In addition, Team Computers provides
us certain administrative services, including computer servicing, salary administration,
automotive fleet maintenance, legal counsel and basic insurance coverage, and we reimburse
Team Computers for the actual cost of such services. We recorded expenses for such
services of $169,000 in 2005, $160,000 in 2006 and $164,000 in 2007. We and Team Computers
have agreed to indemnify each other for liabilities resulting from the acts or omissions
of our respective employees constituting intellectual property violations. The agreement
is automatically renewed for successive terms of one year on each December 31, and can be
terminated by either party at the end of any such term upon at least 60 days prior
written notice.
Since 1992, we have also purchased
fixed assets, such as computer hardware, from Team Computers and Omnitek-Eichut Ltd.
(Omnitek-Eichut), a subsidiary of Team Computers. The payments made by us to
Team Computers and Omnitek-Eichut in respect of such asset purchases were, in the
aggregate, approximately $398,000 in 2005, $352,000 in 2006 and $437,000 in 2007. We
believe that the terms of these purchases are not different in any material respect than
the terms we could receive from unaffiliated third parties.
In December 2003, we issued a
purchase order to Team Computers with respect to third party software, Team Computers
represents in Israel, for the integration as part of our Netrac products. We have
purchased licenses to be deployed as part of our solution to be sold to our customers, as
part of our solution, in the initial amount of $100,000. The engagement with Team
Computers was approved by our Board of Directors on December 23, 2003.
Registration Rights
Agreement
Pursuant to a Registration Rights
Agreement between us and Team Software, dated October 22, 1996, Team Software was entitled
to registration rights with respect to our ordinary shares held by it. We agreed that, at
the request of Team Software, but on no more than two occasions, we would file a
registration statement under the Securities Act of 1933, as amended, for an offering of
those shares as to which registration is requested. In addition, if we otherwise propose
to register any of our ordinary shares under the Securities Act, we would include in such
registration Team Softwares shares, subject to certain limitations. All fees and
expenses incurred in connection with any registration would be borne by us, except that
Team Software would pay all fees and expenses of its own counsel and all underwriting
discounts and commissions relating to Team Softwares shares.
In June 2005, Team Software assigned
its rights under the Registration Rights Agreement. At the request of Arad Investment
& Industrial Development Ltd., one of the assignees, we filed a registration statement
covering 4,408,123 ordinary shares owned by Arad and affiliates, which was effective until
May 2007.
Leased Facilities
From February 1998 to July 2005, we
leased our principal facilities in Petach Tikva, Israel from Team Computers pursuant to a
lease agreement dated February 1, 1998. Aggregate payments under this lease, which amount
includes rent, maintenance and additional related expenses, were approximately $1.4
million during 2005, $1.2 million during 2006 and $1.4 million during 2007. We extended
the lease until December 20, 2007, when we relocated to new facilities of approximately
48,160 square feet of office space in Rosh Aaayin, Israel, which are leased from an
unaffiliated party.
Since we became a tenant of Team
Computers, Team Computers has performed various internal construction projects on our
behalf, adapting our premises to our requirements. These construction projects were
performed on a cost only basis. On September 2, 2002, we and Team Computers amended the
lease, such that, among other things, the space leased by us was expanded by an additional
2,800 square meters, for a total of approximately 5,830 square meters. The amendment was
approved by our shareholders on October 24, 2002. In order to reduce our expenses, on July
14, 2005, we entered into another written amendment to the lease agreement according to
which the space leased by us was reduced by 1,258 square meters, and we agreed to pay to
Team Computers a penalty of NIS 466,526 (approximately $104,000), which is equivalent to
one-third of the pro rated rental fee for the returned space for the remainder of the
lease term. The amendment was approved by our shareholders on December 27, 2005. This
amount has been recorded as an expense in our general and administration expenses.On July
14, 2005, Team Computers sold this property but continued to lease it, and as such, we
were subleasing the property from Team Computers.
Compensation to Directors
With respect to compensation
including options granted to our directors, see Item 6B under the caption
Compensation to Directors.
54
C. Interests of Experts
and Counsel
Not applicable.
Item 8.
|
FINANCIAL INFORMATION
|
A. Consolidated
Statements and Other Financial Information
Financial Statements
See Item 18.
Legal Proceedings
Dispute with a Former
Major Customer
In November 2002, we received a
letter from a major customer notifying us of the termination of its agreement with us for
the supply by us of a Manager of Managers system (MoM), and its intention to
call the performance bond issued by a bank on our behalf under the agreement. As we
believed that this customer terminated the agreement unlawfully, and in violation of the
termination provisions set out in the agreement, we commenced legal proceedings against
this customer. In July 2007, we and the customer entered into a settlement and release
agreement under which we received from the customer £1.7 million (equates to
approximately $3.45 million) (without admission of liability by either party) and both
parties released their claims against each other.
Putative Shareholder
Class Action
A putative shareholder class action
lawsuit was filed in September 2004 against the Company, Team Software Industries Ltd. and
certain of the Companys executive officers. The lawsuit purports to be a class
action filed on behalf of persons who held our shares during the period between February
6, 2002 and November 14, 2002. The complaint alleges that material misrepresentations and
omissions concerning the Companys operations and performance artificially inflated
the Companys stock price, causing damages to investors. We filed a motion to dismiss
the complaint which motion was granted by an opinion dated October 6, 2006. The opinion
dismissed the amended and consolidated complaint but granted plaintiff the right to file a
second amended and consolidated complaint. The second amended and consolidated complaint
was filed on November 9, 2006. We filed a motion to dismiss the second amended and
consolidated complaint on January 10, 2007 which motion was denied with respect to us by
order dated May, 2007. In December 2007, we reached a settlement agreement with the
plaintiffs, which settlement is still subject to approval of the court. Based on the
settlement agreement, our directors and officers insurance carrier is supposed to pay the
entire settlement amount to the plaintiffs. In the event of disapproval of the agreement
by court , we may be required to pay damages and other costs in excess of the amounts
covered by our insurance, in which case, this action could have a materially adverse
effect on our results of operations and financial condition.
Reimbursement of
Withholding Tax
During the years 1998 to 2000, we
granted Mr. Shlomo Eisenberg, the former chairman of our board of directors and a major
shareholder of TTI, an aggregate of 105,000 options to purchase our ordinary shares. In
the years 2001 to 2002, Mr. Eisenberg exercised a portion of his options and we withheld
Israeli income tax from income realized by Mr. Eisenberg upon such exercise of options, as
required under law.
At the end of 2005, we underwent a
tax deductions audit by the Israeli Tax Authority (ITA). As a result of such audit, the
ITA assessed an additional NIS 1.5 million in withholding taxes with respect to income
derived by Mr. Eisenberg from the exercise of his options. Following consultation with our
tax advisors, we paid the additional withholding tax amount assessed in the audit. The ITA
informed us that we are required to collect such additional tax from Mr. Eisenberg
otherwise such additional amount will be viewed as a benefit received by Mr. Eisenberg
from us, resulting in additional withholding tax being charged to us as a result of the
grant of such benefit.
We filed a NIS 1.6 million lawsuit
against Mr. Eisenberg and demanded reimbursement for the additional withholding tax from
Mr. Eisenberg. Based on advice from Israeli counsel, we believe that we are entitled to
such reimbursement. However, we cannot assure you that the court will accept our view. The
trial took place in September 2007 and we are now in a process of submitting written
summations.
55
Dispute with a Vendor
In April 2006, in connection with our
cancellation of a purchase order from Embarcadero Technologies Inc., Embarcadero filed a
lawsuit against us in the San Francisco Superior Court, alleging among other things,
breach of contract and intentional misrepresentation. We believe that the cancellation of
the purchase order and the return of Embarcaderos software by us was made in
accordance with applicable law and regulations. We answered and counterclaimed for
negligent and intentional misrepresentation based on false representation made by
Embarcaderos salesperson. In April 2007, we reached a settlement and release
agreement under which we paid Embarcadero $90,000 (without admission of liability) and
both parties released their claims against each other.
Dividend Policy
We have never declared or paid any
cash dividends on our ordinary shares. We currently intend to retain any future earnings
to finance operations and to expand our business and, therefore, do not expect to pay any
cash dividends in the foreseeable future.
B. Significant Changes
No significant change has occurred
since December 31, 2007, except as otherwise disclosed in this annual report.
Item 9.
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THE OFFER AND LISTING
|
A. Offer and Listing
Details.
Our ordinary shares have been traded
on the NASDAQ Global Market under the symbol TTIL since our initial public
offering on December 4, 1996. The following tables set forth, for the periods indicated,
the high and low closing prices of our ordinary shares, as reported by the NASDAQ.
|
High
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
2003:
|
|
|
|
|
|
|
|
|
Full Year
|
|
|
$
|
6.65
|
|
$
|
4.05
|
|
2004:
|
|
|
Full Year
|
|
|
$
|
6.40
|
|
$
|
1.71
|
|
2005:
|
|
|
Full Year
|
|
|
$
|
3.58
|
|
$
|
1.84
|
|
2006:
|
|
|
Full Year
|
|
|
$
|
5.50
|
|
$
|
2.36
|
|
|
|
|
First Quarter
|
|
|
|
4.42
|
|
|
3.12
|
|
Second Quarter
|
|
|
|
5.50
|
|
|
4.00
|
|
Third Quarter
|
|
|
|
5.28
|
|
|
3.31
|
|
Fourth Quarter
|
|
|
|
3.60
|
|
|
2.36
|
|
|
|
|
2007:
|
|
|
Full Year
|
|
|
$
|
3.22
|
|
$
|
2.20
|
|
|
|
|
First Quarter
|
|
|
|
2.70
|
|
|
2.44
|
|
Second Quarter
|
|
|
|
3.00
|
|
|
2.30
|
|
Third Quarter
|
|
|
|
3.22
|
|
|
2.51
|
|
Fourth Quarter
|
|
|
|
2.66
|
|
|
2.20
|
|
|
|
|
Most Recent Six Months
|
|
|
September 2007
|
|
|
|
2.82
|
|
|
2.51
|
|
October 2007
|
|
|
|
2.66
|
|
|
2.45
|
|
November 2007
|
|
|
|
2.64
|
|
|
2.45
|
|
December 2007
|
|
|
|
2.45
|
|
|
2.20
|
|
January 2008
|
|
|
|
2.42
|
|
|
2.09
|
|
February 2008
|
|
|
|
2.32
|
|
|
2.18
|
|
March 2008 (through March 28, 2008)
|
|
|
|
2.27
|
|
|
1.83
|
|
56
On March 28, 2008, the last reported
closing sale price of our ordinary shares on the NASDAQ National Market was $1.93 per
share.
B. Plan of Distribution
Not applicable.
C. Markets
Our ordinary shares are quoted on the
NASDAQ National Market under the symbol TTIL.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
Item 10.
|
ADDITIONAL INFORMATION
|
A. Share Capital
Not applicable.
B. Memorandum and
Articles of Association
Our Memorandum of Association and
Articles of Association were amended in October 2000, and on December 29, 2004 and our
Articles of Association were further amended on December 27, 2005 and on August 10, 2006.
The following is a summary description of certain provisions of our amended Memorandum of
Association and Articles of Association, and certain relevant provisions of the Israel
Companies Law which apply to us.
Objects and Purposes
We were first registered by the
Israeli Registrar of Companies on February 5, 1990, as a private company. On November 17,
1996, we became a public company. We are registered with the Israeli Registrar of
Companies under No. 52-004301-9.
Section 2 of our Memorandum of
Association includes a comprehensive list of our objects and purposes of the Company.
Among these objects and purposes are the following: to engage in the field of computer
software as a software house in the design, development, conversion, manufacturing,
marketing, enhancement, sale and manufacture of software; to organize, promote, and
establish investment and financial services; to form all kinds of companies; to acquire
shares in companies who have a business similar to ours; to purchase or otherwise own
assets; and to fulfill any other objects any place in the world.
Directors
According to the our Articles of
Association, our board of directors is to consist of not less than three and not more than
seven directors, such number to be determined by a resolution of our shareholders.
Election of Directors
Directors, other than external
directors, are elected by our shareholders at our annual general meeting of shareholders,
or by our board of directors. In the event that any directors are appointed by our board
of directors, their appointment is required to be ratified by the shareholders at the next
shareholders meeting following the appointment. Our shareholders may remove a
director from office under certain circumstances.
57
There is no requirement that a
director own any of our shares. Directors may appoint alternate directors in their stead.
See
Item 6C Board Practices.
Remuneration of Directors
Directors remuneration is
subject to shareholders approval, except for reimbursement of reasonable expenses incurred
in connection with carrying out the directors duties.
Powers of the Board of
Directors
Our board of directors may resolve to
take action by a resolution approved by a vote of at least a majority of the directors
present at a meeting in which a quorum is constituted. A quorum at a meeting of our board
of directors requires the presence of at least a majority of the directors then in office
who are lawfully entitled to participate in the meeting, but in any event, shall not be
less than two directors. Our board of directors may elect one director to serve as the
Chairman of the board of directors to preside at the meetings of the board of directors,
and may also remove such director.
Share Capital
Our authorized share capital is NIS
18,318,195.50 divided into 30,000,000 Ordinary Shares, of a nominal value of NIS 0.50
each, and 6,636,391 Series A Convertible Preferred Shares, of a nominal value of NIS 0.50
each.
The ownership or voting of our
ordinary shares by non-residents of Israel, except with respect to citizens of countries
which are in a state of war with Israel, is not restricted in any way by our memorandum of
association or articles of association or by the laws of the State of Israel.
Ordinary Shares
The holders of our ordinary shares
have, among other rights generally available to shareholders of an Israeli company under
our Articles of Association, as amended, and under the Companies Law, the following
rights, preferences and restrictions:
|
|
one
vote at meetings of our shareholders in respect of each ordinary share held thereby;
|
|
|
the
right to share pro rata in any distributions of dividends; and
|
|
|
subject
to the liquidation preference of holders of any shares having preferred rights upon
liquidation, to share pro rata in the proceeds available for distribution upon
liquidation.
|
Series A Preferred Shares
The holders of our Series A Preferred
Shares have, among other rights generally available to shareholders of an Israeli company
under our Articles of Association, as amended, and under the Companies Law, the following
rights, preferences and restrictions:
|
|
weighted-average
anti-dilution protection in the event that following the closing of the private placement
transaction in which the Series A Preferred Shares were issued (i.e., January 3, 2005),
we issue or are deemed to have issued (subject to certain exceptions) ordinary shares at
a price per share that is lower than the conversion price in effect at the time of such
issuance or deemed issuance, which could result in dilution of the holdings of ordinary
shareholders;
|
|
|
automatic
conversion into ordinary shares in the event that, at any time commencing two years from
the effective date (which has not occurred as of yet) of the registration statement which
we filed in connection with the aforesaid private placement, our ordinary shares trade at
a closing bid price of 100% above the price per share of $2.20 in the private placement
(i.e., $4.40) for a 20 consecutive trading day period, with an average daily trading
volume of at least 100,000 shares per day during such period;
|
|
|
one
vote at meetings of our shareholders in respect of each ordinary share into which a
Series A Preferred Share held of record could be converted;
|
58
|
|
the
right to share pro rata in any distributions of dividends; and
|
|
|
in
the event of any voluntary or involuntary liquidation, dissolution or winding up of TTI,
the holders of Series A Preferred Shares then outstanding shall be entitled to be paid
out of the assets of TTI available for distribution to our shareholders, before any
payment shall be made to the holders of our ordinary shares or any other class or series
of stock ranking on liquidation junior to the Series A Preferred Shares by reason of
their ownership thereof, an amount equal to the greater of: (i) $2.20 per share (subject
to appropriate adjustment in the event of any stock dividend, stock split, combination or
other similar recapitalization affecting such shares), plus any dividends declared but
unpaid thereon, or (ii) such amount per share as would have been payable had each such
share been converted into ordinary shares immediately prior to such liquidation,
dissolution or winding up.
|
It should be noted that the holders
of our Series A Preferred Shares also had additional rights, which expired. For example,
the Series A Preferred Shares had special voting rights which expired in April 2006, when
more than 35% of all Series A Preferred Shares issued have been converted into ordinary
shares.
Dividends
According to the Israeli Companies
Law, a company may distribute dividends only out of its profits, as such term
is defined in the Israeli Companies Law, as of the end of the most recent fiscal year or
as accrued over a period of two years, whichever is higher. Our board of directors is
authorized to declare dividends, provided that there is no reasonable concern that payment
of the dividend will prevent us from satisfying our existing and foreseeable obligations
as they become due. Notwithstanding the foregoing, dividends may be paid with the approval
of a court, provided that there is no reasonable concern that payment of the dividend will
prevent us from satisfying our existing and foreseeable obligations as they become due.
Profits, for purposes of the Israeli Companies Law, means the greater of retained earnings
or earnings accumulated during the preceding two years, after deduction of previous
distributions that were not already deducted from the surpluses, as evidenced by financial
statements prepared no more than six months prior to the date of distribution.
Dividends may be paid in assets or
shares, debentures, or debentures stock of our company or of other companies. Dividends
that remain unclaimed after seven years will be forfeited and returned to our company.
Unless there are shareholders with special dividend rights, any dividend declared will be
distributed among our shareholders in proportion to their respective holdings of our
shares for which the dividend is being declared.
Redeemable Shares
Our Articles of Association allow us
to create redeemable shares, but at the present time, we do not have any redeemable
shares.
Changing the Rights
Attached to Shares
We may only change the rights of
shares with the approval of a majority of the holders of that class of shares present and
voting at the separate general meeting called for that class of shares. An enlargement of
a class of shares is not considered changing the rights of such class of shares.
Shareholders Meetings
We have two types of shareholders
meetings: the annual general meetings and extraordinary general meetings. An annual
general meeting must be held once in every calendar year, but not more than 15 months
after the last annual general meeting. Our board of directors may convene an extraordinary
general meeting whenever it sees fit, at any place within or outside of the State of
Israel.
A quorum in a general meeting
consists of two or more holders of ordinary shares, present in person or by proxy, who
hold together at least a majority of the voting power of our company. If there is no
quorum within an hour of the time set, the meeting is postponed until the following week,
or any other time that the chairman of the board of directors and the shareholders present
agree to. At the postponed meeting, any two shareholders will constitute a quorum. Every
ordinary share entitles the holder thereof to one vote. A shareholder may only vote the
shares for which all calls have been paid up on, except in separate general meetings of a
particular class. A shareholder may vote in person or by proxy, or if the shareholder is a
corporate body, by its representative.
