agreement had a one-year initial term, beginning with the commercial
launch date of the
JunkFilter Plus
in July 2005 and was extended most recently for
another year, ending July 2008. We may mutually renew the agreement for successive periods
of 12 months each but during any renewal period either of us may terminate the agreement
upon 90 days prior written notice or with shorter notice upon the occurrence of
certain events enumerated in the agreement. Commtouch will continue to provide customers
with accessibility to its software and our integrated products following termination of
the agreement, and the licenses granted to our customers will also survive such
termination.
24
Competition
Our
industry is subject to intense competition. Our products compete in the specialized market
for email software products and services that aim to offer a personalized and entertaining
email experience for consumers. IncrediMail was among the first companies to offer to the
consumer email market a solution that combines an email product with an online gallery of
creative content. Compiling content is a lengthy process and we have been doing it since
1999. We consider ourselves a pioneer in this market and we believe that we have an
early mover advantage over many of our competitors. We believe that
IncrediMail has one of the largest collections of creative and diverse graphics, sound and
multimedia content available online for email communications.
Our
ability to compete effectively depends upon our ability to distinguish our Company and our
products from our competitors and their products, and includes the following factors:
|
|
the
creativity, variety and volume of content accessible through our software;
|
|
|
success
and timing of new product development and introductions;
|
|
|
quality
of customer support;
|
|
|
Maintaining
our reputation for fighting spam and offering spyware-free products;
|
|
|
intellectual
property protection; and
|
|
|
development
of successful marketing channels.
|
Our
main competitors among specialized providers of email services offer the following
products: Arcsoft Multimedia Email 3, LetterMark email, FunWeb Products,
Hotbar
®
and WikMail 2005. In addition, our products also
face competition from general email software programs offered to the private market by
large Internet and software companies, such as AOL9 by America Online, Inc.,
Eudora
®
by QUALCOMM Incorporated (Nasdaq: QCOM),
Thunderbird
®
by Mozilla Foundation and Outlook Express
and MSN9 by Microsoft Corporation (Nasdaq: MSFT), some of which may also incorporate
certain special features that provide a personalized email experience. Many of the large
Internet and software companies offer their email software programs free of charge. Our
main competition among providers of wallpapers and screensaver, as does Magentic, offer
the following products: webshots.com and screesavers.com, which offer wallpapers and
screensavers both free and premium products for a fee. Our main competition in the area of
creative instant messenger tools offered by Competition with these products could result
in reduced prices and margins, fewer purchases of our products and services, increased
research and development costs as well as marketing expenses and loss of market share with
regard to our traditional products, or not achieving adequate market share with our new
products and those currently being developed.
Many
of our competitors have more established brands, products and customer relationships than
we do, which could inhibit our market penetration efforts even if they may not offer a
customized and entertaining email experience similar to
IncrediMail
®
. For example, consumers may choose to
receive an extensive package of Internet and email services from a more dominant and
recognized company, such as Microsoft Corporation (Outlook Express or
MSN
®
) or America Online, Inc.
(AOL
®
). If we are unable to achieve continued market
penetration, we will be unable to compete effectively.
In
addition, many of our other current and potential competitors have significantly greater
financial, research and development, manufacturing, and sales and marketing resources than
we have. These competitors could use their greater financial resources to acquire other
companies to gain enhanced name recognition and market share, as well as to develop new
technologies, products or features that could effectively compete with our existing
product lines. Demand for our products could be diminished by products and technologies
offered by competitors, whether or not their products and technologies are equivalent or
superior.
Government Regulation
Our
database and BizChords database, which include a database of registered users, falls
within the definition of a database that requires registration under the Israeli
Protection of Privacy Law 1981. Maintaining a database other than in compliance with this
law may subject the owner, holder, manager and operator to criminal liability and civil
liability. We registered our database with the Data Base Registrar on June 20, 2004.
BizChords database has not yet been registered and is currently in the process of
completing its database registration.
25
There
are still relatively few laws or regulations specifically addressing the Internet. As a
result, the manner in which existing laws and regulations should be applied to the
Internet in general, and how they relate to our business in particular, is unclear in many
cases. Such uncertainty arises under existing laws regulating matters, including user
privacy, defamation, pricing, advertising, taxation, gambling, sweepstakes, promotions,
content regulation, quality of products and services, and intellectual property ownership
and infringement.
However,
to resolve some of the current legal uncertainty, it is possible that new laws and
regulations will be adopted that will be directly applicable to our activities. Any
existing or new legislation applicable to us could expose us to liability, including
significant expenses necessary to comply with such laws and regulations, and could dampen
the growth in use of the Internet in general. Several new U.S. federal laws have already
been adopted that could have an impact on our business. The CAN-SPAM Act of 2003 is
intended to regulate spam and create criminal penalties for unmarked sexually-oriented
material and emails containing fraudulent headers. The USA Patriot Act is intended to give
the government greater ability to conduct surveillance on the Internet by allowing it to
intercept communications regarding terrorism and computer fraud and abuse. The Digital
Millennium Copyright Act is intended to reduce the liability of online service providers
for listing or linking to third-party Websites that include materials that infringe
copyrights or other rights of others. The Childrens Online Protection Act, the
Childrens Online Privacy Protection Act, and the Prosecutorial Remedies and Other
Tools to End Exploitation of Children Today Act of 2003, are intended to restrict the
distribution of certain materials deemed harmful to children and impose additional
restrictions on the ability of online services to collect user information from minors. In
addition, the Protection of Children from Sexual Predators Act of 1998 requires online
service providers to report evidence of violations of federal child pornography laws under
certain circumstances. Under the U.K. Data Protection Act and the European Union Data
Protection Directive, a failure to ensure that personal information is accurate and secure
or a transfer of personal information to a country without adequate privacy protections
could result in criminal or civil penalties. Such legislation may impose significant
additional costs on our business or subject us to additional liabilities. When users visit
our website or install and use our software, certain cookies (pieces of
information sent by a web server to a users browser) may be generated by us and our
advertisers and may be placed on our customers computers. While we believe that our
use of cookies does not result in personal identification, it has been argued that
Internet protocol addresses and cookies are intrinsically personally identifiable
information that is subject to privacy standards. We cannot assure you that our current
policies and procedures would meet these restrictive standards. We post our privacy policy
and practices concerning the use and disclosure of user data. Any failure by us to comply
with our posted privacy policy, Federal Trade Commission requirements or other domestic or
international privacy-related laws and regulations could result in proceedings by
governmental or regulatory bodies that could potentially harm our business, results of
operations and financial condition. In this regard, there are a large number of
legislative proposals before the European Union, as well as before the United States
Congress and various state legislative bodies regarding privacy issues related to our
business. It is not possible to predict whether or when such legislation may be adopted,
and certain proposals, if adopted, could harm our business through a decrease in user
registrations and revenues. These decreases could be caused by, among other possible
provisions, the required use of disclaimers or other requirements before users can utilize
our services.
C.
|
ORGANIZATIONAL
STRUCTURE
|
During
2006, we formed a wholly-owned subsidiary in Delaware, operating out of NY, for marketing
and other activities, and formed another wholly owned subsidiary in Israel to acquire the
business of our transaction processing provider, operating primarily out of Israel. Except
for such subsidiaries, we do not have other subsidiaries.
D.
|
PROPERTY,
PLANTS AND EQUIPMENT
|
We
lease our facility, located in Tel Aviv, Israel, pursuant to a lease that was entered into
during 2006 and expires in 2011, with an option to extend the lease for 2 more years. The
lease is for a total area of 2,300 square meters, at a monthly rent of approximately $20.4
per square meter. On October 15, 2007 we amended the lease so the leased area was
re-evaluated and set out to be 1,700 square meters, and our said option regarding the
additional square meters was exercised.
We
own 73 servers that are hosted in a server farm by Bezeq International Ltd., which we
refer to herein as Bezeq. Our servers include mainly web servers, application servers, ad
servers, mail servers and database servers. Bezeq provides the Internet and related
telecommunications services, including hosting and location facilities, needed to operate
our website. Bezeq is Israels largest provider of such services and is a member of
Bezeq Group, Israels national telecommunications provider. Bezeq provides these
services through standard purchase orders and invoices. We add servers and expand our
systems located at their facilities as our operations require. We have no current
intention to replace Bezeq or to employ an additional provider for these services. We
believe there are many alternative providers of these services both within and outside of
Israel.
26
ITEM 4.A
|
|
UNRESOLVED STAFF COMMENTS
|
Not
applicable.
ITEM 5.
|
|
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|
The
following discussion of our financial condition and results of operations should be read
in conjunction with our financial statements and the related notes to the financial
statements included elsewhere in this annual report. In addition to historical financial
information, the following discussion and analysis contains forward looking statements
that involve risks, uncertainties and assumptions. Our actual results and timing of
selected events may differ materially from those anticipated in these forward looking
statements as a result of many factors, including those discussed under Item 3.D
Risk Factors and elsewhere in this annual report.
Overview
We
design and market an integrated suite of customized and entertaining email software
products for the consumer or home user markets. We believe we are a global technology
leader in enriching email interactions by offering users the ability to design highly
personalized email presentations. We believe that our innovations in entertaining email
technology, along with our large collection of multimedia content for email communication,
have made our website one of the top Internet destinations in the world for downloading
entertaining email solutions.
Since
we began operations in 2000, we have recorded approximately 87 million registered
downloads of our free products in more than 100 countries, and in 2007, we recorded an
average of more than 1.18 million registered downloads each month. As of December 31,
2007, we had 10 million active users, and currently, our users send over 330 million
IncrediMail® emails each month. We define an active user as any user who
has performed any activity using any IncrediMail® product or service, including
opening or sending emails using IncrediMail®, downloading content or updating the
product, in the 90 days prior to the measurement date. Our users typically use our
products for as long as five years, based on current statistics (this was estimated in the
past as three years). Through December 31, 2007, we have sold over 1.3 million products
and content licenses worldwide to our registered users. We believe our historical track
record of converting registered users to purchasing customers represents a convincing
validation of our business strategy.
Prices
and license fees for our products vary based on market, length of license period and
whether the products are offered together. Our prices and fees range from less than $10 to
about $60. These prices can vary in currencies, other than the US dollar.
Revenues
We
generate our revenues primarily from five major sources: (i) software licensing, mainly
IncrediMail® Premium,
our email software, and its complimentary products, (ii)
content licensing of
The Gold Gallery
, our content database, (iii)
JunkFilter
Plus
service, our anti-spam solution, (iv) advertising, from keyword search,
advertising in our email client, our content database and on our website, and (v)
collaboration arrangements with two websites operators who use our
Incredi
brand
name and to whom we refer users, IncrediGames.com, an online computer games site, and
IncrediMail®Personals.com, an online dating service. The following table shows our
revenues by category (in thousands of US Dollars):
|
|
Year Ended December 31,
|
|
|
2005
|
2006
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
$
|
658
|
|
$
|
2,368
|
|
$
|
8,757
|
|
|
Anti-spam solution
|
|
|
|
191
|
|
|
1,828
|
|
|
3,424
|
|
|
Software
|
|
|
|
4,104
|
|
|
3,494
|
|
|
3,128
|
|
|
Content licensing
|
|
|
|
1,665
|
|
|
2,463
|
|
|
2,526
|
|
|
Collaboration and other
|
|
|
|
784
|
|
|
698
|
|
|
840
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
$
|
7,402
|
|
$
|
10,851
|
|
$
|
18,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
Cost of Revenues
Our
cost of revenues consists primarily of salaries and related expenses, license fees and
payments for content and server maintenance.
Research and Development
Expenses
Our
research and development expenses consist primarily of salaries and other
personnel-related expenses for employees primarily engaged in research and development
activities. We expect our research and development expenditures to continue and increase
as we continue to devote resources to research and develop new products.
Selling and Marketing
Expenses
Our
selling and marketing expenses consist of salaries and other personnel-related expenses
for employees primarily engaged in marketing activities, media buying, payments to our PR
firm, credit card commissions and fees to our payment gateway providers that provide
secure Internet payment processes. Credit card commissions vary between 1.9% and 3.3%
based on the credit card, currency of payment and location of clearing agency. We expect
our selling and marketing expenses to continue and increase significantly as a result of
expansion of our marketing efforts in general and our media buying and online marketing in
particular.
General and
Administrative Expenses
Our
general and administrative expenses consist primarily of salaries and other
personnel-related expenses for executive, accounting and administrative personnel,
professional fees and other general corporate expenses. We expect our general and
administrative expenses to continue to increase as a result of our continuing growth.
Income Tax Expense
(Benefit)
In
2001 and 2003, we were granted the status of Approved Enterprise and in 2008
we have received approval for continued Privileged Enterprise status, all with
respect to three separate investment programs, entitling us to a tax exemption for a
period of two years and to a reduced tax rate of 10%-25% for an additional period of five
to eight years (depending on the level of foreign investment in our Company). The
Approved Enterprise status and the Privileged Enterprise status
allow for 0% corporate tax for a limited period of time on undistributed profits generated
from operations, and preferential taxation of the distributed portion, requiring regular
Israeli corporate tax on income generated from other sources. See Israeli
TaxationLaw for the Encouragement of Capital Investments, 1959 for more
information about these programs.
Critical Accounting
Policies and Estimates
The
discussion and analysis of our financial condition and results of operation are based on
our financial statements, which have been prepared in conformity with U.S. GAAP. The
preparation of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We evaluate these estimates on an
on-going basis. We base our estimates on our historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying amount values of assets and
liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions. Under U.S. GAAP, when more
than one accounting method or policy or its application is generally accepted, our
management selects the accounting method or policy that it believes to be most appropriate
in the specific circumstances. Our management considers some of these accounting policies
to be critical.
A
critical accounting policy is an accounting policy that management believes is both most
important to the portrayal of our financial condition and results and requires
managements most difficult subjective or complex judgment, often as a result of the
need to make accounting estimates about the effect of matters that are inherently
uncertain. While our significant accounting policies are discussed in Note 2 to our
financial statements, we believe the following accounting policies to be critical:
Revenue recognition
Revenues
from email software license sales are recognized when all criteria outlined in Statement
of Position (SOP) 97-2, Software Revenue Recognition (as amended),
are met. Revenues from software license are recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, the fee is fixed or determinable
and collectability is probable.
28
For
substantially all of our software arrangements, we evaluate each of these criteria as
follows:
Evidence
of an arrangement
: We consider a clicking on acceptance of the agreement
terms to be evidence of an arrangement.
Delivery
:
Delivery is considered to occur when the license key is sent via email to the customer or
alternatively the customer is given access to download the licensed key.
Fixed
or determinable fee
: Fees are determinable at the time of sale. Customers are charged
immediately through credit cards. In addition, although the fees are subject to a 14-day
refund, we consider collection to be probable as our historical experience shows that
refunds are less than 1% of our revenues.
Collection
is probable
: We are subject to a minimal amount of collection risk related to our
customers as these are either from very profitable global market leader or obtained
through credit card sales .
Revenues
from licensing
The Gold Gallery
content database are recognized over the term of
the licensing period. We offer one year, two year and lifetime licenses for
The Gold
Gallery
content database for a one-time, upfront payment. The different term licenses
accounted for 6%, 1% and 6% of our revenues in 2007, respectively. Our estimation of the
lifetime usage of
The Gold Gallery
is now based on historical data collected in the
fourth quarter of 2007, just over three years after this product was introduced. This data
showed that 40% of the purchasers were still using this product 3.5 years after they
purchased it. Prior to having access to this data we estimated the lifetime usage at being
three years, based on the analysis of the lifetime usage of other products. Therefore,
until the fourth quarter of 2007, we recognized revenue for The Gold Gallery lifetime
license over three years and since the fourth quarter of 2007 we have been recognizing
revenue for The Gold Gallery lifetime license over five years. The effect of this change
in estimate was to reduce 2007 revenues by $0.2 million, decrease 2007 net income by $0.2
million, and decrease 2007 basic and diluted earnings per share by $ 0.01. We continually
track usage patterns, and as we gather more user information, we may update this estimated
useful life. If the lifetime usage of
The Gold Gallery
is demonstrated to be
shorter or longer than the current estimated five years, we would recognize revenues
earlier or later. Based on our current revenue streams, such an adjustment would not have
a significant effect on our revenues.
Revenues
from
JunkFilter Plus
services are recognized over one year, which is the term of
the service period.
Our
deferred revenue consists of the unamortized balance of
The Gold Gallery
and the
JunkFilter Plus
license fees, which totaled $4.8 million as of December 31, 2007,
of which $3.3 million was classified as short-term deferred revenues and the balance as
long-term deferred revenue on our balance sheet.
Revenues
from advertising, whether from keyword search, advertising on our website or in our email
client, are recognized when we are entitled to receive the fee. Advertisers are charged
and pay monthly, based on the number of clicks generated by users clicking on these ads.
Collaboration
arrangements are established with other websites who use our brand name
Incredi
and
to whom we refer users. Under the agreement the collaborators provide their products and
services and manage, host and maintain the websites that provide games or matchmaking
services to Internet users, using our
Incredi
brand for the domain names
IncrediGames.com and IncrediMailPersonals.com and our websites graphical external
envelop. We promote these websites, among other things, through promotions on our website
and email client. In consideration for our brand and promotional activity, we are entitled
to share the net or gross revenues, (as provided in each agreement) generated from these
websites, including subscription and advertising fees. Revenues from these collaboration
arrangements are recognized when earned and based on reports received from the
collaborating party.
Stock-Based Compensation
On
January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment (SFAS 123(R)) which requires the
measurement and recognition of compensation expense based on estimated fair values for all
share-based payment awards made to employees and directors. SFAS 123(R) supersedes
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), for periods beginning in fiscal year 2006.
The Company adopted SFAS 123(R) using the modified prospective transition method,
which requires the application of the accounting standard starting from January 1, 2006,
the first day of the Companys fiscal year 2006. Under that transition method,
compensation cost recognized in the year ended December 31, 2006, includes: (a)
compensation cost for all share-based payments granted prior to, but not yet vested as of
January 1, 2006, based on the grant date fair value estimated in accordance with the
original provisions of SFAS 123, and (b) compensation cost for all share-based payments
granted subsequent to January 1, 2006, based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123(R). Results for prior periods have not been
restated. As of December 31, 2007, the total compensation cost, related to options granted
to employees, not yet recognized, amounted to $1.6 million. This cost is expected to be
recognized over a weighted average period of 3 years. Our stock-based compensation to
employees was allocated as follows (in thousands):
29
|
|
Year Ended December 31,
|
|
|
2005
|
2006
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
$
|
7
|
|
$
|
7
|
|
$
|
11
|
|
|
Research and development
|
|
|
|
56
|
|
|
94
|
|
|
79
|
|
|
Selling and marketing
|
|
|
|
45
|
|
|
53
|
|
|
60
|
|
|
General and administrative
|
|
|
|
3
|
|
|
371
|
|
|
524
|
|
|
|
|
|
|
Prior
to the adoption of SFAS 123(R) we recorded stock-based compensation expenses for financial
reporting purposes under the guidance of Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees, and
Financial Accounting Standards Board(FASB) Interpretation (FIN)
No. 44, Accounting for Certain Transactions Involving Stock Compensation, in
accounting for our employee share option plan. Under APB No. 25, when the exercise price
of an employee share option is equivalent to or above the marketprice of the underlying
stock on the date of grant, no compensation expense is recognized.
Determining
the appropriate fair value model and calculating the fair value of stock-based awards,
which includes estimates of stock price volatility, forfeiture rates and expected lives,
requires judgment that could materially impact our operating results.
Taxes on Income
We
record income taxes using the asset and liability approach. Management judgment is
required in determining our provision for income taxes. The provision for income tax is
calculated based on our assumptions as to our entitlement to various benefits under the
applicable tax laws. The entitlement to such benefits depends upon our compliance with the
terms and conditions set out in these laws. Although we believe that our estimates are
reasonable and that we have considered future taxable income and ongoing prudent and
feasible tax strategies in estimating our tax outcome, there is no assurance that the
final tax outcome will not be different than those which are reflected in our historical
income tax provisions and accruals. Such differences could have a material effect on our
income tax provision, net income and cash balances in the period in which such
determination is made.
On
January 1, 2007, we adopted FIN No. 48, Accounting for Uncertainty in Income
Taxes (FIN No. 48), which contains a two-step approach to recognizing
and measuring uncertain tax positions accounted for in accordance with SFAS No. 109,
Accounting for Income Taxes (SFAS No. 109). The first step is
to evaluate the tax position taken or expected to be taken in a tax return by determining
if the weight of available evidence indicates that it is more likely than not that, on an
evaluation of the technical merits, the tax position will be sustained on audit, including
resolution of any related appeals or litigation processes. The second step is to measure
the tax benefit as the largest amount that is more than 50% likely to be realized upon
ultimate settlement. Prior to January 1, 2007, we estimated our uncertain income tax
obligations in accordance with SFAS No. 109 and SFAS No. 5 Accounting for
Contingencies.
We
recorded interest on late paid taxes as tax expenses. Our policy for interest related to
income tax exposures was not impacted as a result of the adoption of the recognition and
measurement provisions of FIN No. 48.
As
a result of the implementation of FIN No. 48, the Company recognized a $83 thousand
increase in liability for unrecognized tax benefits, which was accounted for as an
decrease to the January 1, 2007 balance of retained earnings
Impairment of investments
in marketable securities.
We
regularly review our investments for factors that may indicate that a decline in the fair
value of an investment below its cost or amortized cost is other-than-temporary. Some
factors considered in evaluating whether or not a decline in fair value is
other-than-temporary include: our ability and intent to retain the investment for a period
of time sufficient to allow for a recovery in value; the duration and extent to which the
fair value has been less than cost; and the financial condition and prospects of the
issuer. Such reviews are inherently uncertain in that the value of the investment may not
fully recover or may decline further in future periods resulting in realized losses.
30
Impairment of Long-Lived
Assets.
Our
long-lived assets include property and equipment, goodwill and other intangible assets. In
assessing the recoverability of our property and equipment and other intangible assets, we
make judgments regarding whether impairment indicators exist based on legal factors,
market conditions and operating performances of our business and products. Future events
could cause us to conclude that impairment indicators exist and that the carrying values
of the intangible assets or goodwill are impaired. Any resulting impairment loss could
have a material adverse impact on our financial position and results of operations.
SFAS
No. 142, Goodwill and Other Intangible Assets, requires that goodwill be
tested for impairment at the reporting unit level on an annual basis and between annual
tests if an event occurs or circumstances change that would more likely than not reduce
the fair value of a reporting unit below its carrying value. These events or circumstances
could include a significant change in the business climate, legal factors, operating
performance indicators, competition or sale or disposition of a significant portion of a
reporting unit. Application of the goodwill impairment test requires judgment, including
the identification of reporting units, assignment of assets and liabilities to reporting
units, assignment of goodwill to reporting units, and determination of the fair value of
each reporting unit. The goodwill impairment test is a two step test. Under the first
step, the fair value of the reporting unit is compared with its carrying value (including
goodwill). If the fair value of the reporting unit is less than its carrying value, an
indication of goodwill impairment exists for the reporting unit and the enterprise must
perform step two of the impairment test (measurement). Under step two, an impairment loss
is recognized for any excess of the carrying amount of the reporting units goodwill
over the implied fair value of that goodwill. If the fair value of the reporting unit
exceeds its carrying value, step two does not need to be performed. The fair value of a
reporting unit is estimated using a discounted cash flow methodology. This requires
significant judgments including estimation of future cash flows, which is dependent on
internal forecasts, estimation of the long-term rate of growth for our business, the
useful life over which cash flows will occur and determination of our weighted average
cost of capital. Changes in these estimates and assumptions could materially affect the
determination of fair value and/or goodwill impairment for each reporting unit.
We
are required to assess the impairment of long-lived assets, tangible and intangible, other
than goodwill, under SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, on a periodic basis, when events or changes in circumstances
indicate that the carrying value may not be recoverable. Impairment indicators include any
significant changes in the manner of our use of the assets or the strategy of our overall
business, significant negative industry or economic trends and significant decline in our
share price for a sustained period.
Upon
determination that the carrying value of a long-lived asset may not be recoverable based
upon a comparison of aggregate undiscounted projected future cash flows to the carrying
amount of the asset, an impairment charge is recorded for the excess of fair value over
the carrying amount. We measure fair value using discounted projected future cash flows.
Recently issued
accounting pronouncements:
In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 157, Fair Value Measurements (SFAS No. 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 SFAS No. 157 are effective for the Company beginning
January 1, 2008. The FASB issues a FASB Staff Position (FSP) to defer the effective
date of SFAS No. 157 for one year for all nonfinancial assets and nonfinancial
liabilities, except for those items that are recognized or disclosed at fair value in the
financial statements on a recurring basis. The Company does not expect the adoption will
have material impact on its consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (SFAS No. 159). SFAS
No. 159 permits companies to choose to measure certain financial instruments and
certain other items at fair value. The standard requires that unrealized gains and losses
on items for which the fair value option has been elected to be reported in earnings. The
provisions of SFAS No. 159 are effective for the Company beginning
January 1, 2008. The Company does not expect the adoption of SFAS No. 159
will have an impact on its consolidated financial statements.
31
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS 141R). SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non controlling interest in the
acquiree and the goodwill acquired. SFAS 141R also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the business
combination. SFAS 141R is effective for fiscal years beginning after
December 15, 2008. Earlier adoption is prohibited. The Company believes that the
adoption of SFAS 141R could have an impact on its consolidated financial statements;
however, the impact would depend on the nature, terms and magnitude of acquisitions it
consummates in the future.
The
following table sets forth, for the periods indicated, our statements of operations
expressed as a percentage of total revenues (the percentages may not equal 100% because of
the effects of rounding):
|
|
Year Ended December 31,
|
|
|
2005
|
2006
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net
|
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
Cost of revenues
|
|
|
|
8
|
|
|
8
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
92
|
|
|
92
|
|
|
91
|
|
|
Operating expenses
|
|
|
|
Research and development costs
|
|
|
|
28
|
|
|
30
|
|
|
33
|
|
|
Selling and marketing expenses
|
|
|
|
12
|
|
|
16
|
|
|
25
|
|
|
General and administrative expenses
|
|
|
|
12
|
|
|
25
|
|
|
20
|
|
|
Goodwill impairment
|
|
|
|
-
|
|
|
-
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
|
52
|
|
|
71
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
40
|
|
|
21
|
|
|
12
|
|
|
Financial income (expense) and other, net
|
|
|
|
-
|
|
|
9
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on income
|
|
|
|
40
|
|
|
30
|
|
|
(7
|
)
|
|
Income tax expense
|
|
|
|
11
|
|
|
7
|
|
|
8
|
|
|
Tax expense in respect of dividend paid out of tax exempt income
|
|
|
|
13
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
16
|
%
|
|
23
|
%
|
|
(15
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
shown in the above table, our operations are characterized by high margins, which are
attributable mainly to two factors: (i) we do not have manufacturing costs for our
products, and (ii) we sell our products and services online and rely primarily on viral
marketing, although in 2007, we increased our investment in non-viral marketing. The
continued decrease in our operating margin in 2007 compared to 2006 and 2005, resulted
primarily from our increased investment in marketing, R&D and general and
administrative expenses to accommodate our growth. If our revenues increase (as we
expect), we expect our operating margins to increase in the long-term, although they may
not reach the levels we have experienced in recent years.
Year Ended December 31,
2007 Compared to Year Ended December 31, 2006
Revenues
.
Revenues increased by 72%, from $10.9 million in 2006 to $18.7 million in 2007.
The increase in revenues was primarily due to a $6.4 million increase in
advertising revenues, with search generating revenues accounting for the entire
increase. Product and subscription sales continued to increase in 2007, going
up by $1.3 million, or 17%. This was achieved by a 39% increase in our
Gold
Gallery
and
JunkFilter Plus
subscription revenues, partially offset
by an 10% decrease in our revenues from product sales of IncrediMail
®
Premium.