59
Duties of Shareholders
Under the Companies Law, the
disclosure requirements which apply to an office holder also apply to a controlling
shareholder of a public company. A controlling shareholder is a shareholder who has the
ability to direct the activities of a company, including a shareholder that holds 25% or
more of the voting rights if no other shareholder owns more than 50% of the voting rights
in the company, but excluding a shareholder whose power derives solely from his or her
position as a director of the company or any other position with the company.
Extraordinary transactions with a controlling shareholder or in which a controlling
shareholder has a personal interest, and the engagement of a controlling shareholder as an
office holder or employee, require the approval of the audit committee, the board of
directors and the shareholders of the company, in that order. The shareholder approval
must be by a majority vote, provided that either:
|
|
at
least one-third of the shares of shareholders who have no personal interest in the
transaction and are present and voting, in person, by proxy or by written ballot, at the
meeting, vote in favor; or
|
|
|
the
shareholders who have no personal interest in the transaction who vote against the
transaction do not represent more than one percent of the voting rights in the company.
|
In addition, under the Companies Law,
each shareholder has a duty to act in good faith in exercising his rights and fulfilling
his obligations toward the company and other shareholders and to refrain from abusing his
power in the company, such as in shareholder votes. In addition, specified shareholders
have a duty of fairness toward the company. These shareholders include any controlling
shareholder, any shareholder who knows that it possesses the power to determine the
outcome of a shareholder vote and any shareholder who, pursuant to the provisions of the
articles of association, has the power to appoint or to prevent the appointment of an
office holder or any other power toward the company. However, the Companies Law does not
define the substance of this duty of fairness.
Exculpation, Insurance
and Indemnification of Office Holders
Exculpation of Office
Holders
Under the Companies Law, an Israeli
company may not exempt an office holder from liability with respect to a breach of his
duty of loyalty, but may exempt in advance an office holder from his liability to the
company, in whole or in part, with respect to a breach of his duty of care (except in
connection with distributions), provided that the articles of association of the company
allow it to do so. Our Articles of Association allow us to exempt our office holders to
the fullest extent permitted by law.
Insurance of Office
Holders
Our Articles of Association provide
that, subject to the provisions of the Companies Law, we may enter into a contract for the
insurance of the liability of any of our office holders with respect to an act performed
in his capacity of an office holder, for:
|
|
a
breach of his duty of care to us or to another person;
|
|
|
a
breach of his duty of loyalty to us, provided that the office holder acted in good faith
and had reasonable cause to assume that his act would not prejudice our interests; or
|
|
|
a
financial liability imposed upon him in favor of another person.
|
Indemnification of
Office Holders
Our Articles of Association provide that
we may indemnify an office holder with respect to an act performed in his capacity as an
office holder against:
|
|
a
financial liability imposed on him in favor of another person by any judgment, including
a settlement or an arbitration award approved by a court; such indemnification may be
approved (i) after the liability has been incurred or (ii) in advance, provided that our
undertaking to indemnify is limited to events that our board of directors believes are
foreseeable in light of our actual operations at the time of providing the undertaking
and to a sum or criterion that our board of directors determines to be reasonable under
the circumstances;
|
60
|
|
reasonable
litigation expenses, including attorneys fees, expended by the office holder as a
result of an investigation or proceeding instituted against him by a competent authority,
provided that such investigation or proceeding concluded without the filing of an
indictment against him and either (A) concluded without the imposition of any financial
liability in lieu of criminal proceedings or (B) concluded with the imposition of a
financial liability in lieu of criminal proceedings but relates to a criminal offense
that does not require proof of criminal intent; and
|
|
|
reasonable
litigation expenses, including attorneys fees, expended by the office holder or
charged to him by a court, in proceedings we institute against him or instituted on our
behalf or by another person, a criminal indictment from which he was acquitted, or a
criminal indictment in which he was convicted for a criminal offense that does not
require proof of criminal intent.
|
Limitations on
Exculpation, Insurance and Indemnification
The Companies Law provides that a
company may not exculpate or indemnify an office holder nor enter into an insurance
contract which would provide coverage for any monetary liability incurred as a result of
any of the following:
|
|
a
breach by the office holder of his duty of loyalty, unless, with respect to insurance
coverage or indemnification, the office holder acted in good faith and had a reasonable
basis to believe that the act would not prejudice the companys interests;
|
|
|
a
breach by the office holder of his duty of care if the breach was done intentionally or
recklessly;
|
|
|
any
act or omission done with the intent to derive an illegal personal benefit; or
|
|
|
any
fine levied against the office holder.
|
In addition, under the Companies Law,
indemnification of, and procurement of insurance coverage for, our office holders must be
approved by our audit committee and board of directors and, if the beneficiary is a
director, by our shareholders. We have obtained such approvals for the procurement of
liability insurance covering our officers and directors and for the grant of
indemnification letters to our officers and directors.
We have agreed to indemnify our
office holders to the fullest extent permitted under Israeli law, but up to a maximum
aggregate amount for all indemnified office holders equal to 25% of our total
shareholders equity at the time of actual indemnification. We currently maintain
directors and officers liability insurance for the benefit of our office holders.
Mergers and Acquisitions
under Israeli Law
There are no specific provisions of
our Memorandum or Articles that would have an effect of delaying, deferring or preventing
a change in control of us or that would operate only with respect to a merger, acquisition
or corporate restructuring involving us. However, certain provisions of the Companies Law
may have such effect.
The Companies Law includes provisions
that allow a merger transaction and requires that each company that is a party to a merger
have the transaction approved by its board of directors and a vote of the majority of its
shares. For purposes of the shareholder vote of each party, unless a court rules
otherwise, the merger will not be deemed approved if shares, representing a majority of
the voting power present at the shareholders meeting and which are not held by the other
party to the merger (or by any person who holds 25% or more of the voting power or the
right to appoint 25% or more of the directors of the other party), vote against the
merger. Upon the request of a creditor of either party to the proposed merger, the court
may delay or prevent the merger if it concludes that there exists a reasonable concern
that as a result of the merger, the surviving company will be unable to satisfy the
obligations of any of the parties to the merger. In addition, a merger may not be
completed unless at least (1) 50 days have passed from the time that a proposal of the
merger has been filed with the Israeli Registrar of Companies by each merging company and
(2) 30 days have passed since the merger was approved by the shareholders of each merging
company.
The Companies Law also provides that
an acquisition of shares of a public company must be made by means of a tender offer if as
a result of the acquisition the purchaser would become a 25% or greater shareholder of the
company and there is no existing 25% or greater shareholder in the company. An acquisition
of shares in a public company must be made by means of a tender offer if as a result of
the acquisition the purchaser would become a 45% or greater shareholder of the company and
there is no existing 45% or greater shareholder of the company. These requirements do not
apply if, in general, the acquisition (1) was made in a private placement that received
shareholder approval, (2) was from a 25% or greater shareholder of the company which
resulted in the acquirer becoming a 25% or greater shareholder of the company, or (3) was
from a 45% or greater shareholder of the company which resulted in the acquirer becoming a
45% or greater shareholder of the company. The tender offer must be extended to all
shareholders, but the offeror is not required to purchase more than 5% of the
companys outstanding shares, regardless of how many shares are tendered by
shareholders. The tender offer may be consummated only if (i) at least 5% of the
companys outstanding shares will be acquired by the offeror and (ii) the number of
shares tendered in the offer exceeds the number of shares whose holders objected to the
offer.
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If, as a result of an acquisition of
shares, the acquirer will hold more than 90% of a companys outstanding shares, the
acquisition must be made by means of a tender offer for all of the outstanding shares. If
less than 5% of the outstanding shares are not tendered in the tender offer, all the
shares that the acquirer offered to purchase will be transferred to it. The Companies Law
provides for appraisal rights if any shareholder files a request in court within three
months following the consummation of a full tender offer. If more than 5% of the
outstanding shares are not tendered in the tender offer, then the acquiror may not acquire
shares in the tender offer that will cause his shareholding to exceed 90% of the
outstanding shares.
Finally, Israeli tax law treats
stock-for-stock acquisitions between an Israeli company and a foreign company less
favorably than U.S. tax laws. For example, Israeli tax law may, under certain
circumstances, subject a shareholder who exchanges his ordinary shares for shares in
another corporation to taxation prior to the sale of the shares received in such
stock-for-stock swap.
C.
Material Contracts
None.
D.
Exchange Controls
There are currently no Israeli
currency control restrictions on payments of dividends or other distributions with respect
to our ordinary shares or the proceeds from the sale of the shares, except for the
obligation of Israeli residents to file reports with the Bank of Israel regarding some
transactions. However, legislation remains in effect under which currency controls can be
imposed by administrative action at any time.
E. Taxation
The following is a general summary
only and should not be considered as income tax advice or relied upon for tax planning
purposes. Holders of our ordinary shares should consult their own tax advisors as to the
United States, Israeli or other tax consequences of the purchase, ownership and
disposition of ordinary shares, including, in particular, the effect of any foreign, state
or local taxes.
U.S.
TAX CONSIDERATIONS REGARDING SHARES ACQUIRED BY U.S. TAXPAYERS
Subject to the limitations described
in the next paragraph, the following discussion describes the material United States
federal income tax consequences to a U.S. holder arising from the purchase, ownership and
disposition of our ordinary shares. A U.S. holder is a holder of ordinary shares that is:
(1) an individual citizen or resident of the United States, (2) a corporation created or
organized under the laws of the United States or any political subdivision thereof, or (3)
an estate, the income of which is includable in gross income for United States federal
income tax purposes regardless of its source, (4) a trust if a court within the U.S. is
able to exercise primary supervision over the administration of the trust, and one or more
U.S. persons have the authority to control all substantial decisions of the trust, or (5)
a trust that has a valid election in effect to be treated as a U.S. person. This summary
is for general information purposes only and does not purport to be a comprehensive
description of all of the federal income tax considerations that may be relevant to a
decision to purchase ordinary shares. This summary generally considers only U.S. holders
that will own ordinary shares as capital assets. Except to the limited extent discussed
herein, this summary does not consider the United States tax consequences to a person that
is not a U.S. holder, nor does it describe the rules applicable to determine a
taxpayers status as a U.S. holder.
This discussion is based on current
provisions of the Internal Revenue Code of 1986, as amended, current and proposed Treasury
regulations promulgated thereunder, and administrative and judicial interpretations
thereof, all as in effect on the date hereof and all of which are subject to change,
possibly on a retroactive basis. This discussion does not address all aspects of United
States federal income taxation that may be relevant to any particular shareholder based on
such shareholders particular circumstances. In particular, this discussion does not
address the tax treatment of U.S. holders who are broker-dealers or who own, directly,
indirectly or constructively, 10% or more of our outstanding voting stock, U.S. holders
holding the ordinary shares as a hedge or as part of a hedging, straddle or conversion
transaction, and certain U.S. holders, including, without limitation, insurance companies,
tax-exempt organizations, financial institutions and persons subject to the alternative
minimum tax who may be subject to special rules not discussed below. Additionally, the tax
treatment of persons who hold ordinary shares through a partnership or other pass-through
entity is not considered, nor is the application of United States federal gift or estate
taxes or any aspect of state, local or non-United States tax laws considered. Each
prospective investor is advised to consult such persons own tax advisor with respect
to the specific United States federal income tax consequences to such person of
purchasing, holding or disposing of the ordinary shares.
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Distributions on
Ordinary Shares
We have never paid cash dividends on
our ordinary shares, and we do not intend to pay cash dividends in the foreseeable future.
In the event that we do pay dividends, and subject to the discussion under the heading
Passive Foreign Investment Companies below, a U.S. holder will be required to
include in gross income as ordinary income the amount of any distribution paid on ordinary
shares to the extent that such distribution does not exceed our current and accumulated
earnings and profits, as determined for U.S. federal income tax purposes. The amount of a
distribution which exceeds our earnings and profits will be treated first as a non-taxable
return of capital, reducing the U.S. holders tax basis for the ordinary shares to
the extent thereof, and then as capital gain. Preferential tax rates for long-term capital
gains are applicable for U.S. holders that are individuals, estates or trusts. Corporate
holders generally will not be allowed a deduction for dividends received.
The amount of a distribution with
respect to our ordinary shares will be measured by the amount of fair market value of any
property distributed, and for U.S. federal income tax purposes, the amount of any Israeli
taxes withheld therefrom. Cash distributions paid by us in NIS will be included in the
income of U.S. holders at a U.S. dollar amount based upon the spot rate of exchange in
effect on the date the dividend is includible in the income of the U.S. holder, and U.S.
holders will have a tax basis in such NIS for U.S. federal income tax purposes equal to
such U.S. dollar value. If the U.S. holder subsequently converts the NIS, any subsequent
gain or loss in respect of such NIS arising from exchange rate fluctuations will be U.S.
source ordinary income or loss.
Distributions paid by us will
generally be foreign source passive income for U.S. foreign tax credit purposes. Subject
to limiting rules set forth in the Internal Revenue Code, U.S. holders may elect to claim
a foreign tax credit against their U.S. income tax liability for Israeli income tax
withheld from distributions received in respect of ordinary shares. One such rule
generally limits the amount of allowable foreign tax credits in any year to the amount of
regular U.S. tax liability for the year attributable to foreign taxable income. This
limitation on foreign taxes eligible for the foreign tax credit is calculated separately
with respect to specific classes of income. Also, this limitation on the use of foreign
tax credits generally will not apply to an electing individual U.S. holder whose
creditable foreign taxes during the year do not exceed $300, or $600 for joint filers, if
such individuals gross income for the tax year from non-U.S. sources consists solely
of certain passive income. A U.S. holder will be denied a foreign tax credit with respect
to Israeli income tax withheld from dividends received with respect to the ordinary shares
if such U.S. holder has not held the ordinary shares for at least 16 days out of the
30-day period beginning on the date that is 15 days before the ex-dividend date or to the
extent that such U.S. holder is under an obligation to make certain related payments with
respect to substantially similar or related property. Any day during which a U.S. holder
has substantially diminished its risk of loss with respect to the ordinary shares will not
count toward meeting the 16-day holding period referred to above. A U.S. holder may also
be denied a foreign tax credit if the U.S. holder holds ordinary shares in an arrangement
in which the U.S. holders reasonably expected economic profit is insubstantial
compared to the foreign taxes expected to be paid or accrued. The rules relating to the
determination of the foreign tax credit are complex, and U.S. holders should consult their
own tax advisors to determine whether and to what extent they would be entitled to such
credit. U.S. holders that do not elect to claim a foreign tax credit may instead claim a
deduction for Israeli income tax withheld, provided such holders itemize their deductions.
Disposition of Shares
Except as provided under the passive
foreign investment company rules, upon the sale, exchange or other disposition of ordinary
shares, a U.S. holder generally will recognize capital gain or loss in an amount equal to
the difference between such U.S. holders tax basis for the ordinary shares and the
amount realized on the disposition (or its U.S. dollar equivalent, determined by reference
to the spot rate of exchange on the date of disposition, if the amount realized is
denominated in a foreign currency). The gain or loss realized on the sale, exchange or
other disposition of ordinary shares will be long-term capital gain or loss if the U.S.
holder has a holding period of more than one year at the time of disposition.
Gain realized by a U.S. holder on a
sale, exchange or other disposition of ordinary shares generally will be treated as United
States source income for United States foreign tax credit purposes. A loss realized by a
U.S. holder on the sale, exchange or other disposition of ordinary shares is generally
allocated to U.S. source income. However, these rules require the loss to be allocated to
foreign source income to the extent certain dividends were received by the taxpayer within
the 24-month period preceding the date on which the taxpayer recognized the loss. The
deductibility of a loss realized on the sale, exchange or other disposition of ordinary
shares is subject to limitations.
63
Passive Foreign
Investment Companies
We would be a passive foreign
investment company, or PFIC, if:
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75%
or more of our gross income, including the pro rata share of our gross income for any
company, United States or foreign, in which we are considered to own 25% or more of the
shares by value, in a taxable year is passive income; or
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at
least 50% of the assets, averaged over the year and generally determined based upon
value, including the pro rata share of the value of the assets of any company of which we
are considered to own 25% or more of the shares by value, in a taxable year are held for
the production of, or produce, passive income.
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Passive income generally consists of
dividends, interest, rents, royalties, annuities, and income from certain commodities
transactions and from notional principal contracts. Cash is treated as generating passive
income.
If we become a PFIC, each U.S. holder
who has not elected to treat us as a qualified electing fund (the QEF election), or who
has not elected to mark the stock to market as discussed below, would, upon receipt of
certain distributions by us and upon disposition of the ordinary shares at a gain, be
liable to pay tax at the then prevailing highest tax rates on ordinary income plus
interest on the tax, as if the distribution or gain had been recognized ratably over the
taxpayers holding period for the ordinary shares. In addition, when stock of a PFIC
is acquired by reason of death from a decedent that is a U.S. holder, the tax basis of the
shares does not receive a step-up to fair market value as of the date of the
decedents death, but instead would be equal to the decedents basis if lower,
unless all gain is recognized by the decedent. Indirect investments in a PFIC may also be
subject to special tax rules.
The PFIC rules above would not apply
to a U.S. holder who makes a QEF election for all taxable years that such shareholder has
held the ordinary shares while we are a PFIC, provided that we comply with certain
reporting requirements. Instead, each U.S. holder who has made such a QEF election is
required for each taxable year that we are a PFIC to include in income a pro rata share of
our ordinary earnings as ordinary income and a pro rata share of our net capital gain as
long-term capital gain, regardless of whether we make any distributions of such earnings
or gain. In general, a QEF election is effective only if we make available certain
required information. The QEF election is made on a shareholder-by-shareholder basis and
generally may be revoked only with the consent of the Internal Revenue Service. Although
we have no obligation to do so, we intend to notify U.S. holders if we believe we will be
treated as a PFIC for any tax year in order to enable U.S. holders to consider whether to
make a QEF election. In addition, we intend to comply with the applicable information
reporting requirements for U.S. holders to make a QEF election. U.S. holders should
consult with their own tax advisers regarding eligibility, manner and advisability of
making the QEF election if we are treated as a PFIC.
A U.S. holder of PFIC stock which is
publicly traded could elect to mark the stock to market annually, 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 PFIC stock and the U.S. holders adjusted
tax basis in the PFIC 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. If the mark-to-market election were made, then the rules set forth above
would not apply for periods covered by the election.
We believe that we were not a PFIC in
2007and will not be a PFIC in 2008, The tests for determination PFIC status are applied
annually. Our conclusions are based on an analysis of our financial position and future
income and assets, about which it is difficult to make accurate predictions. Accordingly,
there can be no assurance that we are not a PFIC. U.S. holders who hold ordinary shares
during a period when we are a PFIC will be subject to the foregoing rules, even if we
cease to be a PFIC, subject to certain exceptions for U.S. holders who made a
mark-to-market or QEF election. U.S. holders are strongly urged to consult their tax
advisors about the PFIC rules, including the eligibility, manner and consequences to them
of making a mark-to-market or QEF election with respect to our ordinary shares in the
event that we qualify as a PFIC.
Backup Withholding
A U.S. holder may be subject to
backup withholding at a rate of 28% with respect to cash dividend payments and proceeds
from a disposition of ordinary shares. In general, backup withholding will apply only if a
U.S. holder fails to comply with certain identification procedures. Backup withholding
will not apply with respect to payments made to certain exempt recipients, such as
corporations and tax-exempt organizations. Backup withholding is not an additional tax and
may be claimed as a credit against the U.S. federal income tax liability of a U.S. holder,
provided that the required information is furnished to the Internal Revenue Service.
64
Non-U.S. holders of
Ordinary Shares
Except as provided below, a taxpayer that
is not a U.S. holder generally will not be subject to U.S. federal income or withholding
tax on the payment of dividends on, and the proceeds from the disposition of, an ordinary
share.
A non-U.S. holder may be subject to
U.S. federal income or withholding tax on the proceeds from the disposition of an ordinary
share if (1) such item is effectively connected with the conduct by the non-U.S. holder of
a trade or business in the United States and, in the case of a resident of a country which
has an income tax treaty with the United States, such item is attributable to a permanent
establishment or, in the case of gain realized by an individual non-U.S. holder, a fixed
place of business in the United States; or (2) the individual non-U.S. holder is present
in the United States for 183 days or more in the taxable year of the sale and certain
other conditions are met or (3) the non-U.S. holder is subject to tax pursuant to the
provisions of the U.S. tax law applicable to U.S. expatriates.
In general, non-U.S. holders will not
be subject to the 28% rate of backup withholding with respect to the payment of dividends
on ordinary shares unless payment is made through a paying agent, or office, in the United
States. After January 1, 2001, however, if payment is made in the United States or by a
U.S. related person, non-U.S. holders will be subject to backup withholding. In general,
if a non-U.S. holder provides a taxpayer identification number, certifies to its foreign
status, or otherwise establishes an exemption, the non-U.S. holder will not be subject to
backup withholding. A U.S. related person for these purposes is a person with one or more
current relationships with the United States.
Non-U.S.
holders generally will be subject to backup withholding at a rate of 28% on the
payment of the proceeds from the disposition of ordinary shares to or through
the United States office of a broker, whether domestic or foreign, unless the
holder provides a taxpayer identification number, certifies to its foreign
status or otherwise establishes an exemption. Non-U.S. holders will not be
subject to backup withholding with respect to the payment of proceeds from the
disposition of ordinary shares by a foreign office of a broker. However,
non-U.S. holders will be subject to backup withholding at a rate of 28% with
respect to the payment of proceeds from the disposition of ordinary shares
effected outside the United States if the broker is a U.S. related person,
unless the holder provides a taxpayer identification number, certifies to its
foreign status or otherwise establishes an exemption.
The amount of any backup withholding
from a payment to a non-U.S. holder will be allowed as a credit against such holders
U.S. federal income tax liability and may entitle such holder to a refund, provided that
the required information is furnished to the Internal Revenue Service.
ISRAELI TAXATION
The following is a summary of the
current tax structure applicable to companies incorporated in Israel, with special
reference to its effect on us. The following also contains a discussion of the material
Israeli tax consequences to purchasers of our ordinary shares and Israeli government
programs benefiting us. To the extent that the discussion is based on new tax legislation
which has not been subject to judicial or administrative interpretation, we cannot assure
you that the views expressed in the discussion below will be accepted by the Israel tax
authorities or courts. This discussion is not intended, and should not be construed, as
legal or professional tax advice, and is not exhaustive of all possible tax
considerations.
This summary does not discuss all the
aspects 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.
Holders of our ordinary shares should
consult his or her own tax advisors as to the particular tax consequences of an investment
in the ordinary shares including the effects of applicable Israeli or foreign or other tax
laws and possible changes in the tax laws.
General Corporate Tax
Structure
Israeli companies are generally
subject to Corporate Tax on their taxable income at the rate of 29% for the 2007 tax year.
Following an amendment to the Israeli Income Tax Ordinance [New Version], 1961 (the
Tax Ordinance), which came into effect on January 1, 2006, the corporate tax
rate is scheduled to decrease as follows: 27% for the 2008 tax year, 26% for the 2009 tax
year and 25% for the 2010 tax year and thereafter. Israeli companies are generally subject
to Capital Gains Tax at a rate of 25% for capital gains, other than gains deriving from
the sale of listed securities, derived after January 1, 2003. However, the effective tax
rate payable by a company that derives income from an approved enterprise (as defined
below) may be considerably less, as further discussed below.
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Tax Benefits and Grants
for Research and Development
Israeli tax law allows, under certain
conditions, a tax deduction in the year incurred for expenditures, including depreciation
on capital expenditures, in scientific research and development projects, if the
expenditures are approved by the relevant Israeli government ministry, determined by the
field of research, and the research and development is for the promotion of the enterprise
and is carried out by, or on behalf of, the company seeking such deduction. However, the
amount of such deductible expenses must be reduced by the sum of any funds received
through government grants for the finance of such scientific research and development
projects. Expenditures not so approved or funded, are deductible over a three-year period.
Law for the
Encouragement of Capital Investments, 1959
Our facilities currently enjoy
approved enterprise status under the Investments Law. See discussion below regarding an
amendment to the Investments Law that came into effect in 2005.
The Investments Law provided (prior
to its amendment in 2005) that a proposed capital investment in eligible facilities may,
upon application to the Investment Center of the Ministry of Industry and Trade of Israel,
be designated as an approved enterprise. Each certificate of approval for an approved
enterprise relates to a specific investment program delineated both by its financial
scope, including its capital sources, and by its physical characteristics, for example,
the equipment to be purchased and utilized pursuant to the program.
The tax benefits derived from any
such certificate of approval relate only to taxable income attributable to the specific
approved enterprise. Tax benefits under the Investments Law shall also apply to income
generated by a company from the grant of a usage right with respect to know-how developed
by the approved enterprise, income generated from royalties, and income derived from a
service which is auxiliary to such usage right or royalties, provided that such income is
generated within the approved enterprises ordinary course of business. The tax
benefits under the Investment Law are not available with respect to income derived from
products manufactured outside of Israel.
Taxable income of a company derived
from an approved enterprise is subject to corporate tax at the rate of 25%, rather than
regular corporate tax rates as stated above, for the benefit period, a period of seven
years commencing with the year in which the approved enterprise first generated taxable
income, limited to twelve years from the year of commencement of production or 14 years
from the beginning of the year of approval, whichever is earlier, and, under certain
circumstances, as further detailed below, extending to a maximum of ten years from the
commencement of the benefit period. In the event that a company is operating under more
than one approval or that its capital investments are only partly approved, its effective
company tax rate is the result of a weighted combination of the various applicable rates.
A company owning an approved
enterprise may elect to forego certain government grants extended to approved enterprises
in return for an alternative package of tax benefits, which we have done. Under the
alternative package, a companys undistributed income derived from an approved
enterprise will be exempt from company tax for a period of between two and ten years from
the first year of taxable income, depending on the geographic location of the approved
enterprise within Israel, and such company will be eligible for a reduced tax rate under
the Investments Law for the remainder of the benefits period.
Most of our production facilities in
Israel have been granted approved enterprise status under five separate
investment programs and, as such, are entitled to tax benefits, under the Investments Law.
According to the law, we have elected the alternative benefits track, and have
waived certain government grants in return for a tax exemption. Upon our initial public
offering in 1996, we became a foreign investment company for purposes of the
Investments Law. Accordingly, we are entitled to a ten year period of benefits. Income
derived from our investment programs is tax-exempt for the first two to four years and is
entitled to a reduced tax rate of 10% to 25%, during the remaining benefit period of six
to eight years (subject to the percentage of foreign ownership in each tax year). The
investments under our approved investments programs were accomplished during 1994-2005. As
of December 31, 2007 the benefit periods of the first and the second programs expired. The
benefit periods of the third and forth programs will expire in 2009 and 2011,
respectively. The benefit period of the fifth program has not yet commenced and will end
in 2013. For the years which entitled to a reduced tax rate, the period of tax benefits
detailed above is subject to limits of 12 years from the year of commencement of
production, or 14 years from the date of granting the approval, whichever is earlier.
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A company that has elected the
alternative benefits and that subsequently pays a dividend out of income derived from the
approved enterprises during the tax exemption period will be subject to company tax in
respect of the grossed-up equivalent of the amount distributed, including the
recipients tax thereon, applying the rate which would have been applicable had the
company not elected the alternative benefits. This is generally 10% to 25%, depending upon
the extent to which non-Israeli shareholders hold our shares. The dividend recipient is
taxed at the reduced rate of 15% applicable to dividends from approved enterprises, if the
dividend is distributed during the tax exemption period or within a specified period
thereafter. This tax must be withheld by us at the source, regardless of whether the
dividend is converted into foreign currency. Subject to certain provisions concerning
income, under the alternative benefits, all dividends are considered to be attributable to
the entire company and their effective tax rate is the result of a weighted combination of
the various applicable tax rates. However, we are not obligated to distribute exempt
retained profits under the alternative benefits, and we may generally decide from which
annual profits to declare dividends.
The Investments Law also provides
that an approved enterprise is entitled to accelerated depreciation on its property and
equipment that are included in an approved investment program. We have not utilized this
benefit.
Grants and other incentives received
by a company in accordance with the Investments Law remain subject to final ratification
by the Investment Center of the Israeli Ministry of Industry and Trade, such ratification
being conditional upon fulfillment of all terms of the approved program.
If the retained tax-exempt income
were distributed, it would be taxed at the corporate tax rate applicable to such profits
as if we had not chosen the alternative tax benefits (rate of 10% 25% based on the
percentage of foreign ownership) on the gross amount distributed. In addition, these
dividends will be subject to a 15% withholding tax. Accordingly, no deferred income taxes
have been provided on income attributable to the Companys Approved Enterprise
programs as the undistributed tax exempt income is essentially permanent in duration.
The benefits available to an approved
enterprise are conditional upon the fulfillment of certain conditions stipulated in the
Investments Law and its regulations and the criteria set forth in the specific certificate
of approval, as described above. In the event that these conditions are violated, in whole
or in part, we would be required to refund the amount of tax benefits, with the addition
of the Israel consumer price index linkage adjustment and interest. We believe our
approved enterprise operates in substantial compliance with all such conditions and
criteria.
Amendment to the
Investments Law
On April 1, 2005, an amendment to the
Investments Law came into force. Pursuant to the amendment, a companys facility will
be granted the status of Approved Enterprise (which is referred to as a
Benefited Enterprise following such amendment) only if it is proven to be an industrial
facility (as defined in the Investments Law) that contributes to the economic independence
of the Israeli economy and is a competitive facility that contributes to the Israeli gross
domestic product. The amendment provides that the Israeli Tax Authority and not the
Investment Center is responsible for a Benefited Enterprise under the alternative package
of benefits. A company wishing to receive the tax benefits afforded to a Benefited
Enterprise is required to select the tax year from which the period of benefits under the
Investment Law are to commence by notifying the Israeli Tax Authority within 12 months of
the end of that year. In order to be recognized as owning a Benefited Enterprise, a
company is required to meet a number of conditions set forth in the amendment, including
making a minimum investment in manufacturing assets for the Benefited Enterprise and
having completed a cooling-off period of no less than two to four years from the
companys previous year of commencement of benefits under the Investments Law.
Pursuant to the amendment, a company
with a Benefited Enterprise is entitled, in each tax year, to accelerated depreciation for
the manufacturing assets used by the Benefited Enterprise and to certain tax benefits,
provided that no more than 12 to 14 years have passed since the beginning of the year of
commencement of benefits under the Investments Law. The tax benefits granted to a
Benefited Factory are determined according to one of the following new tax routes that are
relevant to us:
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Similar
to the currently available alternative route, exemption from corporate tax on
undistributed income for a period of two to ten years, depending on the geographic
location of the Benefited Enterprise within Israel, and a reduced corporate tax rate of
10% to 25% for the remainder of the benefits period, depending on the level of foreign
investment in each year. Benefits may be granted for a term of from seven to ten years,
depending on the level of foreign investment in the Company. If the Company pays a
dividend out of income derived from the Benefited Enterprise during the tax exemption
period, such income will be subject to corporate tax at the applicable rate (10%-25%).
The Company is required to withhold tax at the source at a rate of 15% from any dividends
distributed from income derived from the Benefited Enterprise.
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A
special tax route enabling companies owning facilities in certain geographical locations
in Israel to pay corporate tax at the rate of 11.5% on income of the Benefited
Enterprise. The benefits period is ten years. Upon payment of dividends, the Company is
required to withhold tax at source at a rate of 15% for Israeli residents and at a rate
of 4% for foreign residents.
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Generally, a company that is Abundant
in Foreign Investment (as defined in the Investments Law) is entitled to an extension of
the benefits period by an additional five years, depending on the rate of its income that
is derived in foreign currency.
The amendment changes the definition
of foreign investment in the Investments Law so that instead of an investment
of foreign currency in the company, the definition now requires a minimal investment of
NIS 5 million by foreign investors. Furthermore, such definition now also includes the
purchase of shares of a company from another shareholder, provided that the companys
outstanding and paid-up share capital exceeds NIS 5 million. Such changes to the
aforementioned definition are in effect retroactively from 2003.
The amendment applies to Benefited
Enterprise programs in which the year of commencement of benefits under the Investments
Law is 2004 or later, unless such programs received Approved Enterprise
approval from the Investment Center on or prior to December 31, 2004 in which case the
provisions of the amendment do not apply.
Taxation under
Inflationary Conditions
The Income Tax Law (Inflationary
Adjustments), 1985, or the Inflationary Adjustments Law, is intended to adjust the
corporate tax system to the rate of inflation, i.e., to tax profits on an
inflation-adjusted basis.
Under the Inflationary Adjustments
Law, results for tax purposes are measured in historical cost terms and are subject to a
series of adjustments based on movements in the Israel consumer price index. We are taxed
under this law. The discrepancy between the change in (1) the Israel consumer price index
and (2) the exchange rate of the NIS to the dollar, each year and cumulatively, may result
in a significant difference between taxable income and the income denominated in dollars
as reflected in our financial statements. In addition, subject to certain limitations,
depreciation of fixed assets and losses carried forward are adjusted for inflation on the
basis of changes in the Israel consumer price index.
The salient features of the
Inflationary Adjustments Law are generally as follows:
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(a)
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A
special tax adjustment for the preservation of equity whereby certain
corporate assets are classified broadly into fixed (inflation immune)
assets and non-fixed assets. Where a companys equity, as defined in
such law, exceeds the depreciated cost of fixed assets, a deduction from
taxable income that takes into account the effect of the applicable annual
rate of inflation on such excess is allowed, up to a ceiling of 70% of
taxable income in any single tax year, with the unused portion permitted
to be carried forward, linked to the increase in the consumer price index.
If the depreciated cost of fixed assets exceeds a companys equity,
then such excess multiplied by the applicable annual rate of inflation is
added to taxable income.
|
|
(b)
|
Subject
to certain limitation set forth in the Inflationary Adjustments Law,
depreciation deductions on fixed assets and losses carried forward are
adjusted for inflation based on the increase in the Israel consumer price
index.
|
On February 26 2008 the Israeli
parliament approved an amendment to the Inflationary Adjustments Law which limits the
applicability of such law so that it will cease to apply after the 2007 tax year.
Israeli Transfer Pricing
Regulations
On November 29, 2006, Income Tax
Regulations (Determination of Market Terms), 2006, promulgated under Section 85A of the
Tax Ordinance, came into force (the TP Regs). Section 85A of the Tax Ordinance
and the TP Regs generally require that all cross-border transactions carried out between
related parties will be conducted on an arms length principle basis and will be
taxed accordingly.
Law for the
Encouragement of Industry (Taxes), 1969
We believe that we currently qualify
as an Industrial Company within the definition of the Law for the Encouragement of
Industry (Taxes), 1969, or the Industry Encouragement Law. According to the Industry
Encouragement Law, an Industrial Company is a company resident in Israel, at least 90% of
the income of which in any tax year, determined in NIS, exclusive 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 owned by an Industrial
Company and whose major activity in a given tax year is industrial production activity.
68
The following corporate tax benefits
are available to Industrial Companies, including, among others:
|
(a)
|
Deduction
of purchases of know-how and patents over an eight-year period for tax
purposes.
|
|
(b)
|
Deduction
over a three-year period of expenses involved with the issuance and
listing of shares on a recognized stock market.
|
|
(c)
|
An
election under certain conditions to file a consolidated tax return with
additional related Israeli Industrial Companies that satisfy conditions
set forth in the law.
|
|
(d)
|
Accelerated
depreciation rates on equipment and buildings.
|
Eligibility for the benefits under
the Industry Encouragement Law is not subject to receipt of prior approval from any
governmental authority. No assurance can be given that we will continue to qualify as an
Industrial Company or that the benefits described above will be available in the future.
Capital Gains Tax
Israeli law generally imposes a
capital gains tax on the sale of any capital assets by residents of Israel, as defined for
Israeli tax purposes, and on the sale of assets located in Israel, including shares in
Israeli companies by non-residents of Israel, unless a specific exemption is available or
unless a tax treaty between Israel and the shareholders country of residence
provides otherwise. The law distinguishes between the real gain and the inflationary
surplus. The real gain is the excess of the total capital gain over the inflationary
surplus, computed on the basis of the increase in the Israel consumer price index between
the date of purchase and the date of sale.
As of January 1, 2006, generally, the
Israeli tax rate applicable to capital gains derived from the sale of shares, whether
listed on a stock market or not, is 20% for Israeli individuals, unless such shareholder
claims a deduction for financing expenses in connection with such shares, in which case
the gain will generally be taxed at a rate of 25%. Additionally, if such shareholder is
considered a significant shareholder at any time during the 12-month period
preceding such sale (i.e. such shareholder holds directly or indirectly, including jointly
with others, at least 10% of any means of control in the company), the tax rate will be
25%. Israeli companies are subject to the corporate tax rate on capital gains derived from
the sale of listed shares, unless such companies were not subject to the Adjustments Law
(or certain regulations) as of August 10, 2005, in which case the applicable tax rate is
25%. However, the foregoing tax rates will not apply to (i) dealers in securities, and
(ii) shareholders who acquired their shares prior to an initial public offering (that may
be subject to a different tax arrangement).
The tax basis of our shares acquired
by individuals prior to January 1, 2003 generally will be determined in accordance with
the average closing share price in the three trading days preceding January 1, 2003.