These changes reflect the success of our strategy to migrate from product sales
to subscriptions and leverage the growth potential of search generated revenues
and our large user base, comprised primarily of those using our free products.
As our products mature and search availability expands, we expect search
generated revenues to increase in the future at a faster pace than our other
revenue streams, and as such, to account for a larger portion of our revenues.
Cost
of Revenues
. Cost of revenues increased by $0.9 million, from $0.9 million in 2006 to
$1.8 million in 2007. The increase was primarily due to a $0.8 million increase in
salaries and related expenses, caused by the increase in support and creative staff, as
well as a $0.2 million increase in payments for our anti-spam software, as JunkFilter Plus
sales increased. As a result, in parallel with the increase in revenues, our gross profit
margin was 91% in 2007, compared to 92% in 2006. Together with the growth in our search
generated revenues, we expect the gross profit margin to remain at its current level and
as long as this remains the trend, possibly improve.
32
Research
and Development Expenses (R&D)
. R&D increased $2.8 million, from
$3.3 million in 2006 to $6.1 million in 2007. The increase was primarily attributable to
an increased investment in products recently introduced and those planned for future
release in 2008. In 2006 we released
Magentic
, a desktop enhancing solution,
currently providing wallpapers and screensavers. As of the end of March 2008,
Magentic
has drawn over 6.0 million registered users. In 2007 we began developing a
new version of
Magentic
, dramatically enhancing its personal photograph tools, and
we expect to release
Magentic2
during the second quarter of 2008. In addition, we
are working on a totally new version of our back-bone email client product
IncrediMail
®
. Although we have released numerous upgrades
to this product, this will be the first full makeover, improving the graphics and numerous
user friendly functions, bringing a much more graphically advanced user interface. These
initiatives, together with our ongoing effort to continuously improve our existing suite
of products, are expected to cause our R&D expenses to further increase in 2007. As a
percentage of revenues, R&D increased from 30% in 2006 to 33% in 2007.
Selling
and Marketing Expenses
. We more than doubled our selling and marketing expenses,
increasing them from $1.8 million in 2006, to $4.7 million in 2007. The increase in
selling and marketing expenses was primarily attributable to new marketing initiatives,
including media buying which accounted for $1.4 million in 2007, and we expect to further
increase the expenditure in this venue significantly in 2008. In 2007, we also invested in
numerous other online marketing initiatives, such as branded content, our social community
website
IncrediWorld
, as well as off-line marketing and advertising. These
other online and offline initiatives have been since curtailed, as we focus on our core
competencies for growing our user base and revenues in the future. In 2007 we continued to
increase the staffing of our marketing department, and we expect to continue and do so in
2008, focusing on optimization and media buying proficiencies.
General
and Administrative Expenses (G&A).
G&A increased by $1 million,
from $2.7 million in 2006 to $3.7 million in 2007. This increase was caused primarily due
to increased staffing to accommodate the Companys growth; as well as a $0.2 million
increase in costs of investor relations and other public company-related professional
fees. Finally, the Company incurred in 2007 a $0.5 million expense incurred by stock based
compensation in accordance with FASB 123(R), compared to $0.4 million in 2006. As a
percentage of revenues, G&A decreased from 25% in 2006 to 20% in 2007.
Financial
Expense, net
. The financial expense was due to our recording a $4.9 million expense
from the other-than-temporary impairment of our investment in Auction Rate Securities
currently not liquid. Recent uncertainties in the credit markets have adversely affected
the liquidity of auction rate securities as potential buyers have been unwilling to
purchase these securities, adversely affected by the existing conditions in the mortgage
securities market. The liquidity of these investments has been significantly impacted by
these conditions, and the specific security held by the Company was recently downgraded
from AAA to CCC by S&P, although we continue to receive interest payments every 28
days. During recent months, the Company tried to sell such security, with no success. The
Company received from its banker a valuation of this security, resulting in it recording
an, other-than-temporary impairment of $4.9 million. The Company has no other auction rate
securities. This expense was partially offset by financial income of $1 million of
interest income and net return on our investments. Our current investment policy is to
purchase debentures of a limited sum and relatively short-term maturity, rated at A and
higher, dollar denominated or linked.
Income
(Loss) before Tax.
The loss before tax in 2007 was $1.4 million, compared to income
before tax of $3.2 million in 2006. The loss in 2007 was primarily attributable to the
$4.9 million expense to the write-down of our investment, as described above, partially
offset by other financial income.
Taxes
on Income.
Income tax in 2007 was $1.4 million, compared to $0.8 million in 2006.
Although the Company had a loss before tax in 2007, it still recorded a tax expense. This
is due to our recording a valuation allowance with respect to deferred tax assets related
to other-than-temporary impairment on marketable securities and ARS, due to current
uncertainty of whether we will produce sufficient capital gains in the future, which are
considered a source of income required to offset losses from marketable securities under
the Israeli Tax Law. In addition, the effective tax rate on the other income increased,
compared to 2006, as the benefits from the Companys Approved Enterprise program were
greatly reduced in 2007, compared to 2006. As the Approved Benefit Program for 2008 has
already been approved, we expect these benefits to return to a great extent in 2008.
Net
Income (Loss).
The Net Loss in 2007 was $2.8 million, compared to Net Income of $2.5
million in 2006. The cause of the Net Loss in 2007, was primarily attributable to the
aforementioned $4.9 million other-than-temporary loss from our investment, and creating
valuation allowance against the deferred tax asset from that expense.
33
Year Ended December 31,
2006 Compared to Year Ended December 31, 2005
Revenues
.
Revenues increased by 47%, from $7.4 million in 2005 to $10.9 million in 2006.
The increase in revenues was primarily due to a $2.4 million increase in
The
Gold Gallery
and
JunkFilter Plus
subscription revenues, which
resulted from the completion of the first one-year subscription cycle of our
JunkFilter
Plus
and the subsequent renewals of these subscriptions in 2006, as
compared to 2005, when we had revenues for a period of less than six months. In
addition, advertising revenues more than doubled, increasing by $1.7 million in
2006 compared to 2005, which increase was primarily a result of revenues from
keyword searches as well as increased advertising revenues from our clients and
web page. As a result of our marketing strategy, these increases more than
offset the $0.6 million decrease in one-time fee sale of our
IncrediMail® Premium
and
related products.
Cost
of Revenues
. Cost of revenues increased by $0.3 million, from $0.6 million in 2005 to
$0.9 million in 2006. The increase was primarily due to a $0.2 million increase in
salaries and related expenses, caused by the increase in support and creative staff, as
well as a $0.1 million increase in payments for our anti-spam software, as JunkFilter Plus
sales increased. As a result, our gross profit margin remained stable at 92% of revenues
in both years.
Research
and Development Expenses (R&D)
. R&D increased $1.2 million, from
$2.0 million in 2005 to $3.2 million in 2006. The increase was primarily attributable to
an increased investment in products introduced in 2006 and those planned for future
release in 2007. In 2006 we released
Magentic
, a desktop enhancing solution,
currently providing wallpapers and screensavers. As of February 2007, although less than a
year since release,
Magentic
had drawn over 1.9 million registered users. As a
percentage of revenues, R&D increased from 28% in 2005 to 30% in 2006.
Selling
and Marketing Expenses
. Selling and marketing expenses increased by $0.9 million, from
$0.9 million in 2005 to $1.8 million in 2006. The increase in selling and marketing
expenses was primarily attributable to increased staffing of our marketing department,
which accounted for $0.4 million in 2006, the opening and staffing of our NY office, which
accounted for $0.3 million in 2006, and advertising costs, which increased by $0.2 million
from 2005. As a percentage of revenues, sales and marketing expenses increased from 12% in
2005 to 16% in 2006.
General
and Administrative Expenses (G&A).
G&A increased by $1.8 million,
from $0.9 million in 2005 to $2.7 million in 2006. This increase was caused primarily due
to increased staffing, intended to accommodate the Companys growth and its becoming
a public company (which included recruiting a new CFO and enhancing the Companys
finance department); as well as a $0.5 million increase in costs of investor relations and
professional fees as required by a public company. Finally, the Company incurred a $0.4
million expense incurred by stock based compensation in accordance with FASB 123(R). As a
percentage of revenues, G&A increased from 12% in 2005 to 25% in 2006.
Financial
Income
. Financial income increased from a negligible expense in 2005 to $1.0 million
income in 2006. The increase was primarily due to $1.1 million interest income and net
return on our investments, partially offset by a $0.1 million expense due to exchange rate
differences.
Income
before Tax.
Income before tax increased 11%, from $2.9 million in 2005 to $3.3 million
in 2006. The increase was primarily attributable to growth in revenues and financial
income without a corresponding growth in expenses.
Income
Tax.
Income tax in 2006 was $0.8 million, similar to 2005, with an effective tax rate
of 24%, compared to 29% in 2005. The reduction in the effective tax rate was primarily due
to significant growth in revenues, causing a higher percentage of income to be taxed at a
lower rate.
In 2005 we recorded a one-time tax expense in the amount of $0.9
million in respect of a dividend paid out of tax-exempt income that was declared and paid
in July 2005. Under Israeli tax law, tax-exempt income that is distributed becomes taxable
upon distribution at the corporate tax rate applicable to such income (currently 25% of
the gross distributed amount). As a result of our including virtually all our revenues in
the Approved Enterprise program, we reduced our tax rate and recorded a tax
credit for prior years of $0.1 million.
Net
Income.
Net income more than doubled, increasing from $1.1 million in 2005 to $2.5
million in 2006, primarily due to the $3.2 million increase in gross profits, $1.0 million
decrease in tax expenses and $1.0 million increase in financial income, partially offset
by a $3.8 million increase in operating expenses as described above.
34
B.
|
LIQUIDITY
AND CAPITAL RESOURCES
|
From
inception until consummation of our initial public offering we funded our operations
principally from private placements of ordinary and preferred shares that resulted in
aggregate net proceeds of approximately $3.3 million and cash flow from operations. We
received net proceeds of $16.8 million from our initial public offering, consummated in
February 2006.
As
of December 31, 2007, we had working capital of $19.8 million and our primary source of
liquidity was $23.4 million in cash, cash equivalents, deposits and marketable securities.
As of December 31, 2006, we had working capital of $21.6 million, and our primary source
of liquidity was $25.7 million in cash, cash equivalents and marketable securities. The
decrease in working capital and cash, cash equivalents and marketable securities was due
to the $4.9 million impairment of our investment in marketable securities described above,
which was partially offset by cash generated by our operations.
We
believe that our cash balances and cash generated from operations will be sufficient to
meet our anticipated cash requirements for at least the next 12 months.
Net
Cash Provided By Operating Activities
. Net cash provided by operating activities was
$3.8 million, $5.2 million and $4.0 million for 2005, 2006 and 2007, respectively. The
change in net cash provided by operating activities reflects the growth in revenues,
including those deferred in 2006 and 2007, offset primarily by our increased investment in
R&D, Sales and Marketing.
Net Cash Used In Investing
Activities.
Net cash used in investing activities was $1.4 million, $16.1 million and
$7.9 million in 2005, 2006 and 2007, respectively. In 2007, net cash used in investing
activities consisted primarily from investment in marketable securities of $5.4 million, net of
proceeds from sales of marketable securities, investment in short term deposits of $1.0 million and a $1.4 million investment in property and equipment.
Net
Cash Provided by (Used In) Financing Activities.
Net cash provided by (used in)
financing activities was ($4.8) million in 2005 (resulting from the payment of dividends
to our shareholders), $16.8 million in 2006, resulting from issuance of shares in our
initial public offering in January 2006 and $0.3 million in 2007
.
C.
|
RESEARCH,
DEVELOPMENT, PATENTS AND LICENSES, ETC.
|
Our
research and development activities are conducted internally by our Chief Technology
Officer and a 72-person research and development staff. Our research and development
efforts are focused on the development of new products and upgrading the software and new
features for existing products. Included in the new products is Magentic, a desktop
enhancing solution, currently providing wallpapers and screensavers, which we released in
April 2006. In 2007 we began developing a new version of
Magentic
, dramatically
enhancing its personal photograph tools, and we expect to release
Magentic2
during
the second quarter of 2008. In addition, we are working on a new version of our back-bone
email client product IncrediMail
®
. Although we have
released numerous upgrades to this product, this will be the first full makeover,
improving the graphics and numerous user- friendly functions, bringing a much more
graphically advanced user interface. Finally, we are developing a product adapting our
creative content to the instant messaging environment.
Our
research and development expenditures were $2.0 million, $3.2 million and $6.1 million, in
the years ended December 31, 2005, 2006 and 2007, respectively. We intend to continue our
investment in product development and as a result we expect our expenditures on research
and development to further increase as we develop additional products.
Sales.
The
increase in sales in 2007 compared to 2006 was due to the rapid increase in
advertising revenues, particularly those stemming from search generated
revenues, coupled with significant growth in subscription revenues,
particularly the JunkFilter Plus subscription. We believe that the potential
for growth in search generated revenues is much greater than product sales and
that search generated revenues and subscriptions are more lucrative than
product sales. Therefore, we intend to continue emphasizing our marketing
efforts on search generated revenues and subscriptions, even if to a certain
extent at the expense of one-time fee sales, and we expect future growth to
come primarily from these areas and search generated revenues to comprise a
majority of our sales in the future. The accounting for these two revenue
streams is less seasonal than product sales and we therefore expect that our
total revenues will be less seasonal than in previous years.
35
R&D
.
R&D expenses have increased over the last few years. We expect this trend
to continue, albeit at a slower rate than in the last couple of years, as we
devote resources to research and develop new products, as well as further
enhancing and improving our existing.
Sales
and Marketing Expenses
. Our sales and marketing expenses increased as a percentage of
sales in 2006 and even more so in 2007. We expect this trend to continue at an even
greater pace in 2008, particularly in the area of media buying and other on-line marketing
efforts. The increase in 2007 was primarily a result of media buying expenses, which
totaled $1.4 million in 2007 (the year in which they essentially begun), as well as
increasing the marketing staff. In 2008, we expect to invest even greater sums in on-line
marketing techniques and media buying in order to continue and achieve rapid growth in
users and revenues.
General
and Administrative expenses
. G&A expenses increased over the last few years,
although as a percentage of sales, they decreased from 25% in 2006 to 20% in 2007. We
expect this trend to continue, namely, nominal increases in G&A expenses, representing
a decreasing percentage of our revenues.
Industry
trends expected to affect our revenues, income from continuing operations, profitability
and liquidity or capital resources
:
|
1.
|
In
recent years, we have witnessed an increase in the use of web-based e-mail
solutions such as MSN Hotmail and Yahoo! Mail. Googles Gmail, a
relatively new addition to this market, is becoming increasingly popular,
and home users are gradually choosing Gmail as their preferred web-based
solution over other solutions. Unlike Hotmail and Yahoo! Mail, which do
not support the POP3 mail protocol and are therefore not compatible with
e-mail clients, Gmail fully supports POP3 and is compatible with e-mail
clients such as IncrediMail
®
. We believe
that IncrediMail will benefit from Gmails growing popularity, as
users are able to access their Gmail accounts via IncrediMail
®
and
are likely to choose this option.
|
|
2.
|
The
storing of digital photos on personal computers, and on photo hosting sites
such as Flickr.com, has increased substantially in recent years. The
convenience of such online storage of photos has caused a decrease in
usage of regular printed picture albums. However, a problem often
experienced by people that store their photos on their hard disk or on a
photo-hosting site is that they simply do not enjoy their photos as they
had previously. In the past, people spent time looking through their photo
albums, but today photos are saved in a computer folder and easily
forgotten about or lost. Access to photos saved on personal computers is
not immediate and is somewhat tedious; hence, old favorite photos are
neglected over time. The next version of
Magentic
, which we are
currently developing, is aimed to address this problem, by enabling users to
enjoy all the photos that they have stored on their computer or online
using new capabilities, with no effort from the user. Photos can be
revealed on the users desktop constantly, in more creative and
high-quality ways than those available on the web. Some examples of
Magentics
upcoming
features are 3D Photo Screensavers showing the users photos and
enriched with a variety of styles and designs, fun desktop widgets that
display users photos in creative and playful ways (nicknamed
PhotoToys), and Collage Wallpapers presenting photos within
various themes, sceneries, and illustrations. In addition, the software is
intended to let users take photos stored on other photo web sites (such as
Flickr and Picasa) and enjoy them using
Magentics
fun
capabilities.
|
|
3.
|
In
recent years, we have witnessed an increased use
by younger customers
of Instant Messaging and various social networks as their preferred means
of communication.
Messy
, IncrediMails latest product, is
aimed to enhance the Instant Messaging experience and make it much more
enjoyable for todays teens and young adults.
Messy
offers
IncrediMails high-quality creative content incorporated seamlessly
within
Windows Live Messenger
, thus enabling users to customize and
personalize their conversations, express themselves and most importantly
generate enjoyment from chatting with friends on
Windows Live Messenger
.
We believe that via the introduction of
Messy
, which is aimed to
the younger audience, we will effectively reach this significant
demographic segment.
|
|
4.
|
With
the growing usage of e-mail as a form of daily communication, Spam has
become a major threat to home users, and as a result methods of blocking
and avoiding Spam have become commonly used by home users. As e-mail usage
is continuing to grow with time, so is the usage of Anti-Spam mechanisms.
IncrediMails subscription-based Anti-Spam tool,
JunkFilter Plus
created
especially for IncrediMails
e-mail client, blocks such
Spam from entering IncrediMail
®
users Inboxes.
As Spam threats are consistently rising, we believe that the need to
purchase IncrediMails Anti-Spam mechanism will grow as well, thus
generating an increase in revenue from sales of our
JunkFilter Plus
product.
|
36
E.
|
OFF-BALANCE
SHEET ARRANGEMENTS
|
We
do not have off-balance sheet arrangements (as such term is defined by applicable SEC
regulations) that have or are reasonably likely to have a current or future effect on our
financial condition, changes in financial conditions, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that are material to
investors.
F.
|
TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
|
The
following table summarizes our contractual commitments as of December 31, 2007 and the
effect those commitments are expected to have on our liquidity and cash flow in future
periods:
|
|
Payments Due by Period
|
Contractual Commitments
|
Total
|
Less
than
1 year
|
1-3
Years
|
3-5 Years
|
More than
5 Years
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued severance pay
|
|
|
$
|
1,392
|
|
|
|
|
|
|
|
|
|
|
$
|
1,392
|
|
Uncertain Income Tax Positions(*)
|
|
|
$
|
842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
$
|
2,345
|
|
$
|
656
|
|
|
1,126
|
|
$
|
563
|
|
|
|
|
Total
|
|
|
$
|
4,579
|
|
$
|
656
|
|
|
1,126
|
|
$
|
563
|
|
$
|
1,392
|
|
|
|
|
|
|
|
(*)
|
Uncertain
income tax positions under FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (FIN 48), are due upon
settlement and we are unable to reasonably estimate the ultimate amount or
timing of settlement. See Note 9(f) of our Consolidated Financial Statements
for further information regarding our liability under FIN No. 48.
|
ITEM 6.
|
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
A.
|
DIRECTORS
AND SENIOR MANAGEMENT
|
The
following table sets forth information regarding our executive officers and directors as
of the date of this annual report:
Name
|
Age
|
Position
|
|
|
|
|
|
|
|
|
|
|
|
|
Ofer Adler
|
37
|
Chief Executive Officer and Director
|
Yaron Adler
|
37
|
Director and President
|
Dan Blumenfeld
|
34
|
Vice President - Marketing
|
Keren Elkin
|
33
|
Vice President - Human Resources and Administration
|
Tamar Gottlieb
|
51
|
Director and Chairperson of the Board
|
Gittit Guberman
|
52
|
Director, member of Audit Committee
|
Yuval Hamudot
|
34
|
Chief Technologies Officer
|
Jeff Holzmann
|
33
|
Executive Vice President - Delaware subsidiary
|
David Jutkowitz *
|
57
|
External Director, member of Audit Committee
|
Yacov Kaufman
|
50
|
Chief Financial Officer
|
James H. Lee*
|
41
|
External Director, member of Audit Committee
|
Yair M. Zadik
|
51
|
Director, member of Audit Committee
|
|
|
|
*
Independent for Nasdaq Stock Market purposes.
|
Ofer
Adler and Yaron Adler are cousins. There are no other familial relationships among our
executive officers and directors. Yair M. Zadik was initially appointed to the board by
our founders, Ofer Adler and Yaron Adler, pursuant to provisions of the articles of
association that were in effect prior to our initial public offering. Tamar Gottlieb and
Gittit Guberman were initially appointed to the board by the board of directors, and James
H. Lee and David Jutkowitz were elected to serve as our external directors by our
shareholders as required by Israeli law. No shareholder has special voting rights with
respect to the election of directors or otherwise.
37
Ofer
Adler
co-founded IncrediMail and has been our Chief Product Officer and a director
since our incorporation. Since February 5, 2008 Ofer Adler serves as the Companys
Chief Executive Officer. As a Chief Executive Officer he is responsible for our day-to-day
operations, business development and the overall management of IncrediMail. As a Chief
Product Officer he had overall responsibility for the design and development of
IncrediMail products, website and graphic content. Mr. Adler had direct
responsibility for the design of all major IncrediMail applications and websites. Before
co-founding IncrediMail, Mr. Adler worked as a trader and portfolio manager at Clal
Insurance from 1997 to 1999, and as a trader and technical analysis expert at Batucha,
Israels largest private brokerage firm, from 1994 to 1997.
Yaron
Adler
co-founded IncrediMail in November 1999. Has served as a director since our
incorporation, as our Chief Executive Officer since our incorporation and until February
5, 2008, and since February 5, 2008 serves as the Companys President. In 1999, prior
to founding IncrediMail, Mr. Adler consulted Israeli start up companies regarding
Internet products, services and technologies. Mr. Adler served as a Product Manager
from 1997 to 1999, and as a software engineer from 1994 to 1997, at Tecnomatix
Technologies Ltd., a software company that develops and markets production-engineering
solutions to complex automated manufacturing lines that fill the gap between product
design and production, and which was acquired by UGS Corp. in April 2005. In 1993,
Mr. Adler held a software engineer position at Intel Israel. He has a B.A. in
computer sciences and economics from Tel-Aviv University.
Dan
Blumenfeld
joined us in May 2004 and serves as our Vice President Marketing. He
is responsible for in-depth analysis of our market and industry, implementation of
appropriate market positioning, development of pricing and overall marketing strategies.
Prior to joining us Mr. Blumenfeld gained more than ten years experience, working
primarily as a Product Manager or a Creative Manager, in planning, designing and marketing
of computer software in several positions including at Hotbar Ltd. from 2003 to 2004, at
DVDemand Ltd. from 2000 to 2003 and at Waves Ltd. from 1997 to 1999.
Keren
Elkin
has been the Vice President of HR and Administration since 2000. She is
responsible for the planning, recruitment, organizational development, training,
compensation, benefits, and social activities of company personnel. Keren also served as
IncrediMails Purchase Manager for several years. Keren Elkin holds a B.A in Business
Administration, majoring in Human Resources, from Ruppin College.
Tamar
Gottlieb
has served as our director since 2001 and became Chair of the Board of
Directors on February 3, 2006, the closing date of our initial public offering. She is a
Managing Director of Harvest Capital Markets Ltd., an investment banking and financial
consulting firm that she founded in January 2001. Prior to 2001, Ms. Gottlieb held
Managing Director or Senior Manager positions in several investment banking institutions,
including Investec Clali Management & Underwriting Ltd. (from July 1997 to
January 2001), Oscar Gruss (1996) Ltd. (from February 1996 to May 1997) and Leumi &
Co. Investment Bankers Ltd. (from 1980 to 1991). From August 1991 to June 1994,
Ms. Gottlieb served as the Founding Managing Director of Maalot The Israeli
Securities Rating Company Ltd., Israels first credit rating agency. She currently
serves as a board member of several Israeli public and private companies, including Emilia
Development Ltd., Leumi Mortgage Bank Ltd., Hasin-Esh Ltd., N.R. Spuntech Industries Ltd.,
Reit 1 Ltd. and T.R.A Radio Tel Aviv Ltd. In the past she has also served as a director
of, among others, El Al Israeli Airlines Ltd. and Dan the Company for Public
Transport Ltd. Ms. Gottlieb public service activities include serving as a member of
the Statutory Committee for the approval of Directors and General Managers of Israeli
Government Companies and Statutory Authorities and until 2007 as a member of the Advisory
Committee to the Israeli Anti-Trust Authority. Ms. Gottlieb has a B.A. in
international relations from the Hebrew University of Jerusalem and an M.A. in economics
from Indiana University.
Gittit
Guberman
was appointed to the board effective January 30, 2006. Ms. Guberman currently
serves as Chief Financial Officer at Micronet Ltd., a provider of mobile resource
management technology solutions, publicly traded on the TASE. Prior to that, she served as
a consultant in the capacity of our Chief Financial Officer from September 2002 through
November 30, 2005; her consultancy agreement terminated on December 31, 2005. Prior to her
engagement with us, Ms. Guberman worked for eight years as an attorney and investment
banker with Eihut Capital Markets Ltd., a publicly held investment and consulting firm.
From 1987 to 1993 she served as an attorney and the Deputy Director in the Enforcement
Division of the Israeli Securities Authority, and from 1981 to 1987 she served as an
economist and analyst in the Israeli Ministry of Finance. Ms. Guberman currently
serves as a director and member of several committees at the Tel-Aviv Stock Exchange and
as a director of Maof Clearing House Ltd., a subsidiary of the Tel-Aviv Stock Exchange.
She has a B.Sc. in economics and mathematics, an M.A. in economics, an M.B.A. and an L.LB
from the Hebrew University of Jerusalem.
38
Yuval
Hamudot
is our Chief Technology Officer since March 2007, and is responsible for the
technological design and development of our products and online system. In that capacity
he manages our research and development team as well as our quality assurance and
information technology departments. Mr. Hamudot joined us in 2000, and since 2003, and
until his recent appointment, was Vice President Research and Development. Prior to
joining us, Mr. Hamudot worked for two years in the research and development at
Commonsense Ltd., a software company that outsourced hi-end technology solutions. Mr.
Hamudot served in the IDF computer unit (Mamram) and has a B.Sc. in Computer
Science from Tel Aviv University and an M.B.A. from Bar-Ilan University.
Jeff
Holzmann
was engaged as Executive Vice President and General Manager of IncrediMail
USA in April 2006. Prior to joining IncrediMail Mr. Holzmann was the CEO of Genius
Technologies, a high tech venture capital fund. Mr. Holzmann also served as the CEO of
GREY Interactive in Israel, an interactive advertising agency, as Vice Chairman of the
board of M.L.L Software (TASE:MLL), an Israeli publicly traded IT software company, and a
director with a venture capital fund at Koor Technologies (NYSE:KOR), an Israeli publicly
traded holding company. Mr. Holzmann is a certified systems analyst and holds a B.A in
Business Administration and Information Technologies from the Interdisciplinary Center
Herzliya.
David
Jutkowitz
was elected to serve as an external director at our shareholders
meeting on December 27, 2007. David Jutkowitz serves as a director of Arad Investment and
Industrial Development since 2006. From 2001 until October 2007, Mr. Jutkowitz has served
as an external director of Carmel Investment Group Ltd., and was a member of the audit,
investment and portfolio committees of Carmel Investment Group Ltd. Between 2000 and 2003,
Mr. Jutkowitz held the position of CEO at BXS Ltd., where his responsibilities
included managing all stages in development of the business, including the raising of
funds from investors and building a local and international distribution. From 1995 until
2002, Mr. Jutkowitz held the position of CEO at E.L. Advanced Science Ltd., where his
responsibilities included identifying and acquiring appropriate companies and taking an
active part in the management of such companies. From 1976 to 2001, Mr. Jutkowitz held the
position of CFO at Etz Lavud Ltd.
Yacov
Kaufman
was engaged to serve as our Chief Financial Officer in 2005. From 1996 to
November 2005, Mr. Kaufman was the Chief Financial Officer of Data Systems & Software
Inc. (OTCBB: DSSI.OB) that, through its subsidiaries, provides software consulting and
development services and serves as an authorized dealer and a value-added-reseller of
computer hardware. At Data Systems, Mr. Kaufman established and subsequently managed the
accounting and financial departments of the company and its subsidiaries. His
responsibilities included financial analysis and implementation of procedures for internal
control over financial reporting. Mr. Kaufman also served as the comptroller of dsIT
Technologies Ltd., a subsidiary of Data Systems since 1986 and as its Chief Financial
Officer since 1990. From 1993 to 1999, Mr. Kaufman served as a director of Tower
Semiconductor Ltd. (Nasdaq: TSEM), an integrated circuits manufacturer and then subsidiary
of Data Systems & Software Inc. Mr. Kaufman is an Israeli Certified Public Accountant
and has a B.A. in accounting and economics from the Hebrew University of Jerusalem and an
M.B.A. in business finance from Bar-Ilan University.
James
H. Lee
was elected to serve as an external director at our shareholders
meeting on March 30, 2006. He is an industry leader in electronic securities brokerage and
trading systems providers. Since 2004, he has been a private investor and a member of the
boards of directors of a number of start-up organizations. In 1995, Mr. Lee founded
Momentum Securities LLC, a direct-access broker dealer, which merged with Tradescape Corp,
a provider of advanced trading systems for active and professional traders, in 1999. Mr.
Lee was the Vice Chairman of the Board of Tradescape Corp. from 1999 to 2002. In June
2002, Momentum Securities and Tradescape were acquired by E*Trade Financial for
consideration of about $280 million. At the time of the acquisition, Momentum Securities
was the largest direct-access broker dealer in the world as measured by revenues and trade
volume. From 2002 to 2003, Mr. Lee was responsible for the sale and integration into
E*Trade Financial of Momentum Securities and Tradescape (renamed E*Trade Professional
Trading, LLC). In addition to his responsibilities regarding Momentum Securities, from
1989 to 2000, Mr. Lee was a portfolio manager and registered representative with Pension
Management Company in Houston, Texas. Mr. Lee began his career as an investment banker
with The First Boston Corporation and subsequently with Lehman Brothers in their oil and
gas groups. Mr. Lee won the Ernst & Young LLP Entrepreneur of the Year in eServices
for the South/West region in 2001. Mr. Lee has a B.B.A. in finance and an M.B.A. in
finance from the University of Texas at Austin and holds a certification from the Centre
for Hedge Fund Research and Education at London Business School in the United Kingdom. Mr.
Lee has recently been appointed Chairman of the Teacher Retirement System of Texas.
39
Yair
M. Zadik
has served as our director since 2001. He is the Co-Chief Executive Officer
of Arrow Ecology & Engineering Overseas (1999) Ltd., a company that provides
environmental solutions, and of Eshet Y.E.Z Technologies (2001) Ltd., an investment
company. In 2000 Mr. Zadik founded B-Knowledge Investments Ltd., an investment
company, and has served as its Chief Executive Officer until 2001. He currently serves as
a board member of the Israeli Export Institute, Environmental Branch. Mr. Zadik has a
B.Sc. in physics and computer sciences from Bar Ilan University. He is a Colonel (Reserve)
in the Israeli Air Force. He is the recipient of the Israeli Presidential National Defense
Award for his leadership and management of a major defense project in the Ministry of
Defense as well as a recipient of numerous military decorations.
The
aggregate direct compensation we paid to our officers as a group (seven persons) for the
year ended December 31, 2007 was approximately $1.5 million, which included approximately
$0.3 million that was set aside or accrued to provide for pension, retirement, severance
or similar benefits. This amount does not include expenses we incurred for other payments,
including dues for professional and business associations, business travel and other
expenses, and other benefits commonly reimbursed or paid by companies in Israel. We did
not pay our officers who also serve as directors any separate compensation for their
directorship during 2007, other than reimbursements for travel expenses.
The
aggregate direct compensation we paid to our directors who are not officers for their
services as directors as a group (five of the seven directors who served during 2007) for
the year ended December 31, 2007 was approximately $490,000. Directors are also reimbursed
for expenses incurred in order to attend board or committee meetings.
As
of April 30, 2008, there were outstanding options to purchase 677,000 ordinary shares
granted to twelve of our directors and officers, at a weighted average exercise price of
$6.28 per share. These options were granted under our 2003 employees share option plan.
The
compensation of our directors who are not officers of our Company, including our external
directors, was approved by our audit committee, board of directors and shareholders on
March 30, 2006 and on December 27, 2007. In accordance with the shareholders approval of
March 30, 2006, each such director receives:
(i)
an annual gross cash compensation
of $20,000 (plus V.A.T, if applicable) to be paid in four equal quarterly installments;
(ii)
a grant of options, effective March 30, 2006, to purchase 60,000 of our
ordinary shares, with the following terms:(a) each option shall be exercisable for one
ordinary share at an exercise price of $7.86 (the closing price of our ordinary shares on
March 30, 2006, the date of grant of the options, as reported by the Nasdaq Capital
Market); (b) the options shall vest as follows: (1) 24,000 options shall vest on March 30,
2007, (2) 18,000 options shall vest on March 30, 2008, and (3) 18,000 options shall vest
on March 30, 2009; and (c) any and all other terms and conditions pertaining to the grant
of the options shall be in accordance with, and subject to, the 2003 Israeli Share
Option Plan adopted by IncrediMail in 2003 and our standard Option Agreement
executed by each director and by IncrediMail promptly after the date of grant.
In
accordance with the shareholders approval of December 27, 2007 each of the directors who
is not an employee of the Company, receives for each year of service by such person as a
director of the Company, an option to purchase 10,000 Ordinary Shares of the Company (in
this subsection the
Annual Grant
), under the following terms:
(a) the Annual Grant shall be made immediately following the annual general meeting of the
shareholders of the Company in the relevant year, commencing with the shareholders meeting
held on December 27, 2007; (b) each option shall be exercisable for one Ordinary Share at
an exercise price equal to the closing price of an Ordinary Share on the date of the
annual general meeting of the shareholders of the Company upon which such option was
granted, as reported by the Nasdaq Global Market; and (c) the options shall vest in four
equal portions on each anniversary of the Annual Grant, commencing with the first
anniversary. Any and all other terms and conditions pertaining to the grant of the options
shall be in accordance with, and subject to, the 2003 Israeli Share Option Plan adopted by
IncrediMail in 2003 and our standard Option Agreement.
On
December 27, 2007, and following approval by our audit committee and board of directors,
our shareholders approved a grant to each of Mr. Ofer Adler and Mr. Yaron Adler, of
options to purchase 50,000 Ordinary Shares of the Company, under the following terms:
(a)
each option shall be exercisable for one Ordinary Share at an exercise price
equal to the closing price of an Ordinary Share on December 27, 2007, as reported by the
Nasdaq Global Market; and (b) the options shall vest in four equal portions on each
anniversary of the date of approval of the grant, commencing with the first anniversary.
Any and all other terms and conditions pertaining to the grant of the options hereunder
shall be in accordance with, and subject to, the 2003 Israeli Share Option Plan adopted by
the Company in 2003 and the Companys standard Option Agreement
1
. See
Item 6.E Share Ownership Employee Benefit Plans The 2003 Plan
below.
1
The
50,000 options granted to Yaron Adler shall remain in full force and effect
in accordance with the terms of the Option Agreement following the
execution of the Amended Agreement. According to the Amended Agreement,
despite anything to the contrary contained in the Option Agreement or in
the Companys 2003 Share Option Plan, if Yaron Adlers
employment with the Company is terminated for any reason prior to the date
on which all of the options have become fully vested, the vesting of all
of the unvested options shall be immediately accelerated and all of such
unvested options shall become fully vested and exercisable in accordance
with their terms. In addition, upon the termination of Yaron Adlers
employment with the Company for any reason, the expiration date of the
options shall be extended to 12 months following the date of such
termination. In the event that the Company shall re-price downwards the
exercise price of the options granted by it to its executive officers, the
Company shall treat the options equally and shall re-price downwards the
exercise price of the options to the same new exercise price of the
options held by its executive officers. The Amended Agreement is subject
to shareholder approval, and will be brought to their approval at the
Extraordinary Shareholder meeting to be held on April 9, 2008.
|
40
Board of Directors and
Executive Officers
We
are deemed a limited liability public company under the Israeli Companies Law.
As a limited liability public company, we are managed by a board of directors and by our
executive officers. Under the Israeli Companies Law and our articles of association, the
board of directors is responsible, among other things, for:
|
|
establishing
our policies and overseeing the performance and activities of our chief executive officer;
|
|
|
convening
shareholders' meetings;
|
|
|
preparing
and approving our financial statements;
|
|
|
determining
our plans of action, principles for funding them and the priorities among them, our
organizational structure and wage policy and examining our financial status;
|
|
|
issuing
securities and distributing dividends.
|
Our
board of directors also appoints and may remove our chief executive officer and may
appoint or remove other executive officers, subject to any rights that the executive
officers may have under employment agreements.
Upon
the closing of our initial public offering (meaning, January 30, 2006), all previously
existing special rights to appoint or serve as directors had terminated and our articles
of association were amended to remove these special rights.
Our
board of directors consists of seven directors, two of whom qualify as external
directors for Israeli law purposes and four of whom, we believe, qualify as
independent for Nasdaq Stock Market Purposes. Other than external directors,
who are subject to special election requirements under Israeli law, our directors are
elected in three staggered classes by the vote of a majority of the ordinary shares
present and entitled to vote at meetings of our shareholders at which directors are
elected. The members of only one staggered class will be elected at each annual meeting
for a three-year term, so that the regular term of only one class of directors expires
annually. At our annual general meeting held in 2006, the term of the first class,
consisting of Tamar Gottlieb and Yaron Adler, expired, and they were re-elected at that
meeting for a three-year term. At our annual general meeting held in 2007, the term of the
second class, consisting of Ofer Adler and Yair M. Zadik, expired and they were re-elected
at that meeting for a three-year term. At our annual general meeting to be held in 2008,
the term of the third class, consisting of Gittit Guberman, will expire and the director
elected at that meeting will be elected for a three-year term. The external directors will
not be assigned a class and will serve in accordance with Israeli law.
If
the number of directors constituting the board is changed, any increase or decrease shall
be apportioned among the classes so as to maintain the number of directors in each class
as nearly equal as possible, but in no case will a decrease in the number of directors
constituting the board shorten the term of any incumbent director.
The
board may appoint any other person as a director, whether to fill a vacancy or as an
addition to the then current number of directors, provided that the total number of
directors shall not at any time exceed seven directors. Any director so appointed shall
hold office until the annual general meeting of our shareholders at which the term of his
or her class expires, unless otherwise stated in the appointing resolution.
41
There
is no limitation on the number of terms that a director may serve. As described below,
external directors may serve two terms of three years each and, subject o certain
conditions, an unlimited number of subsequent three-year terms.
Nominations
for the election of directors may be made by our board of directors in view of the
recommendation of the nominating and governance committee or, subject to the Companies
Law, by any of our shareholders. However, any shareholder or shareholders holding at least
5% of the voting rights in our issued share capital may nominate one or more persons for
election as directors at a general meeting only if a written notice of such
shareholders intent to make such nomination or nominations has been given to our
secretary and each such notice sets forth all the details and information as required to
be provided under our articles of association.
Shareholders
may remove a director who is not an external director from office only by a resolution
approved by shareholders holding more than two-thirds of the voting power of the issued
and outstanding share capital of IncrediMail.
The
board of directors appoints its chairperson from among its members in accordance with our
articles of association and subject to the provisions of the Companies Law. Pursuant and
subject to our articles of association, the chairperson convenes and presides over the
meetings of the board. The quorum required for meetings of the board is a majority of the
members of the board who are lawfully entitled to participate and vote at the meeting, and
resolutions are approved by a vote of the majority of the members present. If the board of
directors meeting is adjourned for failure to obtain a quorum and at the adjourned meeting
a quorum is not present, then the quorum shall be constituted by the presence of two
directors then in office who are lawfully entitled to participate and vote at that
meeting. A director may appoint an alternate director to attend a meeting in his or her
place, but an alternate director so appointed must be approved by the board prior to the
relevant meeting.
Pursuant
to the requirements of the Israeli Companies Law, our board has determined that at least
one of our directors must have accounting and financial expertise (in addition to the
external director that must have accounting and finance expertise). In determining such
number of directors, the board considered, among other things, the business of our
Company, our size and the scope and complexity of our operations. Such determination also
took into account our total number of directors as set forth in the articles of
association in accordance with the Israeli Companies Law.
We
have agreed to permit a designee of Maxim Group, the lead underwriter of our initial
public offering, for a period of no less than three years following the completion of the
Companys public offering and subject to certain exceptions, to be an observer on our
board of directors. The observer may attend meetings of the board and shall receive all
notices and other correspondence and communications sent by us to members of our board of
directors. Such observer shall be entitled to reimbursement for costs as provided to the
other members of our board of directors. Maxim Group has not yet designated an observer.
Each
of our executive officers serves at the discretion of our board of directors and holds
office until his or her successor is elected or his or her earlier resignation or removal.
External Directors
Under
the Israeli Companies Law, Israeli companies whose shares have been offered to the public
in or outside of Israel are required to appoint at least two external directors to serve
on their board of directors. Mr. James H. Lee was appointed as an external director on
March 30, 2006 and Mr. David Jutkowitz was appointed as an external director on December
27, 2007, in each case for three years..
Each
committee of the board of directors entitled to exercise any powers of the board is
required to include at least one external director. The audit committee must include all
the external directors.
An
amendment to the Israeli Companies Law in January 2006 provides that a person may be
appointed as an external director if he or she has professional qualifications or if he or
she has accounting and financial expertise. In addition, at least one of the external
directors must have accounting and financial expertise. A person may not serve as an
external director if at the date of his or her appointment or within the prior two years,
that person, or his or her relatives, partners, employers or entities under his or her
control, have or had any affiliation with us or any entity or person controlling us at the
time of appointment or an entity that is controlled, at the time of appointment or the
prior two years, by us or by the person or entity controlling us. Under the Companies Law,
affiliation is defined in this context to include an employment relationship,
a business or professional relationship maintained on a regular basis, control or service
as an office holder. However, the service of a director who was appointed for the purpose
of being an external director in a company that intends to first offer its shares to the
public is not considered a prohibited affiliation. An office holder is defined in the
Companies Law as any 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 these positions regardless of
that persons title.
42
A
person may not serve as an external director if that persons position or other
activities create, or may create, a conflict of interest with the persons service as
a director or may otherwise interfere with the persons ability to serve as a
director. If at the time any external director is appointed, all members of the board are
the same gender, then the external director to be appointed must be of the other gender.
External
directors are elected by a majority vote at a shareholders meeting, as long as
either:
|
|
the
majority of shares voted for the election includes at least one-third of the shares of
non-controlling shareholders voted at the meeting (excluding abstaining votes); or
|
|
|
the
total number of shares of non-controlling shareholders voted against the election of the
external director does not exceed one percent of the aggregate voting rights in the
company.
|
The
Israeli Companies Law provides for an initial three-year term for an external director,
which may be extended for one additional three-year term. Thereafter (with respect to
companies whose securities are listed on certain designated stock exchange, including the
Nasdaq Global Market), he or she may be reelected by our shareholders for additional
periods of up to three years each, in each case provided that the audit committee and the
board of directors confirm that, in light of the external directors expertise and
special contribution to the work of the board of directors and its committees, the
reelection for such additional period(s) is beneficial to the company. External directors
may be removed only:
|
|
by
a court, and then only if
|
|
|
the
external directors cease to meet the statutory qualifications for their appointment;
|
|
|
they
violate their duty of loyalty to the company;
|
|
|
the
director is unable to perform his or her post on a regular basis; or
|
|
|
during
his or her tenure, the director was convicted in a court outside of the State of Israel
on accounts of bribery, deceit, offenses by managers of a corporate body or offenses
involving misuse of inside information; or
|
|
|
If
the board of directors determines that the external director has ceased to meet the
statutory qualification for appointment or that the external director has violated his or
her duty of loyalty to the company, the board shall call a general meeting of the
shareholders and any such external director may be removed for such reason(s) by a
resolution of the general meeting approved by the same special majority as required for
such external directors election.
|
In
the event of a vacancy created by an external director, our board of directors is required
under the Companies Law to call a shareholders meeting to appoint a new external
director as soon as practicable.
External
directors may be compensated only in accordance with regulations adopted under the Israeli
Companies Law. The regulations provide three alternatives for cash compensation to
external directors: a fixed amount determined by the regulations, an amount within a range
set in the regulations, or an amount that shall not be lower than the compensation
received by another director nor higher than the average compensation to other directors.
Another or other directors are defined in the applicable
regulations as directors of the company that are not external directors and who are not
(1) controlling shareholders of the company or (2) employees or service providers of the
company on a regular basis or (3) serving at, or providing services on a regular basis, to
a company that controls the company or to a company that is under common control with the
company or (4) directors who do not receive compensation from the company. A company also
may issue shares or options to an external director at an amount not lower than that
received by another director (as defined in the applicable regulations) nor higher than
the average amount granted to other directors (as defined in the applicable regulations).
Cash compensation at the fixed amount determined by the regulations does not require
shareholder approval. Compensation determined in any other manner requires the approval of
the companys audit committee, board of directors and shareholders, in that order.
Compensation of external directors must be determined prior to their consent to serve as
external directors.
43
Nasdaq Market Governance
Requirements for Foreign Private Issuers
Assuming
that we maintain our status as a foreign private issuer, under the Nasdaq Market rules, a
foreign private issuer may generally follow its home country rules of corporate governance
except for certain matters such as composition of the audit committee (as discussed
below). Nasdaq Market Rules specify that the board of directors must contain a majority of
independent directors by 12 months from the date of its initial public offering and that
the independent directors must have regularly scheduled meetings at which only independent
directors are present. Our board contains a majority of independent directors although our
independent directors do not meet separately since such meetings are not required by
Israeli law. See Item 10.B Memorandum and Articles of Association Approval of
Related Party Transactions for a discussion of the requirements of Israeli law
regarding special approvals for transactions involving directors, officers or controlling
shareholders. Investors are cautioned that there are other Nasdaq governance requirements
with which, as a foreign private issuer, we may elect not to comply. If we so elect,
we will provide disclosure of any Nasdaq governance requirements we elect not to
comply with in accordance with Nasdaqs disclosure requirements, as may be in effect
from time to time.
Committees of the Board
of Directors
Our
board of directors has established an audit committee, a compensation committee and a
nominating and governance committee.
Audit Committee
Our
audit committee is comprised of David Jutkowitz, James H. Lee, Yair M. Zadik and
Gittit Guberman and operates pursuant to a written charter.
Under
the listing requirements of the Nasdaq Stock Market, a foreign private issuer is required
to maintain an audit committee that has certain responsibilities and authority (such as
being directly responsible for the appointment, compensation, retention and oversight of
the work of the issuers public accountants), and whose members meet the independence
requirements under the Exchange Act.
Under
the Israeli Companies Law, the board of directors of a public company must establish an
audit committee. The audit committee must consist of at least three directors and must
include all of the external directors. The audit committee may not include the chairman of
the board, any director employed by the company or providing services to the company on an
ongoing basis, a controlling shareholder or any of the controlling shareholders
relatives.
The
composition and functions of the audit committee meet the requirements of the Israeli
Companies Law, the Sarbanes-Oxley Act of 2002 and the Nasdaq Stock Market rules as they
apply to foreign private issuers.
The
audit committee provides assistance to the board of directors in fulfilling its legal and
fiduciary obligations in matters involving our accounting, auditing, financial reporting,
internal control and legal compliance functions by approving the services performed by our
independent accountants and reviewing their reports regarding our accounting practices and
systems of internal accounting controls. The audit committee also oversees the audit
efforts of our independent accountants and takes those actions as it deems necessary to
satisfy itself that the accountants are independent of management. Under the Israeli
Companies Law, the audit committee is also required to monitor and approve remedial
actions with respect to deficiencies in the administration of the company, including by
consulting with the internal auditor and recommend remedial actions with respect to such
deficiencies, and to review and approve related party transactions.
Compensation Committee
Our
compensation committee is comprised of James H. Lee, Tamar Gottlieb and Yair M. Zadik, and
operates pursuant to a written charter. The composition and functions of the compensation
committee meet the requirements of the Nasdaq Stock Market rules for U.S. domestic
issuers, with which we comply voluntarily. The compensation committee will make
recommendations to the board of directors regarding the issuance of employee share options
under our share option and benefit plans and will determine salaries and bonuses for our
chief executive officer and our other executive officers and incentive compensation for
our other employees.
Nominating and Governance
Committee
Our
nominating and governance committee is comprised of Tamar Gottlieb and Yair M. Zadik, and
operates pursuant to a written charter. It is responsible for making recommendations to
the board of directors regarding candidates for directorships and the size and composition
of the board. In addition, the committee is responsible for overseeing our corporate
governance guidelines and reporting and making recommendations to the board concerning
corporate governance matters. The composition and function of our nominating and
governance committee meet the requirements of the rules of the Nasdaq Stock Market for
U.S. domestic issuers, with which we comply voluntarily.
44
Internal Auditor
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 to
examine whether a companys actions comply with the law and proper business
procedure. The internal auditor may be an employee of the company employed specifically to
perform internal audit functions but may not be an interested party or office holder, or a
relative of any interested party or office holder, and may not be a member of the
companys independent accounting firm or its representative. The Israeli Companies
Law defines an interested party as a holder of 5% or more of the shares or voting rights
of a company, any person or entity that has the right to nominate or appoint at least one
director or the general manager of the company or any person who serves as a director or
as the general manager of a company. The internal auditor shall not be terminated without
his or her consent, nor shall he or she be suspended from such position unless the board
of directors has so resolved after hearing the opinion of the audit committee and after
giving him or her opportunity to present his or her case to the board and to the audit
committee. In August 2006 the Board of Directors approved the appointment of the firm of
Yardeni-Gelfand as internal auditor of the Company, and they have been acting as such
since.
Certain Employment
Agreements with Directors
We
have entered into employment agreements, effective February 3, 2006, with our co-founder,
Chief Executive Officer and Chief Product Officer, Ofer Adler, and our co-founder and
President, Yaron Adler, to retain their continuing services. The employment agreements do
not provide for a specified term and may be terminated by either party upon ninety
days prior notice. Upon termination by us of the employment of either of these
executives other than for cause (as set forth in the agreements), we are
required to continue to pay the terminated executive his salary, benefits and bonus until
the end of the 90 day notice period. However, we will have the option to pay the
terminated executive a lump sum equal to all amounts due as of the notice date. As
required by Israeli law, we will also remit severance payment to the terminated executive
in an amount equal to one months salary for each year of employment with us
following the first year of employment (and a pro rata portion of such monthly salary for
each portion of a year of employment following the first year of employment). Such amount
of severance payment will be remitted to the executives even if they voluntarily terminate
their employment with us. In the event that we terminate the employment of either of Mr.
Yaron Adler or Mr. Ofer Adler for cause, we will not be required to give prior
notice and/or to pay the executive severance payment, except for payment required by
Israeli law. In the event that the executive resigns without giving the required notice
period, we may deduct from the money that we owe the executive an amount equal to the
wages to which he would have been entitled had he worked during the notice period.
On
February 5, 2008, the board of directors of the Company has resolved to appoint Mr. Yaron
Adler as the Companys President, and approved the amendment to Mr. Yaron
Adlers Employment Agreement, which is subject to our Shareholders approval (the
Amended Agreement
). According to the Amended Agreement in rendering the
services of President, as set forth below, Mr. Yaron Adler shall be subordinate to the
Companys Chief Executive Officer. The Company shall have the right to terminate the
Amended Agreement at any time by providing Yaron Adler with a 30 days prior notice of
termination, provided however, that the Company may not provide Yaron Adler with such
prior notice before July 1, 2008. In the event that the Company shall provide Yaron Adler
with a notice of termination of the Amended Agreement after July 1, 2008 but prior to May
1, 2009, the Company and Yaron Adler shall enter into an alternative employment agreement
pursuant to which Yaron Adler shall provide the Company with consulting services on terms
similar to the terms of the Amended Agreement (but in which Yaron Adler shall not be the
Companys President), which agreement may be terminated by the Company upon a 30 days
prior notice which may be provided on or after (but in no event before) April 1, 2009.
Yaron Adler may terminate the Amended Agreement at any time upon providing the Company
with a 30 days prior notice. Upon termination of Yaron Adlers employment with the
Company, by either party, Yaron Adler shall be entitled to all social benefits, including
among others, severance payment in accordance with applicable law, from the date of Yaron
Adlers first day of employment with the Company until the date of termination of his
employment.
Ofer
Adler has agreed not to compete with us during the term of the agreement and for a period
of two years thereafter and Yaron Adler agreed to do so during the term of the Amended
Agreement and for a period of one year thereafter. The agreements also contain customary
confidentiality and intellectual property assignment provisions.
We
also have existing employment agreements with our other executive officers. These
agreements do not contain any change of control provisions and otherwise contain salary,
benefit and non-competition provisions that we believe to be customary in our industry.
45
As
of December 31, 2007 we had 148 employees, including 144 employees based in Israel and 4
employees based in the US. The breakdown of our employees by department and fiscal period
is as follows:
|
|
December 31,
|
|
|
2005
|
2006
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management and administration
|
|
|
|
6
|
|
|
9
|
|
|
17
|
|
|
Support and creative
|
|
|
|
19
|
|
|
25
|
|
|
32
|
|
|
Research and development
|
|
|
|
30
|
|
|
52
|
|
|
68
|
|
|
Selling and marketing
|
|
|
|
7
|
|
|
15
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
62
|
|
|
101
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Some
provisions of the collective bargaining agreement between the Histadrut, which is the
General Federation of Labor in Israel, and the Coordination Bureau of Economic
Organizations, including the Industrialists Association of Israel, apply to our
Israeli employees by virtue of extension orders of the Israeli Ministry of Industry, Trade
and Labor. These provisions concern the length of the workday and the work-week,
recuperation pay and commuting expenses, compensation for working on the day before and
after a holiday and payments to pension funds. Furthermore, these provisions provide that
the wages of most of our employees are adjusted automatically. The amount and frequency of
these adjustments are modified from time to time. Additionally, pursuant to an expansion
order, dated as of May 7, 2006, which applies to the software field we are required to
insure all of our employees by a comprehensive pension plan or a senior employees
insurance according to the terms and the rates detailed in the order. In addition, Israeli
law determines minimum wages for workers, minimum paid leave or vacation, sick leave,
working hours and days of rest, insurance for work-related accidents, determination of
severance pay, the duty to give notice of dismissal or resignation and other conditions of
employment. In addition, certain laws prohibit or limit the employers ability to
dismiss its employees in special circumstances. We have never experienced a work stoppage,
and we believe our relations with our employees are good.
Israeli
law generally requires the payment of severance by employers upon the retirement or death
of an employee or termination of employment. We currently fund most of our ongoing
severance obligations through insurance policies. As of December 31, 2007, our net accrued
unfunded severance obligations totaled $0.3 million. Furthermore, Israeli employees and
employers are required to pay predetermined sums to the National Insurance Institute.
These amounts also include payments for national health insurance. The payments to the
National Insurance Institute can equal up to approximately 16.0% of wages, of which the
employee contributes approximately 10.0% and the employer contributes approximately 6.0%.