However, a request may be made to the tax authorities to consider the actual adjusted cost
of the shares as the tax basis if it is higher than such average price. Non-Israeli
residents are exempt from Israeli capital gains tax on any gains derived from the sale of
shares of Israeli companies publicly traded on a recognized stock exchange or regulated
market outside of Israel, provided that such capital gains are not derived from a
permanent establishment in Israel, that such shareholders are not subject to the
Inflationary Adjustments Law and that such shareholders did not acquire their shares prior
to the issuers initial public offering. However, non-Israeli corporations will not
be entitled to such exemption, if Israeli residents (i) have a controlling interest of 25%
or more in such non-Israeli corporation, or (ii) are the beneficiaries or are entitled to
25% or more of the revenues or profits of such non-Israeli corporation, whether directly
or indirectly.
In some instances where our
shareholders may be subject 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.
Under the U.S.-Israel Tax Treaty, the
sale, exchange or disposition of shares by a person who holds the ordinary shares as a
capital asset and who qualifies as a resident of the United States within the meaning of
the U.S.- Israel Tax Treaty and who is entitled to claim the benefits afforded to such
resident by the U.S.-Israel Tax Treaty will generally not be subject to the Israeli
capital gains tax unless such U.S. resident holds, directly or indirectly, shares
representing 10% or more of the voting power of our company during any part of the
12-month period preceding such sale, exchange or disposition. A sale, exchange or
disposition of shares by a U.S. resident who holds, directly or indirectly, shares
representing 10% or more of the voting power of our company at any time during such
preceding 12-month period would be subject to such Israeli tax, to the extent applicable;
however, under the U.S.-Israel Tax Treaty, such U.S. resident would be permitted to claim
a credit for such taxes against the U.S. federal income tax imposed with respect to such
sale, exchange or disposition, subject to the limitations in U.S. laws applicable to
foreign tax credits. The U.S.-Israel Tax Treaty does not relate to state or local taxes.
69
Tax on Dividends
Non-residents of Israel are subject
to income tax on income accrued or derived from sources in Israel. On distributions of
dividends other than bonus shares or stock dividends, income tax is withheld at the source
at the rates: (i) 20%, or 25% for a shareholder that is considered a significant
shareholder at any time during the 12-month period preceding such distribution; of (ii)
15% for dividends generated by an Approved or Benefited Enterprise (or Benefited
Enterprise); unless a different rate is provided in a treaty between Israel and the
shareholders country of residence.
Under the U.S.-Israel Tax Treaty, the
maximum tax on dividends paid to a holder of shares who is a resident of the United States
is 25% or 12.5% if such U.S. resident is a corporation which holds, directly or
indirectly, shares representing at least 10% or more of our issued voting power during the
part of the tax year which precedes the date of payment of the dividend and during the
whole of its prior tax year (and additional conditions under the U.S.-Israel Tax Treaty
are met). However, under the U.S.-Israel Tax Treaty dividends generated by an Approved or
Benefited Enterprise are taxed at the rate of 15%.
F. Dividends and Paying
Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign
private issuers and fulfill the obligations with respect to such requirements by filing
reports with the Securities and Exchange Commission. You may read and copy any document we
file with the Securities and Exchange Commission without charge at the Securities and
Exchange Commissions public reference room at 100 F Street, N.E., Washington, D.C.
20549. Copies of such material may be obtained by mail from the Public Reference Branch of
the Securities and Exchange Commission at such address, at prescribed rates. Please call
the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the
public reference room.
As a foreign private issuer, we are
exempt from the rules under the Exchange Act prescribing the furnishing and content of
proxy statements, and our officers, directors and principal shareholders are exempt from
the reporting and short-swing profit recovery provisions contained in Section
16 of the Exchange Act. In addition, we are not required under the Exchange Act to file
periodic reports and financial statements with the Securities and Exchange Commission as
frequently or as promptly as United States companies whose securities are registered under
the Exchange Act.
Notwithstanding the foregoing, we
furnish reports with the SEC on Form 6-K containing unaudited financial information for
the first three quarters of each fiscal year and we solicit proxies and furnish proxy
statements for all meetings of shareholders pursuant to NASDAQ Marketplace Rule 4350(g), a
copy of which proxy statement is furnished promptly thereafter with the SEC under the
cover of a Current Report on Form 6-K. However, in accordance with NASDAQ Marketplace Rule
4350(a)(1), we have elected not to comply with the NASDAQ requirement to distribute an
annual report to our shareholders prior to our annual meeting of shareholders. The basis
for the exemption is that the generally accepted business practice in Israel, where we are
incorporated, is not to distribute an annual report to shareholders. We post our Annual
Report on Form 20-F on our web site (
www.tti-telecom.com
) as soon as practicable
following the filing of the Annual Report on Form 20-F with the SEC.
I. Subsidiary Information
Not applicable.
Item 11.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Since the majority of our revenues
are paid in or linked to U.S. dollars, we believe that inflation and fluctuations in the
NIS/U.S. dollar exchange rate have no material effect on our revenues. Inflation in Israel
and U.S. dollar exchange rate fluctuations, however, have some influence on our expenses
and, as a result, on our net income. The cost of our Israel operations, as expressed in
U.S. dollars, is influenced by the extent to which any increase in the rate of inflation
in Israel is not offset, or is offset on a lagging basis, by a devaluation of the NIS in
relation to the U.S. dollar.
70
A significant portion of our
expenditures are employee compensation-related. Salaries are paid in NIS. Annual salary
increases during the first quarter of the year and are adjusted for changes in the Israel
consumer price index through annual salary increases during the first quarter of the year
and bi-annual partial adjustments. This increases salary expenses in United States dollar
terms. The devaluation of the NIS against the U.S. dollar decreases employee compensation
expenditures as expressed in dollars proportionally. Some of our other NIS-based expenses
are either currently adjusted to U.S. dollars or are adjusted to the Israel consumer price
index.
Our results of operations are
adversely affected by increases in the rate of inflation in Israel when such increases are
not offset, or are offset on a lagging basis, by a devaluation of the NIS against the U.S.
dollar. A devaluation of the NIS in relation to the U.S. dollar will have the effect of
decreasing the U.S. dollar value of our assets, mostly current assets, to the extent of
the underlying value of which is NIS-based. Such a devaluation would also have the effect
of reducing the dollar amount of any of our liabilities which are payable in NIS, unless
such payables are linked to the dollar.
We do not presently engage in any
hedging or other transactions intended to manage risks relating to foreign currency
exchange rate or interest rate fluctuations. However, we may in the future undertake
hedging transactions if management determines that it is necessary to offset such risks.
Item 12.
|
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|
Not applicable.
PART II
Item 13.
|
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
|
None.
Item 14.
|
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|
Modification of Rights
Not applicable.
Use of Proceeds
Not applicable.
Item 15.
|
CONTROLS AND PROCEDURES
|
Disclosure Controls and
Procedures
We carried out an evaluation, under
the supervision and with the participation of our principal executive officer and
principal financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2007. Based on this evaluation, our
principal executive officer and principal financial officer have concluded that our
disclosure controls and procedures are effective to reasonably assure that information
required to be included in our periodic reports to the Securities and Exchange Commission
is recorded, processed, summarized and reported within the time period specified in the
SECs rules and forms and is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions regarding required
disclosure.
Managements report
on internal control over financial reporting
Our management including our chief
executive officer and our principal financial officer 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:
71
|
|
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, and
|
|
|
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 including our chief
executive officer and our principal financial officer assessed the effectiveness of our
internal control over financial reporting as of December 31, 2007. In conducting its
assessment of internal control over financial reporting, management based its evaluation
on the framework in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our management
including our chief executive officer and our principal financial officer has concluded
based on its assessment, that our internal control over financial reporting was effective
as of December 31, 2007 based on these criteria.
This annual report does not
include an attestation report of our registered public accounting firm regarding internal
control over financial reporting. Managements report was not subject to attestation
by our registered public accounting firm pursuant to temporary rules of the SEC that
permit us to provide only managements report in this annual report
.
There were no changes in our internal
control over financial reporting that occurred during the year ended December 31,
2007 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Item 16A.
|
AUDIT COMMITTEE FINANCIAL EXPERT
|
Our board of directors has determined
that Meir Dvir, one of the members of our audit committee, qualifies as a financial expert
and is independent under the applicable regulations.
In February 2004, we adopted a Code
of Ethics and Business Conduct that applies to the Companys principal executive
officer, principal financial officer, principal accounting officer or controller and
persons performing similar functions, a copy of which is filed as Exhibit 11 to this
annual report.
Item 16C.
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
Fees Paid to Independent
Public Accountants
In
the annual meeting held on December 20, 2007 our shareholders re-appointed Kost Forer
Gabbay & Kasierer, a member of Ernst & Young Global, or Ernst & Young, to
serve as our independent registered accounting firm until the next annual meeting. The
following table sets forth, for each of the years indicated, the fees paid to Ernst &
Young and the percentage of each of the fees out of the total amount paid to them.
72
|
|
Year Ended December 31,
|
|
|
2006
|
2007
|
|
Services Rendered
|
Fees
|
Percentages
|
Fees
|
Percentages
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audit (1)
|
|
|
$
|
130,000
|
|
|
74
|
%
|
$
|
135,000
|
|
|
63
|
%
|
|
Audit-related (2)
|
|
|
$
|
22,000
|
|
|
12
|
%
|
$
|
20,000
|
|
|
9
|
%
|
|
Tax (3)
|
|
|
$
|
25,000
|
|
|
14
|
%
|
$
|
45,000
|
|
|
21
|
%
|
|
Other (4)
|
|
|
|
-
|
|
|
-
|
|
$
|
15,000
|
|
|
7
|
%
|
|
Total
|
|
|
$
|
177,000
|
|
|
100
|
%
|
$
|
215,000
|
|
|
100
|
%
|
(1)
|
Audit
fees consist of services that would normally be provided in connection
with statutory and regulatory filings or engagements, including services
that generally only the independent accountant can reasonably provide.
This included audit of our annual financial statements, review of our
quarterly financial results, consultations on various accounting issues
and performance of local statutory audits.
|
(2)
|
Audit-related
fees relate to assurance and associated services that are performed by the
independent accountant, including: attest services that are not required
by statute or regulation; accounting consultation; and consultation
concerning financial accounting and reporting standards. In 2006 and 2007,
most of these fees were for services relating to the Section 404 of the
Sarbanes-Oxley Act of 2002 compliance process we have begun.
|
(3)
|
Tax
fees relate to services performed by the tax division for tax compliance,
planning and advice.
|
(4)
|
Other
fees relate to the Teleses transaction.
|
Pre-approval Policies and
Procedures
Our audit committee approves each
audit and non-audit service to be performed by our independent accountant before the
accountant is engaged.
Item 16D.
|
EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES
|
Not applicable.
Item 16E.
|
PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
|
None.
Item 17.
|
FINANCIAL STATEMENTS
|
We have responded to Item 18 in lieu
of this item.
Item 18.
|
FINANCIAL STATEMENTS
|
The Financial Statements required by
this item are found at the end of this annual report, beginning on page F-1.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Financial Statements.
|
|
|
Index to Financial Statements
|
F-1
|
|
Report of Independent Registered Accounting Firm
|
F-2
|
|
Consolidated Balance Sheets
|
F-3
|
|
Consolidated Statements of Operations
|
F-5
|
|
Statements of Changes in Shareholders' Equity
|
F-6
|
|
Consolidated Statements of Cash Flows
|
F-7
|
|
Notes to Consolidated Financial Statements
|
F-8
|
The exhibits list required by this
Item is incorporated by reference to the Exhibit Index which appears before the first
exhibit filed with this document.
73
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant certifies that
it meets all of the requirements for filing on Form 20-F and has duly caused this annual
report to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Petach Tikva, Israel on the 31 day of March, 2008.
|
|
TTI TEAM TELECOM INTERNATIONAL LTD.
By: /s/ Meir Lipshes
Meir Lipshes
Acting Chief Executive Officer
|
74
EXHIBIT INDEX
1.1
|
Second
Amended and Restated Articles of Association of Registrant, as amended through December
27, 2005 (1) and Certificate of Amendment, dated August 10, 2006 (2)
|
1.2
|
Memorandum
of Association of Registrant, as amended through December 29, 2004. (3)
|
4.6
|
The
Registrant's Share Option Plan, dated November 15, 1996. (4)
|
4.8
|
2004
Employee Share Option Plan, adopted December 29, 2004. (3)
|
4.9
|
Agreement,
dated October 9, 1996, between the Registrant and Team. (5)
|
4.10
|
Registration
Rights Agreement, dated October 22, 1996, between the Registrant and TSIL. (5)
|
4.12
|
Lease,
dated February 1, 1998, between the Registrant and Team. (6)
|
4.13
|
Amendment
to Lease Agreement dated September 2, 2002. (7)
|
4.14
|
Second
Amendment to Lease Agreement dated July 14, 2005. (8)
|
10.11
|
Consent
of Independent Auditors of the Registrant
|
11
|
Code
of Ethics and Business Conduct. (9)
|
12.1
|
Certification
of the Principal Executive Officer pursuant toss.302 of the Sarbanes-Oxley Act
|
12.2
|
Certification
of the Principal Financial Officer pursuant toss.302 of the Sarbanes-Oxley Act
|
13.1
|
Certification
of the Principal Executive Officer pursuant toss.906 of the Sarbanes-Oxley Act
|
13.2
|
Certification
of the Principal Financial Officer pursuant toss.906 of the Sarbanes-Oxley Act
|
(1)
|
Previously
filed on TTI's Form 20-F for the year ended December 31, 2005, and incorporated herein by
reference.
|
(2)
|
Previously
filed on TTI's Form 20-F for the year ended December 31, 2006, and incorporated herein by
reference.
|
(3)
|
Previously
filed on TTI's Form 20-F for the year ended December 31, 2004, and incorporated herein by
reference.
|
(4)
|
English
summary from Hebrew original was previously filed as an exhibit to TTI's Registration
Statement on Form F-1 (Registration No. 333-5902), and incorporated herein by
reference.
|
(5)
|
Previously
filed as an exhibit to TTI's Registration Statement on Form F-1 (Registration No.
333-5902), and incorporated herein by reference.
|
(6)
|
English
summary from Hebrew original was previously filed as an exhibit to TTI's annual report on
Form 20-F for the fiscal year ended December 31, 1998, and incorporated herein by
reference.
|
(7)
|
English
translation from Hebrew original previously filed as an exhibit to TTI's annual report on
Form 20-F for the fiscal year ended December 31, 2002, and incorporated herein by
reference.
|
(8)
|
Previously
filed on TTI's Form 20-F for the year ended December 31, 2005, and incorporated herein by
reference.
|
(9)
|
Previously
filed on TTI's Form 20-F for the year ended December 31, 2003, and incorporated herein by
reference.
|
75
TTI TEAM
TELECOM INTERNATIONAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
AS OF
DECEMBER 31, 2007
IN U.S.
DOLLARS
INDEX
- - - - - - - - - - - -
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board
of Directors and Shareholders of
TTI TEAM
TELECOM INTERNATIONAL LTD.
We
have audited the accompanying consolidated balance sheets of TTI Team Telecom
International Ltd. (the Company) and its subsidiaries as of December 31, 2006
and 2007 and the related consolidated statements of operations, changes in
shareholders equity and cash flows for each of the three years in the period
ended December 31, 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) and in accordance with generally
accepted auditing standards in Israel, including those prescribed by the
Auditors Regulations (Auditors Mode of Performance), 1973. 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 include 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries at 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 which differ in certain aspects from
Israel generally accepted accounting principles, as described in Note 13 to the
consolidated financial statements.
As
discussed in Note 2 to the consolidated financial statements, the company
adopted the provision of Statement of Financial Accounting Standard
No. 123(R), Share-Based Payment, effective January 1, 2006.
|
|
Tel-Aviv,
Israel
|
KOST FORER GABBAY & KASIERER
|
March 31,
2008
|
A Member of Ernst & Young Global
|
F-2
|
TTI TEAM
TELECOM INTERNATIONAL LTD.
|
AND ITS
SUBSIDIARIES
|
CONSOLIDATED BALANCE SHEETS
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
31,410
|
|
$
|
33,408
|
|
Short-term bank deposits
|
|
|
984
|
|
|
98
|
|
Trade receivables (net of allowance for
doubtful accounts - $6,865 in 2006 and 0 in 2007) (Note 1b)
|
|
|
4,664
|
|
|
8,185
|
|
Unbilled receivables
|
|
|
2,834
|
|
|
3,155
|
|
Related parties (Note 10)
|
|
|
373
|
|
|
409
|
|
Other accounts receivable
and prepaid expenses (Note 3)
|
|
|
2,265
|
|
|
3,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
42,530
|
|
|
48,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM INVESTMENTS AND
RECEIVABLES:
|
|
|
|
|
|
|
|
Long-term bank deposits
|
|
|
97
|
|
|
-
|
|
Investment in a company
|
|
|
165
|
|
|
165
|
|
Severance pay fund
|
|
|
3,627
|
|
|
3,937
|
|
Long-term trade and
unbilled receivables (Note 1b)
|
|
|
3,324
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term investments and receivables
|
|
|
7,213
|
|
|
4,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET
(Note 4)
|
|
|
3,842
|
|
|
6,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
53,585
|
|
$
|
58,594
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
|
TTI TEAM
TELECOM INTERNATIONAL 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
|
|
$
|
2,508
|
|
$
|
2,364
|
|
Deferred revenues
|
|
|
8,333
|
|
|
4,666
|
|
Related party (Note 10)
|
|
|
40
|
|
|
3,932
|
|
Other accounts payable and
accrued expenses (Note 5)
|
|
|
7,187
|
|
|
6,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
18,068
|
|
|
17,928
|
|
|
|
|
|
|
|
|
|
ACCRUED SEVERANCE PAY
|
|
|
5,022
|
|
|
5,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG TERM LIABILITIES (Note
6a)
|
|
|
-
|
|
|
1,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENT
LIABILITIES (Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY (Note
8):
|
|
|
|
|
|
|
|
Share capital:
|
|
|
|
|
|
|
|
Ordinary shares of NIS 0.5
par value -
|
|
|
|
|
|
|
|
Authorized: 30,000,000
shares at December 31, 2006 and 2007; Issued and outstanding: 16,000,431 and
16,003,158 shares at December 31, 2006 and 2007, respectively
|
|
|
2,260
|
|
|
2,261
|
|
Preferred A shares of NIS
0.5 par value
|
|
|
|
|
|
|
|
Authorized: 6,636,391 at December 31, 2006 and 2007; Issued
and outstanding: 2,936,391 shares at December 31, 2006 and 2007: Aggregate
liquidation preference of $ 6,460 at December 31, 2007
|
|
|
334
|
|
|
334
|
|
Additional paid-in capital
|
|
|
74,919
|
|
|
75,038
|
|
Accumulated deficit
|
|
|
(47,018
|
)
|
|
(44,197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders equity
|
|
|
30,495
|
|
|
33,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders equity
|
|
$
|
53,585
|
|
$
|
58,594
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
F-4
|
TTI TEAM
TELECOM INTERNATIONAL LTD.
|
AND ITS SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
U.S. dollars in thousands, except share and
per share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Revenues (Note 11):
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
25,317
|
|
$
|
27,554
|
|
$
|
25,722
|
|
Services
|
|
|
17,909
|
|
|
18,560
|
|
|
20,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
43,226
|
|
|
46,114
|
|
|
45,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
13,015
|
|
|
14,783
|
|
|
12,504
|
|
Services
|
|
|
9,203
|
|
|
9,571
|
|
|
8,545
|
|
Impairment of capitalized software
development costs
|
|
|
177
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cost of revenues
|
|
|
22,395
|
|
|
24,354
|
|
|
21,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
20,831
|
|
|
21,760
|
|
|
24,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Research and development,
net (Note 12a)
|
|
|
9,136
|
|
|
9,578
|
|
|
9,433
|
|
Selling and marketing
|
|
|
11,977
|
|
|
10,214
|
|
|
7,857
|
|
General and administrative
|
|
|
6,325
|
|
|
6,679
|
|
|
6,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
27,438
|
|
|
26,471
|
|
|
24,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(6,607
|
)
|
|
(4,711
|
)
|
|
626
|
|
Other income (Note 12c)
|
|
|
-
|
|
|
150
|
|
|
33
|
|
Financial income, net (Note
12b)
|
|
|
153
|
|
|
662
|
|
|
2,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
taxes
|
|
|
(6,454
|
)
|
|
(3,899
|
)
|
|
2,809
|
|
Income taxes (Note 7)
|
|
|
624
|
|
|
(96
|
)
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(7,078
|
)
|
|
(3,803
|
)
|
|
2,896
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend associated
with beneficial conversion feature of
Preferred shares
|
|
|
(1,981
|
)
|
|
-
|
|
|
-
|
|
Loss attributable to
preferred shareholders
|
|
|
-
|
|
|
-
|
|
|
(449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
attributable to Ordinary shares
|
|
$
|
(9,059
|
)
|
$
|
(3,803
|
)
|
$
|
2,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share
(Note 9):
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per
share attributed to Ordinary shareholders
|
|
$
|
(0.72
|
)
|
$
|
(0.20
|
)
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss)
per share attributed to Ordinary shareholders
|
|
$
|
(0.72
|
)
|
$
|
(0.20
|
)
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
shares used for computing basic net income (loss) per share attributed to
Ordinary shareholders
|
|
|
12,577,392
|
|
|
15,075,881
|
|
|
16,001,148
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
shares used for computing diluted net income (loss) per share attributed to
Ordinary shareholders
|
|
|
12,577,392
|
|
|
15,075,881
|
|
|
16,121,989
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of the consolidated financial statements.
F-5
|
TTI TEAM
TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY
|
|
U.S. dollars in thousands, except share
data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Share capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Accumulated
|
|
|
|
Total
|
|
Total
|
|
|
|
Preferred
A shares
|
|
Ordinary
shares
|
|
Preferred
A shares
|
|
Ordinary
shares
|
|
paid-in
capital
|
|
other
loss *)
|
|
Accumulated
deficit
|
|
comprehensive
income (loss)
|
|
shareholders
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2005
|
|
|
-
|
|
|
11,872,941
|
|
$
|
-
|
|
$
|
1,794
|
|
$
|
58,881
|
|
$
|
(226
|
)
|
$
|
(34,156
|
)
|
|
|
|
$
|
26,293
|
|
Issuance of Convertible Preferred A
shares and warrants, net
|
|
|
6,636,391
|
|
|
|
|
|
754
|
|
|
-
|
|
|
12,584
|
|
|
-
|
|
|
-
|
|
|
|
|
|
13,338
|
|
Deemed dividend associated with beneficial
Conversion feature of Preferred
A shares
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,981
|
|
|
-
|
|
|
(1,981
|
)
|
|
|
|
|
-
|
|
conversion of Convertible Preferred A
shares
|
|
|
(2,000,000
|
)
|
|
2,000,000
|
|
|
(228
|
)
|
|
228
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss - unrealized
losses on available-for-sale marketable securities, net of impairment *)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(110
|
)
|
|
-
|
|
$
|
(110
|
)
|
|
(110
|
)
|
Net loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7,078
|
)
|
|
(7,078
|
)
|
|
(7,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(7,188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
|
4,636,391
|
|
|
13,872,941
|
|
|
526
|
|
|
2,022
|
|
|
73,446
|
|
|
(336
|
)
|
|
(43,215
|
)
|
|
|
|
|
32,443
|
|
Exercise of warrants
|
|
|
-
|
|
|
427,490
|
|
|
-
|
|
|
46
|
|
|
1,022
|
|
|
-
|
|
|
-
|
|
|
|
|
|
1,068
|
|
conversion of Convertible Preferred A
shares
|
|
|
(1,700,000
|
)
|
|
1,700,000
|
|
|
(192
|
)
|
|
192
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
Share-based compensation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
451
|
|
|
-
|
|
|
-
|
|
|
|
|
|
451
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss - realized gain
on available-for-sale marketable securities, net of impairment *)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
336
|
|
|
-
|
|
$
|
336
|
|
|
336
|
|
Net loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,803
|
)
|
|
(3,803
|
)
|
|
(3,803
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
2,936,391
|
|
|
16,000,431
|
|
|
334
|
|
|
2,260
|
|
|
74,919
|
|
|
-
|
|
|
(47,018
|
)
|
|
-
|
|
|
30,495
|
|
Exercise of warrants
|
|
|
-
|
|
|
2,727
|
|
|
-
|
|
|
1
|
|
|
6
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7
|
|
Share-based compensation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
113
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
113
|
|
Cumulative effect of FIN48 adoption
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(75
|
)
|
|
-
|
|
|
(75
|
)
|
Net income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,896
|
|
$
|
2,896
|
|
|
2,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
2,936,391
|
|
|
16,003,158
|
|
$
|
334
|
|
$
|
2,261
|
|
$
|
75,038
|
|
|
-
|
|
$
|
(44,197
|
)
|
|
|
|
$
|
33,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*) Accumulated
other comprehensive income (loss) on account of unrealized gains (losses) on
available-for-sale marketable securities.
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
|
TTI TEAM
TELECOM INTERNATIONAL 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)
|
|
$
|
(7,078
|
)
|
$
|
(3,803
|
)
|
$
|
2,896
|
|
Adjustments required to reconcile net
income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,258
|
|
|
2,589
|
|
|
1,964
|
|
Impairment of capitalized software
development costs
|
|
|
177
|
|
|
-
|
|
|
-
|
|
Gain from sale of property and equipment
|
|
|
(157
|
)
|
|
(73
|
)
|
|
(221
|
)
|
Amortization of premium and accretion of
accrued interest on available-for-sale marketable debt securities
|
|
|
411
|
|
|
1,305
|
|
|
-
|
|
Accrued interest on short-term bank
deposits
|
|
|
27
|
|
|
(23
|
)
|
|
(4
|
)
|
Accrued severance pay, net
|
|
|
(142
|
)
|
|
513
|
|
|
319
|
|
Share-based compensation
|
|
|
-
|
|
|
451
|
|
|
113
|
|
Decrease (increase) in trade
receivables, net
|
|
|
2,855
|
|
|
(764
|
)
|
|
(3,521
|
)
|
Decrease (increase) in unbilled
receivables
|
|
|
527
|
|
|
(1,870
|
)
|
|
(321
|
)
|
Increase (decrease) in balance with
related parties
|
|
|
(217
|
)
|
|
34
|
|
|
3,856
|
|
Decrease (increase) in other accounts
receivable and prepaid expenses
|
|
|
1,047
|
|
|
(47
|
)
|
|
(927
|
)
|
Decrease (increase) in long-term trade
and unbilled receivables
|
|
|
(669
|
)
|
|
613
|
|
|
3,324
|
|
Increase (decrease) in trade payables
|
|
|
(1,678
|
)
|
|
641
|
|
|
(144
|
)
|
Increase (decrease) in deferred revenues
|
|
|
5,584
|
|
|
(1,893
|
)
|
|
(3,667
|
)
|
Increase (decrease) in other accounts
payable and accrued expenses
|
|
|
1,792
|
|
|
(276
|
)
|
|
(502
|
)
|
Landlord lease incentive
|
|
|
-
|
|
|
-
|
|
|
499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities
|
|
|
4,737
|
|
|
(2,603
|
)
|
|
3,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Investment in short-term and long-term
bank deposits
|
|
|
(2,487
|
)
|
|
(188
|
)
|
|
(2,000
|
)
|
Proceeds from short-term bank deposits
|
|
|
2,901
|
|
|
1,984
|
|
|
2,987
|
|
Investment in available-for-sale
marketable securities
|
|
|
(19,148
|
)
|
|
-
|
|
|
-
|
|
Proceeds from sale of available-for-sale
marketable securities
|
|
|
15,540
|
|
|
14,744
|
|
|
-
|
|
Purchase of property and equipment
|
|
|
(1,145
|
)
|
|
(1,746
|
)
|
|
(4,318
|
)
|
Proceeds from sale of property and
equipment
|
|
|
293
|
|
|
117
|
|
|
372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing
activities
|
|
|
(4,046
|
)
|
|
14,911
|
|
|
(2,959
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Long-term debt from landlord
|
|
|
-
|
|
|
-
|
|
|
1,286
|
|
Short-term bank credit
|
|
|
(967
|
)
|
|
-
|
|
|
-
|
|
Proceeds from issuance of Convertible
Preferred A shares and warrants, net
|
|
|
12,838
|
|
|
-
|
|
|
-
|
|
Exercise of warrants
|
|
|
-
|
|
|
1,068
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
11,871
|
|
|
1,068
|
|
|
1,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
12,562
|
|
|
13,376
|
|
|
1,998
|
|
Cash and cash equivalents at the
beginning of the year
|
|
|
5,472
|
|
|
18,034
|
|
|
31,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of
the year
|
|
$
|
18,034
|
|
$
|
31,410
|
|
$
|
33,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flows
information:
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
$
|
171
|
|
$
|
1,707
|
|
$
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
Reclassification of receivables on
account of Convertible Preferred A shares
|
|
$
|
500
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-7
|
TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share data
|
|
|
|
|
a.
|
TTI Team
Telecom International Ltd. (TTI or the Company), an Israeli corporation,
was incorporated in 1990 and commenced its operations in September 1992.
|
|
|
|
|
|
The Company
designs, develops, markets and supports network management and operations
support system software for the communications industry.
|
|
|
|
|
|
The Companys
Netrac family of products performs and manages functions critical to the
operations of telecommunications service providers, such as fault management
- monitoring equipment performance to detect and analyze failures,
performance management - providing traffic analysis and quality of statistics
service, configuration management - managing physical and logical
connectivity within the network and security management - controlling and
protecting access to data and applications.
|
|
|
|
|
|
The Company
has wholly-owned subsidiaries in the U.S., the Netherlands, the U.K., India,
Malta, Costa-Rica, South Africa, Australia and Hong-Kong.
|
|
|
|
|
|
As to
principal markets and customers, see Note 11.
|
|
|
|
|
b.
|
Termination
of agreements:
|
|
|
|
|
|
On November
13, 2002, the Company received a letter of termination from a major customer,
regarding an agreement signed on January 30, 2002. The customer also
obtained, after a court hearing, the payment of a performance bond issued by
a bank on the Companys behalf under the agreement. On January 23, 2003, the
bond in the amount of approximately £ 1 million ($1.96 million) was paid
to the customer.
|
|
|
|
|
|
The Company
believed that this customer terminated the agreement unlawfully, and in
violation of the termination provisions set out in the agreement. Over the
last couple of years the parties filed claim and counter claim against each
other about the termination of this agreement.
|
|
|
|
|
|
In July
2007, the parties signed a settlement and release agreement under which the
Company received from the customer £ 1.7 million ($3.45 million)
(without admission of liability) and both parties released their claims
against each other.
|
|
|
|
|
|
No gain or
loss has been recorded during 2007 as a result of the settlement agreement
since the company maintained the above amount in previous years on its
financial statements as long term receivable.
|
F-8
|
TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share data
|
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES
|
|
|
|
The
consolidated financial statements have been prepared according to United
States generally accepted accounting principles (U.S. GAAP), applied on a
consistent basis, as follows:
|
|
|
|
Use of estimates:
|
|
|
|
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from these estimates.
|
|
|
|
Financial statements in United States dollars:
|
|
|
|
A majority
of the revenues of the Company and its subsidiaries is generated in United
States dollars (dollar). The Companys management believes that the dollar
is the primary currency of the economic environment in which the Company and
its subsidiaries operate. Thus, the functional and reporting currency of the
Company and its subsidiaries is the dollar.
|
|
|
|
Accordingly,
monetary accounts maintained in currencies other than the dollar are
remeasured into U.S. 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 statement of operations as financial income or expenses,
as appropriate.
|
|
|
|
Principles of consolidation:
|
|
|
|
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. Intercompany transactions and balances have been
eliminated upon consolidation.
|
|
|
|
Cash and Cash equivalents:
|
|
|
|
Cash and
cash equivalents include short-term, highly liquid investments that are
readily convertible to cash with maturities of three months or less at
acquisition.
|
|
|
|
Short-term and long-term bank deposits:
|
|
|
|
Short-term
bank deposits are deposits with maturities of more than three months but less
than one year. The deposits are in U.S. dollars and bear interest at an
average rate of 4.01% and 4.10% for 2006 and 2007, respectively. The
short-term deposits are presented at their cost, including accrued interest.
|
|
|
|
Long-term
bank deposits are deposits with maturities of more than one year, are
included in long-term investments and presented at their cost. The deposits
are in U.S. dollars and bear interest at an average rate of 4.10% for 2006.
As of December 31, 2007 there was no long-term bank deposit.
|
F-9
|
TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share data
|
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
|
|
Investment in another company:
|
|
|
|
The
investment in this company is stated at cost since the Company does not have
the ability to exercise significant influence over operating and financial
policies of the investee.
|
|
|
|
The
Companys investment in the other company is reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an investment
may not be recoverable, in accordance with Accounting Principle Board Opinion
No. 18, The Equity Method of Accounting for Investments in Common Stock
(APB No. 18). As of December 31, 2007, no impairment losses have been
identified.
|
|
|
|
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
|
|
|
6 - 15
|
|
Motor
vehicles
|
|
|
15
|
|
Leasehold improvements
|
|
|
Over the shorter of the term of the lease
|
|
|
|
|
or useful life
|
|
|
|
|
Impairment of long-lived assets:
|
|
|
|
The long-lived
assets of the Company and its subsidiaries are reviewed for impairment in
accordance with SFAS No. 144, Accounting for the Impairment for 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 assets. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. During 2006 and 2007, no
impairment was identified.
|
|
|
|
Income taxes:
|
|
|
|
The Company and its subsidiaries
account for income taxes in accordance with SFAS No. 109, Accounting for Income
Taxes. This Statement prescribes the use of the liability method whereby deferred
tax asset and liability account balances are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are expected to
reverse. The Company and its subsidiaries provide a valuation allowance, if necessary, to
reduce deferred tax assets to their estimated realizable value. As of December 31, 2007, a
full valuation allowance was provided by the Company. See Note 7j for the impact of
adoption of FIN 48, Accounting for uncertainty in Income Taxes.
|
F-10
|
TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share data
|
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
|
|
Revenue recognition:
|
|
|
|
The Company
and its subsidiaries market their products to telecommunications service
providers both directly and through alliances with leading vendors of
computer hardware, telecommunications equipment, test systems, and probes.
The Companys products have been licensed to various types of telecommunications
operators. The Companys software licenses require significant customization,
integration, installation and development services. The Company also
generates revenues from maintenance and customer support services.
|
|
|
|
Revenues are
recognized based on Statement of Position No. 81-1, Accounting for
Performance of Construction - Type and Certain Production - Type Contracts
(SOP 81-1), using contract accounting using the percentage of completion
method based on the relationship of actual labor days incurred to total labor
days estimated to be incurred over the duration of the project to which the
contract relates. In general, the Company divides each project into three
distinct periods: (i) a functional specification period, (ii) an implementation
period and (iii) a stabilization period. A project is considered completed
when the stabilization period is over.
|
|
|
|
The Company
believes that the use of the percentage of completion method is appropriate
as the Company has the ability to make reasonably dependable estimates of the
extent of progress towards completion, contract revenues and contract costs.
In addition, contracts executed include provisions that clearly specify the
enforceable rights regarding services to be provided and received by the
parties to the contracts, the consideration to be exchanged and the manner
and terms of settlement.
|
|
|
|
In all cases
the Company expects to perform its contractual obligations and its licensees
are expected to satisfy their obligations under the contract.
|
|
|
|
According to
SOP 81-1, costs that are incurred for a specific anticipated contract prior
to the existence of a persuasive evidence of an agreement are deferred,
subject to evaluation of their probable recoverability, and only if the costs
can be directly associated with a specific anticipated contract. Such
deferred costs are recorded as pre-contract costs, in other accounts
receivable and prepaid expenses. As of December 31, 2006 and 2007, the
Company does not have such deferred costs.
|
|
|
|
Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined in the amount of the estimated loss on the entire
contract. As of December 31, 2006 and 2007, no such estimated losses
were identified.
|
|
|
|
Unbilled
receivables include all amounts which were recognized as revenues and had not
been billed as of the balance sheet date due to contractual or other
arrangements with customers.
|
F-11
|
TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share data
|
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
|
|
Estimated
gross profit or loss from long-term contracts may change due to changes in
estimates resulting from differences between actual performance and original
forecasts. Such changes in estimated gross profit are recorded in results of
operations when they are reasonably determinable by management, on a
cumulative catch-up basis.
|
|
|
|
Service
revenues primarily consist of fees from maintenance and customer support.