Security Ownership of
Directors and Executive Officers
The
following table sets forth information regarding the beneficial ownership of our ordinary
shares as of April 30, 2008 by:
|
|
each
of our executive officers;
|
|
|
each
of our directors; and
|
|
|
all
of our directors and officers as a group.
|
Beneficial
ownership of shares is determined in accordance with the rules of the SEC and generally
includes any shares over which a person exercises sole or shared voting or investment
power. Ordinary shares that are subject to warrants or stock options that are presently
exercisable or exercisable within 60 days of a specified date are deemed to be outstanding
and beneficially owned by the person holding the stock options for the purpose of
computing the percentage ownership of that person, but are not treated as outstanding for
the purpose of computing the percentage of any other person.
Except
as indicated in the footnotes to this table, each shareholder in the table has sole voting
and investment power for the shares shown as beneficially owned by them. Percentage
ownership is based on 9,475,943 ordinary shares outstanding on April 30, 2008.
46
Name
|
Number of
Ordinary
Shares
Beneficially
Owned
|
Percentage of
Ordinary
Shares
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Ofer Adler
|
|
|
|
1,451,167
|
|
|
15.3
|
%
|
Yaron Adler
|
|
|
|
1,360,933
|
|
|
14.4
|
%
|
Tamar Gottlieb (1)
|
|
|
|
102,800
|
|
|
1.1
|
%
|
Yair M. Zadik (1)
|
|
|
|
102,800
|
|
|
1.1
|
%
|
Yuval Hamudot (2)
|
|
|
|
92,700
|
|
|
*
|
|
Gittit Guberman (3)
|
|
|
|
59,100
|
|
|
*
|
|
Yacov Kaufman (4)
|
|
|
|
42,400
|
|
|
*
|
|
James H. Lee (1)
|
|
|
|
42,000
|
|
|
*
|
|
Dan Blumenfeld (5)
|
|
|
|
31,750
|
|
|
*
|
|
Keren Elkin (6)
|
|
|
|
13,516
|
|
|
*
|
|
Jeff Holzmann (7)
|
|
|
|
3,750
|
|
|
*
|
|
All directors and officers as a group (11 persons) (8)
|
|
|
|
3,302,916
|
|
|
34.3
|
%
|
|
|
|
*
Represents less than one percent
|
(1)
|
Includes
options to purchase 42,000 ordinary shares at an exercise price of $7.86 per
share, exercisable within 60 days of this Annual Report.
|
(2)
|
Includes
options to purchase 22,800 ordinary shares at an exercise price of $1.72 per
share and options to purchase 2,500 ordinary shares at an exercise price of
$3.00* per share, exercisable within 60 days of this Annual Report.
|
(3)
|
Represents
options to purchase 17,100 ordinary shares at an exercise price of $1.72 per
share and options to purchase 42,000 ordinary shares at an exercise price of
$7.86 per share, exercisable within 60 days of this Annual Report.
|
(4)
|
Represents
options to purchase 42,400 ordinary shares at an exercise price of $3.00* per
share, exercisable within 60 days of this Annual Report.
|
(5)
|
Represents
options to purchase 28,000 ordinary shares at an exercise price of $1.72 per
share and options to purchase 3,750 ordinary shares at an exercise price of
$3.00* per share, exercisable within 60 days of this Annual Report.
|
(6)
|
Includes
options to purchase 11,400 ordinary shares at an exercise price of $1.72 per
share and options to purchase 1,250 ordinary shares at an exercise price of
$3.00* per share, exercisable within 60 days of this Annual Report.
|
(7)
|
Represents
options to purchase 3,750 ordinary shares at an exercise price of $3.00* per
share, exercisable within 60 days of this Annual Report.
|
(8)
|
Includes
options to purchase 154,650 ordinary shares, exercisable within 60 days of this
Annual Report.
|
|
*
|
On
February 21, 2008 the board of directors of the Company approved the re-pricing of all
the existing options, granted to employees under the 2003 Plan and with an exercise price
greater than $3.00, to $3.00. The re-pricing of the employees options still
awaits approval of the Israeli Tax Authorities.
|
Employee Benefit Plans
Our
current equity incentive plan was adopted in 2003 under Section 102 of the Israeli Income
Tax Ordinance, providing certain tax benefits in connection with share-based compensation.
Please also see Note 10 of our financial statements included in this annual report for
information on the options issued under our plan.
Under
the 2003 Plan, we may grant to our directors, officers, employees, service providers and
controlling shareholders options to purchase our ordinary shares. Following an increase in
the number of shares available for grant approved by our board of directors and
shareholders in November 2005, a total of 1,368,000 ordinary shares are subject to the
2003 Plan. Any expired or cancelled options are available for reissuance under the 2003
Plan. Our employees, officers and directors may only be granted options under Section 102
of the Israeli Income Tax Ordinance (the
Tax Ordinance
), which provides
for a beneficial tax treatment, and our non-employees (such as service providers) and
controlling shareholders may only be granted options under another section of the Tax
Ordinance, which does not provide for similar tax benefits. To be eligible for tax
benefits under Section 102, options or ordinary shares must be issued through a trustee,
and if held by the trustee for the minimum required period, the employees and directors
are entitled to defer any taxable event with respect to the options until the earlier of
(i) the transfer of the options or underlying shares from the trustee to the employee or
director or (ii) the sale of the options or underlying shares to any other third party.
Based on elections made by us, our employees and directors will only be subject to capital
gains tax of 25% on the sale of the options or the underlying shares, provided the trustee
holds their options or, upon their exercise, the underlying shares for the lesser of (i)
30 months, or (ii) 24 months following the end of the calendar year in which the options
were granted, and if granted after January 1, 2006, for only 24 months. We may not deduct
expenses pertaining to the options for tax purposes.
47
The
tax treatment with respect to options granted to employees and directors under the 2003
Plan is the result of our election of the capital gains tax track under Section 102 of the
Tax Ordinance. Section 102 also provides for an income tax track, under which, among other
things, the benefit to the employees will be taxed as income, the issuer will be allowed
to recognize expenses for tax purposes, and the minimum holding period for the trustee
will be 12 months from the date upon which such options are granted. We are able to change
our election with respect to future grants under the 2003 Plan as of the close of 2004.
Our
board of directors has the authority to administer the 2003 Plan and to grant options
under the plan. However, the compensation committee appointed by the board provides
recommendations to the board with respect to the administration of the plan and also has
full power, among other things, to alter any restrictions and conditions of the options,
accelerate the rights of an optionee to exercise options and determine the exercise price
of the options.
Options
granted to date under the 2003 Plan in past vested over three years from the grant date so
that 40% vest after 12 months and an additional 30% vest after each 12 months thereafter.
Alternatively, these options may vest in 4 equal parts annually. Options under the 2003
Plan prior our initial public offering were generally granted at an exercise price of
$1.72 per share. Since the Companys initial public offering all options are granted
with an exercise price equal to the closing market price, on the day the grant is
approved. See
Item 6.B Compensation for a description of options granted under the 2003 Plan
to our directors.
Options
granted to date under the 2003 Plan generally expire within five years of the grant date
unless extended as provided by the plan. Options may be exercised only if vested and
provided that the holder is employed by us or provides us services continuously from the
time of granting of the option until the date of exercise. However, if termination of
employment is without cause, vested options may be exercised for a period of 90 days from
the date of termination of employment; and if termination is the result of death or
disability, vested options may be exercised for a period of 12 months after the date of
termination. In addition, the board or a compensation committee may extend the exercise
period of options held by employees whose employment was terminated for a period not
exceeding their expiration date.
The
2003 Plan does not provide for acceleration of the vesting period upon the occurrence of
certain corporate transactions. However, the board or compensation committee may provide
in individual option agreements that if the options are not substituted or exchanged by a
successor company, then the vesting of the options shall accelerate.
Adjustments
to the number of options or exercise price shall not be made in the event of rights
offering on outstanding shares.
ITEM 7.
|
|
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
The
following table sets forth information regarding the beneficial ownership of our ordinary
shares as of April 30, 2008 by each person or group of affiliated persons that we know
beneficially owns more than 5% of our outstanding ordinary shares. Other than with respect
to our directors and officers, we have relied on public filings with the SEC. Unless
otherwise stated herein, each shareholders address is c/o IncrediMail Ltd., 4
HaNechoshet
Street, Tel Aviv 69710, Israel.
Beneficial
ownership of shares is determined in accordance with the rules of the SEC and generally
includes any shares over which a person exercises sole or shared voting or investment
power. Ordinary shares that are subject to warrants or stock options that are presently
exercisable or exercisable within 60 days of a specified date are deemed to be outstanding
and beneficially owned by the person holding the stock options or warrants for the purpose
of computing the percentage ownership of that person, but are not treated as outstanding
for the purpose of computing the percentage of any other person.
48
Except
as indicated in the footnotes to this table, each shareholder in the table has sole voting
and investment power for the shares shown as beneficially owned by such shareholder.
Percentage ownership is based on 9,475,943 ordinary shares outstanding on April 30, 2008.
Our major shareholders do not have different voting rights than our other shareholders.
Name
|
Number of Ordinary
Shares Beneficially Owned
|
Percentage of Ordinary
Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Ofer Adler (2)
|
|
|
|
1,451,167
|
|
|
15.3
|
%
|
Yaron Adler (1)
|
|
|
|
1,360,933
|
|
|
14.4
|
%
|
Longview Fund L.P.
|
|
|
|
1,272,694
|
|
|
13.4
|
%
|
600 Montgomery Street, 44th Floor, San Francisco, CA 94111
|
|
|
|
|
|
To
our knowledge, as of April 30, 2008, we had 12* stockholders of record of which 4*
were registered with addresses in the United States. These United States holders
were, as of such date, the holders of record of approximately 68.9%* of our
outstanding shares.
*
Includes the Depository Trust Company
|
B.
|
RELATED
PARTY TRANSACTIONS
|
It
is our policy that transactions with office holders or transactions in which an office
holder has a personal interest ("Affiliated Transactions") will be on terms that, on
the whole, are no less favorable to us than could be obtained from independent parties.
Generally,
Affiliated Transactions which are "extraordinary transactions" (as such term is
defined in the Companies Law), must be approved by a majority of our disinterested
directors; nevertheless under Israeli law, under certain circumstances, such
transactions (i) must be approved by the audit committee and the board of directors and,
in certain circumstances, the shareholders; or (ii) may be approved by a simple
majority of the board (and by a simple majority of the audit committee if required),
and interested directors may participate in the deliberations and the voting with
respect to such transactions if the majority of the members of the board (or the audit
committee, if such approval is required) have a personal interest in the approval of
the transaction; provided that in such circumstances the approval of such Affiliated
Transaction shall also require the approval of the shareholders.
See
"Item 10.B Memorandum and Articles of Association-- Approval of Related Party
Transactions" for a discussion of the requirements of Israeli law regarding special
approvals for transactions involving directors, officers or controlling shareholders.
C.
|
INTERESTS
OF EXPERTS AND COUNSEL
|
Not
applicable.
ITEM 8.
|
|
FINANCIAL INFORMATION
|
A.
|
CONSOLIDATED
STATEMENTS AND OTHER FINANCIAL INFORMATION
|
Our
audited consolidated financial statements for the year ended December 31, 2007 are
included in this annual report pursuant to Item 18.
Legal Proceedings
We
are not currently subject to any legal proceedings or litigation. We may, from time to
time in the future be involved in legal proceedings.
Policy on Dividend Distribution
We
do not expect to pay cash dividends for the foreseeable future. We intend to reinvest
any future earnings in developing and expanding our business. We have decided to
reinvest the amount of tax-exempt income derived from our "Approved Enterprise" status
and not to distribute that income as dividends.
49
On
January 23, 2008 the Company announced that its Board of Directors had resolved to
adopt a share buyback plan. As of the date of this report, the Company was unable to
purchase its shares due to such tax considerations and regulatory restrictions. See
"Item 10A - Additional Information - Share Capital".
The
distribution of dividends and the buyback plan also may be limited by Israeli law,
which permits the distribution of dividends (and a purchasing the company's own
shares) only out of profits. See "Item 10.B Memorandum and Articles of Association --
Dividend and Liquidation Rights." In addition, the payment of dividends may be
subject to Israeli withholding taxes. See "Item 10.E Taxation -- Israeli Taxation
--Taxation of our Shareholders--Taxation of Non-Israeli Shareholders on Receipt of
Dividends."
Since
the date of our audited financial statements included elsewhere in this report, there
have not been any significant changes other than (i) the termination and subsequent
renewal of the Goggle AdSense partnership with the Company (described in Item 3 -
Key Information - Risk Factors - If the Google Adsense program is terminated or
significantly changed by Google, with little or no advance notice, we would be forced
to immediately seek an alternative keyword search provider, in which case we would be
susceptible to a certain transition period during which we may experience a
material reduction in our advertising revenues and, in turn, an adverse effect on our
financial condition), (ii) the recording of a $4.9 million expense from the
non-temporary impairment of our investment in currently illiquid auction rate
securities (described in item 5 - Operating and Financial Review and Prospects -
Operating Results - Year ended December 31, 2007 compared to year ended December 31,
2006 - Financial Expense, Net) and (iii) the replacement of Yaron Adler, our former
Chief Executive Officer, by Ofer Adler, our former Chief Product Officer.
ITEM 9.
|
|
THE OFFER AND LISTING
|
A.
|
OFFER
AND LISTING DETAILS
|
Our
ordinary shares have been quoted on the Nasdaq Capital Market since January 31,
2006 and since June 27, 2007 on the NASDAQ Global Market, under the symbol "MAIL".
The
following table shows, for the periods indicated, the high and low closing sale prices
of our Ordinary Shares as reported on the Nasdaq Capital Market or the Nasdaq Global
Market, as applicable, and the Tel Aviv Stock Exchange:
50
|
|
Nasdaq Capital Market or
Nasdaq Global Market
|
Tel Aviv Stock Exchange
|
|
|
High ($)
|
Low ($)
|
High (NIS)
|
Low (NIS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
|
5.58
|
|
|
2.50
|
|
|
13.50
|
|
|
10.57
|
|
|
|
|
|
|
2007
|
|
|
|
First Quarter
|
|
|
|
8.24
|
|
|
6.50
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
|
|
8.50
|
|
|
7.22
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
|
9.99
|
|
|
6.72
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
|
|
9.15
|
|
|
4.94
|
|
|
25.50
|
|
|
19.57
|
|
|
|
|
|
|
Most recent six months
|
|
|
|
November 2007
|
|
|
|
7.80
|
|
|
5.37
|
|
|
23.38
|
|
|
23.38
|
|
|
December 2007
|
|
|
|
5.97
|
|
|
4.94
|
|
|
25.50
|
|
|
19.57
|
|
|
January 2008
|
|
|
|
5.17
|
|
|
3.21
|
|
|
20.39
|
|
|
12.14
|
|
|
February 2008
|
|
|
|
3.68
|
|
|
2.92
|
|
|
13.23
|
|
|
10.73
|
|
|
March 2008
|
|
|
|
3.30
|
|
|
2.90
|
|
|
11.42
|
|
|
10.12
|
|
|
April 2008
|
|
|
|
4.71
|
|
|
3.10
|
|
|
13.29
|
|
|
10.68
|
|
|
|
|
|
|
Market price on first trading day of each of the following months
|
|
|
|
November 2007
|
|
|
|
8.42
|
|
|
7.66
|
|
|
|
|
|
|
|
|
December 2007
2
|
|
|
|
5.71
|
|
|
5.38
|
|
|
24.58
|
|
|
24.58
|
|
|
January 2008
|
|
|
|
5.58
|
|
|
5.00
|
|
|
20.30
|
|
|
20.00
|
|
|
February 2008
|
|
|
|
3.82
|
|
|
3.68
|
|
|
13.35
|
|
|
12.97
|
|
|
March 2008
|
|
|
|
3.27
|
|
|
3.13
|
|
|
11.05
|
|
|
11.05
|
|
|
April 2008
3
|
|
|
|
3.50
|
|
|
3.10
|
|
|
11.33
|
|
|
11.05
|
|
|
|
|
|
|
|
The closing prices of our Ordinary
Shares, as reported on the Nasdaq Global Market on May 9, 2008 and on the Tel Aviv Stock
Exchange on May 11, 2008, which are the last full trading days before filing of this
annual report, were $3.92 and NIS 13.5 (equal to $3.99 based on the Bank of Israel
representative exchange rate as of such date), respectively.
Not
applicable.
Our
ordinary shares are quoted on the Nasdaq Global Market under the symbol MAIL,
and on the Tel Aviv Stock Exchange under the symbol EMAIL.
Not
applicable.
Not
applicable.
Not
applicable.
2
|
December 4, 2007 was the first day of
trading in the Companys share on the Tel Aviv Stock Exchange.
|
3
|
April 2, 2008 was the first day of
April of which there was a trade in the Companys share on the Tel Aviv Stock
Exchange.
|
51
ITEM 10.
|
|
ADDITIONAL INFORMATION
|
Not
applicable.
B.
|
MEMORANDUM
AND ARTICLES OF ASSOCIATION
|
Registration Number and
Purposes
Our
registration number with the Israeli Companies Registrar is 51-284949-8. Pursuant to
Section 3 of our articles of association, our objectives are the development, manufacture
and marketing of software and any other objective as determined by our board of directors.
Dividend and Liquidation
Rights
The
holders of the ordinary shares are entitled to their proportionate share of any cash
dividend, share dividend or dividend in kind declared with respect to our ordinary shares
on or after the date of this annual report. We may declare dividends out of profits
legally available for distribution. Under the Israeli Companies Law, a company may
distribute a dividend only if the distribution does not create a reasonable risk that the
company will be unable to meet its existing and anticipated obligations as they become
due. A company may only distribute a dividend out of the companys profits, as
defined under the Israeli Companies Law. If the company does not meet the profit
requirement, a court may allow it to distribute a dividend, as long as the court is
convinced that there is no reasonable risk that such distribution might prevent the
company from being able to meet its existing and anticipated obligations as they become
due.
Under
the Israeli Companies Law, the declaration of a dividend does not require the approval of
the shareholders of a company unless the companys articles of association provide
otherwise. Our articles of association provide that the board of directors may declare and
distribute dividends without the approval of the shareholders. In the event of our
liquidation, holders of our ordinary shares have the right to share ratably in any assets
remaining after payment of liabilities, in proportion to the paid-up par value of their
respective holdings.
These
rights may be affected by the grant of preferential liquidation or dividend rights to the
holders of a class of shares that may be authorized in the future.
Voting, Shareholder
Meetings and Resolutions
Holders
of ordinary shares have one vote for each ordinary share held on all matters submitted to
a vote of shareholders. This right may be changed if shares with special voting rights are
authorized in the future.
Our
articles of association and the laws of the State of Israel do not restrict the ownership
or voting of ordinary shares by non-residents of Israel, except with respect to citizens
of countries that are in a state of war with Israel.
Under
the Israeli Companies Law, an annual general meeting of our shareholders should be held
once every calendar year, but no later than 15 months from the date of the previous annual
general meeting. The quorum required for a general meeting of shareholders consists of at
least two shareholders present in person or by proxy holding in the aggregate at least 33
1/3% of the voting power. A meeting adjourned for lack of a quorum generally is adjourned
to the same day in the following week at the same time and place or any time and place as
the chairperson of the board of directors designates in a notice to the shareholders with
the consent of the holders of the majority voting power represented at the meeting voting
on the question of adjournment. In the event of a lack of quorum in a meeting convened
upon the request of shareholders, the meeting shall be dissolved. At the reconvened
meeting, the required quorum consists of any number of shareholders present in person or
by proxy.
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, one fourth of the nominated directors, one or more
shareholders having at least 5% of 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 chairperson of the board of directors presides at each of our general
meetings. The chairperson of the board of directors is not entitled to a vote at a general
meeting in his capacity as chairperson.
52
Most
shareholders resolutions, including resolutions to:
|
|
amend
our articles of association (except as set forth below);
|
|
|
make
changes in our capital structure such as a reduction of capital, increase of capital or
share split, merger or consolidation;
|
|
|
authorize
a new class of shares;
|
|
|
elect
directors, other than external directors;
|
|
|
approve
most transactions with office holders;
|
will be deemed adopted if approved by
the holders of a majority of the voting power represented at a shareholders meeting,
in person or by proxy, and voting on that resolution. Except as set forth in the following
sentence none of these actions require the approval of a special majority. Amendments to
our articles of association relating to the election and vacation of office of directors,
the composition and size of the board of directors and the insurance, indemnification and
release in advance of the companys office holders with respect to certain
liabilities incurred by them require the approval at a general meeting of shareholders
holding more than two-thirds of the voting power of the issued and outstanding share
capital of the company.
Notices
Under
the Israeli Companies Law, shareholders meetings generally require prior notice of
at least 21 days, or 35 days if the meeting is adjourned for the purpose of voting on any
of the following matters:
|
(1)
|
appointment
and removal of directors;
|
|
(2)
|
approval
of certain matters relating to the fiduciary duties of office holders) and of
certain transactions with interested parties;
|
|
(3)
|
approval
of certain mergers; and
|
|
(4)
|
any
other matter in respect of which the articles of association provide that
resolutions of the general meeting may be approved by means of a voting
document.
|
Modification of Class
Rights
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 vote of a majority of the affected class at a separate class meeting.
Election of Directors
Our
ordinary shares do not have cumulative voting rights in the election of directors.
Therefore, the holders of ordinary shares representing more than 50% of the voting power
at the general meeting of the shareholders, in person or by proxy, have the power to elect
all of the directors whose positions are being filled at that meeting, to the exclusion of
the remaining shareholders. External directors are elected by a majority vote at a
shareholders meeting, provided that either:
|
|
the
majority of shares voted for the election includes at least one-third of the shares of
non-controlling shareholders voted at the meeting (excluding abstaining votes); or
|
|
|
the
total number of shares of non-controlling shareholders voted against the election of the
external director does not exceed one percent of the aggregate voting rights in the
company.
|
See
Item 6.C Board Practices regarding our staggered board.
Transfer Agent and
Registrar
American
Stock Transfer and Trust Company is the transfer agent and registrar for our ordinary
shares.
53
Approval of Related
Party Transactions
Office Holders
The
Israeli Companies Law codifies the fiduciary duties that office holders owe to a company.
An office holder is defined in the Israeli Companies Law as any 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 these positions regardless of that persons title. Each
person listed in the table under Management Executive Officers and
Directors is an office holder under the Israeli Companies Law.
Fiduciary
duties.
An office holders fiduciary duties consist of a duty of loyalty and a
duty of care. The duty of loyalty requires the office holder to act in good faith and to
the benefit of the company, to avoid any conflict of interest between the office
holders position in the company and any other of his or her positions or personal
affairs, and to avoid any competition with the company or the exploitation of any business
opportunity of the company in order to receive personal advantage for himself or others.
This duty also requires him or her to reveal to the company any information or documents
relating to the companys affairs that the office holder has received due to his or
her position as an office holder. The duty of care requires an office holder to act with a
level of care that a reasonable office holder in the same position would employ under the
same circumstances. This includes the duty to use reasonable means to obtain information
regarding the advisability of a given action submitted for his or her approval or
performed by virtue of his or her position and all other relevant information pertaining
to these actions.
Compensation.
Under the Israeli Companies Law, all compensation arrangements for office
holders who are not directors require approval of the board of directors,
unless the articles of association provide otherwise. Our compensation
committee will be required to approve the compensation of all office holders.
Arrangements regarding the compensation of directors (including officers who
are also directors) require audit committee, board and shareholder approval, in
such order.
Disclosure
of personal interest.
The Israeli Companies Law requires that an office holder
promptly disclose to the company any personal interest that he or she may have and all
related material information known to him or her, in connection with any existing or
proposed transaction by the company. Personal interest, as defined by the
Israeli Companies Law, includes a personal interest of any person in an act or transaction
of the company, including a personal interest of his relative or of a corporate body in
which that person or a relative of that person is a 5% or greater shareholder, a holder of
5% or more of a companys outstanding shares or voting rights, a director or general
manager, or in which he or she has the right to appoint at least one director or the
general manager. Personal interest does not apply to a personal interest
stemming merely from the fact that the office holder is also a shareholder in the company.
The
office holder must make the disclosure of his personal interest without delay and no later
than the first meeting of the companys board of directors that discusses the
particular transaction. This duty does not apply to the personal interest of a relative of
the office holder in a transaction unless it is an extraordinary transaction.
The Israeli Companies Law defines an extraordinary transaction as a transaction not in the
ordinary course of business, not on market terms or that is likely to have a material
impact on the companys profitability, assets or liabilities, and defines a relative
as a spouse, sibling, parent, grandparent, descendent, spouses descendant and the
spouse of any of the foregoing.
Approvals.
The Israeli Companies Law provides that a transaction with an office holder
or a transaction in which an office holder has a personal interest may not be
approved if it is adverse to the companys interest. In addition, such a
transaction generally requires board approval, unless the transaction is an
extraordinary transaction or the articles of association provide otherwise. If
the transaction is an extraordinary transaction, or if it concerns exculpation,
indemnification or insurance of an office holder, then in addition to any
approval stipulated by the articles of association, approval of the
companys audit committee and the board of directors is required.
Exculpation, indemnification, insurance or compensation of a director also
would require shareholder approval. A director who has a personal interest in a
matter that is considered at a meeting of the board of directors or the audit
committee may not attend that meeting or vote on that matter, unless a majority
of the board of directors or the audit committee also has a personal interest
in the matter. If a majority of the board of directors or the audit committee
has a personal interest in the transaction, shareholder approval is also
required.
54
Shareholders
The
Israeli Companies Law imposes the same disclosure requirements, as described above, on a
controlling shareholder of a public company that it imposes on an office holder. For these
purposes, a controlling shareholder is any shareholder that has the ability to direct the
companys actions, including any shareholder holding 25% or more of the voting rights
if no other shareholder owns more than 50% of the voting rights in the company. Two or
more shareholders with a personal interest in the approval of the same transaction are
deemed to be one shareholder.
Approval
of the audit committee, the board of directors and our shareholders is required for:
|
|
extraordinary
transactions with a controlling shareholder or in which a controlling shareholder
has a personal interest; and
|
|
|
employment
of a controlling shareholder or a relative of a controlling shareholder.
|
The
shareholder approval must include the majority of shares voted at the meeting. In
addition, either:
|
|
the
majority must include at least one-third of the shares of the voting shareholders who
have no personal interest in the transaction voted at the meeting (excluding abstaining
votes); or
|
|
|
the
total shareholdings of those who have no personal interest in the transaction and who
vote against the transaction must not represent more than 1% of the aggregate voting
rights in the company.
|
Under
the Israeli Companies Law, a shareholder has a duty to act in good faith towards the
company and other shareholders and to refrain from abusing his or her power in the company
including, among other things, when voting in a general meeting of shareholders or in a
class meeting on the following matters:
|
|
any
amendment to the articles of association;
|
|
|
an
increase in the company's authorized share capital;
|
|
|
approval
of related party transactions that require shareholder approval.
|
A
shareholder has a general duty to refrain from depriving any other shareholder of their
rights as a shareholder. In addition, any controlling shareholder, any shareholder who
knows that it possesses the power to determine the outcome of a shareholder or class vote
and any shareholder who, pursuant to the companys articles of association has the
power to appoint or prevent the appointment of an office holder in the company is under a
duty to act with fairness towards the company. The Companies Law does not describe the
substance of this duty of fairness.
Anti-Takeover
Provisions; Mergers and Acquisitions
Merger.