Revenues from maintenance and support contracts are recognized ratably over
the term of the agreement, which is typically one year, or at the time when
services are rendered.
|
|
|
|
Deferred revenues
are recognized for payments received under maintenance and support contracts
in advance of the culmination of the earning process.
|
|
|
|
Research and development costs:
|
|
|
|
Research and
development costs incurred in the process of developing product improvements
or new products, are generally charged to expenses, as incurred.
|
|
|
|
SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold Leased or Otherwise
Marketed (SFAS No. 86), requires capitalization of certain software
development costs, subsequent to the establishment of technological
feasibility. Based on the Companys product development process,
technological feasibility is established upon completion of a working model. No software
development costs were capitalized in 2005, 2006 and 2007.
|
|
|
|
Royalty and non-royalty bearing grants:
|
|
|
|
Royalty-bearing
grants from the Government of Israel and others for the funding of approved
research and development projects are recognized at the time the Company is
entitled to such grants on the basis of the related costs incurred and
recorded as a reduction in research and development costs.
|
|
|
|
During 2005 and 2006, the Company
received non-royalty-bearing grants for its participation in the MAGNET
project financed by the Government of Israel. In addition, in 2004 the Company received
non-royalty-bearing grants from the European Union as part of participation in a
consortium of companies engaged in the development of a platform for the management and
control of IP over optical networks (DWDM). Grants from the European Union and
MAGNET projects are not required to be repaid and are recognized at the time
the Company is entitled to such grants on the basis of the related costs incurred and
recorded as a reduction in research and development costs.
|
|
|
|
Concentrations of credit risk:
|
|
|
|
Financial
instruments that potentially subject the Company and its subsidiaries to
concentrations of credit risk consist principally of cash and cash
equivalents, short-term bank deposits and trade and unbilled receivables.
|
F-12
|
TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share data
|
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
|
|
The
Companys and its subsidiaries cash and cash equivalents and short-term bank
deposits are mainly invested in U.S. dollar deposits with major Israeli and
U.S. banks. Such deposits in the United States may be in excess of insured
limits and are not insured in other jurisdictions. Management believes that
the financial institutions that hold the Companys and its subsidiaries
investments are financially sound, and accordingly, minimal credit risk
exists with respect to these investments.
|
|
|
|
The Companys
revenue is generated primarily in the United States and Europe. To a lesser
extent, revenue is generated in Israel, South Africa and South America. Most
customers are among the largest telecommunications companies in the world.
Concentration of credit risk with respect to trade and unbilled receivables
is limited by ongoing credit evaluation and account monitoring procedures.
The Company evaluates accounts receivable to determine if they will
ultimately be collected. In performing this evaluation, significant judgments
and estimates are involved, such as past experience, credit quality of the
customer, age of the receivable and current economic conditions that may
affect a customers ability to pay. An allowance for doubtful accounts is
determined with respect to those specific amounts that the Company and its
subsidiaries have determined to be doubtful of collection.
|
|
|
|
The Company
and its subsidiaries have no off-balance-sheet concentration of credit risk
such as foreign exchange contracts, option contracts or other foreign hedging
arrangements.
|
|
|
|
Basic and diluted net earning (loss) per share:
|
|
|
|
The Company
applies the two class method as required by EITF No. 03-6, Participating
Securities and the Two-Class Method under FASB Statement No. 128 (EITF No.
03-6). EITF No. 03-6 requires the income (loss) per share for each class of
shares (ordinary 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.
|
|
|
|
Basic net
income (loss) per share is computed based on the weighted average number of
shares of Ordinary Shares outstanding during each year. Diluted net income
(loss) per share is computed based on the weighted-average number of shares
of common stock outstanding during the period, plus dilutive potential shares
considered outstanding during the period, in accordance with Statement of
Financial Standard No. 128, Earnings Per Share.
|
|
|
|
For the
years ended December 31, 2005 and 2006 all outstanding options and warrants
were excluded from the calculations of diluted net income (loss) per share,
since they would have an anti-diluted effect. For the year ended December 31,
2007, all outstanding options have been excluded from the calculation of the
diluted earning per share.
|
F-13
|
TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share data
|
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
|
|
Accounting for stock-based compensation:
|
|
|
|
On
January 1, 2006, the Company 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 for
all share-based payment awards made to employees and directors including
employee stock options under the Companys stock plans based on estimated
fair values. SFAS 123(R) supersedes the Companys previous accounting under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees (APB 25) for periods beginning in fiscal 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 expense
over the requisite service periods in the Companys consolidated statement of
operations. Prior to the adoption of SFAS 123(R), the Company accounted for
equity-based awards to employees and directors using the intrinsic value
method in accordance with APB 25 as allowed under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123).
|
|
|
|
No
stock-based employee compensation costs were recognized in the Statement of
Operations in the year ended December 31, 2005, as all options granted in
that period had an exercise price equal or higher then the market value of
the underlying ordinary share on the date of grant.
|
|
|
|
The Company
adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard as of January 1,
2006, the first day of the Companys fiscal year 2006. Under that transition
method, compensation cost recognized in the year ended December 31, 2007 and
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 SFAS 123(R). As required by the modified
prospective method results for prior periods have not been restated. The
Company recognized compensation expenses for the value of these awards, which
has graded vest on the accelerated attribution method over the requisite
service period of each of the award, net of estimated forfeitures. Estimated
forfeitures were based on actual historical pre-vesting forfeitures.
|
|
|
|
The fair
value for options granted in 2005, 2006 and 2007 is amortized over their
vesting period and is estimated at the date of grant using a Black-Scholes
options pricing model with the following weighted average assumptions:
|
F-14
|
TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share data
|
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
Employee stock options
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
57
|
%
|
|
45
|
%
|
|
45
|
%
|
|
Risk-free interest
|
|
4.5
|
%
|
|
5
|
%
|
|
5
|
%
|
|
Dividend yield
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
Expected life of up to (years)
|
|
2.6
|
|
|
3.4
|
|
|
3.5
|
|
|
|
|
|
The
computation of expected volatility is based on realized historical stock
price volatility of the Company. The Company used the simplified method to
establish the expected term of the awards as allowed under SAB 107. The
interest rate for period within the contractual life of the award is based on
the U.S. Treasury yield curve in effect at the time of grant.
|
|
|
|
The Company
recognizes these compensation costs net of a forfeiture rate for only those
shares expected to vest on accelerated attribution basis over the requisite
service period of the award, which is generally the option vesting term of
one to three years. SFAS 123(R) requires forfeitures to be estimated at the
time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.
|
|
|
|
The pro
forma information regarding net loss per share required by SFAS No. 123 has
been determined as if the Company accounted for its stock-based compensation
plans under the fair value method. Had compensation cost for its stock-based
compensation plans been determined in accordance with SFAS No. 123, its net
loss and loss per share would have been reduced to the pro forma amounts
indicated below:
|
|
|
|
|
|
|
|
Year ended
December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
Net loss, as
reported
|
|
$
|
(9,059
|
)
|
Add: Stock-based employee compensation intrinsic value
|
|
|
-
|
|
Deduct:
Stock-based compensation expense determined under fair value method
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
Pro forma
net loss
|
|
$
|
(9,140
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted net loss per share, as reported
|
|
$
|
(0.72
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted net loss per share, pro forma
|
|
$
|
(0.73
|
)
|
|
|
|
|
|
|
|
|
Fair value of financial instruments:
|
|
|
|
The
following methods and assumptions were used by the Company and its
subsidiaries in estimating their fair value disclosures for financial
instruments:
|
|
|
|
The carrying
amount reported in the balance sheet for cash and cash equivalents,
short-term bank credit, trade receivables, unbilled receivables, trade
payables and related parties approximates their fair value due to the
short-term maturities of such instruments.
|
F-15
|
TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share data
|
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
|
|
Severance pay:
|
|
|
|
The
Companys liability for severance pay is calculated pursuant to Israels
Severance Pay Law based on the most recent salary of the employees multiplied
by the number of years of employment, as of the balance sheet date. Employees
are entitled to one months salary for each year of employment or a portion
thereof. The Companys liability for all of its employees is fully provided
by monthly deposits with insurance policies and by an accrual.
|
|
|
|
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 Israels 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
pay expenses for the years ended December 31, 2005, 2006 and 2007 were $961,
$1,236 and $964, respectively.
|
|
|
|
Advertising expenses:
|
|
|
|
Advertising
expenses are charged to the statements of operations as incurred. Advertising
expenses for the years ended December 31, 2005, 2006 and 2007 were $64, $110
and $140, respectively.
|
|
|
|
Comprehensive income (loss):
|
|
|
|
The Company
accounts for comprehensive income in accordance with SFAS No. 130, Reporting
Comprehensive Income. This Statement establishes standards for the reporting
and display of comprehensive income and its components in a full set of
general purpose financial statements. Comprehensive income generally
represents all changes in shareholders equity during the period except those
resulting from investments by, or distributions to, shareholders. The Company
determined that their only item of comprehensive income relates to unrealized
losses on available-for-sale marketable securities.
|
F-16
|
TTI TEAM TELECOM INTERNATIONAL LTD.
AND ITS SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share data
|
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
|
|
Impact of recently issued accounting standards:
|
|
|
|
In December
2007, the FASB issued SFAS 141(R), Business Combinations (SFAS No. 141(R)).
This Statement replaces SFAS 141, Business Combinations (SFAS No. 141), and
requires an acquirer to recognize the assets acquired, the liabilities
assumed, including those arising from contractual contingencies, any
contingent consideration, and any noncontrolling interest in the acquiree at
the acquisition date, measured at their fair values as of that date, with
limited exceptions specified in the statement. SFAS 141(R) also requires the
acquirer in a business combination achieved in stages (sometimes referred to
as a step acquisition) to recognize the identifiable assets and liabilities,
as well as the noncontrolling interest in the acquiree, at the full amounts
of their fair values (or other amounts determined in accordance with SFAS
141(R)). In addition, SFAS 141(R)s requirement to measure the noncontrolling
interest in the acquiree at fair value will result in recognizing the
goodwill attributable to the noncontrolling interest in addition to that
attributable to the acquirer. SFAS 141(R) amends SFAS No. 109, Accounting for
Income Taxes (SFAS No. 109), to require the acquirer to recognize changes
in the amount of its deferred tax benefits that are recognizable because of a
business combination either in income from continuing operations in the
period of the combination or directly in contributed capital, depending on
the circumstances.
|
|
|
|
It also
amends SFAS 142, Goodwill and Other Intangible Assets (SFAS No. 142), to,
among other things, provide guidance on the impairment testing of acquired
research and development intangible assets and assets that the acquirer
intends not to use. SFAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after December 15, 2008.
The Company does not expect that the adoption of SFAS 141R will have any
impact on its consolidated financial statements.
|
|
|
|
In December
2007, the FASB issued SFAS 160 (SFAS No. 160), Noncontrolling Interests in
Consolidated Financial Statements. SFAS 160 amends Accounting Research
Bulletin 51, Consolidated Financial Statements, to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. It also clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial statements.
SFAS 160 also changes the way the consolidated income statement is presented
by requiring consolidated net income to be reported at amounts that include
the amounts attributable to both the parent and the noncontrolling interest.
It also requires disclosure, on the face of the consolidated statement of
income, of the amounts of consolidated net income attributable to the parent
and to the noncontrolling interest. SFAS 160 requires that a parent recognize
a gain or loss in net income when a subsidiary is deconsolidated and requires
expanded disclosures in the consolidated financial statements that clearly
identify and distinguish between the interests of the parent owners and the
interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective
for fiscal periods, and interim periods within those fiscal years, beginning
on or after December 15, 2008. The Company does not expect the adoption of
SFAS No. 160 will have significant impact on its consolidated financial
statement.
|
F-17
|
TTI TEAM
TELECOM INTERNATIONAL LTD.
|
AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share
data
|
|
|
NOTE 2:-
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
|
|
In September
2006, the FASB issued Statement No. 157, Fair value Measurements (SFAS
157). SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157 applies under other
accounting pronouncements that require or permit fair value measurements. The
provisions of SFAS 157 are effective for the Company beginning January 1,
2008. The FASB issued a FASB Staff position to defer the effective date of
SFAS 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
except the adoption will have material impact on its consolidated financial
statements.
|
|
|
|
In February
2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159). SFAS 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 be reported in earnings. The
provisions of SFAS 159 are effective for the Company beginning January 1,
2008. The Company does not expect the adoption of SFAS 159 will have an
impact on its consolidated financial statements.
|
|
|
NOTE 3:-
|
OTHER ACCOUNTS RECEIVABLE AND PREPAID
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Landlord (1)
|
|
$
|
-
|
|
$
|
1,339
|
|
Prepaid expenses
|
|
|
1,059
|
|
|
1,083
|
|
employees
|
|
|
313
|
|
|
300
|
|
Government authorities
|
|
|
376
|
|
|
-
|
|
Others
|
|
|
517
|
|
|
470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,265
|
|
$
|
3,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Receivable
with respect to investments in the new leased office in Israel that according
to the agreement should be reimbursed by the landlord. See also Note 6a.
|
F-18
|
TTI TEAM
TELECOM INTERNATIONAL LTD.
|
AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share
data
|
|
|
NOTE 4:-
|
PROPERTY AND EQUIPMENT, NET
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost:
|
|
|
|
|
|
|
|
Computers and peripheral
equipment
|
|
$
|
14,224
|
|
$
|
15,070
|
|
Office furniture and
equipment
|
|
|
1,439
|
|
|
1,721
|
|
Motor vehicles
|
|
|
4,422
|
|
|
4,237
|
|
Leasehold improvements
|
|
|
3,527
|
|
|
5,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,612
|
|
|
26,666
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation:
|
|
|
|
|
|
|
|
Computers and peripheral
equipment
|
|
|
12,886
|
|
|
13,818
|
|
Office furniture and
equipment
|
|
|
945
|
|
|
1,055
|
|
Motor vehicles
|
|
|
2,815
|
|
|
2,268
|
|
Leasehold improvements
|
|
|
3,124
|
|
|
3,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,770
|
|
|
20,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciated cost
|
|
$
|
3,842
|
|
$
|
6,045
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expenses for the years ended
December 31, 2005, 2006 and 2007 were $2,154, $2,589 and $1,964,
respectively.
|
|
|
NOTE 5:-
|
OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees and payroll accruals
|
|
$
|
4,621
|
|
$
|
4,467
|
|
Accrued expenses
|
|
|
1,721
|
|
|
1,701
|
|
Government authorities
|
|
|
567
|
|
|
494
|
|
Others
|
|
|
278
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,187
|
|
$
|
6,966
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6:-
|
COMMITMENTS AND CONTINGENT LIABILITIES
|
|
|
|
|
a.
|
Lease
commitments:
|
|
|
|
|
|
The Company
and its subsidiaries rent their facilities and motor vehicles under various
operating lease agreements, which expire on various dates, the latest of
which is in 2014.
|
|
|
|
|
|
In March
2007, the Company signed a new lease agreement in Israel. Under this
agreement the Company leases, starting December 2007 a new facility for its
principal office. The lease is scheduled to expire in December 2014 and the
annual rent is approximately $825.
|
F-19
|
TTI TEAM
TELECOM INTERNATIONAL LTD.
|
AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share
data
|
|
|
NOTE 6:-
|
COMMITMENTS AND CONTINGENT LIABILITIES
(Cont.)
|
|
|
|
|
|
Aggregate
minimum rental commitments under non-cancelable leases at December 31, 2007
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
Facilities
|
|
Motor
vehicles
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
1,363
|
|
|
48
|
|
|
1,411
|
|
2009
|
|
|
1,191
|
|
|
26
|
|
|
1,217
|
|
2010
|
|
|
1,177
|
|
|
8
|
|
|
1,185
|
|
2011
|
|
|
1,082
|
|
|
-
|
|
|
1,082
|
|
2012
|
|
|
825
|
|
|
-
|
|
|
825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,638
|
|
$
|
82
|
|
$
|
5,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
lease expenses for the years ended December 31, 2005, 2006 and 2007 were
$1,657, $1,432 and $1,409, respectively.
|
|
|
|
|
|
Motor
vehicle lease expenses for the years ended December 31, 2005, 2006 and 2007
were approximately $122, $106 and $102, respectively.
|
|
|
|
|
|
In December
2007, the Company relocated its offices in Israel.
|
|
|
|
|
|
The new lease
term will be 7 years and the Company will have the option to extend the lease
period for additional 3 years. The monthly payments will be between $32 to
$36. According to the agreement the Company made leasehold improvements that
were funded partly by a loan from the landlord and partly by landlord
incentives. The leasehold improvements were recorded as leasehold improvement
assets and they are being amortized over the shorter of their economic lives
or the lease term.
|
|
|
|
|
|
The
incentives from the landlord were recorded as deferred rent and amortized as
reductions to lease expense over the lease term in accordance with SFAS 13
and the response to Question 2 of FASB Technical Bulletin 88-1 (FTB 88-1),
Issues Relating to Accounting for Leases.
|
|
|
|
|
|
The loan from the landlord was
recorded at its estimated fair value using discounted cash flow method. The loan bears no
interest.
|
|
|
|
|
|
As of
December 31, 2007, the Companys leasehold improvements assets are in an
amount of $2,093 of which $498 were funded by landlord incentives and $1,286
as landlord loan.
|
F-20
|
TTI TEAM
TELECOM INTERNATIONAL LTD.
|
AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share
data
|
|
|
NOTE 6:-
|
COMMITMENTS AND CONTINGENT LIABILITIES
(Cont.)
|
|
|
|
|
|
|
The loan
from the landlord was recorded at its estimated fair value using discounted
cash flow method Present Value in accounting measurements. As a result, the
loan bears no interest. If that information is not available without undue
cost and effort, an entity may use its own estimates of fair value. In this
case the company took interest of 9.58% which represents the company market
condition.
|
|
|
|
|
|
|
As of
December 31, 2007, the Companys leasehold improvements are in an amount of
$2,093 thousand of which $498 were funded by landlord incentives and $1,286
as loan.
|
|
|
|
|
|
b.
|
Royalty
commitments:
|
|
|
|
|
|
Under the
Companys research and development agreements with the Office of the Chief
Scientist (OCS) and the Binational Industrial Research and Development Foundation
(BIRD-F), and pursuant to applicable laws, the Company is required to pay
royalties at the rate of 3%-5% of sales of products developed with funds
provided by the OCS and BIRD-F, up to an amount equal to 100%-150% of the
research and development grants (dollar-linked) received from the OCS and
BIRD-F. The obligation to pay these royalties is contingent on actual sales
of the products and, in the absence of such sales, no payment is required.