The Israeli Companies Law permits merger transactions with the approval of
each partys board of directors and shareholders, except that when the
merger involves one of the following companies, the approval of the
shareholders of these companies is not required:
|
|
an
absorbed company which is under the full control and ownership of the surviving company;
or
|
|
|
a
surviving company, if all of the following conditions are met: (i) the merger does not
entail an amendment of the articles of association or memorandum of association of the
surviving company, (ii) the surviving company does not issue in the course of the merger
more than twenty percent of the voting rights in the company, and as a result of the
share issuance no person shall become a controlling shareholder in the surviving company,
and (iii) circumstances that would otherwise mandate an approval by a special majority of
the shareholders (as described in the following paragraph) do not exist.
|
At
the general meeting of a merging company which shares are held by the other party to the
merger or by any person holding at least 25% of any control measures of the other party to
the merger, a merger shall not be deemed approved if the shareholders holding the majority
of the voting power present at the meeting object to the merger. In calculating this
majority, (i) the abstaining shareholders and (ii) shareholders that are part of the other
party to the merger or hold 25% or more of any control measures of the other party to the
merger are excluded. Shares held by relatives or companies controlled by a person are
deemed held by that person. The term control measures of a company includes,
among other things, voting power or means of appointing the board of directors.
55
Under
the Israeli Companies Law, a merging company must inform its creditors of the proposed
merger. Any creditor of a party to the merger may seek a court order to delay or block the
merger, if there is a reasonable concern that the surviving company will not be able to
satisfy all of the obligations of the parties to the merger. Moreover, a merger may not be
completed until all of the required approvals have been filed by both merging companies
with the Israeli Registrar of Companies and (i) 30 days have passed from the time both
companies shareholders resolved to approve the merger, and (ii) at least 50 days
have passed from the time that the merger proposal was filed with the Israeli Registrar of
Companies.
Tender
Offer.
The Israeli Companies Law requires a purchaser to conduct a tender offer in
order to purchase shares in publicly held companies, if as a result of the purchase the
purchaser would hold more than 25% of the voting rights of a company in which no other
shareholder holds more than 25% of the voting rights, or the purchaser would hold more
than 45% of the voting rights of a company in which no other shareholder holds more than
45% of the voting rights. The requirement to conduct a tender offer shall not apply to (i)
the purchase of shares in a private placement, provided that such purchase was approved by
the companys shareholders as a private placement that is intended to provide the
purchaser with more than 25% of the voting rights of a company in which no other
shareholder holds more than 25% of the voting rights, or with more than 45% of the voting
rights of a company in which no other shareholder holds more than 45% of the voting
rights; (ii) a purchase from a holder of more than 25% of the voting rights of a company
that results in a person becoming a holder of more than 25% of the voting rights of a
company, and (iii) a purchase from the holder of more than 45% of the voting rights of a
company that results in a person becoming a holder of more than 45% of the voting rights
of a company.
Under
the tender Companies Law, a person may not purchase shares of a public company if,
following the purchase of shares, the purchaser would hold more than 90% of the
companys shares or of any class of shares unless the purchaser makes a tender offer
to purchase all of the target companys shares or all the shares of the particular
class, as applicable. If, as a result of the tender offer, the purchaser would hold more
than 95% of the companys shares or a particular class of shares, the ownership of
the remaining shares will be transferred to the purchaser. However, if the purchaser is
unable to purchase 95% or more of the companys shares or class of shares, the
purchaser may not own more than 90% of the shares or class of shares of the target
company.
Tax
Law.
Israeli tax law treats some acquisitions, such as a stock-for-stock swap between
an Israeli company and a foreign company, less favorably than U.S. tax law. For example,
Israeli tax law may subject a shareholder who exchanges his ordinary shares for shares in
a foreign corporation to immediate taxation. Please see Item 10.E Taxation
Israeli Taxation.
Exculpation,
Indemnification and Insurance of Directors and Officers
Our
articles of association allow us to indemnify, exculpate and insure our office holders,
which includes our directors, to the fullest extent permitted by the Israeli Companies
Law, provided that procuring this insurance or providing this indemnification or
exculpation is approved by the audit committee and the board of directors, as well as by
the shareholders if the office holder is a director. Our articles of association also
allow us to insure or indemnify any person who is not an office holder, including any
employee, agent, consultant or contractor who is not an office holder.
Under
the Israeli Companies Law, a company may indemnify an office holder in respect of some
liabilities, either in advance of an event or following an event. If a company undertakes
to indemnify an office holder in advance against monetary liability incurred in his or her
capacity as an office holder whether imposed in favor of another person pursuant to a
judgment, a settlement or an arbitrators award approved by a court, the
indemnification must be limited to foreseeable events in light of the companys
actual activities at the time of the indemnification undertaking and to a specific sum or
a reasonable criterion under such circumstances, as determined by the board of directors.
However, as described below, an undertaking to indemnify an office holder in advance of an
event need not be limited with respect to reasonable litigation expenses, including
attorneys fees.
Under
the Israeli Companies Law, only if and to the extent provided by its articles of
association, a company may indemnify an office holder against the following liabilities or
expenses incurred in his or her capacity as an office holder:
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any
monetary liability whether imposed on him or her in favor of another person pursuant to a
judgment, a settlement or an arbitrators award approved by a court;
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reasonable
litigation expenses, including attorneys fees, incurred by him or her as a result
of an investigation or proceedings instituted against him or her by an authority
empowered to conduct an investigation or proceedings, which are concluded either (i)
without the filing of an indictment against the office holder and without the levying of
a monetary obligation in lieu of criminal proceedings upon the office holder, or (ii)
without the filing of an indictment against the office holder but with levying a monetary
obligation in substitute of such criminal proceedings upon the office holder for a crime
that does not require proof of criminal intent; and
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reasonable
litigation expenses, including attorneys fees, in proceedings instituted against
him or her by the company, on the companys behalf or by a third-party, or in
connection with criminal proceedings in which the office holder was acquitted, or as a
result of a conviction for a crime that does not require proof of criminal intent.
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Under
the Israeli Companies Law, a company may obtain insurance for an office holder against
liabilities incurred in his or her capacity as an office holder, if and to the extent
provided for in its articles of association. These liabilities include a breach of duty of
care to the company or a third-party, a breach of duty of loyalty and any monetary
liability imposed on the office holder in favor of a third-party.
A
company may, in advance only, exculpate an office holder for a breach of the duty of care.
However, a company may not so exculpate an office holder for a breach of the duty of care
in connection with a distribution of dividends or a repurchase of the companys
securities. A company may not exculpate an office holder from a breach of the duty of
loyalty towards the company.
Under
the Israeli Companies Law, however, an Israeli company may only indemnify or insure an
office holder against a breach of duty of loyalty to the extent that the office holder
acted in good faith and had reasonable grounds to assume that the action would not
prejudice the company. In addition, an Israeli company may not indemnify, insure or
exculpate an office holder against a breach of duty of care if committed intentionally or
recklessly, or an action committed with the intent to derive an unlawful personal gain, or
for a fine or forfeit levied against the office holder in connection with a criminal
offense.
Our
board of directors and shareholders have resolved to indemnify our directors and our Chief
Financial Officer to the extent permitted by law and by our articles of association for
liabilities not covered by insurance and that are of certain enumerated events, subject to
an aggregate sum equal to 50.0% of the shareholders equity as set forth in the financial
report of the preceding year to which a claim for indemnification is made.
Since
the third quarter of 2006, search revenues powered by Googles AdSense program made a
significant contribution to the Companys results. This program is currently governed
by the Google AdSense
TM
Online Standard Terms and Conditions a copy of which is
in Exhibit 4.1. Following the receipt of a notice from Google as described under
Item 3D. Risk Factors Risk related to our business, the Company is
currently negotiating a new contract with Google.
Our
Software Product Licensing and Software Game Distribution and Promotion Agreement with
Oberon Media Inc., dated January 7, 2004 and our agreement dated June 7, 2006 with Yahoo!
are described under Item 4.B Business Overview Collaborations. Our OEM
Agreement with Commtouch Ltd., effective December 7, 2004 and most recently renewed on
July 15, 2007, is described under Item 4.B Business Overview Intellectual
Property. The purchase option granted to the lead underwriter of our initial public
offering, are described under Item 7.B Related Party Transactions
Registration Rights. The employment agreements with our principal officers are
described under Item 6.C Board Practices Employment Agreements.
The
collaboration agreement with Babylon Ltd., is described in Item 4.B Business
Overview Collaborations. The acquisition of the transaction processing
business is described in Item 4.B Business Overview Acquisitions.
Non-residents
of Israel who hold our ordinary shares are able to receive any dividends, and any amounts
payable upon the dissolution, liquidation and winding up of our affairs, freely
repatriable in non-Israeli currency at the rate of exchange prevailing at the time of
conversion. However, Israeli income tax is required to have been paid or withheld on these
amounts. In addition, the statutory framework for the potential imposition of exchange
controls has not been eliminated, and may be restored at any time by administrative
action.
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The
following is a general summary only and should not be considered as income tax advice or
relied upon for tax planning purposes.
ISRAELI TAXATION
THE
FOLLOWING DESCRIPTION IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX
CONSEQUENCES RELATING TO THE OWNERSHIP OR DISPOSITION OF OUR ORDINARY SHARES. YOU SHOULD
CONSULT YOUR OWN TAX ADVISOR CONCERNING THE TAX CONSEQUENCES OF YOUR PARTICULAR SITUATION,
AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY STATE, LOCAL, FOREIGN
OR OTHER TAXING JURISDICTION.
The
following is a summary of the material Israeli tax laws applicable to us, and some Israeli
Government programs benefiting us. This section also contains a discussion of some Israeli
tax consequences to persons acquiring our ordinary shares. This summary does not discuss
all the acts of Israeli tax law that may be relevant to a particular investor in light of
his or her personal investment circumstances or to some types of investors subject to
special treatment under Israeli law. Examples of this kind of investor include residents
of Israel or traders in securities who are subject to special tax regimes not covered in
this discussion. Since some parts of this discussion are based on new tax legislation that
has not yet been subject to judicial or administrative interpretation, we cannot assure
you that the appropriate tax authorities or the courts will accept the views expressed in
this discussion.
The
discussion below should not be construed as legal or professional tax advice and does not
cover all possible tax considerations. Potential investors are urged to consult their own
tax advisors as to the Israeli or other tax consequences of the purchase, ownership and
disposition of our ordinary shares, including, in particular, the effect of any foreign,
state or local taxes.
General Corporate Tax
Structure in Israel
Israeli companies are generally
subject to corporate tax at the rate of 29% in 2007. The rate was 31% for 2006, and is
scheduled to decline to 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter. However,
the effective tax rate payable by a company that derives income from an approved
enterprise (as discussed below) may be considerably less. In March 2006, a new program was
approved, to begin in 2008. Special Provisions Relating to Taxation under Inflationary
Conditions
The
Income Tax Law (Inflationary Adjustments), 1985, or the Inflationary Adjustments Law,
represents an attempt to overcome the problems presented to a traditional tax system by an
economy undergoing rapid inflation. The Inflationary Adjustments Law is highly complex.
Until December 31, 2005 we measured our Israeli taxable income in accordance with this
law, but from January 1, 2006 we have elected to measure our Israeli taxable income in
relation to changes in the U.S. dollar/NIS exchange rate rather than the Israeli inflation
index. We were permitted to make such a change pursuant to regulations published by the
Israeli Minister of Finance, which provide the conditions for so doing. A company that
elects to measure its results for tax purposes based on the U.S. dollar/NIS exchange rate
cannot change that election for a period of three years following the election. We believe
that we meet the necessary conditions and as such, continue to measure our results for tax
purposes based on the U.S. dollar/NIS exchange rate.
Law for the
Encouragement of Capital Investments, 1959
The
Law for Encouragement of Capital Investments, 1959 (the Investment Law)
provides that capital investments in a production facility (or other eligible assets) may,
upon approval by the Investment Center of the Israel Ministry of Industry and Trade (the
Investment Center), be designated as an Approved Enterprise. Each certificate
of approval for an Approved Enterprise relates to a specific investment program,
delineated both by the financial scope of the investment and by the physical
characteristics of the facility or the asset. The tax benefits from any certificate of
approval relate only to taxable profits attributable to the specific Approved Enterprise.
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On
April 1, 2005, a comprehensive amendment to the Investment Law came into effect. The
amendment revised the criteria for investments qualified to receive tax benefits. An
eligible investments program under the amendment will qualify for benefits as a Privileged
Enterprise (rather than the previous terminology of Approver Enterprise). As the amended
Investment Law does not retroactively apply for investments programs having an approved
enterprise approval certificate issued by the Israeli Investment Center prior to December
31, 2004, our current tax benefits are subject to the provisions of the Investment Law
prior to its revision, while new benefits that will be received in the future, if any,
will be subject to the provisions of the Investment Law, as amended. Accordingly, the
following description includes a summary of the Investment Law prior to its amendment as
well as the relevant changes contained in the Investment Law, as amended.
Currently
we have two Approved Enterprise Programs under the Investment Law, which entitle us to
certain tax benefits, and a ruling for one Privileged Enterprise Program. The Approved
Enterprise Programs granted to us are defined in the Investment Law as Alternative
Benefits Programs, which allow for a two years exemption for undistributed income and
reduced company tax rate of between 10% and 25% for the following five to eight years,
depending on the extent of foreign (non-Israeli) investment in us during the relevant
year. The tax rate will be 20% if the foreign investment level is more than 49% but less
than 74%, 15% if the foreign investment level is more than 74% but less than 90%, and 10%
if the foreign investment level is 90% or more. The lowest level of foreign investment
during a particular year will be used to determine the relevant tax rate for that year.
The period in which we receive these tax benefits may not extend beyond 14 years from the
year in which approval was granted and 12 years from the year in which operations or
production by the enterprise began.
A
company that has elected to participate in the alternative benefits program and that
subsequently pays a dividend out of the income derived from the Approved Enterprise during
the tax exemption period will be subject to corporate tax in respect of the amount
distributed at the rate that would have been applicable had the company not elected the
alternative benefits program (generally 10% to 25%, depending on the foreign (non-Israeli)
investment in it). In addition, such company is required to withhold tax at source from
the dividend amount.
The
Investment Law also provides that an Approved Enterprise is entitled to accelerated
depreciation on its property and equipment that are included in an approved investment
program.
The
benefits available to an Approved Enterprise are conditioned upon terms stipulated in the
Investment Law and the regulations thereunder and the criteria set forth in the applicable
certificate of approval. If we do not fulfill these conditions in whole or in part, the
benefits can be canceled and we may be required to refund the amount of the benefits, with
the addition of the Israeli consumer price index linkage differences and interest. We
believe that our Approved Enterprises currently operate in compliance with all applicable
conditions and criteria, but there can be no assurance that they will continue to do so.
Income
derived from sources other than Approved Enterprise programs during the
benefit period will be subject to tax at the regular corporate tax rate.
Pursuant
to the amendment to the Investments Law, only approved enterprises receiving cash grants
require the approval of the Investment Center. Approved enterprises which do not receive
benefits in the form of governmental cash grants, such as benefits in the form of tax
benefits, are no longer required to obtain this approval (such enterprises are referred to
as privileged enterprises). However, a privileged enterprise is required to comply with
certain requirements and make certain investments as specified in the amended Investment
Law. The amendment to the Investment Law addresses benefits that are being granted to
privileged enterprises and the length of the benefits period.
Tax benefits under the
2005 Amendment
A
recent Amendment to the Investment Law, effective as of April 1, 2005 has significantly
changed the provisions of the Investment Law. The amendment includes revisions to the
criteria for investments qualified to receive tax benefits as an Approved Enterprise.
However,
a company that was granted benefits according to section 51 of the Investment Law (prior
the amendment) would not be allowed to choose new tax year as a Year of Election (as
describe below) under the new amendment, for a period of 3 years from the companys
previous Year of Commencement under the old investment law.
This
amendment simplifies the approval process for the approved enterprise. According to the
amendment, only approved enterprises receiving cash grants require the approval of the
Investment Center. The Investment Center will be entitled to approve such programs only
until December 31, 2007.
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As
a result of the Amendment, it is no longer necessary for a company to acquire Approved
Enterprise status in order to receive the tax benefits previously available under the
Alternative Route, and therefore such companies need not apply to the Investment Center
for this purpose. Rather, a company may claim the tax benefits offered by the Investment
Law directly in its tax returns or by notifying the Israeli Tax Authority within 12 months
of the end of that year, provided that its facilities meet the criteria for tax benefits
set out by the Amendment (the
Privileged Enterprise
). Companies are
also granted a right to approach the Israeli Tax Authority for a pre-ruling regarding
their eligibility for benefits under the Amendment. The Amendment includes provisions
attempting to ensure that a company will not enjoy both Government grants and tax benefits
for the same investment program.
Tax
benefits are available under the Amendment to production facilities (or other eligible
facilities), which are generally required to derive more than 25% of their business income
from export. In order to receive the tax benefits, the Amendment states that the company
must make an investment in the Privileged Enterprise exceeding a certain percentage or a
minimum amount specified in the Law. Such investment may be made over a period of no more
than 3 years ending at the end of the year in which the company requested to have the tax
benefits apply to the Privileged Enterprise (the
Year of Election
).
Where the company requests to have the tax benefits apply to an expansion of existing
facilities, then only the expansion will be considered a Privileged Enterprise and the
companys effective tax rate will be the result of a weighted average of the
applicable rates. In this case, the minimum investment required in order to qualify as a
Privileged Enterprise is required to exceed a certain percentage or a minimum amount of
the companys production assets at the end of the year before the expansion.
The
amended Investment Law specifies certain conditions that a privileged enterprise has to
comply with in order to be entitled to benefits. These conditions include among others:
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that
the privileged enterprise's revenues during the applicable tax year from any
single market (i.e. country or a separate customs territory) do not exceed
75% of the privileged enterprise's aggregate revenues during such year; or
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that
25% or more of the privileged enterprises revenues during the applicable tax year
are generated from sales into a single market (i.e. country or a separate customs
territory) with a population of at least 12 million residents.
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The
duration of tax benefits is subject to a limitation of the earlier of 7 to 10 years from
the Commencement Year (Commencement Year defined as the later of: (i) the first tax year
in which the Company had derived income for tax purposes from the Privileged Enterprise or
(ii) the year in which the Company requested to have the tax benefits apply to the
Beneficiary Enterprise Year of Election), or 12 years from the first day of the
Year of Election. The tax benefits granted to a Privileged Enterprise are determined, as
applicable to its geographic location within Israel.
Similar
to the currently available alternative route, exemption from corporate tax on
undistributed income for a period of two to ten years, depending on the geographic
location of the Privileged Enterprise within Israel, and a reduced corporate tax rate of
10% to 25% for the remainder of the benefits period, depending on the level of foreign
investment in each year. Benefits may be granted for a term of seven to ten years,
depending on the level of foreign investment in the company. If the company pays a
dividend out of income derived from the Privileged Enterprise during the tax exemption
period, such income will be subject to corporate tax at the applicable rate (10%-25%) in
respect of the
gross amount
of the dividend that we may be distributed. The company
is required to withhold tax at the source at a rate of 15% from any dividends distributed
from income derived from the Benefited Enterprise.
There
can be no assurance that we will comply with the above conditions in the future or that we
will be entitled to any additional benefits under the amended Investment Law.
The
Amendment changes the definition of foreign investment in the Investments Law
so that the definition now requires a minimal investment of NIS 5 million by foreign
investors. Furthermore, such definition now also includes the purchase of shares of a
company from another shareholder, provided that the companys outstanding and paid-up
share capital exceeds NIS 5 million. Such changes to the aforementioned definition will
take effect retroactively from 2003.
As
a result of the amendment, tax-exempt income generated under the provisions of the
Investments Law, as amended, will subject us to taxes upon distribution or liquidation.
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A
substantial portion of our taxable operating income is derived from our approved
enterprise program and we expect that a substantial portion of any taxable operating
income that we may realize in the future will be also derived from such program.
Law for the
Encouragement of Industry (Taxes), 1969
We
believe that we currently qualify as an Industrial Company within the meaning
of the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement
Law. The Industry Encouragement Law defines Industrial Company as a company
resident in Israel, of which 90% or more of its income in any tax year, other than of
income from defense 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.
The
following corporate tax benefits, among others, are available to Industrial Companies:
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amortization
of the cost of purchased know-how and patents, which are used for the
development or advancement of the company, over an eight-year period;
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accelerated
depreciation rates on equipment and buildings;
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under
specified conditions, an election to file consolidated tax returns with additional
related Israeli Industrial Companies; and
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expenses
related to a public offering are deductible in equal amounts over three years.
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Eligibility
for the benefits under the Industry Encouragement Law is not subject to receipt of prior
approval from any governmental authority. We cannot assure that we qualify or will
continue to qualify as an Industrial Company or that the benefits described
above will be available in the future.
Taxation of our
Shareholders
Taxation
of Non-Israeli Shareholders on Receipt of Dividends.
Non-residents of Israel are
generally subject to Israeli income tax on the receipt of dividends paid on our ordinary
shares at the rate of 25%, which tax will be withheld at source, unless a different rate
is provided in a treaty between Israel and the shareholders country of residence.
However, as of the 2006 tax year, the tax rate on dividends will be reduced to 20% and the
withholding rate may be reduced as well. With respect to a substantial shareholder (which
is someone who alone, or together with another person, holds, directly or indirectly, at
least 10% in one or all of any of the means of control in the corporation), the applicable
tax rate will remain at 25%. Under the U.S.-Israel Tax Treaty, the maximum rate of tax
withheld in Israel on dividends paid to a holder of our ordinary shares who is a U.S.
resident (for purposes of the U.S.-Israel Tax Treaty) is 25%. However, generally, the
maximum rate of withholding tax on dividends, not generated by our Approved Enterprise,
that are paid to a U.S. corporation holding 10% or more of our outstanding voting capital
throughout the tax year in which the dividend is distributed as well as the previous tax
year, is 12.5%. Furthermore, dividends paid from income derived from our Approved
Enterprise are subject, under certain conditions, to withholding at the rate of 15%. We
cannot assure you that we will designate the profits that are being distributed in a way
that will reduce shareholders tax liability.
A
non-resident of Israel who receives dividends from which tax was withheld is generally
exempt from the duty to file returns in Israel in respect of such income, provided such
income was not derived from a business conducted in Israel by the taxpayer, and the
taxpayer has no other taxable sources of income in Israel.
Capital
Gains Taxes Applicable to Non-Israeli Resident Shareholders.
Shareholders that are
not Israeli residents are generally exempt from Israeli capital gains tax on any gains
derived from the sale, exchange or disposition of our ordinary shares, provided that (1) such
shareholders did not acquire their shares prior to our initial public offering, (2) the
shares are listed for trading on a stock exchange in a jurisdiction with which Israel has
a treaty, (3) the provisions of the Income Tax Law (inflationary adjustments), 1985
do not apply to such gain, and (4) such gains did not derive from a permanent
establishment of such shareholders in Israel. However, non-Israeli corporations will not
be entitled to the foregoing exemptions if an Israeli resident (i) has a controlling
interest of 25.0% or more in such non-Israeli corporation, or (ii) is the
beneficiary of or is entitled to 25.0% or more of the revenues or profits of such
non-Israeli corporation, whether directly or indirectly. In certain instances, where our
shareholders may be liable to Israeli tax on the sale of their ordinary shares, the
payment of the consideration may be subject to the withholding of Israeli tax at the
source.
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Under
the U.S.-Israel Tax Treaty, the sale, exchange or disposition of our ordinary shares by a
shareholder who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) holding
the ordinary shares as a capital asset is exempt from Israeli capital gains tax unless
either (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 are attributable to a
permanent establishment of the shareholder located in Israel.
Transfer Pricing
In
accordance with Section 85A of the Israeli Tax Ordinance, if in an international
transaction (whereby at least one party is a foreigner or all or part of the income from
such transaction is to be taxed abroad as well as in Israel) there is a special
relationship between the parties (including but not limited to family relationship or a
relationships of control between companies), and due to this relationship the price set
for an asset, right, service or credit was determined or other conditions for the
transaction were set such that a smaller profit was realized than what would have been
expected to be realized from a transaction of this nature, then such transaction shall be
reported in accordance with customary market conditions and tax shall be charged
accordingly. This section shall apply solely to transactions that transpire after November
29, 2006, at which time regulations with respect to this section were legislated. The
assessment of whether a transaction falls under the aforementioned definition shall be
implemented in accordance with one of the procedures mentioned in the regulations and is
based, among others, on comparisons of characteristics which portray similar transactions
in ordinary market conditions, such as profit, the area of activity, nature of the asset,
the contractual conditions of the transaction and according to additional terms and
conditions specified in the regulations.
U.S. FEDERAL INCOME TAX
CONSIDERATIONS
The
following discussion is a description of the material U.S. federal income tax
considerations applicable to an investment in the ordinary shares by U.S. Holders who
acquire our ordinary shares and hold them as capital assets for U.S. federal income tax
purposes. 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;
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a
corporation created or organized in or under the laws of the United States or of any
state of the United States 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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a
trust if the trust has elected validly to be treated as a United States person for U.S.
federal income tax purposes or if a U.S. court is able to exercise primary
supervision over the trust's administration and one or more United States
persons have the authority to control all of the trust's substantial decisions.
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The
term Non-U.S. Holder means a beneficial owner of an ordinary share who 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 also are discussed below.
This
description is based on provisions of the U.S. Internal Revenue Code of 1986, as amended,
referred to in this discussion as the Code, existing and proposed U.S. Treasury
regulations and administrative and judicial interpretations, each as available and 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 as compensation for the performance of services;
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tax-exempt
organizations;
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persons
that hold ordinary shares as a position in a straddle or as part of a hedging,
conversion or other integrated instrument;
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individual
retirement and other tax-deferred accounts;
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expatriates
of the United States;
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persons
(other than Non-U.S. Holders) 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 us.
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This
discussion also does not consider the tax treatment of persons or partnerships that hold
ordinary shares through a partnership or other pass-through entity or the possible
application of United States federal gift or estate tax or alternative minimum tax.
We
urge you to consult with your own tax advisor regarding the tax consequences of investing
in the ordinary shares, including the effects of federal, state, local, foreign and other
tax laws.
Distributions Paid on
the Ordinary Shares
We
currently do not intend to pay cash dividends in the foreseeable future. However, subject
to the discussion below under Passive Foreign Investment Company
Considerations, a U.S. Holder generally will be required to include in 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. Holders 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 paid
in NIS, including the amount of any Israeli taxes withheld, will be includible in the
income of a U.S. Holder in a U.S. dollar amount calculated by reference to the exchange
rate in effect on the date they are included in income by the U.S. Holder, regardless of
whether the payment in fact is converted into U.S. dollars. Any gain or loss resulting
from currency exchange fluctuations during the period from the date the dividend is
includible in the income of the U.S. Holder to the date that payment is converted into
U.S. dollars generally will be treated as ordinary income or loss.
A
non-corporate U.S. holders qualified dividend income currently is
subject to tax at reduced rates not exceeding 15%. For this purpose, qualified
dividend income generally includes dividends paid by a foreign corporation if
either:
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(a)
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the
stock of that corporation with respect to which the dividends are paid is
readily tradable on an established securities market in the U.S., or
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(b)
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that
corporation is eligible for benefits of a comprehensive income tax treaty with
the U.S. which includes an information exchange program and is determined to be
satisfactory by the U.S. Secretary of the Treasury. The Internal Revenue
Service has determined that the U.S.-Israel Tax Treaty is satisfactory for this
purpose.
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In
addition, under current law a U.S. Holder must generally hold his ordinary shares for more
than 60 days during the 121 day period beginning 60 days prior to the ex-dividend date and
meet other holding period requirements for qualified dividend income.
Dividends
paid by a foreign corporation will not qualify for the reduced rates, if the dividend is
paid in a tax year of the recipient beginning after December 31, 2002, however, if such
corporation is treated, for the tax year in which the dividend is paid or the preceding
tax year, as a passive foreign investment company for U.S. federal income tax
purposes. We do not believe that we will be classified as a passive foreign
investment company for U.S. federal income tax purposes for our current taxable
year. However, see the discussion under Passive Foreign Investment Company
Considerations below.
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.
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Controlled Foreign
Corporation Considerations
If
more than 50% of either the voting power of all classes of voting stock or the total value
of stock is owned, directly or indirectly, by citizens or residents of the U.S., U.S.
domestic partnerships and corporations or estates or trusts other than foreign estates or
trusts, each of which owns 10% or more of the total combined voting power of all classes
of stock entitled to vote (10-Percent Shareholders), we could be treated as a
controlled foreign corporation (CFC), for U.S. federal income tax purposes.
This classification would, among other consequences, require 10-Percent Shareholders to
include in their gross income their pro rata shares of Subpart F income (as
defined by the Code) and earnings invested in U.S. property (as defined by the Code).
In
addition, gain from the sale or exchange of preferred shares by a U.S. person who is or
was a 10-Percent Shareholder at any time during the five-year period ending with the sale
or exchange is treated as dividend income to the extent of earnings and profits of the
company attributable to the stock sold or exchanged. Under certain circumstances, a
corporate shareholder that directly owns 10% or more of voting shares may be entitled to
an indirect foreign tax credit for income taxes paid by us in connection with amounts so
characterized as dividends under the Code.
If
we are classified as both a passive foreign investment company, as described below, and a
CFC, we would generally not be treated as a passive foreign investment company with
respect to 10-Percent Shareholders. We believe that we are not and will not become a CFC.
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 purposes, which may be relevant in calculating such holders foreign tax
credit limitation. Subject to certain conditions and limitations, Israeli tax withheld on
dividends may be deducted from taxable income or credited against a U.S. Holders
U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is
calculated separately with respect to specific classes of 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 prospective
purchaser who would be 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 purchaser would be entitled to the 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 holders 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.
In
the event there is an Israeli income tax on gain from the disposition of ordinary shares,
such tax should generally be the type of tax that is creditable for U.S. tax purposes;
however, because it is likely that the source of any such gain would be a U.S. source, a
U.S. foreign tax credit may not be available. U.S. shareholders should consult their own
tax advisors regarding the ability to claim such credit.
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.
Long-term capital gains realized by non-corporate U.S. Holders are generally subject to a
lower marginal U.S. federal income tax rate than ordinary income, other than qualified
dividend income, as defined above. 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, or
|
64
|
|
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.
|
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 passive assets, which generally means assets
that generate, or are held for the production of, passive income. Passive income may
include amounts derived by reason of the temporary investment of funds. 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. Holders
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 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. U.S.
Holders who hold ordinary shares during a period when we are a passive foreign investment
company will be subject to the foregoing rules even if we cease to be a passive foreign
investment company.
We
believe that we are not a passive foreign investment company for U.S. federal income tax
purposes, but we cannot be certain whether we will be treated as a passive foreign
investment company for the current year or any future taxable year. Our belief that we
will not be a passive foreign investment company for the current year is based on our
estimate of the fair market value of our intangible assets, including goodwill, not
reflected in our financial statements under U.S. GAAP, and our projection of our income
for the current year. If the IRS successfully challenged our valuation of our intangible
assets, it could result in our classification as a passive foreign investment company.
Moreover, because passive foreign investment company status is based on our income and
assets for the entire taxable year, it is not possible to determine whether we will be a
passive foreign investment company for the current taxable year until after the close of
the year. In the future, in calculating the value of our intangible assets, we will value
our total assets, in part, based on our total market value determined using the average of
the selling price of our ordinary shares on the last trading day of each calendar quarter.
We believe this valuation approach is reasonable. While we intend to manage our business
so as to avoid passive foreign investment company status, to the extent consistent with
our other business goals, we cannot predict whether our business plans will allow us to
avoid passive foreign investment company status or whether our business plans will change
in a manner that affects our passive foreign investment company status determination. In
addition, because the market price of our ordinary shares is likely to fluctuate and the
market price of the shares of technology companies has been especially volatile, and
because that market price may affect the determination of whether we will be considered a
passive foreign investment company, we cannot assure that we will not be considered a
passive foreign investment company for any taxable year.
The
passive foreign investment company rules 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. However, a
U.S Holder may make a qualified electing fund election only if we furnish the U.S. Holder
with certain tax information. We currently do not provide this information, and we
currently do not intend to take actions necessary to permit you to make a qualified
electing fund election in the event we are determined to be a passive foreign investment
company. As an alternative to making this 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. Holders 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. This 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 market system
established pursuant to Section 11A of the Exchange Act. 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 Capital Market will constitute a qualified exchange or other
market for this purpose. However, no assurances can be provided that our ordinary shares
will continue to trade on the Nasdaq Capital Market or that the shares will be regularly
traded for this purpose.
65
The
rules applicable to owning shares of a passive foreign investment company are complex, and
each prospective purchaser who would be 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 Back-up Withholding
Holders
generally will be subject to information reporting requirements with respect to dividends
paid in the United States on ordinary shares. In addition, Holders will be subject to
back-up withholding tax on dividends paid in the United States on ordinary shares unless
the holder provides an IRS certification or otherwise establishes an exemption. Holders
will be subject to information reporting and back-up withholding tax on proceeds paid
within the United States from the disposition of ordinary shares unless the holder
provides an IRS certification or otherwise establishes an exemption. Information reporting
and back-up withholding may also apply to dividends and proceeds paid outside the United
States that are paid by certain U.S. payors or U.S. middlemen, as
defined in the applicable Treasury regulations, including:
|
(2)
|
the
government of the U.S. or the government of any state or political subdivision
of any state (or any agency or instrumentality of any of these governmental
units);
|
|
(3)
|
a
controlled foreign corporation;
|
|
(4)
|
a
foreign partnership that is either engaged in a U.S. trade or business or whose
Untied States partners in the aggregate hold more than 50% of the income or
capital interests in the partnership;
|
|
(5)
|
a
foreign person that derives 50% or more of its gross income for certain periods
from the conduct of a trade or business in the U.S.; or
|
|
(6)
|
a
U.S. branch of a foreign bank or insurance company.
|
The
back-up withholding tax rate is 28%. Back-up withholding and information reporting will
not apply to payments made to Non-U. S. Holders if they have provided the required
certification that they are not United States persons.
In
the case of payments by a payor or middleman to a foreign simple trust, foreign grantor
trust or foreign partnership, other than payments to a holder that qualifies as a
withholding foreign trust or a withholding foreign partnership within the meaning of the
Treasury regulations and payments that are effectively connected with the conduct of a
trade or business in the United States, the beneficiaries of the foreign simple trust, the
person treated as the owner of the foreign grantor trust or the partners of the foreign
partnership will be required to provide the certification discussed above in order to
establish an exemption from backup withholding tax and information reporting requirements.
The
amount of any back-up withholding may be allowed as a credit against a U.S. Holders
U.S. federal income tax liability and may entitle the holder to a refund, provided that
required information is furnished to the IRS
F.
|
DIVDENDS
AND PAYING AGENTS
|
Not
applicable.
Not
applicable.
66
You
may request a copy of our U.S. SEC filings, at no cost, by writing or calling us at
IncrediMail Ltd., 4 HaNechoshet Street, Tel-Aviv 69710, Israel, Attention: Yacov Kaufman,
Telephone: +972-3-7696100. A copy of each report submitted in accordance with applicable
United States law is available for public review at our principal executive offices. In
addition, our filings with the SEC may be inspected without charge at the SECs
Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the
operation of the Public Reference Room can be obtained by calling the SEC at
1-800-SEC-0330. Our SEC filings are also available to the public from the SECs
website at www.sec.gov.
A
copy of each document (or a translation thereof to the extent not in English) concerning
IncrediMail that is referred to in this annual report on Form 20-F, is available for
public view (subject to confidential treatment of agreements pursuant to applicable law)
at our principal executive offices at IncrediMail Ltd., 4 HaNechoshet
Street,
Tel-Aviv 69710, Israel.
I.
|
SUBSIDIARY
INFORMATION
|
Not
applicable.
67
ITEM 11.
|
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Exchange
Rate Risk.
A significant portion of our revenues and expenses are in foreign
currencies. As a result numerous balances are denominated or linked to these currencies.
In 2006 the related foreign currency fluctuation resulted in $97,000 financial expense and
in 2007 resulted in financial income of $198,000. Both sums are components of the exchange
rate differences set forth in Note 11(a) of our financial statements. As of December 31,
2007, our net liability in foreign currencies amounted to approximately $1.3 million.
In
addition, in territories where our prices are based on local currencies, fluctuations in
the dollar exchange rate could affect our gross profit margin. We may compensate for such
fluctuations by changing product prices accordingly. We also hold a small part of our
financial investments in other currencies, mainly New Israeli Shekels and Euro. The dollar
value of those investments may decline. A revaluation of 1% of the foreign currencies
(i.e. other than U.S. dollar) could reduce our income before taxes by approximately $0.1
million.
A
majority of our costs, including salaries, expenses and office expenses are incurred in
New Israeli Shekels. Inflation in Israel may have the effect of increasing the U.S. dollar
cost of our operations in Israel. If the U.S. dollar declines in value in relation to the
New Israeli Shekel, it will become more expensive for us to fund our operations in Israel.
A revaluation of 1% of the NIS will affect our income before tax by less than one percent.
The exchange rate of the U.S. dollar to the New Israeli Shekel, based on exchange rates
published by the Bank of Israel, was as follows:
|
|
Year Ended December 31,
|
|
|
2005
|
2006
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average rate for period
|
|
|
|
4.488
|
|
|
4.457
|
|
|
4.108
|
|
|
Rate at year-end
|
|
|
|
4.603
|
|
|
4.225
|
|
|
3.846
|
|
|
|
|
|
|
Towards
the end of 2006, we engaged a firm to analyze our exposure to the fluctuation in foreign
currency exchange rates and are implementing their recommendations since then.
Interest
Rate Risk
. The primary objective of our investment activities is to preserve principal
while maximizing the interest income we receive from our investments, without increasing
risk. Our current investment policy is to invest in dollar denominated or linked
debentures, of limited sums, rated A or higher and with an average maturity of no more
than 3 years. We are exposed to market risks resulting from changes in interest rates
relating primarily to our financial investments in cash, deposits and marketable
securities. We do not use derivative financial instruments to limit exposure to interest
rate risk. Our interest gains may decline in the future as a result of changes in the
financial markets. However, we believe any such potential loss would be immaterial to us.
ITEM 12.
|
|
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|
Not
applicable.
68
PART II
ITEM 13.
|
|
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
|
Not
applicable.
ITEM 14.
|
|
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|
The
effective date of our first registration statement, filed on Form F-1 under the Securities
Act (File No. 333-129246), relating to the initial public offering of our ordinary shares,
was January 30, 2006.
ITEM 15.
|
|
CONTROLS AND PROCEDURES
|
(a)
Disclosure Controls and Procedures
. Our management, including our Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of our disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2007. Based
on such evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of December 31, 2007, we have in place effective controls and
procedures designed to ensure that information disclosed by us in the reports we
file or submit under the Exchange Act and the rules thereunder, is recorded,
processed, summarized and reported within the time periods specified in the
SECs rules and forms.
(b)
Managements Annual Report on Internal Control Over Financial
Reporting
: Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act. Our internal control over financial
reporting is a process to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Our
internal control over financial reporting includes those policies and procedures
that:
|
|
pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of our assets
|
|
|
provide
reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and
that our receipts and expenditures are being made only in accordance with authorizations
of our management and directors
|
|
|
provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the
financial statements.
|
Our management recognizes that there
are inherent limitations in the effectiveness of any system of internal control over
financial reporting, including the possibility of human error and the circumvention or
override of internal control. Accordingly, even effective internal control over financial
reporting can provide only reasonable assurance with respect to financial statement
preparation, and may not prevent or detect all misstatements. Further, because of changes
in conditions, the effectiveness of internal control over financial reporting may vary
over time.
Our management assessed the
effectiveness of our internal control over financial reporting as of December 31, 2007.
Our management has concluded, based on its assessment, that our internal control over
financial reporting was effective as of December 31, 2007.
Our financial statements have been audited by Kost, Forer, Gabbay & Kasierer
(A Member of Ernst & Young Global), an independent registered public accounting firm.
(c)
Attestation Report of Registered Public Accounting Firm:
Not applicable.
(d)
Changes in Internal Control Over Financial Reporting
: During the period
covered by this report, no material changes in our internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) have occurred that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
69
ITEM 16A.
|
|
AUDIT COMMITTEE FINANCIAL EXPERT
|
Our
board of directors has determined that Mr. James H. Lee and David Jutkowitz, who are
independent directors (as defined under Rule 4200(a)(15) of the NASD market rules) and
serve on our audit committee, qualify as audit committee financial expert as
defined in Item 16A of Form 20-F.
Our
board of directors has adopted a code of conduct applicable to all of our directors,
officers and employees as required by the Nasdaq Market rules, which also complies with
the definition of a code of ethics set out in Section 406(c) of the
Sarbanes-Oxley Act of 2002. A copy of the code of ethics is attached hereto as Exhibit 11.
ITEM 16C.
|
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
We
paid the following fees for the professional services rendered by Kost Forer Gabbay &
Kasierer, a member of Ernst & Young Global, which have served as our registered public
accounting firm for the last two years:
|
|
2006
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audit Fees
|
|
|
$
|
191,683
|
|
$
|
151,725
|
|
|
Audit Related Fees
|
|
|
|
-
|
|
|
21,768
|
|
|
Tax Fees
|
|
|
|
35,861
|
|
|
49,664
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
227,544
|
|
$
|
223,157
|
|
|
|
|
|
|
|
|
|
|
|
Audit
Fees include audit services, quarterly reviews and audit service rendered in connection
with our initial public offering. Tax fees include, corporate tax returns, international
tax, VAT advise and tax advise related to acquisitions.
Our
audit committee is responsible for the establishment of policies and procedures for review
and pre-approval by the committee of all audit services and permissible non-audit services
to be performed by our independent auditor, in order to ensure that such services do not
impair our auditors independence. Pursuant to the pre-approval policy adopted by our
audit committee, certain enumerated audit, audit-related and tax services have been
granted general pre-approval by our audit committee and need not be specifically
pre-approved. Pre-approval fee levels or budgeted amounts for all services to be provided
by the independent auditor will be established annually by the audit committee and the
committee may also determine the appropriate ratio between the total amount of fees for
audit, audit-related, tax services and other services. All requests for services to be
provided by the independent auditor will be submitted to our Chief Financial Officer, who
will determine whether such services are included within the enumerated pre-approved
services. The audit committee will be informed on a timely basis of any pre-approved
services that were performed by the auditor. Requests for services that require specific
pre-approval will be submitted to the audit committee with a statement as to whether, in
the view of the Chief Financial Officer and the independent auditor, the request is
consistent with the SECs rules on auditor independence. The Chief Financial Officer
will monitor the performance of all services and determine whether such services are in
compliance with the policy.
ITEM 16D.
|
|
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
|
None.
ITEM 16E.
|
|
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
|
None.
70
PART III
ITEM 17.
|
|
FINANCIAL STATEMENTS
|
Not
applicable.
ITEM 18.
|
|
FINANCIAL STATEMENTS
|
The
following financial statements and related auditors report are filed as part of this
annual report:
|
|
Page
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
F-2
|
|
|
|
Balance Sheets as of December 31, 2006 and 2007
|
F-3 - F-4
|
|
|
|
Statements of Income for the Years Ended December 31, 2005, 2006 and 2007
|
F-5
|
|
|
|
Statements of Changes in Shareholders' Equity (Deficiency)
|
|
for the Years Ended December 31, 2005, 2006 and 2007
|
F-6
|
|
|
|
Statements of Cash Flows for the Years Ended December 31, 2005, 2006 and 2007
|
F-7
|
|
|
|
Notes to Financial Statements
|
F-9
|
|
|
|
1.1
|
Memorandum
of Association of Registrant (1)
|
1.2
|
Certificate
of Change of Name of Registrant (translated from Hebrew) (1)
|
1.3
|
Amended
and Restated Articles of Association of Registrant, dated February 3, 2006 (2)
|
4.1
|
Google
AdSenseTM Online Standard Terms and Conditions
|
4.2
|
OEM
Agreement, effective December 7, 2004, between Commtouch Ltd. and the Registrant (1)
|
4.3
|
The
Registrant's 2003 Israeli Share Option Plan and the form of Option Agreement (1)
|
8
|
List
of all subsidiaries.
|
12.1
|
Certifications
required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Executive officer of
the Company
|
12.2
|
Certifications
required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Financial officer of
the Company
|
13
|
Certification
required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of
Title 18 of the United Stated Code
|
14
|
Consent
of Kost Forer Gabbay & Kasierer, an affiliate of Ernst & Young Global, Independent
Auditors
|
(1)
|
Previously
filed with the SEC on October 25, 2005 as an exhibit to our registration
statement on Form F-1/A (File No. 333-129246).
|
(2)
|
Previously
filed with the SEC on January 5, 2006 as an exhibit to our registration
statement on Form F-1/A (File No. 333-129246).
|
(3)
|
Previously
filed with the SEC on January 26, 2006 as an exhibit to our registration
statement on Form F-1/A (File No. 333-129246).
|
*
|
Confidential
treatment has been requested with respect to certain portions of this exhibit pursuant to
17.C.F.R. §§ 230.406 and 200.83. Omitted portions were filed separately with
the SEC.
|
71
INCREDIMAIL LTD. AND
ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL
STATEMENTS
AS OF DECEMBER 31, 2007
IN U.S. DOLLARS
INDEX
|
Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 67067, Israel
Tel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com/il
|
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
INCREDIMAIL LTD.
We
have audited the accompanying consolidated balance sheets of Incredimail Ltd. (the
Company) and its subsidiaries as of December 31, 2006 and 2007, and the related
consolidated statements of operations, changes in shareholders equity (deficiency)
and cash flows for each of the three years in the period ended December 31, 2007. These
financial statements are the responsibility of the Companys 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. We were not engaged to perform an audit of the Companys
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 Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of the Company and its subsidiaries as of
December 31, 2006 and 2007, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 2007 in conformity
with U.S. generally accepted accounting principles.
As
discussed in Note 2s to the consolidated financial statements, in 2006 the Company adopted
Statement Financial Accounting Standards Board No. 123 (revised 2004) Share-Based
Payment.
|
|
|
|
|
|
|
|
|
|
Tel-Aviv, Israel
|
KOST FORER GABBAY & KASIERER
|
May 12, 2008
|
A Member of Ernst & Young Global
|
F - 2
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
CONSOLIDATED BALANCE SHEETS
|
|
U.S. dollars in thousands
|
|
December 31,
|
|
2006
|
2007
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
Cash and cash equivalents
|
|
|
$
|
8,366
|
|
$
|
4,611
|
|
Short term bank deposit
|
|
|
|
-
|
|
|
1,000
|
|
Marketable securities
|
|
|
|
17,381
|
|
|
17,811
|
|
Trade receivables
|
|
|
|
1,828
|
|
|
1,993
|
|
Deferred taxes, net
|
|
|
|
418
|
|
|
368
|
|
Other receivables and prepaid expenses
|
|
|
|
611
|
|
|
2,017
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
|
28,604
|
|
|
27,800
|
|
|
|
|
|
|
|
|
|
LONG-TERM ASSETS:
|
|
|
Severance pay fund
|
|
|
|
589
|
|
|
1,037
|
|
Deferred taxes, net
|
|
|
|
221
|
|
|
92
|
|
Long-term deposits
|
|
|
|
412
|
|
|
482
|
|
Restricted cash
|
|
|
|
92
|
|
|
158
|
|
Long-term investment
|
|
|
|
-
|
|
|
100
|
|
Property and equipment, net
|
|
|
|
877
|
|
|
1,808
|
|
Other intangible assets, net
|
|
|
|
341
|
|
|
164
|
|
Goodwill
|
|
|
|
288
|
|
|
125
|
|
|
|
|
|
|
|
|
|
Total
long-term assets
|
|
|
|
2,820
|
|
|
3,966
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
$
|
31,424
|
|
$
|
31,766
|
|
|
|
|
|
|
The accompanying notes are an
integral part of the consolidated financial statements.
F - 3
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
CONSOLIDATED BALANCE SHEETS
|
|
U.S. dollars in thousands (except share and per share data)
|
|
December 31,
|
|
2006
|
2007
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
Trade payables
|
|
|
$
|
464
|
|
$
|
1,546
|
|
Deferred revenues
|
|
|
|
3,703
|
|
|
3,254
|
|
Accrued expenses and other liabilities
|
|
|
|
2,876
|
|
|
3,244
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
|
7,043
|
|
|
8,044
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
Deferred revenues
|
|
|
|
951
|
|
|
1,559
|
|
Accrued severance pay
|
|
|
|
853
|
|
|
1,392
|
|
|
|
|
|
|
|
|
|
Total
long-term liabilities
|
|
|
|
1,804
|
|
|
2,951
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENT LIABILITIES
|
|
|
|
|
|
SHAREHOLDERS' EQUITY:
|
|
|
Share capital -
|
|
|
Ordinary shares of NIS 0.01 par value -
|
|
|
Authorized: 15,000,000 shares as of December 31, 2006 and 2007; Issued
|
|
|
and outstanding: 9,399,458 and 9,475,943 shares at December 31, 2006 and
|
|
|
2007, respectively
|
|
|
|
20
|
|
|
20
|
|
Additional paid-in capital
|
|
|
|
20,993
|
|
|
22,029
|
|
Accumulated other comprehensive income
|
|
|
|
109
|
|
|
112
|
|
Retained earnings (accumulated deficit)
|
|
|
|
1,455
|
|
|
(1,390
|
)
|
|
|
|
|
|
|
|
|
Total
shareholders' equity
|
|
|
|
22,577
|
|
|
20,771
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
|
$
|
31,424
|
|
$
|
31,766
|
|
|
|
|
|
|
The accompanying notes are an integral
part of the consolidated financial statements.
F - 4
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
U.S. dollars in thousands (except per share data)
|
|
Year ended December 31,
|
|
2005
|
2006
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
|
7,402
|
|
$
|
10,851
|
|
$
|
18,675
|
|
Cost of revenues
|
|
|
|
570
|
|
|
858
|
|
|
1,740
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
6,832
|
|
|
9,993
|
|
|
16,935
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
Research and development
|
|
|
|
2,040
|
|
|
3,251
|
|
|
6,125
|
|
Selling and marketing
|
|
|
|
925
|
|
|
1,767
|
|
|
4,682
|
|
General and administrative
|
|
|
|
922
|
|
|
2,717
|
|
|
3,693
|
|
Goodwill impairment
|
|
|
|
-
|
|
|
-
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
|
3,887
|
|
|
7,735
|
|
|
14,663
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
2,945
|
|
|
2,258
|
|
|
2,272
|
|
Financial income (expenses), net
|
|
|
|
(14
|
)
|
|
984
|
|
|
(3,641
|
)
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on income
|
|
|
|
2,931
|
|
|
3,242
|
|
|
(1,369
|
)
|
Taxes on income
|
|
|
|
845
|
|
|
765
|
|
|
1,393
|
|
Tax expense due to dividend paid out of tax exempt income
|
|
|
|
937
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
$
|
1,149
|
|
$
|
2,477
|
|
$
|
(2,762
|
)
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per Ordinary share:
|
|
|
|
|
|
Basic
|
|
|
$
|
0.17
|
|
$
|
0.27
|
|
$
|
(0.29
|
)
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
$
|
0.16
|
|
$
|
0.27
|
|
$
|
(0.29
|
)
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of the consolidated financial statements.
F - 5
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
|
|
U.S. dollars in thousands (except per share data)
|
|
Share
capital
|
Additional
paid-in
capital
|
Deferred
stock
compensation
|
Accumulated
other
comprehensive
income
|
Retained
earnings
(accumulated
deficit)
|
Total
comprehensive
income (loss)
|
Total
shareholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2005
|
|
|
$
|
11
|
|
$
|
1,118
|
|
$
|
(427
|
)
|
$
|
26
|
|
$
|
2,124
|
|
|
|
|
$
|
2,852
|
|
Reversal of deferred stock compensation in
|
|
|
respect of employees' termination
|
|
|
|
-
|
|
|
(59
|
)
|
|
59
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
Stock based compensation
|
|
|
|
|
|
|
32
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
32
|
|
Amortization of deferred stock compensation
|
|
|
|
-
|
|
|
-
|
|
|
111
|
|
|
-
|
|
|
-
|
|
|
|
|
|
111
|
|
Compensation in respect of grant of options to
non-employees
|
|
|
|
-
|
|
|
30
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
30
|
|
Conversion of Preferred shares into Ordinary shares
|
|
|
|
-
|
|
|
33
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
33
|
|
Exercise of share options
|
|
|
|
1
|
|
|
*) -
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
1
|
|
Dividend declared and paid ($ 0.62 per
Ordinary share)
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,295
|
)
|
|
|
|
|
(4,295
|
)
|
Comprehensive income:
|
|
|
Changes in unrealized holding gains on
marketable securities, net
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
52
|
|
|
-
|
|
$
|
52
|
|
|
52
|
|
Net income
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,149
|
|
|
1,149
|
|
|
1,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
|
|
12
|
|
|
1,154
|
|
|
(257
|
)
|
|
78
|
|
|
(1,022
|
)
|
|
|
|
|
(35
|
)
|
Issuance of share capital upon initial
public offering, net
|
|
|
|
5
|
|
|
16,374
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
16,379
|
|
Conversion of preferred shares
|
|
|
|
3
|
|
|
3,027
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
3,030
|
|
Issuance of shares upon the acquisition
of Bizchord
|
|
|
|
*)
|
|
|
100
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
100
|
|
Issuance of shares to non-employees
|
|
|
|
*)
|
|
|
60
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
60
|
|
Reclassification of deferred stock compensation
to additional paid-in
|
|
|
capital upon adoption of SFAS 123R
|
|
|
|
-
|
|
|
(257
|
)
|
|
257
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
Stock based compensation
|
|
|
|
-
|
|
|
525
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
525
|
|
Exercise of share options
|
|
|
|
*)
|
|
|
10
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
10
|
|
Comprehensive income:
|
|
|
Changes in unrealized holding gains on
marketable securities, net
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
31
|
|
|
-
|
|
$
|
31
|
|
|
31
|
|
Net income
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,477
|
|
|
2,477
|
|
|
2,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
|
20
|
|
|
20,993
|
|
|
-
|
|
|
109
|
|
|
1,455
|
|
|
|
|
|
22,577
|
|
Tax benefit in respect of offering expenses
|
|
|
|
|
|
|
143
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
143
|
|
Issuance of shares to non-employees
|
|
|
|
*)
|
|
|
63
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
63
|
|
Stock based compensation
|
|
|
|
|
|
|
706
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
706
|
|
Exercise of share options
|
|
|
|
*)
|
|
|
124
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
124
|
|
FIN 48 opening balance adjustment
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(83
|
)
|
|
|
|
|
(83
|
)
|
Comprehensive income:
|
|
|
Changes in unrealized holding gains
on marketable securities, net
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3
|
|
|
-
|
|
$
|
3
|
|
|
3
|
|
Net loss
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,762
|
)
|
|
(2,762
|
)
|
|
(2,762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,759
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
$
|
20
|
|
$
|
22,029
|
|
$
|
-
|
|
$
|
112
|
|
$
|
(1,390
|
)
|
|
|
|
$
|
20,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*)
|
Represents
an amount less than $ 1.
|
The accompanying notes are an
integral part of the consolidated financial statements.