Royalties payable with respect to grants received under programs approved by
the OCS after January 1, 1999, are subject to interest on the U.S.
dollar-linked value of the total grants received at the annual rate of LIBOR
applicable to U.S. dollar deposits. Royalties payable with respect to grants
received from BIRD-F are linked to the Consumer Price Index in the United
States.
|
|
|
|
|
|
The Company has paid or
accrued royalties relating to the repayment of such grants in the amount of $
10, $ 2 and $0.6 for the years ended December 31, 2005, 2006 and 2007,
respectively. The amounts were recorded in the cost of revenues.
|
|
|
|
|
|
As of
December 31, 2007, the Company has an outstanding contingent obligation to
pay royalties in the amount of approximately $ 2,743 in respect of these
grants. Management believes that none of its product sales is currently
subject to OCS and BIRD-F royalties payment.
|
F-21
|
TTI TEAM
TELECOM INTERNATIONAL LTD.
|
AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share
data
|
|
|
NOTE 6:-
|
COMMITMENTS AND CONTINGENT LIABILITIES
(Cont.)
|
|
|
|
|
c.
|
Guarantees:
|
|
|
|
|
|
The Company
has obtained performance guarantees in favor of certain customers from
several banks in Israel amounting to $1,809 and $3,109 for the years ended
December 31, 2006 and 2007, respectively.
|
|
|
|
|
|
The Company
has obtained other guarantees in favor of facility and car leases from bank
in Israel amounting to $62 and $409 for the years ended December 31, 2006 and
2007, respectively.
|
|
|
|
|
d.
|
Litigation:
|
|
|
|
|
|
Securities class
action:
|
|
|
|
|
|
A
shareholders class action lawsuit was filed in September 2004 against the
Company, Team Software Industries Ltd. and certain of the Companys executive
officers. The lawsuit purports to be a class action filed on behalf of
persons who held the Companys shares during the period between February 6,
2002 and November 14, 2002. The complaint alleges that material
misrepresentations and omissions concerning the Companys operations and
performance artificially inflated the Companys stock price, causing damages
to investors.
|
|
|
|
|
|
The Company
filed a motion to dismiss the complaint which motion was granted by an
opinion dated October 6, 2006. The opinion dismissed the amended and
consolidated complaint but granted plaintiff the right to file a second
amended and consolidated complaint. The second amended and consolidated
complaint was filed in November 9, 2006. The Company filed a motion to
dismiss the second amended and consolidated complaint in January 10, 2007,
which motion was denied with respect to the Company by order dated May 2007.
The Company filed an answer to the second amended and consolidated complaint
which denied its material allegations. A mediation to explore the possibility
of resolving this matter was held in November 2007. An agreement in principle
was reached and memorandum of understanding outlining such agreement was
executed in December 2007. The Company is now in the process of preparing the
documents and seeking approval of the court necessary to finalize the settlement,
which is being paid by the Companys directors and officers insurance
carrier.
|
|
|
|
|
e.
|
In April
2006, in connection with the Companys cancellation of a purchase order from
Embarcadero Technologies Inc (Embarco). Embarcadero filed a lawsuit against
the Company in the San
Francisco Superior Court, alleging among other things, breach of contract and
intentional misrepresentation. The Company answered and counterclaimed for
negligent and intentional misrepresentation based on false representation
made by Embarcaderos salesperson. Mediation of this case during January 2007
did not resolve the dispute. In April 2007, the parties signed a settlement
and release agreement under which the Company paid Embarcadero $90 (without
admission of liability) and both parties releases their claims against each
other.
|
|
|
|
|
f.
|
Dispute with
respect to balance with related party shareholder, See Note 10b.
|
F-22
|
TTI TEAM
TELECOM INTERNATIONAL LTD.
|
AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share
data
|
|
|
|
|
a.
|
Measurement
of taxable income:
|
|
|
|
|
|
Under the
Income Tax (Inflationary Adjustments) Law, 1985 (the Israeli
law), results for tax purposes in Israel are measured in real terms,
in accordance with the changes in the Israeli Consumer Price Index (Israeli
CPI). Accordingly, until 2006, results for tax purposes were measured in
terms of earnings in NIS after certain adjustments for increases in the
Israeli CPI. Commencing in taxable year 2007, the Company has elected to
measure its taxable income and file its tax return under the Israeli Income
Tax Regulations (Principles Regarding the Management of Books of Account of
Foreign Invested Companies and Certain Partnerships and the Determination of
Their Taxable Income), 1986.
|
|
|
|
|
b.
|
Corporate
tax rates:
|
|
|
|
|
|
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.
|
Tax benefits
under the Law for the Encouragement of Capital Investments, 1959 (the law):
|
|
|
|
|
|
Most of the
Companys production facilities in Israel have been granted approved
enterprise status under five separate investment programs and, as such, are
entitled to tax benefits, under the above law. According to the law, the
Company has elected the alternative benefits track, and has waived
Government grants, in return for a tax exemption.
|
|
|
|
|
|
Upon the
Companys Initial Public Offering that occurred in 1996, the Company became a
foreign investment Company for the purposes of the aforementioned law.
Accordingly, the Company is entitled to up to 10-year period of benefits.
Income derived from the Companys investment programs, is tax-exempt for the
first two to four years and is entitled to a reduced tax rate of 10% to 25%,
during the remaining benefit period of five to eight years (subject to the
percentage of foreign ownership in each tax year).
|
|
|
|
|
|
The
investments under the Companys five approved investments programs were
incurred since 1992.
|
|
|
|
|
|
As of
December 31, 2007 the benefit periods of the first and the second programs
were expired. The benefit periods of the third and forth programs will expire
in 2009 and 2011 respectively. The benefit period of the fifth program has
not yet commenced and will end in 2013.
|
|
|
|
|
|
The period
of tax benefits detailed above is subject to limits of 12 years from the year
of commencement of production, or 14 years from the date of granting the
approval, whichever is earlier.
|
F-23
|
TTI TEAM
TELECOM INTERNATIONAL LTD.
|
AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share
data
|
|
|
NOTE 7:-
|
INCOME TAXES (Cont.)
|
|
|
|
|
|
The
entitlement to the above benefits is conditional upon the Companys
fulfilling the conditions stipulated by the above law, regulations published
hereunder and the instruments of approval for the specific investments in the
approved enterprise. 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 is meeting
all of the aforementioned conditions.
|
|
|
|
|
|
Income from
sources other than the approved enterprise will be subject to the statutory
Israeli corporate tax rate. If the retained tax-exempt income were
distributed, it would be taxed at the corporate tax rate applicable to such
profits as if the Company had not chosen the alternative tax benefits (rate
of 10% - 25% based on the percentage of foreign ownership in the Companys
shares) on the gross amount distributed. In addition, these dividends will be
subject to a 15% withholding tax. The Companys Board of Directors has
determined that such tax-exempted income will not be distributed as
dividends. Accordingly, no deferred income taxes have been provided on income
attributable to the Companys Approved Enterprise programs as the undistributed
tax exempt income is essentially permanent in duration. The Company intends
to reinvest its tax exempt income and not to distribute such income as a
dividend.
|
|
|
|
|
|
On April 1,
2005, an amendment to the Investment Law came into effect (the Amendment)
and has significantly changed the provisions of the Investment Law. The
Amendment limits the scope of enterprises which may be approved by the law by setting criteria for the approval of a
facility as a beneficiary enterprise, such as provisions generally 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 Investment Law so that companies no
longer require Investment Center approval in order to qualify for tax
benefits.
|
|
|
|
|
|
However, the Investment Law provides that terms and benefits included
in any certificate of approval already granted will remain subject to the
provisions of the law as they were on the date of such approval. Therefore,
the Companys existing approved enterprise will generally not be subject to
the provisions of the Amendment. As a result of the Amendment, tax-exempt
income generated under the provisions of the new law, will subject the
Company to taxes upon distribution or liquidation and the Company may be
required to record deferred tax liability with respect to such tax-exempt
income.
|
|
|
|
|
d.
|
Tax loss
carryforwards:
|
|
|
|
|
|
Net operating loss carryforwards as
of December 31, 2007 are standing In Israel, the U.S. and the U.K amount to $ 34,140, $
11,348 and $ 11,508, respectively. Other jurisdiction in which the Company operates has
immaterial effect.
|
|
|
|
|
|
Net
operating losses in Israel, and the UK may be carried forward indefinitely.
Net operating losses in the U.S. may be carried forward through periods which
will expire in the years 2023-2027.
|
F-24
|
TTI TEAM
TELECOM INTERNATIONAL LTD.
|
AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share
data
|
|
|
NOTE 7:-
|
INCOME TAXES (Cont.)
|
|
|
|
|
|
Utilization
of U.S. net operating losses may be subject to substantial annual limitation
due to the change in ownership provisions of the Internal Revenue Code of
1986 and similar state provisions. The annual limitation may result in the
expiration of net operating losses before utilization.
|
|
|
|
|
e.
|
Deferred tax
assets:
|
|
|
|
|
|
Deferred tax
assets reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company and its subsidiaries deferred tax assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves and
allowances
|
|
$
|
6,178
|
|
$
|
5,733
|
|
Net operating
loss carryforward - foreign
|
|
|
8,357
|
|
|
7,791
|
|
Net operating
loss carryforward - domestic
|
|
|
7,541
|
|
|
8,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deferred tax assets before valuation allowance
|
|
|
22,076
|
|
|
22,059
|
|
Valuation
allowance
|
|
|
22,076
|
|
|
22,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax
asset
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
and its subsidiaries have provided valuation allowance in respect of deferred
tax assets resulting from the tax loss carry forward. Management currently
believes that it is more likely than not that the deferred tax regarding
these tax loss carryforward and other temporary differences will not be
realized.
|
|
|
|
|
|
|
|
f.
|
Reconciliation
of the theoretical tax expenses:
|
|
|
A
reconciliation between the theoretical tax expense, assuming all income is
taxed at the statutory rate applicable in Israel to income of the Company and
the actual income tax as reported in the statements of operations, is as
follows:
|
F-25
|
TTI TEAM TELECOM
INTERNATIONAL LTD.
|
AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share
data
|
|
|
NOTE 7:-
|
INCOME TAXES (Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes,
as reported in the consolidated statements of operations
|
|
$
|
(6,454
|
)
|
$
|
(3,899
|
)
|
$
|
2,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory tax rate
|
|
|
34
|
%
|
|
31
|
%
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theoretical tax benefit on
the above amount at the Israeli statutory tax rate:
|
|
$
|
(2,194
|
)
|
$
|
(1,209
|
)
|
$
|
815
|
|
Tax adjustment in respect
of foreign subsidiaries different tax rates
|
|
|
123
|
|
|
(84
|
)
|
|
69
|
|
Deferred taxes on losses
for which a valuation allowance was provided
|
|
|
1,855
|
|
|
1,066
|
|
|
598
|
|
|
|
|
|
|
|
|
|
|
|
|
Temporary Differences
|
|
|
-
|
|
|
590
|
|
|
(1,573
|
)
|
Taxes in respect of prior
years
|
|
|
448
|
|
|
(333
|
)
|
|
-
|
|
Tax withholdings and credits
|
|
|
176
|
|
|
18
|
|
|
(274
|
)
|
Other
|
|
|
216
|
|
|
(144
|
)
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (tax benefit),
as reported in the statements of operations
|
|
$
|
624
|
|
$
|
(96
|
)
|
$
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
g.
|
In October
2006, the Company has signed a settlement agreement with the Israeli Tax
Authority (ITA) under which the company will pay to the ITA an amount $780
with regard to the corporate tax assessment for the years 2000 2002. This
agreement is final and concluded the ITA tax assessments for these years. The
Company paid an amount of $780 during December 2006. The remaining tax
accrual previously recorded was reversed against income from taxes.
|
|
h.
|
Taxes on
income are comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current taxes
|
|
$
|
-
|
|
$
|
219
|
|
$
|
(87
|
)
|
Taxes in respect of prior years
|
|
|
624
|
|
|
(315
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
624
|
|
$
|
(96
|
)
|
$
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
754
|
|
$
|
(248
|
)
|
$
|
(274
|
)
|
Foreign
|
|
|
(130
|
)
|
|
152
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
624
|
|
$
|
(96
|
)
|
$
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
F-26
|
TTI TEAM
TELECOM INTERNATIONAL LTD.
|
AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share
data
|
|
|
NOTE 7:-
|
INCOME TAXES (Cont.)
|
|
|
|
|
i.
|
Income
(loss) before taxes is comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(6,914
|
)
|
$
|
(1,319
|
)
|
$
|
4,877
|
|
Foreign
|
|
|
460
|
|
|
(2,580
|
)
|
|
(2,068
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(6,454
|
)
|
$
|
(3,899
|
)
|
$
|
2,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
j.
|
In
July 2006, the FASB issued FASB Interpretation 48, Accounting for
Uncertainty in Income Taxes (FIN 48). FIN 48 defines the threshold for
recognizing the benefits of tax return positions in the financial statements
as more-likely-than-not to be sustained by the taxing authority. The
recently issued literature also provides guidance on derecognition,
measurement and classification of income tax uncertainties, along with any
related interest and penalties. FIN 48 also includes guidance concerning
accounting for income tax uncertainties in interim periods and increases the
level of disclosures associated with any income tax uncertainties.
|
|
|
|
|
|
FIN 48 is
effective for fiscal years beginning after December 15, 2006. The
differences between the amounts recognized in the statements of financial
position prior to the adoption of FIN 48 and the amounts reported after
adoption will be accounted for as a cumulative-effect adjustment recorded to
the beginning balance of retained earnings.
|
|
|
|
|
|
The Company
adopted the provisions of FIN 48 as of January 1, 2007. The impact of
adopting FIN 48 was insignificant impact on the Companys consolidated
financial statements in the total estimated amount of $75. The effect of the
adoption after January 1, 2007 has increased the income tax expense in the
total estimated amount of $17.
|
|
|
|
|
|
Interest
associated with uncertain income tax positions and penalties expense are
classified as income tax expenses. The Company has not recorded any material
interest or penalties during any of the years presented.
|
|
|
|
|
|
A
reconciliation of the beginning and ending balances of the total amounts of
gross unrecognized tax benefits is as follows:
|
|
|
|
|
|
Gross unrecognized tax benefits
at January 1, 2007
|
|
$
|
75
|
|
Increases in tax positions for
current year
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrecognized tax benefits
at December 31, 2007
|
|
$
|
92
|
|
|
|
|
|
|
F-27
|
TTI TEAM
TELECOM INTERNATIONAL LTD.
|
AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share
data
|
|
|
NOTE 8:-
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
a.
|
The
Companys Ordinary shares have been listed for trade on the NASDAQ National
Market since TTIs initial public offering (IPO) on December 4, 1996, under
the symbol TTIL.
|
|
|
|
|
|
In 1999 and 2000,
the Company effected two additional secondary offerings.
|
|
|
|
|
|
The Ordinary
shares confer upon their holders the right to receive notice to participate
and vote in the Companys general meeting and the right to receive dividends,
if declared.
|
|
|
|
|
b.
|
On November
29, 2004, the Company entered into definitive agreements (the Agreements)
to obtain $14,600 in equity financing, through the sale of 6,636,391 of
Series A Convertible Preferred shares in a private placement to institutional
investors (the Preferred shares). The Preferred shares are convertible into
6,636,391 Ordinary shares. In addition, holders of the Preferred shares were
granted one warrant to purchase 0.4 Ordinary shares at an exercise price of
$2.50 per share for each Preferred share owned at any time until January 2011
(the Warrants). The closing of the investment took place on January 3,
2005.
|
|
|
|
|
|
The rights
of the holders of the Preferred shares include, among other things, the
following rights that are subject to certain limitations as described in the
TTIs articles:
|
|
|
|
|
|
1)
|
Standard
anti dilution provisions;
|
|
|
|
|
|
|
2)
|
Preference
in the event of liquidation of the Company;
|
|
|
|
|
|
|
3)
|
Veto rights
over certain material actions by the Company;
|
|
|
|
|
|
|
4)
|
The right to
nominate one member of the Companys Board of Directors.
|
|
|
|
|
|
|
As part of
the agreement, the Company issued warrants to purchase up to 2,654,556 of its
ordinary shares. The warrants are exercisable for a period of six years, at
an exercise price of $2.5 per share. Through December 31, 2007 430,217
warrants were converted into the same number of the Companys ordinary
shares.
|
|
|
|
|
|
In addition,
as part of the Agreement, the placement agent of the investment was granted
warrants exercisable for the purchase of up to 371,678 of the Companys
Ordinary shares. The placement agents warrants are exercisable at a price
per Ordinary share of $2.64, at any time until January 2009. As of December
31, 2007, none of these warrants were converted into the Companys Ordinary
shares.
|
|
|
|
|
|
In
connection with the issuance of the Preferred shares and the Warrants, the
Company has applied EITF 00-27, Application of Issue No. 98-5 to Certain
Convertible Instruments, (EITF 00-27) which resulted in the recognition of
$1,981 related to the beneficial conversion feature on the Preferred shares.