F - 6
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
U.S. dollars in thousands
|
|
Year ended December 31,
|
|
2005
|
2006
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
$
|
1,149
|
|
$
|
2,477
|
|
$
|
(2,762
|
)
|
Adjustments required to reconcile net income (loss) to net cash
|
|
|
provided by operating activities:
|
|
|
Depreciation and amortization
|
|
|
|
69
|
|
|
245
|
|
|
510
|
|
Stock based compensation
|
|
|
|
173
|
|
|
585
|
|
|
769
|
|
Impairment of goodwill and other intangible assets
|
|
|
|
-
|
|
|
-
|
|
|
316
|
|
Other-than-temporary impairment on long-term investment and
|
|
|
marketable securities
|
|
|
|
-
|
|
|
-
|
|
|
5,147
|
|
Amortization of premium (accretion of discount) and accrued
|
|
|
interest on marketable securities
|
|
|
|
(42
|
)
|
|
(219
|
)
|
|
(294
|
)
|
Deferred taxes, net
|
|
|
|
(27
|
)
|
|
(290
|
)
|
|
211
|
|
Accrued severance pay, net
|
|
|
|
10
|
|
|
185
|
|
|
91
|
|
Decrease (increase) in trade receivables
|
|
|
|
(110
|
)
|
|
243
|
|
|
(165
|
)
|
Increase in other receivables and prepaid expenses
|
|
|
|
(52
|
)
|
|
(799
|
)
|
|
(1,406
|
)
|
Increase in long-term deposits
|
|
|
|
(12
|
)
|
|
(258
|
)
|
|
(70
|
)
|
Increase in trade payables
|
|
|
|
12
|
|
|
350
|
|
|
1,082
|
|
Increase in deferred revenues
|
|
|
|
1,869
|
|
|
1,360
|
|
|
159
|
|
Increase in accrued expenses and other liabilities
|
|
|
|
1,184
|
|
|
1,309
|
|
|
226
|
|
Other
|
|
|
|
28
|
|
|
-
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
|
4,251
|
|
|
5,188
|
|
|
3,821
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
Purchase of property and equipment
|
|
|
|
(266
|
)
|
|
(831
|
)
|
|
(1,355
|
)
|
Proceeds from sale of property and equipment
|
|
|
|
2
|
|
|
-
|
|
|
15
|
|
Proceeds from short-term bank deposits
|
|
|
|
1,138
|
|
|
-
|
|
|
-
|
|
Investment in short-term bank deposits
|
|
|
|
(500
|
)
|
|
-
|
|
|
(1,000
|
)
|
Restricted cash
|
|
|
|
1
|
|
|
(62
|
)
|
|
(66
|
)
|
Capitalization of software development costs and content costs
|
|
|
|
-
|
|
|
(76
|
)
|
|
(84
|
)
|
Payment for the acquisition of Bizchord (a)
|
|
|
|
-
|
|
|
(456
|
)
|
|
-
|
|
Proceeds from sales of marketable securities
|
|
|
|
977
|
|
|
5,833
|
|
|
54,369
|
|
Investment in marketable securities
|
|
|
|
(2,736
|
)
|
|
(20,462
|
)
|
|
(59,749
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
(1,384
|
)
|
|
(16,054
|
)
|
|
(7,870
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
Proceeds from issuance of shares upon initial public offering, net
|
|
|
|
-
|
|
|
16,798
|
|
|
-
|
|
Tax benefit in respect of issuance expenses
|
|
|
|
-
|
|
|
-
|
|
|
111
|
|
Exercise of share options
|
|
|
|
-
|
|
|
10
|
|
|
124
|
|
Repayment of capital lease obligations
|
|
|
|
(8
|
)
|
|
-
|
|
|
-
|
|
Reimbursement of (deferred) issuance costs
|
|
|
|
(478
|
)
|
|
-
|
|
|
59
|
|
Short-term bank credit, net
|
|
|
|
-
|
|
|
(4
|
)
|
|
-
|
|
Dividend paid
|
|
|
|
(4,295
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
|
(4,781
|
)
|
|
16,804
|
|
|
294
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
|
(1,914
|
)
|
|
5,938
|
|
|
(3,755
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
|
4,342
|
|
|
2,428
|
|
|
8,366
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
|
$
|
2,428
|
|
$
|
8,366
|
|
$
|
4,611
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of the consolidated financial statements.
F - 7
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
U.S. dollars in thousands
|
|
Year ended December 31,
|
|
2005
|
2006
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information and disclosures of non-cash investing and
|
|
|
|
|
|
|
|
|
|
|
|
financing activities:
|
|
|
|
|
|
Decrease in deferred issuance costs
|
|
|
$
|
-
|
|
$
|
478
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Preferred shares into Ordinary shares
|
|
|
$
|
33
|
|
$
|
3,030
|
|
$
|
-
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
Income taxes
|
|
|
$
|
1,618
|
|
$
|
275
|
|
$
|
2,019
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Payment for the acquisition of Bizchord:
|
|
|
|
|
|
Estimated fair value of assets acquired at the acquisition date:
|
|
|
|
|
|
Other intangible assets
|
|
|
|
|
|
$
|
268
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
556
|
|
|
|
|
Less - issuance of Ordinary shares
|
|
|
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
456
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of the consolidated financial statements.
F - 8
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
Incredimail
Ltd. and its wholly-owned subsidiary in the U.S, Incredimail Inc., design develop and
market content and media products, particularly email products, creating an entertaining
experience by offering users the ability to design a customized and personal
presentation, targeting the consumer and home market. Bizchord Ltd., a wholly-owned
subsidiary in Israel, is engaged in transaction processing. Incredimail Ltd (Incredimail)
and its wholly-owned subsidiaries are collectively referred to as the Company.
The Company was incorporated under the laws of Israel in 1999 and commenced operations in
2000.
|
|
b.
|
Initial
Public Offering (IPO):
|
|
On
February 3, 2006, the Company affected an Initial Public Offering (IPO) of
its Ordinary shares on the Nasdaq Capital Market. The Company issued 2,500,000 shares at
a price of $7.50 per share before underwriting and issuance expenses. Total net proceeds
from the issuance amounted to approximately $16.4 million. Upon closing of the IPO, each
Preferred share was converted into 38 Ordinary shares. On the closing date of the IPO,
the Company granted to its underwriters an option to purchase 175,000 Ordinary shares at
a price per share of $9.375. The option shall expire five years following the grant date.
|
|
c.
|
Acquisition
of certain assets of Bizchord Consulting Corporation (Bizchord):
|
|
On
December 18, 2006, the Company consummated an agreement to acquire certain assets of
Bizchord Consulting Corporation in consideration of $556,000 including 12,210 Ordinary
shares of the Company valued at $100,000 based on the market price two days before and
after the acquisition date. Bizchord was a provider of online transaction process
solutions, and as such was a significant supplier of the Company. The primary reason for
the acquisition was to ensure the continued availability of these solutions, as well as
the ability to maintain and further improve them in the future.
|
|
Under
the terms of the acquisition agreement, additional contingent payment of up to $250,000
in cash and in shares of Incredimail, equally, was to be paid to the selling shareholders
of Bizchord based on services rendered to the Company by the selling shareholders over
two years. In 2007, one of the selling shareholders ceased rendering services to the
Company and accordingly, $125,000 out of the total amount has been forfeited. The
remaining $125,000 is recognized as an operating expense over the service period in
accordance with Emerging Issue Task Force (EITF) 95-8 Accounting for
Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase
Business Combination.
|
|
The
acquisition was accounted for by the purchase method of accounting in accordance with
SFAS No. 141 and accordingly, the purchase price has been allocated according to the
estimated fair value of the assets acquired. The results of Bizchord operations have been
included in the consolidated financial statements since December 18, 2006.
|
|
The
following table summarizes the estimated fair values of the assets acquired at the
acquisition date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core technology
|
|
|
$
|
268
|
|
|
Goodwill
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
$
|
556
|
|
|
|
|
|
|
Core
technology in the amount of $268 is amortized on a straight-line basis over an estimated
useful life of five years. In 2007, the Company recorded an impairment loss with respect
to core technology and goodwill acquired on the acquisition of Bizchord, see Notes 2(i)
and 2(j).
|
F - 9
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES
|
|
The
consolidated financial statements have been prepared according to United States
Generally Accepted Accounting Principles ("U.S. GAAP").
|
|
The
preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ
from those estimates.
|
|
b.
|
Financial
statements in U.S. dollars:
|
|
The
Company has operations in Israel and most of the Israeli expenses are currently paid in
New Israeli Shekels (NIS); however, the markets for the Companys
products are located outside of Israel and the Company generates most of its revenues in
U.S. dollars (dollars). The Companys management believes that the
dollar is the primary currency of the economic environment in which the Company operates.
Thus, the functional and reporting currency of the Company is the dollar.
|
|
Accordingly,
monetary accounts maintained in currencies other than the dollar are remeasured into
dollars in accordance with Statement of Financial Accounting Standards (SFAS)
No. 52, Foreign Currency Translation. All transaction gains and losses of the
remeasured monetary balance sheet items are reflected in the statements of operations as
financial income or expenses, as appropriate.
|
|
c.
|
Principles
of consolidation:
|
|
Intercompany
balances and transactions have been eliminated upon consolidation.
|
|
The
Company considers short-term unrestricted highly liquid investments that are readily
convertible into cash, purchased with original maturities of three months or less to be
cash equivalents.
|
|
Restricted
cash is invested in bank deposits, which are pledged in favor of the bank which provides
to the Company guarantees with respect to office lease agreements.
|
|
f.
|
Marketable
securities and long-term investment:
|
|
The
Company accounts for investments in debt and equity securities in accordance with SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities.
Management determines the appropriate classification of its investments in debt and
equity securities at the time of purchase and reevaluates such determinations at each
balance sheet date.
|
|
At
December 31, 2006 and 2007, all marketable securities are designated as
available-for-sale. Marketable securities classified as available-for-sale are
carried at fair value. Unrealized gains and losses are reported in a separate component
of shareholders equity in accumulated other comprehensive income. Gains and losses
are recognized when realized, on a specific identification basis, in the Companys
consolidated statements of operations.
|
F - 10
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
Impairment
losses are recognized as realized or when the Company has determined that
other-than-temporary decline in fair value has occurred. FASB Staff Position (FSP)
No. 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investment (FSP 115-1) and SAB Topic 5M Other Than
Temporary Impairment of Certain Investments in Debt and Equity Securities provides
guidance for determining when an investment is considered impaired, whether impairment is
other-than temporary, and measurement of an impairment loss. An investment is considered
impaired if the fair value of the investment decreased below its cost in other-than
temporary manner. If, after consideration of all available evidence to evaluate the
realizable value of its investment, impairment is determined to be other than temporary,
then an impairment loss should be recognized equal to the difference between the
investments cost and its fair value. As for impairment see Note 3.
|
|
g.
|
Property
and equipment:
|
|
Property
and equipment are stated at cost, net of accumulated depreciation. Depreciation is
calculated by the straight-line method over the estimated useful lives of the assets at
the following annual rates:
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computers and peripheral equipment
|
33
|
|
Office furniture and equipment
|
7 - 15
|
|
Automobiles
|
15
|
|
Leasehold
improvements are depreciated by the straight-line method over the term of the lease or
the estimated useful life of the improvements, whichever is shorter.
|
|
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, in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets.
|
|
Amortization
is calculated using the straight-line method over the estimated useful lives at the
following annual rates:
|
|
|
Weighted average %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized software (see l)
|
33
|
|
Content (see o)
|
33
|
|
Technology
|
20
|
|
i.
|
Impairment
of long-lived assets:
|
|
The
Companys long-lived assets, tangible and intangible, other than goodwill, are
reviewed for impairment in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of an asset to the future undiscounted cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the fair value
of the assets. Assets to be disposed of are reported at the lower of the carrying amount
or fair value less costs to sell. In 2005 and 2006, no impairment losses have been
identified. In 2007, the Company recorded an impairment loss to cost of revenues in the
amount of $ 153,000 in respect of core technology acquired in the acquisition of Bizchord.
|
F - 11
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
Goodwill
represents the excess of the cost over the fair value of the net assets of businesses
acquired. Under SFAS No. 142, goodwill is not amortized.
|
|
Statement
of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets(SFAS
No. 142), prescribes a two-phase process for impairment testing of goodwill. The
first phase screens for impairment, while the second phase (if necessary) measures
impairment. In the first phase of impairment testing, goodwill attributable to each of
the reporting units is tested for impairment by comparing the fair value of each
reporting unit with its carrying value. If the carrying value of the reporting unit
exceeds its fair value, the second phase is then performed. The second phase of the
goodwill impairment test compares the implied fair value of the reporting units
goodwill with the carrying amount of that goodwill. If the carrying amount of the
reporting units goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess. Fair value is determined
using discounted cash flows. Significant estimates used in the fair value methodologies
include estimates of future cash flows, future growth rates and the weighted average cost
of capital of the reporting unit. In 2007, the Company performed annual impairment test and recorded an impairment loss in the
amount of $ 163,000 in respect of Bizchord reporting unit.
|
|
The
Companys revenues are derived from licensing the right to use its email software,
content database, email anti spam services, advertising and collaboration arrangements.
|
|
Revenues
from email software license sales are recognized when all criteria outlined in Statement
of Position (SOP) 97-2, Software Revenue Recognition (as
amended), are met. Revenues from software license are recognized when persuasive evidence
of an agreement exists, delivery of the product has occurred, the fee is fixed or
determinable, and collectability is probable. The Companys e-mail users may also
purchase a license to its content database. This content database provides additional
Incredimail content files in the form of email background, animation sounds, graphics and
e-mail notifiers. Licensing fees are recognized over the license period. Lifetime
licensing revenues are recognized over the estimated usage period of the content
database. In accordance with its policy, the Company reviews the estimated usage period
of the lifetime licensing on an ongoing basis. Effective October 1, 2007, as a
result of this review, the Company changed its estimates of the useful life of its
lifetime licensing to better reflect the estimated periods during which revenues will be
recognized. The lifetime licensing recognized previously over three years was
increased to five years. The effect of this change in estimate was to reduce 2007
revenues by $ 204,000, decrease 2007 net income by $ 151,000, and decrease 2007
basic and diluted earnings per share by $ 0.01.
|
|
Deferred
revenues include upfront payments received from customers, for which revenues have not
yet been recognized.
|
|
Revenues
from email anti-spam services are recognized ratably over the service period.
|
|
The
Company generates revenues from search related advertising, receiving a share of the
advertising revenues from companies providing search capabilities. In addition, the
Company offers advertisers the ability to place text-based ads on its website and banners
in its email clients. Advertisers are charged monthly based on the number of times a user
clicks on one of the ads. The Company recognizes revenue from direct and third party
advertisement at that time.
|
F - 12
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
Collaboration
arrangements have been established with companies that use the Companys brand name
Incredi for their website and to which the Company refers users. In
consideration of the brand and promotional activity that the Company provides, it is
entitled to a share of the gross revenues generated from the website or to a share of the
net license fees received by the Companys collaborator through its website.
Revenues from these collaboration arrangements are recognized when earned.
|
|
l.
|
Research
and development costs:
|
|
Research
and development costs incurred in the process of software production before establishment
of technological feasibility, are charged to expenses as incurred. Costs of the
production of a product master incurred subsequent to the establishment of technological
feasibility are capitalized according to the principles set forth in SFAS No. 86, Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Based
on the Companys product development process, technological feasibility is
established upon completion of a working model.
|
|
Costs
incurred by the Company between completion of the working model and the point at which
the product is ready for general release, have been capitalized.
|
|
Capitalized
software development costs are amortized commencing with general product release, by the
greater of the amount computed using the: (i) ratio that current gross revenues from
sales of the software to the total of current and anticipated future gross revenues from
sales of that software, or (ii) the straight-line method over the estimated useful life
of the product.
|
|
The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes. This Statement prescribes the use of the liability method whereby
deferred tax assets and liability account balances are determined based on differences
between financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The Company provides a valuation allowance, if necessary, to reduce
deferred tax assets to their estimated realizable value.
|
|
On
January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48).
FIN 48 contains a two-step approach to recognizing and measuring uncertain tax
positions accounted for in accordance with SFAS No. 109. The first step is to evaluate
the tax position taken or expected to be taken in a tax return by determining if the
weight of available evidence indicates that it is more likely than not that, on an
evaluation of the technical merits, the tax position will be sustained on audit,
including resolution of any related appeals or litigation processes. The second step is
to measure the tax benefit as the largest amount that is more than 50% likely to be
realized upon ultimate settlement.
|
|
The
Company classifies interest as tax expenses. The Companys policy for interest
related to income tax exposures was not impacted as a result of the adoption of the
recognition and measurement provisions of FIN No. 48.
|
|
As
a result of the implementation of FIN No. 48, the Company recognized a $ 83 increase in
liability for unrecognized tax benefits, which was accounted for as an decrease to the
January 1, 2007 balance of retained earnings.
|
F - 13
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
Advertising
costs are expensed as incurred. Advertising costs for the years ended December 31,
2005, 2006 and 2007 amounted to $ 35,000, $ 218,000 and $ 1,411,000, respectively.
|
|
The
Company assembles content for the use of its customers through purchases of a variety of
creative and diverse graphics, sound and multimedia from third party manufacturers and
through internal creation of such content. In 2005 and 2006, the Company expensed content
costs as incurred. Effective January 1, 2007, the Company changed its accounting policy
for recognizing costs of database contents acquired from third parties. Under the new
policy, these costs are capitalized and amortized over their estimated useful life of
three years. The Company determined that this change in accounting principle is
preferable in the circumstances from the following reasons: (1) content database is
acquired and added to the Companys library, (2) being developed and subsequently
billed by independent third parties, the market value of this content is easily
determined. This content is being used by the Companys customers over several years
and does not get depleted. The customers cease using the content after several years when
it becomes no longer attractive or innovative. Prior periods have not been restated due
to immateriality.
|
|
Content
costs for the years 2005 and 2006 amounted to $ 139,000 and $ 198,000, respectively.
Content costs in 2007 amounted to $ 353,000, of which $ 84,000 was capitalized and the
remaining expensed as incurred. Amortization of capitalized content costs in 2007
amounted to $ 17,000.
|
|
p.
|
Concentrations
of credit risk:
|
|
Financial
instruments that potentially subject the Company to concentrations of credit risk consist
principally of cash and cash equivalents, bank deposits, marketable securities and trade
receivables.
|
|
The
majority of the Companys cash and cash equivalents and bank deposits are invested
mainly in dollar instruments with major banks in the U.S. and Israel. Management believes
that the financial institutions that hold the Companys investments are financially
sound and accordingly, low credit risk exists with respect to these investments.
|
|
The
Companys marketable securities consist of investment-grade corporate debentures,
government debentures and equity securities.
|
|
The
Company is subject to a minimal amount of credit risk with respect to sales of the Companys
software products and content database, as these sales are primarily obtained through
credit card sales. The Companys major customer is financially sound, and the
Company believes minimal credit risk is associated with this customer. To date, the
Company has not experienced any material bad debt losses.
|
|
The
Companys liability for severance pay is calculated pursuant to Israeli Severance
Pay Law based on its employees most recent monthly salaries, multiplied by the
number of years of their employment, or a portion thereof, as of the balance sheet date.
This liability is fully provided for by monthly deposits in insurance policies and by an
accrual.
|
F - 14
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
The
deposited funds include profits accumulated up to the balance sheet date. The deposited
funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israeli
Severance Pay Law or labor agreements. The value of the deposited funds is based on the
cash surrendered value of these policies and includes immaterial profits.
|
|
Severance
expenses for the years ended December 31, 2005, 2006 and 2007 amounted to $ 158,000,
$ 405,000 and $ 499,000 respectively.
|
|
r.
|
Net
earnings (loss) per Ordinary share:
|
|
In
2005 and 2006, the Company applied the two-class method as required by Emerging Issues
Task Force (EITF) No. 03-6, Participating Securities and the Two-Class
Method under FASB Statement No. 128, Earnings per Share (SFAS 128). EITF No.
03-6 requires the income per share for each class of shares (Ordinary shares and
Preferred shares) to be calculated assuming 100% of the Companys earnings are
distributed as dividends to each class of shares based on their contractual rights. In
2007, the Company had only one class of shares.
|
|
Basic
net earnings (loss) per Ordinary shares are computed based on the weighted average number
of Ordinary shares outstanding during each year. Diluted net earnings (loss) per Ordinary
share are computed based on the weighted average number of Ordinary shares outstanding
during each year, plus dilutive potential Ordinary shares considered outstanding during
the year, in accordance with SFAS No. 128, Earnings per Share.
|
|
The
total weighted average number of Ordinary shares related to the outstanding options
excluded from the calculations of diluted net earnings per Ordinary share because these
securities are anti-dilutive was 539,609 for the year ended December 31, 2006. None
were excluded from this calculation in 2005. Because of the loss in 2007, all options
were excluded from the calculation of diluted net loss per share.
|
|
Basic
and diluted net earnings per Preferred shares were not presented in the consolidated
financial statements.
|
|
s.
|
Accounting
for stock-based compensation:
|
|
On
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123(R)) which requires the measurement and recognition of
compensation expense based on estimated fair values for all share-based payment awards
made to employees and directors. SFAS 123(R) supersedes Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25),
for periods beginning in fiscal year 2006. In March 2005, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to
SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS
123(R).
|
|
SFAS
123(R) requires companies to estimate the fair value of equity-based payment awards on
the date of grant using an option-pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as an expense over the requisite
service periods in the Companys consolidated statements of operations. Prior to
January 1, 2006, the Company applied the intrinsic value method of accounting for stock
options as prescribed by APB 25, whereby compensation expense is equal to the excess, if
any, of the market price of the stock over the exercise price at the grant date of the
award.
|
F - 15
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
The
Company adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard starting from January 1, 2006, the
first day of the Companys fiscal year 2006. Under that transition method,
compensation cost recognized in the year ended December 31, 2006, includes: (a)
compensation cost for all share-based payments granted prior to, but not yet vested as of
January 1, 2006, based on the grant date fair value estimated in accordance with the
original provisions of Statement 123, and (b) compensation cost for all share-based
payments granted subsequent to January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of Statement 123(R). Results for prior
periods have not been restated.
|
|
The
Company recognizes compensation expenses for the value of its awards, which have graded
vesting based on the straight line method over the requisite service period of each of
the awards, net of estimated forfeitures. Estimated forfeitures are based on actual
historical pre-vesting forfeitures.
|
|
The
Company estimates the fair value of stock options granted using the Binomial method
option-pricing model. The option-pricing model requires a number of assumptions, of which
the most significant are expected stock price volatility and the expected option term.
Expected volatility was calculated based upon an average between historical volatilities
of the Company, similar entities and industry sector index similar to the Companys
characteristics, since it does not have sufficient company specific data due to it recent
IPO.
|
|
The
expected option term represents the period that the Companys stock options are
expected to be outstanding and was determined based on past exercise employee behavior.
The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds
with an equivalent term. The Company has no foreseeable plans to pay dividends.
|
|
The
fair value of the Companys stock options granted to employees and directors was
estimated using the following weighted average assumptions:
|
|
|
Year ended December 31,
|
|
|
2006
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
4.8%
|
4.1%
|
|
Dividend yield
|
0%
|
0%
|
|
Expected volatility
|
41%-71.9%
|
46.9%-59.8%
|
|
Weighted average volatility
|
56.3%
|
53.4%
|
|
Expected term (years)
|
3.95
|
4.175
|
|
*)
|
No
options were granted to employees in 2005.
|
F - 16
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
The
following table illustrates the effect on net income and earnings per share if the
Company had applied the fair value recognition provisions of SFAS No. 123 to options
granted under the Companys stock option plans for the year ended December 31, 2005.
For purposes of this pro forma disclosure, the value of the options is estimated using a
Black-Scholes-Merton option-pricing formula.
|
|
|
Year ended
December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income - as reported
|
|
|
$
|
1,149
|
|
|
Add Stock-based employee compensation-included in reported net income
|
|
|
|
143
|
|
|
Deduct Stock-based employee compensation - fair value
|
|
|
|
(312
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
|
$
|
980
|
|
|
|
|
|
|
Basic net earnings per Ordinary share as reported
|
|
|
$
|
0.17
|
|
|
|
|
|
|
Diluted net earnings per Ordinary share as reported
|
|
|
$
|
0.16
|
|
|
|
|
|
|
Pro forma basic net earnings per Ordinary share
|
|
|
$
|
0.15
|
|
|
|
|
|
|
Pro forma diluted net earnings per Ordinary share
|
|
|
$
|
0.14
|
|
|
|
|
|
|
t.
|
Fair
value of financial instruments:
|
|
The
following methods and assumptions were used by the Company in estimating its fair value
disclosures for financial instruments:
|
|
1.
|
The
carrying amounts of cash and cash equivalents, short-term bank deposits, other
receivables, trade payables and other payables approximate their fair value due
to the short-term maturity of such instruments.
|
|
2.
|
The
fair value of short term marketable securities is based on quoted market
prices.
|
|
3.
|
For
long-term marketable security not actively traded fair value is
estimated using values obtained from the Companys asset managers. To
estimate the value of this investment the asset managers employ various models
that take into consideration such factors, among others, as the credit rating
of the issuer, effective maturity of the security, yields on comparably rated
publicly traded securities. The actual value at which such security could
actually be sold or settled with a willing buyer or seller may differ from such
estimated fair values depending on a number of factors including, but not
limited to, current and future economic conditions, the quantity sold or
settled, the presence of an active market and the availability of a willing
buyer or seller.
|
|
4.
|
The
fair value of derivative instruments is estimated by quotes from the bank.
|
F - 17
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 2:
|
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
u.
|
Recently
issued accounting pronouncements:
|
|
In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 157, Fair Value Measurements (SFAS No. 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 SFAS No. 157 are effective for the Company
beginning January 1, 2008. The FASB issues a FASB Staff Position (FSP) to defer the
effective date of SFAS No. 157 for one year for all nonfinancial assets and nonfinancial
liabilities, except for those items that are recognized or disclosed at fair value in the
financial statements on a recurring basis. The Company does not expect the adoption will
have material impact on its consolidated financial statements.
|
|
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159
permits companies to choose to measure certain financial instruments and certain other
items at fair value. The standard requires that unrealized gains and losses on items for
which the fair value option has been elected to be reported in earnings. The provisions
of SFAS No. 159 are effective for the Company beginning January 1, 2008.
The Company does not expect the adoption of SFAS No. 159 will have an impact on
its consolidated financial statements.
|
|
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS 141R). SFAS 141R establishes principles
and requirements for how an acquirer recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, any non controlling interest
in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the business
combination. SFAS 141R is effective for fiscal years beginning after December 15,
2008. Earlier adoption is prohibited. The Company believes that the adoption of SFAS 141R
could have an impact on its consolidated financial statements; however, the impact would
depend on the nature, terms and magnitude of acquisitions it consummates in the future.
|
NOTE 3:
|
|
MARKETABLE SECURITIES AND LONG-TERM INVESMENT
|
|
a.
|
Marketable
securities:
|
|
The
Companys marketable securities are classified as available-for-sale securities and
are carried at fair value. The following table summarizes amortized costs, gross
unrealized holding gains and losses and market value of marketable securities as of
December 31, 2006 and 2007:
|
|
|
Amortized cost
|
Gross unrealized
gains
|
Gross unrealized
losses
|
Market value
|
|
|
December 31,
|
December 31,
|
December 31,
|
December 31,
|
|
|
2006
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
2007
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debentures
|
|
|
$
|
11,783
|
|
$
|
16,922
|
|
$
|
165
|
|
$
|
134
|
|
$
|
13
|
|
$
|
3
|
|
$
|
11,935
|
|
$
|
17,053
|
|
|
Government debentures
|
|
|
|
5,320
|
|
|
50
|
|
|
1
|
|
|
-
|
|
|
1
|
|
|
-
|
|
|
5,320
|
|
|
50
|
|
|
Equity securities
|
|
|
|
124
|
|
|
709
|
|
|
2
|
|
|
1
|
|
|
-
|
|
|
2
|
|
|
126
|
|
|
708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,227
|
|
$
|
17,681
|
|
$
|
168
|
|
$
|
135
|
|
$
|
14
|
|
$
|
5
|
|
$
|
17,381
|
|
$
|
17,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
amortized cost of marketable securities as of December 31, 2007 was reduced by $ 247,000
to reflect other-than-temporary impairment that was recorded in 2007 with respect to
these securities.
|
F - 18
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 3:
|
|
MARKETABLE SECURITIES AND LONG-TERM INVESMENT (Cont.)
|
|
The
following table summarizes the carrying amount of available-for-sale debt marketable
securities at December 31, 2007, segregated based on their scheduled maturities:
|
|
|
U.S. dollars in
thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
|
$
|
7,211
|
|
|
Due after one year through five years
|
|
|
|
6,597
|
|
|
Due after five years through ten years
|
|
|
|
2,116
|
|
|
Due after ten years
|
|
|
|
1,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,103
|
|
|
|
|
|
|
At
December 31, 2007, the Company had $ 5,000,000 of principal invested in Auction Rate
Security (ARS). The ARS held by the Company is a private placement security
with long-term nominal maturities for which the interest rates are reset through an
auction each month. The monthly auctions historically have provided a liquid market for
these securities. Some of the underlying collateral for the ARS held by the Company
consists of sub-prime mortgages.
|
|
At
the time of purchase the ARS investment had Aaa/AAA credit ratings. With the liquidity
issues experienced in global credit and capital markets, the ARS held by the Company at
December 31, 2007 have experienced multiple failed auctions as the amount of
securities submitted for sale has exceeded the amount of purchase orders. This security
was rated A3*-/AAA as of December 31, 2007.
|
|
The
estimated market value of the Companys ARS holdings at December 31, 2007 was
$100,000, which reflects a $ 4,900,000 adjustment to the principal value of $ 5,000,000.
Although the ARS continue to pay interest according to their stated terms, based on
valuation models and an analysis of other-than-temporary impairment factors, the Company
has recorded a pre-tax impairment charge of $ 4,900,000 in the fourth quarter of 2007 in
the financial expenses, reflecting the ARS holdings that the Company has concluded have
other-than-temporary decline in value.
|
|
Given
the failed auctions, the Companys ARS are illiquid until there is a successful
auction for them. Accordingly, the entire amount of such remaining ARS has been
classified as a long-term investment.
|
|
On
February 19, 2008, the Company was notified that this security was downgraded by S&P
to CCC and on April 4, 2008, the security was downgraded by Moodys to B3 and on
CreditWatch with negative implications.
|
F - 19
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 4:
|
|
PROPERTY AND EQUIPMENT
|
|
|
December 31,
|
|
|
2006
|
2007
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
Computers and peripheral equipment
|
|
|
$
|
1,335
|
|
$
|
2,125
|
|
|
Office furniture and equipment
|
|
|
|
222
|
|
|
278
|
|
|
Leasehold improvements
|
|
|
|
165
|
|
|
631
|
|
|
Automobiles
|
|
|
|
30
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,752
|
|
|
3,075
|
|
|
Accumulated depreciation
|
|
|
|
875
|
|
|
1,267
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciated cost
|
|
|
$
|
877
|
|
$
|
1,808
|
|
|
|
|
|
|
|
|
Depreciation
expenses totaled $ 69,000, $ 242,000 and $ 402,000 for the years ended December 31, 2005,
2006 and 2007, respectively.
|
NOTE 5:
|
|
OTHER INTANGIBLE ASSETS
|
|
a.
|
Other
intangible assets:
|
|
|
December 31,
|
|
|
2006
|
2007
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
Original amounts:
|
|
|
|
|
|
|
|
|
|
Capitalized software development costs
|
|
|
$
|
76
|
|
$
|
76
|
|
|
Capitalized content costs
|
|
|
|
-
|
|
|
84
|
|
|
Core technology
|
|
|
|
268
|
|
|
115
|
|
|
|
|
|
|
344
|
|
|
275
|
|
|
|
|
|
|
|
|
Accumulated amortization:
|
|
|
|
Capitalized software development costs
|
|
|
|
-
|
|
|
39
|
|
|
Capitalized content costs
|
|
|
|
-
|
|
|
17
|
|
|
Core technology
|
|
|
|
3
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets, net
|
|
|
$
|
341
|
|
$
|
164
|
|
|
|
|
|
|
|
|
b.
|
Amortization
expense amounted to $0, $3,000 and $108,000 for the years ended December 31,
2005, 2006 and 2007, respectively.
|
|
c.
|
Estimated
amortization expense for the years ended December 31, (excluding amortization
of capitalized software development costs):
|
|
|
U.S. dollars
in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
$
|
43
|
|
|
2009
|
|
|
|
43
|
|
|
2010
|
|
|
|
26
|
|
|
2011
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
127
|
|
|
|
|
|
|
d.
|
For
impairment loss see Note 2(i).
|
F - 20
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
The
changes in the carrying amount of goodwill for the years ended December 31, 2006 and 2007
are as follows:
|
|
|
December 31,
|
|
|
2006
|
2007
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
Goodwill, beginning of the year
|
|
|
$
|
-
|
|
$
|
288
|
|
|
Addition in respect of Bizchord acquisition
|
|
|
|
288
|
|
|
-
|
|
|
Goodwill impairment
|
|
|
|
-
|
|
|
(163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, end of year
|
|
|
$
|
288
|
|
$
|
125
|
|
|
|
|
|
|
|
NOTE 7:
|
|
ACCRUED EXPENSES AND OTHER LIABILITIES
|
|
|
December 31,
|
|
|
2006
|
2007
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
Employees and payroll accruals
|
|
|
$
|
946
|
|
$
|
1,443
|
|
|
Government authorities
|
|
|
|
1,350
|
|
|
1,296
|
|
|
Accrued expenses
|
|
|
|
580
|
|
|
505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,876
|
|
$
|
3,244
|
|
|
|
|
|
|
|
NOTE 8:
|
|
COMMITMENTS AND CONTINGENT LIABILITIES
|
|
The
Company rents its facilities under an operating lease agreement with an initial term
expiring in 2011, with an option for additional two years.
|
|
Future
minimum lease commitments under non-cancelable operating leases for the years ended
December 31, are as follows:
|
|
|
U.S. dollars in
thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
$
|
563
|
|
|
2009
|
|
|
|
563
|
|
|
2010
|
|
|
|
563
|
|
|
2011
|
|
|
|
563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,252
|
|
|
|
|
|
|
Total
rent expenses for the years ended December 31, 2005, 2006 and 2007 amounted to $ 75,000,
$ 118,000 and $ 337,000 respectively.
|
|
The
Company leases its motor vehicles under cancelable operating lease agreements. The
minimum payment under these operating leases, upon cancellation of these lease agreements
amounted to $ 93 as of December 31, 2007. Total lease expenses for the years ended
December 31, 2005, 2006 and 2007 amounted to, $ 155,000, $ 206,000 and $ 373,000,
respectively.
|
F - 21
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
a.
|
Tax
benefits under the Israel Law for the Encouragement of Capital Investments,
1959 (the Law):
|
|
Two
programs of the Company have been granted Approved Enterprise status under
the Law. For these programs, the Company has elected alternative benefits, waiving grants
in return for tax exemptions. These benefits include a tax-exemption for a period of two
years and taxation at the reduced corporate tax rate of 25% for an additional period of
five to eight years thereafter. The benefit period commenced in 2003 and in 2005 for the
first and second programs, respectively.
|
|
The
period of tax benefits detailed above is subject to limits of the earlier of 12 years
from the commencement of production or 14 years from receiving the approval. The
entitlement to the above benefits is subject to fulfilling the conditions stipulated by
the Law, regulations published thereunder and instruments of approval for the specific
investments in Approved Enterprises. In the event of failure to comply with
these conditions, the benefits may be canceled and the Company may be required to refund
the amount of the benefits, in whole or in part, including interest. As of December 31,
2007, management believes that the Company meets all conditions of the approvals.
|
|
On
July 20, 2005, the shareholders of the Company approved a dividend distribution in an
amount of approximately $ 4,300,000, which was paid on July 27, 2005. An amount of
approximately $ 2,800,000 was paid out of the tax exempt profit. As a result of the
distribution of tax-exempt profit, the Company recorded tax expense in an amount of
approximately $ 937,000 in the year ended December 31, 2005.
|
|
On
April 1, 2005, an amendment to the Law came into effect (the Amendment) and
has significantly changed the provisions of the Law. The Amendment limits the scope of
enterprises which may be approved by the Investment Center by setting criteria for the
approval of a facility as a Beneficiary Enterprise (rather than the previous
terminology of Approved Enterprise), such as a provision requiring that at least 25% of
the Beneficiary Enterprises income will be derived from export.
Additionally, the Amendment enacted major changes in the manner in which tax benefits are
awarded under the Law so that companies are no longer required for Investment Center
approval in order to qualify for tax benefits. The period of tax benefits for a new Beneficiary
Enterprise commences in the Year of Commencement. This year is the
later of: (1) the year in which taxable income is first generated by the Company, or (2)
a year selected by the Company for commencement, on the condition that the Company meets
certain provisions provided by the Law (Year of Election).
|
|
If
a company requested the Alternative Package of benefits for an Approved
Enterprise under the old law before the 2005 amendment, it is precluded from filing a
Year of Election notice for a Beneficiary Enterprise for three years after
the year in which the Approved Enterprise was activated.
|
|
In
addition, the Law provides that terms and benefits included in any letter of approval
already granted will remain subject to the provisions of the law as they were on the date
of such approval. Therefore, the two existing Approved Enterprises will not be subject to
the provisions of the Amendment.
|
|
The
Company has one Beneficiary Enterprise plan. As of December 31, 2007, the
period of benefits under the Beneficiary Enterprise first program has not commenced yet.
|
F - 22
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 9:
|
|
INCOME TAXES (Cont.)
|
|
As
a result of the amendment, tax-exempt income generated under the provisions of the
amended law, will subject the Company to taxes upon dividend distribution or complete
liquidation.
|
|
As
of December 31, 2007, approximately $ 6,690,000 is tax-exempt attributable to its various
Approved Enterprise programs. If such tax exempt income is distributed (other than in
respect of the first two programs upon the complete liquidation of the Company), it would
be taxed at the reduced corporate tax rate applicable to such profits (currently 25%) and
an income tax liability of up to approximately $ 1,672,000 would be incurred as of
December 31, 2007. The Company has decided not to declare dividends out of such
tax-exempt income, and accordingly, no additional deferred tax liabilities have been
provided for.
|
|
Income
of the Company from sources other than the Approved Enterprise and Beneficiary Enterprise
during the period of benefits is taxable at the regular corporate tax rate.
|
|
b.
|
Corporate
tax rates in Israel:
|
|
Taxable
income of Israeli companies is subject to tax at the rate of 29% in 2007, 27% in 2008,
26% in 2009 and 25% in 2010 and thereafter.
|
|
c.
|
Deferred
tax assets, net:
|
|
Deferred
taxes reflect the net tax effect of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for tax
purposes. Components of the Companys deferred tax assets are as follows:
|
|
|
December 31,
|
|
|
2006
|
2007
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
Employee benefits
|
|
|
$
|
110
|
|
$
|
138
|
|
|
Research and development expenses
|
|
|
|
350
|
|
|
181
|
|
|
Issuance costs
|
|
|
|
223
|
|
|
123
|
|
|
Other-than-temporary impairment on marketable securities
|
|
|
|
and ARS
|
|
|
|
-
|
|
|
1,287
|
|
|
Impairment of intangible assets and goodwill
|
|
|
|
-
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, before valuation allowance
|
|
|
$
|
683
|
|
$
|
1,765
|
|
|
Valuation allowance *)
|
|
|
|
-
|
|
|
(1,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
$
|
683
|
|
$
|
478
|
|
|
Deferred tax liability
|
|
|
|
(44
|
)
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
639
|
|
$
|
460
|
|
|
|
|
|
|
|
|
*)
|
The
Company recorded a valuation allowance with respect to deferred tax assets
related to other-than-temporary impairment on marketable securities and ARS,
due to current uncertainty of whether the Company will produce sufficient
capital gains in the future, which are considered a source of income required
to offset losses from marketable securities under the Israeli Tax Law.
|
F - 23
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 9:
|
|
INCOME TAXES (Cont.)
|
|
d.
|
A
reconciliation of the Companys effective tax rate to the statutory tax
rate in Israel is as follows:
|
|
|
|
Year ended December 31,
|
|
|
|
2005
|
2006
|
2007
|
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on income
|
|
|
$
|
2,931
|
|
$
|
3,242
|
|
$
|
(1,369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory tax rate in Israel
|
|
|
|
34
|
%
|
|
31
|
%
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theoretical income tax expense
|
|
|
$
|
997
|
|
$
|
1,005
|
|
$
|
(397
|
)
|
|
|
Increase (decrease) in tax expenses resulting
|
|
|
|
|
from:
|
|
|
|
|
|
|
|
|
|
Income taxes due to dividend paid out of tax
|
|
|
|
|
exempt income
|
|
|
|
937
|
|
|
-
|
|
|
-
|
|
|
|
"Approved Enterprise" benefits
|
|
|
|
(442
|
)
|
|
(409
|
)
|
|
(77
|
)
|
|
|
Non-deductible expenses
|
|
|
|
83
|
|
|
234
|
|
|
358
|
|
|
|
Previous years taxes
|
|
|
|
-
|
|
|
(68
|
)
|
|
-
|
|
|
|
Other-than-temporary impairment on marketable
|
|
|
|
|
securities and ARS
|
|
|
|
-
|
|
|
-
|
|
|
1,493
|
|
|
|
Other
|
|
|
|
207
|
|
|
3
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes on income
|
|
|
$
|
1,782
|
|
$
|
765
|
|
$
|
1,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per Ordinary share - amounts
|
|
|
|
|
of the benefit resulting from the "Approved
|
|
|
|
|
Enterprise" status:
|
|
|
|
|
Basic
|
|
|
$
|
0.07
|
|
$
|
0.05
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
$
|
0.06
|
|
$
|
0.04
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
e.
|
Income taxes are comprised as follows:
|
|
|
|
|
|
|
|
|
|
Deferred tax benefit (expense)
|
|
|
$
|
(27
|
)
|
$
|
(70
|
)
|
$
|
106
|
|
|
|
Tax expense in respect of dividend paid out of
|
|
|
|
|
tax exempt income
|
|
|
|
937
|
|
|
-
|
|
|
-
|
|
|
|
Current taxes
|
|
|
|
872
|
|
|
903
|
|
|
1,199
|
|
|
|
Previous years taxes
|
|
|
|
-
|
|
|
(68
|
)
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,782
|
|
$
|
765
|
|
$
|
1,393
|
|
|
|
|
|
|
|
|
|
|
F - 24
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 9:
|
|
INCOME TAXES (Cont.)
|
|
f.
|
Uncertain
tax position:
|
|
A
reconciliation of the beginning and ending balances of the total amounts of unrecognized
tax benefits is as follows:
|
|
|
U.S. dollars
in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2007
|
|
|
$
|
634
|
|
|
Increases in tax positions for current year *)
|
|
|
|
208
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 **)
|
|
|
$
|
842
|
|
|
|
|
|
|
*)
|
Includes
additions generated from changes in the Dollar/NIS exchange rate, adjustment to
the CPI and accrued interest in the total amount of $88,000.
|
|
**)
|
As
of December 31, 2007 the unrecognized tax benefits included $799,000 of tax benefits, which if recognized, would reduce
the Companys annual effective tax rate.
|
|
As
of December 31, 2007, the Company is subject to Israeli income tax examinations for the
tax years 2003 through 2007 and to U.S. Federal income tax examinations for the tax years
of 2006 through 2007.
|
NOTE 10:
|
|
SHAREHOLDERS EQUITY
|
|
All
Ordinary share and per share data included in these consolidated financial statements for
all periods presented have been retroactively adjusted to reflect the 38-to-one share
split effected as share dividend that was effected immediately prior to the effectiveness
of the registration statement dated January 30, 2006, and the increase of authorized
share capital to 15,000,000, as approved by the Companys shareholders on November
27, 2005.
|
|
b.
|
Ordinary
share rights:
|
|
The
Ordinary shares entitle their holders to voting rights, the right to receive cash
dividend and the right to a share in excess assets upon liquidation of the Company.
|
|
Preferred
shares of NIS 0.01 par value were issued in 2000 and had the same rights and privileges
associated with Ordinary shares, and also redemption and conversion rights.
|
|
On
March 3, 2005, 510 Preferred shares in the amount of $33,000 were converted into 19,380
Ordinary shares of NIS 0.01 par value each. On February 3, 2006, upon closing of the
Companys IPO, 1,764,948 Preferred shares in the amount of $3,030,000 were converted
into the same number Ordinary shares.
|
F - 25
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 10:
|
|
SHAREHOLDERS EQUITY (Cont.)
|
|
d.
|
Shares
granted to non-employees:
|
|
In
August 2006, the Company granted 7,500 restricted Ordinary shares to non-employee in
respect of services granted to the Company. The shares vested on December 1, 2006.
|
|
In
February 2007, the Company granted 7,500 restricted Ordinary shares to non-employee in
respect of services granted to the Company. The shares vested on June 1, 2007.
|
|
The
Company accounted for the grant in accordance with SFAS No. 123 and Emerging Issues Task
Force (EITF) No. 96-18, Accounting for Equity Instruments That are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services. Stock based compensation amounted to $60 and $63 in the years ended
December 31, 2006 and 2007, respectively.
|
|
In
1999, the Company adopted an employee share option plan (the 1999 Option Plan).
Under the 1999 Option Plan, employees and officers of the Company were granted options to
acquire Ordinary shares. The options to acquire Ordinary shares were granted at an
exercise price of $ 0.00. Pursuant to the Plan, the Company reserved for issuance a
total of 627,000 Ordinary shares. The Company granted options to purchase 617,500 shares.
|
|
As
of December 31, 2007, no options from the 1999 Option Plan were outstanding and no more
options may be granted under this plan.
|
|
In
2003, the Company adopted a share option plan (the 2003 Option Plan). Under
the 2003 Option Plan, employees, officers and non-employees may be granted options to
acquire Ordinary shares. Pursuant to the 2003 Option Plan, the Company has reserved for
issuance a total of 1,368,000 Ordinary shares. As of December 31, 2007, 1,189,695 options
were still available for future grant under the 2003 Option Plan.
|
|
Options
granted under the 2003 Plan up to March 31, 2006 vested over three years from the grant
date so that 40% vest after 12 months and an additional 30% vest after each 12 months
thereafter. Subsequently, options under the 2003 Plan vested in 4 equal parts annually.
The options expire no later than five years from the date of grant.
|
|
The
Company recognizes compensation costs using the straight line attribution method, but not
less than the grant date fair value of the options vested at the balance-sheet date.
|
|
A
summary of the activity in the share options granted to employees and directors as of
December 31, 2007 and related information is as follows:
|
|
|
Number of
options
|
Weighted
average
exercise price
|
Weighted
average
remaining
contractual
term
|
Aggregate
intrinsic
value
|
|
|
|
|
(Years)
|
U.S. dollars
in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2007
|
|
|
|
815,000
|
|
$
|
5.19
|
|
|
1.72
|
|
$
|
2,502
|
|
|
Granted
|
|
|
|
472,100
|
|
$
|
7.21
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
(68,985
|
)
|
$
|
1.79
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
(108,795
|
)
|
$
|
7.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
|
1,109,320
|
|
$
|
6.08
|
|
|
3.58
|
|
$
|
899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
|
|
367,170
|
|
$
|
4.35
|
|
|
2.34
|
|
$
|
754
|
|
|
|
|
|
|
|
|
|
|
|
F - 26
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 10:
|
|
SHAREHOLDERS EQUITY (Cont.)
|
|
The
weighted-average grant-date fair value of options granted during the years 2006 and 2007
was $2.57 and $2.46, respectively. No options were granted in 2005.
|
|
As
of December 31, 2007, the total compensation cost related to options granted to
employees, not yet recognized amounted to $ 1,550,794. The cost is expected to be
recognized over a weighted average period of 3.04 years.
|
|
Aggregate
intrinsic value of options exercised in 2007 amounted to $ 444,673.
|
|
On
January 23, 2008 the Companys Board of Directors resolved to adopt a share buyback
plan for a total of up to $ 3,750,000.
|
NOTE 11:
|
|
SUPPLEMENTARY DATA ON SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
a.
|
Financial
income (expenses), net:
|
|
|
Year ended December 31,
|
|
|
2005
|
2006
|
2007
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
Financial income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest from bank deposits and marketable securities
|
|
|
$
|
156
|
|
$
|
998
|
|
$
|
1,033
|
|
|
Gains from marketable securities, net
|
|
|
|
-
|
|
|
151
|
|
|
-
|
|
|
Exchange rate differences , net
|
|
|
|
-
|
|
|
-
|
|
|
39
|
|
|
Other
|
|
|
|
-
|
|
|
-
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156
|
|
|
1,149
|
|
|
1,270
|
|
|
|
|
|
|
|
|
|
|
Financial expenses:
|
|
|
|
Losses from marketable securities and ARS, net
|
|
|
|
-
|
|
|
-
|
|
|
4,887
|
|
|
Exchange rate differences, net
|
|
|
|
135
|
|
|
68
|
|
|
-
|
|
|
Other
|
|
|
|
35
|
|
|
97
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170
|
|
|
165
|
|
|
4,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(14
|
)
|
$
|
984
|
|
$
|
(3,641
|
)
|
|
|
|
|
|
|
|
|
F - 27
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 11:
|
|
SUPPLEMENTARY DATA ON SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS (Cont.)
|
|
b.
|
Net
earnings (loss) per Ordinary share:
|
|
Computation
of basic and diluted net earnings (loss) per share is as follows:
|
|
|
Year ended December 31,
|
|
|
2005
|
2006
|
2007
|
|
|
U.S. dollars in thousands
(except share data)
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted net
|
|
|
|
|
|
|
|
|
|
|
|
|
earnings (loss) per share -
|
|
|
|
Net income - (loss) as reported
|
|
|
$
|
1,149
|
|
$
|
2,477
|
|
$
|
(2,762
|
)
|
|
Net income attributable to Preferred
|
|
|
|
shareholders
|
|
|
|
(306
|
)
|
|
(45
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to Ordinary
|
|
|
|
shareholders
|
|
|
$
|
843
|
|
$
|
2,432
|
|
$
|
(2,762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net earnings per
|
|
|
|
|
|
|
|
|
|
|
|
|
share -
|
|
|
|
Weighted average number of Ordinary shares
|
|
|
|
4,869,698
|
|
|
8,982,201
|
|
|
9,442,658
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
Add - stock options
|
|
|
|
410,305
|
|
|
164,192
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net earnings per
|
|
|
|
share - adjusted weighted average
|
|
|
|
shares
|
|
|
|
5,280,003
|
|
|
9,146,393
|
|
|
9,442,658
|
|
|
|
|
|
|
|
|
|
NOTE 12:
|
|
MAJOR CUSTOMER DATA
|
|
Major
customer data as a percentage of total revenues:
|
|
|
Year ended December 31,
|
|
|
2005
|
2006
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
|
0
|
%
|
|
14
|
%
|
|
42
|
%
|
|
|
|
|
|
|
|
|
|
The
Company relies upon a major customer, a loss of whom could cause a material adverse
effect on the Companys results of operations and financial position.
|
F - 28
INCREDIMAIL LTD. AND ITS SUBSIDIARIES
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
NOTE 13:
|
|
SEGMENT INFORMATION
|
|
a.
|
Reportable
segments information:
|
|
In
2007, following the acquisition of Bizchord, the Company determined that Bizchord is
considered a reportable segment and provided summarized financial information as set
forth below.
|
|
|
Year ended December 31, 2007
|
|
|
U.S. dollars in thousands
|
|
|
Incredimail
|
Bizchord
|
Intercompany
charges
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
|
18,647
|
|
$
|
316
|
|
$
|
(288
|
)
|
$
|
18,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
$
|
17,307
|
|
$
|
(84
|
)
|
$
|
(288
|
)
|
$
|
16,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
$
|
14,020
|
|
$
|
931
|
|
$
|
(288
|
)
|
$
|
14,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
$
|
3,287
|
|
$
|
(1,015
|
)
|
$
|
-
|
|
$
|
2,272
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues from external customers divided on the basis of the Companys product lines
are as follows:
|
|
|
Year ended December 31,
|
|
|
2005
|
2006
|
2007
|
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
Software license
|
|
|
$
|
4,104
|
|
$
|
3,494
|
|
$
|
3,128
|
|
|
Content database
|
|
|
|
1,665
|
|
|
2,463
|
|
|
2,526
|
|
|
Advertising
|
|
|
|
658
|
|
|
2,368
|
|
|
8,757
|
|
|
Collaborations
|
|
|
|
784
|
|
|
698
|
|
|
812
|
|
|
Anti-Spam
|
|
|
|
191
|
|
|
1,828
|
|
|
3,424
|
|
|
Bizchord - clearing house services
|
|
|
|
-
|
|
|
-
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,402
|
|
$
|
10,851
|
|
$
|
18,675
|
|
|
|
|
|
|
|
|
|
|
The
following presents long-lived assets of December 31, 2006 and December 31, 2007:
|
|
|
December 31,
|
|
|
2006
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incredimail
|
|
|
$
|
951
|
|
$
|
1,798
|
|
|
Bizchord
|
|
|
|
555
|
|
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,506
|
|
$
|
2,097
|
|
|
|
|
|
|
|
F - 29
SIGNATURES
The
registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on
its behalf.
|
|
IncrediMail Ltd.
By: /s/ Ofer Adler
Ofer Adler
Chief Executive Officer
|
Date: May 12, 2008
72
EXHIBIT INDEX
1.1
|
Memorandum
of Association of Registrant (1)
|
1.2
|
Certificate
of Change of Name of Registrant (translated from Hebrew) (1)
|
1.3
|
Amended
and Restated Articles of Association of Registrant, dated February 3, 2006 (2)
|
4.1
|
Google
AdSenseTM Online Standard Terms and Conditions
|
4.2
|
OEM
Agreement, effective December 7, 2004, between Commtouch Ltd. and the Registrant (1)
|
4.3
|
The
Registrant's 2003 Israeli Share Option Plan and the form of Option Agreement (1)
|
8
|
List
of all subsidiaries.
|
11
|
Code
of Conduct and Ethics
|
12.1
|
Certifications
required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Executive officer of
the Company
|
12.2
|
Certifications
required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Financial officer of
the Company
|
13
|
Certification
required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of
Title 18 of the United Stated Code
|
14
|
Consent
of Kost Forer Gabbay & Kasierer, an affiliate of Ernst & Young Global, Independent
Auditors
|
(1)
|
Previously
filed with the SEC on October 25, 2005 as an exhibit to our registration
statement on Form F-1/A (File No. 333-129246).
|
(2)
|
Previously
filed with the SEC on January 5, 2006 as an exhibit to our registration
statement on Form F-1/A (File No. 333-129246).
|
(3)
|
Previously
filed with the SEC on January 26, 2006 as an exhibit to our registration
statement on Form F-1/A (File No. 333-129246).
|
*
|
Confidential
treatment has been requested with respect to certain portions of this exhibit pursuant to
17.C.F.R. §§ 230.406 and 200.83. Omitted portions were filed separately with
the SEC.
|
73
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