The Company accounted for the beneficial conversion feature as a deemed
dividend to the preferred shareholders of $1,981 and was credited to
additional paid-in capital.
|
F-28
|
TTI TEAM TELECOM
INTERNATIONAL LTD.
|
AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share
data
|
|
|
NOTE 8:-
|
SHAREHOLDERS EQUITY (Cont.)
|
|
|
|
|
|
According to
the Agreements, the
investors have the right to receive payment for liquidated damages if a
registration statement on Form F-3 is not declared effective within 90 days
(or 120 days in the event the U.S. Securities and Exchange Commission conducts a review) following the closing of
the private placement transaction. The Company obtained effectiveness of the
registration statement on May 24, 2005. Therefore, since May 4, 2005, the
Company has been accruing liquidated damages at a rate equal to 2% of each
investors investment in the Company for each 30 day period, or pro rata for
any portion thereof, during the period for which the registration statement
was not declared effective. The Company paid liquidated damages at a total
amount of $194, which were recorded in the second quarter of 2005 as general
and administrative expenses.
|
|
|
|
|
|
During the
year ended December 31, 2006, an amount of 1,700,000 Preferred shares were
converted into the same number of the Companys Ordinary shares. As of
December 31, 2007 none of the Preferred shares were converted into the
Companys Ordinary shares and none of the Warrants had been exercised into
Ordinary shares, and also Subsequent to balance sheet date.
|
|
|
|
|
c.
|
Share
options:
|
|
|
|
|
|
Employee
Share Option Plans:
|
|
|
|
|
|
In 1996, the
Board of Directors of the Company adopted share option plans (as amended the
Old Plans). As of December 31, 2007 108,000 options are outstanding and
exercisable under the Old Plan. At the Companys annual general shareholders
meeting in December 2004, it was decided that there was no intention to grant
any more options from the Old Plan and it was resolved to approve the 2004
share option plan (the New Plan), pursuant to which 1,000,000 Ordinary
shares were reserved for issuance. In August 2006, an additional amount of
500,000 shares were reserved for issuance under the New Plan.
|
|
|
|
|
|
The Board of
Directors is empowered, among other things, to designate the options, dates
of grant and the exercise price of options. Unless otherwise decided by the
Board, the options will vest over a period of one to three years of
employment, and will be non-assignable.
|
|
|
|
|
|
Pursuant to
the New Plan, as of December 31, 2007, an aggregate of 867,333 options of the
Company are still available for future grant.
|
|
|
|
|
|
Each option
granted under the Plans to employees expires no later than five years from
the date of the grant. Any options which are canceled or forfeited before
expiration become available for future grants.
|
F-29
|
TTI TEAM
TELECOM INTERNATIONAL LTD.
|
AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share
data
|
|
|
NOTE 8:-
|
SHAREHOLDERS EQUITY (Cont.)
|
|
|
|
|
|
A summary of
the stock option activities in 2005, 2006 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
Year ended December
31, 2006
|
|
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Amount
of options
|
|
Weighted
average
exercise price
|
|
Amount
Of options
|
|
Weighted
average
exercise
price
|
|
Amount
of
options
|
|
Weighted average
exercise
price
|
|
Weighted
average
remaining contractual
term
|
|
Aggregate intrinsic value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year
|
|
|
374,133
|
|
$
|
10.13
|
|
|
390,333
|
|
$
|
4.55
|
|
|
1,049,000
|
|
$
|
3.97
|
|
|
|
|
$
|
-
|
|
Granted
|
|
|
200,000
|
|
$
|
3.50
|
|
|
755,500
|
|
$
|
3.78
|
|
|
18,000
|
|
$
|
3.00
|
|
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
|
|
$
|
-
|
|
Forfeited
|
|
|
(82,000
|
)
|
$
|
7.00
|
|
|
(93,500
|
)
|
$
|
4.23
|
|
|
(185,004
|
)
|
$
|
3.71
|
|
|
|
|
$
|
-
|
|
Expired
|
|
|
(101,800
|
)
|
$
|
21.02
|
|
|
(3,333
|
)
|
$
|
20
|
|
|
(141,329
|
)
|
$
|
3.63
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
390,333
|
|
$
|
4.55
|
|
|
1,049,000
|
|
$
|
3.97
|
|
|
740,667
|
|
$
|
4.03
|
|
|
2.76
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year
|
|
|
113,499
|
|
$
|
5.05
|
|
|
266,330
|
|
$
|
4.78
|
|
|
375,336
|
|
$
|
4.51
|
|
|
2.23
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate intrinsic value in the tables above represents the total intrinsic
value (the difference between the Companys closing stock price on the last
trading day of December 2007 and the exercise price, multiplied by the number
of in-the-money options) that would have been received by the option holders
had all option holders exercised their options on December 31, 2007. This
amount change based on the fair market value of the Companys stock. The share
price as of December 31, 2007 is lower than the exercise price of all the
changes during the year and therefore aggregate intrinsic value was not
calculated.
|
F-30
|
TTI TEAM
TELECOM INTERNATIONAL LTD.
|
AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share
data
|
|
|
NOTE 8:-
|
SHAREHOLDERS EQUITY (Cont.)
|
|
|
|
|
|
The
weighted-average grant-date fair value of options granted during the years
2005, 2006 and 2007 was $0, $1.45 and $1.13.
|
|
|
|
|
|
Compensation expenses (income) related to
options granted to employees were recorded to research and development
expenses, sales and marketing and general and administrative expenses, as
follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$
|
229
|
|
$
|
54
|
|
Research
and development expenses
|
|
|
102
|
|
|
29
|
|
Sales
and marketing
|
|
|
84
|
|
|
17
|
|
General
and administrative expenses
|
|
|
36
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
451
|
|
$
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2007, there was $146 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted to employees
under the Companys stock option plans. That cost is expected to be
recognized over a weighted-average period of 1.16 years.
|
|
|
|
|
|
The options
outstanding as of December 31, 2007 have been separated into exercise prices,
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
price
|
|
Options
outstanding
as of
December 31,
2007
|
|
Weighted
average
remaining
contractual
life
|
|
Weighted
average
exercise
price
|
|
Options
exercisable
as of
December 31,
2007
|
|
Weighted
average
exercise
price of
exercisable
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 3.0
|
|
|
115,000
|
|
|
1.92
|
|
$
|
3.0
|
|
|
83,666
|
|
|
|
|
$ 3.5
|
|
|
240,000
|
|
|
3.22
|
|
$
|
3.5
|
|
|
86,666
|
|
|
|
|
$ 3.9
|
|
|
248,667
|
|
|
3.12
|
|
$
|
3.9
|
|
|
87,336
|
|
|
|
|
$ 4.3
|
|
|
29,000
|
|
|
3.25
|
|
$
|
4.3
|
|
|
9,668
|
|
|
|
|
$ 6.0-8.0
|
|
|
108,000
|
|
|
1.5
|
|
$
|
7.0
|
|
|
108,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
740,667
|
|
|
2.76
|
|
$
|
4.03
|
|
|
375,336
|
|
$
|
4.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
d.
|
Dividends:
|
|
|
|
|
|
In the event
that cash dividends are declared in the future, such dividends will be paid
in NIS or in foreign currency subject to any statutory limitations.
|
|
|
|
|
e.
|
Subsequent
to the balance sheet date, the Companys Board of Directors granted
additional 25,000 options to employees. The exercise price of the options is
the shares par value. The options expire 5 years from the date of grant.
|
F-31
|
TTI TEAM
TELECOM INTERNATIONAL LTD.
|
AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share
data
|
|
|
NOTE 9:-
|
EARNINGS PER SHARE
|
|
|
|
The
following table sets forth the computation of basic and diluted earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Ordinary
shares
|
|
$
|
(9,059
|
)
|
$
|
(3,803
|
)
|
$
|
2,447
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used for
computing basic net income (loss) per share attributed to Ordinary shareholders
|
|
|
12,577,392
|
|
|
15,075,881
|
|
|
16,001,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive affect:
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
*)-
|
|
|
*)-
|
|
|
120,841
|
|
Preferred shares as converted
|
|
|
*)-
|
|
|
*)-
|
|
|
*)-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used for
computing diluted net income (loss) per share attributed to Ordinary shareholders
|
|
|
12,577,392
|
|
|
15,075,881
|
|
|
16,121,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 10:-
|
RELATED PARTIES TRANSACTIONS AND BALANCES
|
|
|
|
Composition:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances between Team and the Company (see
a below)
|
|
$
|
(40
|
)
|
$
|
(3,932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance with related party
shareholder (see b below)
|
|
$
|
373
|
|
$
|
409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Transactions
and with Team:
|
|
|
|
|
|
Transactions
between Team and its affiliates and the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Commissions on product sales and
payment for services
|
|
$
|
93
|
|
$
|
-
|
|
$
|
502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
Rent and maintenance
|
|
$
|
1,379
|
|
$
|
1,160
|
|
$
|
1,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative and management services
|
|
$
|
169
|
|
$
|
160
|
|
$
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
$
|
398
|
|
$
|
352
|
|
$
|
437
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
|
TTI TEAM
TELECOM INTERNATIONAL LTD.
|
AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share
data
|
|
|
NOTE 10:-
|
RELATED PARTIES TRANSACTIONS AND BALANCES (Cont.)
|
|
|
|
|
|
On April 19,
2005, Team Software Industries Ltd., a wholly-owned subsidiary of Team
Computers and System Ltd. (Team), a public company listed for trade on the
Tel-Aviv Stock exchange, has distributed to its shareholders Ordinary shares
of the Company that it owned, such that immediately following the
distribution, Team held approximately 4.6% of the Companys outstanding share
capital.
|
|
|
|
|
|
As of
December 31, 2007, Team holds 0.79% of the Companys outstanding share
capital.
|
|
|
|
|
|
Since the
commencement of the Companys operations in 1992, Team has, from time to
time, paid the Company commissions in respect of sales by the Company of
certain products represented and sold by Team. This relationship is reflected
in an agreement between the Company and Team dated October 1996 (the
Agreement). Team generally pays the Company a commission at the rate of 15%
of the sales price of these products, up to a maximum of 50% of the amount
received by Team from these sales less the cost to Team.
|
|
|
|
|
|
Since 1992,
the Company has also purchased property and equipment, such as computer
hardware, from Team and Omnitek-Eichut Ltd. (Omnitek-Eichut), a subsidiary
of Team. The Company pays Team and Omnitek-Eichut prices for these assets
that are no less favorable to the Company than those it could obtain from
unrelated third parties.
|
|
|
|
|
|
In addition,
Team supplies the Company with hardware, related software and support
services for such hardware for the Companys projects, in accordance with the
agreement referred to above. Under the agreement between the Company and
Team, the Company is required to pay for such hardware, related software and
support services when it receives payment from its customers.
|
|
|
|
|
b.
|
Balance with
related party shareholder:
|
|
|
|
|
|
During the
years 1998 to 2000, the Company granted Mr. Shlomo Eisenberg (Mr.
Eisenberg), the former chairman of the board of directors and a major
shareholder of the Company, an aggregate of 105,000 options to purchase
ordinary shares of the Company. In the years 2001 and 2002, Mr. Eisenberg
exercised a portion of his options (the Options) and the Company withheld
Israeli income tax from income realized by Mr. Eisenberg upon the exercise of
the Options, as required under law.
|
|
|
|
|
|
At the end
of 2005, the Company underwent a tax deductions audit by the Israeli Tax
Authority (ITA). As a result of such audit, the ITA assessed an additional
NIS 1.5 million ($390 as of December 31, 2007) in withholding taxes with
respect to income derived by Mr. Eisenberg from the exercise of the Options.
Following consultation with the Companys tax advisors, the Company paid the
additional withholding tax amount assessed in the audit. The Company was
informed that it is required to collect such additional tax from Mr.
Eisenberg otherwise such additional amount will be viewed as a benefit
received by Mr. Eisenberg from the Company, resulting in additional
withholding tax being charged to the Company as a result of the grant of such
benefit.
|
F-33
|
TTI TEAM
TELECOM INTERNATIONAL LTD.
|
AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share
data
|
|
|
NOTE 10:-
|
RELATED PARTIES TRANSACTIONS AND BALANCES
(Cont.)
|
|
|
|
|
|
The Company
filed a NIS 1.6 million ($416 as of December 31, 2007) lawsuit and demanded
reimbursement for the additional withholding tax from Mr. Eisenberg. Based on
an advice from Israeli council, the Company believes that it is entitled to
such reimbursement. However, the
Company cannot assure that the court will accept such view if this matter
were brought before it. The trial took place in September 2007 and the
Company is now in a process of submitting written summations.
|
|
|
|
NOTE 11:-
|
GEOGRAPHIC INFORMATION AND SELECTED
STATEMENTS OF OPERATIONS DATA
|
|
|
|
|
a.
|
Summary
information about geographic areas:
|
|
|
|
|
|
The Company
operates in one reportable segment (see Note 1 for a brief description of the
Companys business). The following data is presented in accordance with
Statement of Financial Accounting Standard No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS No. 131). The
total revenues are attributed to geographic areas based on the location of
the end customer.
|
|
|
|
|
|
The
following presents total revenues and long-lived assets as of and for the
years ended December 31, 2005, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
Long-lived
assets
|
|
Total
revenues
|
|
Long-lived
assets
|
|
Total
revenues
|
|
Long-lived
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Israel
|
|
$
|
3,065
|
|
$
|
4,249
|
|
$
|
3,199
|
|
$
|
3,217
|
|
$
|
3,516
|
|
$
|
5,596
|
|
North America
|
|
|
17,004
|
|
|
453
|
|
|
18,929
|
|
|
600
|
|
|
16,118
|
|
|
397
|
|
Europe
|
|
|
11,536
|
|
|
4
|
|
|
12,331
|
|
|
4
|
|
|
16,320
|
|
|
2
|
|
Australia
|
|
|
2,466
|
|
|
23
|
|
|
3,724
|
|
|
20
|
|
|
2,598
|
|
|
35
|
|
South America
|
|
|
3,551
|
|
|
-
|
|
|
3,085
|
|
|
-
|
|
|
2,251
|
|
|
14
|
|
Far East
|
|
|
1,999
|
|
|
-
|
|
|
1,626
|
|
|
1
|
|
|
3,217
|
|
|
1
|
|
South Africa
|
|
|
3,605
|
|
|
-
|
|
|
3,220
|
|
|
-
|
|
|
1,897
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
43,226
|
|
$
|
4,729
|
|
$
|
46,114
|
|
$
|
3,842
|
|
$
|
45,917
|
|
$
|
6,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
b.
|
Major
customers data as a percentage of total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
14
|
%
|
|
13
|
%
|
|
15
|
%
|
|
Customer B
|
|
2
|
%
|
|
5
|
%
|
|
7
|
%
|
|
Customer C
|
|
0
|
%
|
|
1
|
%
|
|
6
|
%
|
|
Customer D
|
|
4
|
%
|
|
5
|
%
|
|
6
|
%
|
|
F-34
|
TTI TEAM TELECOM
INTERNATIONAL LTD.
|
AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share
data
|
|
|
|
NOTE 12:-
|
SELECTED STATEMENTS OF OPERATIONS DATA
|
|
|
|
|
a.
|
Research and
development, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
$
|
9,166
|
|
$
|
9,632
|
|
$
|
9,433
|
|
Less - grants and participations
|
|
|
30
|
|
|
54
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
$
|
9,136
|
|
$
|
9,578
|
|
$
|
9,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
income, net
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
$
|
(646
|
)
|
$
|
41
|
|
$
|
985
|
|
Loss from sale of marketable securities
|
|
|
-
|
|
|
(838
|
)
|
|
-
|
|
Other than temporary decline in fair value
of marketable securities
|
|
|
(301
|
)
|
|
(329
|
)
|
|
-
|
|
Interest and other
|
|
|
1,100
|
|
|
1,788
|
|
|
1,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
income, net
|
|
$
|
153
|
|
$
|
662
|
|
$
|
2,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
c.
|
Other
income:
|
|
|
|
|
|
The Company
filed a claim against Ness Technologies Ltd. (Ness) regarding a Purchase
Order from the ministry of defense for IDF. The Company claimed that it has a
valid agreement with Ness to perform this project jointly and that Ness
unlawfully decided to perform the said project without the Company. The
Company did not record a provision for this claim.
|
|
|
|
|
|
In November
2006, the Company has signed a settlement agreement with Ness according to
which Ness will pay the Company a sum of $150 in 3 equal installments, to be
received up until December 31, 2007 as a full and final settlement including
the dismissal of the claim filed by Ness.
|
F-35
|
TTI TEAM
TELECOM INTERNATIONAL LTD.
|
AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share
data
|
|
|
NOTE 13:-
|
RECONCILIATION TO ISRAELI GAAP
|
|
|
|
|
The
consolidated financial statements of the Company have been prepared in
accordance with U.S. GAAP. Had the consolidated financial statements been
prepared in accordance with Israeli GAAP, the effects on the financial
statements would have been as follows:
|
|
|
|
a.
|
Effect on
the statement of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2006
|
|
|
|
|
|
|
|
As reported
|
|
Adjustments
|
|
As per
Israeli GAAP *)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,803
|
)
|
$
|
(2,204
|
)
|
$
|
(6,007
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss attributed to
shareholders
|
|
$
|
(0.20
|
)
|
$
|
(0.18
|
)
|
$
|
(0.38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2007
|
|
|
|
|
|
|
|
As
reported
|
|
Adjustments
|
|
As per
Israeli GAAP *)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,896
|
|
$
|
(5,774
|
)
|
$
|
(2,878
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss attributed to
shareholders
|
|
$
|
0.15
|
|
$
|
(0.30
|
)
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*)
|
Amounts in
NIS presented in accordance with Israeli GAAP for all periods were translated
into U.S. dollars according to the average exchange rate in the corresponding
period.
|
|
|
|
b.
|
Effect on
the balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2006
|
|
|
|
|
|
|
|
As reported
|
|
Adjustments
|
|
As per
Israeli GAAP *)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
$
|
30,495
|
|
$
|
272
|
|
$
|
30,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2007
|
|
|
|
|
|
|
|
As
reported
|
|
Adjustments
|
|
As per
Israeli GAAP *)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
$
|
33,436
|
|
$
|
699
|
|
$
|
34,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*)
|
Amounts in
NIS presented in accordance with Israeli GAAP were translated into U.S.
dollars according to the exchange rate at the end of the corresponding
period.
|
F-36
|
TTI TEAM
TELECOM INTERNATIONAL LTD.
|
AND ITS
SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except per share
data
|
|
|
NOTE 13:-
|
RECONCILIATION TO ISRAELI GAAP (Cont.)
|
|
|
|
|
|
c.
|
Material
adjustments:
|
|
|
|
|
|
The
abovementioned adjustments result primarily from the differences between U.S.
GAAP and Israeli GAAP, as follows:
|
|
|
|
|
|
|
1.
|
According to
US GAAP, the net income used to compute the net income per share is the net
income attributed to Ordinary shareholders after deducting the deemed
dividend associated with the beneficial conversion feature of the Preferred
shares. According to Israeli GAAP, the net loss used to compute the net loss
per share is not affected by the deemed dividend and the Preferred shares are
included in the computation of the basic net loss per share.
|
|
|
|
|
|
|
2.
|
According to
U.S. GAAP, the Companys management believes that the dollar is the primary
currency of the economic environment in which the Company and its
subsidiaries operate. Thus, the functional and reporting currency of the
Company and its subsidiaries is the dollar. Accordingly, monetary accounts
maintained in currencies other than the dollar are remeasured into U.S.
dollars in accordance with Statement of Financial Accounting Standards No.
52, Foreign Currency Translation. All transaction gains and losses of the
remeasured monetary balance sheet items are reflected in the statement of
operations as financial income or expenses, as appropriate. In Israel, no
directives were determined for reporting based on functional currency. Since the Company does not comply with
Section 29a to Opinion 36 of the Institute of Certified Public Accountants in
Israel, the Company reports according to Standard 12 and 13 of the Israel
Accounting Standards Board in reported NIS.
|
|
|
|
|
NOTE 14:-
|
SUBSEQUENT EVENTS
|
|
|
|
|
|
|
In 2007 the
Company signed a definitive agreement to acquire Telesens LLC, a software
house headquartered in Ukraine. Telesens has been developing, implementing
and promoting software solutions and related professional services for the
telecommunications market since 1998. The agreement closed in the beginning
of January 2008.
|
|
|
|
|
|
Under the
terms of the agreement, the aggregate purchase price will be up to $2.7
million, subject to downward adjustments related to amongst other, actual
2007 annual turnover and certain other performance parameters based on 2008
and 2009 operations. The consideration will be paid in cash over a three-year
period.
|
------------
F-37
Grafico Azioni Tti Team Telecom International Ltd. (MM) (NASDAQ:TTIL)
Storico
Da Ago 2024 a Set 2024
Grafico Azioni Tti Team Telecom International Ltd. (MM) (NASDAQ:TTIL)
Storico
Da Set 2023 a Set 2024